Bernanke's Mess

This note was originally published at 8am on September 13, 2012 for Hedgeye subscribers.

“It took a lot of hard work to get us into this mess.”

-Neil Barofsky’s Dad


The more I learn, the scarier Washington, D.C. gets. The aforementioned quote didn’t come from a politician. It came from Barofsky’s freshly printed tell-all book about crony socialism, Bailout (page 32). That time it was about TARP. This time it’s about Qe. Unless you want to wander on into the next politically perpetuated crisis willfully blind, I highly recommend you read it.


I wasn’t born in this country, but I do love it – and I will fight for its liberties. Hell would freeze over before the Founding Fathers of the Unites States of America signed off on a centrally planned market event like the one an un-elected academic will host today.


Whether he wants to accept responsibility or not, Ben Bernanke has signed off on the #1 thing that has been driving stock and commodity markets for the last 2 months – expectations. Up or down, whatever happens today will be Bernanke’s Mess.


Back to the Global Macro Grind


A)     Market up = mess for the economy: that’s right, if the man pushes 0% money out to 2015, 2016, then infinity and beyond, that’s a mess for a lot of people in this country. Just ask a retiree living on a fixed income, or a small business owner. When your cost of living is rising faster than your income, that’s called a tax hike.


B)      Market down = mess for the market: yep, since corporate revenue growth is slowing at its fastest rate since 2008, where do you think corporate margins go from their all-time peak? What do you think a collapse in the Fed’s final bubble (1st it was internet stocks, 2nd housing; now it’s commodities) is going to do to companies like Caterpillar (CAT) who aren’t prepared for that?


But, like it was in October 2007 (up double digits YTD), the “market is up” and we don’t hold the Fed accountable to its mandate? As a reminder, that mandate is:

  1. Price Stability
  2. Full Employment

Meanwhile, this is what we have:

  1. Price Volatility like markets have never ever seen (ever is a long time)
  2. Unemployment that’s higher than where it was on January 20, 2009 (7.8%)

So we better empower this guy to do more of whatever has not worked. And I mean really beg for it. If this insanity can only end in a blow up, I say get on with it so that I can start hiring again and get on with my day.


Since I have nothing else to write about this morning, let’s just review where we stand pre-game (1230PM Bernanke release):

  1. Financials (XLF) are up +3.83% in less than 2 weeks, front-running the Fed
  2. Energy stocks (XLE) are up +3.96% in less than 2 weeks, front-running the Fed
  3. Basic Materials (XLB) are up +3.76% in less than 2 weeks, front-running the Fed

Front-running? Bad word, for people who actually take on the Orange Jump Suit risk to be in the know pre-game. But that’s the game of expectations Ben Bernanke and his group-thinkers have perpetuated; that’s where the money’s at. Follow the money.


If 2 weeks of causality (Fed policy expectations) is too short-term for you, let’s look at the last month instead. Here are the inverse correlations between the US Dollar (down) and everything big that people are being forced to chase (30 day correlations):

  1. Gold -0.96
  2. Silver -0.95
  3. CRB Commodities Index -0.94
  4. Eurostoxx600 -0.86
  5. SP500 -0.74

In other words, get the US Dollar right, and you get everything but the US Economy right. Gold, last I checked, is not a “Full US Employment” trade. It wasn’t in the 1970s either.


Back to the two risk management words never uttered by our Central Planner in Chief (Correlation Risk), if I shorten that back up to 2 week correlations front-running Bernanke, the SP500’s inverse correlation to the US Dollar goes higher to -0.86. That’s because it’s closer to the main event. And that’s being driven by the aforementioned moves in the Financials and Commodities.


As Neil Barofsky says at the end of Chapter 2, “I might be completely on my own” (page 38) in calling Bernanke out on this mess of expectations at this point. But I doubt it.


When I started this firm in early 2008, I vowed to fight Old Washington and Wall Street for the truth. “What is the truth?” If that ruffles the odd feather, I’m doing my job. That’s what Canadian-American Patriots fighting for the purchasing power of their dollars do.


