Failed Policy

“The fact that this policy had failed spectacularly in 1973 did not deter the weak dollar crowd.”

-Jim Rickards


Between today’s G-7 meeting, tomorrow’s ECB decision, and Thursday’s Bernanke testimony, there will be plenty of opportunity for politicians and their pandering economists to beg and fear-monger for more of what simply has not worked.


That’s the short-run. The conflicted and compromised will do whatever it takes for their short-term political survival. In the long-run, apparently Keynes had the duration of the policy trade wrong – the rest of us aren’t all yet dead.


Taking a step back, the last 60 years of history are obviously littered with examples from Charles de Gaulle to Richard Nixon where sovereign currency devaluation and debt monetization did not work. If you’d like to get back up to speed on that, Jim Rickards does a great job walking through part of this  history in Chapter 5 of Currency Wars (1).


Back to the Global Macro Grind


Real-time market prices don’t lie; politicians do. Within hours of last week’s US Growth Slowing double-header (US GDP slowed to 1.9% in Q1 versus 3% in Q4, then the May Employment Report bomb detonated), the US Dollar stopped going up.


Why? Because the rest of the world fully expects an un-elected central planner in Washington (Ben Bernanke) to launch an iQe4 Upgrade. He did it on January 25th (pushing 0% rates out to 2014) and there’s no reason to expect he doesn’t do something again between Thursday’s Joint Economic Committee meeting and the FOMC meeting on June 20th. He’s fighting for his political life.


All that said, we have no idea what he is going to do. So don’t look for us to give you the super-secret whisper on that. Our strategy remains playing the game that’s in front of us, Embracing Uncertainty. We think the US Election puts him in a box.


Right, the man walked on water during 2008 and we should perpetually give him thanks and praise. But seriously, what Bernanke should have done and what he did have been 2 very different things since 2010.  


By the summer of 2010 Bernanke had bi-partisan support (the Republicans wanted to win the mid-term elections) to move to Quantitative Easing (Policy To Inflate). Both parties wanted the stock market up. Now only one of them do.


What Bernanke does next must also be contextualized on a relative basis. This is not 2008 or 2010 in that regard either. Today you have a currency war between the 3 major currencies of the world (Dollar, Euro, and Yen). They trade relative to the expedience of the latest Fiat Fool (failed) Policy that is designed to debauch them. The Fed, ECB, and BOJ don’t get paid to act unilaterally.


So what are currency markets signaling happens next?


1.   The US Dollar – remains in what we call a Bullish Formation (bullish across all 3 of our risk management durations, TRADE/TREND/TAIL) with immediate-term TRADE support at $81.55 and next resistance = $83.31.


2.   The Euro (vs USD) – remains in what we call a Bearish Formation (bearish across all 3 of our durations) with an immediate-term TRADE support/resistance range of $1.22-1.25.


3.   The Yen (vs USD) – is in a neutral position with long-term TAIL resistance at $77.68 and immediate-term TRADE support at $79.05.


In other words, if we had to pick one and #TimeStamp our highest probability scenario right now (we do), we’d be long the US Dollar and short the Euro (which we re-shorted on yesterday’s bounce).


It’s another way of saying that both Hedgeye and Global Macro markets think that the Europeans are in a much more dire situation (for now) than the United States of America is.


That could change at literally any minute of any day now – and that, of course, is why most sane people don’t trust these markets or the politicians attempting to centrally plan them.


Back to the ‘for now’…  


We still aren’t all brain dead, and we have to deal with whatever tomorrow’s European move to debauch the Euro back down to $1.22 brings. Then we have to react to Bernanke’s reaction to the reaction. Then we all have to pray.


Prayer, in markets, is obviously not a risk management process. Neither is hope. That said, my only long-term hope for this country and the free-market economy that we used to have is to get Ben Bernanke out of the way of expectations, let prices at the pump clear, and let US Consumption Growth recover again.


With Bernanke having not been able to really do anything for the last 5-6 weeks, the US Dollar has risen steadily and Oil, Gold, Copper, etc. prices have fallen precipitously. That’s good for American consumers.


