It's Your Problem

“The Dollar is our currency, but it’s your problem.”

-John Connolly, US Treasury Secretary (1971)


That’s the quote Jim Rickards uses to start Chapter 5 of Currency Wars. From an economic history perspective, it’s a critical quote to contextualize as President Richard Nixon was the first Republican President to go all-in Keynesian.


I’m not a Republican or Democrat. I am Canadian. So sometimes I just have to laugh when Republicans blame Obama for everything. It’s as if these partisan political pundits think we are dumb enough to believe that the likes of Nixon and Bush didn’t uphold the same monetary and fiscal policies to debauch the Dollar.


At least Nixon admitted it when he said plainly, “we’re all Keynesians now.” But are we? Inquiring minds in this country would like to know. Are we as numb to economic reality as the economically partisan media? Being Keynesian (Republican or Democrat) is partisan you know. And that probably had something to do with Republican veteran Lugar losing to the Tea Party in Indiana.


Back to the Global Macro Grind


You can blame Greece or Canada at this point, but the market doesn’t care to hear the excuses. The global economy is as interconnected as it has been for the last 5 years. The idea of “de-coupling” is only something the Sell-Side could make up.


If you didn’t know that the US Dollar is still the world’s reserve currency and that its daily, weekly, and monthly moves are driving what we call The Correlation Risk, now you know.


The US Dollar Index is having its 6th consecutive up day (touching $80 this morning), and one of our major Global Macro Theme calls for Q2 2012, Bernanke’s Bubbles (as in Commodities), are popping.


Since the Old Wall begged for Bernanke to do it, market expectations became addicted to it. Now it, as in “It’s Your Problem”, is on the tape.


Deflating The Inflation of easy money Commodity bubbles in Gold, Oil, etc. are riding the following immediate-term TRADE correlations to the US Dollar: 

  1. Gold -0.85
  2. Palladium -0.81
  3. Copper -0.67
  4. Oil -0.84
  5. Heating Oil -0.82
  6. Soybeans -0.79 

If you want to call these mathematical ironies, you can. As a matter of fact, you can call anything in this profession whatever you want to call it until you have to report your performance results back to your clients. If you are just a pundit, not held accountable to the TimeStamps of what you say and when, I can’t help you from yourself. Twitter’s gotcha!


In our 50 slide Q2 Global Macro Themes Deck (April 2012) we walked through the Top 10 Bernanke Bubbles (email if you’d like to review it with refreshed risk management levels).


The aforementioned immediate-term TRADE correlations anchor on 6 commodities. If you want to look at The Correlation Risk from a bigger picture perspective, here’s how the USD Index is trending versus some fairly major stuff: 

  1. CRB All-Commodities Index (19 Commodities) = -0.93
  2. S&P 500 = -0.85
  3. Euro Stoxx 600 = -0.84 

It’s Your Problem” or its your opportunity now. It’s a major performance problem if you are long anything US, European, or Japanese Equities (all Keynesian Policy Bubbles) or commodities. It has been since the middle of March.


Now plenty people who are long Gold (I have a zip lock bag of the stuff in my desk, fyi) will quickly say that’s precisely why they are long Gold – because it’s “protection against all the money printing and Keynesian central planners” of the world.


Fair e-nuff.


But what if the world is pricing in an end to the Nixonian madness? They did in the early 1980’s. What if we are on the verge of actually getting off the iQe drugs? Gold being up for 12 consecutive years naturally implies some mean reversion risk to the idea that Americans are dumb enough to vote for Dollar Debauchery for much longer.


In addition to their Keynesian economic policy making teams, Bush and Obama have one thing in common – Ben Bernanke. This is not unlike what Nixon and Carter had in common – Arthur Burns (who was also tasked, politically, with devaluing the Dollar and monetizing US Treasury debt).


Got Causality? 

  1. Dollar Debauchery in both the 1970’s and 2000’s perpetuated commodity price inflation
  2. Dollar Debauchery in both the 1970s and 2000’s perpetuated fear-mongering by policy makers to back their policies
  3. Dollar Debauchery in both the 1970s and 2000’s perpetuated a lack of confidence/trust and employment growth 

Both GDP Growth and US Employment Growth were as nasty as they have ever been (by decade) in both the Nixon/Carter and Bush/Obama periods of raging Keynesian Economic policy influence.


So, here’s a little reminder from little old me in New Haven, CT this morning to all of the Keynesians, from Larry Summers to Ben Bernanke, and all of their offspring – It’s Your Problem now. If that sounds like I am picking a fight, that’s old news. I did that in our April Themes presentation too. We are officially Fighting The Fed (and winning).


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Euro (EUR/USD), and the SP500 are now $1, $110.92-113.87, $79.42-79.88, $1.29-1.31, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


It's Your Problem - Chart of the Day


It's Your Problem - Virtual Portfolio

Behind Bed Bath & Beyond’s Cost Plus deal

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 80.46%
  • SHORT SIGNALS 78.35%


TODAY’S S&P 500 SET-UP – May 9, 2012

As we look at today’s set up for the S&P 500, the range is 17 points or -1.08% downside to 1349 and 0.17% upside to 1366. 












