The 6% Risk: SP500 Levels, Refreshed



Suffice to say, it’s been an interesting week to start off the New Year. Almost every global macro data point that I measure as a very immediate-term leading indicator has all of a sudden flashed an either amber or red flashing light. I said almost.


US small caps, which everyone and their brother was hot and heavy for after a boomer of a 2010, are now down for 2011 YTD. Barely down, but down doesn’t register as a green light in my model.


The SP500, however, isn’t flashing amber or red yet…


For that to occur, I’d need to see the SP500 breakdown and close through the 1265 level outlined in the chart below. That’s the immediate-term TRADE line of support. If it holds, God bless my longs – if it breaks, God help the perma-bulls.


If we’ve learned anything in the last 3 years about markets, it’s that they subscribe to mean reversion. Just when you think all of your short ideas are stupid, they become the only thing that works. A TRADE line breakdown through 1265 puts the intermediate-term TREND line of support down at 1190 back in play.


Now I fully realize that it’s been a while – since we had a mean reversion oriented correction that is… and that’s exactly why the probabilities are climbing of one occurring. This is actually the 1st time that the SP500 will close down on back to back days since November 29th-30th …


It’s been a while, indeed.


I’m having surgery on Monday. So I’ll be out for a few days with no SP500 levels updates. Don’t pray for me – its minor stuff. But while I’m gone, keep the 1265 line in mind. If it cracks, the buy-and-hope-bulls who re-appeared after a +89% rally from the March 2009 lows, may need the prayers.


Cheers and enjoy your weekend,



Keith R. McCullough
Chief Executive Officer


The 6% Risk: SP500 Levels, Refreshed - 1



January 7, 2010





  • Keep an eye on the next evolution of internet exclusivity mixed with fashion.  Enter Moda Operandi, an ecommerce site slated to launch in February which will bring the “trunk show” to the masses.  Sounds interesting, but the real question will be how many people outside of big cities or luxury area codes actually know what a “trunk show” is.  Perhaps “pre-order” is the better term.
  • Expect the Jersey Shore product parade to continue unabated, this time with a flurry of licensed goods bearing Snooki’s name.  The star of the hit show has signed a deal to license her name on fuzzy slippers, jewelry, and sunglasses.  Future products are expected to include denim, sportswear, lingerie, handbags, beauty products, fragrance, swimwear, bedding, and home goods.  In other words, every product conceivable may have a Snooki logo on it by year end.
  • With Gap sales struggling to materialize, we wonder if the company’s return to  the 70’s will offer any help for the Spring season.  Gap will roll out its 70’s inspired, high waist denim and bell bottoms over the course of this month in hopes of catching the next trend.  Whether this translates into positive same store sales still remains to be seen, although the sharp contrast in silhouette vs. the past couple year’s skinny jean trend is notable.



New Ebay App Allows Consumers to Try on Product at Home  - In what may be a first, eBay has added augmented reality to its fashion app. The new version of the app made its debut Thursday. Now anyone with an iPhone 4 can virtually try on a pair of sunglasses by superimposing an image of the glasses over an image of their face. For now, though, try-on is limited to a few select styles. EBay plans to expand the virtual try-on to other designs and categories later. It is also exploring using augmented reality in other ways, said eBay executives. “Our ‘See It On’ augmented reality feature is truly an innovative way to shop — it allows consumers the option of making their style and spending decisions in a snap, on the go,” said eBay Inc. general manager for fashion Miriam Lahage. “I was questioning how I would look in Wayfarers so I tried a pair on [virtually] and I liked what I saw, they were…placed on my face. Then I could just click and buy.”Although owners of other iPhones won’t be able to try the augmented reality feature because their cameras don’t face the right direction, they can still download the new version of the app, which includes the additional categories of watches, jewelry and bridal.<WWD>

Hedgeye Retail’s Take:  Long in the works, it looks like Ebay is the first major platform to utilize augmented reality as way to influence purchasing decisions.  Expect this technology to permeate many more fashion sites in the coming year, as the barrier to trying product on when purchasing online is the key factor in e-commerce’s significant return rates.


