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TODAY’S S&P 500 SET-UP - November 12, 2010

As we look at today’s set up for the S&P 500, the range is 27 points or -0.29% downside to 1210 and 1.93% upside to 1237. 

  • California Pizza Kitchen (CPKI) forecast 4Q adj. EPS 5c-7c vs est. 15c
  • Caribou Coffee (CBOU) reported 3Q EPS 8c vs est. 5c (2 ests)
  • Cumberland Pharmaceuticals (CPIX) reported 3Q EPS 5c vs est. 1c
  • Dynavox (DVOX) cuts FY2011 adj EPS forecast to 21c-27c from 56c-62c, vs est. 47c
  • Essex Rental (ESSX) buys Coast Crane for $80m; sees deal adding to earnings, 2011 FCF
  • Finisar (FNSR) sees 2Q adj. EPS 41c-43c vs est. 36c
  • Jefferies (JEF) agrees to sell some ops to Bank of New York subsidiary Pershing; sees small gain on sale
  • Matthews International (MATW) reported 4Q adj. EPS 66c vs est. 64c (3 analysts)
  • Microsemi (MSCC) sees 1Q EPS 36c-39c vs est. 37c
  • Nvidia (NVDA) sees 4Q rev. up 3%-5%, implies $869.2m-$886.1m, vs est. $863.9m
  • Thomas & Betts Corp. (TNB US) says it will sell its Communications Products Business to Belden for $78m in cash
  • Walt Disney (DIS US) reported 4Q adj. EPS 45c vs est. 47c, sees 2011 capex increasing by $1b


  • One day: Dow (0.65%), S&P (0.42%), Nasdaq (0.90%), Russell 2000 (0.45%)
  • Month-to-date: Dow +1.48%, S&P +2.56%, Nasdaq +1.92%, Russell +4.01%.
  • Quarter-to-date: Dow +4.59%, S&P +6.34%, Nasdaq +7.76%, Russell +8.2%.
  • Year-to-date: Dow +8.20%, S&P +8.83%, Nasdaq +12.62%, Russell +16.97%
  • Sector Performance: Tech (1.54%), Financials (0.98%), Industrials (0.56%), Consumer Disc (0.14%), Utilities (0.06%), Consumer Spls (0.10%), Healthcare +0.29%, Materials +1.03%, Energy +1.10%
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Gamestop +4.77%, H&R Block +4.40% and Halliburton +4.19%/CISCO -16.03%, JABIL -4.64% and Linear -4.47%.


  • ADVANCE/DECLINE LINE: 869 (-1566)  
  • VOLUME: NYSE - 949.51 (-15.00%)
  • VIX: 18.64 +0.92% - YTD PERFORMANCE: (-14.81%) - BEARISH TREND
  • SPX PUT/CALL RATIO: 1.64 from 1.61 +2.06%  


  • TED SPREAD: 16.49 0.406 (2.522%)
  • 3-MONTH T-BILL YIELD: 0.13%
  • YIELD CURVE: 2.21 from 2.21


  • CRB: 314.85 -0.71% -
  • Oil: 87.81 flat - BULLISH
  • COPPER: 402.95 +1.33% - BULLISH
  • GOLD: 1,405.75 +075% - BULLISH


  • EURO: 1.3654 -0.62% - BEARISH - Down 3.84% in the last 4 days
  • DOLLAR: 78.217 +0.75%  - BULLISH - Up 3.05% in the last 4 days



European markets:

  • FTSE 100: (0.84%); DAX: (0.61%); CAC 40: (1.81%)
  • European markets fell from the open before paring losses.
  • The decline is lead by lingering concerns over the Irish financial crisis and fears China may tighten policy weighed.
  • Regional economic data provided little support.
  • The G20 agreed to move towards market-determined exchange rates and shun competitive devaluation.
  • Peripheral debt spreads were mixed as worries lingered and ahead of supply in Italy.
  • EU statement that new rules concerning bond writedowns would only apply to future issues and German Chancellors comments that EU is ready to deal with any scenario in the Irish financial crisis provided support.
  • All sectors apart from travel & leisure trade lower led by oil & gas and mining sectors down over (2.5%).
  • France Q3 preliminary GDP +0.4% q/q vs consensus +0.5%
  • Germany Q3 preliminary GDP +0.7% q/q vs consensus +0.7%, +3.9% y/y vs consensus +3.7%

