TODAY’S S&P 500 SET-UP - October 26, 2010

As we look at today’s set up for the S&P 500, the range is 11 points or -0.64% downside to 1178 and 0.29% upside to 1189.  Equity futures are trading below fair value having closed higher on Monday in what was an otherwise quiet start to the week. Today sees steady flow of corporate earnings, including Dupont, Bristol-Myers and US Steel. In economic releases, Conference Board Consumer Confidence, Aug Case/Shiller Home Prices plus the FHFA House price index are center stage.

  • Amgen (AMGN US) reaffirmed 2010 guidance; 3Q rev., adj. EPS beat est.
  • Berkshire Hathaway (BRK/B) hired Castle Point Capital Mgmt’s CEO Todd Combs to manage a “significant portion” of the investment portfolio
  • Digital River (DRIV) 3Q rev. beats, sees 4Q rev. above est.
  • Edwards Lifesciences (EW) sees 2010 rev. $1.435b-$1.455b vs est. $1.44b, had seen bottom $1.43b-$1.50b   
  • Plum Creek Timber (PCL) sees 2010 EPS cont. ops $1.28-$1.35, had seen $1.35-$1.50 in July vs est. $1.46
  • Prologis (PLD) plans to lower its quarterly div. to 11.25c-shr
  • Rent-A-Center (RCII) exploring strategic alternatives with respect to its financial services business, may include sale or divesture of such business
  • Synovus Financial (SNV) 3Q loss 25c-shr vs est. loss 22c
  • Texas Instruments (TXN) sees 4Q rev. $3.36b-$3.64b, est. $3.52b; 4Q adj. EPS 59c-67c, est. 63c
  • Veeco Instruments (VECO) sees 4Q adj. EPS $1.46-$1.74 vs est. $1.45, sees 4Q rev. $285m-$320m vs est. $316m
  • Williams (WMB) boosted its quarterly dividend payout to 68.75c- shr from 67.25c-shr


  • One day: Dow +0.28%, S&P +0.21%, Nasdaq +0.46%, Russell +0.63%
  • Month/Quarter-to-date: Dow +3.49%, S&P +3.89%, Nasdaq +5.16%, Russell +4.7%
  • Year-to-date: Dow +7.06%, S&P +6.32%, Nasdaq +9.77%, Russell +13.19%
  • Sector Performance: Materials +1.73%, Consumer Discretionary +0.56%, Healthcare +0.47%, Telecom +0.37%, Tech +0.27%, Industrials +0.2%, Consumer Staples +0.17%, Energy +0.1%, Utilities (0.32%), and Financials (0.41%)


  • VOLUME: NYSE: 1007.37 (+30.32%)
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Advance Micro +5.37%, Eastman +5.08% and Dow Chemical +4.50%/Radioshack -9.04%, Avon -4.10% and Legget & Platt -3.43%.
  • VIX: 19.85 +5.70% - YTD PERFORMANCE: (-8.44%)
  • SPX PUT/CALL RATIO: 1.91 from 1.06 +80.63%


  • TED SPREAD: 17.18 -0.203 (-1.169%)
  • 3-MONTH T-BILL YIELD: 0.14% +0.01%   
  • YIELD CURVE: 2.22 from 2.24


  • CRB: 300.31 +1.04%
  • Oil: 82.51 +1.02% - BULLISH
  • COPPER: 386.30 +1.74% - OVERBOUGHT
  • GOLD: 1,335.45 +0.86% - BULLISH


  • EURO: 1.3961 +0.05% - BULLISH
  • DOLLAR: 77.103 -0.48%  - BEARISH



European markets:

  • FTSE 100: (0.62%); DAX (0.11%); CAC 40 (0.49%)
  • Major indices were weaker with the Basic Resource sector hit by a cautious outlook statement issued by ArcelorMittal with banks down despite UBS reporting a return to positive net money flows at its private bank.
  • Sweden's central bank raised its repo rate by a quarter of a percentage point to 1%
  • UK Q3 prelim GDP +0.8% q/q vs cons +0.4%
  • France Oct Consumer Confidence (34) vs cons (36)  

Asian markets:

