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Buying Gold? Yes.

Client Talking Points


What’s bad for the Buck and US Rates is good for the Europeans. Both the Euro and Pound bounced right where they should have this morning ($1.34 and $1.58 TREND supports, respectively) on another round of rock solid European growth data for October. UK Construction PMI moved up to an impressive 59.4 October, a new cycle high.


I bought Gold for the first time in a year on Friday. The immediate-term TRADE correlation between the US Dollar and Gold is -0.78, so I shorted the Dollar for the first time in over a year too. Shame on Ben Bernanke’s no tapering policy. It should slow growth back to 2% from 2.5% first, then we can decide from there (on the margin that matters).


If A) US GDP growth slows on Thursday and B) the European Central Bank doesn’t give into these ridiculous “rate cut” talks on Thursday, I think USD Down, Rates Down (or I wouldn’t have bought Gold and Treasuries on Friday). There's no support for 10-year yield to 2.55%, then 2.27% below that. Keep your head up out there.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

In line with our #EuroBulls Q4 theme, we’re long the German DAX via the etf EWG. With European fundamentals showing improvement off low levels, we expect outperformance from Germany, and in turn for the region’s largest economy to pull the rest of the region higher. ECB policy remains highly accommodative and prepared to aid any of its sovereign members to preserve the Union. Inflation remains moderate and fundamentals are positive: confidence readings and PMIs are up since June, with factory orders trending higher and retail sales inflecting to push the trade balance higher. Finally, the unemployment rate has held steady at the low level of 6.9%, all of which signals to us that Germany’s economic climate is ramping up.


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.


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


FX: Euro and Pound bounced right where they should have (off @Hedgeye TREND supports vs USD) @KeithMcCullough


“You have enemies? Good. That means you've stood up for something, sometime in your life” -Winston Churchill


Hyperinflation (Currency Burning) Watch: Venezuelan stocks up +23.9% week-over-week to +454% year-to-date.


Takeaway: Below we rank our top read notes from October. Click the note title for access.


  1. 10/15/13 – DRI: A Generational Opportunity
  2. 10/03/13 – Potbelly (PBPB): The Latest Restaurant IPO
  3. 10/14/13 – Casual Dining Weakness Persists
  4. 10/15/13 – CAKE: The Party Is Over, For Now
  5. 10/21/13 – PNRA: Stage 1 Denial
  6. 10/25/13 – MCD: McDonald’s Obsession With Starbucks
  7. 10/2/13 – MCD: Mighty Disaster Part II
  8. 10/23/13 – PNRA: The Pace Of Change?
  9. 10/21/13 – MCD: Entering Stage 1 Panic?
  10. 10/18/13 – Dismantling Darden: Hedgeye vs. Barington

Feel free to contact us if you have any questions, or would like to discuss any of our work in more detail.




Howard Penney

Managing Director


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Gold's Silver Lining

“The silver of Potosi helped to destroy Spain.”

-Jack Weatherford


I bought Gold for the first time in over a year on Friday. Gold’s perverse, but modern, silver lining is what it’s always been – an un-elected body of central planners (the US Federal Reserve) having the unlimited and un-checked power to interrupt this thing called gravity (also known as the economic cycle) via A) currency devaluation and B) rate repression.


Down Dollar, Down Rates = Gold Up. And the precise opposite of that has been occurring for the better part of a year now (so we were shorting Gold on all bounces because expectations of getting the Fed out of the way (tapering) was perpetuating the always progressive two-stroke engine of US #GrowthAccelerating: #StrongDollar + #Rates Rising.


Like the fall of the hoped-to-be “New Spanish World Empire” of the 16th century, most government expectations tend to fall on Shakespeare’s sword of un-planned heartache. “Spain, the greatest beneficiary of the Potosi silver soon bankrupted itself. By 1700, Spain was reduced to a minor power of neither economic nor political importance.” (Indian Givers, pg 25)


Back to the Global Macro Grind


“Potosi was the first city of capitalism, for it supplied the primary ingredient of capitalism – money.” –Jack Weatherford


You won’t read that every day. And you won’t see me take my asset allocation off of 0% to both Commodities and Fixed Income every day either:

  1. COMMODITIES: 0% asset allocation for 165 days
  2. FIXED INCOME: 0% asset allocation for 100 days

Many did and did not agree with my risk managed decision to not lose money in each of those major investing styles. That’s why there are many different YTD performance numbers for Global Macro hedge funds in 2013. Not losing money in Gold was a choice.


