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TODAY’S S&P 500 SET-UP – March 22, 2012

As we look at today’s set up for the S&P 500, the range is 16 points or -0.56% downside to 1395 and 0.58% upside to 1411. 












  • ADVANCE/DECLINE LINE: -32 (986) 
  • VOLUME: NYSE 726.47 (2.16%)
  • VIX:  15.13 -2.89% YTD PERFORMANCE: -35.34%
  • SPX PUT/CALL RATIO: 3.27 from 2.22 (47.30%)


  • TED SPREAD: 38.78
  • 3-MONTH T-BILL YIELD: 0.08%
  • 10-Year: 2.26 from 2.30
  • YIELD CURVE: 1.89 from 1.93 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Jobless claims, week of Mar. 17, est. 350k (prior 351k)
  • 9:45am, Bloomberg Consumer Comfort, week Mar. 18 (prior -33.7)
  • 10am: House Price Index (M/m), Jan., est. 0.3% (prior 0.7%)
  • 10am: Leading Indicators, Feb., est. 0.6% (prior 0.4%)
  • 10am: Fed’s Tarullo testifies to Senate committee on regulation and Volcker rule
  • 10am: Freddie Mac 30-yr mortgage
  • 10:30am: EIA natural gas storage
  • 12:45pm: Fed Chairman Bernanke lectures at George Washington U. (2 of 4)
  • 1pm: U.S. to sell $13b 10-yr TIPS (reopen)
  • 4pm: Fed’s Evans speaks on communication at Brookings
  • 8pm: Fed’s Bullard speaks in Hong Kong
  • U.S. Treasury announces 2-, 5-, 7-yr auction sizes 


  • President Barack Obama to speak on energy infrastructure in Oklahoma, 10:55am
  • Obama attends event on energy-related research, development at Ohio State University, 4:30pm
  • House, Senate in session:
    • Senate Armed Services Committee holds hearing on the situation in Afghanistan, 9:30am
    • House Ways and Means subcommittee hears from IRS Commissioner Doug Shulman on its operations and the tax filing season, 9:30am
    • Senate Appropriations subcommittee hears from Commerce Secretary John Bryson on his agency’s proposed budget, 10am
    • Senate Environment Committee hears from Environmental Protection Agency Administrator Lisa Jackson on the agency’s budget, 10am
    • Senate Banking Committee hears from Treasury Undersecretary Lael Brainard, Fed member Daniel Tarullo and FDIC acting Chairman Martin Gruenberg on the Volcker rule, 10am
    • House Appropriations subcommittee hears from acting Federal Aviation Administration chief Michael Huerta on the agency’s budget, 10am
    • House Appropriations subcommittee hears from Commodity Futures Trading Commission Chairman Gary Gensler on the agency’s budget, 10:30am   


  • McDonald’s CEO Jim Skinner is retiring after almost 8 yrs at helm, to be succeeded by COO Don Thompson
  • Bats Global Markets will seek more than $100m for owners today, plans to sell 6.3m shrs at $16-$18 each
  • Abstracts for EASL’s International Liver Congress may be
  • released on embargo
  • Chinese manufacturing index indicated a worse contraction this month; prelim. 48.1 reading in a purchasing managers’ index is the lowest since Nov.
  • Sony said to tap Studio Chief Lynton to oversee U.S. media units
  • Former Fed Chairman Paul Volcker says U.S. needs reforms in financial sector, govt.
  • Nomura said to be involved in Inpex insider-trading breach
  • American Airlines said to plan to start a bankruptcy-court process for rejecting union contracts by next week
  • Euro-area services, manufacturing output contracted more than economists forecast in March
  • Hartford fails to satisfy holder John Paulson with plan to shrink insurer
  • Vantiv raised $500m in IPO at mid-point of price range 


    • IHS (IHS) 6 a.m., $0.82
    • Dollar General (DG) 7 a.m., $0.82
    • Lululemon Athletica (LULU) 7:15 a.m., $0.49
    • ConAgra Foods (CAG) 7:30 a.m., $0.48
    • FedEx (FDX) 7:30 a.m., $1.35
    • Signet Jewelers Ltd (SIG) 7:30 a.m., $1.77
    • GameStop (GME) 8:30 a.m., $1.72
    • Accenture (ACN) 4 p.m., $0.86
    • Steelcase (SCS) 4:01 p.m., $0.14
    • Micron Technology (MU) 4:04 p.m., $(0.19)
    • Nike (NKE) 4:15 p.m., $1.17
    • Silver Wheaton (SLW CN) 5 p.m., $0.40 


OIL – probably the only good news this morning is that Oil stopped going up. We sold our long Oil position and took our asset allocation to Commodities to 0% because the US Dollar looks like it could put on a big move to the upside again. Immediate-term support lines that broke for WTIC and Brent are $106.79 and $124.89, respectively. 

