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The data points in Global MACRO have turned decidedly negative, putting pressure on the US equity prices; China’s PMI, US jobless claims, US ISM and the US housing market.  The S&P 500 closed lower on Thursday by 0.3%, making 8 of the last 9 days down-days for the market.


Yesterday’s Jobless claims were 472,000 vs. consensus 455,000; prior week revised to 452,000 from 459K - the 4-week average is the highest since March 6th of 466,750.  Continuing claims were reported at 4.616M vs. consensus 4.52M; prior week revised to 4.573M from 4.548M.  June ISM was 56.2 vs. consensus 59.0. 


We are bearish in our outlook for housing and home prices; this is being expressed in out 3Q10 theme of Housing Headwinds.  Yesterday’s May Pending Home Sales declined 30.0% month-to-month versus consensus of a decline of 11.8%.  Pending homes sales for May declined 15.6% year-over-year.


Despite the decidedly negative trends for the consumer, the only two sectors in the green yesterday were consumer related - Consumer Discretionary (XLY up 0.8%) and Consumer Staples (XLP up 0.2%).  The S&P Retail and Restaurant indices were up 1.1%, each. 


Treasuries were mixed with the long-end outperforming in a continued flattening of the curve.  The 10-year traded below 2.90%, before rising again to 2.94% at the end of the day.  The dollar index closed dramatically lower, closing down 1.5% at $84.60.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (83.56) and Sell Trade (86.52).  The VIX moved lower by 4.9% - the Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (30.46) and Sell Trade (36.16). 


With a sharp decline in the Dollar index, it’s worth noting the big spike in the Euro - the Euro traded up 1.5%, closing at 1.2439.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.22) and Sell Trade (1.25).


The three worst performing sectors were Materials (XLB down 0.6%), Healthcare (XLV down 0.9%), and Financials (XLF down 0.9%).   Health insurers CI and WLP were lower on concerns around healthcare reform risk.


This has been a disastrous week for copper, down 4.9% over the last five trading days.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.84) and Sell Trade (2.97).


Yesterday gold saw its biggest decline in two months (April 16).  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,207) and Sell Trade (1,265). 


Oil has declined 5% over the last five days, on slowing global growth.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (72.88) and Sell Trade (75.14).  


As we look at today’s set up for the S&P 500, the range is 57 points or 1.5% (1,012) downside and 4.1% (1,069) upside.   Equity futures are trading mixed ahead of the jobs number.    


Howard Penney













An American Business

“Being ignorant is not so much a shame, as being unwilling to learn.

-Benjamin Franklin


After finishing “Founding Brothers” by Joseph J. Ellis, I just started digging into “Benjamin Franklin - An American Life” by Walter Isaacson. Being a Canadian hockey player these days can feel golden at times, but not when I’m staring at the mountain that is my reading pile of American history.


On June 23rd I titled my Early Look “Rigorously Frugal” in reference to how the Founding Fathers of America considered government spending. By immersing myself in Franklin’s American story, one thing has already become crystal clear – on a relative basis to Thomas Jefferson, Benjamin Franklin lived frugally.


What I love about Franklin is that he wasn’t twirled up in the trees with the squirrel hunters espousing theories. He was a doer. If we had him running a portfolio in these globally interconnected times, I think he would find a way to do quite well. The man never stopped learning.


Ahead of our 4th of July weekend, here are 3 more Franklin quotes that I think fit our financial times:

  1. “We are all born ignorant, but one must work hard to remain stupid.”
  2. “A penny save is a penny earned.”
  3. “By failing to prepare, you are preparing to fail.”

As a practical matter, I think a lot of Americans are already moving down the right path when it comes to preparing their personal balance sheets for the inevitable. While the US government literally does the opposite of these 3 Franklin quotes, Americans are proving to do what they’ve always done – evolve.


On the first point, dropping Americans 401ks to 201ks and then fear mongering them from the mountain tops of political life did exactly what professional politicians preached – it scared the hell out of the American people. Whether it be from a mortgage application or a US equity fund flow perspective, Americans are proving that they haven’t remained “stupid” enough to make the same mistake twice. They aren’t buying houses or stocks.


