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Bearish TAIL: SP500 Levels, Refreshed

POSITION: no positions in SPY or Sector ETFs


Since I have no idea what the next central plan is other than its to “go big” (Obama at the G20 today), I’m just going to get out of the way. While the US stock market’s intermediate-term TREND level of 1213 held this week, its longer-term TAIL level of 1267 did not. This market is in no man’s land now.


Across my risk management durations here are the lines that matter most: 

  1. TAIL resistance = 1267
  2. TRADE resistance = 1251
  3. TREND support = 1213 

The way I’ve managed risk around this is from a net exposure perspective (overall my call is to take gross exposure down). On Tuesday’s TREND line test of 1213, I moved the Hedgeye Portfolio to 9 LONGS, 5 SHORTS. As of today, I’ve tightened that back up to 7 LONGS, 7 SHORTS.


The EUR/USD is going to decide which way the SP500 trades from here. I’m watching how the Euro’s $1.36 TRADE line support holds up very closely.



Keith R. McCullough
Chief Executive Officer


Bearish TAIL: SP500 Levels, Refreshed - SPX

TGT: Selling

Keith just sold Target in the Virtual Portfolio; oil is too high and TGT has broken its immediate-term TRADE line of support.


TGT: Selling - TGT levels 11 4 11


From a quantitative perspective, Starbucks is overbought at current levels from a TRADE perspective.  From a fundamental perspective, it remains one of our favorite names in the space.


Keith signaled to us this morning that Starbucks is overbought from a TRADE perspective at current levels, trading up as it is more than 6% today following yesterday’s earnings.  Clearly, the strength of the price action Starbucks in the face of an ugly tape shows that investors are confidence that the back-end loading of FY12 EPS growth is not a cause for concern.  We've liked this name for a long time and remain positive on the stock.





Howard Penney

Managing Director


Rory Green


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Notable MACRO data points, news items, and price action pertaining to the restaurant space.




There is a great article by Jonathan Maze on Private Equity's Mixed Track Record in the Restaurant Finance Monitor - “The buyout boom years of 2005 to 2007 haven't been good to private equity buyers of restaurant chains. In that period, those investors, buoyed by cheap debt, bought up numerous chains around the country. Yet of the 35 restaurants they bought in those years, 11 have gone bankrupt, and two others are in distress”.




The employment situation in October was largely unchanged with the unemployment rate dropping slightly to 9.0% from 9.1% prior and the Labor Force Participation Rate was unchanged at 64.2%.  Private Payrolls came in below expectations at 104k versus 125k expectations.  September’s number was revised from 137k to 191k.


We will be following up with a post this morning on important employment trends that pertain to the restaurant space in particular.





THE HBM: SBUX, WEN - subsector fbr





SBUX: As we wrote this morning, Starbucks posted strong 4QFY11 earnings last night and mentioned that business has been strong in Canada.  Tim Horton’s must be feeling the heat.  Tim Horton’s has announced the launch of its new specialty coffees, which will soon be available at more than 2,500 locations across Canada. The company said it's the biggest specialty coffee roll out ever in the country. Starting at $2, the lineup includes lattes, mocha lattes and cappuccinos made with premium espresso.


WEN: Wendy’s continues to trade well.  We believe that sales at the concept are strengthening.


THE HBM: SBUX, WEN - stocks 114



Howard Penney

Managing Director



Rory Green






TODAY’S S&P 500 SET-UP - November 4, 2011


Get the US Dollar right, you’ll get a lot of other things (beta) right!   As we look at today’s set up for the S&P 500, the range is 16 points or -0.80% downside to 1251 and 0.46% upside to 1267. 