Asian markets:

  • Nikkei (1.39%); Hang Seng (1.93%); Shanghai Composite (5.16%)
  • Asian markets followed Wall Street down today, as the region waits for China to raise interest rates.
  • China dropped more than 5% on tightening fears. Property stocks went down on a report that the government is limiting real-estate investment by foreign companies.
  • Renewed worries about European sovereign debt also dampened the mood.
  • Energy stocks declined as oil prices fell.
  • South Korea retreated to flat after earlier being the only market to rise, rebounding from yesterday’s almost-3% fall that was said to be due to a single trade by Deutsche Bank in the last minute of trade on options expiry.
  • National Australia Bank fell 4% on becoming the third major bank to raise interest rates by more than the 25 bp that the country did in its most recent hike; Westpac, which finished flat, made it four of four later in the day.
  • Hi-tech shares fell in Japan on declines in US peers, and exporters went down on concerns about global growth rates. 

Howard Penney
Managing Director

On the Road

"Behind us lay the whole of America and everything Dean and I had previously known about life, and life on the road. We had finally found the magic land at the end of the road and we never dreamed the extent of the magic."

-Jack Kerouac, On the Road


Jean-Louis Kerouac, or Jack as he was more popularly known, was the leader of the beat generation and is one of the most well known American novelists of the last half decade.  I recently took a break from my weekend readings of the Economist, Barron’s, Grant Interest Rate Observer, and other similar publications that make my girlfriend go to sleep, to reread Kerouac’s classic, On the Road.


I think it is fair to say that most type “A” investor types operate in stark contrast to the beat generation, and in particular to the writing style of Mr. Kerouac.  In 1950, Kerouac outlined The Essentials of Spontaneous Prose, which was an overview of his style of writing - a style which emphasized the unplanned spewing forth of ideas, emotions, experiences and so forth.


Our CEO Keith McCullough wrote his own book, which came out earlier this year, titled, Diary of a Hedge Fund Manager.   Far from being the spontaneous prose of a beat, the book is a well thought-out overview of the last decade of Keith’s journey in the world of Hedge Funds.  As one reviewer wrote:


“In telling his story, McCullough may end up inspiring a whole new generation of Wall Street achievers and innovators. He may also succeed in tipping a few sacred cows and instilling new paradigms for investing before all is said and done.”


Admittedly, I may be a little biased as I appear in the book via my nickname Jonesy a few times, but I would recommend you consider it as a stocking stuffer in the upcoming holiday season for that emerging fund manager in your family. ( http://www.amazon.com/Diary-Hedge-Fund-Manager-Bottom/dp/0470529725 )


Coincident to reading Kerouac’s book, I was literally on the road this week.  I flew out to Colorado Springs to participate in a bi-annual forum with a subscriber of ours, Huntley Thatcher Ellsworth Advisors (http://www.hteadvisers.com/). Aside from being very innovative in the ETF field, twice a year the folks at HTE get up in front of their clients, put on the accountability pants, and talk about what they got right, what they got wrong, and what’s next.  At the forum, I gave a presentation titled, “Should U.S. Debt Be Rated Junk Status?” and then participated in Q&A. An interesting question that came up a number of times from the audience was: should we own gold?


As we think about gold, it is pretty simple.  If the dollar continues to get debased, gold will go higher.  So longer term, it is likely an asset you want to own if you believe the dollar is going lower.  That fact is, if there weren’t monetary value in gold stock, the U.S. Federal Reserve wouldn’t be sitting on over 8,000 tonnes of gold and not selling it.  In the short term, we aren’t long gold and have highlighted a key reason in the chart of the day below, which shows the dramatic increase in the price of gold over the past few months juxtaposed against a recent front page New York Times article, “In Anxious Times, Investors Seek Cover in Gold.” If newspaper and magazine covers aren’t the best contrarian indicators, they are close. 


Another topic we discussed was the implications of Quantitative Easing, the monetary policy more popularly known at Hedgeye as Quantitative Guessing.  Our view is that QE will lead to inflation, without the commensurate pickup in economic activity. While we can debate whether we are seeing inflation in the U.S., globally we are seeing it.  In fact, yesterday Chinese CPI accelerated dramatically.  As Darius Dale wrote to our subscribers yesterday:


“Chinese October inflation numbers came in white hot this morning.  CPI accelerated to a 25-month high of 4.4% Y/Y and PPI also quickened substantially to 5% Y/Y.”