    • Down from the prior day’s trading of 252
  • VOLUME: on 5/08 NYSE 902.47
    • Increase versus prior day’s trading of 19.64%
  • VIX:  as of 5/08 was at 19.05
    • Increase versus most recent day’s trading of 0.58%
    • Year-to-date decrease of -18.59%
  • SPX PUT/CALL RATIO: as of 05/08 closed at 2.03
    • Up from the day prior at 1.31 


  • TED SPREAD: as of this morning 38
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.82
    • Decrease from prior day’s trading at 1.84
  • YIELD CURVE: as of this morning 1.57
    • Down from prior day’s trading of 1.59 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, week of May 4 (prior 0.1%)
  • 10am: Wholesale Inventories, Mar., est. 0.6% (prior 0.9%)
  • 10am: Fed’s Kocherlakota speaks in Minneapolis
  • 10:30am: DoE inventories
  • 10:45am: Fed’s Pianalto speaks in Lexington, Kentucky
  • 12pm: Fed’s Plosser speaks in Philadelphia
  • 1pm: U.S. to sell $24b 10-yr notes 


  • President Obama meets with NATO Secretary General Anders Fogh Rasmussen to finalize plans for NATO Summit in Chicago, 2:10pm
  • Chamber of Commerce holds quarterly economic briefing, 8:45am
  • Postal Service announces plan for smallest post offices, 10am
  • House lawmakers hold news conference calling for a special prosecutor to investigate the collapse of MF Global, 11am
  • House, Senate in session:
    • House Judiciary holds hearing on FBI oversight, with testimony from Robert Mueller, 10am
    • House Natural Resources hearing on offshore drilling, 10am
    • House Armed Services marks up defense authorization bill, 10am
    • House Financial Svcs subcommittee holds hearing on regulatory compliance costs for small financial institutions, 10am
    • Senate Banking panel holds hearing on need for long-term reauthorization of national flood insurance program, 10am
    • Former Fed Chairman Paul Volcker; FDIC member Thomas Hoenig testify before Senate Banking panel on limiting federal support for financial institutions, 2pm
    • World Economic Forum takes place in Ethiopia 


  • S&P 500, Dow index futures lower; Dow has dropped the previous five sessions amid concerns of political wrangling in Europe
  • Glaxo to begin hostile offer for Human Genome at $13/shr
  • Toyota forecasts profit will double to highest in five years
  • China passenger-vehicle sales rise 13%, exceeding estimates
  • Confidence among U.S. CEOs in 1Q reaches highest level in 3 yrs
  • Green Mountain Coffee removes chairman after stock sale
  • Verizon Wireless Airwaves purchase said to raise U.S. concerns
  • U.K. retail sales plunge by most in more than a year, BRC says
  • Commerzbank exceeds capital target as profit misses estimates
  • FDA advisory panel meets on PFE’s tofacitinib
  • Disney profit rises 21% on theme parks, says there will be “Avengers” sequel 


    • Spectrum Brands Holdings (SPB) 6am, $0.31
    • Quebecor Inc (QBR/B CN) 6am, C$0.68
    • Dollar Thrifty Automotive Group (DTG) 6am, $1.35
    • Agrium (AGU CN) 6:30am, $1.04
    • Enbridge (ENB CN) 7am, C$0.48
    • AOL (AOL) 7am, $0.17
    • Tim Hortons (THI CN) 7:30am, C$0.59
    • Dean Foods (DF) 7:35am, $0.21
    • Ariad Pharmaceuticals (ARIA) 7:35am, $(0.25)
    • Macy’s (M) 8am, $0.40; Preview
    • (PCLN) 4pm, $3.95
    • MEMC Electronic Materials (WFR) 4:01pm, $(0.26)
    • News Corp (NWSA) 4:03pm, $0.31
    • Live Nation Entertainment (LYV) 4:03pm, $(0.41)
    • Cisco Systems (CSCO) 4:05pm, $0.47
    • Universal Display (PANL) 4:05pm, $0.04
    • Activision Blizzard (ATVI) 4:05pm, $0.04
    • Alterra Capital Holdings (ALTE) 4:05pm, $0.62
    • BMC Software (BMC) 4:05pm, $0.80
    • Tesla Motors (TSLA) 4:10pm, $(0.70)
    • Monster Beverage (MNST) 4:10pm, $0.38
    • CenturyLink (CTL) 4:25pm, $0.58
    • TELUS (T CN) post-mkt, C$1.04    



GOLD – no iQe4 upgrade option = down Gold, or at least that’s how Gold acts; its immediate-term TRADE correlation to the USD is also -0.85, so with the USD up for 6 consecutive days, if you didn’t know about the Correlation Risk, now you know. Ron Paul saying abolish Bernanke in DC yesterday and Tea Party win vs Lugar – there’s an American Zeitgeist out there called The People. 

