This note was originally published at 8am on July 26, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“… modern finance has changed the world, and not in a way that we should celebrate.”

-Roger Lowenstein


That’s what one of my favorite economic historians, Roger Lowenstein, wrote in a provocative Bloomberg article in May titled “Banks’ Hyper Hedging Adds To Risk of Market Meltdown.”


Market meltdown? Shh, keep that on the down low. That only happens in other people’s markets. With the almighty American “but earnings are great” season showing the worst beat-miss spread for US corporate revenues since Q3 of 2008, everything in the US stock market is going to be fine, provided that Bernanke does more of what has not worked.


The sad reality of the culture of short-termism that we have perpetuated in both our politics and banking system is that when the revenue misses ramp, the pressure to cheat does too. Whether it’s guys marking up their books into month and quarter end, or gals rolling the bones on black into a central planning event, it’s all one and the same thing – unsustainable.


Back to the Global Macro Grind


That probably all made less sense to you with the SP500 at 1376 last Thursday or at 1419 last quarter. But, after 4 consecutive down days (-2.8% correction) in US stocks and The #GrowthSlowing risk management signal (10 year Treasury Yield) hitting a freshly squeezed morning YTD low of 1.40%, that darn Canadian hockey player is going to show up on the score sheet again.


If you peel back the onion to when this whole thing started to unravel (2007), it’s a lot easier to agree with me that we are not only behaving Japanese from a policy perspective, but that both our stock and bond markets are too.


Lower long-term highs on lower and lower stock market volumes became the norm in Japan inasmuch as people piling into “expensive” Japanese Government Bonds did. That’s been going on for 20 years. Bernanke has only been at this for six.


To review, what Bernanke is doing by attempting to maintain a 0% return on fixed income savings accounts in perpetuity is superimposing what we have coined as “3D Risk” on all macro markets:

  1. The Dare – he’s daring you to chase yield (make sure you get those high dividend stocks as the companies miss revenues!)
  2. The Disguise – he’s distorting the long-term asset allocation “opportunity” in financially liquid assets like Gold and Oil
  3. The Delay – he’s inspiring companies to delay financial restructuring under the assumption that cost of capital will never go up

All the while, he’s failing miserably to achieve either of his 2 “mandates” (full employment and price stability). Five years into this mess, we have an unemployment disaster and the highest levels of market price volatility ever.


Did I mention ever is a long time?


The best news we’ve had this week is that Ron Paul had a big win getting his “Audit The Fed” bill passed in the House by a rock solid margin of 327-98. In response to the victory, Dr. Paul said “it is up to us to re-assert ourselves.” Amen to that.


Bernanke’s response: “this is a nightmare scenario.”


Yes it is Ben, for you.


I like to fight. I really like Fighting The Fed (Q2 2012 Hedgeye Global Macro Theme). But I also like timing – as in what a lot of people say they cannot do (take their word for it, they can’t). And once again, with Johnny Hilsenrath at the WSJ floating another Fed rumor ahead of next week’s FOMC decision, the timing game is on.


The manic media is as complicit in this entire gong show of Expectations Mismatch as anyone else. One of the top economic headlines on Bloomberg this morning is “Central Banks Search Tool Kit for Untried Ideas Amid World Slowdown.”




Bernanke talked about “tools” in his latest testimony. While it should scare the hell out of you at this point to hear about more “untried ideas” coming out of the government, allow me to define the 2 main tools Bernanke is talking about:

  1. Printing Money, Monetizing Debt, Bailing Out Losers, etc.
  2. Whispering through Fed mouth-pieces

Bernanke’s boys at the Fed and Treasury will be whispering about my calling them whispers (they call them “communication tools”). Whatever you want to call them, they are what they are – they drive the biggest risks to bank prop trading and asset management hedges that markets have seen since WWII – #expectations.


Shakespeare said expectations are the root of all heartache. With the SP500 down -1.8% for July and Q312 to-date, Bernanke’s mouthpieces may be creating the biggest risk of them all. If Lowenstein’s “market meltdown” happens from here, the central planners will see that this time is different. They’ll have no one to blame but themselves.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, German DAX, and the SP500 are now $1586-1612, $100.73-103.91, $83.35-84.14, $1.20-1.22, 6311-6433, and 1331-1348, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


#Tools - Chart of the Day


#Tools - Virtual Portfolio


TODAY’S S&P 500 SET-UP – August 9, 2012

As we look at today’s set up for the S&P 500, the range is 22 points or -1.16% downside to 1386 and 0.41% upside to 1408. 











