Panza Policy

“Never stand begging for what you have the power to earn.”

-Miguel de Cervantes Saavedra


This is an important quote from one of Western literature’s most important authors. Cervantes wrote Don Quixote in two volumes (in 1605 and 1615) and to this day it is regarded as one of the greatest fictional works of all time.


Wikipedia summarizes the Cervantes central characters well: “Don Quixote is noble-minded, an enthusiastic admirer of everything good and great, yet having all these fine qualities accidentally blended with a relative kind of madness. He is paired with a character of opposite qualities, Sancho Panza, a man of low self-esteem, who is a compound of grossness and simplicity.”


As we prepare to hear the proclamations of Fiat Faith from our central planners in Jackson Hole, Wyoming this morning, we must realize that the developing story of Sancho America is far from fiction. Consumer and small business confidence in this country is abysmally low and the causes of the slowdown in US economic growth are being grossly misrepresented by both the US government and its dogmatic economic advisors.


The “grossness and simplicity” of it all is now being compounded by the world YouTubing us for who our professional politicians have become. When the most compromised and conflicted of all central planners in the world (Japan) launches into public attacks on Americans being “simple” and “single-celled organisms”, folks we have a problem.


Those are Ichiro Ozawa’s quotes. He is challenging the current Japanese Bureaucrat in Chief, Naoto Kan, to an election in Japan on September 14th. The battle lines have already been drawn. This economic disaster of a Japanese quantitative easing experiment provides for a proactively predictable political debate.


Never mind whether his challenger’s platform is calling America a modern day Sancho Panza, there is only one question that matters here. It’s the same question that the Fiat Republic of Japan has been asking of its countless PM’s since Paul Krugman talked the Bank of Japan into “PRINTING LOTS OF MONEY” in 1997. After only 2 months on the job will the current PM of Japan lose his job to an antagonistic charge that he isn’t doing more of what hasn’t worked?


What hasn’t worked in Japan is government “stimulus spending” that is financed with borrowed money (government debt). This week, the Japanese sold 1.1 TRILLION Yen in 20-year debt in order to ostensibly give Naoto Kan that last heroin shot he needs to give his citizenry another enema before the election.


All the while back in America we have our own Panza Policy that will be pandered to, big time, in Jackson Hole as the czars of ‘government is good’ throw down the gauntlet of their long-standing, fear-mongering, marketing message to the American people.


This morning, Paul Krugman has already accused the US government of “sugar coating” the messaging about the recovery. This must me some sad and sadistic attempt to make sure that the fear-mongering messaging that leaves America effectively begging Bernanke for free moneys remains Washington consensus.


Never mind empowering American independence and confidence. Out with the grind and grit that makes the great leaders on this country’s fields of battle earn the world’s respect. Bring in the government  - it’s the elixir you need – debt financed spending will give us all “the power to earn.”


I wish I was coloring Krugman unfairly – I really do. Sadly, the alternative to believing this man doesn’t have an impact on how Bernanke thinks is also fiction. In the flesh, here are the 2 comments that were most alarming to me in his New York Times editorial this morning:

  1. “This isn’t a recovery, in any sense that matters… and policy makers should be doing everything they can to change that fact.”
  2.  “We’ve already seen the consequences of playing it safe, and waiting for recovery to happen all by itself… It has landed us in what looks increasingly like a permanent state of stagnation and high unemployment.”

Alarming, yes. And being blunt about the economy being a mess isn’t what alarms me. It’s A) the misrepresented cause of the mess and B) the dogmatic solution to this mess that makes us trust government so little.


If Americans think that the answer to this Failed Fiat Experiment is empowering government to compound their Japanese spending and quantitative easing mistakes, this is not the United States of America that we used to be.


Put on our cowboy hats in Jackson Hole and pretend you are patriots. Begging for Bernanke and stimulus will have no power in earning this simple man in New Haven, Connecticut’s respect.


My immediate term support and resistance levels for the SP500 are now 1038 and 1070, respectively. I continue to register lower-lows of support and lower-highs of resistance on both the US Dollar and the US stock market. Stocks are down -14% since April and down -33% since 2007. These markets don’t lie folks, politicians do.


