Weekly European Monitor: “Not in my Lifetime”

-- For specific questions on anything Europe, please contact me at to set up a call.


No Current Positions in Europe


Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed up +1.9% week-over-week vs +1.0% last week. Top performers:  Russia (RTSI) +7.0%; Norway +4.9%; Belgium +4.8%; Italy +4.5%; Ireland +3.5%; France +3.4%; Austria +3.4%; Spain +3.3%. Bottom performers: Cyprus -10.8%; Slovakia -0.8%; Ukraine -0.3%; Finland -0.0%; Portugal +0.1%; Greece +0.5%.
  • FX:  The EUR/USD is UP +0.69% week-over-week vs -0.59% last week.  W/W Divergences: RUB/EUR +1.52%, PLN/EUR +1.27%, CZK/EUR +0.99%, HUF/EUR +0.62%; SEK/EUR +0.62%; CHF/EUR -0.03%; GBP/EUR -0.06%; TRY/EUR -0.31%, NOK/EUR -0.65%, RUB/EUR -1.84%.
  • Fixed Income:  10YR Yields came in day-over-day pretty dramatically and showed a mixed picture on the week. On the day Greece and Spain fell -66bps to 25.83% and 6.33%, respectively.  Italy fell -40bps on the day to 5.82%. On the week, Greece saw the biggest move to the downside, falling -123bps. Spain fell -20bps on the week, while Portugal gained +62bps to 10.16% and the other countries we track were largely flat.  On the month German yields are up +23bps to 1.58%.

Weekly European Monitor: “Not in my Lifetime”  - GGG. YIELDS



“Not in my Lifetime”


Zee EU Summit concludes today. Interestingly, we saw quite a sustained relief rally today on the back of the statement’s release this morning [Italy +6.6%; IBEX +5.7%; Greece +5.7%; CAC +4.8%; DAX +4.3%; and EUR/USD +1.7% day-over-day]. While today’s rally doesn’t look dissimilar to rallies around releases of major bailout packages for Europe’s periphery since May 2010, we believe this rally will not have legs. Why?


Unfortunately, it’s both what today’s release didn’t address and intentionally dodged that confirms Europe is far from out of the dark crisis; the results are far from anything near a “bazooka” that could set markets on a sustained up trend.   Keep in mind that today’s entire statement is three paragraphs long! It’s not that we’re looking for a 2-ton volume like the Dodd-Frank bill, but the release’s brevity leaves many river cards unturned. What’s missing?


The biggest concerns this time around include:

  • Uncertainty around the extent of ECB involvement to leverage its balance sheet to bailout out/print money for any and all sovereign and banking “needs” across the region. Here Draghi has not shown his cards and Germany (Merkel and Co.) continues to fear-monger hyperinflation.
  • How can, short of ECB involvement, the existing bailout facilities—the EFSF and the ESM that is “expected” to come online on 9 July (after German ratification today) with €600B upfront cash—cope with the default threats of Italy (sovereign and banking) and remaining Spanish sovereign imbalances? We view both facilities as being far too underfunded to cope.
  • There was no concrete talk or agreement on a fiscal compact and fiscal union for the Eurozone-17 and/or EU-27. As a reminder, we believe a fiscal union must go hand in hand with a monetary union, if the Eurozone has any hope of maintaining its existing fabric.
  • Because Europe needs a fiscal union before it can legitimately consider such programs as Eurobonds and a Pan-European deposit guarantee, we also didn’t get any further clarity on these two programs. Both could be very impactful for mitigating risk, however we remain firm that given the inability of states to willingly give up their full fiscal sovereignty to Brussels, such compromise, if it ever materializes, is many months if not years out.


 So what were the key components of the proposal?

  • Creating a single banking supervisor under the ECB
  • Allowing the ESM to recapitalize banks directly
  • Renouncing the preferred creditor status of loans to Spanish banks after they are transferred from the EFSF to ESM, and
  • Flexible use of EFSF/ESM under a “Memorandum of Understanding” without Troika oversight

And what are the key undefined points and question marks?

