WMT: Portfolio Update

WMT continues to be one of our favorites on the long side as the Hedgeye Macro team maintains a bullish outlook on the US dollar and consumer discretionary into 2012.


Though it is near-term TRADE overbought, we continue to like WMT over the TREND and TAIL durations for the following reasons…


1) US business is inflecting after years of investing to turn the cruise ship. This is partially apparent in WMT outperforming peers this holiday -- in part due to layaway plan, but also due to better alignment outside of consumables.         


2) Great play on stronger dollar heading into 2012. 

3) Street estimates are low next year by 3-4%. Not huge, but meaningful for WMT. 

4) Though not really 'new' is share repo is a part of many investors' thesis, the fact is that the Walton Family is slowly but surely taking the company private. 

5) Sentiment (per our backtested indicator) has never been worse.  


WMT: Portfolio Update - WMT TTT


WMT: Portfolio Update - WMT Sentiment

Sneaking One Past the Goalie – CAF Trade Update

Position: Long Chinese equities (CAF)


Late yesterday afternoon, Keith purchased the Morgan Stanley China A-Share Fund (CAF) in our Virtual Portfolio. Not for the faint of heart, Chinese equities closed 2011 down -21.7% after front-running 2011’s global growth slowdown by falling -14.3% in 2010. Cumulatively, the Shanghai Composite Index is down -31.8% and China’s yield curve (10’s-2’s) has compressed -82bps since we made a then-contrarian bearish call on China in Jan ’10 via our Chinese Ox in the Box thesis. For comparison, the S&P 500 is up +11.1% over that same duration.


That’s certainly not to say we’ve had it right the entire time. We were bullish on China from a fundamental perspective throughout the second and third quarters of 2011, based largely upon a series of internal and external catalysts that included: 

  1. A slowing of the multi-year deceleration in rates of Chinese economic growth;
  2. A peaking and a subsequent rolling over of Chinese inflation;
  3. An introduction of accommodative monetary policy – first via ending the tightening cycle and secondly via introducing an easing cycle; and
  4. Slowing global growth forcing investors to pay a premium for the growth they could find (i.e. China). 

For the most part, this thesis is still very much intact and could come to fruition in 2012. What made us early (and wrong) was the misjudgment of Time & Space Risk, or the amount of trading days it would take for the catalysts to line up and valuation to become supportive enough to warrant a purchase of Chinese equities to the marginal investor.


In full respect of the coaching points learned from the last rep, this is certainly not a risk we’re likely to miscalculate again – particularly given current elevated levels of volatility across asset classes (i.e. time itself is a major risk factor when volatility is high). That said, however, we did see a near-term opportunity for a short-term mean reversion trade in Chinese equities. Our process was rewarded with a +1.2% bounce in the Shanghai Composite Index overnight on the strength of a sequential acceleration in HSBC’s Manufacturing PMI report (48.7 DEC vs. 47.7 NOV).


More importantly, the gain fueled the index to a close just above our TRADE line of 2,190. We’re still long and we’re happy to wait and watch to see if this confirms. The next line of resistance (TREND) is up at 2,381. A sustained breakout above the TREND line would likely put the aforementioned storytelling back in play and may force investors to chase China. And while this is an outcome we do not necessarily expect at the current juncture due to the sheer uncertainty around the magnitude of the growth slowdown and the associated implications for the banking and property sectors, we are cognizant of the fact that every trend starts with a mere trade


Wishing you all the best in the New Year,


Darius Dale

Senior Analyst


Sneaking One Past the Goalie – CAF Trade Update - 1

Signing Off: SP500 Levels, Refreshed

POSITION: Long Consumer Discretionary (XLY)


I don’t have a short position in either SPY or a Sector ETF here. That needs to change. But it likely won’t today. The Year End is being TimeStamped right around where the SP500 started.


While it requires some serious storytelling on why a Perma-Bull is long now (‘Europe priced in, stocks are cheap, etc’) versus why they were long then (‘US Growth 3-4%, Sales Growth Accelerating, etc’), history will mark its spot in t-minus 5 hours of trading. Growth Slowing will have equated to multiple compression across Global Equities.


Looking forward, here are the lines that matter most across our 3 risk management durations: 

  1. Long-term TAIL resistance = 1270
  2. Immediate-term TRADE support = 1249 

Not unlike the end of July and October of 2011, what’s interesting about my long-term TAIL is that it rests above the 200-day Moving Monkey. We call it that because that’s where 1-factor price momentum chasers have been getting sucked in (repeatable process!).


If there’s one quantitative risk management lesson from 2011, it’s the same lesson learned in 2008: Simple moving averages like the 50 and 200 day do not proactively predict risk – they force emotional reactions.


Signing off for 2011,



Keith R. McCullough
Chief Executive Officer


Signing Off: SP500 Levels, Refreshed - SPX

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Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

NKE: Portfolio Update

Nike remains one of our top longs headed into the new calendar year. Keith sold NKE from the virtual portfolio today on a TRADE basis. The TREND and TAIL remain solid.


For our longer term thoughts following the latest quarter's results, please see our 12/21 note "NKE: Too Good".


NKE: Portfolio Update - NKE Trade Trend



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


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