TODAY’S S&P 500 SET-UP - September 30, 2010

As we look at today’s set up for the S&P 500, the range is 14 points or -0.11% downside to 1140 and 1.12% upside to 1154. Equity futures are trading above fair value as Asian and European markets rally on strong Chinese PMI data. Crude oil remains close to a 7-week high on the prospects for improving growth and on news of political unrest in Ecuador.

Today is a busy day for macro releases with September ISM report, August Personal Income/Spending figures and the final reading to September's UofM Consumer Confidence.

  • Accenture (ACN) sees FY 2011 EPS up 13%-16% vs previous 12%-15%, implying $3.00-$3.08 vs estimate $2.90
  • Gymboree (GYMB) is considering putting itself up for sale, WSJ reports
  • Hewlett-Packard (HPQ) appointed former SAP CEO Leo Apotheker as CEO and president, succeeding Mark Hurd
  • Lawson Software (LWSN) sees 2Q adjusted EPS $0.11-$0.12, vs estimate $0.12
  • MetLife (MET) said interest rate of 2.5% on 10-year Treasuries would reduce 2011 earnings by ~$0.20 per share
  • Teekay Tankers (TNK) plans to offer 8.2m shares


  • One day: Dow (0.44%), S&P (0.31%), Nasdaq (0.33%), Russell 2000 (0.22%)
  • Year-to-date: Dow +3.49%, S&P +2.34%, Nasdaq +4.38%, Russell +8.11%


  • VOLUME: NYSE - 1283.38 (+26.79%)  
  • SECTOR PERFORMANCE: Long live REFLATION - Only one sector up yesterday XLE
  •  MARKET LEADING/LAGGING STOCKS YESTERDAY: Devry 4.95%, American International +4.41% and Tyson +3.89%/Prudential -4.16,CF Industries -3.88% and JDS -3.35%
  • VIX: - 23.70 +1.94% - YTD PERFORMANCE: (+9.32%)
  • SPX PUT/CALL RATIO: 1.76 from 1.42 +23.82%


  • TED SPREAD: 13.48 -0.203 (-1.481%)
  • 3-MONTH T-BILL YIELD: 0.16%
  • YIELD CURVE: 2.11 from 2.11


  • CRB: 286.86 +0.33%
  • Oil: 79.97 +2.71%
  • COPPER: 365.15 -0.27%
  • GOLD: 1,307.52 +0.18%


  • EURO: 1.3621 +0.07%
  • DOLLAR: 78.72 +0.04% - An up day! Not going to last!




  • FTSE 100: +0.89%; DAX +0.73%; CAC 40 +0.49%
  • Major indices have started the final quarter on a positive note following on from gains seen across Asia helped by strong Chinese PMI data for Sep.
  • Oil & Gas and Basic Materials are pacing gainers as commodity prices gain.
  • European PMI data painted a mixture of manufacturing strength across the region
  • Repsol (REP.SM) announces jv with China's Sinopec (SNP) to develop Repsol's Brazilian assets
  • Eurozone Sep Final Manufacturing PMI revised up 53.7 vs Flash 53.6
  • Germany Sep Final Manufacturing PMI 55.1 vs prelim 55.3
  • UK Sept manufacturing PMI 53.4 vs cons 53.8


  • Nikkei +0.37%;Shanghai Composite (closed)
  • Strength in commodity prices including a surge in crude oil to the highest in seven weeks helped equities across the region.
  • Strong Chinese PMI helping sentiment.
  • Nikkei up on expectations that the BoJ will take additional steps towards monetary easing at its policy meeting next week.
  • Japan Aug jobless rate 5.1% vs cons 5.2%, core CPI (1%) y/y vs cons (1%); overall Aug CPI (0.9%) y/y
  • China manufacturing Purchasing Managers' Index 53.8 vs prior 51.7

Howard Penney

Managing Director


THE DAILY OUTLOOK - levels and trends














The New Storytelling

“Prosperity and overconsumption was driven by asset inflation that in turn was leverage and interest rate correlated.”

-William H. Gross


From my inbox, I’ve been a long time student of Bill Gross. He is one of the most influential teachers on the buy-side. He’s a great communicator. He’s somewhat transparent about his positioning. And he’s certainly accountable to his investors’ returns.