  • Newedge Says Soy Beats Corn as Cekander Talks Seeds: Commodities
  • Copper Reaches Two-Week Low as Chinese Manufacturing Contracts
  • Gold Drops to Lowest Since January on Manufacturing, U.S. Dollar
  • Crude Declines on Stockpile Release Speculation, China Slowdown
  • Iran Seeking to Import Farm Commodities From India, Group Says
  • Sugar Erases Gains in New York Trading After Rising 0.8%
  • China Grain Output May Have Been Overstated, Imports to Rise
  • England Tsunami Risk Swells Costs at EDF After 40% Slump: Energy
  • Sinofert Has Been in Potash Acquisition Talks, CEO Feng Says
  • Gold Tax Aids Rupee as Deficit Fight Spurs Strike: India Credit
  • Vale, Rio, BHP to Join China’s Spot Iron Ore Platform
  • Water Scarcity to Fuel Global Tensions, Intelligence Report Says
  • BHP Leading Record Foreign-Currency Bond Sales: Australia Credit
  • Crude Futures Decline on Stockpile Release
  • European Crops Damaged by Winter Freeze Now Face Drought Risk
  • H.K. Mercantile Bourse Plans RMB Gold, Silver, Copper Contracts
  • Jewelers in North, East India Continue Strike Over Gold Tax










SPAIN – Growth Slowing was the most obvious message for the PMI reports across Europe for the month of March. Central Planners can arrest stock market deflations in the short-term, but in the long-run, their ideas to stop economic gravity are dead. Spain’s IBEX remains bearish across all 3 of our risk management durations (down -1.5% this morn).





INDIA – Energy stocks (XLE) stopped making higher-YTD-highs on Feb 24 and India stopped going up on Feb 21; this morning India’s Sensex was down another -1.8% on fundamentals (Growth Slowing As Inflation Accelerates) and is down over 6% from its YTD high. India’s Yield Curve has pancaked.










The Hedgeye Macro Team



Commodity moves were mixed over the past week as the dollar index declined.  Coffee gained 0.6% week-over-week but are down more than 19% year-to-date.







Gasoline prices are assuming more importance in the political debate and management commentary, while thus far playing down the impact of gas prices, is likely to change if this current trend continues. Domino’s Pizza yesterday mentioned three ways in which elevated gas prices impacts its business perhaps more directly than many of its peers in the restaurant industry: first, reimbursing drivers for gasoline usage; second, the change in consumer behavior than can result from pressure at the pump; third, the flow through to commodity prices due to higher cost of production for food processing companies.









Wheat futures have declined to the lowest level in over a week on signs that precipitation in the Great Plains are improving prospects for winter crops that recently emerged from dormancy. 





Talk of early planting and big acreage is said to be pressuring the market.


Indications of rising ethanol supplies could be pushing corn process lower.  Ethanol inventories gained 3% to a record 22.7 million barrels in the week ended March 16th, up 13% from a year earlier, according to the Energy Department.





Last week’s cattle slaughter totaled 619k, down 1.9% from the week prior and flat year-over-year.  Year-to-date, according to cattlenetwork, cattle slaughter is down 6% versus the same period last year.


U.S. beef producers have started the early stages of herd expansion, according to Purdue Extension agricultural economist Chris Hurt.  Beef cow numbers have dropped by 9% since 2007.  Lower slaughter numbers are expected through 2014.





Egg sets placements continue to contract at around the same rate, roughly -5.3% year-over-year for the six-week moving average, according to the Broiler Hatchery report released by the USDA today. This implies that supply will remain tight as the industry looks for more favorable business conditions before expanding production.






Beef: Most companies are expecting beef cost inflation to be up mid-to-high single digits versus last year


TXRH: We expect approximately 8% food inflation in 2012, primarily due to higher beef costs…on the beef side we do have fixed price – pricing arrangements in effect for over 90% of our beef costs in 2012.


