Political Chaos

Client Talking Points

Get It Together

The markets don't believe that President Obama and John Boehner can come to an agreement on the fiscal cliff as the futures sell off en masse this morning. Ironically, the rest of the world seems to not care about America’s problems as the rest of the global equity landscape is essentially flat. No major sell offs anywhere but here. As we head into the holiday weekend, we can’t help but shake our heads over the political class and how Washington can't get its act together. 

The Cycle Turns

One of our global macro themes of commodity deflation continues as gold sells off further. There are a lot of investors who are long gold and this is a punch to the gut for them. Gold may have little bounces but they can be sold on green. Other commodities like copper to soybeans have had a very rough December. As we move from Growth Slowing to Growth Stabilizing, we will continue to see further commodity deflation.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Our competitors are neutral to bearish on the name ahead of earnings, but we think they’re missing the bigger picture. We think concerns over the shoe cycle rolling over are overdone. With R&D in the mid-teens, NKE has the ability to drive the ‘sneaker cycle’ in a case of “the tail wagging the dog”. We also think $NKE is a candidate for releasing a special dividend when they report EPS next week.


Uncertainty in US from a macro perspective (jobless claims uptick) gives us pause from TRADE perspective although coffee prices will serve as a tailwind going forward. Company is becoming more complex, taking on risk as it acquires new brands. Longer-term, we view Starbucks, along with YUM, as one of the most attractive global growth stories in our space.


Margins are in a cycle trough as the USPS is on the brink. FDX is taking more share in the U.S. and following the recent $TNT news flow we think $UPS is in a tough spot.

Three for the Road


“If people we right freaked out about USA credit risk, they'd be selling Treasuries and Dollars - they are buying both” -@KeithMcCullough


“The power of accurate observation is commonly called cynicism by those who have not got it.” -George Bernard Shaw


S&P 500 futures drop 20 points (-1.5%) pre-market amid worries over the fiscal cliff.


TODAY’S S&P 500 SET-UP – December 21, 2012

As we look at today's setup for the S&P 500, the range is 21 points or 1.02% downside to 1429 and 0.44% upside to 1450.    















  • YIELD CURVE: 1.50 from 1.53
  • VIX closed at 17.67 1 day percent change of 1.79%
  • BONDS – Treasuries haven’t budged on the budget thing – the 10yr is down 1 beep in the last 24hrs to 1.76% and remains well above the TREND breakout line of 1.69%. Currency markets aren’t moving much either – EUR/USD is down 20bps.

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Chicago Fed Nat Activity Index, Nov. (prior -0.56)
  • 8:30am: Personal Income, Nov., est. 0.3% (prior 0.0%)
  • 8:30am: Personal Spending, Nov., est. 0.4% (prior -0.2%)
  • 8:30am: PCE Deflator M/m, Nov., est. -0.1% (prior 0.1%)
  • 8:30am: PCE Core M/m, Nov., est. 0.1% (prior 0.1%)
  • 8:30am: Durable Goods Orders, Nov., est. 0.3% (prior 0.0%, revised 0.5%)
  • 8:30am: Durable Goods Ex-Transportation, Nov., est. -0.2% (prior 1.5%, revised 1.8%)
  • 8:30am: Capital Goods Orders Non-Defense, Ex-Aircraft, Nov., est. 0.0% (prior 1.7%, revised 2.9%)
  • 9:55am: U. of Michigan Confidence, Dec. final, est. 75.0 (prior 74.5)
  • 11am: Kansas City Fed Manufacturing Activity, Dec. est. -5 (prior -6)
  • 11am: Fed to buy $1.5b-$2.25b notes in 02/15/2036–11/15/2042 sector
  • 1pm: Baker Hughes rig count


    • Washington Day Ahead
    • NRA holds news conf. on Newtown, Conn., slayings, 10:45am
    • EPA may announce latest version of Boiler MACT rule
    • CFTC holds closed hearing on enforcement matters, 10am
    • FDA decision date on Alexza’s Adasuve for agitation tied to schizophrenia, J&J’s bedaquiline for multidrug-resistant TB


