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This Time Is?

“Mr. Dalio admits to being wrong roughly a third of the time…”

-The Economist, March 2012


At least there’s someone out there who doesn’t proclaim to nail it on every Global Macro market move. Bridgewater’s Ray Dalio is, incidentally, one of the only major hedge fund managers to not blow up in a down tape going back to the 2007 turn.


There are, of course, different definitions of being right and wrong in markets. All you need to do is change the duration of your prospective holding and/or risk management period, and you are all set.


While the Fed Chairman’s Policy to Debauch The Dollar and Inflate provided for a fascinating time to watch another no volume rally in US stocks yesterday, my process also reminded me that it was a time to sell.


Back to the Global Macro Grind


I came into the day with 14 LONG positions in the Hedgeye Portfolio and ended the day with 10. I came into the day with 13 SHORT positions and ended the day with 14. #TimeStamped - that’s just what I did. It doesn’t mean that all 27 of my LONG/SHORT positions were right or wrong. I’m simply showing you what I do in real-time. Most people won’t.


Per the same article in The Economist, Dalio also “attributes a big part of his success to managing the risk of bad calls.” That’s something that Steve Cohen says too. If you’ve successfully managed risk with live ammo across all of the big bull and bear moves since 2007, you’ll recall that being perma-anything has not worked.


Maybe this time it’s different. Maybe it’s not.


Bearish Factors in my notebook this morning:

  1. SP500 = immediate-term TRADE overbought at 1417
  2. SP500 immediate-term downside versus upside (3 weeks or less) = 10:1
  3. Financials (XLF) and Tech (XLK) are 3.7 and 3.9 standard deviations overbought on my TREND duration
  4. US Equity Volatility (VIX) at 14 anything = the most obvious clean cut sell signal since Q1 2008
  5. US Equity Volumes are the most bearish I have ever seen (yesterday’s volume = -17% vs my TREND avg!)
  6. US Dollar Down -0.62% yesterday on Ben Bernanke’s Policy To Inflate will only slow growth faster
  7. US Treasury Bond Yields (10yr) stopped going up at 2.31% and 2.47% TRADE and TAIL resistance, respectively
  8. China Slowing had the Shanghai Composite down -0.2% overnight and the Hang Seng remains bearish TRADE
  9. India’s stock market had a no volume bounce to a lower-high and remains bearish TRADE (Growth Slowing)
  10. Spain’s stock market (-3.5% YTD) remains in a Bearish Formation as Spanish bond yields won’t go down
  11. Greek stocks stopped going up on FEB 13thand are down -8% since
  12. Oil prices remain in a Bullish Formation with immediate-term upside on Brent Oil at $126.92/barrel
  13. Copper remains below its long-term TAIL of 4.03% resistance (and all-time bubble high)
  14. US Housing (New and Pending Home sales) numbers are suggesting a potential Triple Dip
  15. Japanese Yen continues to signal we are crossing the Rubicon of the mother of all Sovereign Debt Crises

Bullish Factors in my notebook this morning:

  1. SP500 remains in a Bullish Formation provided that 1402 holds (intermediate-term TREND support = 1312)
  2. S&P Equity Sector Model has 8 of 9 Sector ETFs bullish TRADE and TREND (Energy is the only bear – XLE)
  3. SP500 is up +12.6% YTD, perpetuating the performance chase into month and quarter end (Friday)
  4. SP500 is finally developing less bearish Correlation Risk to the US Dollar (30-day correlation = +0.27%)
  5. Japanese stocks, closed up +2.4% overnight (like European stocks did in Q1 of 2011, they love FX devaluation)
  6. South Korea’s KOSPI is holding onto its Bullish Formation with critical TRADE support of 2,012 intact
  7. Germany’s DAX remains on fire at +20.2% YTD (Bullish Formation)
  8. Russia’s Trading System Index loves the fuel of the almighty Petro-Dollar (down dollar, up oil) = RTSI +24.5% YTD
  9. Brazil’s Bovespa remains bullish intermediate-term TREND (we sold our long position yesterday at overbought)
  10. Canada’s TSX remains in a Bullish Formation (we sold that too yesterday at immediate-term TRADE overbought)
  11. Gold prices didn’t snap long-term TAIL support of $1652/oz yet
  12. US Treasury Yields on the short-end of the curve are moving into a Bullish Formation with TAIL support = 0.35% (2yr)
  13. US Treasury Curve Yield Spread (10s minus 2s) is +3bps wider day-over-day at +192bps wide
  14. Euro is back above intermediate-term TREND support of $1.32 vs USD (bullish for European purchasing power)
  15. President Obama’s probabilities of re-election just hit a fresh new high in our Election Indicator of 62.3%

In other words, if you open your process to what’s going on in the entire world, there’s a lot going on out there.


