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


The three things that matter this morning:

  1. Deflating The Inflation (our Q2 Macro Theme) was big yesterday = CRB Index down -1.1% on oil down hard
  2. Chinese Data for May was rock solid sequentially = Fixed Asset Investment up 40bps sequentially in May to +25.8%
  3. Global Equity Markets stopped going down


Bulls are dying for some bullish data to cling to at this point and, if you look hard enough, it's there today - what price do you pay remains the question.  In SP500 points, I say just relax and manage risk around the range (1)


Being perma anything won't work in 2011. As we look at today’s set up for the S&P 500, the range is 31 points or -0.94% downside to 1259 and 1.90% upside to 1290.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: -468 (+1452)  
  • VOLUME: NYSE 908.34 (-10.89%)
  • VIX:  19.61 +3.98% YTD PERFORMANCE: +10.48%
  • SPX PUT/CALL RATIO: 1.67 from 1.77 (-6.13%)



  • TED SPREAD: 19.95
  • 3-MONTH T-BILL YIELD: 0.05%
  • 10-Year: 3.00 from 2.99
  • YIELD CURVE: 2.60 from 2.58 



  • 7:30 a.m.: NFIB Small Business Optimism, est. 90.5
  • 7:45 a.m./8:55 a.m. ICSC/Redbook Weekly Sales
  • 8:30 a.m.: Producer Price Index, est. 0.1%
  • 8:30 a.m.: Retail sales, est. (-0.5%)
  • 10 a.m.: Business inventories, est. 0.9%
  • 11:30 a.m.: U.S. to sell $28b 4-wk bills
  • 2:30 p.m.: Fed Chairman Bernanke speaks at the Committee for a Responsible Federal Budget Annual Conference


  • Nokia and Apple agreed to settle all patent litigation between the companies in a deal that awards a one-off payment and royalties to Nokia
  • BofA “significantly hindered” a federal review of its foreclosures on loans insured by the FHA, U.S. says
  • U.K. inflation held at the fastest pace since October 2008



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Sugar Rising as Thailand Port Congestion Worst in Memory: Freight Markets
  • Michael Coleman’s Trading Company Hires Ex-JPMorgan Coal Trader Chan Bhima
  • Cotton Acres in China Seen Capped as Manufacturing Jobs Lure Farm Workers
  • Record Corn Crop in India May Help Increase Exports, Limiting Global Costs
  • Fees Punish Savers Seeking Hedge-Fund Cachet in Commodities Futures Funds
  • Crude Oil Trades Near One-Month Low on Demand Outlook for China and U.S.
  • Corn Drops for Third Day as Weather Improves, Pre-Export Inspections Fall
  • Copper Climbs for First Day in Three as China Production Maintains Growth
  • Sugar Falls on Reduced Concern About Brazilian Supply; Coffee Prices Drop
  • Gold May Advance on Inflation Concern, Sovereign-Debt Crisis in Europe
  • Violent Protests Increase at Chile’s El Teniente Copper Mine, Codelco Says
  • Chicken Breeders Face Tax-Cut Hawks in U.S. Senate Showdown Over Ethanol
  • Sino-Forest’s Investors Will Question Executives After Stock Plunges 73%




THE HEDGEYE DAILY OUTLOOK - daily currency view




  • EUROPE: another dead cat bounce on hope of Keynesian resolve? DAX up +1.6% (we're long); Spain +1.4% (were short); Greek stocks, no dice

THE HEDGEYE DAILY OUTLOOK - euro performance




  • ASIA: better than bad; China rallies on "news" that inflation hits a new high; Hang Sang fails to confirm (down -0.05%); India +0.27%
  • China May CPI +5.5% y/y, matching expectations. May PPI +6.8% y/y vs cons +6.5%.
  • Japan April capacity utilization (1.1%) m/m. Revised April industrial output +1.6% m/m vs prelim +1.0%.


THE HEDGEYE DAILY OUTLOOK - asia performance








Howard Penney

Managing Director

Bullish Bears

“I was just saying on that particular play, I would have played it different.”

-Roberto Luongo (Vancouver Canucks)


If you’re going to get paid to play this game at the highest level, whether you like it or not, you will be held accountable to both your words and performance. I’m not just talking about the Stanley Cup Playoffs. I am talking about the Future of Finance.


