Punishing Her Currency

“The punishment process is as important as the reward system.”

-John Allison


As I quote one of my favorite post-2008-crash books, The Financial Crisis and The Free Market Cure (pg 177), I’m thinking more about the full body ache I have from our old-man hockey semi-final yesterday than what’s going on in the market. That’s not good.


Neither was the US stock market’s reaction to Friday’s US jobs report that “beat” expectations (must have been the weather). Stocks raged to all-time highs on the open, then got pancaked by midday. Newsflash: the monthly jobs report is a lagging indicator.


I didn’t have a good week, but it could have been worse. With the CRB Commodities Index +9.6% YTD (vs. the Dow -0.7%), this year’s Burning Buck rally in some asset prices has a lot more to do with #InflationAccelerating than anything else.


Back to the Global Macro Grind


While I am certain that if they had @CNBC Kiev, Ukraine would look just fine (Ukrainian currency crash has its stock market +29.8% YTD in Burning Currency terms); it’s not. Especially when a country’s currency is in free fall, her stock market is not the economy.


In Russian terms, Putin’s Ruble is crashing (-10% YTD) and so is his stock market (-24% since OCT and -19.7% YTD). Meanwhile the Chinese just printed a -18.1% year-over-year export disaster for FEB. The Shanghai Composite dropped -2.9% on that to -5.5% YTD.


Argentina’s Burning Currency is -17.1% YTD, but there’s probably nothing to worry about there either. Unless you are an Argentine, that is… Oh, and after trying the whole debt-levered-currency-devaluation thing, Venezuela is about to default on its debt.


In other news last week…


  1. US Dollar Index remained on its YTD lows (below @Hedgeye TAIL risk line of $81.14)
  2. US 10yr Yield popped +14bps to 2.80%, but failed to overcome @Hedgeye TREND resistance of 2.81%
  3. Coffee Prices ripped another +9.2% on the week to +74.3% YTD


No that’s not a typo – up +74.3% is the number, so whatever you do – don’t call that #InflationAccelerating.


With the CRB Foodstuffs Index +14.9% YTD, it’s not just coffee prices that are inflating:


  1. Corn was up another +5.5% last week to +13.7% YTD
  2. Soy was up another +3.1% last week to +14.2% YTD
  3. Lean Hogs were up another +5.8% last week to +24.6% YTD


Yes, basically you’re going to have to back everything out of your breakfast and call eating anything with pig in it “non-core” as the Fed tells you to consume a gluten-free Whatsapp for a buck a day instead.


Have you ever asked yourself why neither the Fed nor Bush/Obama ever talk about America’s currency?


As John Allison points out plainly on page 187 of the aforementioned book, “The fundamental issue underlying the boom-and-bust cycle in the financial industry is the lack of sound money. Unfortunately, the Fed is constantly manipulating the value of the dollar.”


And our profession gets that – or at least the machines do. It’s called Correlation Risk – and this is how it works:


  1. Down Dollar starts to trend as the Fed abandons anything that remotely resembles a two-way policy
  2. “Bad” economic news becomes good for asset price inflation, as the market front-runs the Fed easing
  3. Correlation Risk (asset price inflation trading inversely with US Dollars) starts to dominate


On that last point, here are the 30-day inverse correlations between US Dollar and the big stuff:


  1. Gold -0.88
  2. SPX -0.87
  3. CRB Index -0.75


In other words, the market calls what the Fed is signaling a Policy To Inflate (humans call it a tax). And yes, #InflationAccelerating will slow growth. That’s why you saw me buy bonds on Friday (and anything that looked like a bond, including Utilities, XLU).


Punishing The People with food, energy, rent, etc. inflation can only last for so long. Unless you think America has it in her to become Argentina, she has a tendency to rise up against these types of un-constitutional taxes. So stay tuned on that. History repeats.


The Unites States has already had two failed central banks. Between 1870 and 1913, the US experienced the greatest economic boom in history without a central bank.” –John Allison, pg 187


UST 10yr Yield 2.59-2.81%


Shanghai Comp 1

VIX 12.95-15.64

USD 79.46-80.16

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Punishing Her Currency - Chart of the Day

Punishing Her Currency - Virtual Portfolio

March 10, 2014

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TODAY’S S&P 500 SET-UP – March 10, 2014

As we look at today's setup for the S&P 500, the range is 29 points or 0.96% downside to 1860 and 0.58% upside to 1889.                       