He’s also got the US Federal Reserve in his back pocket.


I’m highlighting the aforementioned quote from Gross’ Investment Outlook missive for October titled “Stan Druckenmiller is Leaving”. It’s one of those macro sentences that you need to read slowly. Then you need to read it again. It’s solid, but it needs a little love. Subtract the qualitative word PROSPERITY and add the words DOLLAR DEVALUATION. Then you’ll see Hedgeye’s New Reality intersect PIMCO’s New Normal.


“Overconsumption was driven by asset inflation that in turn was leverage, interest rate, and Dollar devaluation correlated.”


Not that I keep track, but we introduced The New Reality before Gross went with The New Normal. The New Reality abides by the principles of chaos theory. The New Reality is that normal is grounded in uncertainty. The New Storytelling of global markets will be shaped by the math that backs it.


So let’s dig into some math…


As of last night’s Q310 closing prices, here are the top 10 inverse correlations (using our immediate term TRADE duration) versus the US Dollar Index:

  1. America’s SP500 = -0.89
  2. India’s SENSEX = -0.91
  3. Brazil’s Bovespa = -0.92
  4. Reuters CBR Commodities Index = -0.96
  5. Gold = -0.96
  6. Copper = -0.89
  7. Silver = -0.97
  8. Cotton = -0.91
  9. Sugar = -0.94
  10. Rice = -0.92

The first thing you should say about anything in the area code of a 0.90 correlation is wow. The second thing you should say to the government that perpetuates this debauchery of your currency is shame on you.


As for Mr. Gross, I’m not quite sure what to say. After all, he does run the world’s largest bond fund – and that fund proved to not do so well during the DOLLAR DEVALUATION days of 2008.


That’s not a shot at Bill Gross. That’s reality. If you debauch the currency of a nation, you will ultimately get inflation. Sequentially rising inflation is bad for bonds. When oil hit $150/barrel and copper was at $4/lbs, neither Greenspan nor Bernanke saw inflation, but PIMCO’s investors did. Overlay PIMCO’s Total Return Fund with Treasury Inflation Protected securities (TIPs) for the first 9 months of 2008 and you’ll get the picture.


The New Reality is that Bill Gross gets paid to talk about the New Normal, not QE’s impact on the US Dollar. On our immediate term risk management duration, the US Dollar has an inverse correlation versus the PIMCO Total Return Fund of … drum roll for the storytellers in the Haven… -0.91!


What we’ve learned in the last few years is that DOLLAR DOWN = REFLATION until these inverse correlations get too high and REFLATION becomes INFLATION. Sure, there’s deflation in US Housing – but there’s been longstanding deflation in the price of tulips and Japanese real estate too.


The US Dollar is getting annihilated (down 15 of the last 18 weeks and down -11% since June). Those getting paid by this may not care, but the other 95% of people who live in this country do. How else could the US stock market have its best September since 1939 and US consumer confidence drop?


I bought back my inflation protection in both the Hedgeye Portfolio and Hedgeye Asset Allocation Model yesterday (TIP). My immediate term support and resistance levels for the SP500 are now 1140 and 1155, respectively.


Correlations in markets are never perpetual, but The New Storytelling of Wall Street is.


Best of luck out there today and enjoy your weekend,



Keith R. McCullough
Chief Executive Officer


The New Storytelling - gross

PSS: More to Go

We all know that the sentiment turned in PSS’ favor over the past 3 weeks, but one needs to at least question if there’s more to go. We think Yes. The fact that PSS insiders have recently bought stock is not a secret – but it is notable given that selling stock has been in their arsenal of tricks much more than buying it over the past 5-years. In fact, for the most part the larger stock transactions were pretty darn good.  We also think that the company is more likely than not trending ahead of its stock repo activity plans quarter-to-date. If so, it’ll be nice to see them step into a capitulation by the Street. Again, this goes against the grain as to how PSS has traditionally acted. Add to that the more positive sales environment for footwear, a stabilizing gap between PSS and competition (which has been the root of its problems), estimates being in check for this quarter, and the company hosting an analyst meeting later this month, and we’re finally at a point w/PSS where its’ got some more wind at its back. 