On the second score, while the savings rate in this country has its own problems in terms of how it’s calculated, there is no doubt that the direction of cash in savings accounts of fiscally conservative Americans is going one way – up. Earlier this week we saw the US savings rate bump back up to 4%. Everything starts with a penny saved (after buying our Gold position back yesterday, our allocation to cash in the Hedgeye Asset Allocation Model is now 58%).


On the final point, whether it was preparing for a slowdown in Chinese or US economic growth, a lot of our clients were proactively prepared for the swoons that we’ve recently seen in global equities. As of last night’s close, China and the US are down -27.3% and -7.9% YTD, respectively. Those who were unwilling to learn that there is a global interconnectedness to fiat currencies and the Debtor Nations that create them are learning now.


Yesterday we had our largest audience ever for a quarterly Macro Themes conference call. As Big Alberta (Daryl Jones) and I broke bread with our American teammates for dinner last night in New Haven, there was a sense of graciousness that I have not yet felt in my investing life. We are grateful for our clients giving us the opportunity to build a new American business. Without their confidence in us, we wouldn’t have been able to build while we learn.


I realize that sometimes I sound overly doomsday’ish when I write about the state of this American union – and to be clear, I remain bearish on all that has become the Officialdom of Perceived Wisdoms in Washington’s economic department – but I am also humbled and proud to have the opportunity to be industrious and frugal in building this American business. I may not make the money I used to make working on Wall Street, but I am certainly happier.


My immediate term support and resistance levels for the SP500 are now 1012 and 1069, respectively.


Enjoy America’s 4th of July with your families and friends,



Keith R. McCullough
Chief Executive Officer


An American Business - ben


We’ve found seasonality in slot ship share; something to think about when making judgments about quarter to quarter shifts.



If history holds, IGT should see a sequential market share gain when calendar Q2 unit figures are released.  However, before anyone runs out and calls an end to IGT’s chronic ship share losses, understand that seasonal shifts may explain most of the changes.  In the following chart, we’ve analyzed the seasonal shifts in quarterly ship share.  For IGT, BYI, and WMS, each bar represents the percentage of average annual ship share for each of the four quarters for the period of 2007-2009.




Aside from the aforementioned CY Q2 shift in IGT, the only other notable shift occurs in CY Q3 where WMS typically gives back a lot of share.  Unlike IGT and WMS, BYI's share is usually consistent throughout the year.  Although as we noted in our post last week, Konami is likely to give up a lot of share from CY Q1 to CY Q2 which could benefit all three US suppliers.  Konami's fiscal year end is March 31st and they tend to be very aggressive in that quarter.  IGT apparently captures the lion's share of Konami's sequential decline.  WMS maintains a lot of exposure to the Midwestern markets, which generally experience their strongest quarter in CY Q3.  Thus, customers tend to order a lot of WMS products ahead of the big July 4th weekend, which falls in CY Q2.  WMS's FY 4Q also ends in June which may spur sales as salespeople strive to meet annual quotas.

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As the consumer gets DUPE(d), consumer discretionary categories like casual dining will feel the pinch.


I think it is instructive to link Tuesday’s Early Look with the current picture we face when looking at restaurant stocks.  “MEGA” was one of our Q209 macro themes – calling for a MEGA squeeze in consumer stocks with Mortgage Rates going down, the Employment picture turning around, Gas prices declining sharply year-over-year, and Asset prices re-flating.  Looking at the data as we emerge from 2Q10, it is clear that the American consumer is now going to get DUPE (d) and is not going to be happy. 



Double-Dip:  The housing market and the broader economy are on the precipice of a double dip; housing prices have already started to decline and the economy has slowed significantly quarter-to-quarter in 1Q10.  The Hedgeye Risk Management Financials team recently presented a very strong case for why the housing market is in trouble.  We have high conviction that a double-dip in housing is underway and this will have a serious impact on consumer behavior.  Following a decade of out of control spending, the state of the USA’s balance sheet inhibits the country’s ability to navigate the structural issues still present in the economy.  Our Double-Dip thesis was supported by data released yesterday concerning mortgage applications; The MBA weekly Purchase Application Index released yesterday fell 3.3%, bringing June-to-date to 86.1 (versus April at 123.2 and May at 101.0).  A few additional points to keep in mind include:

  1. The benefits from the current Obama stimulus peaked in the 1Q10 - Slowing GDP growth.
  2. In 2011, taxes are going up and that will hamper economic growth - Slowing GDP growth.
  3. Real estate prices are estimated to decline 20% in the next twelve months - Slowing consumer spending. 



