Bulls On Parade







US equities are currently enjoying a bull rally for one main reason: bailouts. As long as central planners around the world keep bailing out their respective countries, the trend will remain the same. Spain’s getting a blank check along with Greece and soon Spain will pay a visit to the bank known as the ECB to make a multi-billion euro withdrawal. Now we can sit back and wait to see if Ben Bernanke will deliver the drugs for the US in the form of QE3; we’re talking about a full on rate cut here, not another round of MBS buybacks.



It was the Reverend Jesse Jackson who once said “Keep hope alive!” It appears that market participants and central planners are following in Jackson’s footsteps. It’s no secret that growth is slowing. Throw in asset price inflation, amplify market volatility and shorten economic cycles and you’ve got a delicious jambalaya called disaster and disappointment. We are perpetuating the inevitable consequences of bailouts, QE and all the other problems that remain.


But it’s all OK. As long as the S&P 500 rips five handles in the pre-market, no one is going to complain. It’s astonishing that people aren’t ready for lower fuel and food prices yet. King Dollar will make his way to the throne, but it may take him awhile before he gets there.      



Speaking of expectations, how about this inflation we’ve been experiencing? Sure, Isaac Newton once noted that “what goes up, must come down” but the commodity perma-bulls seem not to have a care in the world for that idiom. Should Bernanke deliver the goods, $1700 gold and $100+ a barrel oil will again become the “norm.” Oil is up +6% week over week and sugar is up +17% week over week.


If you don’t mind coughing up $12 for a Hershey’s bar, then so be it. Keith noted in this morning’s Early Look that CFTC contracts outstanding have passed the 1 million mark. An efficient market needs both hedgers and speculators but this is getting ridiculous. If commodity prices go any higher (and the drought in the Midwest continues to obliterate corn), perhaps we’ll soon see CASH 4 CORN stores popping up here and there.




Cash:  Flat              U.S. Equities: Down


Int'l Equities: Flat     Commodities: Flat


Fixed Income: Up     Int'l Currencies: Flat





This company is transitioning from cash burn to $75mm annual free cash flow generation thanks to completion of a reimaging program and refranchising of JIB units. Qdoba is the leverage; a maturing and growing store base will bring higher margins. We see 8.5% upside over the next 6-9 months.




TAIL: LONG            



The former Liz Claiborne (LIZ) is on the path to prosperity. There’s a fantastic growth story with FNP. The Kate Spade brand is growing at an almost unprecedented clip. Save for Juicy Couture, the company has brands performing strongly throughout its entire portfolio. We’re bullish on FNP for all three durations: TRADE, TREND and TAIL.







We continue to expect outpatient utilization to pick up in 2H12 alongside stabilization in acuity with ortho and cardiac/ICD volumes supporting both pricing and inpatient admissions growth. Births should serve as a tailwind into year-end, recent and prospective acquisitions offer some upside to 2012/13 numbers and the in place repo offers some earnings flexibility. With European and Asian growth slowing, we like targeted domestic revenue exposure as well.










Quote of the Day: “The glory of great men should always be measured by the means they have used to acquire it.”              – Francois de La Rochefoucauld


Stat of the Day: $700 million. The total amount of fines levied by the US due to the company’s failure to squash money-laundering at the bank.


TODAY’S S&P 500 SET-UP – July 30, 2012

As we look at today’s set up for the S&P 500, the range is 32 points or -1.87% downside to 1360 and 0.44% upside to 1392. 











  • ADVANCE/DECLINE LINE: on 07/27 NYSE 2012
    • Up versus the prior day’s trading of 1406
  • VOLUME: on 07/27 NYSE 912.81
    • Increase versus prior day’s trading of 1.66%
  • VIX:  as of 07/27 was at 16.70
    • Decrease versus most recent day’s trading of -4.73%
    • Year-to-date decrease of -28.63%
  • SPX PUT/CALL RATIO: as of 07/27 closed at 1.26
    • Down from the day prior at 1.62 


  • TED SPREAD: as of this morning 34
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.53%
    • Decrease from prior day’s trading at 1.55%
  • YIELD CURVE: as of this morning 1.30
    • Down from prior day’s trading at 1.31 

MACRO DATA POINTS (Bloomberg Estimates):

  • 10:30 am: Dallas Fed Manufacturing Activity, July, est. 2
  • (prior 5.8)
  • 11am: Fed to purchase $1.5b-$2b notes due Feb. 15, 2036- May 15, 2042
  • 11:30am: U.S. to sell 3-mo, 6-mo bills
  • 4pm: Crop conditions 