THE HEDGEYE DAILY OUTLOOK - levels and trends 114


THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance



  • ADVANCE/DECLINE LINE: +1303 (-695) 
  • VOLUME: NYSE 1002.25 (+4.69%)
  • VIX:  30.50 -6.84% YTD PERFORMANCE: +71.83%
  • SPX PUT/CALL RATIO: 1.55 from 2.29 (-32.07%)




TREASURIES: long end of the US treasury yield curve has been yelling that this unemployment report is going to be bad again; stay tuned

  • TED SPREAD: 43.50
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.09 from 2.03    
  • YIELD CURVE: 1.85 from 1.80


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30 a.m.: Change in non-farm payrolls, est. 95k, prior 103k
  • 8:30 a.m.: Unemployment rate, est. 9.1%, prior 9.1%
  • 1 p.m.: Fed’s Tarullo speaks in Washington on regulation
  • 1 p.m.: Baker Hughes rig count
  • 4:05 p.m.: Fed’s Williams speaks in Santa Clara, Calif.


  • Greek PM George Papandreou’s government faces confidence vote in parliament; referendum canceled
  • G-20 chiefs meeting in Cannes, France, are pushing European authorities to flesh out, enact a week-old rescue plan that has already shown signs of unraveling
  • Basel Committee on Banking Supervision scheduled to release list of so-called global systemically important institutions following G-20 meeting
  • MF Global’s Asian units may be sold as soon as this weekend after liquidators received between 30 and 40 “credible” purchase offers: WSJ




THE HEDGEYE DAILY OUTLOOK - daily commodity view



  • Ex-Credit Suisse Oil Head McKenna Starts Mastic Hedge Fund
  • Gartman Sees Euro Slump Pushing Gold to Record: Chart of the Day
  • RBA Cuts Growth, CPI Forecasts as Europe’s Turmoil Deepens
  • Yingluck Banks on $26 Billion Plan After Flood ‘Stumble’
  • Wheat Plunging as Stockpiles Climb to 10-Year High: Commodities
  • India Economy Faces ‘Critical’ Coal Shortage: Chart of the Day
  • Oil Trades Near Three-Month High as Greece Cancels Referendum
  • Gold Traders More Bullish as Hedge Funds Increase Bets on Gains
  • Stocks, Oil Rise, Treasuries Drop as Greece Moves Toward Bailout
  • Heating Fuel at Record as European Diesel Surges: Energy Markets
  • Chinese Iron Ore Miners Losing Money at Current Prices, UBS Says
  • Copper Gains for Third Day as Greece Near Bailout, ECB Cuts Rate
  • Malaysia’s Export Growth Quickens on Higher Sales of Commodities
  • Thai Rice Exports Seen Plunging on State Buying, Flooding
  • Gold Pares Second Weekly Increase as Investors Lock in Gains
  • Credit Suisse Brazil Unit Said to Shut Agriculture Trading Desk
  • Starbucks Fourth-Quarter Profit Rises 29% as U.S. Sales Gain
  • Abramovich Says He Feared Russia’s Murderous Aluminum Trade
  • Vale Marketing Head Gutemberg Leaves Amid China Price Talks




EURO – we covered at TRADE line support (and sold the USD) on Tuesday at Euro 1.36. Now we can re-short it on the mini-squeeze back up to 1.39-1.40 (and buy the USD back). Just managing risk around a proactively predictable FX range.

Eurozone Producer Prices +5.8% y/y in SEP and set to rip higher again in OCT/NOV as policies to inflate continue


THE HEDGEYE DAILY OUTLOOK - daily currency view




FRANCE – there’s nothing stealth about what either the French stock or bond market continues to tell us – its explicit - France is entering a period of intermediate-term stagflation; this morning’s failure to capture TREND line resistance (3403) combined with a nasty Services PMI print of 44.6 for OCT (vs 46 in SEP) tells us all we need to know to be shorting French stocks on green.


THE HEDGEYE DAILY OUTLOOK - euro performance




CHINA – stealth move higher in Chinese stocks continued overnight as the Shanghai Comp closed up for the 9th day out of the last 10. Heard from large constituencies in the hedge fund community that China (as in the country) was going off a cliff in early October. Hearing crickets now. Our predictive tracking algorithms have Chinese GDP growth bottoming (sequential slowdown) in Q1 of 2012.



THE HEDGEYE DAILY OUTLOOK - asia performance






The Hedgeye Macro Team

Howard Penney

Managing Director


Golden Handcuffs

This note was originally published at 8am on November 01, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“You know what it is? It is a golden handcuff, with the keys thrown away.”