Chinese inflation will lead to one thing, Chinese tightening. If you don’t think that has global growth implications, then you haven’t turned on your Bloomberg terminal yet this morning. In the anticipation of tightening, Chinese equities are down more than 5% and the commodity complex is getting taken behind the barn and shot. Copper is down 2%. Silver is down 2%. Cotton is down 3.6%. Sugar is down 3.4%. It seems we may not have to guess as to the implications of Quantitative Guessing much longer.


My last road trip to Colorado Springs was about 15-years ago when Keith and I were members of the Yale Hockey team.  (Keith was a little quicker and I had a little more hair back then.)  We were playing Air Force in a two game series.  As I recall, Keith was suspended for the weekend and we were swept by Air Force. (Keith would likely suggest there was something to that correlation.)  Ironically, the Yale hockey team is back in Colorado Springs this weekend taking on Air Force and Colorado College.  Much has changed in the last 15-years, including the fact that Yale is now ranked 3rd in the country.  Let’s hope the Bulldogs find the “magic land at the end of the road” this weekend.


Keep your head up and stick on the ice,


Daryl G. Jones

Managing Director


On the Road - 1


The Macau Metro Monitor, November 12th, 2010



The Macau Theme Park and Resort Ltd, led by Angela Leong On Kei, Stanley Ho Hung Sun's fourth wife and local businesswoman,  will build a MOP10.4BN Cotai theme park. Pending approval from the Land, Public Works and Transport Bureau, the resort project will consist of 3 phases, each taking around 2-3 years to complete.  The entire family resort will consist of one 5-star, four 4-star and one 3-star hotels with over 6,000 guest rooms, shopping malls, convention facilities, an indoor beach and wave pool, amusement rides, a 4D theatre, an equestrian centre, a horse carriage trail, and a water sports performance centre.


7,500 construction jobs are expected and once the theme park becomes fully operational, about 9,000 employment opportunities will be added to the job market.  Director Angela Leong disclosed that the project is for now only financed by Industrial and Commercial Bank of China (ICBC) and to date MOP 1BN has already been secured.  Of the MOP 10.4BN total investment, MOP 9.4BN is for the hotel development and MOP 1BN is for the theme park. The amount will be divided into MOP 4.4BN for the first phase construction, and then MOP 3BN each for the second and third phases.


CPI rose 4.4% YoY, beating estimates of 4%.  This has led to speculation of further tightening measures by the Chinese central bank.



According to the Securities Times, China plans to limit foreigners from investing in its real estate market.  The Ministry of Housing and Urban-Rural Development and the State Administration of Foreign Exchange have issued a notice to outline the rules, which will only allow individuals to purchase one housing unit for their personal use.  Foreign companies can only acquire non-residential office facilities in their registered cities, the newspaper said.

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 80.46%
  • SHORT SIGNALS 78.35%

Chinese Inflation Data Confirms What We Should Already Know: QE2 Will Slow Global Growth

Conclusion: The latest Chinese economic data suggest China may continue with its latest round of tightening measures, as inflation and speculation continue to be a concern. Further, we are starting to see confirmation that QE2 will incrementally slow global growth.


Position: Long Chinese Yuan (CYB); Long the U.S. Dollar (UUP); Short U.S. Equities (SPY); Short Emerging Market Equities (FFD)


Chinese October inflation data came in hot this morning. CPI accelerated to a 25-month high of +4.4% YoY and PPI also quickened substantially to +5% YoY. In line with our call since late-August, we’re seeing more confirmation of accelerating inflation globally as a result of the Fed’s weak-dollar policy (QE2). Moreover, we’re seeing central bankers across the globe lash out against Quantitative Guessing, and judging by this morning’s data release, it’s no surprise that China has been the leader in anti-QE rhetoric of late.


Chinese Inflation Data Confirms What We Should Already Know: QE2 Will Slow Global Growth - 1


While economists could spend hours debating whether China’s “artificial devaluing” of the yuan is perpetuating inflation within its borders, the real truth that matters to market practitioners is that inflation is accelerating globally, across a spectrum of currency policies. Don’t take our word for it, however; pull up a chart of Brazilian, Indian, or Korean CPI (just to name a few countries).