Every investor has their own unique investment time horizon and appetite for draw-down risk. You can make your call on what to do next. That’s is the beauty of this game. It’s always changing and offering you another chance to do the same.


Yesterday is over. Risk is managed proactively for tomorrow. Inasmuch as selling low in 2009 was, buying high can be a “bad call” too. So just keep that in mind at VIX 14 if you think buying in Q1 of 2012 is going to be different this time.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Japanese Yen (vs USD), and the SP500 are now $1, $124.45-126.92, $78.83-79.38, $82.41-84.12, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


This Time Is? - Chart of the Day


This Time Is? - Virtual Portfolio


TODAY’S S&P 500 SET-UP – March 27, 2012


As we look at today’s set up for the S&P 500, the range is 15 points or -1.02% downside to 1402 and 0.03% upside to 1417. 











  • ADVANCE/DECLINE LINE: 1566 (304)  
  • VOLUME: NYSE 754.94 (1.79%) 
  • VIX:  14.26 -3.78% YTD PERFORMANCE: -39.06% 
  • SPX PUT/CALL RATIO: 1.72 from 1.96 (-12.25%) 


  • TED SPREAD: 40.14
  • 3-MONTH T-BILL YIELD: 0.08%
  • 10-Year: 2.25 from 2.25
  • YIELD CURVE: 1.91 from 1.90 

MACRO DATA POINTS (Bloomberg Estimates): 

  • 7:45am/8:55am: ICSC/Redbook weekly retail sales
  • 9am: S&P/Case-Shiller (Y/y), Jan., est. -3.8% (prior -3.99%)
  • 10am: Consumer Confidence, Mar., est. 70.1 (prior 70.8)
  • 10am: Richmond Fed, Mar., est. 18 (prior 20)
  • 10am: Fed’s Dudley, Kamin to speak at hearing in Washington on Eurozone aid
  • 11:30am: U.S. to sell $35b 4-week bills
  • 12:35pm: Fed’s Rosengren speaks in London
  • 12:45pm: Fed’s Bernanke lectures at George Washington (3 of 4)
  • 1pm: U.S. to sell $35b 2-yr notes
  • 1:20pm: Fed’s Fisher speaks in Choudrant, Louisiana
  • 3:45pm: Fed’s Duke speaks via videoconference on building sustainable communities
  • 4:30pm: API inventories
  • 9pm: Fed’s Bullard speaks at Tsinghua University 


  • President Obama meets with Pakistan PM Yousaf Raza Gillani, says he hopes countries can repair strained ties
  • Nuclear Regulatory Commission holds a briefing on license renewal for research and test reactors, 9am
  • House, Senate in session:
    • Treasury Secretary Tim Geithner testifies on the budget to House Appropriations subcommittee, 10am
    • Natural Resources Committee holds a hearing on impact of rising gasoline prices on U.S. tourism industry, 10am
    • House Financial Services subcommittee hears from New York Fed President William Dudley on Fed aid to the Eurozone, 10am
    • House Energy subcommittee hearing on cosmetics, 10:15 am
    • House Financial Services Committee marks up FHA Emergency Fiscal Solvency Act, 1pm 


  • Home prices in 20 U.S. cities measured by S&P/Case-Shiller probably fell 3.8%, smallest decline in 3 mos., economists est.
  • Obama administration today will defend requirement that Americans obtain insurance or pay a penalty in second of three days of arguments before Supreme Court over health- care law
  • Annie’s, maker of organic and natural packaged foods, boosted its IPO range to $16-$18 ahead of today’s expected offering
  • Michaels Stores, owned by Blackstone, Bain, said to consider filing for IPO as soon as next week
  • Universal Music said to ready three publishing catalogs for sale which may raise as much as $200m
  • United Technologies faces in-depth EU probe into bid to buy Goodrich for $16.5b; UTX says sees closing of deal mid-year
  • RBS up 6% in London after two people familiar with situation said the U.K. govt. held talks with investors, including Middle Eastern sovereign wealth funds, about sale of part of its stake
  • Sharp plans to raise ~$800m in share sale of unit to Hon Hai Precision, three related companies, to replenish capital
  • Rio Tinto weighing sale of diamond assets as part of strategy review 