    • Defense Secretary Leon Panetta arrives in Israel as part of regional tour for meetings that may focus on Syria, Iran and defense cooperation
    • Commerce Dept expected to set preliminary anti-dumping duties for Korean, Mexican clothes washers that U.S. producers say are sold in the U.S. for less than production costs
    • NHTSA releases study on children left in locked cars
    • Mitt Romney meets with with Polish Prime Minister Donald Tusk, former President Lech Walesa, visits historical sites in Poland 


  • Fed Chairman Ben Bernanke may be taking another look at cutting the interest rate the Fed pays on bank reserves to bring down S-T borrowing costs, spur slowing U.S. expansion.
  • Apple’s $2.5b patent-infringement lawsuit against Samsung begins today in federal court in California
  • GM says Chief Marketing Officer Joel Ewanick resigned because he didn’t “meet the company’s expectations of an employee”
  • Berkshire Bank sues Barclays, Citigroup over alleged Libor fraud
  • Bain said to be in talks for $1.6b Genpact stake
  • 3 JPMorgan bankers are said to depart for Evercore, Centerview
  • Apple talks with Twitter said to have ended without investment deal
  • Boeing Dreamliner GE engine probed after jet spews debris
  • “The Dark Knight Rises” led NA box office for 2nd weekend with $64.1m
  • Cnooc-Nexen deal may spark U.S. scrutiny of Chinese control
  • SEC freezes trader assets in probe of Cnooc’s Nexen purchase
  • Ex-UBS executives go to trial in municipal bond bid-rigging case
  • HSBC said 1H profit rose 10%, lifted by gains on asset sales
  • Corn jumps to record amid worst drought in decades
  • Euro-area July economic confidence falls to 87.9, est. 88.9


    • Loews (L) 6am, $0.76
    • CNA Financial (CNA) 6am, $0.56
    • CIT Group (CIT) 6:30am, $(0.57)
    • Roper Industries (ROP) 7am, $1.15
    • Diebold (DBD) 8am, $0.59
    • UDR (UDR) 8am, $0.33
    • Arrow Electronics (ARW) 8am, $1.13
    • Mercury General (MCY) 8:30am, $0.66
    • Franklin Resources (BEN) 8:30am, $2.05
    • Cirrus Logic (CRUS) 4pm, $0.21
    • Vertex Pharmaceuticals (VRTX) 4pm, $0.58
    • Hologic (HOLX) 4:01pm, $0.34
    • Anadarko Petroleum (APC) 4:01pm, $0.77
    • Fiserv (FISV) 4:01pm, $1.26
    • Plum Creek Timber (PCL) 4:01pm, $0.18
    • Seagate Technology (STX) 4:01pm, $2.43
    • Dendreon (DNDN) 4:01pm, $(0.62)
    • Allison Transmission Holdings (ALSN) 4:01pm, $0.42
    • Flowserve (FLS) 4:02pm, $1.91
    • PMC - Sierra (PMCS) 4:04pm, $0.08
    • PartnerRe Ltd (PRE) 4:04pm, $1.98
    • Enbridge Energy Partners (EEP) 4:08pm, $0.30
    • Herbalife (HLF) 4:10pm, $0.96
    • Hertz Global Holdings (HTZ) 4:31pm, $0.32
    • Masco (MAS) 5pm, $0.11
    • American Financial Group (AFG) 5:01pm, $0.79
    • Eastman Chemical (EMN) 5:09pm, $1.30
    • Jacobs Engineering Group (JEC) Post-Mkt, $0.75


  • Hedge Funds Add Wagers in Longest Streak Since 2009: Commodities
  • Gas Bullish Bets Advance to Highest in 29 Months: Energy Markets
  • Tony Hayward Loads Trucks With Kurdish Oil Awaiting Pipe: Energy
  • Corn Jumps to Record as Worst Drought in Decades Hurts U.S. Crop
  • West Australia’s Grain Harvest Seen Dropping 40% on Weather
  • Oil Falls for First Day in Five as European Confidence Worsens
  • Sugar Gains on Speculation Indian Output Will Fall; Coffee Rises
  • Copper Drops Before ECB, Federal Reserve Policy Makers Gather
  • Gold Set to Decline in London as Dollar’s Rebound Curbs Demand
  • Enbridge Failed Pipe Section to Undergo Lab Exam, U.S. Says
  • Malaysia Said Planning to Boost Crude-Palm Tax-Free Export Quota
  • Iron Ore Seen Extending Decline in October Amid China Slowdown
  • CRB Index Seen Falling 11% on Island Pattern: Technical Analysis
  • Green Mountain CEO Faces Percolating Issue of Who’s Boss: Retail
  • Peet’s Seen Tempting Starbucks to Top Richest Java Bid: Real M&A 





EURO – we re-shorted the Euro right at our immediate-term TRADE line of 1.23 resistance (vs USD) on Friday; the Euro backed off that line hard, and copper/gold just went red too. Will Bernanke go Qe3 at SPX 1385? Doubt it, and so do Euro/Gold/Copper; stay tuned though – this man’s ideology trumps most things I can reconcile in my head.






