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TODAY’S S&P 500 SET-UP - December 20, 2010

As we look at today’s set up for the S&P 500, the range is 13 points or -0.64% downside to 1236 and 0.41% upside to 1249.  Equity futures are trading mixed to fair value as investors keep an eye on events on the Korean peninsula where tensions threaten to escalate after South Korea went ahead with its drill with live ammunition. Treasuries and the dollar are benefiting as investors apply safe haven trades. European markets are frozen amid some pretty awful weather which has shut much of the continent's transport systems, with the UK particularly badly hit. Elsewhere, news flow is thin in what looks like being a quiet run in to the festive break assuming the situation in Korea does not escalate beyond current tensions

  • Constellation Energy Group (CEG) said COO Michael J. Wallace plans to retire in April
  • Illinois Tool Works (ITW) may rise as it introduces new products and expands into Asia Barron’s said, citing analysts
  • Invesco (IVZ) may rise as much as 20% as one of the “best value” asset managers, Barron’s reported, citing analysts
  • SLM (SLM) may rise to the “high teens” during next 18 months and could attract a buyer, Barron’s says, without attribution
  • Sunstone Hotel Investors (SHO) said Arthur Buser has resigned as president and CEO


  • One day: Dow (0.06%), S&P +0.08%, Nasdaq +0.21%, Russell +0.38%
  • Last Week:  Dow +0.72%, S&P +0.28%, Nasdaq +0.21%, Russell +0.34%
  • Month-to-date: Dow +4.41%, S&P +5.37%, Nasdaq +5.79%, Russell +7.22%
  • Quarter-to-date: Dow +6.52%, S&P +9.00%, Nasdaq +11.58%, Russell +15.29%
  • Year-to-date: Dow +10.20%, S&P +11.55%, Nasdaq +16.47%, Russell +24.65%


  • ADVANCE/DECLINE LINE: 346 (-726)  
  • VOLUME: NYSE 2018.78 (+103.95%)
  • VIX:  16.1 -7.36% YTD PERFORMANCE: -25.69%
  • SPX PUT/CALL RATIO: 2.45 from 1.10 +123.09%


  • TED SPREAD: 20.64 0.406 (2.005%)
  • 3-MONTH T-BILL YIELD: 0.13% -0.01%  
  • YIELD CURVE: 2.81 from 2.85


  • CRB: 320.62 +1.03% (up 1.81% last week)
  • Oil: 88.02 +0.36% (up 0.26% last week)
  • COPPER: 415.90 +1.04% (up 1.14% last week, up three weeks in a row)
  • GOLD: 1,371.70 -0.02% (down 0.96% last week)


  • EURO: 1.3188 -0.34% (down -0.29% last week)
  • DOLLAR: 80.373 +0.24% (up +0.38% last week)




  • European markets trade higher in thin trading with gains capped by worries over the EuroZones debt crisis and increased tension in the Korean peninsula as South Korea held a live fire drill.
  • There was little significant economic news, M&A remained a focus.
  • Greece a big mover to the downside -2.69%
  • Autos and basic resources lead advancing sectors, with retail and travel & leisure the leading decliners as pre-Christmas snow and ice disruption across Europe weighed.
  • Advancing sectors lead decliners 14-4.
  • Germany Nov PPI +4.4% y/y vs consensus +4.5% and prior +4.3%
  • CBI sees UK 2011 GDP +2.0%, 2012 +2.4%, expects slow start to 2011, cuts is Q1 q/q growth to +0.2%, says risk of double dip recession remains low. Expects 2011 inflation to be higher than prior forecast and the BOE will start to normalize monetary policy in the spring with interest rates gently rising through mid 2012


  • Asian markets were lower today on concerns about European debt sparked by Ireland’s rating’s being cut by Moody’s, and South Korea’s decision to go ahead with an artillery drill.
  • Hong Kong slipped -0.56%, weighed on by China’s performance down 1.41%.
  • Unsurprisingly, South Korea fell -0.30%on worries about exacerbated geopolitical tensions, but defense-related shares Victek and Speco climbed 2% and 8%, respectively.
  • Australia gave up early gains down -0.56%.  Perpetual tumbled 15% when KKR terminated takeover talks.
  • Japan fell -0.85% with some high-priced issues dumped in profit-taking, while small- and mid-caps were bought.  Toyota fell 1% after the Japan Automobile Manufacturers Association predicted lower demand in Japan for 2011, but Honda rose 1% after saying it is targeting sales growth of 12% y/y in China for 2011. Canon Electronics rose 3% on raising its FY outlook.
  • China fell on concerns that access to funds may shortly get more difficult, though it recovered half its losses from its intraday low.
  • Japan revised October composite index of economic indicators (1.3 points) m/m vs preliminary (1.4 points) m/m. November convenience store sales +1.1% y/y vs prior (5.9%). November department-store sales (0.5%) y/y. Tokyo November department-store sales +0.3% y/y.