  • It’s not clear the scope of a “single supervisory”, which will not be in place, if it ever is, until a target of the end of 2012.
  • The ESM “could” have the “possibility” (“following a regular decision”) to recapitalize banks directly with “appropriate conditionality”. Which means specifically?
  • Question: What is the “appropriate conditionality” tied to banks who receive funds from the ESM? 
  • Question: Will the EFSF/ESM have the ability to buy bonds in the open market?
  • Question: Will ESM loans no longer carry preferred creditor status, or only for certain countries?
    • Merkel was out this morning saying each ESM bank recap will need unanimous approval (and another German official says the ESM seniority change is limited to Spain).
    • Issue: For now the EFSF has to fund itself at the market, while there has been no indication from Germany that it is willing to soften its opposition to granting the ESM a banking license.


Returning to the title of this note, “Not in my Lifetime” (Nicht zu meinen Lebzeiten), which is the phrase Frau Merkel utter this week dismissing “euro bonds, euro bills and European deposit insurance with joint liability and much more” as “economically wrong and counterproductive,” saying that they ran against the German constitution.


Her positioning portends that Eurocrats will remain at loggerheads over Europe’s path forward. Europe is running out of bullets in our opinion to save the Eurozone project short of the ECB stepping in to play a larger role. However, we must return to our most basic outlook which is that excessive debt loads are one main problem across peripheral Europe. Growing debt only further impairs and slows growth, a point proven by history according to the seminal work of Reinhart and Rogoff. 


Switching gears, it was a second straight week that saw peripheral yields and risk metrics (CDS) come in, while new peripheral sovereign paper was issues at significant premiums (vs pervious auctions as recent as last month), and data—including confidence figures and retail sales—slid to the downside! [See below in Data Dump].




Below is an updated EUR/USD price level chart. Our immediate term TRADE support is $1.24 and resistance is $1.26. Today’s Summit release sent the price through our $1.26 line. We’ll be monitoring this level closely to confirm or deny aninflection. Our intermediate term TREND support level remains at $1.23. Our call is that if $1.23 breaks, look out below! We’re not EUR parity folks because we see Eurocrats stepping in to prevent it.


Weekly European Monitor: “Not in my Lifetime”  - GGG. EUR USD


Call Outs:

ECB - A Reuters poll found 48 out of 71 analysts expect the central bank to cut rates next week, most of them forecasting a 25 basis point cut to 0.75%. Benoit Coeure said last week cutting rates was an option and one that would be discussed at the ECB's 5 July meeting.


Italy - Italy’s business lobby sees GDP at -2.4% and -0.3% in 2012/2013 (down from -1.6% and +0.6%).


Spain - Rajoy “we can’t finance at current prices for too long” and “many institutions have no market access”.


UK - Barclays Plc was fined 290 million pounds, the largest penalties ever imposed by regulators in the US and UK, after admitting it submitted false London and euro interbank offered rates.


Germany - Egan Jones Downgraded Germany From AA- To A+.


France - France's government will increase the minimum wage by more than inflation this year for the first time since 2006, in the hope that stronger consumption will revive the country's ailing economy.


Spain - Moody’s downgraded 28 Spanish banks (12 cut to junk) citing the sovereign downgrade earlier this month as well as the possibility that commercial real estate losses will worsen. 


EU - is losing around €1 trillion a year in tax evasion. The EU Commission is calling on the 27-nation bloc to improve tax collection nationally, boost cooperation between EU countries in fighting tax fraud and increase pressure on tax havens outside the EU to limit tax evasion. Draft proposals include making taxes simpler with the ability to deal with them online and that EU countries should have the same minimum penalties for tax evasion, so that fraudsters cannot choose less risky locations.


Slovenia - may ask for a bailout in July says PM Janez Jansa.


Greece - Greek Finance Minister Vassilis Rapanos resigned for health reasons.


Cyprus - becomes the 5th Eurozone nation to request EU aid, with initial figures projected at up to €10B.


Cyprus - Fitch Ratings cut Cyprus’s credit rating to junk status at BB+ from BBB- and maintained a negative outlook on the nation’s rating, citing expectations that Cypriot banks will need further, substantial capital injections. Fitch said that in addition to the €1.8B required to recapitalize Cyprus Popular Bank, the country’s banks could require as much as an additional €4B in additional capital — an amount equal to 23% of the tiny country’s GDP.



