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Rational History

“Study history, study history. In history lies all the secrets of statecraft.”

-Winston Churchill


The last time we hit these levels in the SP500 was the worst time of my career. It was October 2007, and most of my big (bearish) macro ideas weren’t working yet. Our credit guys were blowing up our fund – and the performance pressure at Carlyle was palatable.


I’ll never forget. Whenever the market tells me I am wrong, I remind myself what it felt like to stay wrong for months at a time. It’s not personal. It’s just the score – and you have to find it within yourself to either change your mind, or live with the consequences.


Hedgeye’s history starts from my professional lows (I got fired in November 2007). I’ve been writing about every market move I make since. Rich Blake and I wrote a book in 2010 called Diary of a Hedge Fund Manager - From the Top, to the Bottom, and Back Again. Oh how history sides with charts that look just like that. The US stock market is back again, and (thank God) this time I didn’t get run over.


Back to the Global Macro Grind


“History will assign a neat set of circumstances for this past crash – the popping of the housing bubble, one created in large part by the US government-sponsored entities, Freddie and Fannie, exacerbated by an overindulgent credit derivatives market. Sounds right.”


“If history has proven anything, it’s that patterns repeat, again and again. Greed takes over and the self-fulfilling groupthink of the herd trumps rational process.” (pages 175-176, Diary Of a Hedge Fund Manager)


Rich and I wrote that then, but after 5 long years of making mistakes, I’m not sure what “rational” means. Isn’t rational what we call something after it plays out in full? It’s very rear-view looking.


Here’s what I used to think was rational:

  1. Every positioning that was working

Here’s what I thought was irrational:

  1. Every position that wasn’t working

I thought wrong.


Now that every mistake I make is made out loud for everyone to see (over 2,000 long/short positions #timestamped since 2008). What’s rational has a new definition. It’s called the score. And my team is accountable to you on that front, every day.


I’ve been on the road seeing a lot of clients so far this year. That really humbles me. Sitting across the table from money managers gives me a keen sense of performance pressures, positioning anxieties  - really all the things that used to dominate my day. This is an extremely difficult profession to perform in over long periods of time. That’s why we call it the grind.


Today, my day isn’t like it was when the SP500 was last testing 1565. Today, I have many different pressures. I have my wife and kids to provide for. I have 46 employees and their families that I am responsible for – and I have you.


So keeping it shorter today, I just wanted to thank you – every one of you who has taken the time to read my rants for the last half decade; every one of you who is a new relationship; everyone who has both challenged and supported me in making this happen.


While markets may not always seem “rational” relative to your positioning, you can always believe in some very core principles in sports, business, and in life. It’s important to define what’s rational to you on that front. Then surround yourself with more of that.


Our founding principles: Transparency, Accountability, and Trust. These aren’t principles I give lip-service to. They aren’t the secret to modern day #PoliticalClass statecraft either. They are a rational recipe for a team’s long-term success.  


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST10yr Yield, VIX, Russell2000, and the SP500 are now $1, $107.98-110.04, $82.05-83.12, 94.12-97.26, 1.99-2.11%, 10.72-13.41, 937-959, and 1, respectively.


Best of luck out there today and enjoy your weekend,



Keith R. McCullough
Chief Executive Officer


Rational History - Chart of the Day


Rational History - Virtual Portfolio


TODAY’S S&P 500 SET-UP – March 15, 2013

As we look at today's setup for the S&P 500, the range is 23 points or 1.10% downside to 1546 and 0.37% upside to 1569. 