Today, drum roll, I’m going to get all wild and crazy and take up my asset allocations to COMMODITIES and FIXED to 6% each:

  1. Cash = 34%
  2. Foreign Currency = 26% (or 79% of my max to an asset class)
  3. International Equities = 21% (2/3 of my max)
  4. US Equities = 6% (21% of my max)
  5. Commodities = 6% (21% of my max)
  6. Fixed Income = 6% (21% of my max)

“Of my max” means % of the max allocation I’d ever make to any asset class as a % of my total capital (which is 33%)


Why 33%? Why 60/40 equity/fixed %’s? Why have a rules based system that locks you into losing money for the sake of being “diversified” in a nice little pie chart that got blasted in June of 2013 when Gold and Fixed Income allocations were going haywire?


My Mom taught me to think for myself. My Dad taught me to not eat yellow snow. And when I wrote my senior thesis at Yale about Buffett, he taught me Rule #1 about investing – “don’t lose money.”


Despite all my faults as an investor, that’s the one thing I have somehow figured out since going to the buy-side at a hedge fund at the end of the internet bubble in the year 2000  - don’t lose money.


The other thing we’re better than bad at here @Hedgeye is risk managing the direction of the US Dollar (35 for 39 all-time on long/short USD position timestamps = +89.7% batting avg). And to get Gold right, you need to get the US Dollar right.


Currently, on our immediate-term TRADE duration, the US Dollar has an inverse correlation to Gold of -0.78. In other words:

  1. If US Dollar Index fails at intermediate-term TREND resistance of $80.98
  2. And Gold can hang in here and make another higher-low of 2013

Then I think I’ll have made the right move from an immediate-term TRADE perspective.


Another lesson I have learned the hard way in this business is to keep a TRADE a trade. That said, all great investments start somewhere and buying Gold on the first signal is what it is. For being long Gold to be an investment TREND, I need two things:

  1. Gold to breakout of this bombed out base > $1342/oz (it’s still crashing at -22.1% YTD)
  2. US 10yr Bond Yield to remain below this newly established TREND line of 2.63% resistance

I still think the odds of Bernanke and Yellen having my back on this at the December meeting are high (no tapering). Therefore I think the odds of this mini-cycle high of 2.5% US GDP being an intermediate-term top are heightening as well.


Again, to review what our GIP (Growth, Inflation, Policy) model is currently signaling:

  1. #StrongDollar + #RatesRising = US GDP accelerating to 2.5-3%
  2. Devalued Dollar + #RatesFalling = US GDP #GrowthSlowing back to 2%, then 1-1.5%

So, if you want the USA to become like Spain in 1700, beg for more Bernanke, Down Dollar, and Rate Repression. It’s a really cool and coy thing to do, provided that you don’t explain it to anyone that this is really why you want to be long Gold’s Silver Lining.


Our immediate-term Risk Ranges are now as follows:


UST 10yr Yield 2.55-2.63%


USD 80.13-80.98

Euro 1.34-1.36

Pound 1.58-1.60

Gold 1311-1341


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Gold's Silver Lining - Chart of the Day


Gold's Silver Lining - Virtual Portfolio

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SJM Holdings Ltd extended its lead in the gaming market last month.  SJM Holdings had 26% GGR share and Galaxy had 21% share.  Sands China fell to third place after its share shrank by two % points to 20%.



Kazuo Okada’s Universal Entertainment Corp has signed a deal with a Philippine developer that appears to be meant to calm a legal storm over a US$2-billion (MOP16 billion) gaming project in Manila.

Century Properties Group Inc signed a deal to develop 5 hectares of a 44-hectare site earmarked for an entertainment and gaming project. It also acquired a 26% interest in the Universal subsidiary that controls the Manila land.  Universal’s move appears to be meant to undermine allegations that it broke Philippine law by setting up dummy companies to get around a rule that limits foreign ownership of land to 40%.

In a separate deal, Universal sold another parcel of shares in its Philippine subsidiary to First Paramount Holdings 888 Inc.
The combined effect of both deals means 60% of the project is in Filipino hands, Universal said.

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