Adult Supervision: SP500 Levels, Refreshed...

Got a Risk Manager? Plenty of hedge funds all of a sudden need one, on the short side that is…


I get called a lot of things, but one of them is not someone who routinely gets run over on the short side. That’s what we’re seeing again today. Dollar down = everything REFLATION straight up. Where does it stop? Well, this morning I gave you 1068 in the SP500 (that’s where I made 3 short sales intraday), and now I am going to move to 1074 for tomorrow (dotted red line). With the likes of Kenny the Cat Fisher back on TV espousing his perpetually bullish case, only God knows where this will all end…


For now, the long term doesn’t matter. Immediate term TRADE support bumps up once again to a higher-low (bullish). If the bears can’t find a catalyst to crack that 1037 line (dotted green), they’ll be crying “ma-ma” right into September’s quarter end.


When shorting stocks, Adult Supervision is required.



Keith R. McCullough
Chief Executive Officer


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UNH: Baucus on the tape, Industry Friendly Proposal

As we said on our recent MACRO strategy call healthcare is our favorite sector.  Following that call we wanted to share with you a very important post that our healthcare Managing Director Tom Tobin just published on Senator Baucus' new Healthcare proposal:



It's not time to jump up and down if you're long Managed Care like we are or press the short.  The legislative process has a long lead time, even from here, combined with consensus growth that looks meager and multiples well off the lows.  The Baucus bipartisan proposal is finally here, with no Republican support, representing a milestone, but not the end of the process.

With Baucus finally getting his proposal on the tape, and many interested parties (Rockefeller on the Left/Center, Sen. Enzi on the Right) against it, there is what we called this morning a Steel Cage Match going on in DC which seems better understood as a way to assess blame than pass legislation. 

220+ pages is a lot to get through and I am sure I missed something, but all I really cared about was the language around the Co-op, the alternative to the Public Plan.  Specifically, how will a co-op set its prices it pays for services?  Adopting Medicaid or Medicare list prices would be a disaster for the Managed Care Industry.  Layering a margin on top of less than market prices, and passing the premium through a tax free model would make the Co-op premium cheaper by a wide margin. From looking through the document, there is no language about how the Co-op will set prices paid for services.  This makes setting up a provider network of hospitals and physicians extremely difficult in a business as local as Healthcare.  You can't just parachute into a market and set up shop with no members to show the provider and no providers to show the members. That is, unless you are willing to spend a great deal of your own, or other people's money.


UNH is having a solid day so far, but has been unable to recover the losses from yesterday and make a new high.  Trading in the upper half of its range since July, when it became increasingly clear that the opposition was getting its act together and President Obama's approval rating began to slide, Baucus's proposal was perhaps an open secret.  The short position is minimal, and while employment appears to have a shot at getting better, the slow-growth or no-growth recovery seems like consensus. 


UNH: Baucus on the tape, Industry Friendly Proposal - TT1.1


However, I can identify a number of factors supporting the long case here and higher numbers through 2010. 

  1. Health Reform neutral to positive (no plan at all, or Co-op a weak competitor with new tax credit supported enrollment)
  2. Inflation pushing investment income yields higher
  3. Accelerating Premium Growth (anecdotal, PPI trends, PCE trends, company statements)
  4. Age Mix of enrollment reversing and dampening cost trend (see "Fire the Young..." post)
  5. Higher than consensus GDP in Q4
  6. Inflation hitting purchasing power of the consumer, putting pressure on cost trend


Here's the link to the Baucus proposal...


Intrade quote telling me consensus is for no Public Plan, putting the focus back on fundamentals and Macro, or putting the Tail risk in it re-emerging, but I doubt it.


UNH: Baucus on the tape, Industry Friendly Proposal - TT1.2


Thomas Tobin

Managing Director


Burning The Buck: Chart of The Day

While I was presenting my Burning The Buck thesis in Winston-Salem, NC yesterday, at one point I submitted that that one reason why US Dollar goes down every day is that there are some dudes in China hitting a sell button.