  • YIELD CURVE: 1.77 from 1.77
  • VIX  closed at 11.30 1 day percent change of -4.48%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Empire Manufacturing, March, est. 10.00 (prior 10.04)
  • 8:30am: Consumer Price Index M/m, Feb., est. 0.5% (prior 0.0%)
  • 8:30am: CPI Ex Food & Energy M/m, Feb., est. 0.2%
  • 8:30am: CPI Y/y, Feb., est. 1.9% (prior 1.6%)
  • 8:30am: CPI Ex Food & Energy Y/y, Feb., est. 2.0% (prior 1.9%)
  • 8:30am: CPI Core Index SA, Feb.,, est. 232.482 (prior 232.108)
  • 8:30am: CPI NSA, Feb., est. 232.102 (prior 230.280)
  • 9am: Total Net TIC Flows, Jan. (prior $25.2b)
  • 9am: Net Long-Term TIC Flows, est. $37.5b (prior $64.2b)
  • 9:15am: Industrial Production, Feb., est. 0.4% (prior -0.1%)
  • 9:15am:Capacity Utilization, Feb., est. 79.4% (prior 79.1%)
  • 9:15am:Manufacturing Production, Feb., est. 0.5% (prior -0.4%)
  • 9:30am: Fed’s Fisher speaks on banking in National Harbor, Md.
  • 9:55am: U of Mich., March prelim., est. 78 (prior 77.6)
  • 11:00am: Fed to buy $4.75b-$5.75b notes in 2017-2018 sector
  • 1pm: Baker Hughes rig count


    • 9:45am: Sen. Homeland Security and Governmental Affairs panel hears from former JPMorgan CIO Ina Drew, Comptroller of Currency Thomas Curry on JPMorgan whale trades
    • 1pm: Rep. Mike Thompson, D-Calif., chair of Congressional Gun Violence Prevention Task Force, holds hearing on need for background checks.


  • Fed rejects Ally, BB&T capital plans; GS, JPM conditional OK
  • Banks disclose capital plans for divs, buyback
  • JPMorgan hid trades banned by Volcker, Senate probe finds
  • Former JPM CIO Ina Drew testifies today
  • Citigroup, others report monthly charge-offs, delinquencies
  • Obama presses China President Xi on computer attacks
  • Amgen, Novartis said to show interest in Hikma unit
  • Molycorp loss wider than est. amid rare-earth mine delays
  • BYD said to plan sale of up to 20% of Hong Kong stock
  • China bad bank said to plan $3b IPO in Hong Kong
  • CNPC to buy stake in Eni Mozambique assets for $4.2b
  • FOMC, Obama in Israel, U.K. Budget, HP: Wk Ahead March 16-23


    • Hibbett Sports (HIBB) 7am, $0.71
    • Carnival (CCL) 9:15am, $0.03


  • Top Robusta Grower Vietnam Seen Poised for Lowest Crop Since ‘06
  • Copper Bulls Retreat on Signs Chinese Demand Weaker: Commodities
  • WTI Crude Heads for Weekly Gain to Narrow Discount Versus Brent
  • Industrial Metals Head for Second Weekly Advance on U.S. Rebound
  • Gold Set for Weekly Gain Amid Signs of Physical Demand, Recovery
  • Soybeans Advance for First Time in Four Days as U.S. Sales Gain
  • Japan Aluminum Buyers to Pay Near-Record Fee on Recovery
  • Arabica Coffee Seen Extending Slump on Ample Brazilian Supplies
  • Silver Heads for $40 on China Solar-Power Push: Chart of the Day
  • Patriot Coal Asks Court to Modify Wages, Benefits
  • SHFE Copper, Aluminum Stockpiles Advance to Highest in a Decade
  • Japan May Open Beef in TPP Trade Talks, Former Adviser Says
  • Worst New Zealand Drought in 30 Years Weighs on Economic Growth
  • Oil May Fall as Rising Output Boosts Inventories, Survey Shows


















The Hedgeye Macro Team








In preparation for CCL's F1Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.







  • $0.08-$0.10 reduction in EPS


  • Renewed its authorization for the repurchase of up to $1 billion of its common stock and declared a quarterly dividend of $0.25 per share.  
  • The company has repurchased two million shares of Carnival Corporation common stock valued at $78 million since the start of fiscal 2013
  • The board approved a record date for the quarterly dividend of February 22, 2013 with a payment date of March 15, 2013. 