CBRL: To the continued pressure on ground beef prices and other commodities partly offset by lower average dairy and produce prices, along with benefits from our supply chain initiatives, we expect cost of sales to increase 60 basis points to 80 basis points over 2011 to near 26% in 2012.


RUTH: We project 2012 beef inflation to be between 5% and 8%. We currently have purchase agreements for beef representing approximately 30% of our needs through August of 2012, which represents an approximate 7% premium compared to the prior years.


CMG:  While we're cautiously optimistic we'll see more reasonable prices in 2012 for avocados, dairy and produce, we expect these benefits will be more than offset by higher costs for our beef, chicken, rice and beans. Beef costs will be especially challenging due to protracted supply shortages, despite recent reductions in grain prices.


MCD: As we look at our guidance for 2012, we've built another mid-teens increase for beef, expecting that the dynamics in the marketplaces that we see, and are expecting, will continue.


DRI:  U.S. beef production will continue decline though over the next 24 months, placing continued upward pressure on beef prices because of the slow economic recovery hamburger and value oriented beef, cattle beef are in high demand and can be priced accordingly by the packers. At Darden we purchased mainly tenderloins and other premium steakcuts, while we expect pricing for our beef products to increase by 12% our pricing has been tempered by consumers' resistance to record higher retail prices for premium stakes and the resulting shift to value oriented cuts and as you can see beef is approximately 14% of our cost basket … We have 75% of our beef requirements contracted for fiscal 2012 and 40% of the June to December usage under contract for fiscal 2013.


SONC: One item to note is that we recently locked in our beef contract for calendar year 2012… given the potential for beef costs going even higher, which there are a lot of reports out there that speculate that could happen, that we chose to go with making this more of a known quantity here, and the idea of having a set price for the next 12 months, we feel like would be good for our business, adds some predictability to the business.



Coffee: Prices are now down more than 33% versus last year


PEET: We expect 2012 coffee costs to rise 12% instead of last year's 42%.


SBUX: We've taken advantage of the recent declines in the C-price to lock in more of our coffee needs for fiscal 2013. We now have six months of our fiscal 2013 requirements secured at costs moderately favorable to 2012.



Dairy: CAKE, DPZ, PZZA, TXRH and others could benefit from favorable cheese costs this year


TXRH: The volatility around that 8% estimate for food cost inflation would really be driven by produce and dairy.  Those are of the biggest components that we float around the market, and that's about 15% to 20% of our total cost of sales.


CMG: While we're cautiously optimistic we'll see more reasonable prices in 2012 for avocados, dairy and produce, we expect these benefits will be more than offset by higher costs for our beef, chicken, rice and beans.






















WEEKLY COMMODITY CHARTBOOK - chicken whole breast













Howard Penney

Managing Director


Rory Green







Commentary from CEO Keith McCullough


Most Read this morn = #1 Apple, #2 Asian Stocks Drop, and #3 Romney Wins:

  1. ASIA – generally weak session in Asian Equities after the Hang Seng snapped my line yesterday; Asian Growth Slowing is a reality right now; the perma-bulls refused to accept it in Q1 of 2011 and are at their own risk doing so now.
  2. YEN – easily the ugliest chart in all of Global Macro right now – also something consensus has not moved towards addressing/understanding yet; we’ll be in Boston all day explaining why we think the Yen’s -9.2% drop since FEB is similar to the initial steep decline of the Euro in April/May of 2011. #SovDebtRisk
  3. SENTIMENT – I’ve been on the road in Canada and Minnesota for the last 3 days and the feedback loop was frothy; allegedly, markets can’t go down because they haven’t yet – with Growth Slowing and seasonality playing negative like it did in Q1 of 08, 2010, and 2011, we look ripe for a counter consensus move (II Bullish/Bearish Survey = 2500 bps wide to the Bull side this morn)

Oil prices > $100 have never not slowed real (inflation adj) growth, globally – ever.








THE HBM: SBUX, DPZ, MCD, CMG, EAT, RT - subsector





SBUX: Starbucks is hosting its AGM today.  The company, along with Green Mountain, announced an expansion of their strategic relationship for “the manufacturing, marketing, distribution and sale of Starbucks-branded Vue packs for use in GMCR’s recently introduced Keurig Vue Brewer.