Unemployment:  Weekly Jobless Claims have not shown any material improvement over the past six months.  Private sector job creation remains a concern; private-sector job creation in May decreased sequentially from April.   While private sector job creation had been growing for four straight months, it has now come to an impasse as businesses have become nervous about the state of the economy.   Unemployment is at an elevated level and indicates a continuing softness in the underlying economy.  Some data emerged yesterday is supportive of our view that the unemployment picture is not materially improving.  According to ADP, US companies added a mere 13,000 jobs vs consensus 65,000.  As census workers are laid off, the rate could jump higher unless other sources of employment pick up hiring drastically.  This metric, of course, is of paramount importance to the restaurant industry’s top line.

  1. The Administration failed to get Congress to pony up an extra $50B for unemployment claims - our leveraged balance sheet inhibits the government’s ability to provide stimulus. 
  2. A strong dollar policy has proven to help job creation – Bill Clinton and Ronald Reagan were the last two presidents to oversee true job creation and both pursued strong dollar policies - to be sure Obama is debauching the US currency.
  3. As the Double-dip scenario pays out, unemployment will remain elevated and may even go higher. 


Prices Paid by the Consumer:  While reported inflation by the government looks to be under control, the Hedgeye Inflation Index tells a different story.  The Hedgeye Inflation Index focuses on the part of the economy showing inflation that impacts the consumer, specifically the spread between the prices of things they buy and what they earn.  Looking out over the next 6-12 months (and even longer), consumers will be paying more to drive their cars, or “bring home the bacon” and to make sure they have health insurance for their family.  The issues that arise from the disaster in the Gulf of Mexico will not be solved by the cash flow from BP.  The government has been sponsoring cheap gas prices in the US for years and that will, at some point, come to an end.  Once again, the government cannot afford to manage through the issues the country faces due to the highly-leveraged balance sheet.      

  1. The Hedgeye Inflation Index turned ugly last week.
  2. The disaster in the Gulf is inflationary and will be a drag on growth.
  3. The prices paid by the US consumer for gas is far below the rest of the world and there is a possibility that the gap could close significantly under pending energy legislation – this would be a massive headwind for the consumer.  Some commentators are speculating that prices could rise to meet those paid at the pump in Western Europe – some 50% higher than where they are currently.


Equity and Real Estate deflation:  We believe that the debasing of any currency (even the Almighty Dollar) ends badly.  A lack of austerity in government policies and an aversion to facing facts among our professional politicians is not helping the long-term outlook for equities.  The VIX’s 19% up-move week-over-week, along with the move in the equity market, indicates that political summits are doing little to ease fears. 

  1. U.S. equity markets have lost $1.78 trillion since April 23 on concern the European debt crisis will spread. 
  2. China declined 4.2% last night and is now down 26% year-to-date. 
  3. The S&P 500 is down 3.6% year-to-date. 


The same metrics that buoyed the consumer over a year ago are depressing spending this year.  As long as the data continues to confirm this thesis, we will continue to believe that the consumer is getting DUPE(d).  Taking stock of performance in restaurant stocks over the past quarter, it is clear that the space is highly susceptible to the factors I have outlined above. 



From the table below, one can see right away that it has been an ugly quarter for casual dining.  Almost every stock in the category with the exception of Cracker Barrel, BJ’s Restaurants, and Landry’s (private) got hammered over the last quarter.  Notably, in the table, from Bob Evans down to the bottom of the list (BOBE, RT, RUTH, BWLD, EAT, MSSR, DIN, RRGB, and CHUX) there are nine stocks that have declined by more than 20% over the last 90 days.  Despite the precipituous declines, some of these  companies are still facing serious issues (RRGB’s heavy dependence on promotions, BWLD’s terrible ROIIC due to unsustainable growth).   With regard to EAT, we are maintaining our view that the company can take meaninful share from DIN and use their improved balance sheet (new revolver and proceeds of On the Border sales) to buy back ~25% of their market cap.