  • "There are a few unique items in 2013 that will be difficult to totally overcome which will push our unit costs higher. To begin with, we are expecting that Costa will fill their ships in 2013, which will lead to higher food and other unit costs associated with this higher occupancy. Also, as I have previously indicated, our insurance costs will be higher in 2013. Furthermore, we are anticipating a charge from a closed pension plan for certain British officers. Finally, we are investing in new market development initiatives in Japan, China and Australia including deployment decisions not yet announced. These unique factors alone in 2013 will drive up unit costs 2%."
  • "We expect in 2013 to use 24% less fuel per berth than we did in 2005....Just to be clear, the price of Brent was just under $110 a barrel when we determined our guidance."
    • "A 10% change in the current price of fuel excluding the impact of fuel derivatives represents a $0.30 per share impact for the full year. Please note that the impact of a 10% change obviously moves along with the price of fuel. Just to be clear, the price of Brent was just under $110 a barrel when we determined our guidance."
  • "For 2013, our protection begins when the price of Brent goes above $127 per barrel, and we begin to pay on our fuel derivatives when the price of Brent falls below $100 per barrel. With respect to FX movement, a 10% change in all relevant currencies related to the U.S. dollar would impact our P&L by approximately $158 million or $0.20 a share for the full year."
  • "We have two ships scheduled for delivery in 2013. The first is the 2,200 little berth, AID Astella, which will be delivered in March to our very successful AIDA brand in the German-speaking market. And the next one will be the new generation Royal Princess with 3,600 lower berths, which will be delivered sometime towards the end of May. These two ships together with three ships delivered during this past year 2012 will drive a 3.6% increase in cruise capacity in 2013."
  • "In Europe where we have a strong market presence, we anticipate continuing struggling economies during 2013, much as we experienced during 2012."
  • "In April 2013, Princess Cruises will introduce the Sun Princess to the Japanese market, and we have recently established a Carnival Japan sales and reservations office in Tokyo. With the announcement of the Sun Princess Japanese deployment, response from the market in Japan has been very strong and early signs are quite encouraging."
  • "In 2013, operating plan forecasts a nice increase in Costa Asia's profitability."
  • "During the last 13 weeks, fleet-wide bookings and pricing excluding Costa for the first three quarters of 2013, are at the same levels against the very strong booking volumes we experienced last year. Not surprisingly, Costa's pricing is still running behind last year's pricing, but we expect that to change once we lap January of 2012."
  • "For our North American brands, during the 13-week period, bookings are running slightly behind with slightly higher pricing. For EAA brands, the bookings excluding Costa are running at higher levels than last year at lower pricing. We are encouraged by the recent North American booking pattern, especially given consumer distraction from the elections and post-election consumer nervousness about the pending fiscal cliff, and the recent pattern excludes some negative impact on bookings from the Northeast resulting from the Hurricane Sandy. So we are hopeful that once the fiscal cliff issue is resolved and we get into January, and the wave season begins, consumers will start to turn their attention getting on with their lives and booking their cruise vacations." 
  • "For the full year, from a revenue yield forecast standpoint, we are forecasting a constant currency increase in yield in the range of 1% to 2%. North American revenue yields are forecasted to come in higher year-over-year, EAA yields are forecasted to be higher when we include Costa, which will have easier comps versus last year, but excluding Costa, EAA yields are forecasted to be lower on a year-over-year basis."
  • "Recovery of Costa is not a one-year issue, it's going to be multiple years; and we're forecasting a recovery of about half the yield deterioration, that's one item. Two is it's important to understand that we don't cycle through this until the second quarter because the first quarter was done, and the timing of first quarter in this instant versus competitors is very important because it did happen in the middle of our first quarter when the first quarter was done."
  • "If you start the first quarter being down in pricing for the Costa brand then the recovery in the back half for the year is a little bit heavier pricing."
  • "Caribbean looks strong now."
  • [Yield] "We do expect the second quarter to be up, but when you look at the full year guidance of 1% to 2%, that does imply let's say 2% to 3% yield increase in the back half of the year."
  • "We're starting to have – to see some effect of a weaker economy both in the UK and Germany, which we really didn't see a whole lot in 2012. So if there's anything different, I'd say we're a little bit more concerned. Although those brands are performing well, we are a little bit concerned going forward as the booking curve has tightened in those countries."
  • "The other thing that I haven't seen a lot of focus on is some of our competitors have talked about reducing capacity in Europe. But in reality, our two largest competitors together have increased the Northern Europe capacity by over 20% next year. So, the Northern Europe itineraries have tended to be the highest yielding itineraries in the European market, and that capacity increase will be interesting to see how that all plays out."
  • "All of our capacity increase in Europe next year is in Germany." 
  • [2013 cost assumption] "And if you take into account the prior year's ship incident cost, we would've been flat year-over-year."
  • "Our onboard trend overall around the globe for 2013 is very similar to 2012. 2012 we were up like a little over 2% and our guidance for 2013 is in the similar range with increases in all the major categories. Our operating companies have done a great job with some new initiatives and so we're expecting those to be driven higher as well."


