Commentary from CEO Keith McCullough


Finally! The Japanese Yen is the Most Read story on Bloomberg (ahead of Angry Birds):

  1. JAPAN – currencies lead bonds, then currencies/bonds lead stocks – that’s what happened into the European Sov Debt Crisis and I don’t know why that would change in Japan. The Yen looks awful and finally the Nikkei broke an impt line of immediate-term support (10,065) last night.
  2. SPAIN – the Spanish IBEX continues to flag negative divergences vs most major markets of the world (down -2% YTD vs Russia +20%) and Spain’s bond yields continue to move up into the right. German Finance Minister on Spain and Italy yest: “they are too big to save”… alrighty then.
  3. US TREASURIES – the top in bond yields came last week when Credit Suisse said “buy stocks b/c bond yields are rising”; now its game time w/ TRADE line support for 10s at 2.27% and the long-term TAIL of resistance up at 2.47%. I’m expecting to see a battle royal in this 20bps range.

SP500 down 3 days in a row after the 2ndlargest down day of 2012 yesterday. When -0.72% is the 2ndworst day you’ve seen, mean reversion thoughts should be dancing in your head. This is not normal.







THE HBM: PEET, MCD, DRI - subsector





PEET: Peet’s Coffee estimates were raised at Jeffries.  The price target was raised to $88 from $68.


MCD: McDonald’s Japan plans to introduce a service that will enable customers to place an order and pay for it using their mobile phones, according to Bloomberg.



SBUX: Starbucks gained 2.6% on accelerating volume.


DPZ: Domino’s Pizza declined 8.8% on accelerating volume.  The stock was downgraded on Tuesday by BofA following the announcement of a special dividend that investors were baking in.  JP Morgan also lowered its price target to $37 from $40.


SONC: Sonic is facing a tough compare (sales and margin) next quarter and investors are less-than-convinced by the strategies being put forward by the current management team.





DRI: Darden Restaurants reports 3QFY12 EPS of $1.25 versus expectations of $1.24. Blended US same-restaurant sales for Olive Garden, Red Lobster, and LongHorn Steakhouse came in at 4.1% versus guidance of approximately 4% provided a month ago. 




RT: Ruby Tuesday declined 2% on accelerating volume.


THE HBM: PEET, MCD, DRI - stocks



Howard Penney

Managing Director


Rory Green




The Macau Metro Monitor, March 23, 2012




Visitor arrivals totaled 2,130,977 in February 2012, down by 1.5% YoY.  In the first two months of 2012, visitor arrivals increased by 8.3% YoY to 4,592,617.  The average length of stay of visitors decreased by 0.1 day YoY to 0.9 day.  Visitors from Mainland China increased by 6.7% YoY to 1,285,266, with those traveling to Macao under the Individual Visit Scheme dropping by 11.4% to 514,095





Singapore Second Minister for Trade and Industry S Iswaran said, "STB (Singapore Tourism Board) is projecting visitor arrivals to be between 13.5 and 14.5 million this year, an increase of up to 10% from 2011."  The board also expects tourism receipts to reach S$23 to S$24 billion ($18.95 billion) this year, a rise of up to 8% YoY.



Singapore's inflation rate eased to 4.6% YoY in February 2012 from 4.8% in January.  This was lower than Street expectations of 4.9%.  Core inflation, which excludes accommodation and private road transport, eased to 3.0% YoY in February, down from 3.5% YoY in January.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.47%
  • SHORT SIGNALS 78.71%


This note was originally published at 8am on March 09, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“That the chance of gain is universally overvalued, we may learn from the universal success of lotteries.”

-Adam Smith, The Wealth of Nations


The concept of risk management is, at least for me, a continual learning process.  Strictly speaking, what I do is research but naturally when discussing ideas with teammates here at Hedgeye, risk is always on and something that is always foremost in our thinking. 


Confidence in the market has increased over the last 6 months and commentary from financial media outlets of all kinds seems to be increasing in its assuredness that the recovery is finally showing some teeth.   A notion confirmed today by Bank of America CEO, Brian T. Moynihan, as he suggests that the consumer using leverage again to increase spending.  He said “purchases by the bank’s credit and debit-card customers have increased 5%-7% for each of the last five months.”  If consumer are levering up again, it is not a positive!


