The Marshmallow Experiment

“Strength does not come from physical capacity.  It comes from an indomitable will.”

-Mahatma Gandhi


It is a quiet week at Hedgeye and in the markets this week.  Keith is spending some time with his family, so I’ve been handed the pen on the Early Look.  My family decided to take a little vacation in the Canadian Rockies for the holidays.  As a result, this note is coming to you from Banff, Alberta in all of its -30 degrees Celsius glory.


Similar to most vacations, I’ve taken an opportunity in the downtime to do some reading.  The most interesting book I’ve picked up this holiday season is called, “Willpower”, and was written by Roy Baumeister and John Tierney.  This is not one of those books in which the title has a double meaning - the book is in fact about will power. 


As the authors write, when psychologists attempt to identify the key traits that lead to positive outcomes in life they consistently come up with two: intelligence and self control.  Interestingly, the first trait, intelligence, is considered to be somewhat innate and researchers have thus far been unable to permanently increase a person’s intelligence.  Self control, on the other hand, can be improved.  In fact, according to Baumeister and Tierney, improving self control, or willpower, is the surest path to a better life.


One of the most interesting studies that support the relationship of willpower to positive life outcomes is the Marshmallow Experiment.  This experiment was conducted by Stanford psychologist Walter Mischel in 1972 and its original objective was to study how children learn to delay gratification.  In the experiment, four year olds were put in a room alone and told that they could eat a marshmallow whenever they wanted, or if they waited until the experimenter returned they would get two marshmallows.


Interestingly, Mischel’s daughters attended the school where the Marshmallow Experiment occurred, so he kept hearing anecdotes about the marshmallow kids from his daughters after the experiment had ended.  Naturally, this led Mischel to do follow up research on the children that had participated in the experiment. 


The follow up research showed that those four years olds who were able to hold off for the second marshmallow had SAT scores that were on average 210 points higher, earned higher salaries, had lower body mass indexes, and lower rates of divorce.  The results of this experiment surprised many academics, since prior to this experiment it was thought that childhood characteristics were not accurate predictors of future success.


Since discipline is an attribute of most great investors, I’m sure many of those men and women that went on to have great careers as stock market operators would have waited for the second marshmallow.  As for politicians, I’m not so sure.  If the most recent policy stalemate implies anything, it is that elected officials don’t really want any marshmallows.  The caveat over the last 24 hours is that President Obama has made the decision to end his Christmas vacation early and will return to Washington, D.C. today, thus the futures are up this morning.  Santa Claus Rally anyone?


So, even as President Obama is coming back in hopes of getting his proverbial second marshmallow, it remains very unlikely that the fiscal cliff gets resolved in 2012.  Senator Mitch McConnell, who has been a catalyst for prior bargains, is having none of it this year as he looks toward a re-election campaign in 2014 and recently stated:


“We don’t know what Senator Reid will bring to the floor.  He is not negotiating and the president is out of town.  So I don’t know what they are going to do over there.”


The Republicans in the House, of course, have also not been able to accomplish much. Speaker Boehner’s attempt before the holidays to get his members to support a tax increase on incomes over $1 million was not successful. The likely reality is that we are looking at a short term solution that allows Congress more time to negotiate.  If this reminds you of the definition of insanity, doing the same thing over and over again and expecting different results, it should.


The other major concern related to the influence of politicians is the debt ceiling.  According to the most recent data from the Treasury Department, the total outstanding U.S. government debt was $16.30 trillion as of December 21th.  This is just shy of the statutory debt limit of $16.39 trillion, a number which is likely to be violated in early January 2013.


So, where is Washington on resolving the looming breach of the debt ceiling? Well, according to InTrade, the online prediction market, the odds of the debt ceiling being raised by year-end are currently at 10%.  Similar to the fiscal cliff, our elected officials have decided to wait until both of these issues are directly upon us and volumes are back in the New Year.  I suppose this is a version of waiting for two marshmallows, albeit not a positive version.


Clearly, if we get past the inability of the politicians in Washington to put their partisan bickering aside and reach a workable solution to both the fiscal cliff and debt ceiling, then 2013 may shape up to be a positive year for equities.  As Keith has been writing, global growth seems to be bottoming (one of the more recent supportive global data points this week is Taiwanese Industrial Production hitting a nine month high on Monday), commodity inputs look to be on a deflationary path, and housing in the U.S. is poised for a parabolic recovery in terms of home prices.


