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At The Front

“No man can properly command an army from the rear; he must be at its front.”

-General William Tecumseh Sherman


I don’t force myself to write every morning. I have a passion to find the truth. I want to be on the front lines of that daily search.


On the Research Front, that doesn’t mean I’ll always find the truth; it just means I expect to. On the Risk Management Front, that doesn’t mean I am certain of anything markets will do; I am constantly humbled by their uncertainty.


That’s my life At the Front. Research (Growth Slowing) and Risk Management (market moves) are 2 very different things. Long-term, I think you are best prepared to have a process that embraces both. Winning and losing battles happens in every position, everyday. The war, however, is far from over.


Back to the Global Macro Grind


Hats off to them. I have no problem giving credit to my competition where it is due. The last 48 hours of global equity market trading has provided for one of the more impressive Keynesian Central Planning performances in at least the last 40 years.


Just think, it was only January of 2008 when you could have bought the SP500 at this very same price. You’d have had to have taken a very “long-term investor” view from that price… and mostly everything the buy-high bulls told you to buy on would have changed at least once every 3 months during the next 5 years… but now, after a little volatility, you are back to break-even, right?


Back to reality…


At The Front of real-time risk management this morning, yesterday is over. Now, what we really need to ask ourselves is what I have been borrowing from Ray Dalio’s Principles as of late, “What Is True?”


This usually happens when I am short-term wrong – I have more questions than answers:

  1. Is the US bond or stock market right on growth?
  2. What is the US stock market? the SP500 (higher-highs yesterday) or Russell2000 (lower-highs yesterday)?
  3. Is the European bond or stock market right on growth?
  4. Are German stocks (higher highs vs March this morning!) or the Eurostoxx600 (lower-highs) right?
  5. Is the Asian bond or stock market right on growth?
  6. Was the 1-day +3.7% rip off the YTD low in Chinese stocks the bottom or another lower-high?

If you have all the answers to these questions nailed down, across immediate to long-term durations, give me a buzz. On growth, the answer isn’t what the SP500 is “up year-to-date.” That’s just a short-term proxy for how less and less people get paid.


If that was the answer in Weimar Germany in 1923 or, say today in Venezuela’s IBVC Index (+155% YTD post currency debauchery), that would have been good and fine until revised as a very wrong answer. I guess they needed “more time.”


To review: stock and commodity market inflation is not economic growth.


The former is helpful to some, the latter is hurtful to many. I didn’t hear that coming out of either the RNC or DNC in the last few weeks. Why? Because both parties are Keynesian in their economic policy. Sadly, Obama and Romney look a lot more like Carter and Nixon, than they do Reagan or Clinton to me.


At this point, maybe I can appeal to both the far left and right of each party. Political strategists, you will love this storyline: when I came to this country (mid-1990s), I was an immigrant… son of a teacher and firefighter


I had no money… I was the beneficiary of two US Administrations (Reagan and Clinton) who had the three things that someone like me could believe in – Strong Dollar, Low Oil Prices, and Free-Market Capitalism. I worked 3 jobs; I took risks; got married, had 2 beautiful American children, and hired 50 people – a Made In America exporter of ideas…


Enough of the storytelling drama already. I didn’t earn any of this kissing anyone’s rear at the 2007 September-October stock market highs. I didn’t beg for bailout money at the 2008-2009 lows either. I sucked it up; I took my losses; and I carried on.


So don’t expect me to fade and not face the front lines this morning. From the top, to the bottom, and back again - it’s been a long 5 years writing to you – and there is still a war to be won.


My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $112.21-114.92, $80.98-81.61, $1.24-1.26, 1.56-1.72%, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


At The Front - Chart of the Day


At The Front - Virtual Portfolio


TODAY’S S&P 500 SET-UP – September 7, 2012

As we look at today’s set up for the S&P 500, the range is 16 points or -0.92% downside to 1419 and 0.20% upside to 1435. 











