TODAY’S S&P 500 SET-UP - January 14, 2011

Equity futures are trading below fair value, tracking European/Asian markets, despite last night's bullish outlook from INTC. China has again raised its bank reserve requirement by 50bps.



  • 8:30 a.m.: CPI, Dec., est. 0.4% M/m, ex. food and energy est. 0.1% 
  • 8:30 a.m.: Advance retail sales, Dec., est. 0.8%, ex. autos and gas est. 0.3% 
  • 9:15 a.m.: Industrial production, Dec. est. 0.5%, capacity utilization est. 75.6% 
  • 9:55 a.m.: Uni. of Mich. Confidence, Jan., P, est. 75.5 
  • 10 a.m.: Business inventories, Nov., est. 0.7% 
  • 12:45 p.m.: Fed’s Jeffrey Lacker speaks on economy in Richmond 
  • 1:15 p.m.: Fed’s Eric Rosengren speaks at mortgage expo. in Connecticut


  • The SEC has started a broad investigation involving several financial firms to determine whether they made improper payments to secure investments from sovereign wealth funds
  • The biggest U.S. banks, facing tighter scrutiny and higher capital requirements, are pressing regulators to force hedge funds, money managers, insurers to share the pain. The newly created Financial Stability Oversight Council plans to discuss guidelines to determine which non-bank financial companies are systemically important at a meeting in Washington next week
  • Google may face an antitrust lawsuit by U.S. Justice Department over its $700m acquisition of ITA Software. Department officials haven’t made a final decision about whether to sue to block the purchase by Google
  • AIG’s recapitalization deal is set to close today, giving Treasury ~92% ownership of AIG
  • Coinstar (CSTR) cut 2011 rev., EPS cont ops forecasts
  • Dendreon (DNDN) to offer $250m shrs 
  • Intel (INTC) sees 1Q rev. above est.
  • Sealy (ZZ) 4Q rev. missed est.
  • Sunstone Hotel Investors (SHO) plans to Buy $1b of hotel properties this year


  • One day: Dow (0.20%), S&P (0.17%), Nasdaq (0.07%), Russell 2000 (0.09%)
  • Last Week: Dow +0.84%, S&P +1.10%, Nasdaq 1.90%, Russell +0.53%
  • Month-to-date: Dow +1.33%, S&P +2.08%, Nasdaq +3.11%, Russell +2.17%
  • Sector Performance - (Only two sectors positive) - Materials (0.86%), Healthcare (0.53%), Financials (0.35%), Energy (0.28%), Consumer Disc (0.16%), Tech (0.08%), Utilities (0.09%), Industrials +0.10%, Consumer Spls +0.20%          


  • ADVANCE/DECLINE LINE: -271 (-1545)  
  • VOLUME: NYSE 924.63 (4.04%)
  • VIX:  16.39 +0.92% YTD PERFORMANCE: -7.66%
  • SPX PUT/CALL RATIO: 1.39 from 1.29 (+7.97%)


Treasuries were stronger today with support from the Fed's $8.4B buying operation. The uptick in claims and pullback in stocks also seemed to help, though the bond auction seemed to be a disappointing.

  • TED SPREAD: 16.32
  • 3-MONTH T-BILL YIELD: 0.15%     
  • YIELD CURVE: 2.75 from 2.79


  • CRB: 333.00 -0.56%  
  • Oil: 91.40 +0.50% - trading -1.41% in the AM
  • Crude Oil Falls a Second Day as U.S. Economy Signals Slowing Fuel Demand
  • COPPER: 437.70 -0.78% - trading -0.46% in the AM
  • Copper Falls on Speculation Higher Stockpiles Signal Weaker Chinese Demand
  • GOLD: 1,384.47 +0.06% - trading -1.12% in the AM
  • Gold Demand in India Is `Good' as Incomes Increase, Biggest Exporter Says