    • Down versus the prior day’s trading of 888
  • VOLUME: on 08/08 NYSE 636.63
    • Decrease versus prior day’s trading of -12.54%
  • VIX:  as of 08/08 was at 15.32
    • Decrease versus most recent day’s trading of -4.19%
    • Year-to-date decrease of -34.53%
  • SPX PUT/CALL RATIO: as of 08/08 closed at 1.52
    • Up from the day prior at 1.33 


10YR – this has happened plenty of times in 2012 – bonds down hard in 1-2wk moves, presenting you w/ a buying opp in bonds or 1 more chance to tell yourself this time is different and growth is not slowing. There’s a TREND wall of resistance for the 10yr at 1.71%. 

  • TED SPREAD: as of this morning 33
  • 3-MONTH T-BILL YIELD: as of this morning 0.11%
  • 10-Year: as of this morning 1.68%
    • Increase from prior day’s trading of 1.65%
  • YIELD CURVE: as of this morning 1.40
    • Up from prior day’s trading at 1.38 

MACRO DATA POINTS (Bloomberg Estimates) 

  • 8:30am: Trade Balance, June, est. -$47.5b (prior -$48.7b)
  • 8:30am: Initial Jobless Claims, week Aug. 4, est. 370k (prior 365k)
  • 9:45am: Bloomberg Consumer Comfort, week Aug. 5 (prior -39.7)
  • 10am: Wholesale Inventories, June, est. 0.3% (prior 0.3%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural gas change
  • 11am: U.S. Fed to purchase $1b-$1.5b TIPS in 1/15/2019 to 2/15/2042 range
  • 1pm: U.S. to sell $16b 30-year bonds 


    • House, Senate not in session
    • NOAA updates hurricane forecast. In May agency predicted near-normal season with from nine to 15 named storms, 11am
    • Board of governors of U.S. Postal Service, which on Aug. 1 skipped a required $5.5b payment to U.S. Treasury, meets to discuss third-quarter financial results, 8:30am
    • CFTC meets on customer protection requirements for futures commission merchants, 9:30am
    • Commerce Dept. panel meets on technical questions that affect materials, technology export controls, 10am


  • Trade Deficit in U.S. Probably Narrowed in June on Cheaper Oil
  • Goldman Sachs Tops Corporate Split With Obama, GE Jilts Him Too
  • Apple Patent Faceoff With HTC Pivots on Dueling Pinch Videos
  • Profits at Fannie Mae, Freddie Mac May Ease Wind-Down Pressure
  • Standard Chartered CEO Says ‘No Grounds’ to Revoke License
  • Nokia to Sell App Unit Amid Increasing Microsoft Dependence
  • U.S. foreclosure filings in July fell 10%: RealtyTrac
  • Restaurant operator CKE expected to price IPO after close
  • Amgen Halts Pancreatic Cancer Study After Drug Fails to Work
  • Manchester United seeks to raise $333m in IPO
  • U.K. Goods-Trade Deficit Widens to Record as Exports Decline
  • World Food Prices Jump as U.S., Russia Droughts Spark Crop Rally
  • China Adds Scope to Cut Rates as Japan, S. Korea Hold


    • Bombardier (BBD/B CN) 6am, $0.10
    • Manulife Financial (MFC CN) 6am, C$(0.49)
    • Quebecor (QBR/B CN) 6am, C$0.97
    • Kohl’s (KSS) 7am, $0.96
    • Metro (MRU CN) 7am, C$1.36
    • Elizabeth Arden (RDEN) 7am, $0.20
    • Wendy’s (WEN) 7am, $0.05
    • Windstream (WIN) 7am, $0.12
    • Brinker International (EAT) 7:15am, $0.58
    • Tim Hortons (THI CN) 7:30am, $0.69
    • Hillshire Brands Co (HSH) 7:30am, $0.38
    • AMC Networks (AMCX) 8am, $0.58
    • Magna International (MG CN) 8am, $1.28
    • Royal Gold (RGLD) 8am, $0.44
    • Canadian Tire (CTC/A CN) 8:05am, C$1.52
    • Advance Auto Parts (AAP) 8:30am, $1.39
    • Teekay (TK) 8:30am, $(0.45)
    • Teekay Offshore Partners (TOO) 8:30am, $0.37
    • Crescent Point Energy (CPG CN) 9am, C$0.07
    • Kronos Worldwide (KRO) Premkt, $0.44
    • ViroPharma Inc (VPHM) Premkt, $0.21
    • CI Financial (CIX CN) 11:17am, $0.32
    • CareFusion (CFN) 4pm, $0.49
    • DeVry (DV) 4:01pm, $0.44
    • Open Text (OTC CN) 4:01pm, $1.16
    • Nordstrom (JWN) 4:05pm, $0.74
    • Fusion-io (FIO) 4:05pm, $0.04
    • NVIDIA (NVDA) 4:19pm, $0.22
    • Osisko Mining (OSK CN) 4:19pm, C$0.07
    • Pembina Pipeline (PPL CN) 4:30pm, C$0.31
    • ShawCor (SCL/A CN) 5:01pm, C$0.35
    • Silver Wheaton (SLW CN) After-mkt, $0.37
    • Lions Gate Entertainment (LGF) After-mkt, $0.18
    • Assured Guaranty (AGO) After-mkt, $0.52
    • Arena Pharmaceuticals Inc (ARNA) After-mkt, $(0.11)
    • Scotts Miracle-Gro (SMG) After-Mkt, $1.99 


