Grass Money

This note was originally published at 8am on August 09, 2012 for Hedgeye subscribers.

“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 1870-1884 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 $1603-1624, $108.03-113.18, $81.72-82.64, $1.22-1.24, 788-803, and 1386-1408, respectively.


Bes of luck out there today,



Keith R. McCullough
Chief Executive Officer


Grass Money - Chart of the Day


Grass Money - Virtual Portfolio


TODAY’S S&P 500 SET-UP – August 23, 2012

As we look at today’s set up for the S&P 500, the range is 9 points or -0.25% downside to 1410 and 0.39% upside to 1419. 











  • ADVANCE/DECLINE LINE: on 08/22 NYSE -648
    • Decrease versus the prior day’s trading of -344
  • VOLUME: on 08/22 NYSE 600.77
    • Decrease versus prior day’s trading of -6.27%%
  • VIX:  as of 08/22 was at 15.11
    • Increase versus most recent day’s trading of 0.60%
    • Year-to-date decrease of -35.43%
  • SPX PUT/CALL RATIO: as of 08/22 closed at 2.41
    • Up from the day prior at 1.10


  • TED SPREAD: as of this morning 33
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.68%
    • Decrease from prior day’s trading of 1.69%
  • YIELD CURVE: as of this morning 1.43
    • Unchanged from prior day’s trading

MACRO DATA POINTS (Bloomberg Estimates)

  • 8:30am: Initial Jobless Claims, Aug. 18 wk., est. 365k (prior 366k)
  • 9am: Markit US PMI Preliminary, Aug., est. 51.5 (prior 51.8)
  • 9:45am: Bloomberg Consumer Comfort, Aug. 19 (prior -44.4)
  • 10am: New Home Sales, July, est. 365k (prior 350k)
  • 10am: New Home Sales, M/m, July, est. 4.3% (prior -8.4%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas change
  • 11am: Fed to purchase $1.5b-2b notes 11/15/2022-2/15/2031
  • 1pm: U.S. Treasury to sell $14b 5-yr TIPS (reopening)


    • House, Senate not in session
    • Quinnipiac U,, CBS News, NY Times discuss swing-state poll on Obama/Romney matchup conducted in Fla, Ohio, Wisc., 10am
    • Federal Election Commission holds audit hearing on McCain- Palin 2008, McCain-Palin Compliance Fund, 10am
    • FERC meets on natural gas, electricity market coordination in U.S. Southeast, 9am
    • Oxfam America holds a conference call briefing on final rules for oil, mining transparency provision of Dodd-Frank Act Consumer Protection Act after SEC vote, 10am
    • SEC holds closed meeting on enforcement matters, 2pm


  • Best Buy said to resume talks with founder Richard Schulze about agreement to allow him to conduct due diligence
  • Sales of new homes in U.S. probably climbed 4.3% in July
  • Euro-area services, manufacturing contract for seventh mo.
  • Pfizer lawyers to ask federal judge today to throw out claims the fen-phen diet pills caused fatal disease
  • Hertz said to start soliciting Dollar Thrifty shareholders to gauge their selling price
  • EU regulators resumed review of UPS’s bid for TNT Express; set new deadline of Dec. 20 to rule on deal
  • David’s Bridal agreed to be acquired by Clayton, Dubilier for $900m: N.Y. Post
  • U.S. to expand missile defense system in Asia: WSJ
  • Chesapeake Energy accused of letting CEO McClendon profit from Texas oil, gas wells while denying same chance to leaseholders on properties
  • Qantas cancels order for 35 Dreamliners after annual loss
  • Pilots at American Airlines, US Airways said to be considering terms of transitional labor pact if carriers merge
  • Sirius holders lost bid to stop Liberty Media from seeking to acquire controlling stake
  • SEC Chairman Mary Schapiro canceled vote on proposal to tighten money-market fund rules amid opposition
  • Ancestry said to seek higher buyout bids from Permira, TPG
  • Facebook won FTC approval for acquisition of Instagram
  • Citigroup urges SEC to block Nasdaq’s Facebook plan to pay $62m in compensation
  • China manufacturing may contract at faster pace in August
  • First Solar plans to develop solar farms in India
  • Broadview Networks filed for bankruptcy protection yesterday
  • Lawyers for Kazuo Okada return to Nevada court today to argue for access to Wynn Resorts’s book\ Brazil may need to import U.S. ethanol if fuel mix raised this year, CEO for Bunge in Brazil told Bloomberg News


    • Big Lots (BIG) 6am, $0.41
    • Hormel Foods (HRL) 6:30am, $0.41
    • Patterson (PDCO) 7am, $0.49
    • Lancaster Colony (LANC) 7:16am, $0.79
    • Signet Jewelers Ltd (SIG) 7:30am, $0.83
    • Toro (TTC) 8:30am, $0.63
    • Micros Systems (MCRS) 4:02pm, $0.60
    • Autodesk (ADSK) 4:02pm, $0.49
    • Aruba Networks (ARUN) 4:03pm, $0.17
    • (CRM) 4:05pm, $0.39
    • Solera Holdings (SLH) 4:05pm, $0.62
    • Mentor Graphics (MENT) 4:15pm, $0.17


























The Hedgeye Macro Team




The Macau Metro Monitor, August 23, 2012




The Ministry of Public Security has announced an easing on restrictions on travel to Macau by people living in six big mainland cities--Beijing, Chongqing, Guangzhou, Shanghai, Shenzhen or Tianjin.  Those permanent residents of those cities will be able to get visas for travel to Macau, Hong Kong or foreign countries.  The president of the Macau Travel Industry Council, Andy Wu Keng Kuong said the easier visas could mean more visitors to Macau.



