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In today's Morning Investment Call, we discuss yesterday’s selloff in the market, our macro themes of Earnings Slowing and Growth Slowing, and the inherent risk associated with the fiscal cliff. Remember: it’s all about trading the risk and the range of the market. Stay within your limits and you’ll be fine. You can listen to the Q&A from the call below.



Three Big Themes

Client Talking Points

Three Big Themes

Now that we can put the political madness of the election behind us, let’s focus on our three macro themes for Q4 and beyond. We’re well into earnings season and our theme of #EarningsSlowing continues as company after company either misses Street expectations or lowers guidance. The commodity bubble given to us courtesy of the Fed is bursting at the seams with commodities down -9.3% since the Bernanke Top (September 14). Lastly, there is the fiscal cliff. It has been said that Republicans are reaching across the aisle and offering compromise on taxes in order to fix this mess, but more than likely, the two sides will bicker until the 11th hour and will kick the can down the road yet again. 

Market Breakdown

Yesterday’s big selloff can be attributed to the election results. Or the trouble in the Eurozone. Really, it can be blamed on anything. That’s how it works. If your strategy doesn’t work, just find someone or something to blame. It’s certainly worked out well for Old Wall. With the pop in the futures this morning, we’ll likely see some upside early on in trading; what really matters is the risk and the range. If you stick to your levels and trade within them, you’ll do just fine. That’s how proper risk management works as opposed to closing your eyes and throwing darts at sheets of paper with tickers written on them.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

After a long downward slide, TCB has finally turned the corner. The margin has stabilized after the balance sheet restructuring. Loans are growing thanks to the equipment finance business. Non-interest income is more likely to go up than down going forward, a reversal from the past 18 months. Credit quality has a tailwind from a distressed housing recovery in TCB’s core markets: Minneapolis, Detroit and Chicago. On top of this, the CEO, Bill Cooper, is one of the oldest regional bank CEOs, which raises the probability that the bank will be sold. Expectations are bombed out at this point, so we think it’s time to move from bearish to bullish on TCB.


Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjoys a strong position in a structurally advantaged industry and an attractive valuation.


While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

Three for the Road


“scheduled a meeting at 3pm - people complained because lunch time is from 2 to 4pm#spainisdifferent” -@brilldisruptive


“You must first have a lot of patience to learn to have patience.” -Stanislaw J. Lec


US jobless claims fall by 8000 to 355,000


Takeaway: We are growing more certain that DRI's next earnings release will disappoint shareholders.

Conclusion: It seems likely that Darden is lagging the industry given Knapp trending at -1.8% (on average) for first two weeks of October and Blackbox coming in flat for the month.  Assuming Knapp Track in Oct comes in roughly on trend with the first two weeks, the 180bps spread is far greater than it has been (it was 0 bps in September) and is possibly a poor sign for Darden.  We will be waiting for Knapp’s monthly data to confirm.


Blackbox Intelligence released casual dining same-restaurant sales growth data for October at 0% with traffic at -2.1%. 


Last month, we learned that Knapp Track casual dining comps were down -1.5% and -2.1% for the first and second week of the month, respectively. 


There are many differences between the two metrics, but one significant one is that Darden (the largest system in the business) is not counted in the Blackbox data.  If we assume that Knapp’s October data will come in on trend with the first two weeks, this could be negative for Darden. 


If a significant portion of the spread between Knapp and Blackbox is driven by Darden not being accounted for in the Blackbox data, which is likely to be at least partly true given Darden’s size, we would infer that Darden underperformed the industry in October. 



Howard Penney

Managing Director


Rory Green



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The Macau Metro Monitor, November 8, 2012




Private equity company Permira Advisers LLP has agreed to sell its remaining holdings (5.94% stake) in Galaxy. Completion of the sale is expected to be on November 12.  The 249.6 million shares were sold at HK$27.17 (US$3.5) each, putting the deal value at HK$6.78 billion, a source with direct knowledge of the deal told Reuters.

My Business

“My business is making things.”