My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, Russell2000, and the SP500 are now $1709-1756, $114-116.22, $79.45-80.94, $1.26-1.29, $1.69-1.77%, 830-846, and 1419-1451, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bernanke's Mess - Chart of the Day


Bernanke's Mess - Virtual Portfolio


The Macau Metro Monitor, September 27, 2012




Sheraton Macao Hotel achieved 100% occupancy on Saturday, and 90% occupancy on Sunday, according to a press release from Sands China Ltd.  “Occupancy rates for Sheraton Macao Hotel’s opening weekend far exceeded our expectations,” said Gunther Hatt, executive vice president of operations for Venetian Macau.



Macau Legend Development has plans to build a second casino as part of its HK$5 billion (US$645 million) redevelopment plan for its Macau Fisherman’s Wharf theme park.  The gaming facility would operate under SJM's gaming licence as a third-party promoted casino and it should be ready by 2016 at the latest.


The government’s revised land grant for Macau Fisherman’s Wharf was yesterday published in the official gazette.  The grant detailed enlarging the park’s area by over 23,500 square metres, to 133,000 square metres, but failed to mention a second casino.  Macau Legend also owns the five-star Macau Landmark hotel, which includes the Pharaoh’s Palace Casino.



Macau CEO Fernando Chui Sai On denied that the Secretary for Economy and Finance Francis Tam and the Secretary for Transport and Public Works Lau Si Io were giving conflicting messages over a possible casino for Studio City, which Chui said is eligible to apply for a gaming floor. 

He was quoted by TDM as saying that the project originally contained a casino in the construction application submitted to the government, but the project was later transferred to MPEL, which did not include a casino in its first construction plan submitted to the Secretariat of Transport and Public Works.  Only later on did Melco file an application to a department under the Secretariat for Economy and Finance for a gaming venue inside Studio City.  



Macau unemployment rate for June-August 2012 held stable at 2.0% in comparison with the previous period (May-July 2012).  Total labor force increased to 351,000; the labor force participation rate stood at 72.3%, up by 0.1% point over the previous period. 

Early Look

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Barking Buyem!

“A dog is not considered a good dog because he is a good barker.”



There are a lot of things I love about Eastern culture. One of them is the deep simplicity of their quotes. If I need to channel my inner-Buddha this morning to make a buy call, so be it.


Back to the Global Macro Grind


So, after a 41 handle (-2.8%) drop in the SP500 from the Bernanke “Buy Everything” top, US stocks have been down for 7 out of the last 8 days. I heard more crickets than I heard bulls yesterday. Weird.


Sometimes I like to bark. And sometimes that means my cage gets kicked by my central planning overlords too. But that’s ok. I’m just that dog in your life that never goes away. I have big teeth. And when I say “Buyem!” (with a smile), I kind of look like a little bull too.




That’s what my intraday note at 11:18AM EST was titled yesterday. In addition to the list of 7 long ideas I listed in yesterday’s Early Look note, we made the following moves:

  1. Covered Gold (GLD) at immediate-term TRADE oversold
  2. Bought Taiwan (EWT) at immediate-term TRADE oversold
  3. Covered Discover Financial (DFS) at immediate-term TRADE oversold
  4. Bought Consumer Discretionary (XLY) at immediate-term TRADE oversold
  5. Covered Burger King (BKW) at immediate-term TRADE oversold

In other words, when I start barking buy/cover or sell/short, it’s always based on the same repeatable process. Infrequently do I get all of my Global Macro signals at the same time as I get my bottom-up (single stock) signals. But when I do, that’s when I lean long or short. The process works both ways.


This is where I can get a lot better at this game, and I will. With more reps, mistakes, and successes, I’ve learned the game by playing it. Sure, some of my lovers out there will say “he does it with a paper portfolio”, and that’s fine. I hear them barking too. But I highly doubt they’d have the guts to show the entire world every move they’ve made for the last 5 years anyway.


From the day that I started this company, I’ve believed in one very simple set of Canadian-American principles: Transparency, Accountability, and Trust. I care less about the tone of my barking than I do the results. This game can be loud and it can get messy. Anyone who wants me to hold some high level of Ivy League gravitas wants me to be someone I am not.


