Notable news items and price action over the past twenty-four hours.

  • CMG is generating headlines as Immigration Customs Enforcement officers scrutinize the company’s alleged employment of illegal immigrants. 
  • JACK is offering a limited time offer Fish Sandwich for $2.99. 
  • There was little in the way of price action yesterday, with the overall space trading sideways. 
  • CHUX and EAT both declined on accelerating volume.
  • China raised rates overnight to combat inflation. Both MCD and SBUX have raised prices to combat inflation in China.



Howard Penney

Managing Director

Bond Boys

This note was originally published at 8am on February 03, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Big boys don’t cry unless their last name is Boehner, or they’re a banker in need of a bailout.”

-William H. Gross


Bill Gross is one of the buy-side’s best writers. And in his Investment Outlook note from PIMCO yesterday, that was one of his best one liners. There’s nothing quite like having the Big Boy discussion out there about what’s actually happening in the marketplace.


What’s happening out there is that The Ber-nank and the bullish Bond Boys are all of a sudden getting smoked out of their holes by inflation. And the manager of the world’s biggest bond fund isn’t happy about it.


Before I recap some of Gross’ snarly attacks on The Ber-nank (he one-upped me!), let’s preface this Big Boy argument not with what should be happening to bond yields (Bernanke’s QG2 promise is that they’d remain low), but what is happening to bond yields:

  1. 2-year US Treasury yields - continue to make higher-highs and higher lows since Bernanke made his Quantitative Guessing 2 promises. This morning 2’s are busting a move towards 0.67%, which is a +24% move for the week-to-date and +103% move since the 1st wk of November
  2. 10-year US Treasury yields - broke the sound barrier of their December highs yesterday and at 3.52% are +38% higher since the 1st wk of November.
  3. 30-year US Treasury yields – continue to make higher 9-month highs, pushing towards 4.64% yesterday which is up +17% since the 1st week of November, and up +31% since the 1st week of September.

So what gives here? Isn’t Big Government Intervention the elixir of American life?


Obviously a few things seem to be going the wrong way on Bernanke here - as they should when Global Inflation Accelerates. After all, there is always another side to any government supported trade. Debauching the US Dollar = inflation. And inflation kills bonds.


Now for a more sophisticated Big Boy dress-down on the matter, let’s turn back to what Bill Gross has to say about this:

  1. “A low or negative real interest rate for an “extended period of time” is the most devilish of all policy tools.”
  2. “This is the framework that has been created by modern-day policymakers who have innovated far beyond their biblical counterparts.”
  3. “Today’s rock bottom yields, however, have less to do with disinflation and more to do with providing fuel for an asset based economy that promotes unsustainable wealth creation and false confidence in perpetual capital gains.”

Well done Mr. Gross. Well done.


You see, the Thunder Bay Bear isn’t balled up in his ice fishing gear clawing at Bernanke’s beard all on his very own here. From Jim Grant in New York to Bill Gross in California, this is turning into a whale hunting expedition - with the hunted being the Chairman of the Fiat Fools.


Yes, I am pushing my own book here because I am long inflation (short bonds) and Gross is trying his best to protect his book (all bonds), but no matter where Bernanke may want this little inconvenient critter called real-time market prices to go, there it is…


Now, to be fair to the perma-stock market bulls who claim that they don’t see any inflation anywhere (despite being long commodity and energy stocks), there are 2 cornerstones to the argument that rising inflation and rising borrowing costs won’t hurt US stocks or corporate margins (even though borrowing costs are at all time lows and operating margins are at all time highs):

  1. This move higher in US interest rates is all about US growth accelerating
  2. And if US Growth doesn’t accelerate from here, we’ll blame the snow and/or dial up The Ber-nank for some QG3

There is also the infamous “flows” argument, but US stock market history fans should be reminded of what happens to legendary long only guys like Bill Miller when “the flows” stop…


Interestingly (and not ironically in terms of market timing), according to a Bloomberg headline this morning “Bill Miller Is Back On Top”…


Can someone get me a quote on what a dollar invested with ole Bill at the last US stock market top (2007) looks like today (give the poor guy some marking-to-model and don’t adjust that dollar for its debauchery).


