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Human Action

“Nations stumble upon establishments which are indeed the result of human action…”

-Hayek

 

That’s a simple but appropriate quote for central planners to noodle over this morning. It comes from Adam Ferguson’s economic history work that is cited by Ralph Raico in the book I am currently studying, Classical Liberalism and the Austrian School (pg 27).

 

Human Action, of course, wasn’t Hayek – it was the title of Ludvig von Misses’ magnum opus in 1949. If you want to begin to attempt to understand the difference between Keneysian and Austrian economics, start there.

 

Inasmuch as there are some differences between Bernanke and Krugman, there are between von Misses and Hayek as well.  In the former versus the latter, we are talking about derivatives of centrally planned versus free-market based economic ideologies.

 

Back to the Global Macro Grind

 

France, Italy, and Japan are “stumbling upon establishments” (Hayek) of Keynesian economic policy decisions again this morning:

  1. FRANCE Industrial Production growth for OCT = down another -1.1% (after a -2.5% drop in SEP)
  2. ITALY GDP Growth = down -2.4% year-over-year for Q3 of 2012
  3. JAPAN GDP Growth = down -3.5% QoQ SAAR for Q3 of 2012

I know. It’s too bad all 3 of these centrally planned economies are out of bullets and couldn’t jack up government spending like the USA did (+9.5% annualized government spending ramp in Q312). Maybe that’s why Italy’s Super Mario Monti says ‘I’m out!’

 

On the globally interconnected risks associated with sovereign Debt & Deficit Spending, as the late Milton Friedman said in 1991, maybe “there’s only one thing left to do: fight.” On that score, instead of being taxed by the #PoliticalClass and signing off on an unlimited US Debt Ceiling, at least some Americans still look ready to stand up for their individual liberties.

 

But what if the USA gets a debt/deficit deal? Short-term, I assume stocks will rip. But, in the long-run, what will happen to the US economy? What will happen to your children’s liberties?

 

In the long-run, for America to achieve sustainable economic growth, it needs:

  1. To restore its competitive advantage as one of the last standing free-market economies
  2. To resuscitate the credibility of her hard earned currency – the world’s reserve currency

The #PoliticalClass, of course, thinks they only get paid if we don’t get what we need. Then they perpetuate pinning us all against one another via class, gender, and race warfare.

 

The good news last week was that the government got out of the way. There was no fiscal deal. There was no Ben Bernanke decision to print to double-infinity and beyond either.

 

With the US Dollar up +0.35% on the week, you also got a real-time tax cut:

  1. CRB Commodities Index (19 commodities) = down another -1% wk-over-wk (down -8.4% from the Bernanke SEP Top)
  2. Brent and WTIC Oil prices = down another -3.7% and -3.3% wk-over-wk, respectively
  3. Corn = down another -2% wk-over-wk (down over 12% from all-time highs in 2012)

At the same time, institutional investors betting that the USA becomes more like France got sacked for the 1st week in the last 3:

  1. CFTC Futures & Options contracts (betting net long commodities) = down -3.4% on the week to 898,000 net long positions
  2. Gold saw net long positions get hammered by the most since March = down -25% wk-over-wk to 127,000 net longs
  3. Wheat got crunched for another -20% wk-over-wk drop in net long positions = down to 34,000 net longs

People who drive to work and eat throughout the day loved it; institutions long inflation didn’t. Last week’s net long positions in farm goods fell -10% wk-over-wk and are down almost 50% from their 2012 all-time highs (Wheat’s net long position is down -57% from its all-time high).

 

Get the government out of the way, and you’ll take expectations for asset price inflation in food and energy prices away. That’s something that you don’t hear out of Bernanke and Geithner do you? You’d think Obama’s “middle class” warfare thing would pick up on the marketing opportunity as well. Not.

 

And that’s really sad because our Human Actions should be better than that. On government policy orders, the difference between Hayek and Von Mises was actually that Hayek was more socially liberal. “For the tradition that Hayek recommends, on the contrary, such order is best understood as coming about through a process of adaptive evolution.” (Raico, page 27).

 

And that’s all I have to write about that. Short commodities on green and buy consumption on red until we really make this Italy.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $106.51-109.53, $80.11-80.67, $1.28-1.30, 1.58-1.65%, and 1, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Human Action - Chart of the Day

 

Human Action - Virtual Portfolio


THE M3: JUNKETS; VIP GAMING; SOUTH KOREA

The Macau Metro Monitor, December 10, 2012

 

 

NEPTUNE BOSS SAYS JUNKETS NOT INVOLVED IN CRIME Macau Business

Nicholas Niglio, CEO of Neptune Group Ltd, dismisses rumors that junket operators in Macau are involved in illegitimate businesses.  “They [the promoters] will not give up their credibility for such a small return from illegal activities,” he added, noting the junket activity in Macau is regulated and governed by the Gaming Inspection and Coordination Bureau. As of June-end, Neptune controlled 51 VIP tables.  Around 2,000 licensed agents work for these tables.

