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The Old Wall Way Of Thinking








Nearly 20% of the corn crop has been destroyed in the US due to the massive heatwave that has engulfed the Midwest. Forget the policy of devaluing the dollar for now – the lack of QE combined with a massive upward flux in commodity prices is taking place. Corn is wiped out. Wheat isn’t doing well. You need corn to feed cows, pigs, etc. See the chain effects we’re referring to? Expect higher prices at your local grocer soon.



Did you see what Morgan Stanley did? It had a mess of a quarter, slashed 700 jobs, and proved that Old Wall Street is dying. All these banks are running into nothing but trouble. No volume, no market. A bunch of algo guys at the banks are trying to tweak their algos so their algo can front run another algo for a basis point. Sheesh.



The VIX is headed to 15. The volume is abysmal out there but should the VIX get to 15, we’ll look to short the S&P 500. It’s simple: look at the levels, look at the volume and make the connection. There’s no volume in between our S&P 500 levels, so when we got to 1374, we knew it’d make for a good short. Pay attention out there.





Cash: Up                U.S. Equities: Down


Int'l Equities: Down    Commodities: Down


Fixed Income: Up        Int'l Currencies: Down






The bulk of the bad news is on the table following disappointing F2012. Rebased F2013 estimates far more reasonable, and revenues should be supported by our expectations for rising physician utilization, and in the near-term, a flu season that is shaping up as a considerable tailwind.







SS volume accelerated in 1Q12 and employment remains a tailwind to both admissions & mix. We expect acuity to stabilize and births and outpatient utilization to accelerate out of 1Q12, while supply cost management continues as a margin driver and acquisition opportunities remain a source for upside.







The company continues to control its own destiny through investments in all the right areas. We think 30%+ top line and EPS growth for 5+ years. One of its failures, however, has been in penetrating markets outside the US. That will happen. But for now, its failure is a competitive advantage in the face of a strengthening dollar. We like it in sympathy with a LULU sell-off.









Tweet of the Day: “I couldn’t care less about who’s delivering alpha. Much more concerned with who’s delivering pizza..”-@ilkandcookies


Quote of the Day: “Get all the fools on your side and you can be elected to anything.” –Frank Dane


Stat of the Day: 700. The amount of additional job cuts taking place by year-end at Morgan Stanley. 


Valued Client,


5-10 minutes prior to the 11AM EST start time please dial:


(Toll Free) or (Direct)

Conference Code: 429126#




To submit questions for the live Q&A, please email






"Too Big To Perform" is a turn of phrase that our CEO, Keith McCullough, loves to use to describe the mega-banks that make up the Old Wall.  We think Darden is in danger of falling into that same category within the restaurant space.  While the company generates ample cash flow, the reasons to own this stock, in our view, are increasingly moving away from fundamentals such as market share and toward a blinkered perspective on "hitting numbers" and - of course - that generous yield.  Still, the Street's optimism seems to be based on an Olive Garden turnaround and future growth prospects.  We do not share this view and would caution against owning the stock over the next three years.


Our restaurant research team led by Howard Penney will be hosting a conference call on Darden, TOMORROW, Thursday, July 19th at 11am EST.


We will address the following topics, among others:


  • Management (and executive compensation) is laser-focused on growth. We think that is a problem when the company's two largest brands are struggling to gain any sustained traction with consumers
  • Blind dedication to a "rate of growth" target independent of a changing operating environment can be a fatal mistake. Growth can mask issues, particularly of the transient variety, but the issues at Olive Garden and Red Lobster are long-standing and require significant attention.
  • Inconsistency in the company's rationale behind its top-line strategy at Olive Garden. We are not deducing a clear message from the company regarding its ability to stop the sustained traffic losses at Olive Garden.
  • Massive CapEx demands. The company is facing a prolonged period of investment into its largest chain. Getting this effort started in earnest is taking more time than many were expecting.
  • The margin gap between Darden and some competitors offers clues as to how management could seek to bring about sustainable positive momentum in their largest business.



Please reply to this email with any questions.




Howard Penney

Managing Director


Rory Green


Bringing the Heat

“Midway upon the journey of our life,
I found myself within a forest dark,
For the straight foreward pathway had been lost."

-Dante Aligihieri, “The Inferno”


Keith is out in California this week meeting with some of our subscribers, so instead of getting up at 2am Eastern time he handed me the baton on the Early Look this morning.  As I was riding the train into New York last night, an article in The New Yorker prompted the theme for this note: heat. (By the way, yes I know hockey players from Alberta aren’t supposed to read The New Yorker, but just indulge me this once.)