CDS Risk Monitor:

Sovereign CDS were down on the week. Ireland saw the largest decline in CDS w/w at -43bps to 582bps, followed by Portugal -39bps to 808bps, Spain -17bps to 552bps, and Italy -1bps to 508bps. Germany rose +5bps to 104bps.   


Weekly European Monitor: “Not in my Lifetime”  - GGG. CDS   A


Weekly European Monitor: “Not in my Lifetime”  - GGG CDS   B


Data Dump:

Eurozone Business Climate indicator -0.94 JUN vs -0.79 MAY

Eurozone Consumer Confidence -19.8 JUN Final vs -19.3 MAY

Eurozone Economic Confidence 89.9 JUN vs 90.5 MAY (lowest level since 2009)

Eurozone Industrial Confidence -12.7 JUN vs -11.4 MAY

Eurozone Services Confidence -7.4 JUN vs -5.2 MAY


Weekly European Monitor: “Not in my Lifetime”  - ggg. business confid


Weekly European Monitor: “Not in my Lifetime”  - ggg. euro consumer


Weekly European Monitor: “Not in my Lifetime”  - ggg. eurozone services



Germany CPI 2.0% JUN Preliminary Y/Y (exp. 2.1%) vs 2.2% MAY   [-0.2% JUN M/M (exp. -0.1%) vs -0.2% MAY]

Germany Unemployment Rate 6.8% JUN (exp. 6.7%) vs 6.8% MAY (revised up from 6.7%)

Germany Unemployment Change 7K JUN vs 1K MAY

Germany GfK Consumer Confidence 5.8 JUL vs 5.7 JUN


UK Q1 GDP Final UNCH -0.3% Q/Q

UK Q1 GDP Final revised to -0.2% Y/Y vs -0.1% previous estimate

UK Nationwide House Prices -1.5% JUN Y/Y (exp. -0.6%) vs -0.7% MAY   [-0.6% JUN M/M (exp. 0.1%) vs 0.2% MAY]


France Consumer Confidence 90 JUN vs 90 MAY


Spain Total Housing Permits -32.4% APR vs -27.8% MAR

Spain CPI 1.8% JUN Prelim Y/Y vs 1.9% MAY

Spain Producer Prices 3.2% MAY Y/Y vs 3.0% APR

Spain Retail Sales -4.3% MAY Y/Y vs -11.5% APR


Italy Retail Sales -6.8% APR Y/Y vs 1.5% MAR

Italy Business Confidence 88.9 JUN vs 86.6 MAY


Italy CPI 3.6% JUN Prelim Y/Y vs 3.5% MAY

Italy PPI 2.3% MAY Y/Y vs 2.5% APR


Sweden PPI 0.3% MAY Y/Y vs 0.0% APR

Sweden Retail Sales 4.6% MAY Y/Y (exp. 3.8%) vs 0.5% APR                                             

Norway Unemployment Rate 3% APR vs 3% MAR

Finland Consumer Confidence 5.8 JUN vs 12.0 MAY

Finland Business Confidence -6 JUN vs -9 MAY

Finland Unemployment Rate 9.5% MAY vs 8.4% APR


Switzerland UBS Consumption Indicator 1.05 MAY vs 1.37 APR


Ireland Retail Sales -2.1% MAY Y/Y vs -1.8% APR

Ireland Property Prices -15.3% MAY Y/Y vs -16.4% APR

Ireland PPI 2.0% MAY Y/Y vs 2.8% APR


Portugal Consumer Confidence -51.5 JUN vs -52.6 MAY

Portugal Economic Climate Indicator -4.4 JUN vs -4.6 MAY


Hungary Unemployment Rate 11.2% MAY vs 11.5%

Slovakia PPI 4.2% MAY Y/Y vs 3.8% APR

Slovakia Consumer Confidence -22.6 JUN vs -22.5 MAY

Slovakia Industrial Confidence 2 JUN vs 2.7 MAY


Netherland Q1 GDP Final -0.8% Y/Y vs -0.8% in Q4   [+0.3% Q/Q vs -0.6% in Q4]

