TODAY’S S&P 500 SET-UP – January 6, 2012


Sold my Growth Slowing position in Fixed Income yesterday (US Treasury Flattener – FLAT = +28% gain). I’d held that position for a year and felt all warm and fuzzy about the buy-and-hold on conviction thing. Onto the next - KM


As we look at today’s set up for the S&P 500, the range is 19 points or -1.10% downside to 1267 and 0.39% upside to 1286. 




For the 3rdconsecutive day, the SP500 holds my long-term TAIL line of 1267 support. Not only did it test that level on the lows of the morning, but its bounce was finally confirmed by some volume. I don’t mean real volume. I just mean +19% more volume that my immediate-term average.


Volatility continues to breakdown as the US Dollar continues to breakout. Strong/Stable Currency = Stronger Employment, Confidence, and Consumption. I’ll stay on this until it stops.


All 9 Sectors remain bullish from an immediate-term TRADE perspective and I remain long of 2 of them (Consumer Discretionary, which has been a Top 2 Sector in both of the last 2 days, and Utilities, which I bought back on down move – Citi downgraded Utilities today and XLU closed up).


If tomorrow’s employment report is a bomb, a lot might change in a hurry. If it’s not, we’ll likely move to Day 4 of a bullish confirmation. - KM









  • ADVANCE/DECLINE LINE:  -75 (-1734) 
  • VOLUME: NYSE 759.44 (-11%)
  • VIX:  21.48 -3.33% YTD PERFORMANCE: -8.21%
  • SPX PUT/CALL RATIO: 1.69 from 1.99 (-15%)




TREASURIES – let the masses focus on whatever it is they flip to day to day; today, I’ll be focused on 1 line in the sand and that’s the intermediate-term TREND line of 2.03% resistance on the 10yr UST; a sustained close > than 2.03%, combined w/ repeated closes > 1267 for the SP500 will have me doing more of what I have been doing for a month (buying stocks, selling bonds).

  • TED SPREAD: 57.23
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 2.02 from 2.00   
  • YIELD CURVE: 1.75 from 1.75


GLOBAL MACRO DATA POINTS (Bloomberg Estimates):

  • Eurozone Nov Retail Sales (2.5%) y/y vs consensus (0.8%) and prior revised to (0.7%) from (0.4%)
  • Payrolls may have climbed by 155k workers in Dec. after rising 120k the previous month, economists est.
  • Fed officials are nearing agreement on adopting inflation goal as Bernanke extends his push for improving transparency
  • Eurozone Dec consumer confidence (21.9) vs consensus (21.2) prior (20.4)
  • Eurozone Nov unemployment rate +10.3% vs consensus +10.3% and prior +10.3%


  • 8:30am: Nonfarm Payrolls, Dec., est. 155k (prior 120k)
  • 8:30am: Unemployment Rate, Dec., 8.7% from 8.6%
  • 9am: Fed’s Dudley speaks in N.J.
  • 10:20am: Fed’s Rosengren speaks on economy on Connecticut
  • 12:40pm: Fed’s Duke speaks on economy in Richmond
  • 1pm: Baker Hughes rig count
  • 1pm: Fed’s Raskin speaks on community banking in Baltimore


  • China Forestry Auditor KPMG Resigns Citing Valuation Concern
  • Gold Traders More Bullish After Bear Market Averted: Commodities
  • Thieves Defy Death to Tap Metal Price Boom as U.K. Cracks Down
  • Resilient Pubs May Appeal to Investors More Optimistic on U.K.
  • Nestle Gains With Heinz as China Fears Local Food Safety: Retail
  • Alcoa to Cut Smelting Capacity by 12% After Aluminum Decline
  • Oil Little Changed as Europe’s Economy Limits This Week’s Gain
  • Stocks Reverse Declines as Banks Rally; Treasuries, Euro Retreat
  • Palm Oil Output in Malaysia Seen at Nine-Month Low on Floods
  • Gold Set for Best Week Since December as Haven Demand Increases
  • BHP’s Ekati Mine May Fetch Less Than $500 Million, Investec Says
  • ENRC to Buy First Quantum’s Congo Assets for $1.25 Billion
  • Oil Heading for Weekly Gain on U.S. Economy, Iranian Tensions
  • Gold to Outperform Dow Index on ‘Fear Trade,’ SICA Wealth Says
  • Rich to Invest More in Commodities, Reduce Cash, Survey Says
  • Copper Trims Weekly Loss as U.S. Data May Lift Demand Prospects
  • Platinum-Gold Ratio Drops to 0.8677, Lowest Since at Least 1987
  • Soybeans, Corn Advance as USDA Seen Paring Stockpiles Estimates
  • Raw Sugar Declines Most Since Mid-September; Coffee, Cocoa Drop









GERMANY – both bunds and stocks starting to act like the fiscal champ Germany has become; no matter what the fanfare and/or finger pointing is here in the US re the Europeans, Germany’s employment and fiscal position is better than USA’s and now the DAX is holding TRADE and TREND lines of support. Haven’t bought it yet, but I will.






