As expected, the MCD management team did not share much at the GS conference.  The initial comments from the presentation suggest that they believe that the economy is to blame for the difficult sales trends. 


Despite a flurry of recent initiatives regarding new items and menu changes that might give support to some more optimistic forecasts, we remain comfortable with our thesis.  In fact, we’ve had a rather bearish take on this news, as we believe these initiatives could add to the operational complexities of McDonald’s stores.  Please see our recent note “MCD: A Pending Mighty Disaster” for more thoughts on this topic.


When questioned, management brushed aside any complexity concerns surrounding the Mighty Wings limited-time offer, citing their focus on training and hiring initiatives in anticipation of the rollout.  They also appeared excited about a “clever tie-in” with the NFL that should help promote the product.


On Tuesday, MCD reported that sales were solid in Europe despite a very difficult year-over-year comparison (+3.1% in August ’12).  The results benefited from continued strong performance in the UK and Russia, but France also improved. Importantly, France benefited from the Ramadan shift, while the UK benefited from the introduction of Smoothies & Frappes. 


Highlighted by the chart below, McDonald’s introduction of Smoothies & Frappes in the U.S. only had limited appeal and, we can argue, masked a decline in the core sandwich business.







Howard Penney

Managing Director


Don't Get Piggy

Client Talking Points


Japan up a beep (only one down day for the Nikkei so far in September; Up +39.6% year-to-date). China and KOSPI both punch fresh TREND highs, and the two laggards (India and Indonesia) stopped going up after Indonesian FX (Rupiah) has its worst day in three weeks. This is a good spot for a breather for anything you like long side. It's also a good spot to re-short some indices too.


I'm selling my long German Equity (EWG) position on the immediate-term TRADE overbought signal. There’s no fundamental reason to sell it. It’s just called managing the immediate-term risk of a trade-able range. The FTSE and MIB are both overbought within their bullish intermediate-term TRENDs here too.


The S&P 500 is up +3.12% for the month-to-date. Yet another one of the 2013 bear cases bites the beta dust. Meanwhile, oil corrected in a hurry down -3.5% from the highs. The VIX? It's down -18.4% since people sold fear again in August. That’s really the story of the year, fade the fear – but also have the discipline to sell some at the high end of the risk range on the recurring squeezes.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.


Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road.


Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road


Mostly every Global Equity market we like is now immediate-term TRADE overbought; dont get piggy



"Time is passing. Yet, for the United States of America, there will be no forgetting September the 11th. We will remember every rescuer who died in honor. We will remember every family that lives in grief. We will remember the fire and ash, the last phone calls, the funerals of the children." -President George W. Bush, November 11, 2001


#RatesRising? It isn't just a USA thing; 10-year Bund is up +40 basis points month-over-month to 2.08%; Gilt is up 56 basis points month-over-month to 3.02%.






Universal Entertainment received a letter dated August 23rd from the Philippine Economic Zone Authority clearing it of wrongdoing in obtaining land for its Manila casino-resort.



Macau's government budget surplus is on track to exceed 2012's MOP72.8BN by month end. At the end of August, the cumultive surplus stood at MOP68BN, over 30% higher than the YTD surplus from a year ago. 




September 11, 2013

September 11, 2013 - dtr



September 11, 2013 - 10yr

September 11, 2013 - spx

September 11, 2013 - nik

September 11, 2013 - dax

September 11, 2013 - dxy

September 11, 2013 - euro

September 11, 2013 - oil

September 11, 2013 - natgas



September 11, 2013 - VIX

September 11, 2013 - yen
September 11, 2013 - gold

September 11, 2013 - copper

Deafening Drops

This note was originally published at 8am on August 28, 2013 for Hedgeye subscribers.

“The noise can be deafening.”

-George Gilder


When he wrote that in Knowledge and Power, Gilder was referring to government interference (in markets). He also went on to make the critical, but often overlooked, behavioral link between simple market signals (like interest rates) and central planning noise.