Fortune Brands Hires Morgan Stanley - Fortune Brands (has hired Morgan Stanley to auction its golf division, a sale that may fetch as much as $1.5 billion, Bloomberg reported. The news agency cited four people with knowledge of the matter. The company's golf segment includes the Titleist and Footjoy brands. Morgan Stanley may approach and Adidas, which owns Taylormade, and Nike as well as private equity firms and Asian companies like Sumitomo Rubber, the owner of the Srixon golf-ball brand, Bloomberg said. Fortune Brands and Morgan Stanley were not available for comment.<SportsOneSource>

Hedgeye Retail’s Take:  This is one to watch as the low (no) growth profile of the golf industry will likely limit the pool of potential buyers. 


LivingSocial hires former exec as CFO - John Bax Daily deal company LivingSocial has hired a former executive of as chief financial officer.  John Bax held a similar job for the e-commerce operation of the world’s largest retailer. LivingSocial, one of the main rivals to Groupon Inc., which also sells online discounts and coupons for local and some national retailers, last month received a boost from the world’s largest Internet retailer, Amazon, No. 1 in the Internet Retailer Top 500 Guide, invested $175 million in LivingSocial while the e-commerce world waited for confirmation that Google would spend up to $6 billion for Groupon. That deal never materialized. Most recently, Bax worked as chief financial officer for RecycleBank, a New York-based company that operates a merchant-funded rewards program; consumers can earn rewards points by recycling household goods. Before that, Bax was chief financial officer of Sentient, a private travel firm. His experience as Wal-Mart, No. 6 in the Internet Retailer Top 500 Guide, came prior to Sentient. Besides the e-commerce job, he also had worked as vice president of planning and analysis for Wal-Mart Stores.<InternetRetailer>

Hedgeye Retail’s Take: Following Groupon’s recent hire of an AMZN financial executive last week, the discount deal companies are actively adding to the bench strength of their financial teams given heightened investor interest. Our sense is that experience bringing companies public, or at least working for one, is also at play here.   


Justin Beiber Nail Polish Sells Out on Christmas - Tween heartthrob Justin Bieber created a holiday sales mania at Wal-Mart, which created a dedicated display of Bieber-themed goods for the Christmas season. Bieber’s nail polish collection with Nicole by OPI — with song-inspired shade names, including One Less Lonely Girl (lavender) and Give Me the First Dance (silver) — completely sold out in the 3,000 doors where it was sold. “The call center in Bentonville was flooded and flooded with calls with people wanting to know where they could get the nail polish. We just couldn’t keep up,” said Carmen Bauza, Wal-Mart Stores Inc.’s vice president and divisional merchandise manager of beauty and personal care. She added, “We thought it would be a stretch since he doesn’t wear nail polish.” Bauza said Bieber’s unisex scented wristbands and dog tags by Etoile Nation also were brisk sellers. <WWD>

Hedgeye Retail’s Take:   This may be the first exclusive product to sell out of WMT in years!  Unfortunately the unit volume would have to be in the billions to move the comp the needle. 


Crocs Hires Senior Creative Director -Crocs Inc. named Becky Gebhardt senior creative director. In the newly created position, Gebhardt will be responsible for concept creation in sales and brand strategy, as well as driving the online and in-store Crocs customer experience. She previously worked as VP of creative, PR and online experience at Avelle Inc., formerly known as, and at Land’s End as VP of creative. "Gebhardt has an extraordinary talent for conceptualizing compelling consumer brand marketing solutions that will broaden Crocs awareness, increase sales and enhance customer loyalty,” said John McCarvel, president and CEO for the Niwot, Colo.-based brand. “Her understanding of the brand’s new positioning and expanding product line will help us continue to elevate and evolve the Crocs brand globally.”<WWD>

Hedgeye Retail’s Take:  Over a year removed from the AVP partnership stranglehold, it appears that the brand building effort underway continues to gain steam (and investment).  For Crocs to continue its recovery, it has to build the brand beyond its “clog” image.


Red Wing Plans Store Roll-Out - Red Wing Shoe Co. is on a retail roll. The company plans to grow its network of retail stores by 20 percent over the next five years. It currently has more than 425 Red Wing stores in the U.S., with close to 70 percent of those independently owned. According to the firm, based in Red Wing, Minn., the 1,200- to 1,500-sq.-ft. stores are generally located in larger metropolitan areas with populations of about 100,000 or more, providing a strong customer base for independent storeowners. Additionally, because the stores are not franchised, no fees are paid to Red Wing.<WWD>

Hedgeye Retail’s Take:  Is this a sign of a pick up in industrial production or perhaps validation that the company’s iconic and fashionable Americana boots have reaccelerated growth prospects for the 100 year old brand?