JAPAN – down -1.2% last night puts Japanese Equities into the cellar of the major/liquid markets for the 1st week of the year. Away from being grounded by Keynesian policy, Japan has more issues than Time Magazine – so watch this market (because consensus isn’t). Japan needs to rollover 31.2% of its sov debt in 2012 – that’s 3 TRILLION Yens (a lot of yens = $566B USD)






  • Sheikh Holding IPad Gazes at Breitling Before Winning Melbourne
  • Obama Returns to Bush Plan for Cutting U.S. Troops in Europe
  • Dana Gas Sukuk Sink on Debt Payment Concerns: Islamic Finance
  • Fewer, Better Nuclear Weapons Can Make the U.S. Stronger: View
  • Mubarak, El-Adli Should Be Executed, Egypt Prosecution Says
  • Japan to Express Concerns to U.S. Over Possible Iranian Oil Ban
  • Oil May Fall Amid Iranian Threat and Rising Dollar, Survey Shows
  • Oil Heading for Weekly Gain on U.S. Economy, Iranian Tensions
  • MTN Drops on Nigeria’s Doubling Fuel Costs, Iran Concern
  • Saudi Arabia Moved 6 Million Barrels of Oil a Day Through Hormuz
  • U.K. Opposes Pre-Emptive Strike on Iran, Will Act If Hormuz Shut
  • Gold Has Longest Rally in 10 Weeks on Iran ‘Fear,’ U.K. Warning
  • European Refiners Seek to Replace Iran Crude as EU Nears Ban
  • Formosa Buys Extra Crude, Naphtha in Case of Iran Supply Cut
  • Iran’s Revolutionary Guards Plan Naval Exercises, General Says
  • Dubai, Fujairah Ports Busy as Usual Amid Hormuz Passage Threat
  • As Currency Crisis And Feud With West Deepen, Iranians Brace for War
  • Italy’s Monti Questions Scope, Timing of EU Ban on Iranian Oil



The Hedgeye Macro Team

Howard Penney

Managing Director

BBBY: Shorting

Keith added BBBY to the virtual portfolio on the short side into the close.


The money making call on BBBY was to go long because it looked expensive – for 2 years. But, now the top line is rolling and the Q4 sales/gross margin setup is unfavorable as the company continues to shift into lower margin merchandise. In addition, the quality of earnings is starting to deteriorate with SG&A cuts and a lower tax rate driving the recent beat.


BBBY: Shorting - BBBY

NKE: Portfolio Update

Nike remains one of our top longs in 2012. Keith sold NKE from the virtual portfolio this afternoon trading the range with the stock immediate-term overbought.


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


NKE: Portfolio Update - NKE

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Retail: The Cost of Sales


December sales didn’t quite materialize as many had hoped. While the ratio of beats-to-misses was net positive at 2:1 (16 companies beat to 8 misses) the resounding takeaway this morning is the cost at which these sales came. With the majority of retailers looking to clear inventories in the midst of an unseasonably warm holiday selling season (least snowfall in over 50 years) coupled with consumers coming in later to purchase, promotional activity accelerated into month end crippling margins across the industry.


The result is ‘guide-down’ activity outpacing ‘guide-ups’ by a count of 8-to-6 this morning. More important is the magnitude of Q4 revisions i.e. JCP (-38% consensus/prior guidance), PLCE (-26%), AEO (-19%), and KSS (-14%). Consistent with last month’s sales performance and our Key Q4 Themes, margins continue to come in weaker than expected particularly at the mid-tier where there is clearly blood in the water. Just a week after SHLD lowered its guidance, both JCP and KSS lowered their own while GPS missed comp expectations yet again.


Volatility continues to increase in retail and is expanding the bifurcation between upward and downward revisions as is clearly evident through the first two months of the quarter. We expect Q4 results to reflect this reality and for volatility and this bifurcation to remain clear and present through the 1H at a minimum in an increasingly more competitive pricing environment.


A few additional callouts in December:

