Cheap Talk

This note was originally published at 8am on June 14, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“My own view is that he will speak eloquently, but that words are cheap, and that the record of an individual is the basis upon which you determine whether they should continue to hold on to their job.”

-Presidential candidate Mitt Romney


Since starting Hedgeye almost four years ago, many of our readers have a hard time discerning the political leanings of the firm.  At times we’ve been accused of being Democrats and in other instances we’ve been accused of being Republicans.   In reality, while individuals at Hedgeye have personal political leanings, and we encourage them to get involved in the process, as analysts we are completely objective about politics.  Our job is to analyze the economic policies of politicians and come up with a view of their ultimate impact on asset classes and prices.


I highlight the quote above not because I necessarily agree with Romney, but rather because I want to highlight that the political debate is going to only accelerate in the coming months heading into the nominating conventions and ultimately the general election in November.  Romney’s statement above is very accurate in one sense, this election, as they usually are, will be about the performance of the incumbent and the economy under the incumbent.


Later today President Obama will be giving a speech that will be the beginning of his campaign’s attempt at taking back the economic debate.  Based on early previews, Obama is likely to focus less on the last three years, a time in which he will claim he shored up the economy, and more on the future prospects for the U.S. economy.  As it relates to the future, Obama will attempt to juxtapose Romney, a wealthy private equity investor, with middle class Americans.   The insinuation being that Romney’s policies will only enrich the wealthy, while Obama will help the middle class.


The challenge that Obama faces, especially if he uses only rhetoric and has no new tangible plans, is that the middle class has very much struggled under his Presidency.   The two statistics that the Romney camp repeatedly cites, which are largely accurate, are that no net new jobs have been created under Obama and that median household incomes have declined somewhere in the range of $4,000 per annum under Obama.


In the Chart of the Day, we highlight our proprietary Hedgeye Election Indicator (HEI).  The HEI is driven by real time economic price data that correlates closely with polls and ultimately establishes a probability of an Obama re-election.  In line with Romney’s statement that talk is cheap as it relates to economic performance, the HEI bears this out as it has declined to its lowest level in five months at 54%.  As the economy goes, so goes Obama’s re-election chances.


In Europe this morning, we are getting increasing evidence that not only is talk cheap, but action itself is cheap.  Specifically, Spanish 10-year yields touched 7.0% overnight.  This is a 91 basis point increase from Monday morning’s bailout lows.  It seems the attempt at containing European sovereign debt issues by adding more debt, without long term structural reform, is actually now being perceived as mere talk by the market, even if the Eurocrats see it as action.


Later today we will be publishing a note on Italy.  As much of the media attention is rightfully focused on the pressure points of Spain and Greece, Italy is the third largest economy in the Eurozone , so a much bigger problem than Spain, and its yields and CDS are starting to trade in line with Spain at 6.3% on the 10-year and 554 basis points on 5-year CDS.  With a 120% debt-to-GDP, it should be no surprise that adding more debt in Europe to bail out Spain is not a positive catalyst for Italy.


The unintended consequences of failed European bailouts are not only being seen in Italy’s sovereign debt markets, but also broadly in European companies.  This morning the Swiss banks are getting punished.  Credit Suisse is down -8.0% after the Swiss National Bank said they need a “marked increase” in capital this year to prepare for possible escalation of Euro-zone risks.  The Swiss National Bank also recommended that UBS boost capital. 


On a more micro level, our Restaurant team led by Howard Penney will be hosting a call on the restaurant industry’s franchise model, and its latent risks, with restaurant finance expert John Hamburger (yes, that is his real name). The crux of the debate is as follows:


“The interests of franchisees and franchisors do not always align; in fact, in today’s environment of tight capital supply for small businesses and increasing competitiveness among restaurant companies, they can sometimes diverge.  Through franchising, franchisors gain more stable cash flow, protection from swings in variable costs, and lower expenses.  In turn, franchisees, ideally, gain operational expertise from companies and brand recognition while assuming much of the operational risk of the business.  Most of the decision-making authority pertaining to the business remains with the company and, in difficult business conditions, this can be a source of contention.


As franchisors seek to grow royalty fees, decisions made by corporate restaurant executives in the past few years have tended to focus on promotional strategies and capital-intensive store and process alterations.  Of course, as long as the consumer and financing environments cooperate, this behavior may not meaningfully impact the franchisee’s bottom line.  However, with the backdrop of a fragile economy, volatile commodity costs, tight access to capital, and increasing labor costs, there is a potential for friction.  The addition of any controversial business decisions that magnify franchisees’ difficulties all but guarantees disharmony between management and the franchise community.  Examples over the past few years are numerous, from Kentucky Grilled Chicken at KFC to bun toasters at Wendy’s to 99 cent double cheeseburgers at Burger King.”