The last point is critical for growth surprising on the upside in the U.S. as the value of the consumer’s home has historically shown a high positive correlation to their discretionary spending intentions.  A sustained housing recovery is the proverbial marshmallow that many U.S. focused investors have been patiently waiting for over the last five years.  Based on our models, 2013 could well be the year where that happens.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $106.21-109.77, $3.49-3.58, $79.13-79.99, $1.30-1.33, 1.70-1.85%, and 1, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Marshmallow Experiment - Chart of the Day


The Marshmallow Experiment - Virtual Portfolio

It Happened

This note was originally published at 8am on December 11, 2012 for Hedgeye subscribers.

“It would all be as if nothing had happened.”

-Michael Sallah & Mitch Weiss


That’s a quote from the end of the book I cited in last week’s Early Look,  Tiger ForceA True Story of Men and War. It’s a true story about American war crimes in Vietnam (Pulitzer Prize, 2004). Sadly, it’s how a lot of cover up stories involving the #PoliticalClass end.


“The Pentagon had decided that is was better to cover up what had happened. Let the country move on… there would be no press conferences. There would be nothing at all… and so it was.” (page 306)


To be fair, maybe our central planning overlords do know what’s best for the country. But maybe they don’t. All I know is that whether it’s Bernanke, Geithner, or Petraeus – as Canadian-American Patriots, it’s our responsibility to keep questioning.


Back to the Global Macro Grind


I’ve been questioning Bernanke and Geithner’s Keynesian Policy To Inflate via US Dollar Debauchery for 6 years. Even if they refuse to acknowledge what has happened publicly, proving this out has been a daily dog fight – and I’m proud to have done the work.


All-time highs in food and energy prices? It Happened in the last 6 years. It all happened under Bernanke and Geithner’s watch. Causality was both fiscal (debt/deficit spending) and monetary (money printing). They both deserve their #FairShare of the blame.


As Bernanke and Paulson promised “shock and awe” rate cuts and bank bailouts, the all-time high in Oil prices happened during the economic crisis (2008). Think about that. Then think about why Gold and Food prices hit their all-time highs in 2011 and 2012, respectively as net long positions in futures & options commodity positions hit all-time highs (twice) in 2012.


All-time is a long-time. It Happened.


Now, deflating these policy mistakes, and popping the bubble in commodity price expectations, perversely, becomes the American and Global consumer’s greatest opportunity to get a real-time tax cut. I like that. If you don’t take car service to D.C. to work every day on US tax moneys and have all your meals bought and paid for, you should too.


From a Global Macro perspective, I also like the following positions:

  1. LONG Consumption
  2. SHORT Commodities

Perma marketers can attempt to label me whatever they want. Our clients only pay us if A) we are helping them avoid blowups and B) we are helping them get things right. Never mistake “negativity” with reality. Reality is that, since we launched our Bernanke’s Bubbles Theme, it started happening – the commodity bubble has started to pop, faster, and louder.


Since Bernanke’s Top (September 14th, 2012 when he decided to print to infinity and beyond), the CRB Commodities Index (19 commodity basket) is down -8.7%. That compares with the SP500 that is now down only -3.8%. Some global equity markets (like Germany’s DAX, which is crushing the Dow YTD) are now up versus their early September highs.


The US Dollar, of course, has been up for 8 of the 11 weeks since Bernanke’s last decision. Tomorrow’s FOMC meeting offers him an opportunity to get out of the way. We’ll see if he has the political spine to do that now that the election is out of the way.


All the while, you have had great buying opportunities presented by the #PoliticalClass and their cliff babbling along the way. Our critics will be the last to remind you that on the Hedgeye Best Ideas Conference Call on November 15, 2012, 6 of our 8 Best Ideas were actually longs. Timing matters. And we have a great deal of pride focusing on it.


To review, our 6 LONG US Equity Ideas have returned, on average, +9.9% (versus SP500 +5% off the lows) during the same period:

  1. International Game Technology (IGT) – Todd Jordan idea = +14.3%
  2. C&J Energy Services (CJES) – Kevin Kaiser idea = +12.4%
  3. Jack in The Box (JACK) – Howard Penney idea = +10.4%
  4. Paccar (PCAR) – Jay Van Sciver idea = +6.5%
  5. Nike (NKE) – Brian McGough idea = +8.0%
  6. TCF Financial (TCB) – Josh Steiner idea = +4.8%

That’s not a victory lap. That’s just the score. In what most would agree is a tough alpha generation environment, It Happened.