  • Commodity Options Traders Make Record Bearish Bets After Oil, Metals Rally
  • Corn Heads for Biggest Weekly Gain Since October on Concern About Supply
  • Cooking-Oil Crunch Looms as Growing China Wealth Boosts Diet: Chart of Day
  • Palladium May Rally to $1,000 on Car Sales, Russian Supply, Ikemizu Says
  • Cocoa Prices Rebound in London Trading, Following Advance in New York
  • Rice Stockpiles in Vietnam Decline by 41% After Record Exports, Group Says
  • Palm Oil Has Biggest Weekly Slide in Four Following Rally to 34-Month High
  • Tin Output From Indonesia's Timah, Largest Shipper, May Be Level in 2011
  • Cooking-Oil Imports by India Drop for a Second Month as Local Supply Gains
  • Copper Stockpiles Climb to Seven-Month High in Shanghai, Aluminum Decline
  • Sugar May Gain Next Week on Speculation Demand Will Increase, Survey Shows


  • EURO: 1.3355 +2.08% - trading -0.07% in the AM
  • DOLLAR: 79.191 -1.05% - trading +0.19% in the AM


  • European Markets: FTSE 100: (1.20%); DAX: (0.60%); CAC 40: (0.35%)
  • European markets trade lower after a mixed open as news that China has raised banks reserve ratio 50bps sent indices to session lows.
  • Initially, gains amongst technology shares following Intel's (INTC) results overnight were mitigated by weakness in banks, basic resources and household products sectors.
  • ARM Holdings rose as much as +10% before paring gains.
  • Germany Dec Final CPI +1.7% y/y vs prelim +1.7%
  • UK Dec core PPI +2.9% y/y vs consensus +3.0%
  • Eurozone Dec final CPI +2.2% y/y vs consensus +2.2% and prior +1.9%
  • European Automobile Manufacturers' Association (ACEA) Dec new passenger car Registrations for the EU+EFTA (2.7%) y/y


  • Asian Markets: Nikkei (0.86%); Hang Seng +0.18%; Shanghai Composite (1.29%)
  • Asian markets were mixed today, with more markets falling than rising on disappointing USA initial unemployment claims.
  • South Korea +0.89% - Oil refiners fell on concerns that the government will pressure them to lower gas prices to fight inflation
  • Banks rose, offsetting weakness in resource shares and leaving Hong Kong slightly up on the day. Tsingtao Brewery fell again, extending losses another 3% on fears that higher food prices will hurt its bottom line.
  • Australia finished flat, with banks rising to support the market, but miners falling on lower commodity prices.
  • Japan went down when weak January options settlement and a stronger yen resulted in profit-taking. Reaction to Prime Minister Naoto Kan’s new cabinet was limited.
  • China sank on talk of interest rate increases over the weekend. Banks were broadly weaker, and coal miners plunged.
  • China told banks to set aside more deposits as reserves for the fourth time in two months, stepping up efforts to rein in liquidity after foreign-exchange holdings rose by a record and lending exceeded targets.
  • Japan December domestic CPGI +1.2% y/y. December consumer sentiment diffusion index (51.7), (9.6 points) from prior.

EARLY LOOK: Buck Breakout

This note was originally published January 10, 2011 at 07:57.  It's available to Hedgeye subscribers in real-time.



“The best way to destroy the capitalist system is to debauch the currency.” 

-John Maynard Keynes



This year I am going to try my best to kick off each week with a Global Macro recap of the week prior. I’ll also try to address what decisions I made in the Hedgeye Asset Allocation Model to reflect ongoing and ever-changing Global Macro risks.


The biggest move that mattered last week was the Buck’s Breakout above my immediate-term TRADE line of $79.92 on the US Dollar Index. After taking a breather into December end, the US Dollar Index is now bullish again on both our immediate-term TRADE and intermediate-term TREND durations.


