Prepare The Pile

This note was originally published April 10, 2012 at 07:21am ET.



“The key is not to predict the future, but to be prepared for it.”



I was on a plane to Denver last night and was reviewing some of the required reading in my pile. For those of you un-familiar with my research process, my pile is part of it. I never leave home without it. I typically read my pile on a 1-3 week lag.


The Pile revealed 2 different perspectives on preparing for the future trajectory of long-term Global Economic Growth:

  1. Goldman Sachs: Global Strategy Paper No. 4 – “The Long Good Buy” (March 21, 2012)
  2. Reinhart & Rogoff: “Five Years After Crisis, No Normal Recovery” (April 2, 2012)

Goldman’s view acknowledges that “future growth may be lower than experienced over the past decade in many parts of the world”, but that equities are already pricing in “unrealistically large declines in growth.” They’re making both a growth and valuation call.


Reinhart & Rogoff suggest that “the concepts of recession and recovery need to take on new meaning” and that “financial crises leave behind deep recessions of long duration and considerable volatility.” They’re calling for debt and volatility to slow growth.


The Pile did not change my 5 year-old view on the Global Growth Cycle. Neither did it change my risk management process. From these debt and deficit levels, Big Government Interventions in our markets and economies will continue to:


A)     Shorten economic cycles

B)      Amplify market volatility


As growth slows, “cheap” markets get cheaper. Valuation isn’t a catalyst until growth re-accelerates.


Back to the Global Macro Grind


While it’s interesting to observe the emotion and Storytelling associated with why the US stocks are going down, this morning’s Global Macro research process reveals pretty much the same thing we have been flagging since February. While Growth Slowing, globally, may be new to a US stock market centric media consensus, it’s not new to the rest of the world.


Here’s a quick Global Equity market update:


1.   ASIA – context is always critical, so it’s important to acknowledge that 2 of the major leading indicators in Asia, the Hang Seng and the Nikkei, stopped going up on February 29th and March 27th, respectively. Inclusive of this week’s declines, the Hang Seng and Nikkei are down -6.1% and -7.0% from their YTD tops. India, Australia, and Singapore are all bearish TRADE.


2.   EUROPE – if Germany’s DAX is susceptible to a 6.2% correction from its YTD high (March 15th), any equity market in the world is. Germany’s employment situation is much more stable than that of the US, despite neighboring some of the most dysfunctional debt/deficit laden countries in the world. Spain is the Global Macro train wreck of the YTD, down -11%.


3.   USA – the SP500 finally broke our immediate-term TRADE line of 1391 support yesterday, but has only corrected -2.6% from its April 2nd top. The Russell 2000 stopped going up 3 weeks ago and is down -5.1% from its March 26th top (immediate-term TRADE resistance there is now 822). As for the 50-day moving averages – we only use them for behavioral observations.


The rest of the world, of course, doesn’t hinge on Dow 13,000 or the price of Apple. It’s globally interconnected, across asset classes, from countries, to currencies, bonds, and commodities.


Here are my Top 10 cross asset class callouts to make a note of this morning:

  1. US Equity Volatility (VIX) has held its long-term TAIL of 14.41 support and is now breaking out above our 16.24 TRADE line
  2. Oil Volatility (OVX) remains above its immediate-term TRADE line of 28.43 support as Oil prices break TRADE support
  3. Brent Oil (BNO) has finally broken its immediate-term TRADE support line of $124.23/barrel
  4. Copper continues to be broken from a long-term TAIL perspective and immediate-term TRADE resistance = $3.85/lb
  5. Gold is in a freshly formed Bearish Formation (bearish TRADE, TREND, and TAIL) with next support = $1616/oz
  6. Spanish and Italian 10yr bond yields remain in a Bullish Formation (bullish TRADE, TREND, and TAIL)
  7. US Treasury 10yr bond yields continue to signal Growth Slowing, under both TRADE resistance of 2.18% and TAIL 2.47%
  8. US Treasury Curve Yield Spread (10s minus 2s), which is a proxy for growth’s slope, has compressed 14bps wk/wk
  9. US Dollar Index is moving into a stealth Bullish Formation with intermediate-term TREND support = $79.55
  10. Japanese Yen is bumping up against another lower long-term high at $81.23 (vs USD) and remains in a Bearish Formation

I have a passion for my team’s process because it’s had repeatable success in revealing the deep simplicity of Growth and Inflation Accelerating or Decelerating, globally, on a real-time basis. I Prepare The Pile every day so that I am always reading the counter punches to our overall risk management conclusions, but I do not defer to The Pile’s views based on short-term market moves.


What we’ve all had the opportunity to learn in the last 5 years is that if you get the intermediate-term TRENDS in both Growth and Inflation right, and you’ll get a lot of other things right. Valuation calls with no catalysts are called opinions. If you’re using the wrong Global Economic Growth assumptions, you’re basing your “valuation” work on the wrong numbers anyway.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1616-1655, $121.31-123.84, $79.55-80.16, and 1374-1391, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Prepare The Pile - Chart of the Day


Prepare The Pile - Virtual Portfolio


Keith shorted MGM in the Hedgeye Virtual Portfolio at $13.70.  According to his model, the TRADE resistance is $14.06 and the TREND support is at $12.93.