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Swapping out BKW (short) for DRI (long) in Best Ideas List

We are removing short BKW from our Best Ideas as increasingly positive macro data and a strong quantitative setup are overshadowing the bearish aspects of Burger King’s outlook.  In BKW’s place, we are adding DRI on the long side.



Quantitative Setup

BKW has been moving against us recently as continuing gains in employment growth, particularly among younger age cohorts, overshadow the company-specific negatives. 


Swapping out BKW (short) for DRI (long) in Best Ideas List - BKW levels



Fundamental Setup

DRI: Pursuant to our Black Book, we now see an attractive risk-reward setup on the long-side of DRI.  We believe the downside in the stock is limited, even with continuing mismanagement, as the dividend yield continues to attract investors.  Despite this, we believe the board and broader investment community will agitate for change in the company’s C-Suite, either in terms of personnel or strategy or both.  We believe the stock price is currently trading at a discount to the value of the sum of the parts and expect that PE is likely sizing up the company presently.


BKW: Robust macro data continues to support stocks within the XLY and BKW is not an exception.  The issues we see in the business model, and the cash flow pressure on franchisees, are very real but positive macro data are taking center stage.  Given the importance of timing on the short-side, and our lack of visibility as to when the market will begin to discount the issues we know are at play in BKW, we do not see the stock as an attractive short.



Howard Penney

Managing Director


Rory Green

Senior Analyst



Takeaway: $TCB remains one of our favorite longs. It looks like Chicago is poised to make significant gains and TCB should benefit.

Thesis Continuing to Play Out

One of our primary bullish thesis points on TCB has been the recovery in housing, reflating its distressed collateral. The company has approximately 30% of its residential loan book in Illinois. To date, Chicago has been a laggard among major markets on a home price basis. We think that is likely to change in the coming 12 months. Consider the chart below.


We're showing inventory (x-axis) and volume (y-axis) changes on a YoY basis by market as of either January or February, depending on the market. Our work has shown that prices lag both demand (sales volume) and supply (inventory) in housing by 11-18 months. Currently, Chicago is one of, if not the strongest looking market on a prospective basis. The change in inventory over the past year is -41.6%, while the change in demand is +32.3%. Putting those two factors together creates a very powerful tailwind for the coming year. Given how much exposure TCB has to this market, we think they will be a primary beneficiary of Chicago's coming property recovery. For reference, the bubble size corresponds to the LTM change in home prices for that market. The best long plays are small bubbles in the top left quadrant, and vice versa.


Interestingly, we also ran across this article (hat tip bankstocks) that profiles the nascent Chicago recovery: Chicago Tribune


TCB: CHICAGO TAILWIND - bubble chart




Joshua Steiner, CFA


Eye-Catching Industrial Data

Takeaway: Here's how industrial production compares between the United States, Europe and Japan right now.

Industrials sector head Jay Van Sciver released a number of charts to his institutional clients earlier this week. Here's one we found very interesting. It compares industrial production in three regions: the United States, Europe and Japan. Van Sciver writes:


"The mid-month lull in data is a good chance to step back and look at global industrial activity.  Europe and Japan (note Japan is on the right axis) continue to show year-on-year declines in industrial activity.  Industrial activity in Europe and Japan has continued to contract, although Europe seems to have rebounded from year-end weakness.  Industrial activity in the US has remained positive but continued to slow as of January.  Given stronger US transport data so far in 2013, February and March data may improve."


Eye-Catching Industrial Data - Industrials


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