With the US Dollar Index closing up +2.6% on the week (up for the 8th week out of the last 10), here’s the big stuff that went down: 

  1. Euro = down -3.1% to close the week at $1.29 (we covered our short position in FXE into week’s end)
  2. CRB Commodities Index = down -2.7%, after hitting a new cycle-high of 333 on the 1st trading day of 2011
  3. Oil = down -3.7%, breaking its immediate-term TRADE line of support of $89.46 midweek (we sold our OIL this wk)
  4. Gold = down -3.7%,  breaking its December closing low (we remain short GLD)
  5. Copper = down -3.6%, after hitting an all-time closing-high of $4.48/lb on the 1st trading day of 2011 
  6. Volatility = down -3.3% to $17.14 on the VIX, after seeing volatility rise in an up US equity market in the 2 weeks prior

I’m no Keynesian, but I (like Keynes did when he was 36 years old) trade currencies and believe them to be a very important barometer of a country’s overall health. In those days, as Liaquat Ahamed wrote in one of my favorite financial history books (Lords of Finance, page 11), “in 1914 the single most important, indeed overriding, objective of these institutions was to preserve the value of the currency.”


As a direct result of last week’s US currency strength, I think last week was a win, win, win for most Americans who care, not only about how much money they make, but how the rest of society does in the meantime.


Let’s look at these 3 wins associated with a strong American currency:

  1. Stocks went up (SP500 was up +1.1% on the week)
  2. Inflation went down (that’s what should happen if a country’s currency is pervasively strong)
  3. Rates of return on our hard earned savings accounts went up (10yr and 30yr US Treasury rates climbed again week-over-week)

No, I’m not saying we are out of the woods yet. I’m just saying that last week was a better week for America by my global macro scorecard than the week prior was – and by the looks of the aforementioned Keynesian quote, the Fiat Fools should agree.


Nor am I saying this was good for the rest of the world (some of their currencies went down, and so did their stock markets):

  1. India’s BSE Sensex Index = down -4.0%
  2. Spain’s IBEX Index = down -3.0%
  3. Luxembourg’s LUX Index = down -2.6%
  4. Portugal’s PSI Index = down -2.4%
  5. Taiwan’s TAIEX Index = down -2.1%
  6. Indonesia’s Jakarta Index = down -1.9%

After all, inflation, like politics, is priced in local currency. This, of course, isn’t a consensus way to look at the world; particularly from a money printing government official’s perspective – but I think that will change.


Whether it was the price of oil hitting an all-time high choking off US consumption in 2008 or the price of the United Nation’s Food Index hitting an all-time high (this week) staring Indian and Indonesian stock markets right in the face (the #2 and #4 largest country size populations in the world), it’s all the same to me. The Fiat Fools around this world are just taking turns.


Back to the Hedgeye Asset Allocation Model, I ended the week with the same allocation to US Cash that I started the week with (61%). Although I did drop down to a 49% position in cash intra-week and changed the complexion of my invested position into Friday’s close (I call this managing risk around my gross invested exposure). My updated positioning is now as follows:

  1. US Cash = 61%
  2. International Currencies = 21% (all in the Chinese Yuan, CYB)
  3. International Equities = 9% (all in German Equities, EWG)
  4. Commodities = 3% (all in Corn, CORN)
  5. US Equities = 3% (all in Volatility, VXX)
  6. Fixed Income = 3% (all in Treasury Inflation Protection, TIP)

Now I fully understand that this isn’t the way that most strategists do it  - that’s why I do it this way.


As price, volatility, and volume studies change, I change both my asset allocation positions and invested exposures. For example, I started the week long oil (stocks and the commodity) and US Healthcare stocks (XLV), but Oil broke its immediate-term TRADE line of support and US Healthcare (XLV) became immediate-term TRADE overbought on Thursday. There are no rules stating that I can’t buy either of those positions back (lower) in the coming weeks.


Nor are there rules stating that I can’t get less bearish on US Equities if the US Dollar were to continue to strengthen. US stocks actually closed down for back-to-back sessions for the 1st time on Thursday/Friday since November 29th and 30th. I don’t have to buy them when they are on sale. I don’t have to get bullish on the way down either. I’m just saying that with a 61% cash position, I have plenty of options.


