The Joker

This note was originally published at 8am on March 30, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I’m a joker

I’m a smoker

I’m midnight toker

I get my loving on the run.”


-The Steve Miller Band


Technically speaking today is the last business day before April Fool’s Day.  Last year, as some of you remember, I pulled off a decent prank as I removed Keith from his post as CEO of Hedgeye and we replaced him with the The Most Interesting Investor In The World. 


For those of you that missed last year’s joke, I’ve posted the mock video of The Most Interesting Investor In The World directly below.  Our readers that are in tune with popular culture will recognize that it is a spoof of Dos Equis Most Interesting Man In The World:


In my opinion, although perhaps it is because I wrote the script for the You Tube video above, the best line is:


“He shorts naked, with his clothes on.”


But to be even more fair, April Fool’s Day jokes can at times completely miss their mark, especially in times like this when global macro markets really need our utmost focus.  So, this year, we are putting April Fool’s to the sidelines.


Ironically, or perhaps not, Steve Miller is from Wisconsin, which, setting aside the Republican primary battle, is really the current battleground of U.S. politics.  As ABC News wrote this morning:


“While the national media attention has been focused on the upcoming GOP primary in Wisconsin, there’s another political battle gearing up in the Badger State, and it involves both Democrats and Republicans.


On Friday, the Government Accountability Board of Wisconsin is expected to certify the 1 million petitions turned in in January to recall Republican Gov. Scott Walker. With a special gubernatorial election pending, Democrats and Republicans in the state are bracing for a tight race ahead.


A special election is tentatively scheduled for June 5, with a Democratic primary to take place four weeks earlier, on May 8. (Those dates will be made official after the recall is certified.)  Three Democrats have declared their candidacies – former Dane County executive Kathleen Falk, Wisconsin secretary of state Doug LaFollette and state senator Kathleen Vinehout.”


On many levels, the June 5 election will be a critical leading indicator for President Obama’s re-election chances.


On that front, President Obama currently has a 60.4 probability of getting re-elected based on InTrade.  This correlates very closely with the Hedgeye Election Indicator (HEI), which currently shows a 62.3 chance of Obama getting re-elected.  Our proprietary index is based on rigorous back testing.  In effect, we’ve determined that there is a short list of real time market-based indicators that move ahead of President Obama’s position in conventional polls.


Setting all joking aside, in the Chart of the Day, I’ve flagged a note passed along yesterday by my colleague Darius Dale in which he wrote:


“Broadening our read-through on volatility as a measure of investor complacency, we’ve created a proprietary cross-asset class volatility index that uses an unequally-weighted average of the following volatility indices:


CBOE SPX Volatility Index (VIX);

Merrill Lynch U.S. Treasury Option Volatility Estimate Index (MOVE);

CBOE Oil ETF Volatility Index (OVX);

JPMorgan G7 FX Volatility Index; and

JPMorgan EM FX Volatility Index. 


On this score, the Hedgeye Global Macro VIX is at levels last seen since early OCT ’07. Note: that date is coincident with the all-time peak in U.S. equities amid consensus faith that “shock and awe” interest rate cuts and other modes of central planning would ultimately prove effective in delivering a shallow, manageable domestic growth slowdown.”


So The Chart of the Day, no joke, shows that volatility, per Darius’s point, is at a very complacent level.  In fact, this is a level that previous flagged both U.S. equity market and global equity tops.


The global macro action this morning is once again in Europe.  Eurozone Financial Ministers are meeting in Copenhagen today (beginning at 11:30am GMT) and tomorrow to discuss strengthening the region’s firewall via EFSF/ESM.  As well, Rajoy will present Spain’s 2012 budget this afternoon with a statement expected around 12pm GMT (deficit target 5.3% of GDP down from 8.5% last year).