Last night in Boston, the Bruins chased Vancouver Canucks’ goalie Roberto Luongo to the bench within the first 10 minutes of the game (to chase de goalie means to pull him from de net – and make him feel shame). At that point, the score was already 3-0 en route to a big Bruins’ Game 6 win. Boston goalie Tim Thomas played the 1st period “differently.”


I played against Tim Thomas in college. He was at Vermont. I was at Yale. They were a national powerhouse. We were in the dog house. I’ll never forget coming onto the ice for the warm-up in their barn. I was like a Thunder Bay deer in headlights facing a full student section of kids clanging cow bells and playing some version of the Smurfs song while I tried to pretend they weren’t there.


You can pretend your competition isn’t there, but you’ll have a really big problem if they’re really good and Proactively Prepared to beat you. From Boston last night to Vermont in 1995, that’s what winners do – they wake-up every morning expecting to win.


I don’t expect to be Bullish inasmuch as I don’t expect to be Bearish. I expect my teammates and I to execute on our research and risk management process to the best of our ability every day. When we fail, we learned. When we win, we expected to.


This morning’s economic data and, more importantly, the market’s reaction to it, is bullish:

  1. Chinese Data – Growth Slowed at a SLOWER RATE as Inflation Accelerated at a SLOWER RATE (May data)
  2. Deflating The Inflation (Q2 Hedgeye Macro Theme) – oil prices falling to a 1 month low deflated the CRB Index by 1.1% yesterday
  3. Stock Markets – after 6 consecutive down weeks, around the world, they stopped going down

But can you be a Bullish Bear?


Yes We Can. Our risk management task every morning isn’t to be either Bullish or Bearish – it’s to be right.


That’s the American (and Canadian) Optimism we’re looking to champion. That’s the winning attitude we can believe in.


Are there bearish data points in my notebook this morning? You bet your Madoff there are:

  1. United Kingdom Stagflation – continued in May with Consumer Prices (CPI) remaining in-line with April’s print of +4.5%
  2. Hong Kong Property Bubble Popping – in motion now that HK Industrial Production has dropped to 3.5% (versus 5.7% last quarter)
  3. Spanish/Greek Piggies Don’t Fly – both countries issued more Pig Paper (fiat debt) this morning at higher yields than last auction

But what trumps what? In the aggregate, are these 6 bullish and bearish data points more bullish or bearish? Do you have an investment mandate to be bullish or bearish, regardless? Or are you tasked with neither being a Perma-Bull nor a Perma-Bear?


My answers to these questions are already in print. I think this morning’s Global Macro Grind flushes out as bullish as last night’s Bruins win. That doesn’t make me un-Canadian. Neither does it pigeon hole me into not being able to change my mind within the next 24 hours. The only rule in this game is to say what you think – take your position – and be accountable to it.


Across our 3 core risk management durations, the Bullish Bear’s view of US Equities from yesterday’s closing price is as follows:

  1. Immediate-term TRADE upside in the SP500 to 1290
  2. Intermediate-term TREND upside in the SP500 to 1320
  3. Long-term TAIL upside in the SP500 to 1377

Wow. Maybe on The Kudlow Report tonight (I’ll be on with Larry at 7PM EST) I’ll pretend I am Don Luskin and only be bullish. Maybe not.


Across our 3 core risk management durations, the Bearish Bull’s view of US Equities from yesterday’s closing price is as follows:

  1. Immediate-term TRADE downside in the SP500 to 1259
  2. Intermediate-term TREND downside in the SP500 to 1223
  3. Long-term TAIL downside in the SP500 to 1223

You see, if you are Duration Agnostic, there are two sides to every market debate – and, not surprisingly, two sides to every bid-ask spread across different times and prices. Sometimes durations converge (my intermediate and long-term support levels are the same right now). Sometimes they diverge. Sometimes you should be bullish; sometimes bearish.


Sometimes your competition is sleeping. All of the time we need to keep changing our positioning as the market’s time, price, and expectations do. As my great hockey Coach and mentor at Yale, Tim Taylor, taught me – you have to keep moving out there.


My immediate term support and resistance ranges for Gold (bought more yesterday), Oil (we remain bearish; Goldman bullish), and the SP500 (we have no long or short position here) are now $1, $97.60-100.03, and 1.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bullish Bears - Chart of the Day


Bullish Bears - Virtual Portfolio

the macro show

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Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.