My immediate term support and resistance levels in the SP500 are now 1251 and 1276, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer



EARLY LOOK: Buck Breakout - matt

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Europe’s Rosy Near-term Outlook

Position: Long Germany (EWG); Short Italy (EWI) and Euro (FXE)


As we mentioned in the Early Look this morning, this week global markets are tuned squarely to Europe’s bond auctions and statements from the region’s leaders on its sovereign debt issues. This morning also saw announcements from the ECB and BOE to keep their main interest rates on hold at 1.0% and 0.5%, respectively; and while the BOE has recognized the risk of rising inflation this year, today ECB President Trichet made it clear that he’s willing to raise rates to fight inflation.


Over the short-term we’d expect European markets to continue to make gains on the heels of announcements from China (earlier this month) and Japan (on Tuesday) to buy European bonds and statements from EU Economic and Monetary Commissioner Olli Rehn (yesterday) that EU officials are trying to forge a “comprehensive” plan to contain the sovereign debt crisis and from German Chancellor Angela Merkel who indicated a desire to do “whatever is needed to support the euro.”  Rehn also ruled out debt restructuring for Greece or any other euro-area member state.


As a catalyst, European finance ministers meet in Brussels next week to discuss initial details of a more "comprehensive package" and German Finance Minister Wolfgang Schaeuble said today that the EU member states will assemble this package by March when EU leaders are schedule to meet for a summit. 


With this kind of support, it’s no surprise that investors cheered, markets boomed, and European bond auctions have found plenty of demand, including Spain’s auction of €3 billion of 5YR bonds (at 4.542%) this AM.


While yesterday saw substantial outperformance from the peripheral equity markets, with gains from: Spain’s IBEX +5.4%; Greece’s Athex+ 5.0%; and Italy’s FTSE +3.8%, today these same equity markets closed in positive territory, however with lesser gains: Spain’s IBEX +2.7%; Greece’s Athex +0.3%; and Italy’s FTSE +0.9%.


It was on the bounce yesterday that we shorted Italy via the etf EWI and the Euro via FXE in the Hedgeye Virtual Portfolio.


However, and arguably as a more important forward-looking indicator, credit markets have improved substantially over recent days.  Below we refresh the chart of 10YR bond yields of the PIIGS (see chart). You’ll note that yields (on the 10YR) have fallen precipitously since 1/7, down -144bps in Greece; -77bps in Ireland; -35bps in Portugal; -16bps in Spain; and -9bps in Italy as risk abates on the aforementioned supportive announcements.


Europe’s Rosy Near-term Outlook - HEUTE


Importantly in this chart we flag the gravitational pull of the 7% level. This level proved ominous last year for it was a mere 17 days after Greece broke through it that the country received a €110 Billion bailout (May 15, 2010), whereas Ireland received a bailout of €85 Billion a month after breaking through the line on October 29th. Portugal is dangerously near this level.


Long-Term Woes


However, over the longer term our concerns for the region remain grave: the road ahead for Europe will be mired in the inability of some governments to meet their targeted debt and deficit reduction figures (Italy, Spain, Portugal), and the bailout band aids that we’ve seen already in Greece, Ireland, and perhaps Portugal soon, will simply offer temporary solutions to longer term fiscal imbalances. Further, along with lower growth prospects across the region this year and next, we could see more pushback on the austerity measures issued by many governments and political instability from countries like Italy, Belgium, and Hungary, to name a few.


Perhaps blame for Europe’s woes can be attached to the idealistic goal of binding unequal states under a common currency and monetary policy, but what’s clear is that the EU and Eurozone must figure out longer term attainable policy to punish fiscal excesses and incentivize its member states to maintain fiscal balance. 


In any event, European markets could soon lose the near-term support we’re seeing across European markets. It all depends on the means in which European officials want to support and direct this ship. We could learn more on this front as soon as next week.


