All Is Calm

“All is calm, all is bright.”

-Garth Brooks


One of my favorite holiday history songs is Belleau Wood, by Garth Brooks. It’s a song about a truce between US and German soldiers in 1918. The first WWI Christmas truce came between British and German soldiers in 1914.


“Through the week leading up to Christmas, parties of German and British soldiers began to exchange seasonal greetings and songs between their trenches; on occasion, the tension was reduced to the point that individuals would walk across and talk to their opposite numbers bearing gifts.” (Wikipedia, Christmas truce)


Then across the frozen battlefield another’s voice joined in…

Until one by one each man became a singer of the hymn.” (Garth Brooks)


Back to the Global Macro Grind


I’ll keep it relatively tight this morning – just economic data and risk management levels.


But first, here’s how I’d summarize our GIP (Growth, Inflation, Policy) model right now:

  1. Globally (across countries in our model), growth has been stabilizing now for almost a month
  2. Inflation continues to deflate, providing the real-time tailwind to this shift from growth slowing to stabilizing
  3. Both Treasury Bond and Gold prices do not like this (they like #GrowthSlowing)

Global Macro Economic data:

  1. Taiwan printed its highest Industrial Production number in 9 months this morning (+5.9% NOV vs +4.8% OCT)
  2. Singapore reported a 2-yr low in Consumer Price Inflation (CPI) this morning (+3.6% y/y NOV vs +4% OCT)
  3. CFTC Futures & Options net long contracts hit a 6 month low (-5.6% wk-over-wk to 758,256 contracts)

That last point is one of the most critical we have been focused on since making our Bubble#3 (Commodities Bubble) call - 1 of our Top 3 Global Macro Themes @Hedgeye for Q42012. It’s also what’s driving the shift in our model from growth slowing to stabilizing.


To put the market’s expectations for lower commodity prices in perspective:

  1. Total net long contracts are -43% below their all-time (Bernanke Bubble) peak of September 2012
  2. Gold net long contracts (down -13% last wk to 112,421) hit their lowest level since August 2012
  3. Corn contracts are getting cobbed, down another -22% last week to 175,631 (lowest since July 2012)

Now maybe the Policy to Inflate thing gets plugged back into your life in January, but the probability of Qe6 superimposing new all-time highs for commodity inflation versus those that have been bubbling up for the last decade is relatively low.


Across the board, our risk management signals concur:

  1. CRB Commodities Index = 294 (flat last week in an up tape for Global Equities) remains in a Bearish Formation
  2. Gold = down another -2.2% last week to $1657/oz, snapped our long-term TAIL risk line of $1671
  3. Silver = down another -7.1% last week led losers in the commodities complex, followed by Palladium at -4.8%

Yes, this is me pushing my thesis for Strong Dollar = Strong America. With the US Dollar making a series of higher long-term lows (up for 9 of the last 13 weeks), that’s the most bullish thing I can tell you this Christmas. Let free-market prices win the day.


But for just one fleeting moment, the answer seemed to clear…

Heaven’s not beyond the clouds, it’s just beyond the fear.” (Garth Brooks, Belleau Wood)


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $106.20-109.59, $3.52-3.58, $79.09-79.99, $1.31-1.33, 1.70-1.85%, and 1, respectively.


Merry Christmas and Happy Holidays to you and your loved ones,



Keith R. McCullough
Chief Executive Officer


All Is Calm - Chart of the Day


All Is Calm - Virtual Portfolio


The Macau Metro Monitor, December 24, 2012




Singapore's inflation moderated to 3.6% YoY in November, down from 4% in October and lower than what economists had expected.  The November core inflation rate which excludes transport and accommodation also fell to 2% last month, from 2.2% in October.  Persistent tightness in the labour market will support wage increases in 2013. 

The central bank has forecast a full-year inflation of slightly above 4.5% this year and between 3.5% and 4.5% in 2013. 

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Human Action

This note was originally published at 8am on December 10, 2012 for Hedgeye subscribers.

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



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 $1684-1713, $106.51-109.53, $80.11-80.67, $1.28-1.30, 1.58-1.65%, and 1406-1419, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Human Action - Chart of the Day


Human Action - Virtual Portfolio

Is PM Mispriced Growth?

Among the questions we have received post initiation one of the more consistent is “why no love for PM?”  More specifically, “isn’t PM mispriced versus other large cap staples companies?”


Our response takes us back to one of our favorite quotes from an underappreciated character on “The Simpsons”, Reverend Lovejoy:


“Ooooh short answer yes with an if, long answer no with a but…”


So, short answer, yes PM is mispriced growth if we didn’t have concerns that 2013 consensus EPS estimates were too high.  We would prefer to have a clearer path to EPS upside as the quarters of 2013 are reported and as it currently stands, we are $0.08 below consensus for 2013 ($5.73 versus $5.81).  Our primary regions of concern heading into 2013 are Western Europe – admittedly not a new issue, but one that has displayed continued weakness with respect to both volume and profit and will likely remain a drag throughout 2013 despite some easy comparisons.  Also, Eastern Europe (part of Eastern Europe, Middle East and Africa in PM’s reporting structure) is a “watch out” for us as we have seen signs of incremental weakness among a number of companies, most notably the beer companies.