  • Boehner drops "Plan B" as budget deal efforts turn to disarray
  • Citigroup said to give CCA managers 75% stake in funds for free
  • Aviva agrees to sell U.S. unit to Athene for $1.8b
  • Greenbrier calls for talks after rejecting Icahn sweetened bid
  • Crane buys bill-machine maker MEI Conlux from Bain-Advantage
  • Nokia signs patent-licensing deal with RIM, ending all disputes
  • SEC enforcement chief Khuzami said to leave agency next month
  • Facebook’s Instagram scraps changes amid outcry over content
  • ArcelorMittal reports $4.3b writedown of Europe units
  • Nike 2Q profit tops ests. as North America sales gain
  • RIM shrs fall on concern that service rev. will suffer
  • IBM judge refuses to rubber stamp SEC foreign bribery settlement
  • U.K. 3Q GDP rises 0.9%, revised from prior est. of 1%
  • BlackRock sees distortions in country ratings seeking S&P change
  • Fiscal Cliff, U.S. Home Sales, 2013: Wk Ahead Dec. 22-Jan. 5


    • Walgreen (WAG) 7:30am, $0.70 - Preview


COMMODITIES – you’d think this would be the ideal freak-out morning to be long Gold – nope; Gold snapped its long-term TAIL line of $1671 yesterday and didn’t look back – Gold and Oil are in Bearish Formations; if you need to get some short exposure on in a hurry this morning, we say stick with commodities and their related equities all day long.

  • Gold Gains in New York as Central Banks Boost Bullion Reserves
  • Copper Traders Turn Bearish as Hedge Funds Buy More: Commodities
  • Oil Declines Most in Two Weeks as U.S. House Delays Budget Vote
  • Copper Gains on Short Covering After China’s Imports Rebound
  • Tiberius Forecasts Gains in Commodities Indexes Next Year
  • Brazilian Arabica Coffee Trades at Discount, U.S. Roaster Buys
  • Oil May Rise on Higher Demand as Inventories Fall, Survey Shows
  • China Copper Imports Rebound as Exports Rise to Five-Month High
  • LNG Three-Year Rally Seen Over as Reactors Start: Energy Markets
  • Bearish Gold Options May Signal More Declines: Chart of the Day
  • Brazil Doubles Gold Reserves as Central Banks Buy Bullion
  • China Coal-Import Growth Seen Halting on Better Inland Transport
  • Aluminum Surplus May Widen 22% on China, Mideast Output Growth
  • Argentine Forecast Gap Keeps Wheat Market Guessing on Crop Size










ASIA – both Asian and European stock markets act a lot better than the US Equity Futures do – given how much both have ripped, that’s a pleasant surprise. China only down -0.69% after a monster melt-up and Singapore down -0.38%; nothing in Asia snapped even an immediate-term TRADE line of support.








The Hedgeye Macro Team




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.

Staggeringly Quiet

“No one could remember when London had been so quiet.”

-Paul Reid


That’s what Paul Reid wrote about the French surrender to the Germans on June 22, 1940. It “staggered all of Britain. Britons began to realize that the way of life they had known and loved was vanishing.” (The Last Lion, pg 105)


And with the S&P Futures having a mini flash crash of -3.4% last night (1390 was the low) on the new “news” that our political overlords have no concept of real-time risk management, all was quiet.


Staggeringly quiet.


Back to the Global Macro Grind


People who wake up every day begging for and/or getting paid by more Big Government Intervention in what were our free-markets have no business whining about this today. They want a deal? This is part of the deal. So deal with it.


While there’s no doubt some in the #PoliticalMedia panicked last night, maybe freaking out is the only thing left that will drive ratings off 8 year lows. Who knows. The Rest of Us just sat back and watched the #PoliticalClass self-implode.


Context in considering market risk is always critical. Understand that both Asian and European equity markets were immediate-term TRADE overbought to begin with, so I wouldn’t consider Asia’s closing prices overnight and/or how Europe is trading this morning anything to freak-out about.