If there is one key red flag this morning in Europe it is from Germany.  Specifically, German February retail sales came in weaker at -1.1% month-over-month versus the estimate of +1.1%.  Now, clearly, this is but one data point, but Germany is definitely the positive bell weather in Europe to focus on. Well, until Germany turns negative.


As it relates to our negative thesis on the Yen, this morning we had two supportive data points:


1. Japan Industrial production unexpectedly fell as strengthening yen hurt outlook for exporters earnings; and

2. Japan February consumer prices unexpectedly increased +0.1%  year-over-year versus -0.1% estimates.


But data points, as always, are only data points.  So, this morning I will leave you with one last quote from Steve Miller:


“The question to everyone’s answer is usually asked from within.”




Our immediate-term support and resistance ranges for Gold, Oil (Brent), and the SP500 are now $1652-1688, $122.25-124.67, and 1391-1416, respectively.


Keep your head up and your stick on the ice,


Daryl G. Jones

Director of Research


The Joker - Chart of the Day


The Joker - Virtual Portfolio


TODAY’S S&P 500 SET-UP – April 13, 2012

As we look at today’s set up for the S&P 500, the range is 38 points or -2.42% downside to 1354 and 0.32% upside to 1392. 











    • Up from the prior day’s trading of 1684
  • VOLUME: on 4/12 NYSE 756.67
    • Decrease versus prior day’s trading of -4.24%
  • VIX:  as of 4/12 was at 17.20
    • Decrease  versus most recent day’s trading of -14.09%
    • Year-to-date decrease of -26.50%
  • SPX PUT/CALL RATIO: as of 04/12 closed at 2.11
    • Increase from the day prior at 2.04 


GROWTH SLOWING – away from the economic data (which now includes US employment gains slowing), Copper and 10yr UST yields are the most obvious signals this morning with Copper moving into a falling knife formation (-1.6%) and 10yr slicing back through our intermediate-term TREND support of 2.03% to 2.01% last. 

  • TED SPREAD: as of this morning 38
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 2.01
    • Down from prior day’s trading of 2.05
  • YIELD CURVE: as of this morning 1.73
    • Decrease from prior day’s trading at 1.77 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:00am, Fed’s Dudley speaks in Buffalo on the economy
  • 8:30am: CPI (M/m), Mar., est. 0.3% (prior 0.4%)
  • 9:55am: U.Mich, Apr. P, est. 76.2 (prior 76.2)
  • 1pm: Bernanke speaks in New York on financial crisis and policy response
  • 1pm: Baker Hughes rig count
  • 2:15pm: Dudley visits cancer center in Buffalo 


    • President Obama speaks on benefits of trade with Latin America at Port of Tampa, Fla. 1:20pm
    • Obama departs Tampa for Cartegena, Colombia, for April 14-15 Summit of the Americas
    • Mitt Romney speaks to NRA annual meeting in St. Louis. 1pm 


  • JPMorgan Chase, Wells Fargo are first two big U.S. financial cos. to report 1Q earnings
  • CPI probably rose at slower pace in March.
  • Google gives founders share-issuing power at investors’ expense: corporate-governance experts
  • U.S. video-game industry sales fell 25% in March, NPD says; watch GME, MSFT, EA, SNE
  • Best Buy said to probe ex-CEO Dunn’s relationship with employee
  • China’s below-forecast GDP growth of 8.1% may mark end of slowdown
  • Spanish banks’ ECB borrowings climb to $300b in March
  • Infosys sales forecast misses est.; follows report SAP off to slower 1Q start in North America; watch IT services stocks
  • North Korean long-range missile launch fails
  • Judge to consider approval of L.A. Dodgers bankruptcy plan
  • Week Ahead preview: G-20, IMF Meetings, Goldman, Iran Talks 


    • JPMorgan Chase & Co (JPM) 6:58 a.m., $1.17
    • Shaw Communications (SJR/B CN) 8 a.m., $0.38
    • Wells Fargo & Co (WFC) 8 a.m., $0.73    