Is PM Mispriced Growth? - PM EPS Growth Progression

Long answer, no PM isn’t mispriced growth, but there are a number of companies, mostly notably large cap HPC names such as KMB and CLX that we would happily pair against a long position in PM over a longer duration, recognizing that there may be some hiccups around the PM quarters if our math is correct.  Top line growth is what garners a multiple in staples and where PM has delivered an average of 7.7% constant currency organic growth over the past eight quarters, KMB and CLX have been at 3.0% and 2.4%, respectively, on the same metric.  Yet, KMB trades at 15.0x 2013 EPS and CLX at 16.6x – PM trades at 14.6x consensus and 14.8x our number.  Even if EPS results for PM in 2013 more closely resemble the $5.59 number that KMB is currently expected to earn, the current stock prices are virtually identical and we feel very strongly that should not be the case.  Even PEP at 15.9x next year with an average top line of 5.9% doesn’t compare well to an investment in PM given the current relative multiples.   Also, to be clear, our view on the achievability of consensus estimates for either KMB or CLX is no more certain than our view on PM.


Is PM Mispriced Growth? - Revenue growth vs. PE

Dividend yield tells largely the same story, as CLX yields 3.46%, PM 4.00% and KMB 3.52%.  It appears that the market has decided to put a lower multiple on higher growth as well as having the asset that is faster growing in the long-term have the higher yield.  We aren’t quite there yet, but every once in awhile the market takes us back to Mugatu in “Zoolander” where he exclaims “I feel like I’m taking crazy pills!”


Bottom line, we can certainly abide by pair of PM against some other names that have garnered a multiple that we consider to be inappropriate versus those companies’s longer-term earnings growth profile, but we have concerns over how consensus has been modeled in 2013 for PM.


Robert Campagnino

Managing Director





Takeaway: With one statement - “we have been too protective about our margins” - the management of Darden declared war on casual dining.

With one statement - “we have been too protective about our margins” - the management of Darden declared war on casual dining. This not going to end well for anybody, but DRI has the most to lose.


Going forward, all of DRI advertising spending will focus on price point promotions and move away from “brand building” initiatives. Knowing what we know now, it looks clear why the company’s CMO jumped ship last month! Consumers will definitely “sea food” differently.


We believe that the company is taking a very big risk on the future of the company and there is a better-than-average chance it could end up being pivotal moment for the casual dining industry. We already know that the Red Lobster customer is transitory and only coming back consistently when the food is on sale; now the company will be training the Olive Garden customers to behave the same way. This is a difficult habit to coax consumers out of, once they have attained it. As our Chief Compliance Officer, Moshe Silver, likes to say, “it is much easier to make a mess than it is to clean it up”.


The company will be adding another 100 new store to this potential mess in FY2013 and likely another 90-100 in FY2014!


The massive discounting strategy they conveyed to the street is reactionary and defensive. We believe there are several important issues to consider when assessing the current strategy:


1. LACKING CREDIBILITY: Over the last two years DRI senior management team has proven they are not in sync with what the consumer wants!

2. CART BEFORE THE HORSE: DRI has not fixed the cost structure of the company, especially the middle of the P&L (food and labor costs) to effectively compete at lower price points.

3. NO PRICING POWER: Once you go down the road of discounting, it is difficult to turn back. Future inflation in input costs is felt more acutely as discounting increases.

4. MARGIN: How much margin will they need to give up before they see a sustained improvement in traffic? Do they have the ability to predict consumer behavior around the current promotions?

5. BLOATED COST STRUCTURE: As a multi-brand restaurant company DRI carries significantly more infrastructure and growth related expense. It should also be noted that the top six executives at DRI took home over $23 million in compensation.


In FY1H13 DRI earned $1.13 on $3.994 billion in revenue. So what does the company strategy of significant discounting mean for FY2H13? We have the company earning $2.00 on $4.485 billion in revenues. The street consensus is for the company to earn $2.27 on $4.60 billion in revenues. As we have seen over time with DRI conformation bias exists in the numbers; the street has historically given management the benefit of the doubt. We are taking the other side of that trade.


Bottom line, we think uncertainty overwhelms the ability of the street or the company to know how this new tack will be reflected in the company’s results. We would suggest that more pain than expected, not less, is likely before the company’s repositioning is complete.


In six months, every management team in the casual dining space is going to be wishing that DRI would go back to raising prices 2-3% every year and driving customers away!


Howard Penney

Managing Director


Rory Green

Senior Analyst



Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.