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.42 from 2.42
  • VIX closed at 14.11 1 day percent change of -0.70%

MACRO DATA POINTS (Bloomberg Estimates):

  • 6:15am: Fed’s Plosser speaks on panel in Paris
  • 12:40pm: Fed’s Evans to speak in Columbus, Ga.
  • U.S. Rates Weekly Agenda
  • FX Weekly Agenda


    • U.S. hold fourth round of trade negotiations for a Trans-Atlantic Trade and Investment Partnership
    • U.S. Election Wrap


  • SEC said to probe whether forex rigging distorted options, ETFs
  • Chiquita Brands to merge with Fyffes to create banana leader
  • Malaysia jet investigators struggle for clues to air mystery
  • China reports falling exports, drop in producer prices
  • Japan economy expands less than initially estimated in 4Q
  • IBM CEO Rometty says company didn’t meet expectations last yr
  •’s owners said to work with Moelis on sale of website
  • Russell Investments said to lure BX, Bain for $3b sale
  • United Rentals to buy National Pump, Gulfco for ~$780m
  • SoftBank said to ready broadband pitch on merger resistance
  • Fed’s Plosser sees high bar for change in pace of tapering
  • Tesla, Dell supplier Amtek to seek out more acquisitions
  • Ranbaxy falls after second recall of generic Lipitor in U.S.


    • Casey’s General Stores (CASY) 4pm, $0.49
    • Ferrellgas Partners (FGP) 7am, $0.85
    • FuelCell Energy (FCEL) 5:50pm, $(0.04)
    • Globalstar (GSAT) 4:05pm, $(0.05)
    • Novavax (NVAX) 4:10pm, $(0.08)
    • Perfect World (PWRD) 4:35pm, $2.98
    • Resolute Energy (REN) 6am, $0.05
    • United Natural Foods (UNFI) 4:01pm, $0.56
    • Urban Outfitters (URBN) 4pm, $0.55


  • Coutts Adds Gold as Demand in China Climbs With Ukraine Risk
  • Gold Most Bullish Since 2012 as Goldman Sees Slump: Commodities
  • Palm Reserves in Malaysia Shrink Most Since 2009 as Output Drops
  • Ukrainian Impasse Propels Bullish Corn Trades to Record: Options
  • Sugar Rallying With Cooking Oil for Merchant Fund on Less Supply
  • Copper Tumbles to 8-Month Low in London on China Demand Concern
  • Gold Extends Decline as U.S. Jobs Data Back Stimulus Reduction
  • WTI, Brent Crude Fall as China Export Drop Signals Slower Growth
  • Polar Vortex Emboldens Industry to Push Old Coal Plants: Energy
  • Rubber in Tokyo Drops Most in Two Weeks; Shanghai at Five-Yr Low
  • China Gold Demand Seen Falling 17% This Quarter Amid Price Rally
  • Thai Sugar Premium Steady Before Result of State Tender Tomorrow
  • Libya Vows to Block Tanker Attempt to Lift Oil in Rebel Port
  • Corn Extends Drop From Six-Month High as Ukraine Concern Eases

























The Hedgeye Macro Team














Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.




Recent Notes

03/04/14 DRI: Things Are Heating Up

03/06/14 Frosty February Stifles Sales

03/07/14 The Battle For Darden

Events This Week

Monday, March 10

  • MCD February 2014 Sales & Revenue Release

Tuesday, March 11

  • ARCO earnings call at 10:00am
  • Bank of America Merrill Lynch Consumer & Retail Conference: MCD, CAKE, DPZ, THI, EAT, BKW, SBUX, BOBE, NDLS, PBPB, WEN
  • ROTH Capital Partners Conference: PZZI, JMBA

Wednesday, March 12

  • Bank of America Merrill Lynch Consumer & Retail Conference: JACK, SONC, CBRL
  • ROTH Capital Partners Conference: BJRI
  • RBC Capital Markets Consumer & Retail Conference: EAT, PBPB, WEN, NDLS
  • J.P. Morgan Gaming, Lodging, Restaurant & Leisure Management Access Forum: DNKN

Thursday, March 13

  • RBC Capital Markets Consumer & Retail Conference: THI, YUM
  • UBS Global Consumer Conference: JACK, BWLD
  • J.P. Morgan Gaming, Lodging, Restaurant & Leisure Management Access Forum: EAT, BJRI