Netherlands Producer Confidence -4.8 JUN vs -5.0 MAY


Czech Republic Business Confidence 4.6 JUN vs 6.0 MAY

Czech Republic Consumer and Business Confidence -2.2 JUN vs -1.4 MAY

Czech Republic Consumer Confidence -29.3 JUN vs -31.0 MAY


Turkey Foreign Tourist Arrivals -1.5% MAY Y/Y vs -5.3% APR


Interest Rate Decisions:

(6/26) Hungary Base Rate UNCH at 7.00%

(6/27) Romania Interest Rate UNCH at 5.25%

(6/28) Czech Repo Rate Announcement CUT to 0.50% vs 0.75%



The Week Ahead:


Sunday: The ESM is set to come into force


Monday: Eurozone Troika will likely start on its mission to Cyprus; Jun. Eurozone, Germany, and France PMI Manufacturing - Final; May Eurozone Unemployment Rate; Jun. UK Lloyds Business Barometer, PMI Manufacturing; Jun. Italy PMI Manufacturing; May Italy Unemployment Rate – Preliminary, New Car Registration, Budget Balance; Spain and Italy Manufacturing PMI


Tuesday: May Eurozone PPI; Jun. UK PMI Construction, BRC Shop Price Index; May UK Net Consumer Credit, Net Lending Sec. on Dwellings, Mortgage Approvals, Money Supply: Jun.  Spain Unemployment


Wednesday: Jun. Eurozone PMI Composite and Services - Final; May Eurozone Retail Sales; Jun. Germany PMI Services – Final; Jun. UK PMI Services, Official Reserves; 1Q UK BoE Housing Equity Withdrawal; France Prime Minister Ayrault is poised to submit new adjusted  budget to his cabinet; Jun. France PMI Services – Final; Spain Services PMI; Jun. Italy PMI Services; 1Q Italy Deficit to GDP; Sweden Riksbank Interest Rate


Thursday: Eurozone ECB Announces Interest Rates; May Germany Factory Orders; UK BoE Announces Rates; Jul. UK BoE Asset Purchase Target; Jun. UK New Car Registration 


Friday: May Germany Industrial Production; Jun. UK PPI Input and Output; May France Central Government Balance, Trade Balance; May Spain Industrial Output


Extended Calendar Call-Outs:


JULY:  France – extraordinary session of parliament in July is due to re-draft the 2013 budget 


9 July:  ESM to come into force


5 July: ECB governing council meeting


19 July: ECB governing council meeting


18-19 October: Summit of EU Leaders



Matthew Hedrick

Senior Analyst


Wendy’s is a company heading in the right direction but we would look elsewhere for exposure to the QSR category at this point in time.  We anticipate the stock continuing to trade in the $4.50 - $5.50 range that it has been in for the last three years until management provides investors with clearer guidance as to the timeline for the system reimaging to reach completion.




President and CEO Emil Brolick, CFO Steve Hare, CMO Craig Bahner, SVP of Strategic Initiatives and Planning Abigail Prince, and others presented at the Wendy’s Investor Day yesterday in Dublin, Ohio.  Hosting its second Investor Day this year, the company was expected to share good news and that came in the form of a preannouncement of +3% same-store sales growth for 2Q at company stores versus expectations of 1.5%, according to Consensus Metrix.  McDonald’s same-store sales growth slowing has definitely been picked up by other domestic QSR chains, including Wendy’s.  However, we have not seen participate in any rally in QSR stocks over the past number of years.  The second chart, below, highlights the price action in the stock versus domestic QSR competitors over the past nine months; we believe that a lack of visibility on cash flow is keeping investors on the sidelines.




WEN: DUBLIN WASN’T BUILT IN A DAY - trad qsr 9 months



The Crux of the Debate


Our view remains that gaining clarity on the timeline for the system to go through the reimaging process is essential before establishing an intermediate- or long-term position in the stock.  The company’s priority is shifting from dividends and share repurchases to “strategic investment” related to the brand revitalization.  The company offered a timeline for reimaging 50% of the company-owned restaurants by the end of 2015 (70% of the company-owned stores need reimaging longer term) but no such specificity was offered with respect to the franchised portion of the system (~78% of total restaurant count).  We see several unresolved components to this story that will keep us on the sidelines until the facts change. 


