Fear's Furnace

“Paris is now become a furnace of politics.”

-Thomas Jefferson


In the beginning, Thomas Jefferson fell in love with France. Eventually, he started falling out of love with some of her socialized parts. The aforementioned quote came from a letter he wrote to a friend in 1788 and went on to add that “all the world is run politically mad. Men, women, children talk of nothing else.” (Thomas Jefferson: The Art of Power, page 215)


Only 225 years later, free-market capitalists living in Paris probably still feel the same. Jefferson’s timing was, as usual, prescient. On July 14, 1789, The People stormed the Bastille Saint Aintone and the French Revolution went full throttle. All the while, George Washington was officially named the 1st President of the United States.


Imagine Americans were paralyzed by France’s politics then inasmuch as our global crisis-seeking media is now? That’s no way to live. There’s always a crisis somewhere in this world. There’s a crisis developing for those calling for a US crisis too.


Back to the Global Macro Grind


Put another way, there is a crisis in the crisis. And, no, I am not saying that you shouldn’t be shorting countries whose economies have been socialized and compromised by modern Marxist regimes. If you are bearish on Italy, just short Italy.


Quantitatively speaking, Fear’s Furnace appears to be alive and well in Europe. Consider the following signals:

  1. The Euro remains in a Bearish Formation (Bearish across all 3 of our core durations: TRADE, TREND, and TAIL)
  2. Germany’s DAX just broke its immediate-term TRADE line of 7865 support (this week); TREND support = 7695
  3. Italy’s MIB Index (-6% YTD) has been bearish TRADE and TREND for over a month now (Italian CDS now > 300 too)

So that’s bad – for them. But is everything that’s bad for them bad for you? Hopefully you aren’t reading this letter from Milan. But if you are, A) I hope it’s from vacation and B) that great cup of coffee you are drinking is going to get more expensive before you finish it.


In Euros, that is.


When your currency starts to get torched by politicians, you probably should start freaking out. If people really start freaking-out about Europe, what they are going to do with their fiat moneys next is more of what they are already doing – buying American:

  1. European investors will buy US Dollars
  2. European investors will buy US Stocks
  3. European investors will buy US Treasuries

And while the last part of that is something I probably need to risk manage more aggressively now (the fund flow bid to US Treasuries), the first two parts of that (#StrongDollar, Strong US Equities) is more of what we continue to like anyway.


The reason why this is confusing consensus is that for the last 3 years, this is not the way that the Global Macro market worked. To review: 2010-2012 was the US Dollar Debauchery period of The Ben Bernank (i.e. the period where the entire capital market world learned to just front-run the poor guy’s Policies to Inflate).


Today, the marginal debaucherer of currency is Japan – and the to-be Bernanked (cutting rates to zero) zone is Europe. That, in turn, puts further downward pressure on Euros and Yens relative to Dollars – and puts purchasing power in the back pockets of Americans.




Or non, mes amis? Not so cool for those using the old correlation playbook of 2010-2012 either:

  1. Dollar Up = Stocks and Commodities Down, globally
  2. Dollar Down = Stocks and Commodities Up, globally

That’s when the game was less hard. Remember, “get the Dollar right and you’ll get a lot of other things right”? That’s still right, but in a completely different way:

  1. Dollar Up = US and Asian Stocks Up
  2. Dollar Up = Brazilian, Russian, and Emerging Market Stocks Down
  3. Dollar Down = Commodities and Basic Materials Stocks Up

I know. Up, Down – all around. This is enough to make a man mad. Just be thankful you aren’t trying to trade S&P futures on what some French dude down on the Eastern edge of Paris was whispering to the Old Media’s twitterati , circa 1789.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST10yr Yield, VIX, and the SP500 are now $1, $106.75-110.48, $82.79-83.66, $1.27-1.29, 1.84-1.96%, 11.31-14.29, and 1, respectively.


Happy Easter Weekend to you and your families,



Keith R. McCullough
Chief Executive Officer


Fear's Furnace - Chart of the Day


Fear's Furnace - Virtual Portfolio


TODAY’S S&P 500 SET-UP – March 28, 2013

As we look at today's setup for the S&P 500, the range is 14 points or 0.57% downside to 1554 and 0.33% upside to 1568.               