That’s bad if you are long Energy stocks (the Energy ETF (XLE) is down -10.3% for the YTD). That’s good if you are short them and long Consumer Discretionary stocks (the Consumer ETF (XLY) is +7.4% for the YTD).


Strong Dollar = Strong America (via Stronger Consumption). That’s not more of a 1973 like Failed Policy. That’s a new idea.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $97.21-102.78, $1.22-1.25, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Failed Policy - Chart of the Day


Failed Policy - Virtual Portfolio


If I had a rating to change on Starbucks I would downgrade it today.


After the market close yesterday, Starbucks announced that it has agreed to enter into a definitive agreement to purchase La Boulange Bakery for $100mm. Investments pertaining to the acquisition will dilute earnings by $0.02 per share in 2H12.  Further dilution is expected in FY13. 


The target of this $100mm acquisition, La Boulange Bakery, operates 19 retail locations in the Bay Area and sells its products to several upscale restaurants, hotels, and specialty grocery stores in the region.  The acquisition is aimed at improving the baked goods that Starbucks offers within its stores and represents, in our view, a significant gamble on the part of Howard Schultz and his team.


This move, along with the Evolution Fresh acquisition, is based on the Starbucks’ “multi channel strategy” of introducing the product through the national network of stores and then expanding the offering into the CPG channel once the brand gains traction.  This rationale behind this strategy seems to be based on the success of the Starbucks VIA product.  The risk, in the case of La Boulange products, is that the VIA strategy was successful as a Starbucks product and that that success will not transfer over to a non-Starbucks branded offering or that it will take longer than expected for the brand to resonate with consumers on a national level.  In terms of the schedule of rolling out the La Boulange offering, the company only said that the products will first show up in Starbucks’ San Francisco stores in 2013.  The offerings will initially focus on pastries and bread.


While we understand the appeal of the multi-channel strategy and can see the potential benefits, assuming that all of Starbucks’ initiatives are going to be successful is unlikely to be the right stance, if history is any guide.  Starbucks is an impressive organization and we have been behind the stock for over three years.  However, the company seems to have entered into an investment phase and that does change the outlook for the stock.   Entering into two significant initiatives (juice and food) at once increases the risk of setbacks for the stock; the consequences, for EPS, of any slowdown in the top line are larger going forward than they would have been over the past few years.


The Evolution Fresh strategy, while still unproven, could be more of an immediate-term positive given the limited capital investment required to get the product into the stores.  Applying the multi-channel strategy to food implies more risk to EPS over the next few years.  There is also the additional risk that, in quickly scaling the La Boulange offerings across the domestic store base, the company may compromise the integrity of what made La Boulange successful to date. 


Based on the conference call held this afternoon by management, our view is that the La Boulange strategy will likely require significant capital investment on the part of Starbucks.  More detail will emerge in the coming weeks but currently we believe that the near-term investment could be significant and the reward, while possibly substantial but not guaranteed, could take years to materialize.


Here are the primary takeaways from the call:

  • Food currently accounts for $1.5 billion in revenue at Starbucks’ domestic, company-owned locations and grew 14% year-over-year during the first two quarters of fiscal 2012.  Management expects this acquisition to help drive that growth over the longer term but few details were provided on the call.
  • Management will first introduce La Boulange products to Starbucks locations in the San Francisco area, beginning in 2013. The offerings will focus on pastries and bread at first.
  • The product will be prepared in company-owned facilities and management intends to build the La Boulange brand into a national presence.  Both of these will require significant capital investment.
  • Once the La Boulange branded products are being distributed to Starbucks stores nationally, management intends to leverage the brand through the CPG channel.



Howard Penney

Managing Director



Rory Green






TODAY’S S&P 500 SET-UP – June 5, 2012

As we look at today’s set up for the S&P 500, the range is 25 points or -1.58% downside to 1258 and 0.38% upside to 1283. 