SPAIN – instead of -33% from the March high (Thursday morning pre Draghi), the IBEX is now -25%, hooray; economic growth however continues to surprise on the downside (Spain GDP miss again at -1% y/y for Q2) and the central plan continues to do more of what is slowing growth (debt). Watching Spain’s intermediate-term TREND line of 6872 very closely.






CHINA – evidently the Chinese agree with me on that; the Shanghai Comp couldn’t care less about what American and/or European is getting their latest 48hr Viagra squeeze, trading down another -0.9% to fresh YTD lows (China down -14.2% since May as food/energy prices ripping on central planning will only slow Asian consumption growth further).











The Hedgeye Macro Team


The Macau Metro Monitor, July 30, 2012




A new alternative route to access the National Day Parade (NDP) on August 9 can be accessed via the Helix Bridge next to MBS.  Previously, the 26,000 plus crowd caused bottlenecks at the five entrances along Raffles Avenue and Marine Square shopping centre where every spectator goes through security checks before entering the Marina Bay floating platform.


NDP operations director Tay Boon Khai told The Straits Times that he expects the process for spectators to get to their seats from the entrances, which usually takes between 30 to 45 minutes, to be smoother this time round.

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Unintended Consequences

This note was originally published at 8am on July 16, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Increasing taxes on successful risk takers will slow the accumulation of equity and discourage risk taking.”

-Edward Conard


This weekend I finished reading Edward Conard’s “Unintended Consequences: Why Everything You’ve Been Told About the Economy is Wrong.” On an ABC scoring scale, I’ll be nice and give the book a B (minus). The book’s title is a borrowed one – and the “truth” is written from a partisan perspective (Conard was a Managing Director at Bain who made a million dollar contribution to a Romney Super Pac).


If you are well versed in Global Macro markets, economic history, and frameworks of economic thought, you don’t have to start reading this book until page 195 where Conard asks 3 important questions: “How does America protect its economy from another crisis? How does it reduce unemployment and revive growth? And how does it balance the federal budget – by raising taxes or cutting costs?”


Good questions; average at best answers. Not once did he use modern day math (Chaos or Complexity Theory) or any aspect of current Behavioral Economics (Kahnmen/Tversky/Taleb). He focused mostly on how bad the likes of Keynesian “multiplier-effect” economists like Christina Romer have been in advising Obama. But everyone who doesn’t do drugs knows that just as well as an MBA from Harvard does.


The only question Conard answered really well (that I haven’t read anywhere else) was the unemployment question. That’s why I gave him the Hedgeye Quote of The Day. Central planners like Ben Bernanke and Tim Geithner (who have never had to take on risk with their own after tax capital and meet a payroll in their life), do not get this very simple relationship between risk capital and hiring.


Take it from me (a small business owner in America). It’s one of the main reasons why US Unemployment is high and US Consumer Confidence is low. People don’t trust this will end well.


Back to the Global Macro Grind


In the last 3 weeks, the USA has had some terrible economic data related to hiring and confidence:

  1. NFIB Small Business Survey in June plummeted to a fresh YTD low of 91.4 versus 94.4 in May
  2. US unemployment rate of 8.2% for June didn’t budge as non-farm payrolls missed badly (again) at 80,000
  3. University of Michigan Consumer Confidence for early July got smoked to another YTD low of 72 (versus 73.5 2 weeks ago)

That last data point actually came at 10AM EST on Friday morning after the US stock market was already up +1% on the day. Bad news for America is obviously bullish for the only part of the bull case that’s left (Qe rumors and bailouts). Throw a little China “rate cut” rumor on top of that fire into Friday’s close, and you had yourself one mother of a no-volume rally. It was the market’s 1st up day in the last 7.


Hooray. Now what?


1.   ASIA: After the Chinese didn’t deliver on the USA manufactured lie of the day (Premier Wen actually told the media he wants it “clearly understood” that China’s #GrowthSlowing continues at an accelerating rate), stocks in Shanghai closed down another -1.7%, hitting fresh YTD lows. Like US Small Business and Consumer Confidence, fresh lows are great, right?


2.   EUROPE: Despite the no-volume rally in US Stocks (down 29% volume day versus my top 10 down days in Q2) on Friday, Europe opened like a wet Kleenex. Spanish, Italian, and Russian stocks all remains in crash mode this morning at -25%, -22%, and -20%, respectively, from their YTD tops. More bailout debt is only going to structurally slow real (inflation adjusted) growth further.