So, in effect are the perceived benefits to the franchisee really just talk?  If you are an institutional investors and would like to join the call and trial our restaurant vertical please email


As it relates to talk and action, I will leave you with one last quote from President Roosevelt:


“The man who really counts in the world is the doer, not the mere critic-the man who actually does the work, even if roughly and imperfectly, not the man who only talks or writes about how it ought to be done.”




Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1586-1633, $96.11-98.85, $81.91-82.46, $1.24-1.26, and 1305-1322, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Cheap Talk - Chart of the Day


Cheap Talk - Virtual Portfolio


TODAY’S S&P 500 SET-UP – June 28, 2012

As we look at today’s set up for the S&P 500, the range is 16 points or -0.89% downside to 1320 and 0.31% upside to 1336. 











    • Up from the prior day’s trading of 833
  • VOLUME: on 6/27 NYSE 684.49
    • Decrease versus prior day’s trading of -3.90%
  • VIX:  as of 6/27 was at 19.45
    • Decrease versus most recent day’s trading of -1.37%
    • Year-to-date decrease of -16.88%
  • SPX PUT/CALL RATIO: as of 6/27 closed at 1.56
    • Up from the day prior at 1.55 


USA – got “de-coupling”, c’mon already. The Bond market has had this right for a long time, and the 10yr has it right again this morning, looking to break 1.60% again as the Yield Spread (10s-2s) threatens to break-down to new YTD lows. Yield Spread is down -7bps wk-over-wk. Bank earnings (cash, not trading condors) going lower. 

  • TED SPREAD: as of this morning 38
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 1.60
    • Decrease from prior day’s trading at 1.62
  • YIELD CURVE: as of this morning 1.30
    • Down from prior day’s trading at 1.31 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: GDP Q/q, 1Q revised, est. 1.9% (prior 1.9%)
  • 8:30am: Personal Consumption, 1Q rev., est. 2.7% (prior 2.7%)
  • 8:30am: GDP Price Index, 1Q revised, est. 1.7% (prior 1.7%)
  • 8:30am: Core PCE QoQ, 1Q revised, est. 2.1% (prior 2.1%)
  • 8:30am: Initial Jobless Claims, June 23, est. 385k (prior 387k)
  • 8:30am: Continuing Claims, June 16, est. 3280k (prior 3299k)
  • 9:45am: Bloomberg Consumer Comfort, June 23 (prior -37.9)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural gas change
  • 11am: Kansas City Fed Manf. Act., June, est. 4 (prior 9)
  • 11am: Fed to sell $8-8.75b notes in 11/15/2014-6/15/2015 range
  • 11:30am: Fed’s Pianalto speaks in Cleveland
  • 1pm: Treasury to sell $29b 7-yr notes
  • 7pm: Fed’s Fisher speaks in Aspen, Colorado, on U.S. economy 


    • U.S. Supreme Court will issue its health-care ruling, 10am
    • House, Senate in session
    • Senate Commerce Committee holds a hearing examining whether online advertising industry self-regulation of consumer privacy is providing adequate protections, 10am
    • House Financial Services subcommittee holds hearing, “Fractional Reserve Banking and the Federal Reserve: The Economic Consequences of High-Powered Money” 2pm
    • The American Enterprise Institute for Public Policy Research
    • holds a discussion on “Do Money Market Funds Create Systemic Risk?” 2pm
    • SEC Chairman Mary Schapiro to testify before House Oversight subcommittee hearing on Jobs act, 9:30am
    • Interior Dept to announce final 5-year program for offshore oil, gas dev.; Secretary Ken Salazar holding conf. call at 3pm
    • CFPB releases report on reverse mortgages 