  • ADVANCE/DECLINE LINE: on 09/06 NYSE 1763
    • Increase versus the prior day’s trading of -148
  • VOLUME: on 09/06 NYSE 736
    • Increase versus prior day’s trading of 8.93%
  • VIX:  as of 09/06 was at 15.60
    • Decrease versus most recent day’s trading of -12.06%
    • Year-to-date decrease of -33.33%
  • SPX PUT/CALL RATIO: as of 09/06 closed at 1.38
    • Down  from the day prior at 2.15 


  • TED SPREAD: as of this morning 30.69
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.73%
    • Increase from prior day’s trading of 1.68%
  • YIELD CURVE: as of this morning 1.46
    • Up from prior day’s trading at 1.42

MACRO DATA POINTS (Bloomberg Estimates)

  • 8:30am: Change in Nonfarm Payrolls, Aug., est. 130k (prior 163k)
  • 8:30am: Unemployment Rate, Aug., est. 8.3% (prior 8.3%)
  • 8:30am: Average Hourly Earnings M/m, All Employees, Aug., est. 0.2% (prior 0.1%)
  • 11am: Fed to sell $7b-$8b notes due 2/15/2013-2/28/2014
  • 1pm: Baker Hughes rig count


    • Washington Day Ahead
    • House, Senate not in session
    • Comments due on proposed revisions to current capital rules being considered by Fed, FDIC, 5pm
    • Medicare Payment Advisory Commission meets on outpatient therapy, hospital readmissions, 8:30am
    • Solyndra LLC, the solar-panel maker that received a $535m government loan guarantee, may win court approval of statement describing bankruptcy exit plan
    • EPA Administrator Lisa Jackson, Canadian Environment Minister Peter Kent hold signing ceremony for updated Great Lakes Water Quality Agreement
    • Obama Seeks Second Term on Harder Path Leading to Better Place


  • Less Hiring Probably Kept U.S. Jobless Rate Elevated in August
  • HTC Wins Dismissal of Patent Lawsuit Due to False Statements
  • HTC Patents Challenged by Apple Probably Valid, U.S. Judge Says
  • Amazon Challenges Apple With Updated Kindles in Crowded Market
  • Apple in talks for service similar to Pandora: WSJ
  • Samsung Chips Said to Be Kept From New IPhone on Pricing
  • FCC Said to Propose Market-Maker Role in U.S. Airwaves Auction
  • Glencore Raises Xstrata Offer Ratio to 3.05x; Not a Firm Offer
  • U.K. Industrial Output Jumps Most in 25 Years After Jubilee
  • Monti Says ECB Plan Reduces Stigma as Rajoy Stalls on Aid
  • Volkswagen Lowers Sales Target on European Debt Crisis Woes
  • AIG Sells $2 Billion AIA Stake as it Seeks Funds for Buybacks
  • Lufthansa Drops 1,000 Flights Amid Biggest Cabin Crew Strike
  • China Backs Roads-to-Subways Construction Sparking Stock Rally


    • Lululemon (LLL CN) 7:15am, $0.31
    • Comverse Technology (CMVT) 7:30am, $0.08
    • Brady (BRC) 8am, $0.52
    • Kroger (KRO) 8:15am, $0.49 - Preview



COPPER – looks like everything else that’s gone straight down since the Feb-March highs on fundamental (demand slowing, supply building, etc.), squeezed right back up to a lower-high, hitting immediate-term TRADE resistance of $3.58/lb.

  • Copper Trade Most Bullish Since October on Stimulus: Commodities
  • Glencore Raises Xstrata Offer as Glasenberg Proposed as CEO
  • Shale Boom Cuts Gulf Oil Premium to 24-Year Low: Energy Markets
  • Crude Trades Near One-Week High as Slower Hiring Curbs Optimism
  • Asia Fuel-Oil Crack Widens; Gasoil Swaps Rebound: Oil Products
  • Hurricane Leslie to Resume Move Toward Bermuda After Stalling
  • Deutsche Bank Faces Fine for U.S. Power Market Manipulation
  • Soybeans Poised for First Weekly Loss Since July; Corn Declines
  • Robusta Coffee Rises as Inventories Drop Further; Sugar Gains
  • China’s Tin Demand to Decline as Europe, U.S. Economies Cool
  • Oil May Fall as U.S. Output Rebounds From Isaac, Survey Shows
  • Palm-Oil Shipments From Indonesia May Climb for Third Month
  • Sugar Output in India’s Biggest Grower Set to Rise 11% on Rain
  • Copper Traders Most Bullish Since October
  • Copper Heads for Biggest Weekly Gain in 10 on Chinese Projects
  • Record Corn Imports by China to Drive Rally, Rabobank Says
  • Gold Drops as Rally to Six-Month High Spurs Sales; Silver Falls









GERMANY – get this, the DAX is now trading higher than where it was before global #GrowthSlowing started in March; if you nailed that, congratulations, because I certainly didn’t – just thankful we’re not short it here, because we should have been on fundamentals; policies to inflate will only slow Eurozone growth (and global growth) further. Spain, Italy, etc still making lower highs vs March.






CHINA – more like 4mths down, 1 day up for Chinese stocks, but hoowah! What a move if you are a professional v-bottomer with a little looksy into headline rumoring; Shanghai +3.7% on rumors instead of reality; now what?










