TODAY’S S&P 500 SET-UP - December 2, 2010

As we look at today’s set up for the S&P 500, the range is 13 points or -0.75% downside to 1197 and 0.33% upside to 1210.  Equity futures are trading back above fair value after the Dow on Wednesday posted its 6th largest points and percentage gain this year as strong data seen at home, China and in Europe encouraged increased risk.  Today's focus will center on the ECB meeting where there is growing expectations the ECB will unveil new or additional measures to prevent contagion within the eurozone sovereign debt markets.  Weekly jobless claims and Nov retail chain store sales are also scheduled for release.

  • Aeropostale (ARO) 3Q sales below est. 
  • Collective Brands (PSS) 3Q EPS, Rev beat est.
  • Finisar (FNSR) sees 3Q adj EPS above est.
  • Jo-Ann Stores (JAS) 4Q gross margin improvement less than 3Q, sees costs increasing
  • Krispy Kreme Doughnuts (KKD) boosted year adj. op. income forecast
  • Merck (MRK)’s Proscar for treatment of enlarged-prostate
  • failed to win the support of a U.S. advisory panel for use in
  • preventing prostate cancer
  • Regal Cinemas (RGC) boosted qtr div to 21c from 18c; declares $1.40 special div
  • Semtech (SMTC) Sees 4Q rev. below est.
  • Sequenom (SQNM) Plans secondary offering
  • Valeant Pharmaceuticals (VRX) receives CRL from FDA on NDA for ezoga


  • One day: Dow +2.27%, S&P +2.16%, Nasdaq +2.05%, Russell 2000 +2.22%
  • Month-to-date: Dow +2.27%, S&P +2.16%, Nasdaq +2.05%, Russell +2.22%;
  • Quarter-to-date: Dow +4.34%, S&P +5.68%, Nasdaq +7.63%, Russell +9.91%;
  • Year-to-date: Dow +7.94%, S&P +8.16%, Nasdaq +12.35%, Russell +18.83%
  • Sector Performance: Utilities +1.17%, Consumer Spls +1.62%, Healthcare +1.92%, Consumer Disc +2.13%, Financials +2.02%, Tech +2.13%, Industrials +2.58%, Materials +2.73%, Energy +2.97%


  • ADVANCE/DECLINE LINE: 1686 (+2650)  
  • VOLUME: NYSE - 1118.61 (-27.18%)
  • VIX: 21.36 -9.26% - YTD PERFORMANCE: -1.48%
  • SPX PUT/CALL RATIO: 1.67 from 2.12 -21.38%  


  • TED SPREAD: 14.62 -0.101 (-0.689%)
  • 3-MONTH T-BILL YIELD: 0.16% -0.01%  
  • YIELD CURVE: 2.44 from 2.36


  • CRB: 308.91 +2.49%
  • Oil: 86.75 +3.14% - NEUTRAL
  • COPPER: 394.75 +3.19% - BEARISH
  • GOLD: 1,390.83 +0.17% - BEARISH


  • EURO: 1.3129 +0.70% - NEUTRAL
  • DOLLAR: 80.713 -0.59%  - BULLISH




  • European markets opened higher and pared gains before advancing to currently trade at session highs.
  • Continuing expectation that the ECB will introduce more measures to mitigate concerns over the EuroZone's debt crisis buoyed sentiment.
  • The ECB benchmark interest rate decision is due at 7:45ET, with no change to the 1% rate expected. Spains relatively successful 3-yr bond auction, though the yield was much higher vs last auction, provided additional support.
  • 15 of 18 sectors trade higher led by banks, autos and insurers. The leading decliner is healthcare.
  • France Q3 ILO unemployment rate 9.7% vs prior 9.7%
  • UK Nov Construction PMI 51.8 vs con 51 and prior 51.6
  • EuroZone Q3 GDP and Oct PPI due at 5ET


  • Nikkei +1.8%; Hang Seng +0.9%; Shanghai Composite +0.7%
  • Asian markets followed Wall Street up to post decent rises today.
  • Miners lifted Australia on higher resource prices, though the market drifted off its highs when disappointing October retail sales data was released.
  • Japan rose on a weaker yen and Wall Street’s gain, with electricity & gas and air transport being the only sectors to decline.
  • Hong Kong rose on bargain hunting.
  • Large caps advanced modestly as China rose, though it lost some gains in the afternoon.
  • Japan Q3 corporate capex +5.0%. Q3 corporate sales +6.5% y/y. Q3 corporate pretax profits +54.1% y/y. November monetary base +7.6% y/y. Australia October seasonally adjusted retail sales (1.1%) vs survey +0.5%. October trade surplus A$2.63B vs survey A$2B.  

Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends














There may be little correlation with VIP, but Macau visitation drives Mass revenues and profits.



The common held view is that gross gaming receipts in Macau bear little statistical resemblance to visitation growth.  Since VIP revenues are about 3x Mass revenues, that shouldn’t be a surprise.  However, visitation is hugely statistically significant in explaining Mass gaming revenues - with a t-stat over 7 and an R Square of 0.73.


Mass gaming revenue generates over 50% of Macau EBITDA so it is critical to profitability.  Regressing Macau EBITDA to visitation yields an even stronger statistically significant relationship with an R Square of 0.85.


The strong relationship can be seen in the chart below that shows 3-month rolling Mass gaming revenue and visitation growth:




It’s clear from the chart that both visitation and spend per visitor have grown nicely.  Visitation is the more important metric, in our opinion, for long-term growth.  We’ve consistently maintained that there remains a significant amount of untapped demand from mainland China and as long as visitation is growing, that should remain the case.

Surviving The Future

This note was originally published at 8am this morning, December 01, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

"Every organization must be prepared to abandon everything it does to survive in the future."

~ Peter Drucker


After closing down for the 3rd consecutive day, the S&P500 ended up closing down -0.23% in November, doing less-bad than both the Nasdaq Composite and Dow Jones Industrial Indices which were down -0.37% and -1.01% for the month, respectively.


If you were long virtually anything other than the US Dollar (best major global asset class allocation for November of 2010, closing up +5.2%) in the last 3 weeks of November, you probably felt some pain. I did. The MSCI All World Index underperformed US Equities closing down -2.2% for the month and, depending on which Fixed Income strategies you had assets allocated to, November probably didn’t feel very good either.


So where do we go from here?


GAME ON: It’s DAY 1 of a new month and the perma-bulls are blasting out of the box, taking US futures up to another lower-long-term-high, repeating what they’ve said since the October 2007 peak – the world is “awash with liquidity” and “don’t fight the Fed.”


For us, it’s always a game of US versus THEM. Yes, we have a culture of picking fights. But we pick the ones we expect to win. When we lose, we are prepared to abandon almost every theoretical and qualitative assumption in our macro model.


It’s critical to keep them (Wall Street consensus) in the game. Without them, I don’t know how we’d go about Surviving The Future.


For them, it’s going to be very interesting to see who survives getting wiped out the 2nd time around. Sure, the world is “awash” with liquidity, but it’s also laden with sovereign debt. Absolutely, “fighting the Fed” was painful in October of 2007 and 2010, but it’s also been the fight worth fighting in both Novembers of those respective years. You have to know what you are fighting for. We are fighting the academic dogma of the Fiat Fools.


So let’s throw down and get at it this morning…


The #1 Headline on Bloomberg (most read) is: “Contagion May Force EU to Expand Arsenal To Fight Debt Crisis”


TRANSLATION: Predictably, the Big Government Interventionists (them) are out in full force this morning trying to get investors to believe that the solution to this European Sovereign Debt disaster = QE/EU.


The quants @Hedgeye are already tweeting about this phenomena of buy-and-hope – they’ve interpreted this academic solution as:


QG = QE/EU = Inflation


I know. This is the kind of quant that we spend hours on, laboring throughout the night. It’s amazing that we get any sleep over here at all. But it’s always encouraging to wake-up to real-time market prices and global activity that supports or refutes our case.


Here’s the real-time, globally interconnected, market response to QE/EU:

  1. Asian Equities UP
  2. European Equities UP
  3. US Futures UP

Oh wait, that’s just the stock market response. Silly Mucker.

  1. Fiat Euro UP
  2. Commodities UP
  3. Bonds DOWN

Right, right…


So, after getting powdered for the last 3 weeks, stock markets around the world have a dead cat bounce to lower-highs (on low volume), global inflation reignites to the upside (Oil is bullish TRADE and TREND at $85.10, Gold is blasting higher to $1392, and Copper is up +2.4% in a straight line), and the real global contagion on risk managers minds remains a flashing red light in the bond market.


All the while, Chinese stocks (which are down more than -10% in the last month and down -13.8% for the YTD) closed up a whole 12 basis points after China reported its highest INPUT PRICE number (73.5) since June of 2008. Yes, like QG (Quantitative Guessing) = QE/EU, the Chinese see inflation.