CAKE was sold short today in the Hedgeye Virtual Portfolio.


The Cheesecake Factory is one of our favorite short ideas in the restaurant space at the moment.  Keith sold it short today in the Hedgeye Virtual Portfolio based on his quantitative levels and our fundamental analysis which has highlighted significant risk of CAKE missing numbers this year.  Specifically, Keith wrote that we are “bearish on Cheesecake’s intermediate-term TREND and the stock is immediate-term TRADE overbought today”.   We published two posts, last Thursday and Friday, detailing our fundamental view.


As a recap, the main tenets of our fundamental thesis are as follows:

  • Management’s commodity guidance is likely too low for 2H11.  As we outlined on Friday, a chart of cheese or milk shows the current level of dairy costs are far in excess of those seen in 4Q10, a period management recently highlighted as a period that will offer easier comps from a dairy perspective.  While a significant leg down is possible, especially given the volatility in dairy costs for the year-to-date, we believe that the likelihood of still-significant dairy inflation in the fourth quarter is not adequately baked in to management’s guidance.  CAKE only has 60% of its food commodity basket locked.
  • The Cheesecake Factory is a concept with an average check problem and management’s constant increasing of price helps protect margins but does not help mix or traffic.  We believe that the concept must retain its relative value over time and it seems that management is – for now – steadfast in its belief that taking price consistently is its optimal strategy.
  • Sentiment around this name is bullish and has only become more so over the last several months.  The street’s ratings are as follows: 41% Buy, 59% hold, 0% sell.




Howard Penney

Managing Director

Higher Taxes: Yes Please!

Conclusion: The consumer’s State & municipal government tax burden is headed north on a nationwide basis starting in FY12. Additionally, we are of the view that the “G” component of US GDP (~20%) will continue to weigh on the economy over the intermediate-term TREND and we detail why in the report below.


As outlined in our recent presentation on US interest rates, we are of the view that the “G” component of US GDP (~20%) will continue to weigh on the economy over the intermediate-term TREND. While we certainly do not support the tired Keynesian Dogma of textbook “countercyclical government spending”, we do agree that fiscal retrenchment throughout the economy will auger bearishly for near-to-intermediate term economic growth. On a long-term basis, however, we welcome a much needed dose of fiscal austerity and would view that as positive for the confidence that ultimately drives consumer spending and corporate investment alike.


From a Federal perspective, we continue to believe that the negotiations centered around the Debt Ceiling Debate are likely to result in reduced levels of spending in the FY12 budget, as well as some groundwork laid for entitlement reform – though the tough decisions will likely continue to get punted to future Congresses. That said, however, any austerity at the Federal level is a sharp reversal from what certainly looks and feels like permanently enacted stimulus spending. Refer to Daryl Jones’ 4/20 Early Look titled, “The Case of the Missing Stimulus” for more details. This is one of many potential positive catalysts for our long DXY position in the Virtual Portfolio.


From a State & Municipal perspective – which is the real focus of this note – we continue to highlight their fiscal stress as a headwind to 2H11 and 1H12 GDP growth. According to the National Association of State Budget Officers Spring 2011 Fiscal Survey of the States report, an aggregate $75.1B budget gap must be closed with the enactment of FY12 budgets (starting July 1st in all but four States). Furthermore, the $75.1B is likely to be revised higher in coming weeks, due to additional States’ completions of official forecasts (17 States remaining). That $75.1B-plus number is on top of a cumulative $12.1B in mid-year budget gaps from the FY11 budget that must be closed by June 30th. All told, assuming a constant budget gap-to-State ratio for the 17 States which have yet to report and the additional $12.1B in mid-year FY11 deficits, a budget gap of roughly $126B must be rectified via legislation in the coming weeks (with the exception of Vermont, all States have balanced budget  statutes).


Perhaps the most noteworthy way in which States are prescribing to close their deficits is tax and fee increases. On a net basis, States are proposing tax and fee increases to the tune of $13.8B – a YoY gain of +122.6% vs. FY11’s $6.2B tax hike (-74% YoY).  From a breadth perspective, the tax and fee increases are more concentrated in FY12 budget proposals (12 States) vs. last year’s 24 States. Still, the aggregate sum of taxation on a national level is what matters to the overall economy and, on both a nominal and sequential basis, State tax and fee hikes are an additional headwind to the economy over the intermediate-term TREND. Some States are even hiking taxes in arrears; CT, which just increased taxes and fees by a record $2.6B is applying the changes on a retroactive basis to January 1, 2011.