Have a great weekend and best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Panza Policy - eldd


The Macau Metro Monitor, August 27th 2010



Singapore visitor arrivals reached 1,095,000 in July (24.1% YoY growth), the first time that visitor arrivals have exceeded 1 million in a single month.  STB attributed the growth to improved travel sentiment, the two IRs, and the Great Singapore Sale.  Visitor days increased 21% YoY to 4.3 million days.

Indonesia (232,505), China (117,728), Australia (87,273), Malaysia (82,512) and India (64,862) were Singapore's top five visitor-generating markets. China registered the highest growth at 62.8%, followed by Malaysia at 52.6% and HK at 39.9%. Hotel room revenue increased 37.2% YoY to S$173 million as occupancy rose 10.2% points to 90% and ADR increased 19.9% YoY to S$209.




The unemployment rate for May-July 2010 was 2.9%, up 0.1% point over the previous period (April-June 2010).  Total labor force was 326,000 in May-July 2010 and the labor force participation rate stood at 71.5%, with the employed population decreasing by about 200 over the previous period to 317,000.  Number of the unemployed increased by about 300 from the previous period to 9,600.


TODAY’S S&P 500 SET-UP - August 27, 2010

As we look at today’s set up for the S&P 500, the range is 32 points or 0.88% (1,038) downside and 2.18% (1,070) upside. 

Equity futures are trading mixed to fair value as markets wait for the first revision to the Q2 GDP reading and Fed Chairman Bernanke’s speech in Jackson Hole. He is set to speak on "The Economic Outlook and the Federal Reserve's Policy Response"


After the close, Hewlett Packard (HPQ) raised its bid for 3PAR (PAR) to $27 a share.


Eli Lilly (LLY) got another court order temporarily blocking generic versions of Strattera drug while it appeals patent ruling J.Crew Group (JCG) cut FY EPS forecast to $2.25-$2.35, vs. est. $2.46


Netezza (NZ) boosted FY sales growth forecast to 30% from 20%


OmniVision Technologies (OVTI) reported 1Q rev. $193.1m vs. est. $204.1m

  • PERFORMANCE ONE DAY: Dow (0.74%), S&P (0.77%), Nasdaq (1.07%), Russell 2000 (0.84%)
  • PERFORMANCE MONTH-TO-DATE: Dow (4.59%), S&P (4.94%), NASDAQ (6.03%), Russell (7.86%)
  • PERFORMANCE QUARTER-TO-DATE: Dow +2.17%, S&P +1.60%, NASDAQ +0.45%, Russell (1.60%)
  • PERFORMANCE YEAR-TO-DATE: Dow (4.24%), S&P (6.09%), NASDAQ (6.63%), Russell (4.10%) 
  • NCE/DECLINE LINE: -867 (-1516)
  • VOLUME: NYSE - 1045 (-6.2%) - Waiting on Bernanke today
  • SECTOR PERFORMANCE: Every sector traded down yesterday
  • MARKET LEADING/LOOSING STOCKS YESTERDAY: Teradata +5.80%, Monster WW +4.70% and Red Hat +3.88%/Sandisk -5.24%, Ralph Lauren -5.18% and Pattersao -4.91%


  • VIX - 27.37 +2.51%          
  • SPX PUT/CALL RATIO - 1.47 down from 1.97  


  • TED SPREAD - 15.74 0.305 (1.974%)
  •  3-MONTH T-BILL YIELD .16% unchanged
  • YIELD CURVE - 1.985 from 2.01


  • CRB: 264.04 +0.865% - first up day in 6
  • Oil: 73.36 +1.16% - a 2 day rally
  • COPPER: 332.55 +2.91%
  • GOLD: 1,236 -0.24%


  • EURO: 1.2707 +0.04%
  • DOLLAR: 82.934 +0.39%


  • ASIA - Most markets ended mixed although Japan closed higher on a report that Prime Minister Naoto Kan would speak about steps to fight the rise in the yen.
  • Australian shares were lower on the back of banks and resources
  • Japan July seasonally adjusted jobless rate 5.2% vs. prior 5.3%. July core CPI (1.1%) y/y, matching expectations.
  • EUROPE - Major indices have drifted lower after a flat open with investors largely sidelined ahead of US GDP and Bernanke's speech at the Jackson Hole symposium.
  • Weighing on indices were Oil & Gas, Basic Resources, Financials and Technology, while Construction and Media were trending higher
  • UK Q2 GDP (first revision) +1.7% y/y vs. cons +1.6%
  • France 12M Industrial Investment 5% vs. prior 6%
  • Germany July Import Prices +9.9% y/y vs. cons +9.8%
  • LATIN AMERICA - Mostly lower - Argentina, Brazil and Mexico are trading down
Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends













get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.