Below, we address several key takeaways from the meeting:


Reimaging: CFO Steve Hare presented what, to us, was the most important part of the presentation as he offered some details around what management expects the financial implications of the reimaging initiative to be. 

  • 10 Company reimages in 2011, 50 in 2012, and 100+ expected in 2013
  • 50% of total ~1420 company stores reimaged by end 2015 with $500mm of CAPEX during 2013-15
  • Three tiers of image activation investments depending on needs/location/economics of each store
    • Tier 1 = $650-700k
    • Tier II =$500k
    • Tier III = $300k
  • The company expects annual positive free cash flow during those years
  • Of 372 franchisees, 28% own 78% of the franchise stores
  • Management believes that reimages may bring 25% sales lifts with a 30% flow-through to profit

This could all play out as Mr. Hare outlined but we think there is too much risk to the company’s assumptions to place capital behind them at this point in time.  For instance, franchisees’ enthusiasm for the reimaging program will likely depend on negotiations between corporate and the franchise community; royalty relief and other options will surely be discussed.  Recent conversations we have had with prominent members of the franchisee community have expressed concerns about the “eye-popping” numbers involved in the reimaging program.  Such concerns may prolong the process.  The benefits of the reimaging program, it seems, will need to be proven over a broader span of time and a larger number of restaurants before franchisees join the effort en masse.  The reimaged Bethel Road, Dublin, prototype location that we visited on Wednesday night reopened its doors 10 months ago in a core Wendy’s market.  While the ~$700k sales lift on the restaurant was impressive, we believe that the franchisees we have spoken to will seek further evidence that a positive yield can be expected from any investment they make in the reimaging initiative. 


The next meeting between management and the company’s franchisees, in October, is the next major milestone for the long-term Wendy’s story.  The support of the franchise community is important for the company to attain the benefits of the reimaging program.  Management believes that when 35-40% of dominant marketing areas have reimaged the restaurants, the long-term improvement in traffic should become material.


Cash Priority Shifting: Management is changing its focus to reimaging and reinvestment in the brand.


Marketing: Wendy’s has picked up its marketing game from non-existent to evidently effective over the last few quarters and the results, of 3% positive comps in 2Q, are clear for all to see. 


Stinky Carpets: Good food is important and it was encouraging to see the distinctive new offerings Wendy’s is bringing to the consumer.  As Emil Brolick admitted to a group of analysts at a lunch in New York shortly after he was appointed CEO, increasing traffic in the lobby depended very much on the asset base being upgraded; essentially, (our words) stinky carpets will lessen the appeal of new food offerings.  Management recognizes this and rightly asserts that the asset base should not preclude the company from leading in terms of product.  We agree, but believe that the broader system will continue to struggle versus major competitors in terms of traffic until the reimaging process reaches a satisfactory run rate.


Breakfast Yet to Leave the Station: The company has a strong pipeline of breakfast products and its coffee sales have grown encouragingly (up 25% since rollout of “Red Headed Roasters”).  22% of QSR traffic occurs during breakfast and the day part represents all of the growth in QSR over the last 5 years.  Wendy’s is missing out on the only rising tide in the industry and is forced to battle it out with competitors for traffic growth in other day parts.  The product, for what it’s worth, seemed very competitive to us but is real estate a problem?  Are the stores on the wrong side of the Street?  Are franchisees going to want to roll out breakfast while so many other changes are taking place?  We don't know the answer to these questions but that they persist is a concern in and of itself.


WEN: DUBLIN WASN’T BUILT IN A DAY - wendy s breakfast





Wendy’s has a great management team that is aware of the challenges it faces.  That said, this Investor Day was loaded with statements that hinge on many uncertain factors.  If, for lack of available details, we conservatively assume that the average reimage will cost $500k, it would imply $2.6 billion of investment required to revitalize the franchised portion of the asset base.  Reimaging remains a dark cloud hanging over the Wendy’s story and we expect the stock to remain range-bound until investors gain more visibility as to the timeline and the cost associated with this core component of the brand revitalization effort.  There will be a time to get behind this stock but, for the foreseeable future, we will stay on the sidelines until we gain clarity on the company’s timeline and future cash flow generation.



