What's In A Dollar?







Jerry Seinfeld would probably say something along the lines of “what’s the deal with the US dollar these days?” Well, Jerry, the US dollar broke its 6 week spell of falling lower and lower and is now up for the week. You know what that means? A Dollar Holler smashes commodity prices in the face of Ben Bernanke and his policy of inflating prices and easing the markets. The CRB Commodity Index is down -4.4% week-to-date. You have to remember that when trading these markets, there is correlation risk to be had. Get the US dollar right and you’re going to get a lot of other things right, including oil, gold and even the stock market.




The 10-year Treasury is an instrument which many consider to be among the safest in the world. When people flock to Treasuries, driving yields lower, they’re looking for a safe haven play; a way to allocate capital while still earning some kind of return, even if it’s only 100 basis points or so. Well now that Ben Bernanke has extended QE3 and encouraging rampant stock market orgies of epic proportions, we’re seeing the 10-year yield climb higher. 10-year breakevens are testing new all-time highs and the current 1.76% yield will probably go higher by the end of the day as long as there’s no drastic news about the issues in Europe.







Cash:                  UP


U.S. Equities:   Flat


Int'l Equities:   Flat   


Commodities: Flat


Fixed Income:  Flat


Int'l Currencies: DOWN  








Our conversations with Wendy’s franchisees indicate that sales have been trending sequentially higher in 3Q versus 2Q. We believe the company is about to announce the end of the company’s Sisyphean breakfast initiative after a prolonged “testing” phase. Given the capital demands on the company over the next few years as it invests to upgrade its asset base, shifting capital from the distraction that has been breakfast is a positive. The tail is less certain as it will take years for the system to rejuvenate the asset base and push out the older franchisees that don’t want to make the necessary investments to bring the asset base in line with contemporary industry standards..

  • TAIL:      NEUTRAL            



Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TAIL:      LONG



LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TAIL:      NEUTRAL







“If you waited in line earlier then 7am for an iPhone 5 today, you need to get a job. $AAPL” -@MarketShot




“I didn't really say everything I said.” –Yogi Berra




CRB Commodity Index fell -4.4% week-to-date.




Idea Alert: UA

Keith added UA back on the long side of the Real-Time Positions yesterday. Pressure in retail/apparel presented an opportunity to buy back one of our favorite TAIL ideas. There’s no chance to the research call. While this is one of our favorite TAIL ideas, look for us to keep a TRADE a TRADE on this one.

On a TAIL duration (3-Years or Less):

  • UA should put up $3bn in revenue by ‘14 – impressive given a $1.5bn print in 2011.
  • It’s tough to find any name out there growing EBIT in the 25-30% range. This translates to over $2 per share in earnings at UA’s current margin structure (which we think is sustainable). Simply put, UA was built to be expensive.
  • There’s no fundamental reason why footwear should not attain share at least in line with lesser brands like New Balance, Reebok, Brooks, Saucony…Admittedly it has not happened yet, but will – the big risk is that it costs them more to do it.
  • International is also next on the docket with the hire of Charlie Maurath.
  • All in, it’s true that it faces a stiff competitor in Nike, but barriers to entry here are immense, and UA has already invested to jump that hurdle. Few others have.
  • In addition, UA has ~2x the Direct-to-Consumer exposure as Nike – that’s one of the benefits of building a business without a legacy wholesale model that’s dependant on dinosaur retailers to conform to its marketing plan.

Near-term TRADE duration (3-Weeks or Less) factors:

  • Our estimate is 7% ahead of the Street in the upcoming quarter reflecting strong sales trends and share gains in both apparel and footwear.
  • Apparel sales have continued to outpace the broader industry posting greater than 2pts of share gain quarter-to-date.
  • Meanwhile, footwear sales have reaccelerated since early June reflecting the early success of the new Spine platform and launch of UA’s new basketball line.
  • On the flip side, UA just lost its SVP/Sourcing, which is not good. Also, DKS writing off its investment in UK’s JJB is not great for UA’s int’l growth given the relationship between the two. We’re more concerned with perception than reality, but the facts can’t be ignored. When concerns are high, we’re buyers.

Idea Alert: UA - UA TTT


At The Front

This note was originally published at 8am on September 07, 2012 for Hedgeye subscribers.

“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 $1674-1712, $112.21-114.92, $80.98-81.61, $1.24-1.26, 1.56-1.72%, and 1419-1435, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


At The Front - Chart of the Day


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The Macau Metro Monitor, September 21, 2012




Sheldon Adelson announced that Sands China has already received the government’s licence to go ahead with the construction of a fourth hotel tower at Sands Cotai Central.  According to Adelson, the US$450 million (MOP3.6 billion) tower will host a St. Regis hotel, with 460 rooms and serviced apartments.

It is to be ready within 18 months, he said.