Examining short interest in the restaurant space yields some interesting observations.


The data referred to in this post and shown in the chart below is reflective of short interest as a percentage of shares out as of the most recent release date of August 24th.  The settlement date of this data is August 13th, which was after the bulk of restaurants calendar 2Q earnings had been reported.  I have some thoughts and observations to share.

  • QSR has been pressed by the shorts with the past six weeks showing upticks in short interest data.  Casual Dining shows a diametrically different trend; shorts have been easing off.
  • Coffee retailers have been pressured recently by rising coffee prices and this is reflected in the heavy and sustained shorting of PEET and GMCR over the past two months. 
  • SBUX has remained largely immune to this trade, having reaffirmed guidance and demonstrated strong top line trends of late.
  • Along with the coffee retailers, CMG, JACK, and DPZ round out the top five gainers in terms of short interest in the most recent two weeks of data.  CMG, PEET and GMCR are the three most highly valued QSR stocks on an EV/EBITDA NTM basis (according to Factset estimates).
  • CMG can only maintain its recent high level of outperformance for so long and an upswing in commodity costs could impact the stock significantly.
  • DPZ’s top line performance will be difficult to sustain and dairy prices have been rising of late (as have foodstuffs in general).
  • JACK continues to be inundated by bad news.  Unemployment and California’s continuing woes are the main pain centers for the stock and investors are continuing to short that stock despite the low valuation.
  • BWLD, which has seen the shorts ease most recently (though short interest is still up sharply over the last two months), has been benefitting from the lower commodity outlook despite the unsustainable nature of their unit growth remaining a strucutral problem for the company
  • PFCB stands out purely because of the elevated level of short interest (highest absolute level among the casual dining names) and it ticked up in the latest release.
  • Back in July, writing on short interest, I wrote that for RRGB “pressing the short here is not a good bet here from a risk reward perspective” in light of news that an “activist investor” was pressuring the company.
  • Knapp track figures for the casual dining restaurants improved in July on a two-year average basis after declining for the three prior months, which might help explain the recent decline in short interest on average for the group.

SHORTS PRESSING QSR - short interest 826


Howard Penney

Managing Director


The first revision to 2Q 2010 annualized real GDP is due out on Friday.  According to Bloomberg estimates, there is an expectation for a large downward revision to 1.4% from an original 2.4%.


With the S&P down 4.2% this month and 3.7% year-to-date, the down shift in GDP growth is being reflected in the equity markets ahead of the print.  Tomorrow we could be setting up for manic media to make the last Friday in August to a “the-economy-is-not-as-bad-as-consensus-thinks” day.   Away from the media spin, the data shows that the economy is decelerating and revisions are bringing growth to lower and lower levels. That said, it appears that the downside impact of the weaker June trade data and expectation of lowered inventory levels may be overdone on an immediate term basis.


The Hedgeye estimate is for a revised GDP growth figure of 1.7% for 2Q.  Our view is that positive adjustments to the consumption figures will offset the negative trade data.  As always, it is in Washington’s best interest to dress up the numbers as much as possible. 


As Keith has been hinting to our clients on the daily Hedgeye Morning Macro call, our 3Q GDP estimate of 1.7% (consensus is at 2.5%) is headed lower.  Consensus estimates are even more out of line when looking at GDP growth in 4Q 2010 at +2.6%.  We will be adjusting the models accordingly over the weekend, but suffice to say that we see the chances that the economy contracts in 4Q10 growing by the day.


To be sure, the street is very bearish on the GDP print.  Today GS pushed up its second quarter real GDP growth to 1.2% from 1.1%.  We are bearish, but not quite bearish enough to short the S&P coming into the last Friday in August.


Howard Penney

Managing Director



The Brazilian Consumer – Getting Hotter

Conclusion: More bullish data points affirm our bullish stance on domestic consumption within Brazil.