And I think, for me at least, it’s really important to highlight all the great work the men and women who grind it out for us every day do. They are both resilient and adaptive. They are also transparent and accountable. And for that, I am thankful to have the opportunity to work alongside them each and every day.


Our immediate-term Risk Ranges (support and resistance) for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1684-1719, $105.99-109.26, $3.62-3.72, $80.01-80.51, $1.28-1.30, 1.59-1.65%, and 1405-1421, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


It Happened - Chart of the Day


It Happened - Virtual Portfolio


Today we bought International Game Technology (IGT) at $13.99 a share at 10:03 AM EDT in our Real-Time Alerts. IGT remains one of our top long ideas in gaming and we’re buying back the stock after selling it higher earlier this month. We like the entry price and are confident the stock can go higher.



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 80.47%
  • SHORT SIGNALS 78.68%

HOLX: Healing America

Hologic (HOLX) is one of our top long ideas for 2013 as the company’s long-term growth prospects outweigh potential near-term weakness.  Longer-term, the company could be one of the stronger beneficiaries from the Affordable Care Act beginning in 2014 from a growing pool of newly-insured individuals.  Those bulk of these individuals will be in the 18 to 64 age group, which utilizes women’s healthcare (HOLX’s core market) more than most other healthcare services. In the near-term, we’re concerned about a potential slowdown in utilization and the lingering effects of Hurricane Sandy. However, both of these factors are temporary in nature.


HOLX: Healing America - HOLX   MQSA Facilities   Unit Growth   4Q12 normal


HOLX: Healing America - HOLX   Tomo Tracker 12 15 12 normal

Implications of the Affordable Care Act; Healthcare Expert Call

Implications of the Affordable Care Act; Healthcare Expert Call - KenBur.dialin


The Hedgeye Healthcare Team, led by Tom Tobin, will be hosting an expert conference call Thursday, January 3rd, at 1:00pm EST featuring industry expert Ken Burdick, former Senior Executive of United HealthGroup and Chief Executive Officer and President of Blue Cross Blue Shield of Minnesota.

The call will analyze the impact of the Affordable Care Act across the healthcare industry, addressing the opportunities and risks associated with the implementation of the Patient Protection and Affordable Care Act. Ken Burdick has more than 25 years of experience in managed healthcare and his insight to the implementation of this act will be extremely insightful and constructive in managing risk across the managed care names. 


  • Will employers drop coverage? Penalties? Taxes?
  • Insurers versus exchanges
  • Consolidation among providers and payers  


Please dial in 5-10 minutes prior to the 1:00pm EST start time using the number provided below. A link to the presentation will be distributed before the call, if you have any further questions email .

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 939528#



  • Served as SVP of Medicaid Business at Coventry Health Care Inc. and managed its Medicaid and Behavioral Health (MHNet) businesses
  • Served as President and CEO of Blue Cross and Blue Shield of Minnesota
  • October 1995 to May 2009 employed by UnitedHealth Group
    • May 2008 to May 2009, served as the CEO of Secure Horizons, a Medicare business
    • November 2006 to May 2008, served as the CEO of United Healthcare's Commercial Business
    • April 2004 to November 2006, served as CEO of United Healthcare's Southwest Region and President of United Healthcare Public Sector
    • January 2000 to April 2004, served as the CEO of United Healthcare of Arizona
    • Prior to 2000, served as the head of the national underwriting organization for all lines of business and the general manager of the central Texas operation 
    • Served as the CEO and President of United HealthCare Services, Inc.
  • Director of United Biologics, LLC since October 2012
  • Serves as a Director of A.T. Still University of Health Sciences
  • Serves on the Board of Directors for Preferred Homecare and PASR, a non-profit Board advancing school readiness throughout Minnesota
  • Earned his bachelor's degree from Amherst College and a law degree from University of Connecticut School of Law  

EZPW: End Of The Golden Age

Pawn shops like EZ CORP (EZPW) are particularly sensitive to the price of gold. Think about how many people come in to pawn or sell gold jewelry or scrap it for cash. With the price of gold sinking week-after-week as the great commodity bubble deflates, pawns are getting hit. But it’s not just the price of gold that’s causing headaches for EZPW, it’s gold volumes. Since Q312, gold volumes have fallen off a cliff and have yet to recover. It’s a problem that will materially affect earnings going forward hence our short position on EZPW in our Real-Time Alerts. Another company that will bare the brunt of the decline in volumes is Cash America (CSH).


EZPW: End Of The Golden Age - EZPW GOLD VS VOL S normal


EZPW: End Of The Golden Age - ez slide normal

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