DPZ: Domino’s Pizza CFO, Michael Lawton, spoke at the J.P. Morgan Gaming, Lodging, Restaurant & Leisure Management Conference yesterday.  The company spoke about international strength, particularly in India, and the recent warm weather in the U.S. as being unfavorable for its business.  The company guided to 1-3% comparable restaurant sales in the U.S.


MCD: McDonald’s is seeking a 50% rent reduction at its location on Dublin, Ireland’s main retail thoroughfare, Grafton Street.  The company is currently paying a rent of 1.15 million euros per annum.  The landlord, as the date for MCD to sign the new lease approaches, is hoping for a 20% reduction. 


CMG: Chipotle Mexican Grill is opening a new restaurant at 71 Spring Street, in Manhattan.




COSI: Cosi continues to outperform, gaining 6.1% on accelerating volume yesterday.


YUM: Yum gained yesterday on accelerating volume despite China weakness.


DPZ: Domino’s declined almost 3% on accelerating volume yesterday.





EAT: Brinker International saw its price target increased from $31 to $33 at J.P. Morgan today.  The firm is maintaining an Overweight rating on EAT.


RT: Ruby Tuesday was raised to Outperform at Raymond James.





Howard Penney

Managing Director


Rory Green



Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


The Macau Metro Monitor, March 21, 2012



Bloomberry Resorts topped out Phase 1 of its integrated resort complex in PAGCOR Entertainment City in Pasay City. Bloomberry chairman Enrique K. Razon Jr. said, "We are doubly proud because Solaire Manila will be the first resort to be built and operational here in Entertainment City." 


Phase 1 of Solaire Manila which cost an estimated $650MM will include 180,000 square meters of floor area, comprising of a hotel tower, three levels of podium that has ballroom/convention facilities, gaming areas, restaurants, retail shops, and health and wellness facilities. The project's total cost is expected to reach $1.2BN.

Old Habits

This note was originally published at 8am on March 07, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“He was a man of habits.”

-Benjamin Wallace


Earlier this week I cited a book I am enjoying, “The Billionaire’s Vinegar.” Today’s quote summarizes the unique persona of Michael Broadbent. Becoming the world’s most prominent wine auctioneer didn’t just happen.


Neither does risk in these globally interconnected markets. There is no such thing as “risk on” and “risk off.” In real life, risk is always on. Risk never sleeps.


Habits in this business can be as polarizing as a legacy media channel’s partisanship. Fortunately, Old Habits on Wall Street and News Media 2.0 are dying on opacity’s vine.


Back to the Global Macro Grind


I personally have a habit of selling on green and buying on red. Most of the time it saves me from grossly violating Rule #1 – Don’t Lose Money. Some of the time it doesn’t.


Buying too early is also called being wrong. The lynx-eyed Jeff Gundlach at Doubleline says “an investor is a trader who is under-water.” Great one liner – primarily because it royally annoys Captain Stock Picker. Especially after a day like yesterday.


Yesterday’s Short Covering Opportunity in everything that was immediate-term TRADE oversold was as obvious to me as the Short Selling Opportunities we were signaling 2.5% higher with the SP500 at its YTD highs last week.


On red, after a 3-day correction in Global Equities and Commodities, here’s what I’ve done in the Hedgeye Asset Allocation Model:

  1. Cash = 46% (down from 58% on Friday)
  2. Fixed Income = 24% (no change)
  3. US Equities = 18% (up from 12% on Friday)
  4. Commodities = 9% (sold Corn, bought Oil)
  5. International Equities = 3% (bought Canada)
  6. International FX = 0%

I’m not saying this positioning is right or wrong. The market will decide my fate on that. I’m just TimeStamping what I did. Repeatable Process is a habit too.


Getting longer here certainly has risks. In the Hedgeye Portfolio I went into yesterday’s open with 11 LONGS, 9 SHORTS. This morning I have 13 LONGS and 7 SHORTS. I’ll most likely tighten that up, selling some on green today.