Whether you are a believer in global warming, or not, this has been one heck of a hot summer.  The temperature hasn’t necessarily created an inferno, like in Dante’s namesake poem, but, yes, it has been quite hot.  In fact, for the month of June the average temperature in the United States was 71.2 degrees Fahrenheit.  This is two degrees higher than the average for the 20th century.  In aggregate, the average June temperature made the last 12 months the hottest year since record keeping began in 1895.


Not surprising, especially for those amateur psychologists amongst us, the upshot of the heat wave is that according to a University of Texas poll more than 70% of Americans now believe in climate change.  This is up from 52% in the winter of 2011 when we had record snows.  If you didn’t know whether the average person reacts to their most proximate stimuli, now you know.


The downside to Mother Nature bringing the proverbial heat is that much of the more agriculturally oriented parts of this country are experiencing droughts.  According to the National Atmospheric and Oceanic Administration, the country is under the most severe drought since 1955.  Currently, 55% of the contiguous United States is in a moderate-to-severe drought. 


So, inferno? Indeed.


The upshot of a drought is that it provides a bullish backdrop for commodity prices.  Former Hedgeye intern Brennan Turner recently retired from professional hockey and now operates a brokerage business for farmers in Western Canada.  As part of his business he writes a morning note to farmers.  In his note from a couple of days ago, he commented that for Canadian farms, because of the drought in the United States, this year could be like three years in one for both yields and revenues.  As they say, there is always a bull market somewhere. 


The more pressing question for most of us, though, is whether the bull market that has been occurring in U.S. equities over the last week plus is sustainable.  Our view, not to mince words, is no.  In fact, yesterday between meetings Keith ducked into a Starbucks and shorted the SP500 in the Virtual Portfolio. So, we are official time stamped on our bearish view.


The first thing that concerns us is volatility.  As is highlighted in the Chart of the Day, every time that volatility has approached the 15-ish level on the VIX over the past three years, the market has put in an intermediate term top.  Volatility is a great proxy for investor sentiment and currently the VIX is at 16.2.  Complacency, just like heat, is officially here my friends.


The second factor that we are concerned about is earnings.  Wall Street analysts are quite good at engineering earnings “beats”.  This quarter is clearly no exception since as of yesterday 73% of companies in the SP500 had “beat” earnings for the quarter.   Even if the market is excited by this, those of us who are quantitative in nature should not be surprised.


Coming in the Q2 2012 top down earnings estimates for the SP500 were projecting a -2.1% year-over-year decline in earnings.  How’s that for the soft bigotry of low expectations?  So sure, companies are beating very low expectations, but more concerning for the equity market is future earnings estimates.  Currently, earnings growth for Q1 and Q2 of 2013 is expected to be 14%.  Yah, I don’t think so.  Both a lack of real earnings growth and declining future earnings are not a positive catalyst for equities.


Finally, one of our last major worries is Europe.  Just as the Eurocrats finally go on their lengthy summer vacations, the European sovereign debt markets have again taken a turn for the worse.  Overnight, the Spaniards held an auction for 2-5-7 year bonds and bond buyers didn’t exactly bringing the buying heat.  To be precise, bid-to-cover was an abysmal 1.9x versus 4.3x just over a month earlier on June 7th.   Meanwhile the yield on the Spanish 10-year bond is once again back above the 7% handle.


Not to put wood on my bearish inferno this morning, but for those of you who are interested in stock specific ideas our Restaurant research team, led by Howard Penney, is hosting a conference call on Darden Restaurants this morning.  I won’t give away their punch line, but the title of the call is: “Is Darden Too Big Too Perform?” I think you get the drift.  If you are institutional investor and interested in listening in, ping .


Our immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Germany’s DAX, and the SP500 are now $1, $101.29-106.98, $82.88-83.93, $1.21-1.23, 6, and 1, respectively.


Good luck out there today,


Daryl G. Jones

Director of Research


Bringing the Heat - Chart of the Day


Bringing the Heat - Virtual Portfolio


TODAY’S S&P 500 SET-UP – July 19, 2012

As we look at today’s set up for the S&P 500, the range is 21 points or -1.37% downside to 1345 and 0.16% upside to 1375. 