The Hedgeye Macro Team


Junket commissions remain consistent but all-in commissions tick up



The data is in.  Once again, we have seen a sequential uptick in all-in commissions, from 2H11 to 1H12.  Whether we look at commissions as a % of win or as a % of RC, the conclusion is the same.  However, we would argue that % of win is a more relevant metric since the majority of junkets and almost all the large ones are paid on a revenue share basis.


The charts below show the composition, by company, of all-in commissions among the straight junket commission, the rebate that goes back to the player, and non-gaming giveaways.  The first analyzes the dynamics on a revenue share basis, the second as a percentage of rolling chip.  


Main takeaways:  

  • The gap between the lowest and the highest all-in commission rate widened to 4.95% in 1H12 from 3.97% in 1H11 on a % of win basis and to 34bps from 22bps on a % of RC basis.  We believe this is directly a result of increased competition.
  • WYNN remains the least aggressive in its commission policy.  From 2008 to 1H11, the spread between the average all-in commission rate paid by WYNN vs. average of LVS, MPEL & MGM narrowed from 7.81% to 2.67%.  It gapped out again to 3.79% in 1H12.   
  • MPEL still offers the largest junket commission but until 1H12, they consistently had the lowest comps on non-gaming amenities.  That changed this interim period with non-gaming comps increasing to 3.68% of win up from 2.56% in 1H11 and 2.62% for all of 2011.  MPEL maintained one of the lower rebate rates which is surprising given the relatively large direct premium play business at City of Dreams.

Other observations:

  • Rebate rates
    • The average rebate rate for 1H12 was 32.8% (as a % of win) or 97bps (as a % of RC) vs. 32.3%/94bps in 1H11
    • WYNN had the lowest rebate rate in 1H12 at 30.2%/81bps
    • MGM had the highest rebate rate in 1H12 at 34.6%/121bps
  • Junket commission  
    • The average junket commission increased 2% in 1H12 vs 1H11 on a % win, and 4% on a RC basis to 8.2%/24bps
    • WYNN continued to offer the lowest commission rate  of 7.1%/19bps
    • MPEL continued to offer the highest commission rate of 9.2%/27bps
  • Comped non-gaming amenities
    • The average non-gaming comps increased 14% in 1H12 vs 1H11 to 4.5% as a % of win and to 13bps as a % of RC.
    • For a change, MGM offered the lowest comps at a rate of 3.25%/10bps
    • LVS continued to offer the highest comps at a rate of 5.85%/17bps, which is not surprising given that they have the largest % of their revenue base coming from non-gaming amenities.
  • The all-in commission rate
    • The average all-in commission rate increased to 45.53% in 1H12 from 44.35% in 1H11 on a % of win basis and from 1.29% to 1.35% on a RC basis
    • On a % of win basis, LVS paid the highest all-in rate at 49.2% in 1H12
    • On a % of RC basis, MGM was the biggest spender at an all-in rate of 1.48% in 1H12
    • WYNN held the line at 42.69%/1.14% in 1H12






A Deceptive Rally


Hedgeye CEO Keith McCullough appeared on CNBC’s Fast Money this evening to discuss market moves and what lies ahead over the coming weeks. Mario Draghi’s announcement that the ECB would participate in “unlimited” bond buying was the de facto catalyst for today’s massive rally in US stocks. Keith believes this one day rally is not an indicator of things to come, however. If tomorrow’s jobs report is positive, the US dollar could catch a bid.


Sell the losers, ride the winners and remind yourself that growth continues to slow as evident in this week’s FedEx announcement and performance of cyclical names. Watch the above clip for Keith’s take on the market and more.

COMMODITY CHARTBOOK: Drought, Beef, Company Guidance

Takeaway: Beef prices are likely to trend higher for the long term $BLMN $TXRH $WEN $JACK

Beef was the outlier, versus other food commodities, over the last week as it gained 5.8%.  Grains also dropped over the past week on Hurricane Isaac bringing rain to some, but far from all, states affected by drought in the U.S.  However, it seems that downside may be limited as futures trading suggests that the market is betting on demand accelerating for grains on the back of the past two weeks’ price declines.  Coffee prices continue to decline as supplies, on a global basis, seem abundant.  Output in major coffee producing countries, such as Brazil, as well as inventory levels, are indicative of abundant supply which should help maintain a favorable cost environment for the coffee chains over the next year or so.