While the name “dude” isn’t as prevalent in North Carolina, there appears to be a whole lot of international dudes who want nothing to do with American assets anymore. This morning’s TIC (Treasury Capital Inflows) report was another disaster. Look at that big red arrow in the chart Andrew Barber and I have outlined below. By Research Edge’s definition, that would be a nasty long term TAIL.


The TIC Flows report for July registered another loss of -$98B. That was an acceleration to the downside versus the -$57B reported in June (see the 2nd chart below). I know a BILLION US Dollars isn’t what it used to be. Heck, that US Dollar Index is making another new YTD low again today. Who cares anymore, right? The US Government being willfully blind to this is starting to remind me of some dudes who used to work at Lehman in 2007.


Obviously, this chart and that of the US Dollar are not ones that our current Secretary of Squirrel Hunting at the US Treasury is too concerned about. Or is he? Would a man who looks as trustworthy as Timmy Geithner ever hide anything from the American people (other than paying his taxes)?


Look on the bright side – at least the Bankers, Debtors, and Politicians are getting paid.



Keith R. McCullough
Chief Executive Officer


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Solid Sports Apparel Sales Continue

Sports apparel sales continue to improve on the margin. While the growth rate slipped to 5% from 6.9% week on week per SportscanINFO, the 3 week trend (that we really focus on) is headed higher. Mass channels took another leg down, but this is more than made up by the sports retail channel, which is showing an extremely positive trend. The last time we saw a better and more consistent growth rate from this channel was in November 2008.  Every region saw growth in YY sales, with the exception of the Mid-West region, which posted a 13% decline. As for brands, Nike remains king with double digit sales growth. Under Armour’s sales trends look particularly good on a sequential basis.


Solid Sports Apparel Sales Continue - 1


Solid Sports Apparel Sales Continue - 2


Solid Sports Apparel Sales Continue - 3


Solid Sports Apparel Sales Continue - 4

Game Time: Reflation Rotation...

Reflation Rotation is one of our Q3 Macro Themes at Research Edge.


The investment theme’s submission was simple: until the end of Q3, the US would report DEFLATIONARY Consumer and Producer price reports; and as we moved into September, we’d see the beginnings of deflation rotating towards inflation. Remember, everything that matters in our macro models occurs on the margin.


One of the main drivers of our call was the Leverage Cycle’s peak inflation report that was reported in August of 2008 at +5.3%. Since that CPI report is issued in mid-September (today), we felt that the US Dollar DOWN, Everything Priced in Dollars UP trend could continue. Today, the Buck is Burning to new YTD lows, and the US stock market is hitting new YTD highs. Check. Check…


Now it’s Game Time. Every consensus Wall Street “economist” and/or “strategist” is going to come out parroting Bernanke’s view that we have a “deflation” problem and not an inflation one. That’s what these guys do – they react to yesterday’s news and serve us with nothing useful but an accurate representation of their own revisionist history.


Why is it Game Time? Look at the 3 charts that Andrew Barber and I have outlined below:

  1. Top Chart: at +0.4% m/m, this chart shows the 4th consecutive month where the sequential rate of change in the CPI was UP
  2. Middle Chart: at -1.5% y/y (August 2009), this chart shows you that last month (July 2009) was the low for deflation (-2.1%)
  3. Bottom Chart: shows you 60 years of economic history that contextualizes the July 2009 Deflation low that’s now in the rear-view mirror

Game time occurs when we no longer have to worry about Duration Mismatch. As of the CPI report confirming our DEFLATION bottom at 830AM EST, this is it. This is when consensus morphs into monkey business. This is where you get paid.


If you have been long TIPs, Gold, or anything priced in Burning Bucks, congratulations. That should keep working until the US Federal Reserve acknowledges that this Reflation Rotation is in motion. Bernanke isn’t much of a macro forecaster, so he’ll wait until next month to confirm what I am showing here with red and green arrows in the middle chart. The green arrow confirms economic history (DEFLATION). Meanwhile the red arrow is a proactive prediction as to where reported inflation is headed next, UP.