Chinese interest rate swaps just had their biggest melt-up since April of 2007 (+58 basis points = biggest monthly move in 3 years). That’s an explicit signal that China gave us then as it is now. It’s also similar to the one they gave us on global inflation in June of 2008 when The Ber-nank said he saw no inflation with $150 oil. China is going to continue to raise interest rates to fight Fed and ECB stoked inflation.


During the recent -3.7% correction in US Equities (from their November 5th high of 1225 on the SP500 when we had 15 SHORTS), I’ve pared back our SHORTS in the Hedgeye Portfolio to 9 positions. I’ll be looking to re-populate our short book on today’s strength. My immediate-term support and resistance lines for the SP500 are now 1173 and 1189, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Surviving The Future - div

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Europe’s Dead-Cat Bounce in Context

Position: Long Germany (EWG)


Today, European equities rallied off oversold levels (gaining +1.75%-4% across the region), however we’re interpreting the move as just that, a dead-cat bounce.  The headline risk associated with Europe’s sovereign debt contagion that has markets punishing countries with over-extended public debts and deficits is severe and should weigh to the downside over the next 3-5 years.


As we’ve shown in our research, despite the bailout package for Greece (May 2010) and the assurance of one in Ireland (Nov. 2010) credit spreads continue to widen as investors demand further protection to own the debt of Europe’s periphery and sell out of their positions as the Crisis in Confidence persists (see chart below).


Europe’s Dead-Cat Bounce in Context - m1


We don't believe recent statements from Eurocrats that speak to the contrary:


(12/1) Portugal’s PM Jose Socrates: “I do not see any reason to change the position of the Portuguese government which is very clear: we do not need any help…”


(12/1) Deutsche Bank’s CEO Josef Ackermann: “Investors’ mistrust of Spain is unjustified and the problems in the banking industry are manageable.”


Also, a quick look at select equity markets of debt and deficit bloated countries shows just how severe the recent run (inclusive of today’s bounce) has been. Here is the performance since the weekend of November 20-21 when Ireland confirmed its “need” for a €85 Billion bailout from the EU/IMF:  Italy’s MIB FTSE -6.0%; Portugal’s PSI 20 -5%; Ireland’s ISEQ -4%; Spain’s IBEX -4.0%.


The Euro has also corrected severely against major currencies, including versus the USD, down -4% since 11/19.  Our immediate term TRADE range for the EUR-USD is $1.29-$1.33.


As the PIIGS remain mired in the muck, we continue to like Germany due to its fiscal conservatism and profitable industrial and exporting base.  As the chart below shows, its unemployment rate has steadily declined over the last year to 7.5%, far outpacing the Eurozone average that ticked up 10bps to 10.1% in the most recent month and the scary base levels of 20.7% in Spain or 13.5% in Ireland. Further, German companies continue to outpace their peers, finding strong demand at home and abroad (especially China).


Europe’s Dead-Cat Bounce in Context - m2


German Retail Sales reported today gained a healthy +2.3% in October month-over-month. 


Finally, Manufacturing PMI figures were released for 15 European countries today. As the chart below shows, 10 countries saw an improvement while 5 contracted month-over-month. The notable call-out here is Italy, which contracted to the downside and teeters above the 50 line that divides expansion (above 50) and contraction (below 50). For more on our bearish bias on Italy see our portal.


Europe’s Dead-Cat Bounce in Context - m3


We’ll be looking to tactically short European countries with sovereign debt risk in the Hedgeye Portfolio.  Stay tuned.


Matthew Hedrick



Sports Apparel Came in Strong

Athletic Apparel sales came in +31% due in the week ending Sunday per Sportscan POS data. This is due in part to the most favorable compare of the year, but even adjusting for that, sales were still robust.  Sales improved across all channels, and higher sequential ASPs also suggests that sales were not driven by accelerated promotional activity.

Another key callout is regional performance – particularly the strength in the Pacific region up +30% which posted its third straight week of double-digit growth outperforming all other regions on the week. In addition, the regions’ stability through October is noteworthy relative to the rest of the country and particularly as it relates to Collective Brands reporting after the close given this region has been highlighted as an underperformer for the domestic business of late.


Details on specific company callouts to follow.


Sports Apparel Came in Strong - App sales table 12 1 10


Sports Apparel Came in Strong - App Region chrt 12 1 10


Casey Flavin


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