“Interest rates are critical for information-theory economic analysis because they are an index of real economic conditions. If the government manipulates them, they will issue false signals, breeding confusion that undermines entrepreneurial activity.” (pg 24)


That pretty much sums up what I think all of us are struggling with today. Inclusive of yesterday’s drop in interest rates (oil ripping new highs is an economic headwind), the bond market is becoming as good a leading indicator of the slope of US economic growth’s TREND as anything I can back-test.  At the same time, we have to deal with the deafening impact of central planning commentary.


Back to the Global Macro Grind


Yesterday’s 1-day drop in the US stock market was deafening too. It came on a legitimate Information Surprise (Oil ripping on Syria) and the rotation you’d expect to see when expectations for growth fall (bond yields and US growth stocks have a positive correlation).


How did that deafening drop (there was no volume) fair within the context of the Top 3 biggest 1-day drops since April?

  1. June 20th, 2013 = SP500 -2.5%
  2. April 15th,2013 = SP500 -2.3%
  3. August 28th,2013 = SP500 -1.6%

#EOW (end of world) type stuff, I know.


In both of the prior 1-day freak-outs (which were bigger in terms of both magnitude and volume), fear spiked (front-month VIX) to higher levels than what you saw yesterday too. In other words:

  1. US stocks keep making higher intermediate-term TREND lows
  2. US Equity Volatility keeps making lower intermediate-term TREND highs

That’s why we do the multi-duration risk management thing. How else are you going to contextualize the immediate-term TRADE noise of Mr. Market if you don’t have anything to signal the intermediate-term TREND?


Since we are raging bears on Emerging Market Equities (EEM), this morning’s discussion is more focused on how to interpret US market noise (US markets include big stuff like the currency and bond market). Here are the other two Big Macro Signals I care about most:

  1. US Dollar Index grinded out another higher-low (versus the recent FEB and JUN lows) and held long-term TAIL support
  2. US 10yr Treasury Yield (2.73% this morning) held both TRADE (2.69%) and TREND (2.44%) levels of support = higher-lows

And yes, the TREND is your less noisy friend, until he/she isn’t – I get that. I also get that Oil prices steadily rising from here could cut US consumption growth in half, sequentially. So there’s a lot to think about (including whether this will be the YTD high in oil altogether).


But while I think, I have to try hard to take the emotion out of the decisions I make on what to do next. That’s why my immediate-term TRADE signals determine my short-term risk management decisions. I’ve tried the feel thing – and it ends up not feeling good.


When running money in a bull market like this for US growth stocks, not selling the lows is one of the most important decisions you can make. What if you read Zero Hedge, capitulated to your emotional state, and sold the April 15th and/or June 20th lows?

  1. By April 18th (3days later), the SP500 locked in another higher-YTD-low of 1541
  2. By June 24th (3days later), the SP500 locked in another higher-YTD-low of 1573

Can you wait 3 more days to see if this noise settles? Or are we all high-frequency blog freaks now? By August 2nd 2013 (when the SP500 hit its all-time closing high of 1709) you’d have been up +11% and/or +8.6% in SPY, respectively. Just saying.


Maybe the world is going to end this time. I started making that call around this time in 2007 (and it almost did end). But this is not 2007, and not one of the people and/or risk management processes that called it last time is making that call this time either.


Maybe everyone who didn’t call the 2007 topping process is going to nail it this time. But maybe not. All I can tell you is that the noise of #PTCs (professional top callers) since April of 2013 has been deafening.


Our immediate-term Risk Ranges are now as follows:


UST 10yr Yield 2.70-2.93%

SPX 1621-1666

EEM (Emerging Markets) 36.91-38.49

VIX 15.05-18.98
USD 80.91-81.73

Brent 110.69-115.98


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Deafening Drops - CHART

Deafening Drops - vp

VIDEO: Hedgeye's Best Ideas: Kinder Morgan


Hedgeye Risk Management Senior Energy Analyst Kevin Kaiser speaks with Hedgeye Managing Director Todd Jordan about his concerns regarding energy behemoth Kinder Morgan.

Kaiser illuminates some of the key points from his rigorous, in-depth research on North America's largest oil and gas pipeline and processing company which he says is "misunderstood and mispriced."

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