The US$1.5 billion (MOP12 billion) loan currently in syndication for MGM China Holdings Ltd has attracted commitments from 12 banks.  The commitments reach just over US$1.4 billion, said the source.  MGM China is eyeing to close syndication of the facility by month-end  The proceeds will be used by MGM China to repay debt.  The company is offering to pay a margin of 250 basis points over Libor on a leverage ratio of four times or more.



S'pore CPI rose 4% YoY.  The median estimate of 18 economists in a Bloomberg News survey was for a 4.5% increase, after a +5.3% pace reported earlier for June.  The July core inflation rate was 2.4%.  Singapore trimmed its prediction for 2012 expansion this month and said the island’s growth outlook “remains cautious,” increasing pressure on the Monetary Authority of Singapore to join central banks from China to the Philippines in adding stimulus. 

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Takeaway: So now the regionals have to worry about gas prices too?

  • We’ve shown that historically, high gas prices are a statistically significant hurdle for regional gaming revenues
  • Despite common thought, YoY change has a bigger impact than sequential changes in gas prices – at least, statistically speaking
  • Gas prices are now higher than last year for the first time since March, but not significantly so.  The trend is still a little disconcerting, though.



DNKN: Not A Slam Dunk(in)

Takeaway: $DNKN will have a difficult time growing SSS with a lack of new products in the pipeline. It's also expensive compared with other QSRs.

Dunkin’ Brands (DNKN) is expected to miss expectations for the second successive quarter as it struggles to grow in the coming quarters. Dunkin’ IPO’d a year ago in the midst of a coffee bubble and is running out of growth drivers to save itself as it trades at an extremely high EV/EBITDA multiple of 13.5x. Chipotle (CMG) is the only other company that trades at a higher valuation in the same QSR space.


One big problem for Dunkin’ outlined by Restaurant Sector Head Howard Penney in a note from today was that Dunkin’s same store sales accelerated from 2% to 7% due to new products and the introduction of Dunkin-brand K-CUPS for Green Mountain’s (GMCR) Keurig machines. Since these events will not reoccur in the next year, it will be hard to compare and keep SSS growth at a similar level.


Penney’s bearish case on DNKN is outlined below:


If we were conspiracy theorists, which we are not, we would likely frame the Dunkin’ Brands story something like this:


1.      The insiders could not get out fast enough, with their “swan song” leveraging up the company to buy the remaining stake this month

2.        Of the 14 members of the DNKN board, 5 are representatives of the selling stockholders 

3.        The selling to investors of the “white space” growth opportunity was made possible by the new franchise distribution agreement.  In theory, this should help accelerate franchise unit opening.  Franchise units opening have been slowing for two quarters (U.S.  Gross openings were flat year-over-year in 2Q12, while net openings of U.S. Dunkin’ Donuts units came to 19 versus 54 expected by the Street)

4.        In trying to put their best foot forward to generate investment banking fees, sell-side expectations for what DNKN can do operationally are stretched.  For example, for nearly every company we track, consensus expectations have 1 and 2 year SSS trends slowing over the next two quarters except DNKN and DNKN is lapping its most difficult SSS compares in over 5 years

5.        As you can see from the chart below, consensus expectations are for the company to reaccelerate unit opening after missing for the past two quarters



DNKN: Not A Slam Dunk(in) - DNKNchart

Grandma Isn’t Scared Of Paul Ryan

Takeaway: Democrats and the media would have you think Ryan's cuts to Medicare have seniors scared. The truth is, they're not.

The consensus among mainstream media and Democrats is that Paul Ryan’s plans for Medicare and Medicaid are detrimental to senior citizens as we cut costs and switch to a “voucher” based system. But in reality, the truth is that seniors aren’t scared of Ryan and his Path To Prosperity.


A new Washington Post-ABC poll of seniors shows that 41% of Americans have a favorable view of Ryan while 37% rate him unfavorably. Seniors have a 50% favorable view of Ryan and 35% unfavorable view. A third of seniors say they have a strongly favorable view of the Wisconsin congressman, while one-quarter have a strongly unfavorable view. These numbers aren’t bad at all for a man Democrats are painting as Death incarnate.


Still, the likelihood of President Obama being reelected remains high despite the massive fundraising numbers being put up by Romney’s camp. Obama has more available “total cash” than Romney (the spread is narrowing quickly) but the monthly fundraising trends favor Romney.


Another factor that’s trending is voter engagement. Current numbers and polls suggest that the GOP voter base is highly energized and significantly more engaged than Democrats. What this means is that come election day, when it’s time to get out and actually vote, Republicans will have a stronger turnout. Recent voter restriction measures passed and/or pending across eastern and mid-western states, as highlighted by the ACLU, presents another fringe dynamic that may impact both engagement and turnout.



Grandma Isn’t Scared Of Paul Ryan - ryanpoll1



Lastly, there are external circumstances that could damage Republican numbers. The first is Tropical Storm Isaac, which is set to become a hurricane that is forecasted to slam into Florida next week right as the Republican National Convention begins in Tampa. The other problem at hand is Representative William Todd Akin (R-MO), whose recent inappropriate comments on birth control have damaged the Republican party as a whole. It will likely take a resignation on his part to repair the damage he has done and it has been said Paul Ryan has had a long conversation with Akin about doing just that.



Grandma Isn’t Scared Of Paul Ryan - ryanpoll2



The election is fast approaching and October’s numbers should paint a clear, concise picture of who’s going to win this battle. For now, the race remains very close with Obama slightly inching out Romney.

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