Golden Defense

This note was originally published at 8am on February 24, 2014 for Hedgeye subscribers.

“All men can see the tactics whereby I conquer, but what none can see is the strategy out of which victory is evolved.”

-Sun Tzu


That’s most likely a familiar quote to any winner in this world – and it should be. Author John Hamm uses it effectively in his intro to chapter 5 of Unusually Excellent (pg 103) in order to link leadership to processes and plans.


As we like to say here @Hedgeye in terms of positioning for new Global Macro Themes, the plan is that the plan is going to change. That’s because real-time prices and market signals do. Our risk management process doesn’t change so much.


Neither did Team Canada’s in this weekend’s Gold medal hockey win at the Olympics. Sure, offense might win shootouts, but defense wins championships. En route to their second consecutive Olympic win, Team Canada shut out both USA and Sweden. It’s really hard to lose if you don’t get scored on (Canada allowed only 3 goals in 6 tournament games). #GoldenDefense


Golden Defense - 44


Back to the Global Macro Grind


Backcheck, Forecheck, Paycheck. That’s another saying meat-head hockey players like me use when we think about grinding out wins. Note that back-checking comes first. Defense always does.


There are obvious ways to apply this mentality to your risk management strategy. In a US stock market that literally went straight up last year, if all you did was not lose money on the short side, you probably won the season for your investors.


Sure, doing crazy stuff (like trading) may look like “short-term” tactics (primarily because they are) but don’t confuse my tactical back-checking  with a lack of a longer-term strategy to win championships.


What is your long-term strategy?


Mine is don’t lose money. That’s why how you did in 2000, 2001, 2002, 2008 and 2011 matters.  That’s also why most of our Global Macro Themes incorporate what to stay clear of (on both the long and short side) if a big macro theme starts to trend.



  1. During #GrowthAccelerating – don’t short high-short interest, high beta, growth stocks that can beat expectations
  2. During #InflationAccelerating – don’t short commodities, breakevens, etc.
  3. During #InflationAccelerating + #GrowthSlowing – don’t short bonds, utilities, or Gold

If you aren’t in the business of shorting things, substitute the word “short” with SELL! Obviously, the other side of “don’t sell” is buy or hold. And I think anyone who has bought and held commodities for the last 3 months is winning YTD too.


Update on our non-consensus 2014 call for #InflationAccelerating:

  1. US Dollar Index is down again this morning and -1.4% in the last 3 months
  2. CRB Commodities Index was up another +2.8% last week and up again this morning to +7.8% YTD
  3. US Consumer Prices (CPI) hit a 4-month headline high of +1.6% year-over-year last week (JAN report)

I know. I know. The government says there’s no inflation, and since they’ve neutered the inflation report so that the headline number can rarely remain above 4% (or below 1%) for long, academics can argue amongst themselves on that.


Reality is that market expectations trade on the rate of change for both GROWTH and INFLATION expectations. And currently the rate of change on both makes our macro call a very easy one to make:

  1. INFLATION: up from its 3yr low of +0.9% y/y CPI in OCT 2013, CPI is going towards 2%, fast, in February
  2. GROWTH: down from its Q313 sequential peak of +4.12% GDP, you’ll probably see a 2% handle in Friday’s GDP report

So, irrespective of your views on how to play Macro Defense, what if?

  1. Inflation doubles (from 1% to 2%)
  2. Growth gets cut in half (from 4% to 2%)

Market #history fans will recall that when inflation slows growth, stock markets get MULTIPLE COMPRESSION. In other words, with the SP500 trading at 16x this year’s #OldWall projection for “earnings”, all you need is 2 points of multiple compression to get you 1638 (14x) at some point this summer. If the “earnings” (and multiple on them) start to fall, it’ll get gnarly out there, faster.


And while I am sure that the “weather will turn” and that some American consumers are dumb enough to go lever themselves up with a few more houses to flip, that doesn’t change the fact that inflation will A) slow real-consumption-growth and B) have a big impact on reported US GDP via a rising “deflator” (note: the deflator, which is subtracted from GDP, hit a 50yr low last yr and is rising).


With Natural Gas (+17.7% last wk to +46.3% YTD) and Coffee price (+19.1% last wk to +50.1% YTD) #InflationAccelerating to 52-week highs last wk, #GrowthSlowing has both Utilities (XLU) and Gold +7% and +11% YTD, respectively. So don’t be short those. Buying and holding them for the last 3 months has been a #GoldenDefense. Being long the American consumer, not so much.


Our immediate-term Macro Risk Ranges are now as follows:


UST 10yr Yield 2.66-2.78%
SPX 1803-1848

VIX 13.44-16.69
USD 79.81-80.41

Brent Oil 108.54-110.69  

Gold 1306-1340


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Golden Defense - Chart of the Day


Golden Defense - Virtual Portfolio

CHART OF THE DAY: Punishing Her Currency


CHART OF THE DAY: Punishing Her Currency - Chart of the Day

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

















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


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