3.   COMMODITIES: while US stocks were flat to down last week (depending on the index), Commodity Inflation had some rip-roaring fun in the sun, with the CRB Index up a full +2.4% on some good ole fashioned food (corn!) and oil (+3.1% wk-over-wk) inflation. Better yet, the CFTC weekly options data showed a +8.9% wk-over-wk pop to 1.05 million contracts!


To put that commodity price speculation into perspective, that 1.05 million number is the highest level of commodity inflation betting since, you guessed it, April 3rd, 2012. The Chinese, just fyi, aren’t going to cut rates if food/energy starts to rip again. That perpetuates civil unrest.


Q: What else peaked on April 2nd, 2012? A: The SP500 (at 1419).


And so it begins…


Another week of storytelling and fun at the gong show that has become our centrally planned market. Will Ben Bernanke deliver the elixir of #BailoutBull drugs at this week’s Senate and House meetings? Will US Housing not slow from its epic Q1 weather highs? Will earnings, un-adjusted for guys marking up their books into month-end, matter as they slow?


Only time and price will tell. All the while, the Unintended Consequences of a No Trust; No Volume marketplace will continue to play a much larger role in whatever centrally planned life someone writes a book about next.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, and the SP500 are now $1549-1588, $96.95-102.91, 83.01-84.33, $1.20-1.23, 6429-6743, and 1338-1365, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Unintended Consequences - Chart of the Day


Unintended Consequences - Virtual Portfolio

Great Inflations

“Asset price inflation is not growth.”



I know. You probably need something more profound than a quote from me to kick off your morning. As Bernanke and Draghi unite this week, how about we all take a deep breath and channel our inner Shakespeare? Since in neither the short nor the long run we aren’t all yet dead, we’re best served to always remember that “expectations are the root of all heartache.”


When it comes to performing day-to-day in our centrally planned markets, those expectations obviously go both ways – and fast. On Thursday morning at 5AM EST, US Equity Futures were down 5 handles and Spain’s IBEX was crashing (-33% from its YTD top). This morning, the SP500 is +4% (53 points) higher, and Spain is still crashing (now only down -25%).


Great short-term inflations of asset prices are awesome, right? So is pretending the Fed and ECB can “smooth” and suspend economic gravity. As we continue to make a series of lower long-term highs versus those established when #GrowthSlowing started, globally, again in March 2012, our governments continue to A) shorten economic cycles and B) amplify market volatility.


Back to the Global Macro Grind


First, let’s go through that ‘inflation slows growth’ thing again with a real life example, US GDP:

  1. Q4 2011 US GDP Growth = 4.10%
  2. Q1 2012 US GDP Growth = 1.97%
  3. Q2 2012 US GDP Growth = 1.54%

So, let’s do more of what has not worked (whatever it takes really), to make sure we keep that asset price speculation (stocks and commodities) in play. Just so that we end up with no real (inflation adjusted) economic growth at all!


Look on the bright side, even though your run of the mill sell-side anchoring “economist” has been off by 33-57% so far with their 2012 US GDP Growth estimates, the stock market went up for the last 48 hours, so they can say they were right on the bull case anyway.


That line of storytelling is as ridiculous as the assumption that begging for Bernanke to give you $1700 Gold and $100 Oil is a “growth” policy for the economy.


That doesn’t mean I can’t be completely wrong here.  Evidently this market isn’t short-able, until it is. Meanwhile the Correlation Risk signals are starting to go hog wild (again), doing exactly what they did in February/March.


Got Great Expectations? Here’s last week’s CFTC data on commodity contracts leaning to the long side:

  1. Oil +6% wk-over-wk to 140,636 contracts
  2. Sugar +17% wk-over-wk to 128,093 contracts
  3. Ag (farm goods basket) +4% wk-over-wk to 856,446 contracts

All in, we’ve crossed the proverbial Rubicon again of > 1.0 million CFTC contracts (1.17M this past week), where the entire Street is expecting Great Inflations from Bernanke and Draghi. *Note: these are all time highs in contracts outstanding.


As most of these perma-commodity bulls learned in April/May, what is expected to keep going up, comes down – and hard. Maybe this time is different though? Maybe this is going to be like Venezuela where a centrally planned stock market (up +109% YTD) is governed by explicit currency debauchery?


I am hearing the Venezuelan commoner’s life is mint these days. Also hearing that if Bernanke goes all-in Obama with Qe3, life for the 71% is going to be just rosy too.


Who knows. All we know is that the biggest loser in all of this is what were our “free” markets. Sadly, some still think the stock market is the real-time economy. All the while, these Great inflations continue to deflate both growth and The People’s trust.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, and the SP500 are now $1, $105.18-108.26, $82.40-83.26, $1.20-1.23, 6, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Great Inflations - COTD July30


Great Inflations - Virtual Portfolio

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