Turning back to China specifically, we are inclined to suspect further tightening may be on the horizon. China has been varied in its efforts to combat inflation and speculation YTD, including raising bank reserve requirements (as recently as yesterday) , restricting home loans, forcing banks to hold more FX, and raising interest rates (10/19). Despite these measures, we feel China may be running out of room for further “cuteness” and that additional interest rate hikes are on the way.


Looking at real 1-year deposit rates, we see that inflation is consuming Chinese savings at an accelerating rate. In October, Chinese savers effectively paid a 1.9% tax on their 1Y savings deposits - even with the recent 25bps rate hike factored in.


Chinese Inflation Data Confirms What We Should Already Know: QE2 Will Slow Global Growth - 2


Considering that inflation has been, on the margin, eroding China’s high household and corporate savings (a combined 42.2% of GDP), it’s no surprise to see that China continues to struggle to rein in property prices as those savers turn to real estate investment on the margin. National Property Prices (70 cities) continued to grow in October, climbing +0.2% MoM. While the pace of YoY growth has been slowing lately (+8.6% YoY in October vs. +9.1% in September), the absolute level of YoY growth and the continued MoM gains continue to defy China’s efforts to dampen speculation in its real estate market. Further resiliency of property prices will likely necessitate incremental rate hikes or the implementation of the oft bandied about national property tax trial.


Chinese Inflation Data Confirms What We Should Already Know: QE2 Will Slow Global Growth - 3


Further compounding China’s inflation woes is the rate at which new loans are accelerating, gaining 587.7B yuan in October vs. advancing 595.5B yuan in September. While the second-derivative slowdown is welcomed by Chinese officials, the rate of growth in October far exceeds the average monthly growth needed throughout 4Q10 to achieve China’s official loan growth target of +7.5 trillion yuan ($1.1 trillion) for full-year 2010 (+402B yuan). On a positive note, new loans do show a bit of seasonality and typically slow into year-end, so the +309B yuan average needed in November and December to meet the target is not as big of a stretch as the headlines make it appear to be.


Chinese Inflation Data Confirms What We Should Already Know: QE2 Will Slow Global Growth - 4


Nevertheless, we feel the confluence of inflation eroding savings (which causes Chinese savers to speculate with their assets on the margin) and robust loan demand will continue to put upward pressure on Chinese inflation data, absent any meaningful policy changes. Layer on the global commodity reflation brought on by Quantitative Guessing and it’s evident to us that further rate hikes may be on the horizon in China.


It’s important to keep in mind that China is not alone in its bout with inflation. As Bernanke and the Fed continue to pursue a weak-dollar policy via QE2, there’s no reason to expect commodity prices to come down meaningfully in the near term, which will put upward pressure on both core and headline CPI readings globally (COGS inflation will likely get passed through to citizens, lest firms suffer margin compression). In turn, that will continue to lead to further tightening globally, which will weigh on global growth going forward. Keep the equation below in mind as you ponder the real effects of QE2 vs. what the Fed would have you believe:


QG = inflation [globally] = monetary policy tightening [globally] = slower growth [globally]


No wonder Bernanke is playing one vs. nineteen at the G20 Summit.


Darius Dale


No Money, Need Crisis

This note was originally published at 8am this morning, November 11, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“This country’s out of money and we better start thinking.”

-Erskin Bowles


Erskine Bowles is a Democrat. He was Bill Clinton’s Chief of Staff the last time this country ran a budget surplus. Now he’s President of the University of North Carolina and Co-Chair of President Obama’s Debt and Deficit Commission.


If you already haven’t, google ‘Bowles Pelosi’ this morning and you’ll see why professional US politicians are tee’ing up America’s balance sheet to implode. The good news is that this isn’t “new” news. Those who aren’t paid to be willfully blind get it at this point. The American political machine has crossed its proverbial Rubicon.


This is going to be critical news for the next few weeks because yesterday afternoon Messrs Bowles and Alan Simpson (former Republican Senator from Wyoming), released a “draft” of their debt and deficit report that’s due out on December 1st.


Commenting on the draft, compare and contrast these views:

  1. “Without tough choices, we’re on the most predictable path toward an economic crisis that I can imagine.” –Erskine Bowles
  2. This is “simply unacceptable” –Nancy Pelosi

Then consider the PR guy’s take from Stan Collender (former Democrat budget analyst): “Mathematically, it apparently works… Politically, it is going to have a lot of trouble getting support from more than just the two co-chairs.”