The risk here, clearly, is that the market is attracting those that are trying to chase performance and not what the consensus believes, which is “we have turned the corner.”  When thinking through what the reality of our position is, it’s important to always consider two things.  First, recall how your counterpart gets paid.  Second, it’s paramount to remind oneself that good luck is not a given.  Unfortunately, we humans generally believe ourselves to be, individually, held above the rest in the pecking order of fortune.  This trait, as Smith puts it, is “an ancient evil remarked by the philosophers and moralists of all ages”.  For a contrite buyer of a market top, or the people whose money he or she loses, that is certainly an apt description and something we can all relate to in one way or another.


Looking back on this week it reminds me that there is something to learn every day in this business.  Writing this morning piece is something that is forcing  me to do something publically that I have tried to do privately at the end of each week, which is assess the week and any lessons that can be taken from it.


Sitting here after the first four days of the week, my macro question is “what is driving this market?” 


On Monday, the S&P had its biggest one-day decline of 2012, -1.54%, on the notion that the bailout plan for Greece was going to unravel (a credit event related to Greece looks to be on the cards today).  On Wednesday, the improving jobs picture – at least according to the ADP Employment report – helped the market move higher by +0.69%.  Yesterday, the market rallied another 1% as private debt holders agreed to convert 85% of Greece’s debt to new securities in the “biggest sovereign debt restructuring in history”. 


Ever is a long time and Greece certainly matters, if only because of the possible repercussions in broader Europe in the event of a disorderly default.  However, the S&P500 being bid up yesterday despite claims disappointing was interesting.


It is impossible for anyone, least of all myself, to state with certainty why market prices moved in any direction on a given day, but the Wall Street Journal’s report that the Federal Reserve may engage in “sterilized QE” which will please all of the people (inflation hawks and doves) all of the time.  Surely, that rumor of Fed intervention abounds anytime the equity market shows any weakness belies the supposed confidence that investors feel in being long this market. 


The Hedgeye Financials team has conducted some tremendous research into the initial claims data that is usually so important for market sentiment; much of the recent upsurge in equity prices is attributed to improving employment conditions as shown by the trend in claims.   


One would think, then, that a disappointing initial claim print yesterday – albeit one week’s data point – may have had more of an impact on a market that has gained so handsomely in recent months. The “Ghost of Lehman” (as the financials team has called it) distortion in the claims dataset, which has been a headwind and is set to turn into a headwind gradually in the summer months, may have helped boost equity prices over the last six months; the question at this point is whether or not a series of disappointing jobs numbers will lead to a commensurate retracement in the S&P.


That question is perverse to read and it feels perverse to write.  Surely deterioration in the underlying fundamentals, especially the all important jobs picture, should lead to a sell off.  The S&P is up 8.6% year-to-date and up 102% from the March2009 low.  Still, with the QE is the go-to strategy the instant any “concerns” creep into the market, will a pause in the jobs picture have any impact on equity prices at all? 


What’s increasingly difficult to discover at this point is truth.  The truth is not always beautiful, as Lao Tzu wrote.  In the case of our financial “markets”, the truth would likely be downright ugly.  Maybe a truth, as Jack Nicholson might say, that we couldn’t handle.  My aim is not to vilify actors in or prescribe solutions for the ills facing our economy.  As a equity analyst, looking back on this past week and thinking about the pending jobs report, my conclusion is that the rumors of intervention by central banks is deterring people from truth and thus market prices might not reflect reality.


Even in vain, the quest for truth must be sustained.  Yesterday was cheering on inflation - Dollar down, Euro up, oil up, gold up, and XLI and XLB were the best performers.  It’s the type of move that has corroborated many of the points that our Macro team has argued recently.  First, inflation slows consumption.  McDonald’s – one of the most macroeconomic-immune companies of the past four years – mentioned inflation as an issue for its business in its press release yesterday.  Second, at this point investors need to embrace uncertainty and stay nimble.  With the VIX at 17, there is plenty of complacency in the market that “we have turned the corner” and not reflecting increased inflation.