COMMODITY CHARTBOOK: Drought, Beef, Company Guidance - commod


The Drought


Drought in the U.S. captured the attention of investors this summer as it drove grain prices dramatically higher.  It seems that the knock-on effects of the drought are likely to be long lasting.  The U.S. Drought Monitor’s latest weekly report was released this morning and indicated that Hurricane Isaac had brought some relief to some afflicted areas but others actually deteriorated over the last week.  Oklahoma’s drought condition actually worsened.  States towards the eastern part of the corn belt showed drastic improvement; nearly half of Arkansas was in the most extreme drought condition last week but, by this morning’s reading, that percentage is down to 12%.   Illinois, Indiana, Kentucky, Missouri, and Ohio all saw improvements in drought conditions due to Isaac.



Where’s the Beef?


Last year’s drought had an impact on the supply of beef within the U.S. and, far from allow farmers to embark on the path to replenishing their herds, 2012 has proven to be even more challenging.  Now, it seems more certain that livestock supply may be impaired for years as higher grain prices continue to take a toll on chicken, beef, and pork processors.  Beef costs have not risen in step with grain prices as more cattle have been pushed to the feedlots, but increased herd culling is likely to maintain the negative trajectory in beef supply.  Longer-term, this will likely pressure the operating margins of companies with exposure to beef costs.



Select Company Guidance



  • Total commodity basket +4-5% in 2013, beef a “big part” of that increase
  • Mgmt’s conversations with experts takeaway: long-term supply-demand imbalance
  • Beef is 20% of WEN spend


  • Basket expected to gain 3-4% for FY12, including 10% gain in beef prices
  • Beef prices expected to gain 10% in FY13 again
  • Beef is 30% of BLMN spend
  • Company believes it has room to take more price at Outback, currently at 1-2% range


  • Beef costs expected to be sequentially higher from where they were most recently (+5% yy)
  • Lapping elevated beef costs in 1QFY13 (Dec) and 2QFY13
  • Beef is 20% of JACK spend


Macro Callout


As we did last week, we are calling out gasoline prices again as the year-over-year increase seems likely to grow at least over the near-term.   For Cracker Barrel and, to a lesser extent, other casual dining chains, this is a very important driver (or destroyer) of demand among consumers, on a year-over-year basis.


COMMODITY CHARTBOOK: Drought, Beef, Company Guidance - gasoline




COMMODITY CHARTBOOK: Drought, Beef, Company Guidance - correl




COMMODITY CHARTBOOK: Drought, Beef, Company Guidance - crb foodstuff


COMMODITY CHARTBOOK: Drought, Beef, Company Guidance - corn


COMMODITY CHARTBOOK: Drought, Beef, Company Guidance - wheat


COMMODITY CHARTBOOK: Drought, Beef, Company Guidance - soybeans


COMMODITY CHARTBOOK: Drought, Beef, Company Guidance - live cattle


COMMODITY CHARTBOOK: Drought, Beef, Company Guidance - chicken whole breast


COMMODITY CHARTBOOK: Drought, Beef, Company Guidance - chicken broilers


COMMODITY CHARTBOOK: Drought, Beef, Company Guidance - chicken wing




COMMODITY CHARTBOOK: Drought, Beef, Company Guidance - milk


COMMODITY CHARTBOOK: Drought, Beef, Company Guidance - cheese





Howard Penney

Managing Director


Rory Green




Takeaway: Global inflation readings are likely on the rise over the intermediate term.



  • While we aren’t necessarily calling for a demonstrable uptick yet, we do anticipate that reported inflation statistics will trend higher over the intermediate term.
  • Monetary easing out of both the ECB and Federal Reserve is likely to continue to be bearish for the USD and bullish for commodity prices – the former over the most immediate of TRADE durations and the latter over the TRADE and TREND durations.
  • Over the long-term TAIL, however, Europe’s monetary expansion and economic stagnation is likely to continue narrowing the spread between traditional EUR and USD fundamentals and that should continue to weigh on EUR/USD cross.


VIRTUAL PORTFOLIO POSITIONS: Long the US dollar (UUP); Short the euro (FXE).



In recent research notes, we’ve been calling for the economic tailwind of reported YoY disinflation to end as of JUL/AUG CPI readings. That is precisely what we’ve seen across a handful of economies in Asia and Latin America – where a growing multitude of central banks have already suspended their easing biases.


  • Of the handful of AUG CPI reports that have been released across Asia and Latin America to-date, Australia, Philippines, Taiwan, Brazil, Colombia and Peru all reported accelerating YoY readings; Thailand and Indonesia’s YoY readings were flat MoM, suggesting a bottoming process is underway.
  • Over the past month, the benchmark policy interest rate has only been reduced in only two of the 21 countries we actively follow across both regions (Brazil and Colombia). A few of our competitors have consistently alluded to “globally coordinated easing” in support of their bull theses; unfortunately, the data no longer supports this claim.