  • News Corp. board said to approve plan to split up company
  • Google unveils $199 tablet in bid to vie with Apple, Amazon
  • Apple said to prepare iTunes changes to improve storage, sharing
  • Watch suppliers, rivals as GOOG unveils ASUS-designed tablet
  • Europe’s leaders today cap their latest effort to check the financial crisis that claimed Cyprus this wk as its 5th victim
  • Nine of the biggest banks are set to deliver plans this wk for how their businesses could be unwound after a collapse
  • Peter Madoff to plead guilty to fraud in brother Bernard Madoff’s Ponzi scheme
  • said to add social features to digital games for tablet
  • T-Mobile USA CEO Philipp Humm will quit, leaving Deutsche Telekom’s U.S. division in search of a replacement as it tries to recover from a failed sale to AT&T last yr
  • AMR says ruling on voiding union contracts delayed by pilot vote
  • Veolia sells U.K. water unit for $1.9b to reduce debt
  • Fed to boost Operation Twist with QE3 jolt: Bank of America
  • Euro-area June eco. confidence falls to 89.9, est. 89.6, is lowest since Oct. 2009
  • Italy sells 2022 bonds to yield 6.19% vs 6.03% on May 30; sells 2017 bonds to yield 5.84% vs 5.66% on May 30
  • U.K. 1Q GDP falls 0.3% in line with previous estimate
  • South Korea cut growth est. for this yr to GDP may expand 3.3% vs Dec. est. +3.7%, announced 8.5t won ($7.4b) of spending
  • Lending to Europe puts U.S. home loan banks at risk, says audit 


    • Family Dollar Stores (FDO) 7am, $1.07
    • MSC Industrial Direct (MSM) 7:30am, $1.11
    • Shaw Communications (SJR/B CN) 8am, $0.43
    • Worthington Industries (WOR) 8:15am, $0.52
    • Empire (EMP/A CN) 8:50am, $1.16
    • Accenture (ACN) 4pm, $0.99
    • TIBCO Software Inc (TIBX) 4:04pm, $0.23
    • Research In Motion (RIM CN) 4:15pm, $(0.07)
    • Nike (NKE) 4:15, $1.37


  • Glencore Courts Qatar as Xstrata Tweaks Merger Pay: Commodities
  • Corn Extends Biggest 4-Day Rally in 14 Months as U.S. Crops Wilt
  • Oil Drops in London on Speculation Europe’s Outlook Will Worsen
  • Sugar Ends Rally as Surplus Overwhelms Demand; Coffee Declines
  • Copper Seen Falling as German Unemployment Fans Crisis Concern
  • Gold Erases Gains in London as Dollar’s Strength Erodes Demand
  • Oil Over $100 Seen After Worst Quarter Since ‘08: Energy Markets
  • Koreans Await Monsoon Rains to Break Worst Drought in a Century
  • Corn Peak in 1988 Drought Hints Rally May End: Chart of the Day
  • Hog-Herd Expansion Signaling Losses After Corn Surge Boosts Cost
  • World’s Largest Atomic Plant to Be Started, Tepco Says: Energy
  • Chinese Steel Prices Drop to Two-Year Low on Weakening Demand
  • Thailand Seeks Rubber-Export Limits With Indonesia, Malaysia
  • Monsoon Worst Since 2009 Threatening Crop Prospects in India
  • Indian Exchange Seeks to End Guar Futures Ban Before Sowing 










GERMANY – been calling this out this week, and it’s really obvious this morning – Germany has more risk now (to the downside) than Spain on our TRADE/TREND equity market signal. After failing at its TRADE line yesterday (6259), the DAX is back into a Bearish Formation, down -1.3%, leading European losers this morning.






CHINA – someone needs to tell the Chinese that the Italians are on it, because the dudes in Shanghai are freaking right out at this pt, pounding the Shanghai Comp to fresh new lows (down another 1% last night; down 10.5% since May 4th). *Reminder – any reactionary Chinese stimulus only amplifies #GrowthSlowing.











The Hedgeye Macro Team


Corn and wheat prices increased sharply week-over-week as hot and dry conditions persist across the corn belt fueled speculation that crop yield estimates for the United States would be revised lower when the next USDA WASDE report is released on July 11th. 


General Overview

A government meteorologist was quoted in the press today as having said that this year’s weather pattern, which settled into the Great Plains and the Southwest last year and has spread into the Corn Belt, resembles those of 1988.  With corn stockpiles already low, grain prices could have room to run.  Overall over the past week, despite the dollar gaining slightly versus a week ago, commodity prices we follow that pertain to the restaurant space moved higher.  The standouts on a year-over-year basis are chicken wings and wheat on the upside and coffee and dairy, on the downside.




Commodity News


Beef prices are likely to find support this summer from the dry and hot conditions and the derivative impact on feed costs and herd sizes.  Consumer prices for beef at retail continue to move higher than overall food costs.


Chicken supplies remain tight but, on a year-over-year basis, USDA data released today shows that the supply of egg sets is declining by 2% compared to 6% declines seen as recently as April. 


WEEKLY COMMODITY CHARTBOOK - egg sets wing prices



Correlation Table

















WEEKLY COMMODITY CHARTBOOK - chicken whole breast









Howard Penney

Managing Director


Rory Green


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Euro Yank

“Go ahead, yank.”