  • Global Food Reserves Falling as Drought Wilts Crops: Commodities
  • Iraq Oil Tops 3 Million Barrels for First Time Since 2002
  • Rubber Poised for Third Surplus in 2013, Helping Bridgestone
  • Oil May Retreat on Fastest Stockpiling Since ’98: Energy Markets
  • World Food Prices Jump as U.S., Russia Droughts Spark Crop Rally
  • Corn Advances to Record as Drought Spurs Surge in Food Costs
  • Gold Seen Advancing as Slowing Growth Fuels Stimulus Optimism
  • Oil Trades Near Three-Month High Amid China Stimulus Speculation
  • Sugar Rises on Speculation Prices Fell Too Far; Coffee Gains
  • Copper Seen Falling on Weaker-Than-Estimated Chinese Production
  • Rubber Near Lowest Level in Three Years Amid Supply Surplus
  • Rusal Sees Aluminum Premiums Rising for 12-18 Months on Rates
  • Europe’s Sugar Producers Set to Gain as EU Faces Third Shortage
  • Palladium May Stall Near $608 Before Falling: Technical Analysis
  • Food Prices Surge as Droughts Spark Rally
  • Palm Oil Rallies From Seven-Week Low as U.S. Set to Cut Soy Crop
  • Billionaire Fredriksen’s Golar Gets Record to Store LNG at Sea 









GERMANY – again, news headlines running w/ “Europe up on China stimulus” (even though Europe is flat and Germany is down); watch the DAX here – German industrials hurting when Chinese demand continues to slow; lower-highs in the DAX from the 7154 high established in March. To get above that would require Draghi walking on water.






CHINA – good thing pig prices collapsed in July, helping the Chinese print a completely random inflation reading in the face of slowing growth – bailout media took that as “another sign for stimulus”; China up a whopping +0.6%, India down on the day after missing industrial production growth too.











The Hedgeye Macro Team

Early Look

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Grass Money

“But you go through and scare the game and your cattle eat the grass so the buffalo leaves and the Indian starves.”

-Quanah Parker


That’s one of the most important quotes from one of the most important leaders of 19th century Western American history. I’d bet that a large percentage of Americans don’t know who the Principle Chief of the Comanches was (or why what he did for the US cattle business between 1 was so critical).


That’s why I read so much history. It helps me contextualize longer-term investing themes within the boundaries of how humans are forced to make short-term decisions. Ultimately, the Comanches traded their long-term liberties for short-term “Grass Money.” If you know anyone begging for bailouts, for the love of the country, please ask them to think about that.


As S.C. Gwynne reminds us at the end of Empire of The Summer Moon, the same kind of question should be on your mind this morning about devaluing your hard earned currency for the sake of short-term asset price inflations - “whether or not the Indians should do what everyone else in America did: lease.” (page 297)


Back to the Global Macro grind…


If Grass Money killed the buffalo, Fiat Fool Money is going to kill whatever is left of your “free” markets. On the heels of China and India reporting another round of #GrowthSlowing data overnight, “futures rally on hopes for Chinese stimulus.”


Alrighty then. I guess we’ll suspend economic gravity for another day.