Below we detail the proposed FY12 tax and fee hikes on a national basis per the aforementioned NASBO report: 

  • SALES TAXES: Seven States proposed increases while three States proposed decreases for a net gain of $6.1B;
  • PERSONAL INCOME TAXES: Six States proposed increases while seven States proposed decreases for a net gain of $5.9B;
  • OTHER (including alcohol, tobacco, motor fuel, fees, etc.): 18 States proposed increases while eight States proposed decreases for a net gain of $2.4B. 

As the chart below highlights, sharp accelerations in proposed State level tax and fee increases have been reasonably shown to lead 100bps-plus slow-downs in the rate of Real GDP growth by 6-12 months on average (likely due to the timing of State fiscal years, which typically begin six months prior to the start of the corresponding calendar year).


Higher Taxes: Yes Please! - 1


One positive callout amid this plethora of rising taxes is the net decrease of $537.2 million from corporate income taxes. To the extent a -1.2% reduction in aggregate State corporate income taxes stimulates job growth rather than mere earnings preservation in a slowing economy remains to be seen. Still, it’s a positive development nonetheless.


From a municipal government perspective, the most notable change to taxes and fees come in the form of property tax hikes. Simply put, as property appraisal values continue to decline on their typical 2-3 year lag to national real estate prices, city and county financiers have taken to gradually increasing property tax rates to offset any declines from this important source of revenue (~26%). As to be expected, property tax appeals have risen sharply on a national level. From our gathering of recent anecdotes, municipalities from Westchester County (NY), to Maui County (HI), to Hernando County (FL) are seeing record levels of property tax appeals that amount to doubling, tripling, and even quintupling of pre-crisis levels. The sheer volume of new cases is creating backlogs across the nation that may eventually amount to incremental hundreds of millions added in arrears to municipal budget deficits – at a time when funding from both the Federal and State level is set to decline dramatically. Still local government officials carry on with their “accounting tricks” for lack of a better solution:


“New Rochelle has seen its tax roll drop by 2 percent or 3 percent a year, so just to get the same revenue, you need to raise tax rates by that much.”

-Howard Rattner, New Rochelle Finance Commissioner


The net result of these gimmicks means homeowners get plugged with higher tax rates amid falling home prices. While payments on a net basis are likely to remain sticky, the psychological effect of higher property tax rates in an environment of ever-falling appraisal values is not one that is bullish for consumer confidence on a national level. Neither is a $13.8B increase in the consumer’s State tax burden. To the extent State and municipal tax and fee increases are offset by Federal tax cuts into and out of the Debt Ceiling Debate and FY12 Budget Debate remains to be seen – though likely at least to some degree.  Still, any resulting spending cuts are likely to be an additional drag on the economy in the near-to-intermediate term that is likely to be eventually offset by higher levels of consumption and investment over the intermediate-to-long term due to [anticipated] tax cuts.


Darius Dale



Macau Studio City, a new junket, and a blowout Q2 makes us wonder why the valuation discount remains so big.



We’ve updated our model for the accretive refinancing and we shake out at $0.32 for 2011, much higher than the Street at $0.21.  MPEL trades at a 25% discount to Wynn Macau, yet there appears to be more positive near-term catalysts for MPEL.



  • Neptune will open at City of Dreams hopefully by the end of June.  Neptune is one of the largest junkets in Macau and they are shooting for HK$3-4 billion on monthly roll.  We calculate that translates into an incremental US$6-8 million in EBITDA or a 5-10% increase in the current company-wide EBITDA run rate.  This is not in anyone’s model, including ours.
  • A blow out Q2 – we are currently estimating $172 million in Q2 EBITDA or approximately 25% above the Street and that’s after accounting for a softer June for the market.
  • A Macau Studio City announcement – We think a resolution between the two principals in his JV could be announced soon.  MPEL will likely take a sizeable equity stake and retain its management contract.  We estimate potential value accretion around $3 per share at the low end.  See analysis below: