EARLY LOOK: Match Point




“I don’t have good luck in the match points.”
-Rafael Nadal


Shakespeare considered youth ambition’s ladder – I love that thought and I love watching winners play with confidence. If the younger players on my team don’t end up being better than me, it is I who has failed. Our congratulations to Spain’s Rafael Nadal for becoming the youngest player in the modern history of professional tennis to complete the Grand Slam.
The US stock market is all of a sudden starting to hit a few Grand Slams of its own. Yesterday the SP500 closed up for the 4th consecutive day and its 8th out of the last 9. At 1121, the SP500 has carried itself on the back of the Pain Trade (volume +25% day-over-day concentrated in 112 stocks) all the way back to the plus column for 2010 year-to-date.
To be clear, a YTD SP500 return of +0.5% isn’t even in the area code of challenging the 2010 global equity market leader-board (Sri Lanka leads with a +78% YTD gain, followed by Bangladesh and Latvia at +50% and +45% YTD, respectively), but it’s making the turn in the loser’s bracket that we call the Fiat Republic.

The structural impediment to long-term US economic growth isn’t very difficult to understand. It starts and ends with debt-financed-deficit spending that professional politicians call “stimulus.” We’ve beaten this Match Point into your inbox hard throughout the last few years. There is no such thing as luck when we unearth a Perceived Wisdom coming out of Washington, DC and take the other side. It’s called math.
The math in markets doesn’t lie; politicians do. As repetitive as that go-to baseline shot from the Hedgeye backhand is going to sound is as verbose as Paul Krugman is starting to sound trying to return it in bounds. There really is no refutation to the economic experience of the Fiat Republic of Japan – and the Big Government Spending fans of a former colony of “smart people” know it.
As a reminder, we have attached the most important global macro chart in Hedgeye’s current risk management slide deck this morning. This is the backhand that we want to see Krugman’s Kryptonite of piling-debt-upon-debt-upon-debt return. We call this chart “Crossing the Rubicon of Sovereign Debt” and overlay the growth of Japanese General Government Debt as a percentage of GDP with the Average Annual GDP growth of Japan by decade.
Here are the mathematical conclusions about growth in a losing country that saturates itself with debt:
1.      Japan Average y/y GDP growth: 1981-1989 = 4.6%

2.      Japan Average y/y GDP growth: 1990-1999 = 1.5%

3.      Japan Average y/y GDP growth: 2000-2009 = 0.8%

These last two decades have been pretty pathetic when you consider growth and innovation in this world like say, China and the Internet. In the moment however, how could Japanese bureaucrats being advised by Krugman in 1997 have known not to “PRINT LOTS OF MONEY”?
Our best answer to why is pretty straightforward – ambition’s ladder provided emerging global economies to take share from the world’s oldest and aging economy because it made itself most vulnerable to creative destruction. Capital chases yield – not zero growth, zero coupon, complacency.
Back to the Pain Trade that I mentioned earlier on but need to expand upon. When you read a missive like this, it’s pretty easy to get all beared up about America and its failed economic policy of printing moneys. That’s exactly the problem though. When something becomes this obvious, and it is, market participants tend to lean too far and too fast to the bearish side of the TRADE.
Since bear market bounces are usually more vicious than bull market ones, you need modern day risk management tools to defend against the machine like Nadals that are constantly going to grind you during every market minute of every market day. This isn’t to say managing money in modern days of an American Roman Republic that’s under siege is easy. This is just to say that this is the game that’s in front of you – so play it.
The Pain Trade is what’s carrying the US stock market higher, not some rah-rah speech from the Oracle of Government’s Got My Book. The America he built Berkshire out of didn’t have this debt. He has his own conflicts of interest. Don’t get upset about them – understand them, and take advantage of every market point you can get.
Understand the US stock market’s intermediate term bearish TREND has every opportunity to see smashing winners of bullish immediate term TRADEs. The TRADE (3 weeks or less) and the TREND (3 months or more) are two different Hedgeye durations and the real match points being made out there in the market every day have nothing to do with luck. They have everything to do with understanding Duration Mismatch.
Our intermediate term TREND line of resistance for the SP500 remains 1144, but a very convincing line of bullish immediate term TRADE support has asserted itself at 1085. Watch both of these lines very closely and play like a winner out there today.
Keith R. McCullough
Chief Executive Officer




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It was originally published at 8am this morning, September 14, 2010.  INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.