I guess another angle you could take on why the Bond Boys are bitter is the upcoming calendar of events in US Congress:

  1. Midterm Message - the newly minted chairman of the US Financial Services Sub-Committee on Domestic Monetary Policy (Ron Paul) will be hosting his first dance with Ben Bernanke in Washington, DC next week (February the 9th)
  2. US Budget Deficit - at some point in the coming week, President Obama needs to unveil the alchemist draft of the US Federal Budget (don’t forget that the CBO just raised the Budget Deficit forecast by 46% for the next 3 years, so Barry has some pencil pushing to do).
  3. US Debt Ceiling – that needs to be addressed over the course of the coming month because, in theory, America needs to make a decision on this before March 4th, or our creditors might get a little peeved.

Or are they already right p.o.’d? If you were The Creditor of this nation (China) and watched Geithner mimic Larry Summers’ hand signals on C-SPAN as he threatens the white wall of Congressional stares with “the alternative”, wouldn’t you be?


This morning, Timmy’s assistant at the Treasury for financial markets, Mary Miller, said this about raising America’s $14.3 TRILLION debt ceiling: “We expect that Congress will do the right thing.”


With all due disrespect for what these government people have considered “the right thing” for the last 10 years, I’ll stay with the right risk management call that we’ve been making here in Q1 called “Trashing Treasuries.” (email if you’d like the 50 slide Q1 Macro Theme deck). Big Boys don’t cry wolf.


My immediate term support and resistance lines for the SP500 are now 1292 and 1311, respectively. We remain bullish on inflation and bearish on bonds. Our latest call to short Treasuries on the short end of the curve was made at 320PM EST on January 27th, 2010.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bond Boys - HeutLeut

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.


The Macau Metro Monitor, February 8, 2011



IM disagrees with Credit Suisse's report that given Four Season's poor results, recent volatility in the local VIP gaming sector has also hurt Wynn Macau.  IM makes the distinction between volatility of volumes and volatility of hold.  In contrast to FS,  Wynn Macau has less exposure to direct VIP play and much greater overall VIP volume; thus, volatility at Wynn Macau should be more stable.  In addition, IM mentions that the ongoing tightening of the Chinese bank lending quotas will affect every operator, not only VIP-focused Wynn Macau.



At Marina Bay Sands, some 885,000 visitors - locals and tourists - celebrated CNY from Feb 3 through Feb 6 at its posh premises.  MBS casino visitation was not disclosed.  RWS sited an overall 150,000 visitation number for the first two days of CNY, which includes casino visitors.

EARLY LOOK: Loving The Process


“Perhaps love is the process of my leading you gently back to yourself.”

-Antoine de Saint-Exupery




I do what I do every day because I love what I do. I love the morning’s silence. I love the research grind. And I love keeping score.


My vision for this firm isn’t to impose what I love upon you. My mission is to democratize the research process so that a real-time risk management conversation can be had. If we help you re-think any aspect of your risk management process, we’ve all won.


If a piece of research data or a point in principle leads you back to yourself, you’ve won. We can’t decide your risk tolerance. We can’t decide your investment duration either. What we can do is accept that markets are grounded in uncertainty and they do not discriminate in favor of anyone.


For me, Loving The Process means living it out loud. That’s why I’m trying my best to give you 100% transparency and accountability in every move we make each and every day. Sometimes this can be confusing – there’s a lot going on in Global Macro, so I get that. But complexity is no excuse for not delivering on the simplicity that is how I am positioned every day. So, going forward, we’re going to include the Hedgeye Portfolio at the bottom of every Early Look.


The Hedgeye Portfolio is not our Hedgeye Asset Allocation Model. These are two separate products that share many interconnected investment thoughts. The Hedgeye Portfolio is our best book of long and short ideas. They aren’t paired off. They aren’t weighted. They all have their own individual top down and bottom up thesis. They are intended to drive alpha on their own individual merits.