Friday, March 14

  • COSI earnings release


Recent News Flow

Monday, March 3

  • DRI preannounced 3Q14 results yesterday and, as we expected, they fell far short of consensus estimates. Management guided 3Q EPS to $0.82 vs prior estimates of $0.93. Darden expects same-restaurant sales in the quarter to decline 5.4% at Olive Garden, decline 8.8% at Red Lobster, increase 0.3% at LongHorn and decline 0.7% at SRG. Despite this, they maintained their prior fiscal year 2014 guidance. The company also held a business call update Monday morning to discuss their strategic initiatives to unlock shareholder value. We certainly weren’t impressed and published a couple of notes during the week explaining why. The activist case is growing stronger by the day.
  • EAT was downgraded to hold at Miller Tabak on valuation concerns.
  • IRG announced new brand leadership for two of its brand. John Gilbert, the former CEO of DAVE (Famous Dave’s), was appointed President of Romano’s Macaroni Grill. David Catalano, the former President of Macaroni Grill, was appointed President of Brick House Tavern.

Tuesday, March 4

  • BLMN announced a secondary public offering of approximately 18 million shares of stock.
  • DRI Starboard Value announced in a 13D filing this that it has retained former Brinker International CFO and EVP Charles Sonsteby to serve as an advisor in its battle against Darden Restaurants. Starboard will pay $50,000 in cash to Mr. Sonsteby who will, in turn, use the proceeds to purchase Darden stock.
  • CMG signed a three-year sponsorship deal with Major League Soccer to be the official sponsor for twelve teams. The financial terms of the deal were not disclosed.

Wednesday, March 5

  • DRI announced that it has cancelled its annual analyst day. Representatives for the firm said the company plans to meet with analysts individually.
  • BLMN announced the secondary offering price of $24.50 per share. The offering is expected to close on Monday, March 10th.
  • DNKN extended the employment contract of Chairman and CEO Nigel Travis to run through 2018. His prior deal was expected to expire at the end of 2016.
  • BJRI Piper Jaffray downgraded BJRI to a neutral rating, reducing the PT to $27 from $30.
  • BLMN Carrabba’s Italian Grill unveiled its new menu “Carrabba’s Italian Ventures.” The menu includes 15 new items priced at $15 or less.
  • BAGL introduced the new Honey Smoked Salmon sandwich to its menu.

Thursday, March 6

  • EAT CFO Guy Constant announced his resignation from the company. Marie Perry, current Controller, will serve as the interim CFO while the company looks for a successor.
  • BWLD announced its intention to rollout tabletop tablets to all North America locations by the end of 2015. The tablets will allow guests to order food, play music, watch television and pay the bill.
  • BJRI reported in a Form 8-K that PW Partners Atlas Fund II LP, in conjunction with Luxor Capital Partners, LP nominated five members to the company’s Board of Directors. Combined, the group owns 12.4% of the company’s outstanding shares. The group is being led by Patrick Walsh who has previously gotten himself a seat on the board of DAVE and successfully placed one of his group members on the board of RRGB. The company plans to review the candidates.
  • BJRI was upgraded to buy at Buckingham.
  • BOBE was upgraded to buy at Miller Tabak.
  • YUM was upgraded to outperform at RW Baird.
  • TAST filed a $100M mixed shelf.

Friday, March 7

  • BOBE Activist Sandell Asset Management increased its stake in BOBE from 5.1% to 8.1%.


Recent Knapp Data

  • This past week, Malcolm Knapp released sales results for February, estimating that same-restaurant sales and guest counts declined -1.5% and -4%, respectively, versus February 2013.  On a two-year basis, same-restaurant sales and guest counts declined -3.5% and -5.2%, respectively.  


XLY Quantitative Setup

From a quantitative set-up, the sector remains bullish on an intermediate-term TREND duration.





Casual Dining Restaurants 

Top 5 Week-Over-Week Divergent Performances:

Positive Divergence: BJRI +18.4%, BAGL +10.8%, BWLD +3.9%, RUTH +1.7%, CAKE +1.4%

Negative Divergence: RRGB -6.3%, BOBE -5.7%, KONA -4.5%, EAT -4.0%, DFRG -3.6%


Notable 1-Month Earnings Revisions:

Positive Revision: RRGB +1.3%

Negative Revision: BOBE -26.0%, BJRI -25.4%, KONA -11.8%, BBRG -6.9%, DIN -4.9%






Quick Service Restaurants

Top 5 Week-Over-Week Divergent Performances:

Positive Divergence: TAST +5.9%, PZZA +4.3%, CMG +4.2%, PLKI +4.0%, YUM +3.3%

Negative Divergence: GMCR -4.3%, KKD -2.8%, WEN -1.9%, DPZ -0.5%, MCD -0.5%


Notable 1-Month Earnings Revisions:

Positive Revision: JACK +3.6%, DPZ +1.2%, BKW +0.4%

Negative Revision: TAST -8.1%, BAGL -5.9%, PNRA -4.7%, PLKI -4.6%, PZZA -3.5%






Howard Penney

Managing Director



The Economic Data calendar for the week of the 10th of March through the 14th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.