Here’s the China data, in context:

  1. Industrial Production growth = +9.2% y/y vs +9.5% in June of last year
  2. Retail Sales growth = +13.1% y/y vs +13.7% in June of last year
  3. Fixed Asset Investment growth = flat y/y at 20.4%



A)     On the margin (where risk managing macro matters most) growth continues to slow

B)      These are hardly the “freak-out” recession or stagflation type levels of growth requiring a Geithner-like bailout

C)      Chinese stocks were up a whopping +0.6% on the “news” (still down -12% from where they were in May)


In May, not only Chinese growth, but global growth really started to accelerate on the downside. That’s why almost every major stock market in the world stopped going up in March-April. Markets discount future events.


But what are they discounting now?


A)     The long-term (TAIL) of lower-highs on lower volume (bearish)

B)      The immediate-term (TRADE) short squeeze (bullish)

C)      The ongoing hope that bailouts will earn everyone a year-end bonus sticker


Hope, of course, is not a risk management process. Timing matters. If you bought beta (the Russell2000) in March-April, you’ve lost money. If you bought the wrong stocks (MCD, PCLN, CAT, etc.) in March-April, you’ve lost a lot of money.


This morning you either buy or sell. And I think that if you buy beta today (SPY or IWM – pick your major US index), come September-October, you’ll lose a lot more money too.


Rule #1, don’t lose money.


Rule #2, don’t forget Rule #1.


Rule #3, don’t smoke Grass Money when central planners are trying to have you forget Rules #1 and #2.


My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Russell2000, and the SP500 are now $1, $108.03-113.18, $81.72-82.64, $1.22-1.24, 788-803, and 1, respectively.


Bes of luck out there today,



Keith R. McCullough
Chief Executive Officer


Grass Money - Chart of the Day


Grass Money - Virtual Portfolio


Jack in the Box reported a solid quarter, albeit one that caused confusion in after hours trading, beating EPS on an adjusted basis and raising FY12 EPS guidance.  The only slight disappointment was Qdoba same-restaurant sales, particularly among the franchised locations.  JACK remains one of the “cheapest” companies in the space from a valuation perspective.  We expect this multiple to be revised higher over the next three years.





Restaurant level operating margins were particularly robust, increasing by 4% year-over-year.  The most important news from the quarter was the company’s decision to outsource its distribution business.  While there are little details about the impact on financials, our initial reaction would be positive; selling non-core assets currently used in this business will be positive for returns and margins. 


During the first four weeks of 4QFY12, according to the press release, same-restaurant sales have tracked above 3Q results.  For the full fiscal year 2012, management raised the mid-point of the EPS guidance range by 10% to $1.53 (consensus $1.43) on the back of higher Jack in the Box same-restaurant sales guidance slightly offset by lower Qdoba same-restaurant sales guidance.


We continue to believe that this company is well positioned to continue to produce results worthy of a higher valuation multiple as the restructuring of the company enhances future profitability, margins, and returns.  At 7.2x EV/EBITDA, with EBITDA growth accelerating ahead of expectations, we believe that JACK could see 2-3 turns in multiple expansion.  On this basis alone, Jack in the Box has $10-15 in upside from the current stock price.







Howard Penney

Managing Director


Rory Green



MGM: Beating Around The Bush On Guidance

MGM’s earnings report for Q212 was a largely negative story across the board. Our bearish stance on the company continues as worse-than-expected numbers hit several metrics at the company, which we’ve outlined below. The story here is bookings: basically, people aren’t booking hotel rooms as much as the industry would have hoped.



MGM: Beating Around The Bush On Guidance  - destroyedperf



Hedgeye Gaming Sector Head Todd Jordan broke down the bookings situation as follows:


•        The convention mix was a little worse than expected. While MGM predicted convention mix to increase YoY during 2Q [at least +1%], there was a patch of softness from May-June that led to a drop off in yearly convention bookings. MGM’s convention mix for 2012 is trending at about the 14-15% mix level (2011 mix was 14.7) which is below earlier predictions.

•         While MGM predicted RevPAR growth for the year to be at least mid-single digit, 3Q RevPAR will be down slightly with weakness in bookings in May/June. Our analysts think it’s too early to make a call on how 4Q will shake out.


Revenue per available room (RevPAR)is only going to get worse and this is one of the biggest factors out there for hotels. However, one very disconcerting comment that management mentioned on yesterday’s earnings call was its guidance for Q3: "We've already seen an improvement in customer trends here in the third quarter.”


Management’s statement seems contradictory. If one had been paying attention to the market today, they’d have noticed that (PCLN) and (OWW) were getting absolutely CRUSHED, down –17.2% and –25.5%, respectively. Why? Their management teams came out and noted that bookings and other metrics in the leisure space are way down.


And that is why we remain bearish on MGM.

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