Position: Long Brazilian Equities (EWZ)


As a result of favorable employment, inflation, and credit conditions, the Brazilian consumer is strengthening. Unemployment came in today at just 10bps off all-time lows (6.9% in July vs. 7% in June); inflation has improved on the margin for the past three months (down to 4.6% in July vs. 4.84% in June); and, as a result of benign inflation, interest rate hikes have come to a halt (recent reports suggest the central bank expects 3Q inflation to come in below forecast, further reducing the risk of a Selic Rate increase).


The Brazilian Consumer – Getting Hotter - 1


The favorable interest rate environment has led to an expansion in consumer and business credit that has reduced Brazilian bank holdings of government debt to record lows (22.7% of assets), according to Austin Rating, a Brazilian financial research firm. Moreover, recent central bank data show lending within Brazil has jumped to 36.3% of assets from 30% five years ago and outstanding loans rose for the 17th straight month in July.


The expansion in consumer and business credit is a national trend that is expected to continue, at least according to Rogerio Calderon, Director of Investor Relations at Itau, which expects its loan portfolio to grow as much as 23% in 2010. This is in stark contrast to the U.S. banking industry, which has seen commercial and industrial loans by banks fall 24% from the 2008 peak, according to the latest data from the Federal Reserve.


Long story short, consumers and businesses in Brazil want credit and banks have been more than willing to lend to them as a result of excellent labor market conditions. Brazil has added jobs ever month this year helping to push the unemployment rate to a near record-low in July. Wages have also been headed in the right direction: the average real income of workers grew 2.2% M/M in July and 5.1% Y/Y to R$ 1,452.50.


The confluence of these positive factors has been quite bullish for Brazilian consumer confidence, which rose 0.7% M/M in August (+9.2% Y/Y), according to Fundacao Getulio Vargas. The component index which measures the percentage of Brazilian families who are happy about their current financial situation grew 170bps M/M to 25.8% in August. Even more bullish for the outlook for Brazilian consumption is the August reading for the component index that measures the percentage of Brazilian consumers who intend to make major purchases in the coming six months rose 260bps M/M to 16.6% in August.


The uptrend in Brazilian consumer confidence, employment, and consumer credit is in stark contrast to what is happening domestically, and that is one of the key tenets of our bullish stance on Brazilian equities. We have conviction that capital will continue to seek yield globally and that will accelerate once U.S.-centric investors come to grips with slowing growth domestically. U.S. housing prices are setup to decline 15-50% (based on our proprietary Hedgeye supply, demand and inventory models). This will likely restrain consumer spending (~70% of the U.S. economy). Furthermore, we hold conviction that the cash sitting on U.S. corporate balance sheets will either continue sitting there or leave this country in search of higher yield. CFO’s are pro-cyclical and seldom invest during slowing business cycles. If they invest at all, it will likely be abroad as their capital seeks yield either through growth or higher rates of return. The Brazilian consumer has both. Perhaps that’s why one-third of the 77 foreign acquisitions of Brazilian companies in 1H10 were by American firms. Expect that trend to continue as long as the jobless, deleveraging and disheartened U.S. consumer stunts growth domestically.


The Brazilian Consumer – Getting Hotter - 2


Managing Risk: Petrobras and Election Update


Regarding the Petrobras saga, unnamed sources claim that the talks between the company and the government are advancing and the agreed-upon prices for the reserves will be $8 per barrel. The source affirms that the talks are being mediated by President Lula and he plans to announce the final price by the beginning of next week.


Regarding the election, Dilma Rousseff (Lula’s endorsee) has taken a commanding 20-point lead over her opposition in the latest Datafolha poll take on August 23-24 (10,848 voters). Her 49% of voter support is a mere 1 percentage point away from winning the election outright on October 3rd (a candidate must secure 50% of the vote to ensure a first round victory). Investors have been rightfully worried that her reputation for big government will keep a floor under the Selic rate as inflation looks to accelerate during her tenure. In a response to such fears, an unnamed source recently reported via Folha de S. Paulo that she agrees with the need to cut government spending in order to keep a lid on the Selic rate and that she and current President Lula have been discussing austerity measures. Keep in mind that this report was released just days before the government revised down its Jan-Aug. budget surplus target due to excessive spending. If, however, these reports are in the area code of true, expect big things from Brazilian equities as we roll forward into 2011.


Darius Dale



Moshe Silver

Chief Compliance Officer