Finally, here’s President Obama’s take: “So before anybody starts shooting down proposals, I think we need to listen, we need to gather up all the facts.”



  1. Bowles is calling it like it is.
  2. Pelosi doesn’t know what it is.
  3. PR guy knows what math is.

Question: Does the President of the United States have the leadership to listen, hear, and execute on the toughest fiscal decision of the century?


Ironically enough, as the Debt and Deficit Commission’s draft was being released, I was sitting in Peter Orszag’s office at Princeton University. Orszag, of course, just left Obama’s team after running the OMB (Office of Management and Budget). He’s done the math too.


We’ll send a research report out to our clients later on today that goes through the details of Hedgeye’s discussion with Peter, but the overall takeaway is that he not only agrees with our (and Reinhart & Rogoff’s) conclusions about structural debts and deficits, but he agreed that we’ll likely need another economic crisis in order to rid ourselves of this unbearable political polarization.


Now, to be clear, Orszag introduced and effectively utilized the word “polarization.” At Hedgeye we use words like: fiat, conflicted, compromised, fools, risk, charlatan, dogma, etc… but it’s all one and the same thing. And guess what Washington people? Americans have a Ph.D. in their gut on this too.


This morning Bloomberg released a poll (which I’ll editorialize) that confirmed most of what the objective mind in you has already internalized:

  1. 75% of people think Quantitative Guessing (QG) will be “ineffective”
  2. 60% of people (down from 71%) trust Bernanke at the wheel
  3. 44% of people trust Geithner has a clue on economic matters

Now at least Geithner is on the record admitting that he “isn’t an economist.” So when you read his quotes from the G20 this morning suggesting that the debauching of the Dollar has nothing to do with our professional politicians burning it at the stake, take his word for it – he doesn’t do interconnectedness.


Back to Orszag, Bowles, and the American leaders who remain brave enough to stand up against the tyranny of a compromised Congress…


Fellow citizens, it’s time. On this Veteran’s Day we need to ask ourselves if the time to rid this country of Pretended Patriotism isn’t now, when will it be?


As Peter Orszag stated plainly, the clock has been ticking. Any independent analyst who isn’t trying to snag a banking bonus or Washington consulting fees gets this. US municipalities and states are already in fiscal crisis – they’ll eventually need to be bailed out too (QE3). But who is going to pay for it? Will America allow Congress to raise the US Debt Ceiling in 2011? If America can’t issue debt at these artificially low rates, what happens next?


Maybe Mr. Macro Market is already giving us a preview of the answer – US Dollar UP, and US Treasury Yields UP. This is new as of the last week. We’re seeing immediate term breakouts in both. The Buck won’t Burn forever – particularly if we find a President who gets that this debt and deficit buck stops with him.


My immediate term support and resistance levels for the SP500 are now 1206 and 1239, respectively. I covered some short positions on yesterday’s opening market weakness and now have 10 LONG versus 11 SHORT positions in the Hedgeye Portfolio. I remain short the Euro (FXE) and long the US Dollar (UUP).


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


No Money, Need Crisis - 1

Bear/Bull Battle: SP500 Levels, Refreshed



For the 2nd day in a row, the US stock market has rallied (intraday) from what we call critical immediate term TRADE lines of support. Today, that line = 1209. This is important and something that should wear on the bears until it doesn’t.


The corollary to barely holding on to support is that eventually markets break support. With time and space, the probabilities of significant mean reversion corrections increase. Then, what was support becomes resistance. If the SP500 were to break down through and close below immediate term TRADE support of 1209, there is no support until 1187 (another -2.5% correction from yesterday’s closing price of 1218).


From a longer term perspective, it’s important to remember that, like the Nikkei 225 has in Japan for the last decade, the SP500 is simply making a series of long-term lower highs versus its leverage cycle-peak of 1565 in October of 2007.


From a more immediate term correlation risk perspective, the US Dollar is now trading bullish on our immediate term TRADE duration as well. This is new and, combined with a very hawkish macro calendar (global inflation data and G20 rhetoric), will have me doing a lot of waiting and watching. Support, after all, doesn’t hold in perpetuity.




Keith R. McCullough
Chief Executive Officer


Bear/Bull Battle: SP500 Levels, Refreshed - SP500

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