Howard Penney

Managing Director


THE DAILY OUTLOOK - levels and trends 1220












THE DAILY OUTLOOK - copper 1220

Fashionable Consensus

“Nothing is more obstinate than a fashionable consensus.”

-Margaret Thatcher


You’d think that some of the sell side’s finest would have learned something from being unanimously bullish on the US stock market in December 2007. Think again. It’s December of 2010 and, after a few minor bailouts and major bonus seasons, the bulls are back.


Don’t wince. Without a Fashionable Consensus, how else would we generate long term absolute returns? This weekend’s edition of Barron’s “Outlook For 2011” may be one of the finest gifts of Groupthink that we’ve been offered in years.


As Barron’s themselves reminds risk managers (not in the cover story article), the SP500 has only seen double-digit gains for 3 consecutive years twice since World War II (1951 and 1994). Looking at the bullish 2011 predictions for US stocks that way, maybe consensus is contrarian!


Will 2011 mark a 3rd year in a row of double-digit gains?


Well, let’s go through that…


Let’s start with a level. My immediate term TRADE zone of resistance for the SP500 into year-end is 1. Giving year-end bonus and mark-up season the bullish benefit of the doubt, let’s use the top end of that range and round the number up to 1256.


Since a +10% or better gain in the SP500 for 2011 (versus 1256) = 1382, let’s take a gander at who is more bullish than that:

  1. Deutsche Bank = 1550
  2. Goldman Sachs = 1450
  3. JP Morgan (formerly known as partly Bear Stearns) = 1425
  4. Barclays (formerly known as Lehman) = 1420
  5. Bank of America (formerly known as partly Merrill) = 1400

Now, to be fair, we’ll need to provide some disclosures (it’s a sell side thing)

*the aforementioned 2011 targets are from last week’s Bloomberg survey and subject to revision

**some of these estimates are the mid-point of Big Broker’s internal range (that’s a CYA thing)

***some estimates are from economists and bond strategists (yes, on Wall Street, cops are sometimes firefighters for commission)


The only person we can find who is more bullish than Binky Chada at Deutsche Bank isn’t a sell-sider, but he was equally as Bullish As Binky back in 2008. Don Luskin called for a +30% move in US stocks when I debated him on Kudlow on Friday night. Luskin’s made for YouTubing estimate implies a +377 point move in the SP500 to all-time highs in 2011 to 1633.


Now let’s not get caught up in what’s going on in the rest of the world this morning (Global Growth Slowing, Inflation Accelerating, and Interconnected Risk Compounding). Chinese stocks closed down for the 4th straight session to -13% for 2010 YTD and the CRB Commodities Index level of 320 is +25.5% inflated since the beginning of July.


Per the US stock market centric bulls, these interconnected global economic realities don’t matter, until they do.


Let’s get back to the US stock market’s 2011 Fashionable Consensus and dig a little deeper into its tapestry.

  1. Everyone loves Tech
  2. Everyone (except Doug Cliggott at CS) hates Healthcare
  3. Everyone has no short ideas

Most risk managers realize that doing what everyone else is doing isn’t a great idea (especially if you want to charge your clients 2 and 20). That’s why I’m short Tech (XLK) and Industrials (XLI) going into year-end. Both are reaching extreme levels of being intermediate-term TREND overbought.


I’m bearish on US Equities (SPY) and US Bonds (SHY). I’m bullish on the US Dollar (UUP).  As a result, I’m bullish on building up a large cash position as we head into what I think is going to be at least a 7% correction in the next 3-6 months (SP500 downside target = 1168).


No, I’m not reckless enough to give you my “year-end target” for the SP500 (that’s what unaccountable Big Brokers do). But I will tell you what I think every day between now and then. I’ll tell you what my upside/downside probabilities are across my 3 investment durations (TRADE, TREND, and TAIL), and I’ll take a long or short position that I’m accountable to.


If I’m wrong on US Equities in the next 3-6 months, I think some combination of the scenario laid out by Jeff Knight at Putnam (buy side PM) and Doug Cliggott (ex buy-sider at Credit Suisse) has the highest probability. Upside in the SP500 to the 1 range with the two sectors that I think auger best to an environment of US style Jobless Stagflation (Energy and Healthcare) outperforming.


My immediate term TRADE lines of support and resistance lines for the SP500 are now 1236 and 1249, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fashionable Consensus - thatcher


With table revenues at HK$8.0 billion through the 15th we are now projecting HK$17.0-17.5 billion in total revs for the full month of December. 