  • YIELD CURVE: 1.60 from 1.60
  • VIX  closed at 13.15 1 day percent change of 2.98%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: GDP Q/q, 4Q revised, est. 0.5% (prior 0.1%)
  • 8:30am: Personal Consumption, 4Q revised, est. 2.1%
  • 8:30am: GDP Price Index, 4Q revised, est. 0.9% (prior 0.9%)
  • 8:30am: Core PCE Q/q. 4Q revised, est. 0.9% (prior 0.9%)
  • 8:30am: Init Jobless Claims, March 23, est. 340k (prior 336k)
  • 9am: NAPM-Milwaukee, March 56.0 (prior 56.5)
  • 9:45am: Chicago Purchasing Mgr, March, est. 56.5 (prior 56.8)
  • 9:45am: Bloomberg Consumer Comfort, March 24 (prior -33.9)
  • 10am: Freddie Mac 30-yr mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: Kansas City Fed Manuf., March, est. -3 (prior -10)
  • 11am: Fed to purchase $4.25b-$5.25b notes in 2017 sector
  • 11:30am: U.S. to sell $29b 7Y notes
  • 1pm: Baker Hughes rig count


    • Obama event w/ law enforcement officials, concerned mothers on protecting children from gun violence
    • 9am: U.S. Chamber of Commerce aviation summit, w/ speakers incl Boeing CEO James McNerney, FedEx CEO Frederick Smith, US Airways CEO Douglas Parker, United Continental CEO Jeff Smisek
    • 3pm: Bloomberg New Energy Finance’s Alejandro Zamorano Cadavid, Rand’s James Bartis, DuPont’s Jan Koninckx, Defense Dept’s Adam Rosenberg discuss future of biofuels in Defense Dept, hosted by Atlantic Council


  • AMR, US Airways merger approved while CEO severance pay denied
  • Cyprus opening banks amid cash withdrawal limits
  • JPM tells SEC new VaR model didn’t require prior disclosure
  • JPM outlook raised to stable by S&P
  • Swiss Re settles life contract dispute with Berkshire Hathaway
  • T-Mobile’s MetroPCS deal rejected by investor-advisory firm
  • D.E Master Blenders in discussions to be acquired by Benckiser
  • Google said to plan to make digital glasses in U.S. w/Foxconn
  • SAC seen facing smoother road to SEC accord approval than Citi
  • Clearwire to tap another $80m in financing from Sprint: Reuters
  • Ford forecasts $300m South America loss in 1Q
  • South Korea announces stimulus after lowering growth outlook
  • BOJ’s Kuroda vows to continue easing until 2% target achieved
  • German retail sales unexpectedly increase for a second month
  • Boeing defense sales gain 38% as rivals feel pinch of U.S. cuts
  • Norwegian Cruise, PBF Energy, Zoelis Join Russell 1000
  • Last trading day of 1Q; mkts closed for Good Friday holiday tmw
  • BOJ Meeting, U.S. Jobs, Final Four: Wk Ahead March 30-April 6


    • Blackberry (BB CN) 7am, $(0.30) - Preview
    • Mosaic (MOS) 7am, $0.88
    • Commercial Metals (CMC) 7am, $0.18
    • Finish Line (FINL) 7am, $0.74
    • Signet Jewelers (SIG) 7:30am, $2.09
    • UTi Worldwide (UTIW) 8am, $0.13
    • GameStop (GME) 8:30am, $2.09
    • B2Gold (BTO CN) 8:44am, $0.05
    • Accenture (ACN) 4:01pm, $0.97


  • Caroline Silver Mines Gold at Moelis Leading NYSE to Sprecher
  • Milk Rout Ending on Worst N.Z. Drought in 30 Years: Commodities
  • Yen’s Slump Revitalizes Commodities From Gold to Rubber in Tokyo
  • WTI Trades Near Five-Week High as U.S. Refiners Boost Operations
  • Gold Swings Between Gains and Losses Amid Record ETP Decline
  • Hunt Becomes Billionaire on Bakken Oil After Silver Bankruptcy
  • Wheat Climbs to Near 5-Week High as Cold Weather Threatens Crop
  • Rebar Falls in Shanghai on Concerns Over China’s Property Market
  • Oil May Rise to $100 on Fibonacci Support: Technical Analysis
  • LME Copper Stockpiles Rose 78% in First Quarter, Most Since 2005
  • Maersk Says China Effort to Boost Consumption Will Help Shipping
  • U.K. Developing Livestock Vaccine That May Ease Global Shortage
  • Sumitomo Metal Mining Looks to Laos, Cambodia for Gold Expansion
  • Copper Falls for Second Day on Europe Debt Concern: LME Preview






















The Hedgeye Macro Team










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Takeaway: With so much data flow on housing sometimes it's tough to keep track of it all. We think this image tells the story well.

Keeping It To 1000 Words ...