Illinois moves to tax online purchases - Illinois would levy taxes on Internet purchases under a plan that won final General Assembly approval today with an 88-29-0 vote in the state House. The law would make Illinois the latest state to try to squeeze revenue from online retail purchases, though other states have faced court challenges and the threat of lawsuits after trying to collect taxes from web sales. And some online retailers have simply cut off affiliates in states that have passed similar laws. The Illinois law still needs approval from Gov. Pat Quinn, a Democrat. Lawmakers have 30 days to send it to him, and he then has 60 days to act. The tax would start on July 1. The tax is part of an amendment to Illinois House Bill 3659. The tax would subject certain online purchases to the state’s 6.25% use tax. Those taxes resemble sales taxes, but, technically, apply to the right to use products purchased from Internet and catalog merchants that don’t collect sales tax on behalf of that state. <InternetRetailer>

Hedgeye Retail’s Take:  Another step towards the inevitable closure of the gap between those collecting tax and those that do not?  As a reminder this past summer the same issues were brought to Capitol Hill in an effort to even the playing field between online only players and traditional retailers as well as generate additional state revenues.  We continue to believe the tax loophole status will be closed soon.




Positive earnings results over the past couple of days helped keep restaurant stocks above break even in yesterday’s down tape for the broader market


Some notable news items and price action in the restaurant space:

  • COSI continues to outperform on accelerating volume.  I still like this stock, and have written extensively about management’s turnaround plans for the concept since early 2010.
  • CMG shares gained on accelerating volume
  • RT gained on accelerating volume following positive earnings released on Wednesday after the close
  • RT’s positive report bolstered many of its peers; RRGB, DIN, EAT, DRI and PFCB all gained on increased volume versus the thirty-day average (to greater and lesser extents, as you can see in table below)
  • MCD declined slightly on accelerating volume.  I maintain a bearish outlook for MCD’s business in 2011 and will hold a conference call with clients to that effect on Friday, the 14th of January.  Email for details.
  • WEN share prices gained on accelerating volume.
  • SBUX declined on accelerating volume as its new logo continues to generate voluminous attention on the web.  As the old maxim goes, there is no such thing as bad publicity.
  • SBUX maintaining its share of the newspaper this morning, commenting on the ongoing dispute with Kraft over its distribution agreement. In legal filings on Thursday, the coffee chain asked a U.S. District Court Judge to deny Kraft’s request to stop Starbucks from ending their agreement.  The filing also alleged that Kraft is making efforts to interfere with an orderly transition of the CPG business and is causing significant harm to SBUX in doing so.  The company also stated that it has given Kraft ample notice of their decision and that it does not impact Kraft, as a whole, significantly.
  • DPZ downgraded to neutral from outperform at Credit Suisse
  • Cowen names BJRI, SONC, and DRI as its Top-3 ideas in the Restaurant space for 2011



Howard Penney

Managing Director

Early Look

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The Macau Metro Monitor, January 7, 2011



MGM CEO Murren said in an interview, “We think that the prospects for us to be in Cotai are bright. We know that we are moving down the path and we hope that we will be fortunate enough to be there.  However, it is very important that we do not think of this as the only opportunity to grow in Macau. There are more opportunities on the peninsula and throughout the SAR in general. We are keeping our eyes open.”  Talking about the recent inclusion of new junket operators at MGM Macau, Mr Murren noted, “the market is becoming more competitive, the [VIP] operators are becoming more discerning and they are more selective in terms of where they would like to set up the ‘shop’."


Murren didn't specify the target IPO listing of 20 to 25% of MGM’s Macau joint venture, but he said that “part of the proceeds, when we do it, will be allocated to developing more in Macau, hopefully in Cotai.”

CHART OF THE DAY: Asian Growth Slowing as Inflation Accelerates



CHART OF THE DAY: Asian Growth Slowing as Inflation Accelerates -  Chart of the day

Transitory Expectations

“Man’s life is brief and transitory, literature endures forever.”

-Persian poet


I’m in the middle of reading Rory Stewart’s The Places In Between where he tells the risk management story of walking alone across Afghanistan. He ends one of his  chapters with that quote. It got my attention.