If good news is good and bad news is QE, surely the only way is up!  Looking at a simple chart of short term interest rates versus the S&P shows that the frequency and amplitude of stock market cycles has increased coincident with the implementation of easy money policies.  The lack of truth in financial markets is rendering trust impossible and that is illustrated clearly in the volatility of the past few years.  As buyers up here, it is worth asking whether or not we are overvaluing the chance of gain.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1692-1717, $123.98-126.89, $79.02-80.12, and 1345-1382, respectively.


Function in Disaster; Finish in Style


Howard Penney 


UGLY TRUTH - EL Chart 3.9


UGLY TRUTH - vp 3 9

Obvious Conclusions

“Once you understand the main conclusion, it seems it was always obvious.”

-Daniel Kahneman


Obviously, after the SP500 is down for 3 consecutive days, Asian stocks have their worst week of the year, and the Japanese Yen drops 9% in a straight line, Global Growth Slowing matters – right? Right. Right. Everyone nailed it, again.


The aforementioned quote comes from the end of Chapter 22 in “Thinking, Fast and Slow” titled Expert Intuition: When Can We Trust It? Obviously, after seeing Sell-Side and Washington consensus miss the Growth Slowdowns in Q1 of 2008, 2010, 2011, and now 2012, the conclusion is that you cannot trust our profession’s broken “economic” sources.


When evaluating expert intuitions you should always consider whether there was an adequate opportunity to learn the cues, even in a regular environment” (Kahneman, page 243). The globally interconnected cues associated with inflation slowing global growth have been as obvious as obvious gets.


Back to the Global Macro Grind


Let’s check in with the “experts” this morning:


1.  Credit Suisse – last week they said that “bond yields could rise further – this might help Equities” … so we’re still waiting to hear from them as to whether US bond yields falling this week might not help equities.


2.   Goldman Sachs – their currency strategist, Tom Stolper (who has been on the opposite side of just about every big currency call we’ve made for the last few years) says buy the Japanese Yen and sell the US Dollar. We’re still on the other side.


3.   Ben Bernanke – says “consumer spending has not recovered, it’s still quite weak relative to where it was before the crisis” and he is effectively daring consumers to draw down their savings even more to “fuel spending growth.”


You’ve just got to love how central planners think. Hey, why don’t we jam the entire world with Policies To Inflate, then chastise people for not having enough real (inflation adjusted) money left to buy things.  




The good news is that some experts still have some credibility. Some of them actually still believe in gravity. German Finance Minister official, Ludger Schuknecht, said yesterday that Italy and Spain are “too big to be saved.”


Spain looks awful, fyi.


Away from the Obvious Conclusion that stocks can in fact go down after they go straight up, it’s a fairly quiet morning here in New Haven, CT. That’s interesting, given that yesterday was actually the 2nd biggest down day for the SP500 of 2012. It was only down -0.7%!


That’s not normal. Neither are the US stock market’s volumes – they are dead as the trust embedded in America’s craw.


Looking at the 3 biggest SP500 down days of 2012:

  1. March 6th= down -1.5%
  2. March 22nd= down -0.7%
  3. Feb 10th= down -0.6%

Since they seem to have a completely arbitrary “year-end target” for just about everything else, ask your local expert at an Old Wall Street shop how many days we’ll have this year where the market closes down by more than 1%. Here’s my expert forecast – more than one.


Remember, as Growth Slows, intermediate-term tops are processes, not points. Here are the last 3 times we’ve shorted what we call immediate-term TRADE overbought tops in the SP500:

  1. February 15th= covered Short SPY for a +0.94% gain
  2. February 22nd= covered Short SPY for a +0.21% gain
  3. Current short position = +0.52% in our favor (unrealized)

Obvious Conclusion: slim pickings for those of us who like to pick off price momentum chasing. That said, this was equally obvious in Feb-April of 2011. Then, tick-ah-tee-boom! The expert perma-bulls got run-over, again.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Japanese Yen (USD/JPY), and the SP500 are now $1, $122.37-124.57, $79.33-80.45, $82.22-84.14, and 1, respectively.


Best of luck out there today and enjoy your weekend,



Keith R. McCullough
Chief Executive Officer


Obvious Conclusions - Chart of the Day


Obvious Conclusions - Virtual Portfolio


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