TODAY’S S&P 500 SET-UP – December 30, 2011


As we look at today’s set up for the S&P 500, the range is 25 points or -1.43% downside to 1245 and 0.55% upside to 1270. 







THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE:  1739 (-1899) 
  • VOLUME: NYSE 531.68 (-2%)
  • VIX:  22.65 -3.7% YTD PERFORMANCE: +27.61%
  • SPX PUT/CALL RATIO: 2.79 from 2.47 (12.96%)



  • TED SPREAD: 58.1
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.03 from 1.97   
  • YIELD CURVE: 1.63 from 1.63


GLOBAL MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Net export sales, grains
  • 10am: NAPM-Milwaukee, Dec., est. 58.3 (prior 56.7)



  • S&P 500 enters the final trading day of the year up 0.4% for 2011; the Dow is 6.1% higher, while the Nasdaq is down 1.5%. Markets are open for regular trading day.
  • Bank of America is poised to be worst performer in Dow, off 59% YTD
  • In Europe, Stoxx 600 headed for first annual decline since 2008, down about 12% YTD
  • IMF may warn Greece bond writedown isn’t enough, WSJ says
  • JPMorgan, Ally sued yesterday by HSH Nordbank on $293m losses in mortgage bonds
  • North Korea warned world not to expect change from regime under new leader Kim Jong Un
  • No major movie releases this weekend
  • No IPOs expected to price today



  • Corn Traders Extend Bullish Bets on South America: Commodities
  • Commodities Poised for First Annual Decline Since 2008 on Europe
  • Oil Heads for Third Yearly Gain on Mideast Tension, U.S. Economy
  • Gold Rebounds, Heads for 11th Annual Gain on Demand Speculation
  • Copper Rises as U.S. Growth May Make Up for Slowdown in China
  • Slowing China Means Ore-Ship Rates at Lowest in Decade: Freight
  • Alcoa Accused of Bribing Alba Officials in Aluminum Scheme
  • Corn Gains in Chicago as South America Dryness Worries Persist
  • Rubber Posts First Annual Loss in Three Years on Europe Crisis
  • Fracking Ban Threats Seen Hollow in Calfrac Bonds: Canada Credit
  • Palm Oil Gains, Paring First Annual Loss Since 2008, on Weather
  • Asia Refiners’ Fuel Oil Losses at Two-Year Low: Oil Products
  • Cellulosic Ethanol Again Misses U.S. Target: Chart of the Day
  • COMMODITIES DAYBOOK: Oil Heads for Third Annual Increase
  • CDS Dealers to Judge If Sino-Forest in ‘Credit Event,’ ISDA Says
  • Record Surge in CO2 Credits May Hamper Rebound: Energy Markets
  • Oil May Rise as Iran Threatens to Block Waterway, Survey Shows

THE HEDGEYE DAILY OUTLOOK - daily commodity view






THE HEDGEYE DAILY OUTLOOK - daily currency view





THE HEDGEYE DAILY OUTLOOK - euro performance





THE HEDGEYE DAILY OUTLOOK - asia performance



  • Oil Heads for Third Yearly Gain on Mideast Tension, U.S. Economy
  • Gold Rebounds, Heads for 11th Annual Gain on Demand Speculation
  • Google Backs Israel Entrepreneurs as Local Financing Drops: Tech
  • Malaysia’s Highest-Rated Sukuk Lead 2011 Gains: Islamic Finance
  • Teva Heads for Biggest Decline in Five Years: Israel Overnight
  • Treasuries Set for Best Year Since 2008, Beating Stocks, Dollar
  • Egypt’s Long-Term Currency Debt Downgraded by Fitch Ratings 





The Hedgeye Macro Team

Howard Penney

Managing Director





Boxed In

This note was originally published at 8am on December 27, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“If you ever dream of beating me you’d better wake up and apologize.”

- Muhammad Ali


In the United Kingdom, Boxing Day, historically, was the day after Christmas on which the wealthy gave their servants gifts in a box to show them appreciation for their service. It is a holiday that it still recognized in much of the Commonwealth, though the concept of the holiday has changed rather dramatically over time. Yesterday, I celebrated Boxing Day in my hometown of Bassano, Alberta with family and friends and a traditional town pond hockey game in the mid-afternoon.


In Canada, Boxing Day has morphed from a charitable day to a day which is generally known to have the best shopping deals of the year. With the commercialization of Boxing Day, the goodwill aspect of it has been all but lost. On some level, though, the massive sales that occur on Boxing Day do provide some respite to the middle and lower class consumer who continue to get Boxed In by the North American economy.


In the United States, one of the key issues facing the middle and lower class consumer clearly remains the employment situation. The most recent monthly employment report from the Bureau of Labor Statistics in the United States, reported in early December and including November data, showed that the national unemployment rate in the United States had declined from 9.8% in November 2010 to 8.6% in November 2011. This was good news, right? Well, as usual, the devil is in the details.