To Summarize:


IF we are right with this proactive inflation prediction, and …


IF Bernanke is right in his asserting that the recession is “very likely” over…


THEN growth and inflation expectations will continue to signal that the Fed should raise rates from ZERO in the coming months.



Keith R. McCullough
Chief Executive Officer


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Earlier today, management from CPKI, CKR and TXRH participated in a panel discussion in which they were asked questions about the current environment and whether the outlook was “glass half full” or “glass half empty” on varying industry topics. 


Although the restaurant operators were seemingly optimistic on the current restaurant industry outlook, I think the most important question was left unanswered.  When asked about their outlook on demand and future guest counts, they all said there was no way to know, saying “no crystal ball” and “it’s kind of a crapshoot.”   In my opinion, it is difficult to get extremely optimistic about the group until demand returns because the industry as a whole will not be able to maintain its current pace of cost cutting and as CPKI’s Co-CEO Rick Rosenfield correctly pointed out, “You can’t cost cut your way to prosperity.”


To that end, Keith McCullough shorted DRI and CKR (ahead of reporting earnings after the close today) in the Research Edge portfolio earlier today.  CKR already preannounced its fiscal 2Q10 sales and earnings so we are not expecting an earnings miss.  We will be looking at the quality of those earnings though as the company guided to relatively flat YOY margins with Carl’s Jr.’s same-store sales down 6.1% and Hardee’s down 2.7%.


Glass Half Full:

Are you glass half full or half empty on outlook for restaurant supply next year?  Each participant seemed confident that the industry is in a better place now than it was last year.  Supply has come down with fewer openings and more closures than openings.  There are great real estate opportunities now at more reasonable prices.  Construction costs are coming down a bit as well.


Can you continue to outperform if the current economic environment stays the same?  All of the respondents seemed to think they will continue to outperform.    All of them said they just need to continue to focus on the business.  Mr. Rosenfield said specifically that slowing growth has allowed the company to become a much leaner, more efficient business.


Are consumer behaviors forever changed? All three seemed to agree that we are currently in a down cycle which should be followed by an up cycle.  Additionally, people like to eat out and that will not change.


Can you retain recently implemented cost saves?  All seemed to agree that they are constantly focused on managing costs but that there is always a point where cutting costs too much will impact the customer’s experience in food quality or service.  Additionally, they stated that the current cost environment is relatively favorable as a result of lower construction costs which they intend to capitalize on while it still exists.


How do you feel about value?  All three responded that value is important and very prevalent now but that they are seeing their competitors diminish their brands by focusing too much on value and discounting.  They all think they are offering value by offering a better product for the price but are not engineering products to bring low cost items to the menu.  CKR’s President and Chief Legal Officer Michael Murphy talked about the company’s new “Big Carl” product that has double the meat than the Big Mac but costs less, which he thinks points to the type of value being offered by CKR. 


Do you have the ability to raise prices if need be?  All agreed that people are definitely more price-resistant now than they used to be.  Mr. Rosenfield commented that he thinks CPKI has pricing power, but now is not the right time to increase menu prices.  Should the cost structure change, the company will have no choice but to raise prices.


How is the credit environment faring? Mr. Murphy stated, “It can’t get much worse than it was so I would say the outlook is improving.”  Specifically, he said CKR continues to attract high quality franchisees.  He said the credit environment could potentially slow growth over time, but that it has not been an issue as of yet.


Glass Half Empty:

Do you see the level of value offers coming down?  They all agreed that they are seeing more value items now and “more desperation.”


What is your view on increased regulation?  The respondents all seemed to believe that a public healthcare plan will really hurt business and will have a huge inflationary impact.  Increased costs will lead to increased prices.  Relative to required menu labeling, they have not seen much impact but agreed that all restaurants and all businesses selling food (regardless of size) should be held to the same requirements.

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