In terms of QSR, too, the poor outlook is certainly being confirmed by the price action.  Chipotle has been unstoppable, up nearly 20% over the last 90 days, but has declined 4% over the past month.  The QSR group on average is down nearly 6.6% over the past quarter.   The “U” in DUPE(d) is highly relevant for the quick service category and, as I discussed above, the unemployment picture is not improving materially.  QSR management teams have reiterated ad nauseum (Sonic Corp and Starbucks recently) the need for the unemployment picture to meaningfully improve if the topline is to grow.



Some recent news items include:

  • CKE restaurants announced that its stockholders approved the proposal to adopt a merger agreement providing for its acquisition by “entities created by certain affiliates of Apollo Management VII, L.P.”. 
  • Brinker International and OTB Acquisition LLC, an affilliate of Golden Gate Capital, closed the sale of On The Border Mexican Grill & Cantina.  Gross proceeds for the transaction total $180 million.
  • Jack in the Box announced a five-year, $600M refinancing plan, comprised of a $400 million revolving credit facility and $200 million term loan.
  • Starbucks is rolling out free WIFI in all US and Canada stores today.
  • UBS raised its YUM price target to $49.
  • CAKE upgraded to market perform from underperform.
  • PFCB upgraded to market perform from underperform.
  • CPKI mentioned in NY Post article detailing how, despite the capital gains tax increasing from 15% to 20% next year, private equity is not overly eager to spend.  The CPKI auction, according to a source cited in the article, is near collapse and the restaurant company is an example of the lack of growth potential out there for PE to acquire.
  • An interesting article in the Wall Street Journal titled, “USING STARBUCKS, DUNKIN’ DONUTS TO TRACK ECONOMY”, discusses the relationship between the state of the economy and where consumers buy their coffee and how much they are willing to spend.  By breaking out the average dollar transactions at Starbuck’s and Dunkin’ Donuts, a research economist was able to identify a trend whereby consumers spent less at the outlets during the worst of the recession, but the spending on coffee ticked up as the unemployment picture improved.  In April, the trend reversed but as the article notes, much of that change is likely to be seasonal.
  • McDonald’s is changing its menu.  The “Big N’ Tasty”, “Mac Snack Wrap”, and the fruit and walnut salad, among other items, are being crossed off the menu while an oatmeal breakfast will be rolled out nationally in January. 
  • Cosi, Inc., has announced that it has named Kimberly Letizia as its director of Culinary Innovation and Menu Strategy.  Letizia most recently acted as Corporate Chef Consultant to Kraft Foods.




Howard Penney

Managing Director

Bear Market Macro: SP500 Levels, Refreshed...

After a horrible pending homes sales number (down 30% sequentially in May; down -15.6% y/y), this bear market is gaining momentum to the downside. At a point, the SP500 will bounce from oversold levels – bear markets always do – but to lower-highs, as we keep selling off to lower-lows.


This morning’s ISM print in the US was more of the same in terms of what we saw overnight coming out of China (PMI slowed sequentially) – global economic growth is slowing. We walked through our GDP estimates for the back half of 2010 and into 2011 on our Q3 Macro Themes call this morning. Consensus is playing catch-up now in re-pricing expectations for go forward growth.


Some players are trying to pick the bottom here today. We’ve tried that in prior bear market cycles and don’t like the risk/reward setup in doing that here today - not in front of a long weekend and before another long line of America’s unemployed getting reported tomorrow morning.


Bottoms are processes, not points. Our immediate term TRADE line of support is now 1011.



Keith R. McCullough
Chief Executive Officer


Bear Market Macro: SP500 Levels, Refreshed...  - sp


The Hedgeye Macro Team, led by CEO Keith McCullough and Managing Director Daryl Jones, hosted our quarterly themes conference call today. To access the replay and the slides, please copy and paste the links below into your URL.









As a reminder, the 3Q10 Key Macro Themes are:

  1. American Austerity - As austerity measures are implemented around the world, the emerging debt and deficit issues in the U.S. will require an imminent and comparable policy response. 
  2. Housing Headwinds - The domestic housing market is faced with another leg down due to a supply and demand imbalance, which will begin to play out in Q3. 
  3. Bear Market Macro - Globally, there are a number of key markets that are in bearish quantitative set ups heading into Q3, which will position our tactical asset allocation. 

As always, if you have any questions regarding any of our processes or conclusions, please email .


We kindly thank you for your support.


Best regards,


The Hedgeye Macro Team

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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.