    • Up from the prior day’s trading of -2193
  • VOLUME: on 6/04 NYSE 824.27
    • Decrease versus prior day’s trading of -17.53%
  • VIX:  as of 6/04 was at 26.12
    • Decrease versus most recent day’s trading of -2.03%
    • Year-to-date increase of 11.62%
  • SPX PUT/CALL RATIO: as of 6/04 closed at 2.19
    • Down from the day prior at 2.64


10yr (UST) – 2 consecutive days of selling on bonds give the 10yr +5bps per day this week to 1.55% this morning (vs 1.45% on the freakout Friday low); my new risk management range (immediate-term) for the 10yr is 1.45-1.69%. 

  • TED SPREAD: as of this morning 40
  • 3-MONTH T-BILL YIELD: as of this morning 0.07%
  • 10-Year: as of this morning 1.52
    • Unchanged from prior day’s trading 
  • YIELD CURVE: as of this morning 1.27
    • Unchanged from prior day’s trading 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: Fed’s Fisher to speak in Fife, Scotland
  • 10 am: ISM Non-Manf. Composite, May, est. 53.5 (prior 53.5)
  • 11:30 am: U.S. to sell 4-wk bills
  • 2:15pm: Fed’s Bullard to Speak on housing in St. Louis
  • 7:15pm: Chicago Fed’s Evans to speak to money marketeers in New York 


    • House meets at noon for morning hour debate, 2pm for legislative business
    • Senate will vote on the motion to invoke cloture on S.3220, to amend the Fair Labor Standards Act of 1938 to provide more effective remedies to victims of discrimination in the payment of wages on the basis of sex, 2:30pm
    • Walt Disney Chairman and CEO Robert Iger, First Lady Michelle Obama announce changes in Disney’s nutrition policies
    • World Bank hosts meeting of Intl. Corruption Hunters Alliance
    • Berkshire Hathaway Inc. Chairman and CEO Warren Buffett attends Economic Club of Washington’s 25th anniversary dinner
    • Governor Scott Walker, R-Wis., faces recall election
    • FDIC Advisory Committee on Community Banking meets, 8:30am
    • CFTC holds public roundtable to discuss proposed regulations for designated contract markets, 9:30am
    • California voters weigh $1 increase in cigarette tax 


  • Spain calls for EU aid for banks to battle financial crisis
  • U.S. service industries probably held at a 4-mo. low
  • JPMorgan to report $4.2b trading loss, ISI forecasts
  • Apple denied ban on Samsung Galaxy tab during U.S. patent trial
  • MF Global bankruptcy trustee Freeh sees claims of $3b
  • J&J to stop selling vaginal implants after safety complaints
  • Wynn Macau plans to invest $4b for new casino resort
  • BlackRock’s Robert Doll to retire as chief equity strategist
  • Goldman Sachs said to cut <50 jobs as revenue outlook worsens
  • Amylin said to receive initial offers at $25-$29/shr 


    • Layne Christensen (LAYN) 6am, $0.26
    • JA Solar (JASO) 7am, $(0.60)
    • United Natural Foods (UNFI) 7:30am, $0.56
    • Saputo (SAP CN) 12pm, C$0.61
    • Guidewire Software (GWRE) 4pm, $(0.02)
    • Oxford Industries (OXM) 4pm, $1.07
    • Bob Evans Farms (BOBE) 4pm, $0.74
    • Ulta Salonmetics & Fragrance (ULTA) 4:01pm, $0.53
    • Mattress Firm Holding (MFRM) 4:01pm, $0.25
    • FuelCell Energy (FCEL) 6pm, $(0.05) 