Back to the why…

  1. Immediate-term TRADE oversold is as oversold does
  2. Immediate-term TRADE overbought in both Bonds (UST) and the Buck (USD), complimented that equity oversold signal
  3. Immediate-term TRADE overbought at VIX 17.37 was another critical intraday risk management signal

US Equity Volatility’s (VIX) inverse correlation to the SP500 is as relevant (some of the time) as SPY versus USD is. Never mind the pooch metaphors, those signals were yelling at me yesterday.


With my Correlation Risk signal in hand, I then looked forward at my Global Macro Calendar Catalyst playbook, which had the following bullish catalysts:

  1. Q2 US GDP report (this morning) will only add fuel to the Bernanke Bailout fire
  2. Both month and quarter-end markups for Q3 2012 are in play in between today and Monday
  3. China’s Golden Week (and 18th Party Congress) is pending for the next 2 weeks

That last one only matters in terms of the manic media’s perma-perpetuating of rumors about China “stimulus.” All it takes is for Chinese stocks to stop going down and they’ll say it’s because something big is coming. The Shanghai Composite got just that overnight, having one of its biggest bounces (off the lows) in weeks (+2.6%).


We have 12 LONGS and 3 SHORTS for this morning’s open. It’s probably fair to stop calling me a bear now – just call me a dog. You can pet and feed me with bullish data points. I won’t bite.


My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are now $1, $106.41-111.44, $79.22-79.98, $1.28-1.30, 1.62-1.71%, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Barking Buyem! - Chart of the Day


Barking Buyem! - Virtual Portfolio


TODAY’S S&P 500 SET-UP – September 27, 2012

As we look at today’s set up for the S&P 500, the range is 28 points or -0.23% downside to 1430 and 1.72% upside to 1458. 













  • ADVANCE/DECLINE LINE: on 09/26 NYSE -678
    • Increase versus the prior day’s trading of -1409
  • VOLUME: on 09/26 NYSE 738.55
    • Decrease versus prior day’s trading of -2.28%
  • VIX:  as of 09/26 was at 16.81
    • Increase versus most recent day’s trading of 8.94%
    • Year-to-date decrease of -28.16%
  • SPX PUT/CALL RATIO: as of 09/26 closed at 1.84
    • Up from the day prior at 1.74


BONDS – Bernanke says money printing buys growth, bonds say nein! 10yr drops from 1.90% to 1.62% in a straight line as both growth and #EarningsSlowing expectations kick the Keynesians where it hurts. Bonds are immediate-term TRADE overbought here within a powerful long-term bull market; another reason to buy stocks this morning instead.

  • TED SPREAD: as of this morning 26.09
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.65%
    • Increase from prior day’s trading of 1.61%
  • YIELD CURVE: as of this morning 1.39
    • Up from prior day’s trading at 1.35

MACRO DATA POINTS (Bloomberg Estimates)

  • 8:30am: Labor Dept. scheduled to issue preliminary benchmark revisions to annual employment data
  • 8:30am: GDP (Q/q) (Annualized) 2Q T, est. 1.7% (prior 1.7%)
  • 8:30am: Initial Jobless Claims, week of Sept. 22, est. 375k
  • 8:30am: Continuing Claims, week of Sept. 15, est. 3.288m
  • 8:30am: Durable Goods, Aug., est. -5.0% (prior 4.2%)
  • 9:45am: Bloomberg Consumer Comfort, week of Sept. 23
  • 10am: Pending Home Sales (M/m), Aug., est. 0.3%
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas change
  • 11am: Kansas City Fed Manf. Activity, Sept., est. 5
  • 11am: Fed to sell $7b-$8b notes in 9/30/2015 to 11/30/2015 range
  • 1pm: U.S. to sell $29b 7-year notes


    • Federal Deposit Insurance Corp. holds Consumer Research Symposium, with FDIC acting chairman Martin Gruenberg, officials from SEC, CFPB, 8am
    • FDA workshop: medical countermeasures in case of radiological, nuclear, chemical attack involving mass burns, 8:30am
    • Pentagon advisory panel meets to discuss uniform fomulary for TRICARE pharmaceuticals, 9am
    • USTR advisory panel meets on trade practices in Iraq, Indonesia, Ukraine, Fiji, 9:30am
    • Cybersecurity conf. w/ ex-NSA/CIA Director Michael Hayden, 8am
    • Ford Chief Economist Ellen Hughes-Cromwick delivers remarks on state of automotive industry at National Economists Club, 12pm