  • Sugar Traders Extend Longest Bear Streak Since ‘07: Commodities
  • Corn Climbs on Signs of Rising U.S. Export Demand; Soybeans Drop
  • Oil Drops First Time in 3 Days on China Slowdown, Naimi Pledge
  • Copper Falls, Extends Second Weekly Drop as Chinese Growth Slows
  • Gold May Decline as Some Investors Sell Following Weekly Advance
  • Cocoa Advances as Some Investors May Be Buying; Sugar Retreats
  • Coffee Crop in Vietnam Gets Boost From Heavy Rain, Aids Fruiting
  • Commodities to Gain 5-20% in Second Half, Credit Suisse Says
  • Gold Set for Rebound With Support at $1,600: Technical Analysis
  • Cheniere Shale-Gas Exports Hinge on U.S.-Asia Price Gap: Energy
  • Nuclear Halt in South Korea Seen Boosting Coal: Energy Markets
  • Oil May Fall After Iranian Nuclear Program Talks, Survey Shows
  • India Said to Consider 16% Increase in State Rice Purchase Price
  • Sugar Traders Seen Bearish for Seventh Week
  • ING Investment Favors Indonesian Coal Bonds on Asian Resilience
  • Kansas Farmers May Increase Soybean Planting After Wheat Harvest
  • Citigroup Countersued by Rajaraman in Singapore Over Gold Losses 










EUROPE – certified train wreck remains in motion – it’s not different this time – you can’t ban economic gravity when imposing Stagflation on your people (Italian CPI +3.3% with Growth flat to down); Sold our long Germany position yesterday and re-shorted France because we think the gap between Spain -12% YTD and France’s CAC +2% YTD is going to narrow #Mean Reversion.





CHINA – GDP growth slows from 8.9% Q4 to 8.1% Q1, missing whatever whisper found its way into the mo mo community yesterday (someone should tell them Global Macro isn’t like small cap rumoring); Chinese stocks acted fine on that because they act inversely with Commodity inflation and Chinese bank lending. Commodities bulls freak out.










The Hedgeye Macro Team


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Charts of the Day: Not Enough Purchasing Power To Boost Growth

Conclusion: In the charts below, we highlight the fairly symbiotic relationship between U.S. import demand and headline economic growth, as well as what that means for the 1Q12 GDP report.


On the heels of a narrowing of the Trade Deficit to $46.0 billion in FEB (vs. $52.5B prior and a Bloomberg Consensus estimate of $51.8B), a rather large sell-side firm came out an increased their 1Q12 U.S. Real GDP growth forecast, citing the both the sequential improvement in the Trade Balance and the pickup in Export growth, which accelerated in FEB to +9.3% YoY vs. +7.8% prior.


While that firm has developed a history over the years taking the other side of a few of our more contrarian calls, their maneuver today does make sense intuitively to us. After all, GDP = C + I + G + NX, where “NX” is the Net Export/Trade Balance figure. In theory, a narrowing of a country’s trade deficit is explicitly supportive of a higher gross domestic product reading in the period.


In actually (i.e. according to the data), the U.S. Trade Balance actually has an inverse correlation to U.S. Real GDP growth. Keynesians want us to believe that “export boosting” currency devaluation policies are the elixir to all of our economic woes, but the fact of the matter is that the best Net Export reading the U.S. has posted over the last ten years came during the thralls of the Great Recession (JUN ’09).


Charts of the Day: Not Enough Purchasing Power To Boost Growth  - 1


The issue with debasing your currency and stoking cost-push inflation ('08; '11; '12) is that it slows the growth rate of end demand for goods in both the household and corporate sectors. At this point, it’s far beyond trivial to remind readers that the U.S. economy is levered to the “C” in the aforementioned equation. That domestic demand/GDP relationship is highlighted in today’s Balance of Payments report, with U.S. Import demand slowing to +6.9% YoY. Over the past 18yrs of data, the quarterly YoY growth rate of U.S. Imports has carried a +73% correlation to the quarterly growth rate of U.S. Real GDP.