  • Silver Forecasters Bullish as Hedge Funds Retreat: Commodities
  • Oil Falls Sixth Day in Longest Drop Since 2010; SocGen Says Buy
  • India to Rival Vietnam, Dethrone Thailand as Top Rice Seller
  • China Said to Plan Auction of 3 Million Tons of Soybean Reserves
  • Ex-Deutsche Securities Banker Plans Commodities Hedge Fund
  • Copper Declines for a Fifth Day as Euro Debt Crisis May Worsen
  • Gold Drops to Four-Month Low in London on Concern Euro to Weaken
  • Corn Drops as U.S. Planting Gains, Boosting Supply Prospects
  • Palm Oil Declines to Two-Month Low on Greece Political Impasse
  • Sugar Gains on Rising Thai Premiums, Ramadan Demand; Cocoa Falls
  • Gold to Rebound to $1,700 an Ounce This Year: Technical Analysis
  • Sino-Forest Debt Insurance Set to Pay Out 71 Cents per Dollar
  • Thai Rice Output From Main Crop Set to Gain 21% on State Buying
  • Gasoline Seen at Earliest Peak in U.S. Since ‘98: Energy Markets
  • Ex-Deutsche Banker Plans Commodities Fund
  • OPEC Crude Drops Below $110 for First Time Since January
  • Glencore Says Commodity Demand ‘Healthy’ as Production Increases









ITALY – we covered our short position in France yesterday; re-shorted Spain (down -2.3% this morning and continues to crash); and stayed short Italian stocks as we think they’ll be back in crash mode in no time (already down -18.9% from the YTD peak in March when most global Equity markets stopped going up, including the Russell2000).






 ASIA – you can blame Europe or Canada or whoever, but the fact of the matter is that we live in a globally interconnected economy that doesn’t “de-couple.” India moved to QE yesterday and the market there didn’t care; China finally had a down day of -1.6%; and Japan is getting wrecked, down -1.5% overnight (down 17 of the last 23 days during a 12% draw-down).










The Hedgeye Macro Team



We see an asymmetric setup for Jack in the Box over the next three years.  For any clients looking for ideas on the long side, here is our favorite one on the three year duration.


The price of oil declining has moved some investors to look more closely at the consumer discretionary sector for long ideas.  Jack in the Box is one name that we like here and now.  The next catalyst for this stock is when 2QFY12 earnings are reported on May 15th.  We expect same-restaurant sales to beat expectations at Jack in the Box.  In addition, we believe that management will provide incrementally positive commentary on Qdoba, its growth prospects, and its operating margins. 


Following the investor day, much of the skepticism was based on Qdoba’s restaurant operating margin trending at 13.5%.  As the asset base matures we expect margins to rise. In its Investor Day materials management highlighted that, for Qdoba restaurants open more than three years, restaurant operating margins are at 18.5%.  We see an asymmetric risk setup for JACK at this point given the margin expansion that should follow as the Qdoba unit base matures. The leverage in this stock, as we see it, lies almost entirely with Qdoba.  The company unit base is projected to double by 2015.  If growth targets can be reached and unit economics improve, we see as much as 60% of upside in this name over the next three years.



Sum of the Parts – FY2012


How high margins can go is largely a function of how successful the company will be in increasing same-store sales.  Our sum of the part analysis, below, outlines our fundamental view on the stock over the next 6-9 months.  We believe that there is 8.5% of upside at current levels.  That view is predicated primarily on growth from Qdoba and the investment community awarding the stock a higher multiple, something that we think is overdue.  Wendy’s and Sonic include some of the names that are trading at higher multiples than JACK.  Given that Jack in the Box has completed a reimaging program of its main concept and is set to generate free cash flow of ~$75mm this year while driving the Qdoba growth story forward, it seems incongruous that Wendy’s, which is facing some serious issues over the next several years, would trade at a premium to Jack in the Box.


THE JACK OPTION - Jack SOTP near terms



Sum of the Parts – FY2015


It is always difficult to forecast what the future holds but, in the case of Jack in the Box, we see much more upside than downside.  Management is planning on growing the company-owned base of Qdoba stores to grow by 15-20% per year through 2015.  Franchisees are expected to add 30-40 units per year over the same time period.  Qdoba’s growth and expanding margins are the primary components of the long-term TAIL story.  The margin expansion that we show in the sum-of-the-parts analysis, below, can be attributed to what we expect to be a maturing store base, stronger sales trends, and opportunistic acquisitions of franchise restaurants. 


Even assuming an enterprise value of Jack in the Box level with what it is today, we believe that Qdoba’s growing and maturing store base can deliver outsized returns to shareholders.  Given that, according to Bloomberg, the sell side is currently divided on the stock – 3 Buys, 7 Holds, 3 Sells – there are plenty of skeptics to be won over if management can hit targets over the next few quarters.


THE JACK OPTION - jack sotp tail1



Quantitative Setup


Keith bought JACK today in the Hedgeye Virtual Portfolio as his model was indicating that the stock was immediate-term TRADE oversold.  Given Keith’s quantitative view of the stock along with our fundamental view on the stock, we believe that Jack in the Box is the most attractive stock in QSR over the longer term TAIL duration.


THE JACK OPTION - jack levels


Howard Penney

Managing Director


Rory Green