  • Rice Poised for Third Record Crop as Prices Retreat: Commodities
  • Gold Gains on Speculation of Stimulus Measures by Policy Makers
  • Oil Falls on Speculation Europe’s Debt Crisis Will Curb Demand
  • Mongolia’s Erdenes May Be Valued at $10.6 Billion, Frontier Says
  • Oil to Avoid Repeat of 2008 Collapse, Shell CEO Voser Says
  • Palm Oil Snaps Four-Day Losing Streak on Ramadan Demand Outlook
  • EON Will Lose Millions of Euros After ‘Irregularities’ by Trader
  • El Nino Seen Developing in Coming Months as Pacific Ocean Warms
  • Freeport’s Indonesian Workers Threaten Strike Amid Tension
  • Asia Buys $500 Billion Australian Gas With U.S. Flooded: Energy
  • Semafo Bets on Africa to Double Gold Output: Corporate Canada
  • Nestle Selling New Coffee Machines as Recipe for Growth: Retail
  • Oil Bailing Out Singh Seen Halting Rupee Slide: India Credit
  • Joy Global Tempts Komatsu With Cheapest Industry Deal: Real M&A
  • Gas Price Slump Unlikely to Halt Capacity
  • Copper Declines, Reversing Advance, as Dollar Rally Curbs Demand
  • Corn Declines on Crop Conditions After Gaining Most in Two Weeks 










GERMANY – after printing another sequential decline in another high-frequency data pt (has been happening since March) w/ German Services PMI down to 51.8 (vs 52.2), German stocks lead on the downside for the 2nd consecutive day in Europe as PM’s just sell whatever was working; DAX down -17% now from the March top.






AUSTRALIA -  per one of the only respectable central bankers in the world (he goes both ways, raising and cutting, so that he has bullets); Stevens cut by another 25bps last night reminding us that “the ongoing trend is unclear and could be dampened by slower Chinese growth” – don’t just blame Europe folks. Australia’s slow-down is nasty.









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President Obama’s Reelection Chances Fall to 54.2% -- Hedgeye Election Indicator

If the US Presidential election were held today, President Obama would stand a 54.2%  chance of winning, according to the Hedgeye Election Indicator (HEI). That marks the lowest reading in about five months, and reflects a weakening US stock market and a strengthening US stock market.



President Obama’s Reelection Chances Fall to 54.2% -- 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. Based on our analysis, market prices will adjust in real-time ahead of economic conditions, which will ultimately shape voters’ perception of the Obama Presidency, the Republican candidates and influence the probability of an Obama reelection.  


The model assumes that the Presidential election would be held today against any Republican candidate. Our model is indifferent toward who the Republican candidate is as the sentiment for Obama and for any Republican opponent is imputed in the market prices that determine the HEI. The HEI is based on a scale of 0 – 200, with 100 equating to a 50% probability that President Obama would win or lose if the election were held today.


Hedgeye releases the HEI every Tuesday at 7am ET until the election November 6

HedgeyeRetail: Chart of the Day; Nike/Umbro

Wall Street will think of Umbro accretion/dilution in terms of earnings and EBITDA. What they aren’t getting is the value of owning the rights to reproduce the ‘kit’ for each’s team’s colors.


Umbro’s most valuable football asset – by a long shot -- is Manchester City.  MC is officially no longer the ‘Other Manchester’ after it beat Man United and later took the Premier League title for the first time in 44 years (the equivalent of the Mets beating the Yankees) on April 30.


Now Nike is selling the Umbro brand. Tough loss of the ManCity kit. Or is it? Interestingly enough, on May 5, just six days after beating Manchester United, and despite being only 3 years into a 10-year deal, Nike renegotiated Umbro’s contract with the club such that ManCity will don the Swoosh next year.


Eight days later, ManC won the Premier League crown.


The timing is no coincidence. 


HedgeyeRetail: Chart of the Day; Nike/Umbro - chart1


HedgeyeRetail: Chart of the Day; Nike/Umbro - Table 1


  • CCL’s P/E valuation premium over RCL has widened to its highest level since Carnival’s acquisition of Princess in 2002.
  • Historically, CCL has a 2-3x premium over RCL on P/E valuation.  That spread has risen sharply in the past few months after narrowing in the midst of the Costa Concordia tragedy.
  • We expect the spread to narrow in the intermediate term due to RCL’s pricing outperformance for the rest of CY 2012.   



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