Charts of the Day: Not Enough Purchasing Power To Boost Growth  - 2


Net-net-net-net-net, don’t be surprised if our call on JAN 25 for Bernanke’s Inflation to Slow Growth continues to show up in the data as we continue to expect it to.


Darius Dale

Senior Analyst

URBN: Small Piece of the Puzzle

It just so happens that URBN dominates the age category where we’re seeing the greatest improvements in unemployment. There’s much more to this story than a simple change in employment for 16-24 year olds. But the modest tailwind can’t hurt.


BLS unemployment trends released last week show that the unemployment rate for Americans ages 16-24 now stands at 16.4% as of March, down 10bps vs. February. Despite only a modest sequential improvement last month, the rate improved 110bps year over year – the most significant improvement across all age groups (see chart 2/3).


Next step…check out who has the greatest exposure to that age group.



While URBN’s greatest individual exposure is in the 25-34 year old age group, no other retailer out of the 100+ we evaluated has more exposure to the 16-24 yr old demographic. On average within the online retail channel, 19% of sales come from consumers below the age of 25 and 25% come from ages 25-34. URBN’s exposure to these demographics is significantly higher at 26% & 33% respectively. Because we’re looking at demographics for E-Commerce consumers and company-direct online sales are only a minority of total sales for most companies, the analysis is all relative. URBN stands out regardless. 


LET’S BE CLEAR…WE’RE NOT SAYING THAT URBN WILLL BE CURED BY BETTER EMPLOYMENT AND SPENDING LEVELS WITH ITS CORE CUSTOMER. There are much bigger issues there. But on the margin a macro factor turning into a tailwind could only help URBN at this point in its turnaround.  URBN remains one of our a top longs.


Below, we’ve included links to recent notes outlining our view on URBN across multiple durations:


"URBN: Strong Start for Top Long" (4/3/12)


"Retail Sentiment: URBN, LIZ, HBI, GIL, JNY, PVH, JCP" (3/27/12)


"URBN: A Winner in 2012" (3/22/12)


URBN: Small Piece of the Puzzle - earnings growth chart 


URBN: Small Piece of the Puzzle - unemployment rate chart


URBN: Small Piece of the Puzzle - employment rate chart


URBN: Small Piece of the Puzzle - URBN demographic mix


Short interest data released yesterday shows that for the two weeks ending 3/30, there were some large swings in sentiment in restaurant stocks.  The standouts were BJRI, CBRL, PEET, RRGB, SBUX, DIN, CBOU, THI, TXRH, BWLD, CAKE and RT. 


Sentiment Scorecard Callouts


SBUX:  Despite having been on a tear for 2011, Starbucks has been the best performing QSR stock of 2012 to-date!  Starbucks saw an uptick in sentiment (and short interest) during the last two weeks of March as the Annual Shareholders meeting, Verismo news, and other growth layers emerged to buoy the stock.  We see Starbucks as the standout coffee play, despite the outstanding returns the stock has seen over the last three years, as it continues to innovate and grow internationally.  All that being said the multiple is priced for perfection; any disappointments or mishaps could bring a strong leg down in the stock.


BWLD: As the sell-side gets more bearish the buy-side gets bullish.  Is management whispering something the ear of the buy side and not the sell-side?  Personally I don’t think they are saying anything to anybody, because they don’t want to admit they have a problem.  This quarter is going to be fun.  This stock continues to defy the gravitational pull of significant commodity inflation.  With SSS expectations of 10.7% for Q1, the street is expecting a strong quarter.  What if same-store sales are 9.5%, comps for the first three weeks of 2Q are 5-6%, and wing prices are up 100% in 2Q?  Hope and pray!  Short interest at 11% of the float is not that high and this company is not that well run. 