While Q1 should be ok, we think the Street's estimates for Q2-Q4 are aggressive.  Numbers just released from Nevada for February were in line with our projections while March faces a difficult comp despite 2 extra weekend days.  The Q2 calendar is unfavorable and the US jobs picture looks a little bleaker.  As it is, we are projecting 15% company wide EBITDA growth for 2012 and we are one of the lower estimates on the Street.   




Preliminary April forecast of HK $24-25 billion, up 21-25% YoY



Average daily table revenues (ADTR) were HK$768 million for the first 9 days of April, slightly above the March run rate.  However, 4 of the 9 days were weekend days so ADTR should be higher.  We are currently projecting HK$24-25 billion in full month GGR for April, up 21-25% YoY.  Relative to the first 8 days of April last year, ADTR was up 15% but those 8 days contained only 2 weekend days which indicates there would be a little downside to our estimate.  However, the opening of SCC this week should juice the numbers into our range.  The April hold comparison is much more difficult than March (approximately 30bps of hold %).  March was the last of the easy comparisons.




In terms of market share, Galaxy is the only company significantly below trend while MGM is the only one significantly above.  With LVS opening up SCC this week, we would expect to see its shares rise, mostly at the expense of Galaxy and WYNN.



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SMP Buying Stuck at Zero

Position in Europe: Long Germany (EWG)

For a fourth straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 4/6, to take the total program to €214 Billion.


February-to-date the Bank has purchased a mere €210 Million versus €2.2 BILLION in the week ended 1/20, and €3.8 BILLION in the week ended 1/12.


While the Bank has been in a wait and watch pattern, European capital markets are far from still.  As a risk signal, sovereign bond yields for the Spanish and Italian 10YR maturity are trading up 100bps and 84bps month-over-month to 5.95% and 5.61%, respectively.


While there are other channels to suck up sovereign bond issuance, including funding from the two 36-month LTRO programs, the SMP’s lack of buying may send a negative signal to market participants. This has perhaps been witnessed in recent weeks by sovereign auctions in which average yields were priced higher than previous auctions. This is an inflection versus February and the first half of March in which most European bond auctions went off with lower yields than previous issuance.


Europe’s response to its sovereign and banking “crisis” remains a reactive one. There's been no increase to the collective size of the EFSF and ESM, while the inability of Spain to reduce its fiscal imbalances is creating increased market nervousness. Should bonds yields continue to break out, we may see the ECB get involved again, perhaps by renewing its secondary bond purchasing.


SMP Buying Stuck at Zero - 11. smp


Matthew Hedrick

Senior Analyst








Comments: Keith closed out the PFCB position yesterday, based on quantitative factors.  We remain bullish on the intermediate term TREND from a fundamental perspective.




Comments: Keith shorted BWLD yesterday in the virtual portfolio.  We continue to like it on the short side.  20% COGS inflation after seeing zero margin flow-through in a much more benign cost environment last quarter is going to pose a problem.  At the recent Telsey Advisory Group presentation, nobody brought up commodity pressures. 




Commentary from CEO Keith McCullough


Pick your leading indicator in Global Macro – most stopped going up in late Feb/early March:

  1. HANG SENG – Hong Kong did not like the Chinese demand message for March w/ Chinese Imports only running +5.3% y/y; HK traded down another -1.1% overnight, taking the Hang Seng’s correction to -6.1% since peaking Feb 29th
  2. DAX – from an employment and stability perspective, Germany is definitely a healthier economy than the USA’s right now and the correction in German stocks is 2x that of the SP500’s; down -0.9% to start the wk (down -6.2% from the YTD high established March 16th)
  3. COMMODITIES – Dollar up days crush commodities; evidently dollar down days don’t help them now either as “weakening demand” rolls off the tongues of most who’s business is global. The CRB index is in what we call a Bearish Formation. Not good. Brent Oil broke $124.23 TRADE line support.

Growth Slowing will matter until growth slows at a slower rate.







THE HBM: MCD, DRI, CBRL - subsector




MCD: has an interesting page on the McDonald’s Political Action Committee which details its spending by election cycle and also the party split per cycle of spending.  It shows that from 1998 through 2006, 84% of the Federal McDonald’s PAC was spent supporting Republicans.  In 2008, 70% of the PAC’s spend went to Republicans.  In 2010, the GOP and Democratic party received 52% and 47% of the PAC’s spend, respectively. 


MCD: MCD Japan’s March same-store sales gained 6% year-over-year.  March 2011 performance, of course, was greatly impacted by the earthquake and tsunami of March 11th, 2011.





CMG: Chipotle gained in a down tape yesterday.  Unit level returns remain strong as this growth story sustains itself longer than many have expected along the way.


MCD: McDonald’s gained in a down tape yesterday.