PSS: More to Go - pssstocksale

PSS: More to Go - PSS Insider Activity Table 9 10


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Conclusion: Recent data points suggest that industry sales trends continue to improve, especially for the more upscale, well positioned concepts.  The most recent consumer conference data points are a clear indicator as to why. 


Consumer confidence continues to be one of the key metrics that management teams look at to predict future sales trends.  As is evident from the chart below, the spread between the confidence levels in the top income bracket versus those in other income brackets has generally expanded during the last couple of years.


The message has been clear throughout this “recovery”: the higher socio-economic strata have been leading the upturn while lower classes continue to struggle.  There are a number of datasets to point to in this regard; participation in the Supplemental Nutrition Assistance Program is probably the most telling.  As of June 2010 there were over 41 million Americans participating in the program.  The bifurcation in restaurants sales trends has reflected this reality but, going forward, it is possible that the space may start to see a convergence in performance across average check levels.  If the spread between confidence levels in the $50,000 and over income bracket and confidence levels in the other income brackets continues to converge, it could have a marginally negative impact on sales trends in higher-end restaurants.  A return to the scenario shown in early 2009, below, where all brackets are tracking closely in terms of confidence, would imply a slowing in sales trends at higher end concepts which have been outperforming, accordingly, as high income confidence levels have outstripped the other income brackets’ confidence trends.  




It is interesting to note that the surge in confidence among the “$50,000 and over” income bracket has tracked, and continues to track, what we call “the piggy banker spread”, or 2-10 yield spread, very closely.  It is important to note that this spread has been compressing since the first quarter of 2010, moving meaningfully downwards since midway through the second quarter.  The ensuing trend augurs poorly for the financial industry which is a negative for business traffic in casual dining – particularly for MRT.  Josh Steiner, head of Financials at Hedgeye, believes that the headwind of sequential declines in the yield spread will grow in significance “as it affects most companies on a lag”.  An article published today in The Wall Street Journal titled, “Wealthy Take a Bigger Helping of Fast Food”, underlines this point.  A survey conducted by American Express revealed that 24% of “ultra-affluent” consumers boosted their fast-food spending by 24% in the second quarter, compared with the year-earlier period versus 8% growth among the rest of U.S. consumers.  A senior executive of American Express Business Insights, Ed Jay, said that while a lot of affluent consumers are trying to spend less on food by frequenting quick-service restaurants and discount retailers, they continue to spend on air travel and luxury items.  “Ultra-affluent” is defined as consumers who charge $7,000 or more per month to their cards and meet certain income criteria.


During the last few days we have heard some commentary from management teams on their macro outlook.  Some insights worth repeating include:

  • “The best evidence of that [Darden’s good position in consumer space] is how well the industry has performed during the economic downturn compared to some other important consumer-related industries” -- Clarence Otis, Darden CEO, 9/29
  • “We expect meaningful same-restaurant improvement this year [at Capital Grille], as business and luxury spending continue to rebound” -- Clarence Otis, Darden CEO, 9/29
  • [On business activity continuing to grow in 2011]: “People are going to get on the road. They’re going to get on planes, they’re going to get on trains, they’re going to be staying in hotels. And once again, if people are out on the road trying to grow their top line, some of them are going to fall into our restaurant” -- Bert Vivian, P.F. Chang’s China Bistro CEO, 9/29
  • “Companies need to get out on the road.  I have heard from many, many businesses…we are seeing it.  We are seeing it in our private board room and our Monday through Thursday business.  That’s our higher margin business.  The Monday through Friday business is typically the business traveler” -- Ron Dinella, Morton’s Restaurant CFO,9/29

Despite the fact that most restaurant companies have guided to improved same-store sales growth in the back half of the year, it was surprising to hear overwhelmingly positive comments out of most of the companies presenting over the last few days in light of the reported decline in consumer confidence. 


As I said yesterday, PFCB’s Co-CEO Bert Vivian sounded modestly optimistic about 2H10 and FY11 top-line trends for PFCB and the overall industry.  Morton’s reaffirmed its +4-6% FY10 comp guidance, which implies a sharp improvement in two-year average trends in the back half of the year.  After the company reported 2Q10 results, I said this guidance seemed aggressive, but management is now maintaining this guidance after nearly completing its third quarter.


This optimism only affirms the high-low society thesis, however, as both PFCB’s Bistro and Morton’s draw a large proportion of its guest counts from business travelers.  At the Bistro, about 30% of tickets end up on expense accounts versus about 80% for Morton’s.  Contrasting this more positive outlook, the best news that both JACK and WEN could provide was that trends appear to be stabilizing. 


Both RT and CHUX, which are situated in the middle of MRT and QSR in terms of average check, talked about their outlook for improved trends but at the same time, they hedged those comments by highlighting the difficult economic environment.  Specifically, RT management said the world is going to be sluggish for the next 3-5 years, or as long as deleverage takes, but that it is seeing a little upside relative to earlier in the summer.  CHUX management stated that the environment is still challenging and as a result of high unemployment, falling home values and declining confidence, consumers are dining out less and are chasing more value.  That being said, he said there was a positive shift in momentum in 2Q, which he expects to continue into the second half.


Reflecting the casual dining industry as a whole, DRI said on its fiscal 1Q11 earnings call that industry same-store sales trends are improving faster than it had expected and the bulk of that growth is being driven by better performance among the higher average check concepts.




Howard Penney

Managing Director

US Dollar: Ugliest Macro Chart In The World

This note was originally published on 09/29/10 at 13:27PM EDT. 






US Dollar: Ugliest Macro Chart In The World - chart1



No, I’m not telling you to short the US Dollar right here and now. It will finally be immediate term oversold within 50 basis points from today’s price.  That said, you should continue to short it with impunity on rallies to lower-highs until America changes its conflicted and compromised monetary policy.


I typically don’t short-and-hold. But in this case I am, at a bare minimum, evolving my investment style. I shorted the US Dollar on June 7th when consensus about “Euro Parity” was running rampant and the US deficit and debt ratios were about to cross the proverbial Rubicon of risk. Risk for anyone with a US Savings account (which yields ZERO percent) or anyone who cares about the US Dollar-adjusted-value of their wealth, that is… read this note in it's entirety, and to receive more real-time research and portfolio positions, please sign-up for a free-trial or subscribe.



US Dollar: Ugliest Macro Chart In The World - Lincoln


"To stand in silence when they should be protesting makes cowards out of men."
- Abraham Lincoln



Keith R. McCullough
Chief Executive Officer

Unemployment’s Tale in Two Countries: US vs Germany

Position: Long Germany (EWG), Long British Pound (FXB), bullish on EUR-USD; Short Italy (EWI)


Conclusion: We don’t see the US unemployment rate turning around materially anytime soon, which should contribute incrementally to USD weakness. German unemployment shows an entirely different slope, one we believe adds to the country’s bullish outlook.  


Today Germany released its unemployment rate, which dropped 10bps versus the previous month to 7.5% in September. While we acknowledge that we’re not comparing apples to apples in looking at Germany’s unemployment rate versus the US’s (see chart below) we do have a few remarks on the implications of their utter divergences.

  1. Remember that Germany issued a $16 Billion subsidized part-time work program (Kurzarbeit) in the early part of 2009. By all accounts the chart would suggest the program helped to mute an upturn in the unemployment rate during the global recession.  Conversely, the US unemployment rate ramped up through the Great Recession, and has a contributing factor in our call for a much lower GDP estimate than most on The Street for 2010 and 2011.
  2. As our Financials analyst and jobless claims guru Josh Steiner has demonstrated in his research, US jobless claims have yet to come down to the 375-400K range, a level that has been shown historically to encourage the unemployment rate to dip meaningfully.
  3. With consumer consumption comprising a larger percentage of GDP in the US versus Germany (~70% versus ~50%) and wage and salary inflation minimal over recent months in both countries, we believe the US economy will be more hostage to a higher unemployment rate.  

We continue to contend that US unemployment rates in the 9-10% range should contribute to further erosion in the USD. One TRADE we think can work here is long EUR, short USD, despite the ongoing sovereign debt contagion threats across the Eurozone.


Matthew Hedrick



Unemployment’s Tale in Two Countries: US vs Germany - unemploy

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.67%