  • Nikkei (0.25%); Hang Seng (0.11%); Shanghai Composite (0.32%)
  • Markets closed mostly lower in fairly quiet trading.
  • Japan opened slightly lower on a strong yen, turned positive in the afternoon but ended in the red.
  • Investors, however, seemed to be waiting for earnings reports later this week.
  • Tech stocks were mostly lower in South Korea although the market was flat.
  • Financial stocks retreated in Australia after making gains yesterday on M&A news
  • Japan Sep corporate services price index (1.1%) y/y, (0.1%) seq. 
Howard Penney
Managing Director


The Macau Metro Monitor, October 25th 2010


Steve Wolstenholme, COO of Galaxy Macau, and Jeff King, senior vice president of marketing for Galaxy Macau, have decided to leave.  Galaxy said Mr. Wolstenholme resigned for personal reasons and will leave the company in November. Galaxy Entertainment President Mike Mecca will assume his duties in the interim.  Raymond Yap, the company's senior vice president of international premium market development, will take over Mr. King's duties while the company looks for a permanent successor.


Galaxy said the management changes won't affect the company's performance or its Cotai project, which is still set to open in early 2011.


IGT sales manager Mick Caban is bullish about the outlook of the local gaming market in Macau and confident the company will be able to expand their business activities by up to 55% across Asia in the foreseeable period, despite increased competition and tougher regulations from the SAR government.


According to China Securities News, real estate prices in China will remain fairly stable for the rest of the year and the property tax pilot program will potentially roll out by the beginning of March 2011.

Lecturing Myself On Shorting, Part II

“Learn to fail with pride and do so fast and cleanly. Maximize trial and error, by mastering the error part.”

-Nassim Taleb


Before I shorted the SP500 on October 13th, I wrote an Early Look note that was titled “Lecturing Myself On Shorting.” I shorted the SP500 again yesterday, so I figured I’d call this morning’s note Part Deux. Immediate term tops are processes, not points.


Chapter 1 of Pablo Triana’s “Lecturing Birds On Flying” provided some food for thought in my initial note and this morning I’ll review Chapter 2, “The Financial Economics Fiefdom” where Triana takes the ball right up the middle on the academic dogma that permeates the US economic system.

  1. On Milton Friedman – Triana argues that the heart of Friedman’s economic theory is that “theories should not be judged based on the realism of their assumptions.”
  2. On Business School – Triana writes on page 37 that, “In sum, B-schools discarded tangibly accurate knowledge and information while embracing what may be deemed as analytical make-believe.”
  3. On Herbert Simon – Triana reminds us that it was Simon who “held behavioral parapet, embracing observation-based empiricism and avoiding dogma-based economic theory.”

Most financial types know who Milton Friedman was but couldn’t tell you much about Herbert Simon. As I read Triana amplifying his point by calling out Simon’s name, I couldn’t help but smile.


Herbert Simon wrote one of my favorite multi-factor modeling books, “Models of My Life.” Charlie Munger recommended it at one of Berkshire’s annual meetings. As Triana points out, Simon was a Hedgeye kind of guy - he “ruthlessly ridiculed the financial economists’ assumptions about human action.”


My analytical team doesn’t wake-up every morning looking for someone to chirp. Keynesians are easy targets right now. They missed Jobless Stagflation in the 1970s too. Fed Chief Arthur Burns opted to monetize US Treasury debt and a Debauched Dollar was the result. Back then, the Nobel Prize in Economics was a new award. Today, some of the biggest risks in life are associated with investing alongside the academic premise of a Nobel winner.


This is where the likes of Simon, Soros, and real-time market practitioners of daily risk management take over the game. Anytime we see someone talking up an economic theory (QE2) that we’d have reserved seating for in the cheap seats, we’d just as soon call these wannabe market players out for who they really are. They travel in packs and are rarely accountable to their theories where it matters – on the tape.


On page 41, Triana offers a solution to this mess. He writes that “once you have mastered the analytical toolbox through your PhD training, churning out research output that may be simply the result of repeatedly applying well-worn techniques… the amount of true innovativeness may be limited. Much more creativity is required from those who can come up with applicable actionable breakthroughs and hard industry knowledge.”


Then on page 43, Triana supports his solution by quoting the former dean of MIT Sloan School of Business, Richard Schmalensee: “The academic system’s current methods for hiring and rewarding professors don’t necessarily attract or encourage the kind of practitioner-oriented faculty we need to make business-school research and MBA education much more attuned to meeting today’s and tomorrow’s management challenges.”


Point made, Mr. Triana. Point made.


Anytime you take a position in this game, measuring time and space is critical. When it comes to timing a short position, I don’t think I ever really had anyone teach me in real-life never mind at school. Maybe that’s what makes me better than bad at shorting stocks. I teach myself by doing. I learn to fail with pride. And, in most cases, I try to do so “fast and cleanly.”


My immediate term support and resistance lines for the SP500 are now 1178 and 1189, respectively. For now, by all of +0.10% my current short position in the SP500 (SPY) is in the black. I raised the Cash position in the Hedgeye Asset Allocation Model to 64% yesterday.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Lecturing Myself On Shorting, Part II - lecture


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Spirit Of Defiance

This note was originally published at 8am this morning, October 25, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“There is no week nor day nor hour when tyranny may not enter upon this country, if the people lose their roughness and spirit of defiance.” 

-Walt Whitman


The world’s short-term US Dollar Debauchery trade is back in motion this morning: dollar DOWN = commodities and stocks UP. As the Buck Burns, Bloomberg’s #1 headline reads “G-20 To Avoid Competitive Devaluation.” Never mind the hypocrisy of it all - America’s currency is the only one being devalued. Provided that we don’t get suckered into buying stocks today, these will be looked back on as fascinating days in the Fiat Republic.


The good news is that, in addition to Americans pushing back against Washington’s economic policies, there is a Spirit of Defiance that’s building globally against Quantitative Guessing. Here’s a taste of what the respectable likes of Germany and Canada are saying:

  1. “It’s the wrong way to prevent or solve problems by adding more liquidity. Excessive, permanent money creation in my opinion is an indirect manipulation of an exchange rate.” –Germany’s Economy Minister, Rainer Bruederle
  2. “I agree that there’s suggestion that aggressive quantitative easing in the United States would create devaluation pressure on the US currency.” – Canada’s Finance Minister, Jim Flaherty

Maybe not so surprisingly, while Canadian and German interest rates remain higher than America’s, both countries have lower structural unemployment levels and both of their respective stock markets are outperforming the SP500 for the YTD (Germany’s DAX +11.7% and Canada’s TSE +7.3%).


As both the Euro and Canadian Dollar strengthen, their citizenry is becoming wealthier. As both the German and Canadian populations age, the rate of return on their hard earned savings accounts isn’t being compromised for the sake of Banker of America’s earnings. As the world turns, both German and Canadian culture isn’t being held hostage by CNBC and US style Congressional commercials. Fancy that.


In the end, this won’t end well for America. Most of us who aren’t creating an economic strategy that conforms to the confirmation-bias in our year-end bonus package get that. “There is no week nor day nor hour” that we can pinpoint when this will all become crystal clear. But that time will come.


Last week was interesting in that the US Dollar Debauchery trade actually paused. However fleeting that moment was, it certainly gave the buy-and-hope crowd something to think about. Like a cold buddy shower, that was a healthy risk management exercise to observe.


The US Dollar closed up +0.55% on the week. That was the 1st week that Burning Buck was up in the last 6 and only the 4th week out of the last 21. All the while, both weekly US Consumer Confidence (ABC/Washington Post poll) and the MBA Mortgage Applications indices fell.


Americans having no confidence to lever themselves up with a “cheap mortgage” or chase the stock market higher (after a +13% rally since Bernanke introduced QE2 at Jackson Hole on August 27th) is not new news. What is news is what happens to asset prices when, God forbid, someone (China) attempts to give the US Dollar and the cost of capital some credibility.


Gold closed down -3.4% last week and was the standout loser in a relatively strong week for the US Dollar. That will, of course, all reverse this morning as the Buck Burns again, but it’s more interesting to note that almost everything else didn’t react as poorly as I would have thought in the face of US Dollar strength. Everything macro was actually quite flat.


On a week-over-week basis, here’s what was flat despite the US Dollar being up:

  1. Small Caps (Russell 2000)
  2. Euro
  3. CRB Commodities Index
  4. Oil
  5. Volatility (VIX)
  6. Yield Spread (10s minus 2s)

Given the extremely high inverse correlations between the US Dollar and everything else, the most obvious question here is why flat? Well, the week didn’t occur in a vacuum. It was very lumpy. The US Dollar picked up all of its strength in a 24 hour move after the Chinese raised interest rates on Tuesday (USD up +1.7% that day and the SP500 was down -1.6%). Otherwise, the US Dollar was flat to down for the remaining trading hours in the week.