CAKE: Coming into EPS on 4/25 CAKE is the only casual dining name that has seen a consistent increase in short interest, the short interest ratio now being at 18%.  With bearish sentiment building through the quarter, what are the chances that the numbers are “bad” and the outlook is even worse?  Cheesecake Factory is a high quality name in the casual ding space that could post a disappointing comp number and also see deterioration in its fundamentals as we proceed through 2Q.  California, an important market for Cheesecake Factory given that 20% of the company’s system is in the Golden State, is being impacted heavily by rising gasoline prices given the Californian consumer’s dependence on private cars for transport.   ICSC data (chart below) is also indicating that the first quarter could come in below current expectations of 2.7%.  That said, given the bearish sentiment around the name, it could be a good pick on the long side if earnings disappoint on the 25thof April.  Some seem to be anticipating that disappointment right here and now.





EAT: Brinker is at the bottom of the pile in terms of sentiment.  We like this stock over the TAIL duration but have to respect the fact that casual dining stocks tend to move together.  The slowing trends in casual dining suggest that Chili’s needs to take significant market share in the quarter to gain the 1% in traffic that we think they will need to stay on track to meet FY12 comp guidance of 2%.  The last couple of weeks saw incremental shorting as the sales data slowed.


PFCB: The covering in PF Chang’s continued during the last two weeks of March.  Over that same period, however, the stock declined as investors booked gains even as shorts capitulated.  The success of the Triple Dragon promotion, launched April 2at the Bistro, is the next key data point for the company.


TXRH: Texas Roadhouse is another name that, into the end of 1Q, the sell-side grew more cautious on while the buy-side got more bullish.  Over the past month, the stock has significantly outperformed the casual dining space.  If the company notices any dip in demand for its products resulting from the “pink slime” controversy lessening appetite for beef more broadly, the negative impact of casual dining sales slowing could be amplified in the case of Texas Roadhouse.


RT: Over the past month, Ruby Tuesday has been the worst performing casual dining name on the heels of a disappointing quarter.  Despite the asset value of the company and the free cash flow, management’s actions are conveying a message that the core Ruby Tuesday business is slowly going away.  The company converting Ruby Tuesday stores to other concepts and closing stores out right does not instill much confidence in the investment case.  At best, bulls can buy the stock back and pray that increasing advertising can temporarily boost comps and allow for some profit-taking in the stock.  In terms of a longer term play, we would look elsewhere.


WEN:  The shorts have been climbing all over Wendy’s since the analyst meeting and the marketing debacles in 1Q12.  There is no reason, in our view, to be long this one.  As an aside, if Burger King is fixed that will put incremental pressure on Wendy’s and vice versa.  But we don’t think either chain will be “fixed” any time soon.


GMCR:  The sell-side is still drinking the kool-aid.  We think the stock could get cut in half.


DPZ:  The shorts have been pressing this one all quarter and the sell-side has been getting incrementally more bearish.  We’re also in that camp.  The top line should slow considerably both in the U.S. and in Europe. 


JACK: We think the sells-side is too bearish on Jack in the Box.  Shorts covered for much of the first quarter.  The company may have given the street too much data on Qdoba at the analyst meeting and some concern about margins that we think are overly cautious, may have arisen from that.  We are buyers on weakness and currently long in the Hedgeye Virtual Portfolio.


MCD: McDonald’s already raised some red flags on this quarter by changing its tone on austerity in Europe.  We are not expecting a dazzling beat in 1Q but think that the look into April will be the focus of investors.  We are currently short in the Hedgeye portfolio.  In a soft macro environment, MCD is a “go-to” stock for investors. 


YUM:  Like Starbucks, Yum Brands is on fire.  Is it because Taco Bell is having a great quarter?  We don’t think the sell-side can get any more bullish on YUM.  We are not confident that the turnaround is truly underway at Taco Bell.   The stock has barely reacted to China-related fears recently but softness in that market remains a big risk for the stock. 









Howard Penney

Managing Director


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