We like the chart below a lot. It tells the current story of housing succinctly in a way that everyone can easily understand. The x-axis shows inventory of homes for sale in millions of units monthly back to 2001. The y-axis is the pending home sales index reading. The bubble size shows the next twelve months home price change based on those levels of supply and demand. Not surprisingly, high demand coupled with low inventory produces big blue bubbles (strong home price appreciation), while the opposite produces big white bubbles (strong home price depreciation).


The obvious takeaway is that we're currently in a very favorable dynamic for prices, as shown in the orange circle. The orange circle shows current inventory and volume, but for bubble size, we've used LTM (as opposed to NTM) price change, which was +9.7% through February 2013 according to Corelogic. Note that the orange bubble is smaller than most of the other bubbles in the same area, suggesting price appreciation may accelerate from here.


Another takeaway is the inverse relationship between supply and demand. Inventories are negatively correlated with demand, which might seem at odds with recent commentary in the market about how low inventories are holding back transaction volume growth. Consider the range of volume that has accompanied the current level of supply historically. It's produced a volume range on the pending home sales index of 96 to 131. Currently we're near the low end of the range at 105. In other words, we've seen sales activity levels as much as 25% higher than they are today based on the same level of inventory, so we don't buy the NAR argument that it's inventory holding back volume. That said, there are likely other factors such as more stringent underwriting, which we consider a good thing.


HOUSING - BUBBLE CHARTS - bubble chart


Joshua Steiner, CFA

Athletic Sales: Hanging Tough

Takeaway: Last week's athletic sales were consistent with the down-tick we saw in broader retail, but that's not a reason to worry.

This note was originally published March 27, 2013 at 15:04 in Retail

Last week we saw a sequential downtick in both athletic apparel and footwear, which was fairly consistent with the tough week that retail had in aggregate. In fact, it was not a bad showing at all given that the ICSC numbers put up the biggest sequential slowdown relative to prior-year levels in at least two years. The saving grace for both apparel and footwear is that price point integrity remains extremely high, with footwear (Average Sales Profits (ASPs) up in the +10% range, and apparel up in the teens. A negative swing in ASPs would likely coincide with heavy promotional activity -- and we're not seeing it.


No surprises as it relates to winners and losers by brand. Nike and Jordan still dominating. Adidas and Reebok still trying to find a bottom, and Under Armour making very slow and steady improvement.


Athletic Sales: Hanging Tough - sales1

Source: SportscanINFO, NPD, and Hedgeye 


ICSC RETAIL SALES INDEX (Sequential % Change -- 80 Store Sample)

Athletic Sales: Hanging Tough - icsc1

Source: International Counsel of Shopping Centers


Athletic Sales: Hanging Tough - sales1point5

 Source: SportscanINFO, NPD, and Hedgeye


Athletic Sales: Hanging Tough - share2

Source: SportscanINFO, NPD, and Hedgeye 

The TAST-BKW Divergence

We’ve been following the breakdown in Carrol’s (TAST) stock price with interest over the last few months, particularly relative to the strong performance of Burger King (BKW). Carrols is the largest franchisee of the Burger King system, globally, and is considered by BKW’s management team to be one of the best.  All of its Burger King stores are located in the U.S., within the Northeastern, Midwestern, and Southeastern states. 



Stock of BKW’s Biggest and “Best” Franchisee Not Doing Well


Share in TAST have been underperforming the broader market and BKW since late 2012.  Some obvious reasons spring to mind; for instance, TAST has missed recent earnings expectations twice in succession while BKW has beat.   Perhaps the turnaround at the 278 Burger King stores that Carrols acquired in 2Q from the Company (BKW) is proving more cumbersome than expected.  On its last couple of earnings calls, Carrols’ management team has highlighted issues with staffing, deferred capex, and lower restaurant-level margins at the acquired restaurants as impairing its ability to provide guidance for FY13. 


Anyone can tell a story but the chart below evokes several questions that we think are worth posing.

  • If Carrols is struggling, how is the rest of the U.S. and Canada franchisee base doing?
  • Is BKW trading on fundamentals or is there a “3G halo” that is impacting sentiment?
  • Are BKW investors more focused on the international opportunity?
  • Is Carrols a reliable read on the state of the North American business?

Depending on your view on these questions, it may be worth avoiding BKW on the long side.  We have our bias, which is negative, but thankfully backed away from our call to short the stock recently given what was clearly poor timing.  From here, we think it’s worth considering what, if anything, the chart below is implying about the state of the North American business.


The TAST-BKW Divergence - bkw tast div chart


Howard Penney

Managing Director


Rory Green

Senior Analyst

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