The other obvious reason as to why, is the discounting mechanism that I think poses the greatest financial risk to your net wealth - the undeniable market expectation that the US Dollar will be compromised by Quantitative Guessing in t-minus a few weeks. This, Ben Bernanke, is the government sponsored risk that’s got the bulls in heat. God Speed with that by the way. In the Spirit of Defiance I’ll be a short seller of the SP500 from here until then.


My immediate term support and resistance levels for the SP500 are now 1165 and 1188, respectively. In the Hedgeye Virtual Portfolio, I’m currently short both the US Dollar (UUP) and the SP500 (SPY). The Cash position in the Hedgeye Asset Allocation Model is a healthy 61% (down from 67% last Monday). I’ll look forward to raising that Cash position today.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Spirit Of Defiance - ww

Bear/Bull Battle: SP500 Levels, Refreshed...

POSITION: Short the SP500 (SPY)


We shorted the SP500 today at 9:53AM, so our view of the US stock market here is implied. We are very time and price sensitive and all the while respectful of the reality that immediate term tops are processes, not points.


This morning’s early run-up was real. On my immediate term TRADE duration, it was the first one-day 3 standard deviation move I’ve observed since October 13th. While the selloff from October 13th to October 19th wasn’t a big one. It was enough to stop the slope and expediency of the market’s weekly ascent. Looking forward at the next two weeks of market catalysts, I won’t be surprised if we look back at today’s intraday highs the same way.


I’m not bearish for bearish sake. In terms of bearish calendar catalysts, here’s what I see coming down the immediate term pike: 

  1. Tuesday = Case Shiller Home Prices for August (bearish)
  2. Wednesday = New Home Sales for September (bearish)
  3. Thursday = the Bank of Japan’s outlook report (bearish)
  4. Friday = US GDP for Q3 (bearish) 

Most importantly, I now have the immediate and intermediate term TRADE (1191) and TREND (1216) lines of resistance in close proximity to where I shorted SPY this morning.



Keith R. McCullough
Chief Executive Officer


Bear/Bull Battle: SP500 Levels, Refreshed...  - 1


In preparation for Royal Caribbean’s Q3 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from RCL’s Q2 earnings call. 




  • “Simply put, the year is progressing better than we expected it to and generally, our business is as good or better than projected both in this country and abroad.” 
  • “The best way to describe demand for our cruises today is stable and remarkably consistent. With the exception of currency fluctuation, our revenue projections today are virtually identical to the ones we did 3 months ago.”
  • “Bookings since our last call has been up about 11% over the same time last year and our booked load factors and average per diems are both running ahead for the second half of the year. Despite a high degree of uncertainty about the economy and the volatility we see in the stock market, our domestic bookings have been very consistent over the last several months.”
  • “Since the beginning of the year, we have seen a steady expansion in the booking window and we’re now quite close to pre-recession levels.”
  • “Just under half of our revenue will come from guests outside of the United States. While the majority of these guests pay for their cruise in local currencies, virtually all of our onboard revenue is in U.S. dollars.”
  • “For 2010, we estimate that approximately 30% of our revenues and 20% of our non-fuel Net Cruise Costs will be denominated in currencies other than U.S. dollars. Our revenues are most influenced by changes in the euro, British pound, and Canadian dollar. Our expenses are most influenced by the euro and to a lesser extent, the British pound.”
  • “Our capacity is forecasted to be up approximately 7.1% and we expect to continue to benefit from the exceptional response to our newest vessels.”
  • “As you saw on the booking window chart, the window is expanding so we do have higher load factors in the second half. Pricing is up a bit.”
  • “From a strict statistical point of view, by our analysis, Epic has about a 3% impact on Caribbean capacity for the full year and about a 6% impact on Caribbean capacity for the back half of the year which is not that significant and so our sense is that her arrival, although it has generated a lot of publicity for the industry which is always a good thing, is not having a significant impact on our Caribbean performance.”
  • [Pricing in the 4Q] "It’s proceeding as expected."
  • “As we look at the third quarter, we’re seeing this year an increase in the number of guests that we’re getting out of Europe and a big increase in the number of guests that we’re getting out of the UK because we put Eclipse in the UK market. So we’ve seen our sourcing mix at Celebrity change quite a bit this year. As we get into the fourth quarter and the ships are doing a more traditional Caribbean business for us, we’ll see a shift away from where we were in the third quarter to more of our guests coming out of the North American markets.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.