 

Niglio also said that the VIP sector in Macau is now facing a consolidation period.  “It is time for industry consolidation as small junket promoters are gradually absorbed by mid-sized ones.”

 

VIP GAMING TO STAY STABLE IN 2013: FRANCIS TAM Macau Business

Secretary Tam said he had not heard anything about any possible restrictions to be imposed by Beijing that could affect the city’s VIP gaming sector.  “We expect that the VIP gaming business will enjoy stable development in the coming year,” said Tam.  The secretary was commenting on rumors that plans by the mainland authorities to strengthen their fight against money laundering and corruption will affect the casino industry.

OKADA EYES CASINO DEAL IN SOUTH KOREA Macau Business

Universal Entertainment Corp last week announced that it has signed a non-disclosure agreement with the Shinsegae Group of South Korea.  “The agreement was signed in preparation for commencing discussions regarding the commercial facilities at the casino resort complex development project at Yeongjongdo Island, Incheon, Korea being undertaken by the Shinsegae Group,” Universal Entertainment said.


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – December 10, 2012


As we look at today's setup for the S&P 500, the range is 13 points or 0.85% downside to 1406 and 0.07% upside to 1419.         

                                                                                                                                                      

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10


CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.37 from 1.38
  • VIX closed at 15.9 1 day percent change of -4.10%

MACRO DATA POINTS (Bloomberg Estimates):

  • 11am: Fed to buy $1.5b-$2.25b notes due 2/15/36-11/15/42
  • 11:30am: U.S. Treasury to sell $32b 3-mo., $28b 6-mo. bills
  • 12:45pm:Bank of England Governor King speaks at Economic Club of New York

GOVERNMENT:

    • President Obama to deliver speech in Detroit to promote his federal budget deficit plan
    • FDIC Systemic Resolution Advisory Committee meets to discuss Title II of Dodd-Frank Act

WHAT TO WATCH

  • Obama, Boehner held private meeting at White House on budget
  • Greece extends deadline for debt buyback after nearing target
  • Canada’s approval of $20b energy takeovers may spark more foreign investments
  • Dragon Systems founders take Goldman to trial over advice
  • SEC said to investigate SAC Capital’s trading in Intermune and Weight Watchers
  • Apple, Google team up for $500m-plus Kodak patents bid
  • AIG sells ILFC majority stake to Chinese investors for $4.23b
  • Japan sinks into recession as opposition leader Abe calls for more stimulus
  • China’s exports rose less than forecast in November
  • Ingersoll-Rand said to plan share buyback, asset spinoff
  • Apple/Samsung ruling on U.S. phone sales may come this week
  • Wanxiang outbids Johnson Controls for most of A123 assets
  • Suntory weighs takeover of whiskey maker Beam, official says
  • Mattel returns to appeals panel that threw out Bratz verdict
  • ‘Skyfall’ reclaims top spot with ticket sales of $11m

EARNINGS:

    • Ferrellgas Partners (FGP) 7am, $(0.23)
    • John Wiley & Sons (JW/A) 8am, $0.82
    • Casey’s General Stores (CASY) 4pm, $0.85
    • Teavana Holdings (TEA) 4:01pm, ($0.01)
    • Greif (GEF) 4:07pm, $0.55
    • ABM Industries (ABM) 5pm, $0.40

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Oil Rebounds as German Exports Advance; OPEC to Meet in Vienna
  • Speculators Cut Bullish Bets on Fiscal Cliff Talks: Commodities
  • Japanese Aluminum Fees Said to Decline for First Time in a Year
  • Gold Gains in London on Drop to One-Month Low, Stimulus Outlook
  • Copper Reaches 7-Week High as Chinese Industrial Output Expands
  • Corn Falls to Three-Week Low as South American Outlook Improves
  • Sugar Declines on Indications of Ample Supplies; Cocoa Slides
  • Gold Set for Retreat on Momentum Indicator: Technical Analysis
  • China Crude Imports Rise to Six-Month High as Oil Refining Jumps
  • Tin Shipments From Indonesia Drop for First Time in Three Months
  • Iron-Ore Exports From Australia Jump to Record on China Recovery
  • Palm Oil Stockpiles in Malaysia Climb to Record as Exports Drop
  • Japan Suspends Beef Imports From Brazil on Mad-Cow Disease
  • Hedge Funds Quit U.S. Natural Gas as Cold Fades: Energy Markets

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


USD – 1st up week in 3 for the USD last week punished Commodity prices, and we liked it. Oil in particular is back into a Bearish Formation after snapping TRADE support of $109.63 Brent; TREND in USD is higher, not lower (up for 8 of last 11 weeks), so we’ll see if getting a cliff deal strengthens it further – not clear on that yet either way.