DOM.LN: Domino's UK & Ireland cannot catch a bid.  The stock is down 10% since reporting disappointing comps on 3/28.





CBRL: Cracker Barrel adopted a new shareholder rights plan with a 20% triggering threshold and a qualifying offer exception.  The Board also declared a dividend distribution of one preferred share purchase right on each outstanding share of CBRL common stock.  The Board’s action, according to CEO Sandra Cochran, is “in response to Biglari Holdings’ continuing open-market acquisition program of CBRL shares”.


DRI: Darden is planning to create the world’s largest lobster farm in Malaysia, allowing it to sell the crustaceans in Asia and supply them to its chains such as Red Lobster.



RT: The market didn’t buy on the leg down.  Ruby Tuesday declined 4.1% on accelerating volume yesterday.


THE HBM: MCD, DRI, CBRL - stocks



Howard Penney

Managing Director


Rory Green




TODAY’S S&P 500 SET-UP – April 10, 2012

As we look at today’s set up for the S&P 500, the range is 17 points or -0.59% downside to 1374 and 0.64% upside to 1391. 











  • ADVANCE/DECLINE LINE: on 4/09 NYSE -1747
    • Down from the prior day’s trading of -410
  • VOLUME: on 4/09 NYSE 724.55
    • Increase versus prior day’s trading of +0.73%
  • VIX:  as of 4/09 was at 18.81
    • Increase versus most recent day’s trading of +12.63%
    • Year-to-date decrease of -19.62%
  • SPX PUT/CALL RATIO: as of 04/09 closed at 2.10
    • Decrease from 2.51 the day prior, -16.33%


  • TED SPREAD: as of this morning 39
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 2.05
  • YIELD CURVE: as of this morning 1.74
    • Increase from prior day’s trading at 1.73 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Business optimism, est. 95.0 (prior 94.3)
  • 7:30am/8:45am: ICSC/Redbook weekly retail sales
  • 8:30am: WASDE: Soybean, corn, cotton, wheat
  • 10am: IBD/TIPP economic optimism, est. 48.5 (prior 47.5)
  • 10:00am: JOLTs Job Openings, Feb.
  • 10:00am: Wholesale Inventories, Feb., est. 0.5% (prior 0.4%)
  • 12pm: DOE short-term outlook
  • 12:30pm: Dallas Fed’s Fisher speaks on U.S. economy in Norman, Oklahoma
  • 12:45pm: Atlanta Fed’s Lockhart gives welcome remarks at Atlanta Fed conference in Stone Mountain, Georgia
  • 2:30pm: Minneapolis Fed’s Kocherlakota speaks to Southern Minnesota Initiative Foundation in Nicollet, Minnesota
  • 4:30pm: API inventories 


    • Obama goes to Southeast Florida, expected to urge Congress to pass the Buffett rule, attend campaign fundraisers
    • Federal Housing Finance Agency Acting Director Ed DeMarco speaks at the Brookings Institution in Washington on principal reduction, 9:30am 


  • Alcoa is the first Dow component to report 1Q earnings after the close, kicking off the “traditional” earnings season
  • Bernanke calls on regulators to limit risks of shadow banking
  • IMF releases analysis of global economy in advance of its spring meeting later this month, 9am
  • China reports unexpected March trade surplus as import growth trailed forecasts
  • Bank of Japan keeps key rate, asset-purchase and credit lending programs unchanged
  • U.S. to ask federal appeals court to restore requirement that pictures of diseased lungs and other consequences of smoking be on cigarette packages
  • Express Scripts purchase of Medco to be challenged by pharma trade groups in court
  • CVC may seek more than $2b from Formula One IPO
  • Sony posts record loss after taking $3.7b charge to write down deferred tax assets; watch suppliers
  • Sharp posts $4.7b loss for year, wider than it forecast
  • Foxtel gets antitrust approval to buy Austar after agreeing to drop exclusive rights to Nickelodeon, National Geographic
  • Calpers said to be seeking to sell about $1.5b in private- equity fund stakes
  • U.S. Department of Agriculture releases estimates for global production, consumption and stockpiles of wheat, corn, soybeans and cotton 


    • Supervalu (SVU) 8am, $0.35
    • Mattress Firm (MFRM) 4:01p, $0.19
    • Alcoa (AA) 4:05pm, ($0.04) 


COMMODITIES – Dollar up days crush commodities; evidently dollar down days don’t help them now either as “weakening demand” rolls off the tongues of most who’s business is global. The CRB index is in what we call a Bearish Formation. Not good. Brent Oil broke $124.23 TRADE line support.











DAX – from an employment and stability perspective, Germany is definitely a healthier economy than the USA’s right now and the correction in German stocks is 2x that of the SP500’s; down -0.9% to start the wk (down -6.2% from the YTD high established March 16th).






HANG SENG – Hong Kong did not like the Chinese demand message for March w/ Chinese Imports only running +5.3% y/y; HK traded down another -1.1% overnight, taking the Hang Seng’s correction to -6.1% since peaking Feb 29th.










The Hedgeye Macro Team


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