Also, according to Sands China executives, US$1 billion of the financing for Lot 3 will come from the company’s equity base with the remainder coming from international banks.


Adelson confirmed yesterday that the new Pacifica casino at Sands Cotai Central, inaugurated yesterday, opened with no new live gaming tables; instead, the units available there came from Sands China’s existing four casinos.  But Sands China executives said they were confident the government would grant the casino operator 200 new tables next year, once the current 5,500 live table cap expires.



Macau CPI for August 2012 increased by 6.33% YoY and 0.23% MoM.

Pain & Progress

“Pain plus reflection equals progress.”

-Ray Dalio


As a hedge fund analyst, turned Portfolio Manager, turned Canadian-American Entrepreneur, there are very few quotes that resonate with me more than that one. Ray Dalio remains, The Man.


In order to really learn how to win, I need to feel the pain of my mistakes. If I’m not making mistakes, that means I’m probably not pushing myself hard enough to try something new. John Cage frames that thought about risk taking another way: “I can’t understand why people are frightened of new ideas. I’m frightened of the old ones.”


As you watch the bull market crowd cheer on 10 million iPhone5 sales this weekend but, at the same time, beg for more of what has not worked (Spain Bailouts), remember that in order to foster Apple like innovation, we can’t incubate an American culture of socializing losses.


Back to the Global Macro Grind


For me at least, last week’s pain was this week’s gain. With the US Dollar Index having its 1st up week in the last 7, the CRB Commodities Index has had its long-term TAIL spanked for a -4.4% wk-to-date move.


Within the parameters of our Multi-factor, Multi-duration Risk Management Model, we focus on 3 key durations of risk (TRADE, TREND, and TAIL). We define TAIL risk on a bi-partisan basis; it works both ways (up and down).


Across the Global Macro waterfront, here are some key TAIL duration risks (3 years or less) for long-term risk managers to consider:

  1. US Dollar Index long-term TAIL support = $78.11
  2. CRB Commodities Index long-term TAIL resistance = 309
  3. Oil (Brent) long-term TAIL resistance = $111.44/barrel
  4. US 10yr Treasury Yield long-term TAIL resistance = 1.91%
  5. EUR/USD long-term TAIL resistance = $1.31

The first and last TAIL risks are the mirrors of one another. One up, one down. That’s why I’ve been saying for a while now that if you get the US Dollar right, you get a lot of other things right. That’s where most multi-duration Correlation Risks associated with Policies To Inflate live.


The other thing that you need to get right is economic growth. Put another way, if you’ve had US and Global Growth right in 2012, you’ve had Treasury Bonds right (long). Despite all of the broken promises from Bernanke on delivering you the elixir of a centrally planned life, the bond market continues to make a series of higher-lows, as the 10yr yield’s TAIL resistance remains intact.


When you get both A) the biggest Ball Under Water Macro trade of the last decade (US Dollar) and B) US Growth (demand) right, you have a tremendous opportunity to get the holy grail of investing right – timing. Personally, I’ll always have room to improve on that.


But does Ben Bernanke? Who holds this man accountable? With a lack of progress, is America’s economy about to experience the most amount of pain yet? If we go back into the soup, what will he do next? Is he out of bullets?


If you know the answer to these critical long-term questions, tweet me.


In the meantime, here’s what you get for your Burning Bernanke Bucks:

  1. Unemployment: US Jobless Claims Rising on a 4-wk rolling average basis to 378,000 (382,000 reported for this wk)
  2. Inflation Expectations: 10yr Breakevens testing all-time highs immediately following Bernanke’s decision last Thursday
  3. Fund Flows: ex-ETFs, US Equity Fund Flows were negative (again) at -$1.9B wk-over-wk (outflows)

In other words, at 4.5 year highs in the US stock market, this is what multiple “Quantitative Easings” and countless “communication tools” about the pending Qe-upon-prior-Qe got us:

  1. Higher US unemployment than we had in 2009 (unemployment rate in January 2009 was 7.8%)
  2. The 3rd of 3 Greenspan/Bernanke Asset Bubbles (Commodities) that every money manager is dared to chase
  3. No trust and/or volume in what used to be America’s beacon of free-market capitalism (the US stock market)

Great job, dude.


Both Bush and Obama signed off on this guy. See the Chart of The Day (10yr Breakeven Inflation Expectations 2007-2012) and you tell me how much longer he can keep America’s Purchasing Power (US Dollar) down, Savings Rates on hard earned moneys at 0%, and show zero reflection on his academic dogma’s mistakes, never mind progress.


My immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500, are now $1, $108.03-111.44, $78.61-80.43, $1.29-1.31, 1.72-1.87%, and 1, respectively.


Best of luck out there today and enjoy your weekend,



Keith R. McCullough
Chief Executive Officer


Pain & Progress - Chart of the Day


Pain & Progress - Virtual Portfolio

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