Pain & Progress

This note was originally published at 8am on September 21, 2012 for Hedgeye subscribers.

“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 $1756-1785, $108.03-111.44, $78.61-80.43, $1.29-1.31, 1.72-1.87%, and 1451-1474, 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


The Macau Metro Monitor, October 5, 2012




According to Lusa sources, Galaxy and Sands China both had 18% share in September.  SJM had 27%, MPEL had 14%, WYNN had 13% and MGM remained steady at 10%. 



Vice‐president and secretary general of Macau Hoteliers & Innkeepers Association said that the average hotel occupancy rate stood at 88% on October 1, and the overall occupancy rate during the Golden Week is expected to be similar to that of last year.  Tourists were mainly from the Pearl River Delta region, and the number of individual tourists is expected to grow.  



Hong Kong-listed Get Nice Holdings Ltd failed to reach an agreement to sell its 65% stake in Grand Waldo.  The company told the Hong Kong Stock Exchange in July it was planning to sell the property to “a member of an international group engaged in the operation of a number of hotels, casinos and other entertainment facilities”.  On Wednesday, Get Nice announced that the deal fell through.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%

Shock Me

“Shocks create change.”

-Myron Scholes


Ex the Nobel Prize thing, Mr. Scholes and I have a few things in common. We’re both Canadian-American economists. We’re both from Northern Ontario (he’s from the home of the Timmins’ Benjamin Bears). We’re both ex-hedge fund managers!


Admittedly, Scholes’ 1998 blow up of Long-Term Capital Management was more shocking than ours at Carlyle in 2007. His team got a bailout. Ours didn’t. But we’ve both had an opportunity to learn from our mistakes.


In one of the most timely chapters of The 4% Solution, “Not All Growth Is Good”, Scholes made some of the simplest but relevant risk management points I have read in a while: “We have to encourage success (and allow for failure), because that is how we grow… we need to remain flexible… adapt to changing circumstances… let’s not let a good shock go to waste.” (page 115)


Back to the Global Macro Grind…


I was on the road this week in both Denver, Colorado and Kansas City, Missouri. I love the road. It’s where I became both an athlete and an investor. As a risk manager, the road is where I get a non-groupthink pulse in this country.


Every cab I got into in Kansas City yesterday was blaring Rush Limbaugh. Every cabbie was all fired up about the debate. No matter what your politics, Mitt Romney shocked the country yesterday. That’s what this country (and market) needed.


Bobby Valentine got a little shock of his own last night too. I’m guessing Red Sox fans probably appreciate the accountability assigned to wins, losses, and leadership.  That’s the America I immigrated to in the 1990s. I think it’s the one we all love too.


Shocks create change


Or at least, in free-market economy, they should. Could a change in overall US Growth Expectations shock the country? You tell me. If my macro model gets as much as a whiff of a +3% US GDP Growth probability that’s greater than 33%, I may have to dress up as a bull for Halloween.


That’s scary.


And so was the Old Wall’s March 2012 consensus that the USA would see +3-4% GDP growth with all this debt and uncertainty. While I have had no problem leaning longer in the last 3 weeks, I’ve had even less of a problem selling on green.


Why? Because #EarningsSlowing is going to continue to shock the bulls in certain stocks throughout earnings season. That starts next week. So, no matter where we go on a made-up and politically massaged government number today, there we will be.


What if Romney’s Rally wasn’t a one off?

  1. Financials (XLF) could continue to shock you to the upside (Financials lead the market in October at +3.0%)
  2. Energy stocks (XLE) could continue to shock you to the downside (Energy lead losers in October at -0.4%)
  3. Strong Dollar, Strong America (higher long-term lows for the USD) could surprise the world

What if Romney continues to build momentum, but Earnings Season is worse than I expect?

  1. I don’t know
  2. But the bond market could continue to be right in 2012, with bond yields making lower-lows
  3. And, on mean reversion risk alone, the SP500 could drop to 1419 (-3%) in a day

A 3% down day? Never. It’s different this time. Right?