Why sell on green? Isolating the USA, here are some of the risk management signals jumping off my notebook page today:

  1. SP500 broke immediate-term TRADE support of 1364 and now has a lower-high of resistance up at 1359
  2. Equity Volatility (VIX) broke out above immediate-term TRADE resistance of 17.72 yesterday; upside to 23.17
  3. US Equity Volumes continue to flash gnarly negative skew – accelerating volumes on the down days, not up ones
  4. S&P Sector Rotation call we made last week remains crystal clear (Utilities (XLU) best yesterday; Financials (XLF) the worst)
  5. S&P Sectors that have broken their immediate-term TRADE lines = 5 of 9 (XLB, XLI, XLF, XLV, and XLE)
  6. 10-year US Treasury Yields continue to signal Growth Slowing (trading below my TREND line of 2.03%)
  7. Yield Spread (10yr minus 2yr) is down 3bps week-over-week; benign but not bullish at 167bps wide
  8. US Dollar Index has moved back to bullish TRADE and TREND after Romney wins in Michigan and Ohio

That last point is probably the one that rings the political gong louder than any other. Why? Because people are partisan. But the math trumps partisanship and the fact of the matter is that the US Dollar Index is up +2.1% since Romney won in Michigan last week (see our newly minted Hedgeye Election Index). Causal? Correlated? Does it matter which?


Strong Dollar = Strong America. Period.


That’s the most bullish long-term (and sustainable) economic strategy I can paint for Americans right now. Sadly, it’s also the most unexpected. Old Habits, and the economists and politicians who get paid to pander to them, won’t agree with this because none of them have tried it in the last decade (i.e. so none of them can take credit for it when it works).


To get a stable and strong US Dollar will take both fiscal and monetary sacrifice. God forbid the stock market goes down for a few weeks to get there. But inflation expectations will go down too. Whether it was $20/barrel (average price of oil) between 1983-1989 or 1993-1999, these were the most bountiful decades or US job creation and economic prosperity, ever.


Ever is a long time. Old Habits of debauching your currency for short-term political votes should be held accountable to ever, too.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1658-1694, $120.83-123.89, $79.32-79.91, and 1336-1359, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Old Habits - Chart of the Day


Old Habits - Virtual Portfolio


Plenty of errors, omissions, and questionable valuations in the recent analyst reports.



With the expiration of the quite period, many analysts have published research on Caesar’s Entertainment.  Most of the reports will provide a thoughtful and detailed overview of CZR's current markets and future growth opportunities. However, even some of the reports with less than positive ratings contained some questionable modeling and valuation assumptions.  


Here are just a few:

  • Ignoring CZR’s material CODI obligations.  Page 14 of CZR’s 10k says it best:
    • “In connection with the debt that we reacquired in 2009 and 2010, we have deferred related CODI of $3.6 billion for tax purposes (net of Original Issue Discount (“OID”) interest expense, some of which must also be deferred to 2014 through 2018 under the ARRA). We are required to include one-fifth of the deferred CODI, net of deferred and regularly scheduled OID, in taxable income each year from 2014 through 2018. To the extent that our federal taxable income exceeds our available federal net operating loss carry forwards in those years, we will have a cash tax obligation. Our tax obligations related to CODI could be substantial and could materially and adversely affect our cash flows as a result of tax payments.”
  • Using the book value of debt vs. face value of debt will get analysts an incremental $2.86BN of “value” – more than enough to get to a lofty stock price target
    • Most of the discount to face comes from the Second-Priority Sr. Secured notes
    • From a purely academic stance, if you believe that CZR’s debt is impaired, it’s unlikely that there would be any equity value –since equity is a residual value by definition
    • If CZR experiences a V-shaped recovery, their debt will rally back to PAR and can also trade at a premium to PAR
  • Over-valuing the US online gaming option
    • Analyst don't like to highlight the fact that near term Federal legislation is looking less likely these days.  That said, most analysts would agree that under a State by State legalization structure, the potential market size is smaller and would take longer to materialize.  
    • To be clear, we agree that a legal US online poker market would present a huge opportunity for Caesar's. We also agree that given the strength of their WSOP brand and nationwide recognition they would likely garner a decent piece of the online pie. While their online operations in Europe are currently immaterial and are unlikely to become material in the intermediate future, the experience of operating legal online gaming does provide them an advantage over other US land based operators. That said with the probability of Federal legislation looking more cloudy than a few months ago we think that a deeper haircut to this option is appropriate.  
  • Bad assumptions surrounding Playtika
    • One analyst attributed all of Corporate and Other revenue reported in the 4th quarter to Playtika.  Roughly $20-22MM of that revenue had nothing to do with Playtika and reflected the run rate of revenues in that line item before Playtika was consolidated.  The other $46-48MM reported in the 4Q represents Playtika revenues.  However, that amount represents catch up accounting for 2 quarters, not just one.  We estimate that 4Q Playtika revenues were roughly $28-31MM.

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