    • Down versus the prior day’s trading of 1036
  • VOLUME: on 07/18 NYSE 727.45
    • Increase versus prior day’s trading of 4.26%
  • VIX:  as of 07/18 was at 16.16
    • Decrease versus most recent day’s trading of -1.94%
    • Year-to-date decrease of -30.94%
  • SPX PUT/CALL RATIO: as of 07/18 closed at 1.32
    • Up from the day prior at 1.04


  • TED SPREAD: as of this morning 37
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 1.50%
    • Increase from prior day’s trading at 1.49%
  • YIELD CURVE: as of this morning 1.29
    • Down from prior day’s trading at 1.27 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Initial Jobless Claims, July 14, est. 364k (prior 350k)
  • 8:30am: Continuing Claims, July 7, est. 3.3m (prior 3.304m)
  • 9:45am: Bloomberg Consumer Comfort, July 15
  • 9:45am: Bloomberg Economic Expectations, July
  • 10am: Philadelphia Fed, July, est. -8.0 (prior -16.6)
  • 10am: Existing Home Sales, June, est. 4.62m (prior 4.55m)
  • 10am: Leading Indicators, June, est. -0.1% (prior 0.3%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural gas change
  • 11am: Fed to purchase $1.5b to $2b notes maturing Feb. 15, 2036-May 15, 2042
  • 1pm: U.S. to sell $15b 10-yr TIPS 


    • President Obama meets with President’s Council of Advisors on Science and Technology at White House
    • House, Senate in session
    • House Oversight and Government Reform holds hearing on impediments to job creation, 9:30am
    • House Ways and Means holds hearing on U.S. manufacturing, tax reform, with Diane Dossin, chief tax officer for Ford, 9:30am
    • House Financial Services oversight subcommittee holds hearing on Dodd-Frank’s effects on families, communities, small businesses, 10am
    • House Financial Services panel holds hearing on Dodd- Frank impact on consumer choice, access to credit, with CFPB Deputy Director Raj Date. 2pm
    • House Foreign Affairs holds hearing on intellectual property rights infringement, 10am
    • Defense Dept. holds meeting on recommendations from “Leveraging Public-Private Collaboration to Augment the Department of Defense’s Mission” Task Group Study, 9:45am
    • NRC meets on low-level radioactive waste disposal, 8am
    • National Research Council begins two-year probe into Japan’s Fukushima Dai-Ichi nuclear accident, 8:30am
    • National Low Carbon Fuel Standard Project releases report that examines how standard would affect energy posture, national security, food prices, 9am
    • FERC holds meeting on pending regulatory issues, followed by briefing for reporters, 10am
    • House Natural Resources invited Interior Secretary Ken Salazar, Office of Mining Reclamation and Enforcement Director Joseph Pizarchik to testify on administration compliance with committee subpoenas, 10am
    • PJM Interconnection CEO Terry Boston, North American Electric Reliability CEO Gerry Cauley, join Energy Central webinar on power grid cybersecurity, 12pm
    • U.S. Chamber of Commerce holds press conference on economic consequences of Volcker Rule, 3pm
    • Mickey Levy, BofA chief economist, speaks at American Enterprise Institute event on European debt crisis, 10am
    • ITC votes on Xantham Gum imports from Austria, China, 11am
    • FCC holds open meeting to discuss next-generation mapping, wireless broadband, 10:30am
    • Journal of Commerce issues peak season shipping forecast for second half of 2012, 2pm


  • Highstar Capital agrees to buy Veolia unit for $1.9b
  • BC Partners, Canada Pension, mgmt buy Suddenlink for $6.6b in assumed debt and equity, from holders incl. Goldman Sachs Capital Partners, Quadrangle, Oaktree Capital Management
  • Spain 5.5% 2017 bond auction at record high yield 6.459%
  • France 5-year note auction yield at record low 0.86%
  • Deutsche Bank to cut 1,000 investment banking jobs: Handelsblatt
  • American Express profit beats ests as card spending climbs
  • Novartis profit beats estimates as sales of new drugs climb
  • China to provide $20b in loans to Africa: President Hu Jintao
  • Apple must publish U.K. notice that Samsung didn’t copy IPad
  • Deutsche Bank, HSBC traders probed for Libor collusion
  • Ex-Progress CEO to speak for first time about Duke ouster
  • Fender Musical, Kayak, Palo Alto among 4 U.S. IPOs possible
  • Monthly Europe CHMP decisions possible today, tomorrow
  • Soybeans climb to record in Chicago trading 