  • The High/Low-end performance spread remains divergent. Within department stores, JWN +8.7%, M +6.2%, SKS +5.8% were solid while JCP +0.3%, KSS -0.1% came in slightly above and below expectations respectively, but both materially lowered Q4 guidance. BONT -0.7% continues to be the department store laggard.
  • Food/Grocery continues to outperform driving results at discounters. Both COST and TGT reported the food/grocery up LDD outpacing all other categories. While COST came in better than expected, TGT came in light as home and hardlines weighed on sales. Notably, TGT was one of only a handful of retailers highlighting its inventory position noting they were in ‘very good condition’ at month end.
  • TGT’s results mark its second consecutive sequential comp decline since Aug11 and its lowest 2yr comp of +1.3% since Jan11. This was perhaps the only negative earnings revision due to weaker sales instead of margins imploding in December. The key here was TGT’s favorable inventory position headed into the holiday that allowed it to be less promotional. Weakness on the margin at TGT a net positive for WMT.
  • GPS posted the biggest miss of the month coming in -4.0% vs. -1.9%E. Perversely, this could be viewed as incrementally positive reflecting lower promotional activity = stronger margins; however, we would strongly caution against such optimism given the visible stress in GPS’ competitive set.
  • JCP & KSS reported the most significant negative Q4 earnings revisions of the monthly contributors. Of the companies to report seasonal results, PLCE and AEO took the honors. Consistent with the rest of retail, both highlighted sales coming in as or better than expectations with ‘margins down due to increased promotional activity.’ That was clearly the tag-line du jour this month.
  • The clear positive standout of December was M. Not only did comps come in better than expected (+6.2% vs. +4.7%E), they also raised guidance (i.e. not at the expense of margins). Online continues to drive sales coming in up +36%. More importantly is the company’s more aggressive stance towards capital allocation. Macy’s announced it would double its dividend as well as significantly increase its share repurchase authorization by $1Bn from the $850mm, which was just reinstated in Aug11. Good for PVH, RL and others over-indexed to M.
  • At the category level, hardlines were negative while softlines/apparel was positive at both COST and TGT. Despite SHLD noting weakness in appliances sales were up at COST and home was up at both KSS and TGT.

Longs: LIZ, WMT, NKE, RL



Casey Flavin


Retail: The Cost of Sales - total SSS


Retail: The Cost of Sales - 1 yr comps


Retail: The Cost of Sales - 2 yr comps


Retail: The Cost of Sales - 3 yr comp


Retail: The Cost of Sales - Equal Weighted SSS


Retail: The Cost of Sales - TGT Sales Grid



Lowered Expectations: FLAT Trade Update

Conclusion: Economic growth is slowing at a slower rate, which is a leading indicator for accelerating growth. As such, we’ve decided to part ways with the flattener.


Earlier this morning, Keith booked a rather sizeable gain vs. our cost basis in the Hedgeye Virtual Portfolio via a sale of the iPath U.S. Treasury Flattener ETN (FLAT). Having held the position since late FEB ’11, our use of the time-tested buy-and-hold technique was driven primarily by our once highly-contested belief that: 

  1. U.S. economic growth was slowing based on our PTA analysis… supported by Reinhart and Rogoff data (sovereign debt structurally impairs growth beyond 90% of GDP);
  2. Consensus (both sellside and buyside) estimates for U.S. economic growth were going to be dragged dramatically lower as the data came in light; and
  3. The U.S. Treasury yield curve would flatten from a near all-time wide as a result of #1 and #2. 

As a result of point #3, the FLAT ETN finished 2011 up +26.8%.


Lowered Expectations: FLAT Trade Update - 1


Looking ahead to the game that’s in front of us, our process continues to focus on the slope of growth – rather than the absolute – as macro markets continue to be driven by slopes, spreads, probabilities, and ranges, NOT neatly-wrapped full-year growth and inflation targets. We’ll be discussing these modeling concepts in greater detail on our 1Q12 Themes Call next Wednesday; for now, refer to Howard Penney’s Early Look from yesterday for more on this subject.


From a slope perspective, U.S. economic growth is still slowing. It is, however, slowing at a slower rate than before, which means that the intermediate term slope of probable economic growth scenarios is flattening out (no pun intended). While certainly not an outright bullish catalyst for beta, it is decidedly less bearish than it was a year ago. 


Bottoms, like tops, are processes, not points.


What would get us to start sending emails titled: U.S. Growth Accelerating?: 

  1. Further strength in King Dollar, which has shown a positive correlation to improving labor market trends over the past 40-plus years of data;
  2. Further Deflating of the Inflation as a result… a direct benefit to the “C” in the C + I + G + NetExp equation (i.e. ~70% of the total);
  3. Quantitative confirmation of the Bullish Formation in U.S. equities in the Treasury bond market… key yield breakout/FLAT breakdown levels to watch are included in the charts below. 

Until then, manage the immediate-term risk associated with the proactively predictable game of tug-o-war between perma-bulls and perma-bears that occurs at every top or bottom.


Darius Dale

Senior Analyst


Lowered Expectations: FLAT Trade Update - 2


Lowered Expectations: FLAT Trade Update - 3

Bullish TAIL: SP500 Levels, Refreshed

POSITION: Long Consumer Discretionary (XLY, Long Utilities (XLU)


No one said that being a stock market operator in a centrally planned Keynesian world was for the faint of heart. But this continued strength and stability in the US Dollar has positive implications for the purchasing power of Americans. I bought back WMT and EAT today.


Across all 3 risk management durations in our model, here are the lines that matter most: 

  1. TAIL support = 1267
  2. TRADE support = 1264
  3. TREND support = 1218 

So I have TRADE and TREND support (immediate-term) below my TAIL…


And, I guess, that’s what every man needs when managing the implied risks of his birthday.





Keith R. McCullough
Chief Executive Officer


Bullish TAIL: SP500 Levels, Refreshed - SPX

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The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.47%
  • SHORT SIGNALS 78.68%