Matthew Hedrick


R3: GPS, ZQK, Fleet Feet, More Snow


January 13, 2010





  • In one of the more aggressive clearance efforts we’ve seen in a while, Old Navy will be throwing a “Practically Free For All” sale this weekend.  The aggressive promotion promises discounts of up to 80% on post-holiday clearance activities.  At 80% off, we agree this is “practically free”.
  • Is Dawson’s Creek readying for a comeback? In just the past couple of days, Katie Holmes and James Van Der Beek both announced endorsement deals, with Ann Taylor and Dockers respectively.  Expect the Van Der Beek campaign to take the prize however for his starring role in a viral campaign promoting a fictional brand called “DILF Khakis”.  Check it out on Funny or Die.
  • In light of the point above, a recent study shows that celebrity endorsements are largely ineffective.  The 2010 Celebrity Effectiveness study showed that fewer than 12% of ads using celebrities exceeded a 10% lift, and one-fifth of celebrity ads had a negative impact on advertising effectiveness.  In fact the average lift of non-celebrity ads was 8%, while celebrity ads returned negative effectiveness of -1.4%. 




Quiksilver Enters India - Quiksilver Holdings has signed a 25-year agreement with Reliance Brands Ltd. to bring its products to India, Sri Lanka, Nepal and Bangladesh. Quiksilver, which manufactures surfwear and other board-sports-related equipment, is available in 90 countries. Roxy, another of its brands, is also being brought to India. “The company plans to open six exclusive Quiksilver stores across Gurgaon, Pune, Hyderabad and Chandigarh this year,” said Darshan Mehta, president and chief executive officer of Reliance Brands.<WWD>

Hedgeye Retail’s Take:  While India is clearly on the radar of western brands, this marks one of the more formal and very long-term partnerships that we’ve seen to date.  With the potential for foreign direct investment to also finally get passed, expect more Indian expansion announcements over the near to intermediate term.


Jermaine O'Neal Launches Men's Line - Boston Celtics center Jermaine O’Neal isn’t about to let Amar’e Stoudemire steal the spotlight in the apparel arena. With Stoudemire linking up with Rachel Roy to launch a line of, first, women’s wear and subsequently men’s wear at Macy’s later this year, O’Neal has already quietly produced his own men’s collection, Le Jaunty, that he is hoping to roll out in 2011. The line, which has been tested at a few specialty stores, is now targeting department stores and a wider specialty store distribution.<WWD>

Hedgeye Retail’s Take:  Note to Jermaine. Your apparel line won’t last more than one, maybe two seasons.  Does anyone remember KG’s line? Or Starbury’s?


Athleta Opens First Full-Scale Store - The women's activewear brand owned by Gap Inc., opened its first full-scale retail location on San Francisco's renowned Fillmore Street. Gap said in a statement that the store offers Athleta's collection of women's active lifestyle apparel for yoga, running, swim, gym, hiking and skiing - designed by and for female athletes -- as well as an array of other products for both athletic and everyday pursuits. "Our customers have been asking us for a place to touch and feel the product and we are thrilled to be able to deliver on their wishes," said Kelly Cooper, Vice President of Merchandising, Design and Product for Athleta. "With Athleta's heritage rooted in Sonoma County, it was a natural fit for our first store to be located in the Bay Area, and in one of San Francisco's great neighborhoods. Our customers will have access to a wide selection of our product in an innovative and vibrant store environment providing a place to build community, and connect with the energy beauty and strength that is Athleta." The 5,000 square foot store, located at 2226 Fillmore Street, has an "open, airy feel and showcases the brand's inspirational imagery and headlines." <SportsOneSource>

Hedgeye Retail’s Take:  Finally an offensive growth move for the activewear brand that has been largely a non-event for Gap Inc.  Perhaps LULU’s monster 2010 gives management reason to believe there may be room for more than one player in the female oriented activewear space.  Key to success will be customer service and experience, both of which drive LULU’s industry leading sales per square foot.


Fleet Feet Surpases $100 Million in Sales - Fleet Feet, Inc. said revenues for the Fleet Feet Sports franchise in 2010 surpassed $100 million ($107M) and marked the seventh straight year of double digit comp store gains (10%). Fleet Feet, Incorporated President Jeff Phillips commented, "Our ongoing success is a direct result of our franchisees' ability to create an environment of inclusiveness where our customers can find the resources and inspiration to live a more fit life." Currently there are 90 Fleet Feet Sports stores located nationwide.   <SportsOnesSource>

Hedgeye Retail’s Take: Further confirmation that specialty running remains a key standout amongst the athletic footwear and apparel space and yet another reason why we may ultimately see RUN by Foot Locker expand beyond its current test phase.