    • Huntington Bancshares (HBAN) 5:55am, $0.16
    • Nexen (NXY CN) 6am, $0.31
    • UnitedHealth Group (UNH) 6am, $1.20; Preview
    • Danaher (DHR) 6am, $0.81
    • BB&T (BBT) 6am, $0.70
    • Diamond Offshore Drilling (DO) 6am, $0.91
    • KeyCorp (KEY) 6:20am, $0.18
    • Textron (TXT) 6:30am, $0.44
    • Fifth Third Bancorp (FITB) 6:30am, $0.35
    • Wesco International (WCC) 6:30am, $1.21
    • Laboratory Corp of America (LH) 6:45am, $1.79
    • Philip Morris International (PM) 7am, $1.35; Preview
    • Travelers (TRV) 7am, $1.34
    • Snap-on (SNA) 7am, $1.20
    • Alliance Data Systems (ADS) 7am, $1.91
    • Quest Diagnostics (DGX) 7am, $1.17
    • Baxter International (BAX) 7am, $1.11
    • AutoNation (AN) 7am, $0.59
    • VF (VFC) 7am, $0.94
    • Johnson Controls (JCI) 7am, $0.67
    • Pool (POOL) 7am, $1.35
    • Entegris (ENTG) 7am, $0.16
    • Hubbell (HUB/B) 7am, $1.22
    • Morgan Stanley (MS) 7:15am, $0.29; Preview
    • Southwest Airlines (LUV) 7:25am, $0.33
    • Verizon Communications (VZ) 7:30am, $0.64; Preview
    • Fairchild Semiconductor Intl (FCS) 7:30am, $0.16
    • Sonoco Products (SON) 7:30am, $0.58
    • Freeport-McMoRan Copper & Gold (FCX) 8am, $0.75
    • Cypress Semiconductor (CY) 8am, $0.18
    • Sherwin-Williams (SHW) 8am, $2.12
    • Union Pacific (UNP) 8am, $1.97
    • Life Time Fitness (LTM) 8am, $0.72
    • TCF Financial (TCB) 8am, $0.18
    • PPG Industries (PPG) 8:11am, $2.37
    • Blackstone Group (BX) 8am, $0.11
    • GATX (GMT) 8:30am, $0.61
    • Syntel (SYNT) 8:30am, $0.81
    • Genuine Parts (GPC) 8:54am, $1.07
    • Nucor (NUE) 9:01am, $0.48
    • Safeway (SWY) 9am, $0.49
    • Shoppers Drug Mart (SC CN) 10:06am, C$0.70
    • NCR (NCR) 4pm, $0.57
    • Cubist Pharmaceuticals (CBST) 4pm, $0.46
    • Acacia Research (ACTG) 4pm, $0.21
    • Align Technology (ALGN) 4pm, $0.28
    • Hub Group (HUBG) 4pm, $0.48
    • Google (GOOG) 4:01pm, $10.12
    • Chipotle Mexican Grill (CMG) 4:01pm, $2.30
    • Associated Banc-Corp (ASBC) 4:01pm, $0.24
    • Athenahealth (ATHN) 4:01pm, $0.24
    • B&G Foods (BGS) 4:01pm, $0.31
    • Glimcher Realty Trust (GRT) 4:03pm, $0.14
    • E*Trade Financial (ETFC) 4:04pm, $0.11
    • People’s United Financial (PBCT) 4:05pm, $0.19
    • SanDisk (SNDK) 4:05pm, $0.18
    • Intuitive Surgical (ISRG) 4:05pm, $3.57
    • Microsoft (MSFT) 4:05pm, $0.62
    • Cepheid (CPHD) 4:05pm, $0.02
    • EastGroup Properties (EGP) 4:05pm, $0.77
    • Cytec Industries (CYT) 4:06pm, $1.29
    • Advanced Micro Devices (AMD) 4:15pm, $0.07
    • City National (CYN) 4:15pm, $0.88
    • Gardner Denver (GDI) 4:15pm, $1.40
    • West Fraser Timber (WFT CN) 5pm, $0.42
    • Swift Transportation (SWFT) Aft-mkt, $0.23 