Takeaway: Current Investing Ideas: BNO, CCL, DRI, FXB, HCA, LO, LVS, RH, TROW and ZQK

Please see below Hedgeye analysts' latest updates on our ten current high-conviction investing ideas and CEO Keith McCullough's updated levels for each.


At the conclusion of this week's edition of Investing Ideas, we feature three recent research notes we believe offer valuable insight into the market and economy.




Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers. 

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less




BNO – Hedgeye's Director of Research Daryl Jones wrote earlier this week in Investing Ideas that our bullish case on Brent Oil is based on three key factors:

  1. Expected decline of the U.S. Dollar; 
  2. Tightening global oil supply and demand,and
  3. A break out in our quant models. 

Click here to read our full report released on Monday.



CCL Despite wobbling back and forth a bit this past week, Carnival is up 10% and has more than doubled the return on the S&P 500 since it was added to Investing Ideas back in November. While concerns about low Caribbean pricing continue to persist, we remain confident that Carnival should keep or raise yield guidance when they report earnings in a couple weeks.


Our proprietary survey shows a significant uptick in Eastern and Western Caribbean pricing for the Carnival brand in March relative to February and December.


Carnival continues to be our top pick in the leisure space.


DRI Darden preannounced 3Q14 results on Monday and, as we expected, they fell far short of consensus estimates. Management guided 3Q EPS to $0.82 versus prior estimates of $0.93. Darden expects same-restaurant sales in the quarter to decline 5.4% at Olive Garden, decline 8.8% at Red Lobster, increase 0.3% at LongHorn and decline 0.7% at SRG.


Despite this, they maintained their prior fiscal year 2014 guidance.


The company also held a business call update Monday morning to discuss their strategic initiatives to unlock shareholder value. We certainly weren’t impressed and published a couple of institutional notes during the week explaining why.


To top it off, Darden came out with yet another curveball on Wednesday when it announced the cancellation of its annual investor meeting, noting that the company will meet with analysts individually. Darden has been under scrutiny recently for cutting off critical analysts, such as our very own Howard Penney. Needless to say, the pressure continues to build and the activist case is growing stronger by the day.



FXB The Bank of England (BOE) maintained the base interest rate at 0.50% this week along with its asset purchase program target (QE) at £375B.


We remain bullish on the British Pound versus the US Dollar (etf FXB), a position supported over the intermediate term TREND by prudent management of interest rate policy from the BOE’s Mark Carney (oriented towards hiking rather than cutting as conditions improve).


UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers. In the BOE’s Quarterly Inflation Report (in February) 2014 GDP was revised higher to 3.4% from 2.8% previously forecast.


PMI Manufacturing came in at 56.9 versus expectations of 56.8 and PMI Services recorded 58.2 versus expectations of 58.0. Inflation continues to moderated in recent months, with CPI currently at 1.9% in January Y/Y – we expect this cut in the consumption tax to continue to boost business and consumer confidence and with it consumption


From a technical perspective, the British Pound is holding its Bullish Formation, trading above its intermediate term TREND and long term TAIL levels of support. It is up over +2% versus the US Dollar over the last month.



HCA As hospitals continue to move toward providing outpatient services and the percentage of their revenue mix from outpatient continues to rise, patient traffic has become increasingly important to track and forecast. We received our monthly survey results earlier this week and things look good for February and March after a big drop in January. The weather has been a big topic lately, but so has growing concern that the US Economy is slowing, led by our own Hedgeye Macro team.


What gets really interesting from here is how a weakening economy has historically boosted medical consumption. While that claim doesn’t make intuitive sense at first, we’ve compiled ample evidence to prove this is indeed true. So are we seeing a rebound in patient volume because the weather got better or because the economy is getting worse? Does it matter?


We still like HCA and have been reworking our assumptions for the benefits from the Affordable Care Act. So far our conservative estimates, which are higher than HCA’s 1-2% benefit to EBITDA in 2014, look to be moving higher.



LO Hedgeye analyst Matt Hedrick sent out a report to subscribers outlining our bullish case on Lorillard on Friday. Click here to read it.



LVS Las Vegas Sands is up 11.7% since being added to Investing Ideas at the end of January, compared to a 4.7% return for the S&P 500. Shareholders had a great week as the stock reacted favorably to positive earnings revision over the past two weeks as a result of stronger than expected gross gaming revenues during February. As mentioned before, LVS took the market share title for the first time ever in February.