Howard Penney

Managing Director


Rory Green




NKE: Just Plain Awful

Nike (NKE) reported its FYQ4 results yesterday and missed the Street consensus by a whopping $0.20. Essentially, it was a total wash and Nike put up one awful print. This is a company that has continued to grow quarter-over-quarter for the past few years up until 2012. Gross margins were off management’s projections for the third quarter in a row. Plain and simple: Nike messed up and management knows it simply cannot screw up next quarter. The board will not allow it.



NKE: Just Plain Awful - NKE 1yr



To put it in perspective, the company had several factors affecting the outcome of its earnings report. Higher R&D costs, a negative customs ruling for four years of imports and gross margins hovering at a 2004 level. And consistent with our macro outlook, growth in China slowed to abysmally low levels, but it can be argued that was to be expected. Furthermore, management’s tone on the conference call displayed a laid back attitude that does not bode well for a company posting a miss like Nike did. In short, it’s time to hunker down and focus.


Despite yesterday’s horrid earnings report, we do remain bullish on the stock over the long-term. Capital expenditures are leveling off, the new NFL contract will grow into a half-a-billion dollar business in about two years, and the sale of Cole Haan and Umbro (both of which Nike had no business owning) will generate cash to play with. 

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Fun: SP500 Levels, Refreshed

POSITIONS: Short Industrials (XLI) and Energy (XLE)


So the SP500 went up 41 handles in less than 2.5 hours of trading, and everyone nailed both sides, right?


This is obviously getting out of control, and anyone who doesn’t realize that probably didn’t in Q3 of 2008 either. No, this is not 2008. This is 2012, and Q3 starts Monday.


Across my core risk management durations, here are the lines that matter most: 

  1. Intermediate-term TREND resistance = 1366
  2. Immediate-term TRADE resistance = 1359
  3. Immediate-term TRADE support = 1335 

In other words, what was a hyper short-term TRADE line of resistance (1335) is now support, and I fully expect to test this 1 wall of resistance. When/if the market fails at the wall, the central planners are going to need another central plan.


Maybe today is a fun one for politicians. That’s just great, for them. Their behavioral similarities to 2008 are mounting, by the week.


Enjoy your weekend,



Keith R. McCullough
Chief Executive Officer


Fun: SP500 Levels, Refreshed - SPX


TODAY’S S&P 500 SET-UP – June 29, 2012

As we look at today’s set up for the S&P 500, the range is 17 points or -0.68% downside to 1320 and 0.60% upside to 1337. 











    • Down from the prior day’s trading of 1589
  • VOLUME: on 6/28 NYSE 906.61
    • Increase versus prior day’s trading of 32.45%
  • VIX:  as of 6/28 was at 19.71
    • Increase versus most recent day’s trading of 1.34%
    • Year-to-date decrease of -15.77%
  • SPX PUT/CALL RATIO: as of 6/28 closed at 1.85
    • Up from the day prior at 1.56 


TREASURIES – US Treasury Bonds continue to be the only sober asset class not being whipped around by central planning headlines. At 1.62% this morning, yields haven’t budged (the 10yr is actually down 5bps on the wk and the Yield Spread (10s/2s) is 6bps narrower. More bailouts only slow growth further; that will be obvious in July/August. 

  • TED SPREAD: as of this morning 38
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 1.64
    • Increase from prior day’s trading at 1.58
  • YIELD CURVE: as of this morning 1.33
    • Up from prior day’s trading at 1.28 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: Fed’s Rosengren speaks on banking crisis in Amsterdam
  • 8:30am: Fed’s Dudley speaks in Puerto Rico
  • 8:30am: Personal Income, May, est. 0.2% (prior 0.2%)
  • 8:30am: Personal Spending, May, est. 0.0% (prior 0.3%)
  • 8:30am: PCE Deflator M/m, May, est. -0.2% (prior 0.0%)
  • 8:30am: PCE Core M/m, May, est. 0.2% (prior 0.1%)
  • 9:45am: Chicago Purchasing Mgr, June, est. 52.3 (prior 52.7)
  • 9:55am: University of Michigan consumer sentiment, June final, est. 74.1 (prior 74.1)
  • 11am: Fed to purchase $4.25-5.25b notes in 6/30/2018-5/15/2020 range
  • 12:05pm: Fed’s Bullard speaks on U.S. economy in Arkansas
  • 1pm: Baker Hughes rig count
  • NAPM-Milwaukee, June, est. 55.2 (prior 57.7) 


