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This note was originally published at 8am on June 20, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Duration neglect is normal in a story, and the ending often defines its character.”

-Daniel Kahneman


I’m a storyteller. So are you. We tell ourselves, our families, and firms stories every day. We tend to frame each story within the framework of how we think. How we think drives our decision making. In the end, we are all accountable for those decisions.


I made a decision to go to 100% Cash in the Hedgeye Asset Allocation Model yesterday. That’s a first. If you’ve been reading my rants for the last 5 years, I don’t have to explain why at this point. You know where I stand. I do not think that this ends well.


Some people think that it will end just fine. Some people think doing more and more of what has not worked is the only way out. Many people thought the very same thing in 2008, and the moneys in their accounts are still underwater to prove it.


Back to the Global Macro Grind


You can call me short-term. You can call me the longest of long-term. You can call me whatever you want – that’s all part of the storytelling too. I was never supposed to be a name in The Game. The Old Wall was never supposed to fall.


The Old Wall used to get away with making up Perma characters in their storytelling. Someone was always the Perma Bull. Someone was always the Perma Bear. Some of us call that fiction. Some of us just permanently manage risk, both ways.


I have by no means perfected the risk management process. The day that you think you have is the day you are about to get clocked. The plan is always grounded in uncertainty. The plan is always that the plan is going to change.


As The Game changes, the process evolves. Sometimes the process signals that it’s time to just get out of the way.


To review why I am already out of the way this morning:

  1. I have no idea what our Central Market Planner in Chief is going to say
  2. If Bernanke delivers the Qe3 drugs, food/energy inflation will slow real growth further
  3. If Bernanke doesn’t deliver the drugs, a world full of Correlation Risk comes into play

In other words:


A)     You cannot beg for Qe and have Accelerating Growth at the same time – the world needs growth, not more debt

B)      If you do not get Qe, the US Dollar stops getting debauched, and Commodity Bubbles continue to pop


So that’s why, at this time and price, I have a 0% asset allocation to Stocks and Commodities. Why I have a 0% asset allocation to Currencies and Fixed Income is simply because I know how to manage my immediate-term risk.


I sold both our US Dollar (UUP) and US Treasury (TLT) positions before yesterday’s plundering. That doesn’t mean I cannot buy either of them back. There are no centrally planned rules associated with how much Cash I can be in. At least not yet.


Back to the #1 thing that Bernanke will not mention today that is driving both causality and correlation in real-time market pricing – The Correlation Risk. Here’s how the last 2 months of Correlation Risk between the US Dollar and everything “risk” has looked:

  1. SP500 = -0.91
  2. Euro Stoxx600 = -0.96
  3. MSCI World Index = -0.95
  4. CRB Commodities Index = -0.94
  5. WTIC Oil = -0.94
  6. Copper = -0.93

No matter what storytelling they continue to feed you (and they is all encompassing at this point, from the Old Wall to Washington, DC and Paris, France), this is all that matters right now.


Get policy right (causality), and you’ll get the US Dollar right. Get the US Dollar right (correlation), and you’ll get a lot of other market things right.


We’ve been right 32 out of 33 times since firm inception (2008) on the US Dollar. That’s probably why I haven’t spent the last 5 years trying to get back to a bull market top break-even. I may be wrong this time. If I am, I’ll at least know why.


European central planning storytellers have played their hands. In my own accounts, with 100% liquid Cash (and illiquid Hedgeye stock), I’m holding a hand of kings. For their last no-volume hurrah, Bernanke Beggars better hope he has 4 aces.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, and the SP500 are now $1589-1640, $94.84-97.59, $81.32-81.97, $1.24-1.27, and 1329-1362, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


100% Cash - Chart of the Day


100% Cash - Virtual Portfolio

BANKS: The New Criminals

Innocent until proven guilty in a court of law is the way of the land and US banking institutions will certainly have to put forth a lion’s share of effort defending themselves in the wake of the recent LIBOR manipulation scandal. The London Interbank Offered Rate (LIBOR) is the benchmark interest rate for rates around the world, essentially. Barclays recently admitted it colluded to manipulate LIBOR and got slapped with a hefty $455 million fine and essentially escaped criminal prosecution for coming clean right away. It has cost the bank its iconic CEO Bob Diamond, who resigned Tuesday morning in addition to now former Chairman Marcus Agius.



BANKS: The New Criminals - LIBOR 5yr



Manipulating interest rates is a violation of the Sherman Antitrust Act and a criminal offense. It is ironic in the sense that what little “trust” was left in the markets has all but evaporated at this point. As regulators both domestic and abroad begin their probes and investigations into financial institutions and the LIBOR scandal, it is becoming clear that this could very well be the worst thing to happen to banks since the 2008 financial crisis.