What’s even more impressive is the company’s massive stock repurchase activity since January 1, as disclosed in the 10K. Investors now look forward to March where growth will slow significantly. Nevertheless, Q1 will likely be a record.



RH As part of our process, we created a proprietary method to track internet traffic trends for a basket of over 200 retailers. Our ranking combines a number of inputs, but the two main drivers of our ranking are unique visitors and page visits per user. In the chart below, you can see the indexed ranking for Restoration Hardware compared to Williams-Sonoma’s (WSM) three main brands.



There are three key call outs from this chart:


  1. WSM is a cyclical business heavily dependent on holiday specific merchandise and gifting categories. This distinction is clearly visible in traffic trends as evidenced by the significant ramp in traffic starting in November. This is one of the key differentiators between the two business models and means that WSM is far more exposed to the shaky 2013 Holiday selling season.
  2. RH has been on a tear. While this ranking says nothing about conversion or sales it is a good indication of interest and allows us to gague the overall health of the channel. The chart duration includes 2Q and 3Q where we saw direct growth of 33% and 47% respectivley. If we assume similar conversion rates – we are looking at another robust quarter from the direct business.
  3. Brand awareness is growing. For Restoration Hardware, that’s huge. After years of shrinking square footage – RH is building brand momentum through its site as it begins its first wave of expansion.


TROW Hedgeye’s Financials team traveled with T Rowe Price management to see subscribers last week which gave us the ability to do some checks on our bullish thesis on the company. The firm is validating that the strong inflows as reported weekly in the Investment Company Institute (ICI) survey is filtering into the firm. T Rowe characterized the environment as “stronger than usual seasonally” which means its largely retail, equity centric enterprise has been seeing good inflow to start 2014 (the first quarter each year is usually the most active quarter for retail engagement and TROW is saying that this year is busier than usual).




This continues to dovetail with the ICI fund flow survey which had another positive week of results with $4.9 billion flowing into all stock mutual funds this week, with $3.1 billion of the $4.9 billion moving into U.S. equity mutual funds (TROW has a domestic bend to its business with 70% of its product offering in U.S. funds versus 30% non U.S.).


While retail equity inflows tend to be late cycle dynamic, we still think TROW shares will work their way higher, especially given that they are just burning off some un-related institutional outflows from the middle of 2013. So, the stock’s multiple should improve with better earnings as well.


We consider T Rowe Price one of the best run asset management companies in the sector along with BlackRock.



ZQK We penned a note to our institutional subscribers on Wednesday stating that we expected this to be a transition quarter for Quiksilver, and that we were cool with it. That’s essentially what we got. When we saw the headline, we viewed it as a slight net negative (due in large part to expectations being all over the place). Let’s face it, on an absolute basis – losing $0.10 on $393mm in revenue is nothing to be proud of. Then we crunched the numbers, and we shifted our view on the event to neutral to slightly positive. Then we listened to the conference call, and viewed it as decisively positive. The market might not agree for a day or two. But that does not concern us.


We think this story is on track to redefine the business model and do what ZQK has not done in over 5-years – grow consistently. No material changes to our model.


Why do the numbers look good to us?


We look at everything on the margin. The reality is that ZQK is coming off a disastrous 4Q with sales down 15%, inventories only down 3%, and margins off by 200bp. That’s pretty much a trifecta of misery. This quarter, sales were down 5% -- though FX hurt by 2%, and exited product lines cost another 1%. At the same time, inventories were down 14%, and margins were UP by 115bp. That’s not exactly a complete reversal of 4Q, but it is a massive improvement on the margin.



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Click on each title below to unlock the content.


CAT: No Hope, No Change?

At CAT’s Analyst Meeting, the absence of negatives did not sum to a positive.  Given the challenges over the past two years, a failure to acknowledge serious problems seemed a bit delusional.  Investors were looking for solutions, but there were no meaningful details given on restructuring. 



6 More Weeks (Months) of Slowdown? ISM Sees Its Shadow

ISM Services printed its worst headline number since February of 2010 as the Employment series went sub-50, posting its largest MoM decline since November of 2008 and its first contractionary print in 25 months.



ICI Fund Flow Survey: Just an Average Week for Equities, But Bond Trends Starting to Pick Up

In the most recent week, equity mutual funds had another solid inflow albeit just inline with the year-to-date averages with bonds funds showing improving subscriptions, well above the year-to-date mean.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.