Fiscal 2010 was a really strong year for Cracker Barrel.  The company achieved positive restaurant same-store sales growth with two-year average trends improving each quarter.  Retail comparable sales improved to -0.5% from -5.9% in the prior year.  Operating margin grew about 80 bps YOY, helping to drive 25% EPS growth.  The year ended strongly with CBRL positing positive restaurant and retail comparable sales growth during the fourth quarter and a nearly 50 bp improvement in operating margin.  And, restaurant traffic turned positive during the fourth quarter for the first time since fiscal 1Q07.


To that end, Cracker Barrel started fiscal 2011 from a position of strength.  I think FY11 will be another good year, but it will not be a repeat of FY10.  Instead, I would expect the company’s rate of growth to slow in FY11, largely as a result of commodity costs, which are expected to work against the company during the year.  Management guided to a 1.5% to 2.5% increase in its FY11 commodity costs and currently has 61% of its costs locked for the year.  Commodity cost favorability should continue into the first quarter and then reverse during fiscal 2Q11 with management saying that the YOY commodity cost increase should peak during the second quarter and remain higher YOY for the balance of the year.  Specifically, the company highlighted its expectation for higher dairy and pork costs during the year.


Helping to offset these higher commodity costs are the expected lower labor costs through most of 1H11 until the company laps its lower healthcare benefit costs from a program it implemented in January 2010.  Management also expects to benefit from initiatives that should lead to improving productivity and labor competencies, lower incentive payments at both the store level and in the G&A line, improvements on the utilities expense line and from lapping some one-time expense items that hit the maintenance line in FY10 that are not expected to repeat in FY11.  Increased leverage from improving comparable sales should also benefit margins in FY11, but just how unfavorably commodity costs swing during the year is the biggest unknown for now.


Most of management’s fiscal 2011 guidance seems achievable; though the +2% to +4% retail comparable sales growth implies a sharp improvement in two-year average trends and could prove to be a stretch.  Outside of that, the company’s outlook appears within reach.  I would expect the company’s restaurant same-store sales momentum to continue.  I am currently modeling 10% EPS growth and a 30 bp improvement in FY11 operating margin, all within management’s guided ranges.  Again, this implies a slowdown from the 25% EPS growth and 80 bps of margin improvement in FY10.  Fiscal 1Q11 should continue to be strong as the company benefits from another quarter of favorable commodity costs, but operating margin should decline during the second quarter.


CBRL – FY10 WILL BE HARD TO MATCH - cbrl sigma png


Howard Penney

Managing Director


Once again the headlines from Washington paint a picture of a consumer that is spending like we are in a recovery.  A closer look at the components suggests a slightly different picture.

The bottom line form the Advance Retail Sales data today is that inflation is driving a higher level of sales but not an increased level of consumption.  As reported by the commerce department today (seasonally-adjusted and before inflation adjustments), retail sales were 0.42% in August; July was revised downward to +0.28%.  


In total, roughly 87%of the reported 0.42% gain was attributable to rising seasonally-adjusted food and energy prices, as seen in the improvement in sales at grocery stores and gasoline stations.  Net of inflation, August real sales were likely flat versus the downwardly revised July estimate of 0.28%.  Net of inflation and without the seasonal adjustment (the Washington fudge factor), August retail sales were most likely flat-to-down for the month of August.


The commerce department is reporting contractions in Vehicles & Parts, Furniture (home), Electronic stores and the miscellaneous categories.  This is consistent with non-government (and, in our view, more objective) data from Consumer Metrics which suggest a much more sever contraction in consumer spending.     


On a year-over-year basis, August 2010 retail sales were reported up by 3.5% from August 2009, versus a revised annual July gain of 5.4% (previously 5.5%).  The slowing year-over-year trends reflect the lack of government support in the economy (i.e. last year’s cash-for-clunkers stimulus benefits).   Going forward, it will be interesting to see if the monthly seasonal factors that are accounted for in the retail sales are adjusted to mask the underlying consumer trends.


The Clothing and General Merchandise categories benefited from the back-to-school shopping season and consumers taking advantage of the sales tax holidays in more than a dozen states.


When the smoke is cleared, it is clear that there is no real sequential improvement in retail sales and, in fact, things are slowing on a month-over-month and a year-over-year basis.


