“But their intervention makes our acts to serve ever less merely the immediate claims of our instincts.”

-Albert Einstein


I started intervening in the Hedgeye Portfolio yesterday, making my first sales (long or short) since September 3rd.


We’re still long Gold (GLD) and we didn’t sell any of that 6% position in the Hedgeye Asset Allocation Model as we saw yesterday’s melt-up in the World’s Replacement Currency a direct function of the fear trade – the fear of US Congress being back in session. We remain short the US Dollar (UUP).


Today’s market headlines are going to be dominated by the bad kind of intervention – government intervention. Particularly when it comes to the Fiat Republics of Japan and America, you have professional politicians who fundamentally believe that this is the only way out. It’s sad to watch losing teams repeat their mistakes.


Japan is intervening in its currency market this morning (bearish for the Yen - we are short FXY) and America is going to host another Groupthink Conference in Washington, DC where Timmy Geithner leads the unaware in pointing fingers at the Chinese for not intervening.


On Japan’s intervention, I found an interesting quote from Geithner who believes “deeply” in the Monetary and Fiscal Policy Manipulation model of the United States of America:


“They’re working through some difficult problems… My view is they should be focusing like we are on how to make sure they’re reinforcing recovery in Japan and doing things that are going to help.”


God help us all.


I’ve ended a few of my morning missives with this thought over the course of the last few days and it’s worth repeating in order to explain why I started making sales yesterday. The biggest risk to NOT selling US Equities here is US Congress and the “economists” that lead their decision making (Geithner says he’s “not an economist” by the way, so we’ll give him a hall pass as he’s only responsible for advising the President on economic matters).


Back to taking matters into my own hands via the Hedgeye intervention strategy…


Here are the moves we made intraday in the Hedgeye Portfolio yesterday. As opposed to Washington’s broken lip-service model, we are big believers in the modern day transparency/accountability model. We think the biggest opportunity in finance is showing the world what it is exactly you do when you make risk management decisions and why. Opacity is dying on the political vines of perceived wisdom.


1.  09/14/2010 10:22 AM


We're looking forward to seeing what happens to the Yen when the Chinese start blowing out of their short term JGBs. Japanese Yen intervention imminent - thats what Fiat Republics like this do.


2.  09/14/2010 10:42 AM


I haven't made a sale (long or short) since September 3rd. It's time to book a gain and I'll let a Financial out the door first. Steiner remains bullish on CIT's intermediate term TREND.


3.  09/14/2010 12:49 PM


See Tom Tobin's bearish note on Zimmer today for details. The stock is up today but is broken from an intermediate term TREND perspective. Shorting green. KM


4.  09/14/2010 03:20 PM


Keeping a mean reversion TRADE a trade. We don't have to buy-and-hold cocoa. KM


These are just the headlines for research reports we put out on these positions. They are punchy because we like punching some of the hedgies out there whose business model is bullying the sell-side. Everyone knows the sell-side’s horse and buggy whip model is stale. This market needs new blood – and we’re happy to be hated by those we can beat.


On the same day that we bought Chinese equities (CAF) we also published a research note titled “Japan - The World's Easiest LayuP” that outlines why we were shorting the Japanese Yen as it approached 83 versus the US Dollar. Rather than listen to a revisionist sell-side bull tell you today is a “buying opportunity” in the Yen, please email  if you’d like the view of the interventionist firm that called this before the “risk on” day.


Our immediate term TRADE lines of support and resistance for the SP500 are now 1107 and 1128, respectively. That’s the first time I’ve issued a lower-high of immediate term TRADE resistance for the SP500 since September 3rd. That’s a marginally bearish signal and the SP500 not being able to eclipse 1144 on a closing basis to the upside is an explicitly bearish one.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Intervention - FXY

VIDEO: China's Re-accelerating Growth

6:14am ET, September 14,2010


Hedgeye CEO and Bloomberg Television contributing editor Keith McCullough discusses China's re-accelerating growth and his decision to go long Chinese equities after a bearish outlook in Q1.




The chart below was extracted from a in-depth note dubbed "Chinese Growth: Sequential Slowdown Moderating?".  The note and additional charts in their entirety are available to Risk Manager subscribers in real-time.



VIDEO: China's Re-accelerating Growth - China New chart


INSIDE THE HEDGEYE NOTEBOOK: Sept. 14, 2010 - Notebook Image Hedgeye




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

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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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