    • House, Senate in session
    • President Obama travels to Colorado for wildfires
    • EPA Asst. Administrator Gina McCarthy speaks at House
    • Energy panel hearing on EPA’s greenhouse-gas regulations, 9am
    • Last day to submit comments to CFTC on agency’s proposal to ease part of Dodd-Frank regulations limiting speculation in oil, natural gas, wheat and other commodities 


  • EU summit continues in Brussels; Euro-area leaders agreed to relax conditions on emergency loans for Spanish banks and possible help for Italy
  • Anheuser-Busch InBev buys rest of Modelo for $20.1b
  • Basel said to agree on draft changes to bank liquidity rule
  • Personal spending probably stalled in May, household purchases est. unchanged after 0.3% gain in April
  • Melrose to buy Elster for $20.50/shr. or $2.3b
  • Credit Suisse says it expects to be profitable in 2Q
  • Nomura cuts executive pay, halts some business on insider leaks
  • Ford said pretax oper. profit will be “substantially lower” in 2Q
  • JPMorgan allowed CIO Ina Drew to retire with $21.5m in stock, options
  • RIM drop puts pressure on co. to “sell, break up or die”
  • Apple Says Dan Riccio to run hardware as Bob Mansfield retires
  • Melrose to buy Elster Group for $2.3b
  • Peter Madoff, the younger brother of Bernard L. Madoff, is set to plead guilty to conspiracy and fraud
  • Qualcomm CEO Paul Jacobs said he wouldn’t rule out owning a manufacturing plant or tapping its cash pile
  • Bain Capital said to raise $2.3b for 2nd Asia fund
  • Nissan adding Sentra output, 1k jobs at Mississippi plant
  • Today is last trading day of month, quarter, half-year
  • U.S. Jobs, Tankan, Mexico Presidency: Wk Ahead June 30-July 7 


    • Constellation Brands (STZ) 7:30am, $0.39
    • KB Home (KBH) 8am, $(0.35) 


  • Gold Traders Extend Bullish Streak on Debt Crisis: Commodities
  • Commodities Up Most in Six Months as Europe Eases Credit Rules
  • Oil Rises From Nine-Month Low on Europe Measures, Supply Concern
  • Corn Poised for Biggest Weekly Gain Since 2008 on U.S. Drought
  • Copper Rises Most in Two Weeks Amid Reduced Debt-Crisis Concern
  • Palm-Oil Exports From Indonesia Set to Advance on Ramadan
  • Gold Pares Worst Quarterly Loss in Eight Years on Europe Deal
  • Raw Sugar Rises Before ICE July Futures Expiry; Coffee Advances
  • Rio Tinto Sees China Growing 8% in 2012 as Euro Crisis Deepens
  • Drought Rivaling 1980s Won’t Produce More U.S. Farm Assistance
  • Iran Offers to Ship Crude to South Korea on its Own Oil Tankers
  • Gas Drop to $2 Seen After Worst-to-Best Rebound: Energy Markets
  • European Carbon Permits Are Fastest-Rising Commodity in June
  • Alcoa Plans Job Cuts in Australia to Lower Cost, Retains Smelter
  • China, Singapore Granted U.S. Exemptions From Iran Sanctions
  • Oil May Rise After Imposition of Iran Sanctions, Survey Shows 





EURO – get the EUR/USD right, you get all the Correlation Risk trades right – and that’s pretty much the biggest reason why everything from Copper to the Spanish IBEX are ripping. At +1.2% the Euro is having one of its biggest up days of Q2 here, so that is going to train wreck anyone who nailed the quarter, on the last day of the quarter. Nice.