-William S. Knudsen, May 28, 1940


That’s a quote from one of America’s finest immigrant business men during a time in this country where business builders and innovators built your military and economy, not politicians. It comes from a book that I started reading as I saw the election results roll in – Freedom’s Forge: “How American Business Produced Victory in World War II.”


Election Day 2012 was the 5 year-anniversary of building My Business. I am not in the business of producing a racial, gender, or class war in this country. I am an immigrant who is in the business of manufacturing innovative research and risk management ideas.


I didn’t ask for a bailout in 2008, and I’m not begging for a solution to a #FiscalCliff situation that the beggars themselves perpetuated. My Business is to fight the winds of government intervention in my life. My Business is to stand up and fight for the core values of a liberal – equality and liberty.


Back to the Global Macro Grind


How has My Business thrived during one of the worst secular declines in Wall Street trading commissions on record? First, I don’t have a trading desk. More importantly, I started from a place that more should have the opportunity to rise up from – getting fired.


The problem with both our government and many of my sell-side competitors that they’ve bailed out (and paid) is that they get re-hired to do more of what has not worked.


Every mistake I make, either in building My Business or in research ideas, can and should hurt me. I need to wake-up every morning, lick the blood off my paws, and do whatever I can to make up for my mistakes. There is responsibility in recommendation.


To review where we haven’t made mistakes in Q4 of 2012, here are our Top 3 Hedgeye Global Macro Themes:

  1. Earnings Slowing (worst revenue and EPS slowdown since 2008)
  2. Bubble #3 (Commodities down -9.3% from Bernanke’s September 14th Top
  3. Keynesian Cliff (political gridlock perpetuated by the bubble in US politics and the media that supports it)

My Business only works if I have a great team. While I may personally make a lot of short-term mistakes, I think my research and operating team does a great job getting the intermediate-term TRENDS and TAILS right. If they didn’t, we’d fail.


I can’t tell you how rewarding it was to walk into one of the world’s biggest bond manager offices on Election Day and have him tell us that our #GrowthSlowing call in 2012 has helped him buy every dip and have a great year.


That, of course, may sound a little odd to the Equity only clients we have. But, really, that’s the point about what we do. Multi-factor, Multi-Duration Risk Management, across Global Macro Asset Classes.


Yesterday’s down move in the US stock market wasn’t about Germany. It wasn’t about the #KeynesianCliff either. It was about everything that’s been coming to a boil in the US stock market in 2012 as our economic and fiscal reality disconnected from it.


Blow-up days (biggest down day since June 1st, 2012 of -2.46% SP500) are processes, not points. If you don’t think people who chased the top in commodities in September have been blowing up, think again:

  1. CRB Index -9.2%
  2. Oil (WTIC) -14.7%
  3. Copper -10.6%
  4. Gold -3.2%

Gold isn’t blowing up. But it’s not going up anymore after 2 of the most bearish macro events in US history for the US Dollar either:

  1. Bernanke Printing to Infinity & Beyond
  2. Obama getting re-elected

That last point isn’t a political point. It’s a fact. You can’t say Obama has been great for commodity and stock inflation since 2009 and not, at the same time, acknowledge the loose fiscal and monetary policies that Debauched The Dollar all the while.


This isn’t new. Neither is it an Obama or a Democrat thing. Both Nixon/Carter were as bearish for the US Dollar as Bush/Obama have been. Why? Because both Democrats and Republicans went all-in Keynesian in both periods. And it didn’t work. Romney being advised by a hard core Keynesian (Glenn Hubbard) on the key topic of the debate didn’t work either.


What could work – and God help us all if he doesn’t get this – is Obama reaching across the aisle to people like you and me; people running small businesses who have their costs and taxes rising; people who have to meet a payroll before they can start hiring again; people who really want to see Obama succeed inasmuch as patriot Democrat and Republicans wanted Reagan and Clinton to.


You can judge us and you can demagogue us, but you cannot fire us. After all, we are The People too.


Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $105.46-108.67, $80.22-80.98, $1.27-1.29, 1.64-1.72%, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


My Business - Chart of the Day


My Business - Virtual Portfolio

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