  • Nuclear Resurgence Seen Luring Paladin Takeover Bid: Commodities
  • Oil Rises for a Seventh Day on U.S. Gasoline Stockpiles, Housing
  • Copper Rises for Second Day on Speculation About Stimulus Steps
  • Crop Surge Sends Soybeans to Record as U.S. Drought Intensifies
  • Gold Advances in London on Speculation Fed May Add to Stimulus
  • Raw Sugar Rises to Three-Month High as Soybeans Climb to Record
  • Chinese Corn Importers Said to Seek Sale of Undelivered Orders
  • Korea Feed Group Asks U.S. to Curb Corn, Soybean Use in Biofuel
  • Soybeans Climb to Highest Since 2008, Wheat Advances on Drought
  • Palm Oil Climbs as Soybeans Rally to Record, Boosting Discount
  • Biggest Iron Miner Vale Increases Output as Rain Eases in Brazil
  • Mongolia Government Hopeful Opposes Erdenes TT $3 Billion IPO
  • India to Review Farm-Exports, Curb Hoarding on Weak Monsoon
  • Rubber Gains From 2-Week Low as U.S. Data Improve Demand Outlook
  • China Auto Financing Tripling by 2017 Spurs Vehicle Sales: Cars
  • Indonesia Set to Keep Palm Oil Export Tax Unchanged at 15%





















The Hedgeye Macro Team

Baby Bust

This note was originally published at 8am on July 05, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Every child begins the world again.

-Henry David Thoreau


Deciding to start a family is an incredibly hopeful act and one that reflects in part the national mood.  It should be no surprise then that birth trends in the United States peaked in 2007 and then began a long period of deceleration and decline over the subsequent 5 years.  Births were still declining in 2011 and look likely to continue to slow in 2012, reflecting the shifting landscape of global economic concerns.  There are glimmers of hope, however, and a recovery bodes well for many stocks in Healthcare, but in particular Hosptials.


There is a large body of academic work that describes how individuals and families consume, save, and plan over their lifetime.  The broad name of the field is Life-Cycle Hypothesis (http://en.wikipedia.org/wiki/Life-cycle_hypothesis).   In the simplest terms,  an individual  behaves in predictable ways over their lifetime.  They buy a home, invest in stocks, have children, reach their peak income, among many things,  in predictable ways over their lifetimes.  For Healthcare, they also age, which begins an accelerating cycle of doctor visits, medications, and hospital stays.  The key point though is that theses consumption patterns are distinct at discrete age groups.   Looking then at the historic pattern of peaks and troughs of births tells a story of predictable consumption in the future.


What makes understanding these consumption patterns worth thinking about is the wide variation in birth trends over the last 100 years, including the last five years of declines in the United States.  Birth trends fell in the 1920s and 1930s, which has been a present day problem for Nursing Homes and Senior Living in recent years as the growth in their key customer base has slowed.   The Baby Boom following WWII led to the great healthcare boom of the 1990s and early 2000s as Boomers aged through the period in their life when healthcare consumption begins to accelerate in earnest.  It helped too that they had reached peak earnings (late 40s) and peak disposable income (50s).


For Hosptial companies birth trends play a major role in admission trends, making up over 20% of the total hospital admissions.  While there have been many issues facing hospitals including reimbursement pressure from states cutting Medicaid, cuts to Medicare writen into the Affordable Care Act, and pressure from private insurers through rates and rising out of pocket expenses for their enrollees, the slowdown in births has been the least discussed. 


Our analysis shows that over the last 5 years, the differnece between the predicted number of births, based on per capita birth rates by age and the number of women entering child bearing years, and actual births has created a cummulative deficit of between 530,000 and 1,600,000 babies not being born.  Considering that there were 4.3M births in 2007, the magnitude is indeed relevent.  Further, uncovering where the inflection point of a recovery lay in the furture will be a meaningful catalyst for admission trends for Hosptials.  In addition to slowing birth related admissions, Hosptials have experienced pressure on admissions from everything from Knee Replacements to Cardiovascular surgeries.


Our best forecast about the timing of a recovery in births in the United States is that we will see them turn positive in Q412.  However, over the next two quarters, trends will remain soft and in fact appear to be weakening further sequentially.  This will have a negative impact on Hospital admission trends, revenues, and earnings.  Weighing the short term weakness against the longer term acceleration will be our key focus over the next few quarters. 


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Germany’s DAX, and the SP500 are now $1596-1624, $97.47-101.71, $81.59-82.39, $1.24-1.26, 6567-6679, and 1365-1380, respectively.


Tom Tobin

Managing Director Healthcare


Baby Bust  - EL 7 5


Baby Bust  - VP 7 5

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