    • Lennar (LEN) 6am, $0.05
    • Charming Shoppes (CHRS) 6:58am, $(0.02)
    • McCormick (MKC) 7am, $0.53
    • Walgreen (WAG) 7:30am, $0.77
    • Neogen (NEOG) 8:45am, $0.22
    • Oxford Industries (OXM) 4pm, $0.55
    • Exfo (EXF CN) 4pm, $0.08
    • Christopher & Banks (CBK) 4:01pm, $(0.47)
    • Synnex (SNX) 4:02pm, $0.92
    • PVH (PVH) 4:02pm, $1.10
    • Robbins & Myers (RBN) Post-Mkt, $0.75 


  • Russia-Sized Mistakes Driving Corn Prices to Limit: Commodities
  • Oil Near Three-Day High as Equity Gains Balance Supply Increase
  • Soybeans Gain as Dry Weather Hurts Yields in Southern Brazil
  • U.S. Corn Exports to Japan Drop as Brazil, Ukraine Boost Sales
  • Gold May Gain From 2-Week High in London on Fed Monetary Policy
  • Copper May Rise for Third Day on Federal Reserve Policy Outlook
  • White Sugar Slides After India Allows More Exports; Cocoa Rises
  • La Nina Weather Pattern ‘Is Dead,’ World’s Forecasters Say
  • Shell Shearwater Field Pumping Gas After Total’s Elgin Halt
  • Oil Stockpiles Rise to Six-Month High in Survey: Energy Markets
  • Palm Oil Rallies to One-Year High as Vegetable-Oil Supplies Drop
  • Oil-Sands Firm Sells U.S. Debt on Keystone Faith: Canada Credit
  • Cars Sent to U.S. Rise Most Since ‘06 Aiding Wilhelmsen: Freight
  • Oil Stockpiles at Six-Month High in Survey
  • Enbridge Venture Plans New Oil Pipes to Gulf as Keystone Blocked
  • China Aluminum Smelters Undo Alcoa, Rio Cuts: Chart of the Day
  • Fracking Boom Makes U.S. Laggard No More on Greenhouse-Gas Cuts 
























The Hedgeye Macro Team





The Macau Metro Monitor, March 27, 2012




Marina Bay Sands have filed 21 High Court claims against casino debtors this year.  This is the highest reported for a single quarter since MBS opened in April 2010.  The majority of these debtors are understood to be Malaysians who have failed to respond to reminders to make good on what they owe MBS as a result of bad runs at the gaming tables from 2010.



Macau's unemployment rate for December 2011-February 2012 was flat with the previous period (November 2011-January 2012), at 2.1%.  Total labor force was 346,000 in December 2011-February 2012 and the labour force participation rate stood at 73.2%, same as the previous period.


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Obama’s Reelection Chance Jumps to a Record Level – Hedgeye Election Indicator


Obama’s Reelection Chance Jumps to a Record Level – Hedgeye Election Indicator  - Screen Shot 2012 03 26 at 5.27.22 PM



If the US presidential election were held today, President Obama would have a 62.3% chance of winning reelection, according to  the Hedgeye Election Indicator (HEI). President Obama’s likelihood of reelection is up from 60.5% last week, and at its highest level ever, according to the HEI. For some perspective, in October of last year, the HEI calculation showed that the President had only a 44.9% chance of winning, his lowest score on the HEI.



Obama’s Reelection Chance Jumps to a Record Level – Hedgeye Election Indicator  - HEI



Hedgeye developed the HEI to understand the relationship between key market and economic data and the US Presidential Election. After rigorous back testing, Hedgeye has determined that there are a short list of real time market-based indicators, that move ahead of President Obama’s position in conventional polls or other measures of sentiment.


One of those market indicators, the VIX, which measures volatility in the stock market, currently stands below 15, which benefits President Obama’s chances in the Hedgeye Election Indicator model this week.


Additionally, the strong performance of the US stock market in general that saw the S&P 500 move to a four-year high Monday, helps President Obama’s reelection chances, according to the HEI.






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Darden reported 3QFY12 EPS of $1.25 was just ahead of consensus $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 at the company’s Analyst Day. 


Darden reported a solid 3QFY12 on Friday but there was a lot of noise in the quarter with weather and the impact of an earlier start of Lent this year versus last year.  Less severe winter weather boosted the blended same-restaurant sales number by 200 basis points while Lent positively affected results by roughly 60 basis points (including an astounding 480 basis points at Red Lobster).


Management’s commentary on the macro environment as “choppy” was important; the company sees improving employment being offset by the impact of rising gas prices.  The industry slowed in February, according to management, after a strong holiday and post-holiday season.  Management noted that less severe weather did help results but downplayed the impact somewhat by referring to states such as CA, TX & FL.  In the case of TX, we know from other companies’ commentary and our own research, that adverse weather conditions did impact business in Texas during January 2011 so would argue that a benefit would account for some positive impact on Darden’s Texas restaurants.