  • Orders for U.S. durable goods probably slumped on airplanes
  • Euro-area economic confidence unexpectedly fell in September
  • Madrid protesters march for second night on austerity measures
  • China stocks jump most in 3 weeks on market support prospect
  • Chrysler Group reaches 4yr labor deal with CAW
  • German unemployment rose for 6th month in September
  • VW says some carmakers may go bankrupt without state help
  • Nomura said to cut as many as 30 jobs in American equities
  • Comtech says CEO being probed by grand jury over sales to Israel
  • ResCap bondholders pull support for Ally unit’s bankruptcy plan
  • H&M 3Q profit misses estimates as margins shrink
  • Starbucks to add stores in Scandinavia to spur European sales


    • McCormick & Co. (MKC) 6:30am, $0.76
    • Actuant (ATU) 7:30am, $0.54
    • Discover Financial Services (DFS) 8:30am, $1.03 - Preview
    • Accenture (ACN)  4pm, $0.88
    • Micron Technology (MU) 4pm, $(0.23)
    • Global Payments (GPN) 4:01pm, $0.87
    • Sealy (ZZ) 4:01pm, $0.03
    • Nike (NKE) 4:15pm, $1.13
    • Research In Motion (RIM CN) 4:15pm, $(0.47)


  • Gold Gains for First Day This Week as Price Slump Spurs Buying
  • Hedge Funds Bullish on Silver as Hoard Nears Record
  • Sugar Imports by China Seen Falling as Harvest, Stockpiles Climb
  • Oil Recovers From Eight-Week Low After U.S. Inventories Dropped
  • Copper Rises as China Company Profits Fuel Stimulus Speculation
  • Wheat Drops on Signs Russia Won’t Curb Shipments; Soybeans Fall
  • Cocoa Falls as Ivory Coast Reform Concern Eases; Sugar Advances
  • Cotton Exports From India Set to Plunge as Chinese Demand Cools
  • Cosco Sees Extended Slump as Shipper Yields Surge: China Credit
  • Pakistan’s Rice Sales Seen Climbing as Harvest Set to Cut Prices
  • BP’s Texas Refinery Sale Shows Volatile Industry’s Decay: Energy
  • Billionaires Rinehart, Bennett in New Dispute Over Pilbara Mines
  • Oil Puts at 16-Month High Versus S&P 500 on Slowdown: Options
  • Shrinking U.S. Corn Supply Trails Use for First Time in 16 Years





USD – get the Dollar right, and you’ll get a lot of market beta right; it has been a really nice counter-trend move for the Burning Buck off its Bernanke (SEP14) low; everything else has reacted inversely to that and now I’m getting an immediate-term TRADE overbought signal for the USD Index at $79.98, so Buyem! (stocks), for the bounce into mth/quarter end.










CHINA – nice pop off the lows for Chinese Equities of +2.6% should get the rumor mill in motion about the stimuli this morn; If Oil prices remain under pressure, we’ll be much more constructive on Equity markets built on unlevered growth (bought both Brazil and Taiwan on red this week). Interesting to see these markets diverge from USA/Europe – they should.










The Hedgeye Macro Team






Takeaway: $GMCR could have further to fall. A "cheap" multiple does not make up for declining margins and uncertain future earnings prospects

Green Mountain is now down 62% since Starbucks announced the arrival of the Verismo home brewing system.   We believe more pain could be on the way for GMCR shareholders.  



Uncompetitive Brands


Green Mountain’s brand portfolio consists largely of regional coffee brands that, even collectively, do not hold a significant share of the overall market.  The brands are as follows: Barista Prima, Café Escapes, Coffee People, Diedrich Coffee, Donut House Collection, Green Mountain Coffee, Green Mountain Naturals, revvTM, Timothy’s, Tully’s, Van Houtte.



Brewer Margins Declining From Almost Zero to Virtually Zero


The management team at Green Mountain has, since beginning its quest to conquer the home brewing segment, ran its business as a razor-razor blade model.  That is, the company has always sold its brewers (razors) at little margin in order to support sales of K-Cups (razor blades). 