It should have. Every morning, day, and night, we market people walk alone with our P&L. We can’t drop our track record on someone else’s lap. We can’t pretend it’s not there either. No matter where we go, there it is…


That’s not life, but it’s certainly a big part of mine. Within that part, there certainly are a lot of places in between. All the while, I suppose I’m challenged with building bridges in a lot of those places between market prices and Transitory Expectations.


From a US-centric stock market investor’s perspective, expectations for this morning’s US Employment Report are extremely elevated. From a Global Macro investor’s perspective, from Indonesia getting tagged for a -2.8% loss overnight on inflation concerns to Gold testing 5-week lows, there’s a lot more going on.


That’s not to say that a Transitory Expectation for a US-centric economic data point doesn’t matter to Global Macro Risk Managers. It does this morning. Big time. But what exactly are those expectations and how can we proactively prepare to profit from them?


In an intraday note yesterday titled “Government Whispering”, this is how we framed it up:

  1. A Whisper of 580,000 US payroll adds has been going around all week
  2. Every market rally (from Wednesday’s pre-market futures lows) has been followed up with people reminding me of the whisper
  3. Government Whispering is turning into the casino that Big Government Intervention built into our markets – get used to it 

Where are we at on estimates versus expectations: 

  1. First, always remember that governments, to a degree, manipulates these numbers
  2. In our most bullish scenario, the payroll number could be at least 3x consensus (it started the wk at 125,000 which is a bit of a joke)
  3. The question now is can it be 2x that (or better than the whisper of 580,000)? 

In terms of what an improving (in the very short term) US jobs picture actually means for the interconnected macro markets: 

  1. BONDS: are definitely baking this in (collapsing UST’s have been since NOV and UST yields are bullish TRADE, TREND, and TAIL in our model)
  2. CURRENCY: definitely (maybe overly) baking this in (USD had a monster week, up +2.3% for the week-to-date ahead of the print)
  3. STOCKS: are trying their best to bake this in, but I think they’re going to look late – too late because they usually are

That’s the thing about Transitory Expectations in markets – by the time consensus realizes what they are, they’ve moved onto the next.


The key, in both Global Macro risk management and in life, may very well be to live in the moment. I’m not Buddhist, but I do respect the thought process behind the principle of playing the game that’s in front of you. After this morning’s US Employment Report is printed, that game is gone.


Post the 830AM EST report, I think US-centric investors will be forced to face the fiddle on the Expectations Mismatch between what they think the US Consumer is doing now versus what the US Consumer did in November to early December.


While everybody was pumping up Transitory Expectations of tax cuts and QG2 into their year-end Consumer Discretionary portfolios, evidently there was this little critter called reality toiling in the night.


At first, the Consumer Discretionary bulls said Best Buy’s (BBY) collapse was “secular” to their business. Then they said that McDonald’s (MCD) breaking down was due to some hedgies rotating into Best Buy because, I guess, Ackman was going to charge 2 and 20 to buy that one low. Now they’re saying that a broad based selloff in the Consumer Discretionary sector yesterday was due to the snow?


Here’s what some major US-centric Consumer Discretionary names (I mean names with market cap) did yesterday:

  1. Target (TGT) = -7.4%
  2. Gap (GPS) = -6.9%
  3. Macy’s (M) = -4.0%

I guess, with the Consumer Discretionary sector being the top US Sector performer in 2010 at +25.7%, bullish Transitory Expectations were a little off…


Back to the Global Macro risk management picture of Global Growth Slowing as Global Inflation Accelerates, most Asian and European stock markets have been sufficiently adjusting their bullish expectations to the downside all week. Last night, in addition to Indonesia trading down a ton, India was down -2.4%, Thailand lost -1.4%, and Taiwan was down -1.1%. After closing down -17.4% in 2010, Spain is already down -2.7% for 2011 to-date.


If the US stock market perma-bulls want to tell me that all of Asia and parts of Europe are slowing because US growth is strengthening, they can go do that. But they may very well have to adjust their Transitory Expectations after the last lagging bullish economic data point from Q4 is out of the way.


My immediate term support and resistance levels for the SP500 are now 1264 and 1280, respectively. Yesterday, I raised 3% cash, taking our allocation to US Cash back up to 52% in the Hedgeye Asset Allocation Model by selling our 3% position in Healthcare (XLV) on strength. We remain long the US Dollar via the UUP and short Gold (GLD).


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Transitory Expectations - ja


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