Our new projection range represents YoY growth of 55-60% - still strong but a slight slowdown from the first 10 days of the month.  Our projection takes into account slot revenue and the number of weekend days and weekdays.  Market shares are shown in the table below.  We continue to highlight Wynn’s impressive bounce back in market share and MGM's elevated share.  We think both will continue.



investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

The Week Ahead

The Economic Data calendar for the week of the 20th of December through the 24th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - cal1

The Week Ahead - cal2


The Golden Haze

This note was originally published at 8am on December 17, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“A question that sometimes drives me hazy: am I or are the others crazy?”

-Albert Einstein


Per our friends at Wikipedia, “haze is traditionally an atmospheric phenomenon where dust, smoke, and other dry particles obscure the clarity of the sky.” That just about summarizes what I think about the US stock market right here and now.


When I say now, I mean yesterday’s closing price. The SP500 inched up another point above its YTD closing high, taking its YTD gain to +11.4%. If you’re looking at this market price through The Golden Haze of ‘everything is going to be ok’ from here, you must be saying that higher-highs in a market price are bullish. They are, until they aren’t.


Up until 2 weeks ago, The Golden Haze was quite tranquilizing in another asset class market price – Gold. Then the music of bullish price momentum started to fade away. It didn’t stop suddenly. It didn’t stop hastily. It just started to stop…


The price of gold is now hitting a 2-week low this morning and is officially broken on my immediate-term TRADE duration. What were bullish higher-highs before December the 6th can now be considered bearish lower-highs. Again, until they aren’t.


Since I sold our entire gold position on December 6th  (+3.4% higher at $138.55 GLD), I suppose I have some credibility in attempting to make another “call” on gold from here. So let’s take a shot at this and consider the why and where from here:


Why is Gold down?

  1. CORRELATION RISK: Over the long term, Gold tends to underperform when real interest rates are positive.
  2. RELATIVE STRENGTH: Real-interest rates (domestic and global bond yields) have been blasting to the upside since November.
  3. CURRENCY COMPETITION: Don’t look now, but the US Dollar is up in 6 of the last 7 weeks as Fed Fighting becomes fashionable.

Where does Gold go from here?

  1. Immediate term TRADE: as of this morning my immediate term TRADE lines of support and resistance are $1362 and $1391, respectively. Trade the range.
  2. Intermediate term TREND: I introduced this line to investors in Calgary and Vancouver in a slide presentation on December 5th and 6th and the TREND line hasn’t changed. There’s intermediate term mean-reversion risk in the price of gold down to $1313.
  3. Long-term TAIL: there is a world full of support down in the $1210-1230 range and I’d love to buy back my gold there.

Now anyone who knows me well knows that I probably won’t have the patience to wait for $1230 gold on my buyback program. Heck, I may not have the patience to wait for $1313 either. But, provided that I remain bullish on the US Dollar (long UUP) and US Treasury Yields (short SHY), I’ll have a very hard time explaining why I’d buy back gold anytime soon. Being short gold on the next rally to lower-highs may be the better bet. We’ll see.


Back to The Golden Haze that is being long US Equities here… I think it’s instructive to think through the same CORRELATION RISK, RELATIVE STRENGTH, and CURRENCY COMPETITION scenario analysis that I went through for gold.

  1. CORRELATION RISK: using an intermediate-term TREND duration (6 months), the SP500 has an inverse correlation to the US Dollar Index of -0.77 and an r-square of 0.60. In other words, sustained USD strength should be bearish for US equities.
  2. RELATIVE STRENGTH: since March of 2009, the SP500 has outperformed gold by a lot (SP500 is +83.7% from its March lows, whereas gold is up 53%). So if Gold can go down in the face of Fed Fighting (competing with higher real interest rates), US stocks can.
  3. CURRENCY COMPETITION:  seasonal spikes in the US Dollar Index have happened in both of the last 2 years (2009 and 2010). It wasn’t cool to be levered-long US Equities in either of those January-February periods.

Never mind the obscurity of making the “valuation” case for stocks here; valuation isn’t a catalyst. Never mind the atmospheric phenomenon of short-term politicking and its effect on stoking “growth” hopes in the US economy either. That’s now consensus.


Take the “call” to sell US stocks here from a man who is already -3.37% too early in his short position (that would be me), as every Big Broker’s “strategist” is now officially calling for the US stock market to be up next year.


My immediate term support and resistance levels for the SP500 are now 1234 and 1248, respectively. If the SP500 makes another higher-high in the coming weeks, look for me to short it again. Yesterday I moved to a 70% position in Cash in the Hedgeye Asset Allocation Model.


Enjoy your weekend and best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Golden Haze - 1

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.