In the following chart, we take the YoY percentage change of monthly average prices across a variety of commodity markets and indices. From this, we are able to demonstrate that the trend of commodity price disinflation/deflation peaked in JUN. Moreover, in holding the current average for SEPT flat through year-end (a generous assumption given the threat of more central planning), the slope of the aforementioned YoY trends is demonstrably hawkish and will act as a tailwind for directionally-hawkish global CPI readings, on the margin, throughout 2H12 and 1H13. As always in Global Macro, what matters most occurs on the margin.




In the following chart, we plot our arithmetic mean (yellow line from chart above) against the median YoY CPI reading of the US, Eurozone and China and the relationship is both obvious and tight. Interestingly, you can see that commodity price pressures have gone from being largely coincident with these readings in early 2010 to leading by 1-2 months – which is precisely what we’d expect, given the role of commodity prices across global supply chains.




Net-net-net, our conclusions from the aforementioned data analysis are two-fold:


  1. Global commodity prices were supportive of reported disinflation, globally, up until JUL/AUG ‘12. Now commodity price trends are supportive of hawkish CPI readings, on the margin.
  2. The more central planning that continues to get priced into commodity markets (particularly food and energy prices), the more hawkish global CPI readings will become over the next 3-6 months. The Chinese know this and explicitly highlighted this risk in the PBOC’s latest quarterly monetary policy report.


We’re early in calling for this fundamental inflection point, just as we were early in 4Q10 making our post-QE2 call “Growth Slows as Inflation Accelerates” [globally]. We were also ahead of this current trend of reported disinflation with our theme “Deflating the Inflation” (introduced in 2Q11). We expect to be out front in preparing for the turn this time around as well, as our process has not changed. That’s certainly a lot more than we can say about the consensus bull case over the past few months.



The fact that the EUR/USD cross traded up into and through Draghi’s aggressive attempt to counter market fears of the “reversibility of the euro” speaks volumes to how a throng of market participants may be trading the euro – on fear, not fundamentals. While certainly difficult to quantify, there is an argument to be made that a large number of EUR short positions across the hedge fund universe are betting on the currency’s ultimate demise.




If this wasn’t the case, it can also be argued that the market might otherwise be positioned net long of the EUR, as it remains a more sound currency than the USD on traditional fundamental metrics (monetary and fiscal policy; balance of payments). Moreover, the Eurozone has maintained its fundamental advantage even throughout its current financial and economic crises!








Consider two mature companies, A and B, where Company A has substantially healthier operating margins and posts greater returns on equity and assets, but is a candidate for bankruptcy because it can’t rollover its debt due to its creditor(s) being in financial distress. Absent the bankruptcy risk, we’d argue that the vast majority of investors would favor “Company A” over “Company B”. Moreover, we think there is a reasonably large segment of the multi-trillion dollar FX market that sees the EUR as “Company A”. Jim Rickards, author of Currency Wars and recent co-host of a Hedgeye Macro conference call falls squarely into this camp.


That being said, however, we are well aware that markets rarely, if ever, trade purely on their trailing fundamentals; expectations, fear, greed, sentiment and liquidity all play a major roles in price formation. In this vein, we argue that one cannot simply ignore the “bankruptcy risk” embedded in Europe’s common currency. As our European analyst, Matt Hedrick, routinely highlights in his research, the economic and social divides between Europe’s core and the peripheral countries aggressively call into question the sustainability of the euro experiment.


Net-net-net, given its obvious fundamental advantages, anything the Eurocrats do to protect the EUR from going away or at least to extend its shelf life is likely to continue to be bearish for the USD over the TRADE duration – even if their strategies involve monetary expansion! From a TREND and TAIL perspective, the aforementioned fundamental advantage could obviously inflect to the USD’s favor if a Strong Dollar = Strong America message is adopted by US policymakers or if the Eurocrats ever decide to pull the plug on the common currency (an outcome we do not currently view as probable).


The key takeaway from our thought experiment is that the monetary easing out of both the ECB and Federal Reserve is likely to continue to be bearish for the USD – the former over the most immediate of TRADE durations and the latter over the TRADE and TREND durations. Over the long-term TAIL, however, Europe’s monetary expansion and economic stagnation is likely to continue narrowing the spread between traditional EUR and USD fundamentals and that should continue to weigh on EUR/USD cross.


Darius Dale

Senior Analyst

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.