In terms of FY13, management will offer more comprehensive guidance on the FY12 call in June but did provide some initial thoughts during Friday’s earnings call, sounding generally bullish but offering little in the way of specifics.


Darden also seems to be stealing a page out of Brinker’s book when talking about the new Olive Garden promotion; Drew Madsen said, “this promotion is representative of our strategy going forward, where we plan to emphasize a broadly appealing platform idea rather than just one or two new dishes.”


The initial improvements in the Olive garden performance are coming from a “more overt value message as well as more affordable core menu dishes” that are pulling customers into the store.  The issue remains how effective the new initiatives are and to what degree the apparent improvements are being helped by the benefit of easy weather.  The new advertising campaign is also a welcome change, but this too needs time to prove itself out.  The biggest challenge to any real improvement in the chain’s performance will be the “bolder improvement initiatives” that include a “remodel that updates and refreshes the dining atmosphere in the 430 non-Tuscan Farmhouse restaurants.”  This suggests that 55% of the chain is suffering from a stale look in today’s competitive casual dining environment. 


Any big leg up in the stock price will likely come from multiple revision based on a stronger secular story from improved same-store sales.  In the short run, the dividend yield and share repurchase will likely keep the shorts on the side lines.  We will look to revisit the story after FY4Q12, which will likely bring a sequential slowdown in same-store sales.


The bottom line for us is that DRI is a strong company supporting a 3.4% dividend yield and that, along with our belief that management will deliver on most if not all of its long term targets, is sufficient to convince us that the longer term TAIL thesis remains intact.  However, the immediate term TRADE and intermediate term TREND prospects of the company are uncertain.  Macro concerns coupled with concept-specific concerns at Olive Garden and Red Lobster concern us over the next few months.  Olive Garden, in particular, is crucial to the stock’s performance given its relative size within the Darden portfolio and we feel that investors need to see an improving top line that is not achieved to the detriment of restaurant operating margins.


Olive Garden


Olive Garden’s 2% 3QFY12 same-restaurant sales growth lagged Knapp Track by approximately 60 basis points which was a sharp sequential improvement versus the prior quarter’s lag of 320 basis points. 


During the quarter, Olive Garden ran two promotions.  The first, baked pasta romana, ran from December through the third fiscal week of January and compared favorably to last year’s lack-luster scaloppini promotion.  The second, which was launched in the fourth fiscal week of January, was the three-course Italian dinner for $12.95.  This promotion succeeded in driving traffic but is also priced $2 higher the promotion from the same period in FY11 (although that promotion was for an entrée rather than three courses).  While 3QFY12 was successful for Olive Garden in that the gap-to-Knapp was narrowed sequentially, next quarter will pose a much sterner test for the chain as the weather benefit goes away.  Management described the environment as “choppy” and this is causing us to remain on the sidelines.


DARDEN THOUGHTS - olive garden gap to knapp



Red Lobster


Red Lobster posted a 6% same-store sales number for 3QFY12, as preannounced, which benefitted by 480 basis points due to an earlier start to Lent 2012 versus 2011.  The 6% number was 340 basis points above the full service industry benchmark but the benefit derived from the Lent shift will reverse in 4QFY12.  Traffic during 3QFY12 was soft, if we adjust for weather and Lent, and it seems that maintaining profitable traffic growth could prove challenging if the effectiveness of promotional efforts is declining.  Soft underlying traffic trends were a surprise given the 4 for $15 promotion that Red Lobster was running in the quarter.


One important concern for Red Lobster is seafood inflation but that is, according to management, going to ease in 1HFY13 and was less acute in 3QFY12 than 1HFY12.  Nevertheless, management not taking any price against seafood led to margin contraction at Red Lobster.  Going forward, the question is whether or not the “broader range of levers” that management alluded to as being core to its sustaining Red Lobster comps is going to be impactful.  Red Lobster has been a strong component of the Darden portfolio during this fiscal year but maintaining that momentum will be difficult in a choppy macro environment.


DARDEN THOUGHTS - red lobster gap to knapp



LongHorn Steakhouse


LongHorn continues to perform well for Darden.  3QFY12 same-restaurant sales growth of 6.7% was 410 basis points above the full service industry benchmark.  Negative mix was one standout from the chain’s results but the successful and profitable efforts to drive lunch business is the primary driver of that trend.  LongHorn is an important growth vehicle for Darden and new LongHorn units continue to exceed sales and earnings hurdles. 


DARDEN THOUGHTS - longhorn gap to knapp



Howard Penney

Managing Director


Rory Green