Howard Penney

Managing Director




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The Grind: What's In My Notebook

Feedback on the last grind was good. Here it is again – global macro/risk management PRICE and DATA points in my notebook from the last 48 hours:




1.       Chinese economic data for august = re-acceleration in growth (IP and Retail Sales) + expansion of money supply to +19.2% (AUG) vs +17.6% (JUL)


2.       Chinese equities have been up for 3 straight days, confirming bullish TRADE and TREND lines of support in the Shanghai Composite


3.       Indian Equities powered to higher-highs again last night = bullish TRADE and TREND confirming the same in Hong Kong, Indonesia and Singapore


4.       European equities continue to flash more bullish than US Equities as does the Euro vs the US Dollar


5.       Petrodollar stock markets (Russia, Norway, UAE, etc.) are now trading as bullish from a TREND perspective as the price of oil is


6.       Oil is holding its TREND line breakout from last week with TREND line support = $75.77/barrel


7.       Gold continues to flash higher-lows and higher highs; there isn’t a bullish line of price momentum that’s been challenged as suport


8.       US Budget Deficit spending line dropped 100bps sequentially (month over month) to +9.4% y/y growth (AUG) vs +10.4% in July.


9.       Brazil buying US Dollars to the tune of +$18.6B (net) YTD vs $7.3B in all of last year


10.   China introducing a CDS market by year end with allegedly tight control parameters


11.   Turkey’s PM Erdogan wins an important vote (58% to 42%) giving him increasing power over secular courts and army


12.   Basel3 timing pushes out the blowup case for banks out on the duration curve (9 years is to comply is a long time)


13.   Boehner falls in line with Obama’s middle class tax cut idea; give and takes = more, not less, tax cutting


14.   Frank Quattrone is back (selling Go-Daddy) and reminding us that bankers are back from holidays doing M&A


15.   SP500 continues to flash immediate term TRADE bullish (support = 1107) with upside to its intermediate term TREND range (1129-1144)





1.       Chinese inflation (CPI) pushed higher sequentially (month over month) to +3.5% (AUG) vs +3.3% (JUL) and September looks higher to me too


2.       Japanese Equities (Nikkei225) continue to flash very negative divergences vs both rest of Asia and the Fiat Republic nations


3.       UK CPI (AUG) sticky at +3.1% y/y vs the same in July


4.       German ZEW (confidence) drops to a 19 month low (-4 vs +14 last month)


5.       Greek equities and bond yields continue to flash the nasty; a breakdown for the Athex Index below 1575 will be very bearish for worlds worst mkt YTD


6.       US Treasury yields are dancing on coals on the short end of the curve with immediate term TRADE line of support for 2s at 0.52%


7.       Back to a compression day today in Treasury Yield Spread (bearish leading indicator) with yield spread contracting 8bps day over day


8.       US Dollar continues to act like the dog of the Fiat Republic – down over 1% yesterday and down 13 of the last 16 weeks


In summary, this chaos theorist still sees more bullish than bearish PRICE and DATA in the immediate term. That’s why the Hedgeye has more longs than shorts (14 longs, 7 shorts) as of this morning’s open. That can, and will, change as PRICE and DATA does.




Keith R. McCullough

Chief Executive Officer


The Grind: What's In My Notebook - The Grind

Chinese Growth: Sequential Slowdown Moderating?

Conclusion: The most recent batch of Chinese economic data supports the recent strength in Chinese equities and concerns that the government may have to induce further tightening to cool inflation. Further analysis shows that China may ultimately prove to be content with the current reading from a policy standpoint, opting to allow yuan appreciation to quell inflation going forward.


Position: Long Chinese equities (CAF); Long Chinese yuan (CYB)


As we anticipated, the Shanghai Composite has rallied 13.8% off its July 5th low on the strength of now-confirmed re-accelerating economic data. The supportive bullish data points include: 

  • Industrial Production growth re-accelerated sequentially  to +13.9% y/y in August versus +13.4% in July;
  • Retail Sales growth re-accelerated sequentially to +18.4% y/y in August versus +17.9% in July;
  • Money Supply growth re-accelerated sequentially to +19.2% y/y in August versus +17.6% in July;
  • and Loan Growth re-accelerated sequentially to 545.2 billion ($80B) yuan in August versus 532.8 billion yuan in July.

Chinese Growth: Sequential Slowdown Moderating? - China IP Retail Sales


Chinese Growth: Sequential Slowdown Moderating? - China Money Supply 


While these data points are supportive of a moderation of the broader slowdown within the Chinese economy, they do raise concern about the potential for incremental monetary tightening when taken in context of the latest inflation data.