From November 2010 to November 2011, the totally number of employed in the United States increased from 138.9 million to 140.6 million for a total increase of 1.68 million, or 1.2%. Conversely, the total number of civilian and non-institutional population not in the workforce increased from 84.8 million to 86.6 million for a total increase of 1.79 million, or 2.1%. So on a net-net basis, the number of people out of the workforce has increased more than the people in the workforce over the last twelve months, despite the illusion of a decreasing unemployment rate.


As it relates to prospects for hiring, the outlook is muddled. According to the Business Roundtable survey released last week, about 1/3 of CEOs expect to add employees in 2012, about 40% expect to keep their employees flat, and almost 25% expect to trim headcount. This survey is basically unchanged from its results three months before. A recent survey from Manpower echoed similar uncertainty in the job market, with the following key conclusion:


“Seven percent of employers report they are unsure of their hiring intentions going into the new year. The rise from three to seven percent is the most significant quarterly increase since 1977 and represents the highest percentage of uncertain employers surveyed since 2005.”


Despite the more ominous long-term employment picture, recent weekly unemployment claims have shown some improvement in the U.S. In fact, last week’s headline initial claims fell 2,000 to 364,000. In terms of context, our financials team wrote the following regarding the recent claims data point:


“It strikes us that claims have exhibited similar tendencies for the past few years. Starting around week 36 of the year, rolling claims begin improving and continue that improvement through year-end. While we don't have a great explanation for why that is, considering the data is seasonally adjusted, it does seem to be a recurring trend. Also important is the fact that in the first 1-2 months of the new year, claims seem to go the wrong way, or least have done so in the past few years.


We'd also highlight the sizeable divergence that has emerged between claims and the S&P. Historically these divergences have not lasted. Right now the divergence is suggesting that either claims back up to ~445k or the S&P 500 puts on a move to ~1375. Last time a comparable divergence emerged it was in the fall. The mean reversion instrument at that time was the market, as claims showed resilience, and, ultimately, improvement.”


Given the employer surveys highlighted above, it seems likely that typical trend of employment worsening in the first couple of months of the year will again come to the fruition this year.


In the Chart of the Day, we’ve highlighted the growth of the population not in the workforce in the United States going back three years. This chart illustrates that as unemployment has grown over that period, so too has the population that has left the workforce.


The background of the chart is a picture from the “Thrilla in Manilla,” which was the third and final fight between Muhammad Ali and Joe Frazier. At the start of the seventh round, Ali purportedly whispered in Frazier's ear, "Joe, they told me you was all washed up."  Frazier growled back, "They told you wrong, pretty boy." Unfortunately for Frazier he eventually lost in the 14th round by TKO when his trainer threw in the towel.


We are not certain when the U.S. consumer will officially throw in the towel, but there is certainly a scenario in which a strengthening U.S. dollar will help to buoy consumer spending by increasing purchasing power and deflating key input costs. On the other hand, we are much more certain that if Italian yields continue to trend above 7%, as they are this morning, global investors will be increasingly likely to throw in the towel on the Euro.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, and the SP500 are now $1568-1604, $106.02-109.11, $1.28-1.30, and 1231-1270, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research



Boxed In - DJ EL chart


Boxed In - HVP


The Macau Metro Monitor, December 30, 2011




According to Portuguese news agency Lusa, Macau gross gaming revenue for 2011 was over MOP268 BN (US$33.5BN). Casinos will post around MOP24 BN (HKD23.3 BN) in GGR in December, up 27% YoY.



Star Cruises Ltd. of Genting Malaysia Bhd., co-operator of the country’s largest casino, and local partner Alliance Global Group Inc. plan to start building their second gambling resort in Pasay City next year to meet demand.  “We are confident that there is a market,” Alliance president Kingson Sian said.  The second project, called Resorts World Bayshore, follows the existing Resorts World.


Genting and Alliance’s venture, Travellers International Hotel Group, will build a 31-hectare gaming complex in Pasay City after winning one of four casino operator licenses the Philippines issued in 2008 and 2009.  Belle Corp., Bloomberry Investments Holding Inc. and Japan’s Universal Entertainment Corp. are also building casinos under the licenses.


Bayshore Manila will be the company’s second integrated tourism estate. It is three times the size of Resorts World Manila.



Bank loans expanded by 2.3% in November from the preceding month, according to central bank data on Dec 30.  In comparison, October's rise was only 0.3% - the slowest rate of growth since July 2010.  Before October, total bank loans had averaged about 2.6% growth this year.

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Year's End

“Year’s end is neither an end or a beginning, but a going on, with all the wisdom experience can instill in us.”

-Hal Borland


No matter where we go this morning, here we are – at the end of a what’s been a very long year.