-Margaret Hastings


So, I’m bearish. And I really want to know why the bulls are still bullish. If the bull case at  the Q1 top was ‘growth is back, earnings are good, and stocks are cheap’, their entire thesis has to have changed.


Sadly, with Growth Slowing, earnings at risk (73 of the S&P’s 500 companies have already guided lower), and “cheap” getting cheaper, we all know what the bull case is now – bailouts. When centrally planned, those are bearish long-term, too.


If you are like me, publically admitting you are bearish on both the immediate and long-term durations, why wouldn’t you have a big Cash position here? Even for central planners in the post 49BC era, economic gravity has proven to be hard to stop.


Back to the Global Macro Grind


On the morning of the 19th European Bailout Summit, Global Equity and Commodity markets are red and the Euro is getting yanked right back to $1.24.


Imagine that, after 18 attempts these people think we are all dumb enough to believe that this is going to be resolved. *Long-term Risk Manager Note: piling more debt and leverage on top of this sick puppy is only going to prolong the pain.


That’s what she said.


Corporal Margaret Hastings is one of the American heroes in the book I am finishing this week, Lost in Shangri-La – “The True Story of Survival, Adventure, and The Most Incredible Rescue Mission of World War II.”


The aforementioned quote comes from the point in the story where she was down to weighing about 90lbs, badly burned, and dealing with life threatening gangrene. The paratrooper medic was babying her wounds and she promptly reminded him that “If I were back at Fee-Ask, the GI medic would yank the bandages off and then scrub my legs with a brush.”


God Bless America’s bravest.


The world can learn a lot from realists who aren’t trying to prolong the inevitable. If you can’t handle the idea of letting free-market prices clear, the market’s underlying wounds do not care. Eventually, they need to be addressed. At this point, doing more of the same to perpetuate debt mounting and Growth Slowing has reached the height of political cowardice.


Stock, Commodity, Currency, and Fixed Income markets get that. That’s why, when I take a step back and look at the context of these no-volume rallies like we had yesterday, I get more concerned, not less.


Looking at the internals of the SP500 yesterday, here are the key points:

  1. PRICE – both TRADE (1336) and TREND (1365) lines of resistance remained intact
  2. VOLATILITY – both TREND (18.22) and TAIL (14.26) lines of support remained intact
  3. VOLUME – yesterday’s volume was one of the worst (on up days) of the year

On that last point, I have been measuring average down day volume versus up day volume in Q2 as a proxy for both conviction and money flows. Yesterday’s volume was down a shocking -28% versus the average down day volume of the last 6 weeks.


The other obvious point about yesterday’s rally was that the nasty stuff was up the most. In other words, the worst performing Sector (Energy is down -7.4% YTD) led low-volume gainers, whereas one of the best performing Sectors (Consumer Discretionary is +10.5% YTD) led decliners.


This daily observation is very short-term, but it certainly rhymes with my basic long-term conclusion that bailouts will only structurally slow growth at an accelerating rate. Up Energy/Food price days slow real (inflation adjusted) economic growth.


Whether central planners targeting “asset price inflation” get that or not yet remains the most obvious question Romney should be asking Obama, repeatedly, during the Presidential Debate. If I were Romney, I’d label Bernanke as Obama (and Bush’s) guy. I’d also constantly pound on the point that the Europeans are now behaving like Hank Paulson and Bernanke did.


What happens when the Europeans eventually release their Paulson/Geithner “bazooka” anyway?

  1. The Euro could easily snap $1.22 and put “parity” back in play
  2. On that, the US Dollar is going to rip – say $84-85 on the US Dollar Index
  3. Commodity prices (and the equity markets priced off their top-line assumptions) will keep getting rocked

Maybe we get that at the 23rd Summit?


This folks is what Paulson/Geithner/Bush didn’t understand about free market prices in 2008, so don’t expect Geithner/Hollande/Obama to get it now. After the 2008 $800B Bazooka was deployed, that’s why Paulson yanked himself towards a garbage can for immediate-term relief.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Germany’s DAX, and the SP500 are now $1, $88.16-93.39, $82.23-82.91, $1.24-1.26, 6085-6259, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Euro Yank - Chart of the Day


Euro Yank - Virtual Portfolio


The Macau Metro Monitor, June 28, 2012




The Macau Government Tourist Office says it has received no notice of any changes on visa issuing by mainland authorities.  The comment came after a report over the weekend by Macau Daily News suggesting that mainland authorities were tightening Individual Visit Scheme visas.  “We have not received any notice on China tightening visa issuance to visitors traveling to Macau,” said Gigi Chiu, spokeswoman for the Macau Government Tourist Office.

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