Starbucks’ new brewer is adding competitive pressure to the home brewer industry and we believe that the Verismo and any further Starbucks machines will pose a significant threat to Green Mountain’s Keurig brewer.  There is a viable argument, that we happen to agree with, that consumer loyalty is more aligned with the coffee than the brewer.  If this is true, it would suggest that the Keurig brewer could struggle to maintain its market share over the longer-term as customers replace their old brewers and new customers purchase their first home brewer based on its compatibility with their favorite brand of coffee.


A mere week after Starbucks began taking orders for its Verismo machine, Green Mountain announced discounting in the form of a rebate on some brewer sales.  Management has adopted a defensive tone when addressing concerns about the Verismo’s impact on its business:


“…But should something like that happen we have a number of tactical responses, one of which could in fact be deciding to raise the price of the K-Cup brewing system.” – Larry Blanford, CEO of Green Mountain Coffee Roasters, Piper Jaffray Consumer Conference, June 6, 2012


How can they be now discounting their brewers?


It seems that the balance of the evidence suggests that an inventory issue may be underlying and discounting already-low-margin brewer sales will almost certainly bring about even lower margins for the company.



A Contract Manufacturer With Declining Margins


Green Mountain is a contract manufacturer for the following brands:  Starbucks, Tazo, The Bigelow, Caribou Coffee, Celestial Seasonings, Dunkin’ Donuts, Emeril’s, Folgers Gourmet Selections, Gloria Jean’s, Kahlua, Millstone, Newman’s Own Organics, Swiss Miss, Twinings of London, and Wolfgang Puck.


All of these licensing partners could, at some point in the future, detach themselves from their respective agreements with Green Mountain Coffee Roasters.   It is likely only a matter of time before Starbucks leads the way.  The K-Cup patent expiring alone will cause margins on K-Cups to decline but the possibility of partners such as Starbucks or Dunkin’ walking away would be highly damaging to Green Mountain’s profitability.  We would point to the unraveling of the Starbucks-Kraft agreement as evidence of a lack of leniency on the part of Schultz et al. when it comes to issues involving control of the Starbucks brand and consumers’ experiences of it.


Caribou Coffee offered some insight into its relationship with Green Mountain when management said:


Additionally, in the early part of this year, the Caribou brand was repositioned within the Green Mountain portfolio to more premium pricing group.  The Caribou brand can command a premium price from consumers, but the retail implementation of the Green Mountain pricing strategy is having a meaningful impact on our club volume, at least, in the near term. This channel represented a large portion of our total business and is the primary driver of our actual and forecasted volume declines.” 


The apparent lack of control, on Caribou’s part, over the retail pricing of its own brand, at least in club channels, suggests that Green Mountain could be taking steps to increase the rate of sales growth of its own brands.  While this may the best move in the short term, such a strategy cannot be encouraging for its licensing partners.



Getting All Done Up For Nothing


Green Mountain has been readying itself for near-parabolic growth in demand for its products, ramping up capital spending dramatically over the past two years.  Unfortunately, management’s forecasting of demand has been less-than-stellar, not helped by misaligned compensation incentives, and the company has clearly invested money in anticipation of demand that is not materializing. 



Rule #1: Don’t Lost Money


Many indications point to Green Mountain’s profitability continuing to decline and, we believe, there is a potential for GAAP earnings turning negative in FY13.  The following points underscore our concern:

  • Excess inventories including brewer inventory?
  • The potential for excess K-Cup capacity
  • Increased competition and the potential for lost customers
  • Patent expiration leads to retail price competition
  • Burning cash
  • Owned brand market share losses
  • Declining margins 
  • Management creditability

With the company’s financials almost incomprehensible from an analytical perspective, given the well-documented accounting issues, forecasting earnings for the company has become even more of an art, and even less of a science, than it was before.  With the increasing competition and emerging fragility of Green Mountain’s business becoming clearer, the most significant near-term challenge will most likely be 1QFY13 as the possibility of a disappointing holiday season becomes more distinct for the company. 



Howard Penney
Managing Director

Rory Green

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