While the Institutionalization of US Equities can play short-term games with our hearts and minds into month, quarter, and year-end markups, the #1 game in town from a Global Macro Theme perspective in 2011 was Growth Slowing.


For Global Macro Risk Managers, what did that mean? 

  1. Major Asian, European, and US Financials Equities crashed from year-ago levels
  2. Commodities crashed from their 2011 YTD peaks
  3. US Treasury Bonds remained in a raging bull market 

Since, magically, the SP500 has rallied once again (on no volume) to yet another lower long-term and YTD high (-19.3% and -7.3% from OCT 2007 and APR 2011 highs, respectively), I am certain that the marketing departments of Buy-And-Hold Inc will quibble with my globally interconnected interpretation of it all…


Quibble away.


Here are some of the early Major League Macro year-end final scores: 

  1. India (BSE Sensex) = -24.8% YTD
  2. China (Shanghai Composite) = -21.6% YTD
  3. Japan (Nikkei) = -17.3% YTD 

Now an Institutionalized chap running other people’s money in “Asian Equities” might try to argue that being long Japan instead of India equated to him “beating” an Asia-Pacific Index. But “cheap” stocks look a heck of a lot cheaper in Japan -17.3% lower – and his investors may quibble with the representation of his “outperformance.”


How about other countries and commodities? 

  1. Hang Seng Index (Hong Kong) = -19.97% YTD
  2. CRB Commodities Index = -8.4% for 2011 YTD
  3. Copper = -23.4% YTD 

So, I guess, another Institutionalized manager could say being long Hong Kong outperformed long China and being long Gold outperformed being long Copper…  




But these guys better not be on the record at the beginning of 2011 telling you that they nailed those relative outperformers because they thought Global Growth was going to be just fine. That’s like me telling you my Power-Ball ticket was closer to the winning number than yours. There’s only so many times you can change the thesis on why you were long!


Understanding that Piling-Debt-Upon-Debt Structurally Impairs Growth was critical to getting out of the way of most of these nasty 2011 draw-downs. That’s why the ladies and gentlemen who preferred to buy US Treasury Bonds on January 1st and hold them through today are smiling right now.


Check this out: 

  1. 10-year US Treasury Yield started 2011 at 3.29%
  2. 30-year US Treasury Yield started 2011 at 4.33%
  3. Today, 10 and 30 year Yields are trading at 1.89% and 2.89%, respectively! 

The math on that generates -43% and -33% drops in 10 and 30 year UST Bond Yields for 2011 YTD. The inverse picture of that math is best shown in the powerful 2011 chart of the TLT (which uses 20-year yields, splitting the difference between my two bellwethers).


Growth Slowing?


Yep. That was the #1 macro call of 2011. And you could have expressed that in many different ways (long FLAT, which we bought in FEB of 2011 is up +28.01% since).


As I flip the switches on my risk management machines to 2012, I’m getting peer pressure to make another outside of consensus call. Sorry, I can’t do that, yet. Timing matters. Rarely do we get a signal on December 31st.


I’m not going to broker you a gratuitous “2012 Outlook” or sell you some ad space either. In the New Year, I’m going to do exactly what I did this morning – and the morning before that… 

  1. I’m going to stick with my process
  2. I’m going to buy on red
  3. I’m going to sell on green 

And I’ll try my best to not be overly bullish or bearish on anything that worked and/or didn’t work for us in 2011, because “all the wisdom experience can instill in us” reminds me that past performance is no predictor of future results.


My immediate-term support and resistance levels for Gold (covered our short yesterday), Oil (we’re short Brent Oil), China (we bought the CAF yesterday), Consumer Discretionary (we’re long XLY), Long-term Treasuries (TLT), and the SP500 are now $1, $106.89-109.11, 2154-2226 (Shanghai Comp), $38.24-39.98 (XLY), $119.16-123.87 (TLT), and 1, respectively.


It’s been a pleasure and a privilege to both play on this team and earn your business in 2011. On behalf of all of us at Hedgeye at Year’s End, we’d like to wish you the very best of health and capital preservation in 2012.




Keith R. McCullough
Chief Executive Officer


Year's End - Chart of the Day


Year's End - Virtual Portfolio


What does the Department of Justice’s new position that the Wire Act 1961 only applies to sports betting mean for online (and offline) gaming in the US? 



Responding to Senators Reid and Kyl's letter seeking clarification on the interpretation of the Wire Act, the Department of Justice (DoJ) recently published an opinion that essentially amounts to a reversal of previous Justice stances.  We believe that this change in opinion can be the spark for some long awaited Federal online poker legislation which would have widespread implications for our sector.  However, it may take 18-24 months even in the best case scenario before we see anything really happen so the buzz and in some cases, euphoria this announcement caused may be premature.