Right. Right. Until it isn’t, I guess. India’s stock market (the Nifty) dropped -16% this morning on “erroneous orders” and they had to halt trading for 15 minutes. Imagine that happened here? It has. So you don’t have to imagine too hard.


This market is as laden with both risk and opportunity right now as I can remember. I like to be shocked the right way. But I fully expect to be shocked, at any given moment of my centrally planned day, the wrong way.


And that’s all I can say about that.


My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are now $1, $108.41-111.89, $79.29-80.13, $1.29-1.31, 1.59-1.73%, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Shock Me - Chart of the Day


Shock Me - Virtual Portfolio


Takeaway: Dairy prices rising is a negative for $CAKE, $TXRH, $CMG, $SBUX, $DPZ, and $PZZA

A weak dollar over the last week was partly behind the higher commodity prices, generally, on a week-over-week basis.  Coffee prices remain favorable year-over-year, while grains, proteins, and dairy costs are likely to squeeze un-hedged restaurant operators over the next couple of quarters.  On the short side, we are targeting stocks like BLMN and TXRH where we think commodity inflation will be difficult to mitigate from a top-line perspective should our stance that, for each company, top line growth should come in below expectations.


Summary View

Dairy prices are up ~20% versus a year ago as concerns mount over shrinking herd sizes in the United States.   A CME report released this week indicated that the percentage of dairy cows being moved to slaughter is growing and some estimate that a new record high could be achieved when the January 1 inventory report is released by the USDA.  We see this as a negative for CAKE, TXRH, CMG, and SBUX (SBUX has guided to dairy headwind in FY13).  PZZA have their cheese costs hedged but to the extent that dairy prices continue higher, the company’s commodity costs could rise from here.   


Beef prices were flat over the last week as weak economic data and a decline in year-over-year slaughter numbers for cattle YTD.  This article explains that this lesser rate of slaughter is not as bearish a sign as it may seem, given the longer term context and extreme slaughter rates in 2011. 


Longer-term, our view is that beef prices are likely to remain at elevated levels.  Higher feed costs are reducing the number of cattle on feedlots versus a year ago and herd sizes remain depleted after the last two years of drought.  It seems that supplies of beef are set to remain tight for at least a couple of years.  This is a negative for BLMN, TXRH, CMG, JACK, and WEN, among others.


Grains were mixed over the past week largely as a result of the details within the USDA Grain Stocks report released last Friday.  Corn and wheat futures traded sharply higher on the report, which indicated that ending stocks for 2011/12 were below and at the low end of estimates for corn and wheat, respectively.   Soybean stocks were above estimates and the September WASDE projection; soybean prices have declined -1.2% over the last week.  Overall, grain prices remain elevated and, along with energy prices, are squeezing food processor margins.  Ultimately, this is leading to higher costs for food retailers, restaurants, and consumers. 





Refinery and pipeline shutdowns are increasing concern that supplies are not adequate to meet demand.  Gasoline and other commodity-based expenses are squeezing the American consumer.  As we have written in recent posts, we view this inflation as having a negative impact on growth in consumer spending and believe that consensus expectations for same-restaurant sales growth are – in many cases – overly optimistic.  Gas prices are up 11% year-over-year.












COMMODITY CHARTBOOK - crb foodstuffs










COMMODITY CHARTBOOK - chicken whole breast


COMMODITY CHARTBOOK - chicken broilers












Howard Penney

Managing Director


Rory Green




Takeaway: We still think the industry will fall below the low end of MAR’s Q4 RevPAR guidance of 5-7%.

  • RevPAR trends are softening
  • We are projecting 4-5% Q4 RevPAR growth in the US for the Upper Upscale segment
  • The Street and company guidance looks too high for 2013 – MAR guided to +5-7%.  We don’t share their optimism.



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