-O. Henry


Keith and I are in San Francisco with our colleague, and one of the top young institutional salesmen in the business, Bill LeClerc, visiting some of our current and prospective subscribers. (We may also stop by the Googleplex for a quick game of roller hockey if Sergey and Larry accept the Hedgeye challenge.)  Having covered technology in the late 1990s and early 2000s, I know full well that there is something special about San Francisco, and I’m reminded of that on every visit.


Coincident with this visit, I’ve also been reading “Steve Jobs” by Walter Isaacson.  The story of Steve Jobs, and the creation of Apple Computer, is, in many ways, emblematic of the last thirty some years of business history in Silicon Valley.  Plenty of time has been spent rehashing Jobs’ incredible career and personal quirks, but I wanted to highlight one interesting quote from the book, which is as follows:


“Rod Holt, who had built the power supply, was getting a lot options and tried to turn Jobs around.  “We have to do something for your buddy Daniel, he said, and he suggested they each give him some their own options. “Whatever you give him, I will match it,” said Holt.  Replied Jobs, “I will give him zero.”


Now, I’m not about to psychoanalyze Steve Jobs, but I did find this excerpt interesting.  The Daniel in question, was Daniel Kottke, who was a college friend of Jobs and one of the first employees of Apple.  Unfortunately, Kottke wasn’t a high-enough level employee to be cut in on the option pool pre-IPO and Jobs, in a very dispassionate manner, wasn’t willing to make a “charitable” exception.  To Jobs, it seems, there were no free lunches.


Like global macro markets, Steve Jobs waited for no one.  At times Job’s personal drive was seen as extreme and insensitive, yet his success in innovation is difficult to compare.  As is widely known, Jobs was Buddhist, a long time vegetarian, and for much of his early career only showered once a week.  Despite these somewhat “liberal” tendencies, he created all of his businesses without the Golden Handcuffs of government intervention.


This morning we are seeing the downside of reliance on the Golden Handcuffs of government intervention.  Currently, major European equity markets are down across the board from -2.5% to -4.0%.  Leading the charge are Italian and Greek stock markets, down -5% and -6%, respectively. In terms of sectors, the European banking sector is at the forefront to the downside, with the major French banks down close to -10% across the board.


Certainly, this is crazy equity price action given that it seems like just yesterday that Europe was bailed out and saved from the sovereign debt contagion.  Well, actually it literally was yesterday, or at least late last week.  From the outset, we were suspicious of the Bazooka press release.  As Keith wrote last Thursday:


“In the end (and, in the end, this will not end well), I don’t think this concept of Bazooka Light will make a lot of sense to anyone who takes a deep breath and actually reads what it implies.


The timing and size obviously matter – but the timing (end of November? is subject to a hefty political debate) and the size is basically whatever the Europeans want the media to buy into the headline being.”


This morning the key question seems to relate to timing as there is news out that the Greeks will hold a referendum on the EU debt deal, most likely in the December / January time frame – along with a confidence vote on the government in the coming days.  It seems the Greek people, who according to reports yesterday have more Porsche Cayenne’s registered than tax payers making over $50,000 per year, want to take their time and think about the bailout.  Personally, I would probably want to think about the Golden Handcuffs before I put them on as well.  But as I noted above, global macro markets wait for no one.


In the Chart of the Day below, we’ve also flagged the widening spreads between Italian government bonds and similar duration German Bunds.  As of this morning, this spread is literally as wide as it has ever been.  Certainly, Greece is one thing, but Italy is the eighth largest economy in the world with debt-to-GDP at north of 120%.  Unfortunately, for those looking for good news, this widening of Italian yields is signaling that things are going to get worse before they get better in Italy.


To add insult to injury, we are receiving PMI measures this morning that are foreshadowing a further deceleration of growth in Europe. Specifically, Chinese PMI for October came in at 50.4 versus the estimate of 51.8 and U.K. PMI came in at 47.4 versus the estimate of 50.0.  Tomorrow morning, the rest of European PMIs are released. Stay tuned.


Mr. Draghi, welcome to the ECB!


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Golden Handcuffs - Chart of the Day


Golden Handcuffs - Virtual Portfolio

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