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Guido's War

"Not everything that is faced can be changed. But nothing can be changed until it is faced."

- James Baldwin


America, we have a serious problem. It’s time to face it, or we will crash again.


What’s the problem? A picture (see below) may be more powerful in communicating this simple point to your local professional politician than my interconnected global macro prose. These conflicted and compromised leaders of the Fiat Republic either have no idea what debauching our currency means or they are being willfully blind to it. Either way, they are putting their short term job security over your long-term wealth.


Pull up a chart of your Burning Buck. The US Dollar got hammered again yesterday and, sadistically, CNBC cheered. The US Dollar is down for 16 out of the last 19 weeks, losing -12% of its value, hitting fresh 8-month lows. Considering the systemic leverage issues in parts of Western Europe and Japan, this US Dollar crisis tells you everything you need to know about America’s problems relative to the rest of the Fiat Fools.


What does the rest of the world think about this?

  1. FIAT INTERVENTION - Governments are intervening in their respective currency markets at an unprecedented pace. Yesterday alone saw the following countries “intervene”: Japan, South Korea, Brazil, Argentina, India, Thailand, Malaysia, Indonesia, Philippines, and Taiwan.
  2. FIAT POLICY - Ahead of the IMF’s annual meeting with the World Bank in Washington, IMF Chief, Dominique Strauss-Kahn, told the FT, “there is clearly the idea that currencies can be used as a policy weapon” and that this would have “a negative and very damaging longer-run impact.”
  3. GUIDO’s WAR - Last week, Brazil’s Finance Minister, Guido Mantega, labeled this an “international currency war.”

Timmy Geithner, having never traded a currency market or protected the value of his citizenry’s currency in his life, was quick to tell Groupthinkers in DC that he “doesn’t know what” Guido’s War “means”…


Great Timmy… just great. Now that Larry is gone and your ideological overlord Robert Rubin won’t come within a square mile of a YouTube camera on the topic of sovereign debts issued in fiat currencies, America is hostage to your analytical incompetence on global macro matters.


America, if the head of the US Treasury doesn’t know … and the US Federal Reserve doesn’t know… but the rest of the free world knows… who in God’s good name is going to show President Obama a chart of the Burning Buck? I can assure you it won’t be Warren Buffett or Bill Gross. They’re both getting paid by short term performance on dollar down days too.


What do the other Fed Heads over at the Academy of Academic Dogma think?

  1. New York Fed Head Bill Dudley says “QE me” with as much free moneys from the heavens as Heli-Ben can create!
  2. Chicago Fed Head Charles Evans mercy crushed the US Dollar yesterday when he said QE “may not be enough”?!?

I couldn’t make this up if I tried folks, but markets don’t lie – politicians do. If you didn’t know New York City and Chicago Fed Heads get paid by Burning the Buck, now you know.


Admittedly, Dudley’s NYC cronies are getting paid with less immediate-term TRADE intensity than the boys in the pits of Chicago as of late. Check out the refreshed immediate-term inverse correlations between the US Dollar and the following:


Chicago Commodities

  1. Gold = -0.97
  2. Silver = -0.97
  3. Copper = -0.97

New York Stocks

  1. SP500 = -0.83

*note: Timmy, these are extremely high correlations.


Again, since the Secretary of the US Treasury will be the first to remind the world that he’s “not an economist”, we don’t expect him to get the math, or have a risk management radar that might signal Guido’s War to him if it was staring him in the face.


What I can assure you of my fellow Americans (and Canadians), is this – no country has ever debauched its currency, imposed inflation on its people, and played possum to what real-time markets and prices are doing. And ever, is a long time.


As short term stock market bulls beg Bernanke for QE, and the conflicted and compromised Fed Heads from Chicago to New York pander to this “reflation” battle cry that might resonate with 5% of this country’s population, this week’s ABC/Washington Post Consumer Confidence reading tells you that the other 95% of Red, White, and Blue Americans aren’t buying into this sucker’s rally. Been there, done that.


After the best September in 71 years for US stocks, weekly Consumer Confidence dropped like the pit that’s in my stomach right now to MINUS -47 from minus -45 last week.


NEWSFLASH: The rest of the world and 95% of Americans understand what Guido’s War is – Washington perpetuates it. As for the 5% of you who choose to stand in silence when you should be protesting as your currency burns at the stake, as Abraham Lincoln said, you are cowards.


My immediate term support and resistance levels for the SP500 are now 1144 and 1164, respectively. From here on up in the SP500 (north of 1164), and from here on down for the Burning Buck, the probabilities of a US stock market crash will continue to heighten.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Guido's War - ELwed


TODAY’S S&P 500 SET-UP - October 6, 2010

As we look at today’s set up for the S&P 500, the range is 20 points or -1.44% downside to 1144 and 0.28% upside to 1164. Equity futures are trading above fair value in a continuation of yesterday's strong performance. Japan's decision to lower rates yesterday has sparked increased expectations that the Fed will implement further QE measures with other countries likely to follow suit in what could be a coordinated action to stimulate global growth.

Today's macro highlight is September's ADP's Employment report ahead of Friday's nonfarm payroll reading.

  • Costco (COST) reported 4Q EPS 97c vs est. 95c
  • Diamond Foods (DMND) forecast FY11 EPS $2.38-$2.48, vs est. $2.45
  • Equinix (EQIX) sees preliminary 3Q rev. $328m-$330m vs est. $336.6 (also watch SVVS, RAX)
  • M&T Bank (MTB); Allied Irish will start selling 22.4% stake
  • Yum! Brands (YUM) raised FY 2010 adj. EPS forecast to $2.48 from $2.43, vs est. $2.49


  • One day: Dow +1.80%, S&P +2.09%, Nasdaq +2.36%, Russell 2000 +2.97%
  • Month/Quarter-to-date: Dow +1.45%, S&P +1.71%, Nasdaq +1.32%, Russell +1.95%
  • Year-to-date: Dow +4.95%, S&P +4.09%, Nasdaq +5.76%, Russell +10.22%


  • ADVANCE/DECLINE LINE: 1092 (+3429)
  • VOLUME: NYSE - 1239.17 (+31.31%)  
  • SECTOR PERFORMANCE: Every sector was higher - The bulk of the yesterdays upside driven by the heightened momentum behind the risk trade following the unexpectedly aggressive easing announcement overnight by the BoJ. The BoJ cut target for the overnight rate to a range of 0.0%-0.1% from its previous target of 0.1% and announced a ¥5T facility to purchase JGBs, commercial paper, corporate bonds, exchange-traded funds and real-estate investment trusts. The accompanying bout of dollar weakness helped drive the outperformance on the part of commodities and commodity equities, while pockets of the market with outsized leverage to global recovery expectations also fared well.
  •  MARKET LEADING/LAGGING STOCKS YESTERDAY: Harley Davidson +9.18%, Juniper +5.98% and Pioneer Natural +5.75%/Iron Mtn -8.58, Colgate Palmolive -1.96% and American Express -1.95%
  • VIX: 21.76 -7.52% - YTD PERFORMANCE: (0.37%)
  • SPX PUT/CALL RATIO: 1.16 from 1.48, -21.88%


  • TED SPREAD: 17.51 -0.741 (-4.061%)
  • 3-MONTH T-BILL YIELD: 0.12%, -0.01%
  • YIELD CURVE: unchanged at 2.09


  • CRB: 288.42 +1.56%
  • Oil: 82.82 +1.66%
  • COPPER: 376.20 +0.83%
  • GOLD: 1,340.25 +1.94%%


  • EURO: 1.3830 +1.02%
  • DOLLAR: 77.49 -0.89%%




  • European markets: FTSE 100: +0.92%; DAX +1.00%; CAC 40 +1.22%
  • Major indices remain strong with Mining, Construction, Financial Service sectors pacing other sectors.
  • Peripheral European markets up strongly with Greece's ASE Composite (+2.03%), Ireland's ISEQ (+1.25%) and Spain's IBEX (+0.66%)
  • Eurozone Q2 Final GDP +1.9% y/y vs prelim 1.9%
  • Germany Aug Industrial Orders +3.4% m/m vs cons +0.8%
  • Moody's places long-term ratings of Allied Irish Bank, Bank of Ireland plus ICS, EBS and IL&P on review for possible downgrade
  • Greece's 2009 budget deficit increases to 15.1% of GDP from 13.8% previously stated 


  • Asian markets: Nikkei +1.81%; Hang Seng +1.07%; Shanghai Composite (closed for public holiday)
  • Markets finished higher following yesterday performance on Wall Street. 
  • The Nikkei extended yesterday's gains building on the BOJ's unexpected rate cut and hopes of further quantitative easing from the Fed. Japanese Financials (+3.4%) led gains despite news that Japan's financial regulator is considering a capital surcharge for the country's largest banks.
  • Record high gold prices, driven by a faltering dollar, have driven gold mining shares higher. 
Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends















 The Macau Metro Monitor, October 6th 2010




The Monetary Authority of Macau released new guidelines on residential mortgage loans effective 12/1/2010. The guidelines include a maximum 70% LTV ratio, a maximum 50% debt servicing ratio, and mortgage loans which cannot have a maturity longer than the borrower's retirement age.



Early Look

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Conclusion:  China carried the third quarter relative to expectations, but commodity and labor inflation should take a toll on margins in 4Q10.  Top-line trends in the U.S. and YRI were positive, but continued to decline on a two-year average basis.  It will be difficult for the company to sustain its reported restaurant-level margin growth if trends do not improve in both the U.S. and YRI.

YUM 3Q10 earnings came in relatively in line at $0.73 per share versus the street’s $0.72 per share estimate, and management raised its FY10 EPS guidance to $2.48 from $2.43, matching the street’s full-year estimate.


Relative to expectations, China was the bright spot during the quarter with same-store sales growing 6% versus the street’s 4.0% estimate.  This 6.0% comp growth implies a 300 bp acceleration in two-year average trends from the prior quarter.  Restaurant margin grew 90 bps YOY, which was better than I was anticipating, as a result of both the better-than-expected comp growth and the fact that the company guided to both commodity and labor inflation in the back half of the year, which did not fully materialize in 3Q10.  Although the company did experience higher labor costs during the quarter, it benefited from another quarter of YOY commodity deflation.  That being said, management expects commodity and labor inflation to negatively impact margins in the fourth quarter.  To that end, I would expect restaurant-level margin to decline during 4Q10; though given the company’s strong year-to-date restaurant margin gains, YUM should easily achieve its full-year goal of growing restaurant-level margin in China.


Same-store sales growth came in below expectations in both the U.S. and YRI.  U.S. comparable sales growth was up 1% during the quarter relative to the +2.2% consensus estimate.  Pizza Hut posted another quarter of 8% comp growth, which at first glance, looked very impressive, but it is important to remember that the concept was lapping a -13% number from last year.  Positive comps are impressive in this environment, nonetheless, but two-year average trends decelerated 250 bps from the prior quarter.  This slowdown points to share losses within the casual dining segment given the improvement in two-year average Knapp trends in July and August (and rumored for September).  Please refer to my “KNAPP TRACK: SEPTEMBER (RUMORED) TRENDS” post for more details.


Taco Bell same-store sales came in +3%, which points to better trends on a one-year basis but slowing trends on a two-year average basis relative to 2Q10.  And, KFC just continues to be horrible.  Comps declined 8.0%, implying a 300 bp sequential deceleration in two-year average trends.  Management said that trends at KFC would be soft in the back half of the year as “there is no quick fix.”  YUM has been in the process of a turnaround at KFC for some time now and although the concept sees an occasional quarterly uptick in sales, we are yet to any sustained improvement in trends.  U.S. restaurant margin improved 30 bps YOY despite the sales shortfall, which management attributed primarily to refranchising. 

Comparable sales growth at YRI grew 1% in the quarter, in line with the prior quarter on a one-year basis, but implying a 50 bp slowdown on a two-year average basis. 


On the second quarter earnings call, management guided to stronger sales growth for the balance of the year at YRI, largely as a result of easier comps in the back half of the year, so this sequential slowdown in two-year average trends was disappointing.  The street was looking for 2.3% growth during the quarter.  That being said, restaurant level margin improved 160 bps, which the company again attributed to the impact of refranchising.




Investors seem to buying the "high single digit" corporate rate increase story for 2011.  Think corporate America is buying?



High single digit corporate rate increases for 2011?  That’s what the lodgers are implying and investors seem to be buying.  At best, that’s the starting point for lodging companies during their negotiations.  Someone needs to ask the corporations on the other side of those negotiations what they think.  Actually, we know of at least one very large firm that spends a lot on travel who doesn’t think they should pay one dollar more of rate.


Investors need to understand that it is posturing season.  Lodgers, especially Marriott, were very bullish regarding corporate negotiations on their Q2 conference calls.  We expect the same and more on the Q3 calls.  Marriott and maybe some of the other hotel companies will likely be aggressive in their 2011 RevPAR guidance as well to buttress their negotiating stance that room demand is high. 


However, look for less impressive bottom line guidance.  For one, higher EPS/EBITDA guidance won’t help their negotiating leverage so why not leave themselves cushion if their aggressive RevPAR guidance is not met?  Second, we think CostPOR may be 3-4% higher next year, meaning that rates will need to exceed that level for margins to go higher, as analysts are optimistically projecting.  Our private hotel contacts indicated higher cost expectations for next year which don’t appear to be factored into analysts’ projections.


So why do we think corporate negotiations may not be so one sided as implied by hotel management teams?  For one, a very large financial institution with a huge number of expected travel room nights up for grabs recently sent out a letter to the hotel companies.  If their hotel partners want to keep their "preferred" status (to which over 90% of their room nights get allocated) they won’t be paying more in rates in 2011 than in 2010.  They want their current rates rolled over.  We’re pretty sure they are not alone.  Employees of big companies are the only ones traveling.  These big companies have leverage.  This will be a fierce battle that will end up in the low to mid single digit rates in our opinion.  


Keep in mind that corporate rates are a call option that companies may use if prevailing market rates are above "corporate rates."  Contrary to popular belief, companies do not guarantee any room nights in return but rather historical room nights are used as leverage by companies.  Providing hotel partners "preferred status" is also a leverage tool used to drive deeper discounts.


Disagree with us?  Check out the following analysis by Egencia, Inc. which is Expedia’s corporate travel arm.  Egencia projects 2011 corporate rates to increase only 3%.  Incidentally, some of our private hotel contacts agree with us that absolute dollar RevPAR has actually been slowing for a couple of months which may put added pressure on the negotiations.  We think too many analysts take management’s word as gospel in this department.  Keep this in mind during the upcoming conference call (story telling) season.





Call recorded on: Tuesday, October 5th, 2PM EDT


To access the 4Q Key Macro Themes presentation materials, please click here.


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The Hedgeye Macro Team, led by CEO Keith McCullough, detailed Hedgeye's 4Q Key Macro Themes, which are as follows:

  • Japan's Jugular - The Keynesian experiment that is Japan will continue to implode in Q4. The Yen, JGBs, and Nikkei all remain at risk.
  • Krugman Kryptonite - As the Fed signals its intent to use more Krugman Kryptonite (printing dollars/ quantitative easing) we look at both the short and long term implications behind the faulty math of Dr. Krugman.
  • Consumption Cannonball - U.S. consumption will roll over sequentially in Q4 based on our bottom-up consumption model. This is a negative catalyst for our below consensus Q4 GDP domestic growth projections.

To submit questions for the Q&A, please email 




Hedgeye Macro Team

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