N.Y. Shoppers Snowed in  - In the wake of Manhattan’s first major snowfall of the new year, consumers hit the streets Wednesday morning and stores were ready and waiting, but neither seemed to do any serious damage retailwise. Traffic at Tiffany & Co., Saks Fifth Avenue, A|X Armani Exchange, Pucci, Bottega Veneta, Ferragamo, Escada, De Beers, St. John and other designer boutiques along Fifth Avenue was sleepy. Without anyone lined up outside Hollister’s Fifth Avenue store, the velvet ropes near the entrance looked more like an art installation than a holding pen. Intrepid spenders who ventured out found plenty of sale items. <WWD>

Hedgeye Retail’s Take: Given the frequency of major storms recently, we may have consumers looking at the weather channel instead of websites and email promotions for the best post holiday deals.


Online Sales Delivered for Big Chain Retailers this Christmas - Thanks to big discounts and an early start, several big chain retailers reaped the benefits of a strong holiday shopping season online. In numbers reflected in the December sales reports for five big chains—Best Buy Co. Inc., No. 10 in the Internet Retailer Top 500 Guide, GameStop Corp. (No. 115), Kohl’s Corp. (No. 43), Macy’s Inc. (No. 20) and Urban Outfitters Inc. (No. 53)—customers also increased their online shopping more than their purchases in stores. <InternetRetailer>

Hedgeye Retail’s Take: E-commerce growth has outperformed brick and mortar stores for most retailers in 2010 so December performance is not exactly an exception. That said, snow bound consumers can only help drive the spread.


Sports Shoe Brands in China Plan Retail Expansion - A number of Chinese sports shoe brands, including Anta, Xtep, 361 Degree and Peak, plan to expand the number of their retail stores up to 10,000 in the next five years. According to the growth rate of these companies’ half year financial reports, within three years most of them will become the  10,000-retail store establishments. Sources reported that Xtep president Ding Shuibo plans to open 800 to 1000 stores this year including those to be opened in Taiwan. <FashionNetAsia>

Hedgeye Retail’s Take:  With Nike and Under Armour both intensely focused on ramping retail locations in China, the competition for retail space and brand awareness will be fierce indeed.





Initial Claims Rise 35k

The headline initial claims number rose 35k WoW to 445k (36k after a 1k upward revision to last week’s data).  Rolling claims rose 5.5k to 417k. On a non-seasonally-adjusted basis, reported claims rose 192k WoW.  As the third chart below shows, claims are usually elevated in this week of the year. Based on the charts below it seems probable to expect that claims will continue to rise for the next several weeks.


As a reminder, based on our analysis of past cycles, the unemployment rate won't improve until we see claims move into the 375-400k range. That said, it is worth highlighting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 9.8%, it's 11.8%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11.8% actual rate as opposed to the 9.8% reported rate.








In the table below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.





Taking a Look at the Forest

Now that 2010 is done, it's worth taking a step back and considering how mortgage demand fared throughout the whole year. On a full-year basis, the 2010 mortgage purchase applications index averaged 200, which was down 24% year-over-year when compared with the average index level of 264 for 2009. For reference, both years included a stimulative tax credit - 2009's was late in the year while 2010's was early in the year. 2010's 24% decline was a continuation of a trend that's been in place since the peak in 2005. Consider the following year-over-year changes: 2006: -14%, 2007: +4%, 2008: -19%, 2009: -23%, 2010: -24%. We think that speaks quite clearly to the longer-term trend in place in housing demand. This is in spite of affordability improving in each of these years. We would expect 2011 to be another down year for housing demand, driven by still tighter underwriting standards, a lack of incremental downside in mortgage rates and a deflationary mindset driven by further declines in home prices keeping buyers on the sidelines. 


Taking a Look at the Trees

MBA Purchase Applications fell 3.7% week over week. Refinance Applications rose 4.9% as mortgage rates fell. On a year-over-year basis, purchase applications were down 10%.  The charts below show the recent trends in this series.














Joshua Steiner, CFA


Allison Kaptur

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