CPI accelerated to +3.5% y/y in August – the highest increase in 22 months and well above the government’s full year target of 3%.  Driven by higher food costs, the 3.5% August gain is 125bps greater than China’s benchmark one-year deposit rate. The negative real interest rate setup is eroding the value of savings deposits as well as forcing some monies into real estate in order to earn a rate of return (investment in real estate development accelerated sequentially to +34.1% y/y in August versus +33% in July).


Chinese Growth: Sequential Slowdown Moderating? - China CPI


Chinese property prices, while down sequentially in August on year-over-year basis for the fourth consecutive month (+9.3%), have failed to make headway in the desired direction on a month-over-month basis for the past two months (flat in July and August). This has some investors worried that China could take further steps to cool the property market, including stopping loans to real estate developers, compulsory lowering of home prices, and a ban on third home purchases, according to a report from 21st Century Business Herald dated 9/8.


Chinese Growth: Sequential Slowdown Moderating? - China Property


Further, the acceleration in CPI, loan growth and the marked acceleration in money supply could suggest one of two things going forward. The first is that China may want to clamp down incrementally on its monetary policy should inflation continue to hover meaningfully above target. CPI, however, has averaged only 2.78% y/y in the year-to-date, so there is some headroom remaining for China to be flexible in its monetary policy going forward. On the flip side, Chinese loan growth at 5.72 trillion yuan YTD has only 1.78 trillon yuan of headroom left, which means loan growth must average 445 billion yuan per month through year-end if China is not to exceed its full year target of 7.5 trillion yuan. To put this in context, loan growth in China hasn’t been less than 500 billion yuan on a monthly basis since December of last year.


A second way to look at the acceleration in loan growth is that China could, in fact, be relaxing its previously-established lending ceiling to accommodate demand from the business sector in order to support domestic demand in light of slowdowns in Europe and the U.S. Moreover, the recent uptick and above-target annualized rate of loan growth may also be reflective of China’s recent mandate that banks transfer off-balance sheet loans back on to their books. Knowing full well that a lack of securitization will likely cause Chinese bank’s balance sheets to expand, China may be content to allow the 7.5 trillion yuan target in loan growth to be breached by year end.


Lastly, and shifting gears a bit, we want to highlight the August trade data out of China and how it relates to global commodity markets. Year-over-year Import growth accelerated sequentially in August (+35.2%) for the first time since March, which has been supportive of the oil and copper price of late, including crude oil’s recent TREND line breakout.


All told, China’s August economic data has been supportive of equity prices both domestically and globally. Furthermore, the accelerating inflation data has been supportive of the People’s Bank of China allowing the recent strength in the yuan, which today reached the highest level per dollar since the central bank unified official and market exchange rates at the end of 1993 (6.7435). Considering, China is likely to resist the urge to aggressively combat inflation by raising interest rates, and we expect the recent rally to continue as China seeks to decouple its growth prospects from its foreign counterparties by supporting domestic consumption. We also expect the yuan to continue to appreciate under its own merits, despite increased pressure from U.S. Congress to impose further trade sanctions.


Darius Dale



Chinese Growth: Sequential Slowdown Moderating? - China Trade


MPEL share remains strong, Wynn not so much.



Through 9/12, September table gaming revenues were HK$5.91 billion.  After factoring in the number of weekend days versus weekdays and anticipated slot revenue, this projects out to HK$15.0-15.4 billion, or 41-43% growth.  The second week in September clearly accelerated and we are hearing it was concentrated in VIP volume and VIP hold percentage.  Mass growth appears “sluggish” in comparison but obviously still very strong on a YoY basis.


In terms of market share, recent monthly trends are continuing.  Wynn’s table game revenue share dropped all the way down to 11.3%, well off its recent high of 17.2% in June, and below August’s 13.9%.  We are hearing Wynn held poorly on the VIP tables, below 2.3% versus a normal 2.9%.  MPEL continued its recent strength, at 16.0%, in-line with its recent high in August of 16.3%.  LVS share was substandard at 17.7% while SJM had a great start to the month at 34.4%.  Look for LVS and MGM to gain VIP share in the coming months, probably at the expense of the Peninsula - Wynn and SJM.


We would caution people that the data represents only 2 weeks and as we saw from week 1 to week 2, can fluctuate wildly.


MACAU ACCELERATES - sep 12 maca market share