This is not to say that they are all driving alpha every minute of each and every day. This is not to say that we get everything right either. This is simply to say that I am going to be accountable to anything that comes out of these arthritic hockey knuckles, real-time. In the end, I think other firms will be forced by the marketplace to do the same. Opacity is dying on the vine of every industry – and there is no way to bail it out.


Enough about the process and its principles, let’s get at it and address how I am positioned (or thinking about being positioned) in the Hedgeye Portfolio after going through this morning’s grind:



1.  Asia – We continue to see Asian Growth Slowing as Global Inflation Accelerates.


The Chinese and Indian governments are going to perpetuate this investment theme as they do not get paid to be willfully blind to the effects of inflation on their common people over the long term. China is raising interest rates this morning by another +25 basis points, taking its benchmark rate 300 basis points over Fed Funds, in order to address what Bernanke refuses to.


In the short-run, this is the pain that Asian central bankers are willing to impose on their stock markets. Over the long-run, seeing inflation destroy their sovereign bond markets, corporate margins, and their citizenry’s buying power is a really bad idea.


India’s stock market closed down another -1.6% overnight, taking the BSE Sensex Index down -13.4% for 2011 YTD. Bangladesh crashed yesterday, losing -10.3% of its stock market value in one day. Next to China and India at #1 and #2, Bangladesh has the world’s 8th largest population by the way. We remain short Thailand, which continues to see civil unrest on the border with Cambodia. These populations are hungry.



2.  Europe – We’re not leaning bullish or bearish on Europe right now, but British Stagflation is starting to rear its ugly head.


We’ve been bullish on Germany for the last 18 months but recently sold out of that long position (EWG) as we see any price north of 7,300 on the German DAX as immediate-term TRADE overbought. Like it did in 2010, the DAX continues to outperform the SP500 and we think that Germany’s fiscal policy is amongst the most stable in all of the Western world.


We like countries with strong currencies that stand behind sober fiscal and monetary policy and Sweden fits that bill. When we say strong currencies, we don’t mean countries that say they want one – we mean countries that have one. Sweden doesn’t have Ben Bernanke. Sweden has the oldest central bank in the world and the Swedish Kroner is  hitting a 10-year high this morning against the Euro. We’re long Sweden (EWD).


Despite the mean reversion rally in everything Pig Paper for 2011 YTD, we’re not preparing to buy Spanish or Greek stocks and bonds. We’re short Italy (EWI) and, as you can see in the Hedgeye Portfolio, that position is -3.82% against us. The next time someone tells you that inflating a stock market to a lower-long-term-high is bullish for a country’s long-term economic health, remind them Greece is the world’s best performer YTD.



3.  USA and Latin America – We threw in the short-term towel covering our SP500 short position at 1276 on January 28th. Thank God for that.


That doesn’t mean I’m not bearish on US Equities on my long-term TAIL duration. That certainly doesn’t mean I won’t be re-shorting the SP500 again on its way up to my intermediate-term target of 1340. I’m actually as long as I have been US Equities since November and I’m downright scared about it. In the Hedgeye Portfolio, we continue to short the US Consumer stocks, trading around the positions profitably.


Whenever someone asks me about whether I am bearish or bullish on the US, I immediately have to answer them with a question – currency, stocks, or bonds? It’s a simple question, but it’s still a huge investment point when you think about generating uncorrelated returns. We remain bearish on US bonds and the US Dollar. These are major problems for the other HALF of Americans that don’t own The Ber-nank’s stock market inflation.


Latin America looks a lot like Asia – willing to accept that a debauchery of the world’s reserve currency is affecting global inflation and their citizenry. Two of the most important economies in Latin America, Brazil and Chile, are seeing their stock markets down -5.7% and -6.4% for 2011 respectively. We aren’t long of anything south of a Starbucks (SBUX) on the Mexican border.


Keep doing what you do out there, and I’ll keep doing what I do, re-thinking and re-learning how to manage Global Macro risk so that I can keep Loving The Process of being humbled by Mr. Macro Market.


My immediate term support and resistance levels for the SP500 are now 1300 and 1325, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


EARLY LOOK: Loving The Process - VP

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.