 

THE HEDGEYE DAILY OUTLOOK - 6

 

EUROPEAN MARKETS


ITALY – Monti probably took a peek at down -2.4% y/y Q3 GDP growth and said we’re out! So is whoever bought last week’s lower-highs in Italian equities; MIB index down hard (-3.4%) moving back below 15,615 TRADE support and back into a Bearish Formation – risk happens fast.


THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS


CHINA – Chinese stocks moved out of crash mode putting on a +4.1% move last week and saw +1.1% follow through this morning back about my TRADE line of 2039 support (Shanghai); that was bullish, and so was NOV Industrial Production growth (10.1% vs 9.6% in OCT) and Retail Sales (+14.9% vs 14.5%); CPI rose to 2% from 1.7% only neg news.

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

The Hedgeye Macro Team

 

 

 


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THE WEEK AHEAD

The Economic Data calendar for the week of the 10th of December through the 14th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

THE WEEK AHEAD - week


DRI - The dividend has become a liability

The recent DRI press release stating the latest disappointment stopped short of dealing with reality. 

 

A recent note we published highlighted the DRI Annual Report as an important document for investors given the primary takeaway which was: the growth ethos at Darden is an entrenched as ever.  Against a backdrop of sustained traffic declines, it is jarring to read the following sentence: “Our brands have strong individual and collective growth profiles”.   We believe that management has, and is continuing to, set itself up to miss expectations.

 

Unfortunately, the press release of December 4th did not address the most important issue that the company is facing: excessive growth.

 

Clearly, in light of the fundamentals at the company’s largest brands, the five-year growth plan outlined in the Annual Report needs to be reevaluated.  The thesis of our Darden Black Book this past summer expressed our conviction that Darden’s continuing acceleration of new unit growth over the past couple of years has masked evidence of secular decline in Olive Garden and Red Lobster.  Knowing what we now know about how FY13 to-date only adds to the need for management to address how its pace of growth can be sustained without further erosion to the financial health of the company.

 

The message from Darden’s management team highlights the economy as the biggest issue facing the company and, furthermore, sees weakness in trends at its core brands as being transitory in nature.  We have suggested that the longer-term view, as defined by the data, suggests an altogether different story. 

 

The traffic trends at Olive Garden and Red Lobster clearly are demanding significant action of management.  The economy is undoubtedly a factor but the poor performance of the “Big Two” versus the Knapp Track casual dining benchmark is a clear indication that the company’s sluggish traffic trends are not entirely attributable to the macroeconomic environment.  The data points – traffic trends – that we are pointing to as a primary reference for our thesis are indicative of, in no small part, self-inflicted wounds.

 

If the company has become dependent on growth as a drug for all ailments, management’s message is not indicating that Darden is facing up to its growth problem.  Stating that the “core brands remain highly relevant to restaurant consumers” can be supported by pointing to the average unit volumes at Red Lobster and Olive Garden as being some of the strongest in the industry.  We believe this statement to be misguided, however, when considering same-restaurant sales trends – a far more relevant metric when assessing relevance to the consumer.

 

DRI - The dividend has become a liability - red lobster comp detail

 

DRI - The dividend has become a liability - olive garden comp detail

 

DRI - The dividend has become a liability - longhorn comp detail

 

Going back to the very first conference call announcing Clarence Otis as CEO of the company, the pervading theme throughout his tenure has been “growth”.  Acquisitions of LongHorn Steakhouse and, more recently, Yard House, are testament to the unwavering loyalty Darden’s CEO has to his philosophy. 

 

Now the numbers don’t add up.   The balance sheet is levered up and margins are declining.  The company is not generating enough cash to pay the dividend given the current rate of capex growth.  The dividend has become a liability. 

 

Will management admit its past mistakes or, at least, change course and slow growth?  Or will reality continue to be ignored?  The earnings call on December 20th will be the first chance for management to face the music.  The sooner they do it, in our view, the better.

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 

 

 


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