The past six years have seen regulators and politicians dole out an immense amount of restrictions and control over US banks. From Dodd-Frank provisions like Durbin to the Volcker Rule to the (estimated and still climbing) $49 billion in mortgage putback settlements, it has not been an easy journey. Three key players in the US have to worry about the effects of what we will refer to as LIE-BOR: JP Morgan Chase (JPM), Citigroup (C) and Bank of America (BAC). These are the large cap US banks who participate in setting LIBOR. It is worth noting that Goldman Sachs, Morgan Stanley and Wells Fargo are not affected by this mess.


With regulators breathing down their backs, essentially zero public trust and a slew of lawsuits in the wind, the bearish case for BAC, C and JPM is getting stronger by the day. JP Morgan in particular has it rough after getting grilled over its $2 billion+ trading loss out of – where else? London.


BANKS: The New Criminals - BANKSFIX rollercoaster



Cheesecake Factory does not report earnings until July 20th but a data point published this morning gives an idea of how the company’s top line may have shaped up during the second quarter.


Cheesecake Factory reports on July 20th and we will be publishing a comprehensive preview in advance of that print.  The stock has traded strongly over the past week but we believe that the ICSC data published this morning rounds out a quarter where CAKE’s comps may have come in lower than the Street is expecting. 


Cheesecake Factory traffic depends partly on traffic in malls across the U.S. The two lines in the chart below represent Cheesecake Factory comps and the ICSC Chain Store Sales Index year-over-year change.  The aforementioned ICSC dataset details the weekly change but, clearly, for comparability purposes it is necessary to monitor quarterly Cheesecake Factory comps versus the corresponding year-over-year move in the ICSC data. The 2Q12 data point for Cheesecake Factory represents current consensus expectation of +1.95%.  The correlation for the data represented in this chart for 1Q02 through 1Q12 is 0.8.





We like to monitor Google Trends (search “Cheesecake Factory”) versus the comps of many of the companies in our space, depending on how strong the relationship has been historically.  For CAKE, the correlation between the Google Trends data and the company’s blended same-store sales growth over the last four years has been 0.75, which means that we do not ascribe too much importance to the chart below but it is worth highlighting.





Howard Penney

Managing Director


Rory Green



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XLF: The Cycle Repeats Itself

Financials have had one rollercoaster of a ride over the last six years – and that’s putting it rather lightly. This morning we took notice of the XLF (financials SPDR) and what’s been going on there over the last three years. Essentially, this ETF has seen consistent drawdowns in terms of three factors: timing, magnitude and duration. There is a cycle that has been setup which will continue for the foreseeable future that relies heavily on monetary policy put forth by central planners (read: The Fed).



XLF: The Cycle Repeats Itself - XLF Predictable



Since 2010, what happens is that in Q2 and Q3, fears begin to mount about a major recession and investors essentially get scared as seasonal adjustments of government data come in. So the market then begins to look to Ben Bernanke and the Federal Reserve for a crutch to help them out in terms of lower rates, extensions of existing market operations (Twist) or another dose of quantitative easing. This happens in the fall and then for Q4 of that same year and leading into Q1 of the following year, the market becomes overly bullish. Then the same Q2/Q3 fears kick in again and the cycle repeats itself


Hence, the drawdown pattern in the XLF. Life’s good when Bernanke has your back (until he doesn’t).


OH SNAP: Food Stamps’ Impact On Dollar Stores

The nation is hungry and the government has got to feed it. The Supplemental Nutritional Assistance Program (SNAP) – better known as food stamps – has been on the rise since 2007, recently peaking at a 30-year high of 15%. We estimate that based on the current rate of deceleration, SNAP participation growth will turn negative in the beginning of 2013.


What does this mean for dollar stores like DG, FDO and DLTR? It means that people with limited income aren’t hitting up these stores like they used to. Instead they are going to supermarkets and other participating vendors that deal with the SNAP program and accept food stamps. This does not bode well for dollar stores, who are currently sitting at peak margins. This only adds to our increasingly bearish stance on names like DG and FDO.



OH SNAP: Food Stamps’ Impact On Dollar Stores - SNAP foodstamps


The Macau Metro Monitor, July 3, 2012




Visitors to Singapore rose 9% to 1,201,898 in April 2012.  Mainland China visitors gained 32% YoY to 173,540.





Grand Waldo on Cotai has dropped plans to open a shopping mall.  The mall would have catered to shoppers from Taiwan, according to the resort’s major shareholder, Get Nice Holdings Ltd.



New Century Hotel was yesterday temporarily closed to guests, after a messy row between shareholders Ng Wai and Chen Meihuan emerged.  Its Greek Mythology casino, run under SJM Holdings Ltd's gaming licence, remained open all time.  An alleged representative from Ms. Chen said Mr. Ng is no longer a shareholder of the Taipa hotel.  Mrs Chen claims to own 80% of the hotel.


An alleged representative from Mr. Ng accused Ms. Chen of sending “some gangsters” to occupy the hotel.  Unidentified people heavily attacked Mr Ng, better known as “Street Market Wai”, last month in a restaurant inside the hotel.

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