While the new opinion states that only online sports betting is a violation of the Wire Act in instances of intra-state offerings, this doesn’t mean that other forms of intra-state gambling are legal.  Online gambling is illegal in almost every state (aside from Nevada).  State-based lottery and land-based casino wagering are specifically allowed where any form of gambling is legal.  In order for online gambling to happen without Federal regulation, each state would need to pass legislation – and in many cases change its constitution. 


There are a myriad of scenarios that can occur between now and when/if something passes outside of Nevada.  Some states will follow on Nevada’s heels and try to pass some sort of online gaming legislation – which can take the form of just lottery offerings online or actual online poker.  Given the recent Wire Act opinion, states that have legal online gambling laws will then be able to pool liquidity.  However, any state legalization of online poker (excluding Nevada) would likely take at least 2 years to materialize.  Online lottery offerings can happen sooner.  At the same time, Senators Kyl and Reid will likely make a push to get something passed on the Federal level.


Keep in mind that a Justice Department decision, particularly one that is controversial, can be reversed by the Courts or future Departments of Justice.  The only way to ensure the legalization of online gaming is to codify it into law.  


Federal route and potential outcomes

Our legislative sources do not believe that an internet gaming bill will pass on its own.  Senators Kyl and Reid will likely try to tack on i-gaming regulatory language to the new payroll tax bill which is scheduled to be voted on in February/March 2012.  The current Reid/Kyl language proposes that if operators are licensed through a proficient regulatory body (e.g. Nevada or NJ), then the operator will be allowed to offer online poker to other states where online gaming is legal, rather than having a national regulatory body that licenses operators.  The current language proposes that States can opt-out of on-line gaming and doesn’t allow lotteries to offer online poker.  Apparently, Republican Minority Leader McConnell supports the Kyl/Reid initiative so it is likely that the tack on language will pass muster in the Senate.  However, the House is a whole different animal.  It doesn’t help that Sheldon Adelson, who has been a major supporter of House Republicans, has been opposed to online gambling. 


The currently proposed language is being vehemently opposed by state lotteries which are against Federal gambling regulation and by tribal gaming which prefer to be regulated by the NIGC.  As a reminder, gambling has historically been a state regulated issue so any federal legislation is highly controversial to constituents which support state rights.  Should the legislation pass in 1Q12 then there still needs to be technology approval and rules vetting which we believe would take 18-24 months before everything is said and done.  There will also likely to be a flurry of States opting out – like Utah, for example.  

If the currently language doesn’t pass but still has momentum, then there is likely to be a heated debate over changing the opt-out provision to an opt-in provision.  Lotteries will want the same rights as other licensed operators, even though initially they are likely to just provide the sale of traditional products online.


State Route

Nevada is the first state to pass a regulatory framework to license and legally allow online poker.  Under the most aggressive scenario, licensed operators will be allowed to offer I-poker to players in Nevada within a year, although we believe that 18-24 months is more likely.  Even with the onset of online poker offerings in a year, we believe that the market size and opportunity will be fairly small and immaterial given that Nevada lacks liquidity on its own.  Technically, licensed operators like CZR, MGM, and BYD will boost liquidity by combining online play with land-based play.  However, until a large state like California or New York pass something, it’s unlikely that I-poker will be meaningful. 

Without Federal legislation, there could be a patchwork of state initiatives that are not compatible.  It also raises the question whether states where lotteries are the body through which gaming is regulated (e.g. New York, Maryland, Rhode Island, etc) would want to combine with Nevada to increase liquidity.  We believe that California and Iowa will want to pursue state legalization of I-poker regardless of what happens at the Federal level unless something passes in 1Q12.  However, even through a state-only route, it will likely that up and running online gaming operations will take a long time to materialize since licensed US operators will proceed cautiously without additional federal clarity on the topic.




Who wants what?

Supporters of online poker legalization generally want legislation passed at the federal level since this is the best way to ensure a liquid market with a uniform regulatory structure.  Federal legislation is also by far the fastest path to building a US market of any material size.  While not all of the casino operators want internet gaming to be legalized, most will agree that to the extent it is legal, they would prefer federal regulation.  LVS is the only operator that we are aware of that is vocally opposed to internet gambling at this point.  


The slot guys support online gaming legislation at the federal level but will likely not really benefit much from just I-poker legalization.  The hope for the manufacturers is that the legalization of I-poker becomes the stepping stone for legal online casino gambling.  International gaming operators, especially online operators, all support Federal level legislation for obvious reasons.  Tribes are split on the issue of online gaming, but most would prefer to be regulated by the NIGC if something is approved.  Lotteries oppose federal legislation and prefer state legislation.  However, if something is passed at the federal level, lotteries want states to be able to opt-in vs. opt-out of the legislation and they want to have the same rights to introduce online games as other licensing bodies (Nevada/NJ).