  1. China (Shanghai Composite) only gave back -0.69% of its recent rip
  2. Japan (Nikkei) was down -1% after being up +17% in the last month
  3. Singapore and South Korea were down -0.38% and -0.95%, respectively


  1. EuroStoxx50 is only down -0.59% this morning after going straight up since mid-November
  2. Germany (DAX) is -0.68% to 7619 (up +29.4% YTD and comfortably above its SEP 7451 closing high)
  3. Denmark (OMX Copenhagen) doesn’t care about any of this noise, UP +0.4% on the session

I know, who cares about Denmark? Let me assure you that the Danes don’t care about Captain Bailout America these days either. That’s the new world we are perpetuating – a very much polarized and protectionist one. Get used to it.


Global Fixed Income and Currency markets aren’t freaking-out like US Equity Futures traders either:

  1. US Treasury Yield (10yr) has literally moved 1 beep (basis point) in the last 24hrs (1.76% vs 1.77%)
  2. US Dollar Index is actually up +0.11% on the session to $79.37, making another higher long-term low
  3. EUR/USD only down 20 beeps to $1.32 showing no stress whatsoever

Spread risk and bond yields, globally, aren’t signaling much to me this morning; neither are commodities. Other than seeing a lot of bad jokes about Mayans on my Twitter stream, all I really see going on is a bunch of politically oriented people on TV looking emphatic on mute.


*Twitter and TV Viewer Note: when you are emphatic about everything, you emphasize nothing.


Where do we go from here?


You probably pick your favorite stock this morning and buy it on red. Don’t buy a Gold stock though. You’d think on an end-of-the-world morning like this Gold would actually go up. Nope.


Our intermediate-term strategy view remains the same as it has for the last month:

  1. Long Global Consumption Stocks (NKE had a great quarter last night – FDX acted well on earnings this week too)
  2. Short Commodities (we’re still short Oil and Energy related equities)
  3. Out of Fixed Income (we sold all of ours last Friday and might short bonds today if we get our price)

If someone in your workplace is running around like a chicken with their head cutoff this morning, do me a favor and tell them to relax and realize that the way of life we had during free-markets is vanishing. Shhh.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $105.99-110.65, $3.52-3.59, $79.01-79.71, $1.31-1.33, 1.70-1.85%, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Staggeringly Quiet - Chart of the Day


Staggeringly Quiet - Virtual Portfolio


We think investors buying BWLD in anticipation of the share price reaching the consensus twelve-month price target are likely to be disappointed.


Buffalo Wild Wings has been one of the more volatile restaurant stocks in 2012.  We believe that buyers of the company’s shares risk less-than-expected returns in 2013.  That the company is taking 6% of pricing as we near the end of the year is very concerning from the perspective of the consumer’s perception of the brand.  Stubbornly high chicken wing prices are forcing management’s hand and, if Sanderson Farm’s commentary from 12/18 is anything to go by, the company’s input costs could remain elevated in 2013. 


While we believe the stock is a decent short here and now, we would find it increasingly compelling if the price were to rise closer to $80.


BWLD PRICE TARGET NOT LIKELY - bwld price target



Notable Commentary from SAFM


“As many of you know, the Georgia Dock price is a good indicator of the supply and demand dynamics for products sold to retail grocery stores. The balance of supply and retail grocery demand has held relatively steady through most of the past three fiscal years. The Georgia Dock price needs to move higher still, however, to offset current grain costs.”


“In the past when wings got really truly hot and high, other products found themselves on to menus like boneless wings, boneless breast, chicken tenders. High prices will cure high prices. And I don't know what the ceiling is, but I am guessing that these restaurant owners will find something else put on the menu if they're not making margins. They might go to $2, but my guess is they won't stay there very long.”



Fundamental Outlook


The company’s top-line is likely to be a concern for the next couple of quarters.  We see two issues, one specific and one potential, facing the company over the next couple of quarters:

  1. The company taking 6% price could lead to a greater-than-anticipated slowdown in traffic
  2. Testing is ongoing of a strategy to sell wings by weight, not number, in several markets

We are cautious on BWLD’s ability to maintain the magnitude of its same-restaurant sales “Gap-to-Knapp” in 2013, particularly if the testing of serving wings by weight becomes the company’s system-wide policy. 


BWLD PRICE TARGET NOT LIKELY - bwld comps detail



Changes in the company’s cost of sales are mainly driven by fluctuations in spot wing prices.  Bone-in wings comprise 20% of the company’s basket.  Below is a table that we first published at the start of 2012 outlining the sensitivity of BWLD’s earnings per share to 10% of wing price inflation.  While boneless wings do offer some shelter from spot market price, since the company contracts boneless wings, the mix shift that the company has managed to bring about during prior bouts of inflation has not been substantial (3% increase in boneless mix in 2009).


BWLD PRICE TARGET NOT LIKELY - bwld cogs vs wing prics



Other operating expenses – Labor, Operating, and Occupancy – have been declining as a percentage of sales for some time.  Considering that comps are decelerating and, by these metrics, the company has become more efficient over the last couple of years, it could be a challenge to gain margin from these line items in FY13.  Management guided to higher labor costs, as a percentage of sales, in the fourth quarter but consensus is still modeling a year-over-year decline in labor costs as a percentage of sales.  









Howard Penney

Managing Director


Rory Green

Senior Analyst


Are Houses Like Potatoes?

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

Reflexivity. Reflexivity asserts that prices do in fact influence the fundamentals and that these newly-influenced set of fundamentals then proceed to change expectations, thus influencing prices; the process continues in a self-reinforcing pattern.
- Wikipedia


Last night we celebrated another great year, our fifth, at our firm’s annual holiday party. Not thinking ahead, I agreed two days ago to write this morning’s Early Look. Keith was proactively managing risk, as usual.


Housing has been in the news a lot recently. A few days ago, Corelogic reported that home prices had risen 6.3% in October vs. the prior year, the fastest rate of growth in a long time. What’s more, Corelogic provides an early look into the following month – something they’ve been doing for the last few months – that showed November’s growth is even stronger at +7.1%. Those are some serious numbers. It’s no longer just Wall Street taking notice. Main Street is starting to pay attention too.


Housing is reflexive. I would argue it’s also a Giffen good. Giffen goods are things people buy more of when the price rises. To economists, Giffen goods are a paradox, something that should not/cannot exist. In fact, at one point in time, the only Giffen good thought to have ever existed was potatoes in Ireland during the Great Irish Potato Famine. Economists later published papers on why this wasn’t a Giffen good after all.


Why would anyone buy more of something as the price rises? The short answer is because he or she expects the price to keep rising. Consider some empirical evidence from the housing market. In 1999, the median priced home in the U.S. cost $137,000. That same year, the Mortgage Bankers Association, or MBA, showed that demand for houses, as measured by their mortgage purchase applications index, stood at 276. Fast forward six years, and by 2005 the median priced U.S. home cost $218,000, an increase of 59%. Meanwhile, demand for homes had risen to 471 on the MBA index, an increase of 70%. Apparently, when houses cost 59% more, we choose to buy 70% more of them.


Fast forward another six years, to 2011, and median price had fallen to $165,000, a decline of 24%. Demand? Demand fell to 180, a drop of 62%. So, again, when houses cost 24% less, we bought 62% less of them. It’s pretty clear that housing is, at a most basic level, a Giffen good. Rising prices stoke greater demand, which fuels rising prices. That cycle, of course, works in reverse too.


So, whether it’s reflexive or a Giffen or a potato, it’s with this dynamic in mind that we’re hosting our 11am call this morning entitled “Could Housing’s Recovery Go Parabolic in 2013?” If you’d like to listen, email


Our contention is that housing’s positive momentum is accelerating. On the call we’ll explain the underappreciated role being played by falling rates, growing modifications, and the upside potential from credit easing. We’ll also be laying out our new home price models in the context of supply and demand across the three major markets: existing, new and distressed homes. Of course, we’ll also be flagging the stocks we see as major winners from this dynamic.


Taking a step back, it’s worth reminding investors why housing matters. My sector, Financials, is up 21.9% year-to-date. Bank of America is up 88% year-to-date and is trading at a new high for the year. While there are several reasons why, none is more important than the improvement we’ve seen in housing. Housing is still in the early stages of a secular recovery that will last for years. Similarly, Financials are in the early stages of their own recovery. 2012 has been a good year for both so far (after having endured five straight years of misery), and we expect more progress in 2013 fueled largely by housing.


Josh Steiner, CFA
Managing Director


Are Houses Like Potatoes? - potatoes core logic


Are Houses Like Potatoes? - Virtual Portfolio

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