GERMANY – probably the most important lines to watch are Euro $1.26 (immediate-term TRADE resistance) and DAX 6251 (immediate-term TRADE line); for the DAX, holding above that line would be as bullish as it looked bearish below the line only 24hrs ago. Guys running billions can probably flip their entire book upside down in 24hrs, right?













The Hedgeye Macro Team





The Wall

This note was originally published at 8am on June 15, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Would it be excessive of me to ask you to save my life twice in a week?”

-Tyrion, Game of Thrones


I was speaking at a Canadian Economic Development dinner last night. At the end of my presentation I opened it up for the customary Q&A. Most of the questions were concerned with where Oil and Metal prices could go when Bernanke and Geithner run out of US Dollar Debauchery bullets.


Whenever talking about mean reversion and/or tail risks, the most obvious two-word risk factor that I explain (that neither Berrnanke or Geithner ever mention) is CORRELATION RISK. After I walked through that, a nice Scottish-Canadian man stood up and said, “this is more of a statement than a question – you are scaring the hell out of us.”


I politely replied (he was Canadian remember), “after what happened again out there into the US market close today, you should be scared.”


Back to the Global Macro Grind


Yesterday’s stock and commodity markets were trading off into the close, and then completely reversed course to the upside after our overlords floated a headline to the market that central planners were “prepared to take coordinated action.”


Whew, thank God for that!


Fear is what central planners are feeding you. Without fear-mongering the citizenry, they can’t print, bail, and print. Without fear of being held accountable for their own policy moves (Growth Slowing, equity market outflows, crashing market prices, and no political re-election) they wouldn’t be making these ridiculous short-term decisions.


At this point, it’s clear that they have gone over The Wall. They cannot go back. And no, that doesn’t mean that it ends well when they realize what’s on the other side either.


In HBO’s latest mini-series hit, Game of Thrones, The Wall separates the known (centrally planned kingdom societies) from the unknown. It’s the perfect metaphor for how conflicted and compromised Keynesian politicians must feel right here and now in 2012. They fear what they cannot see. They fear letting free market prices clear.


We let losers win until The Wall no longer holds. In the meantime, Mr Market is already in motion in taking down the Old Wall.


If you are afraid of a small part of The Wall coming down this weekend, you should be – because now these market morons have ramped expectations (market prices) right back up to the walls of Hedgeye’s immediate-term TRADE lines of resistance.


What does that mean?


That means that if market prices fail, again, at this interconnected wall of resistance, there is very little left in terms of Big Government Intervention catalysts and/or downside market price supports.


Across countries, commodities, and currencies, here are your immediate-term TRADE walls of resistance:

  1. SP500 = 1344
  2. Russell2000 = 775
  3. Euro Stoxx50 = 2179
  4. CRB Commodities Index = 280
  5. Japan’s Nikkei225 = 8731
  6. Shanghai Composite = 2348
  7. South Korea’s KOSPI = 1897
  8. Germany’s DAX = 6281
  9. Spain’s IBEX = 6797
  10. Greece’s ATG Index = 664
  11. Oil (Brent) = $104.87
  12. Gold = $1645
  13. Copper = $3.44
  14. 10yr UST Yield = 1.73%
  15. EUR/USD = $1.27

If, by chance, The Wall of resistance to do more of what has not worked is overcome, beyond that is another wall – The Wall of intermediate-term TREND resistance. Economic gravity is thick.


It remains unclear if these people making these short-term political decisions to manipulate market expectations have any idea about what I am talking about. It remains unknown if they ever had a proactive process of preparation to meet the challenges that remain outside The Wall of their leadership’s groupthink. It is a problem – it is them.


Fortuitously, in anticipation of some version of this political gong show, I got longer earlier this week. Don’t expect me to keep a 67% Cash position into this weekend though. I only have 4 SHORT positions left in the Hedgeye Portfolio. Expect that number to go up, maybe a lot, too.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1586-1634, $95.90-98.71, $81.73-82.36, $1.24-1.27, and 1310-1344, respectively.


Happy Father’s Day Dad – best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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