TODAY’S S&P 500 SET-UP – January 17, 2012


As we look at today’s set up for the S&P 500, the range is 18 points or -0.39% downside to 1284 and 1.00% upside to 1302. 












  • ADVANCE/DECLINE LINE: -922 (-1591) 
  • VOLUME: NYSE 827.88 (+7.51%)
  • VIX:  20.91 +2.15% YTD PERFORMANCE: +10.64%
  • SPX PUT/CALL RATIO: 1.82 from 1.55 (+17.54%)



  • TED SPREAD: 54.46
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 1.89 from 1.86   
  • YIELD CURVE: 1.67 from 1.64


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Empire Manufacturing, Jan., est. 11 (prior 9.53)
  • 8:30am: NOPA oil stocks, soybean capacity
  • 11am: Export inspections, corn, soybean, wheat
  • 11:30am: U.S. to sell $29b 3-mo., $27b 6-mo. bills
  • 9pm: World Bank releases new growth forecasts



  • BB&T, Toronto-Dominion Bank said to be among cos. in talks to buy BankUnited
  • Ista Pharmaceuticals received revised non-binding takeover offer from Valeant, will consider updated proposal
  • Electricite de France withdrew opposition to merger between Exelon, Constellation Energy
  • Georgia Gulf yesterday rejected $1.03b buyout offer from Westlake Chemical as too low
  • Morgan Stanley said to plan to tell employees this week it’s capping, delaying some bonuses: WSJ
  • IRS pursuing documents from CME Group as part of probe into whether some members underreported income earned from leasing their seats
  • Greek PM due to meet tomorrow with group representing private Greek bondholders after 5-day break to discuss forgiving at least half of nation’s debt
  • Seventh victim recovered from Costa Concordia cruise ship; Carnival fell 16% in London yday; also watch RCL
  • Capital One, Citigroup among those reporting monthly credit- card delinquencies, charge-offs
  • Solyndra deadline today for final bids to buy bankrupt co. that got $535m in govt. loan guarantees
  • New York Governor Andrew Cuomo to announce budget at 1pm on spending cuts to erase $2b deficit in yr starting April
  • “Contraband” from Universal opened as weekend’s top film in N.A. theaters 
  • No IPOs scheduled
  • EARNINGS: Citigroup, Wells Fargo, McMoran among those reporting financial results today. Selected companies, with approximate time and Bloomberg est.:
    • TD Ameritrade Holding (AMTD) 7:30 a.m., $0.26
    • M&T Bank (MTB) 7:46 a.m., $1.52
    • Forest Laboratories (FRX) 8 a.m., $1.01
    • First Republic Bank/SF (FRC) 8 a.m., $0.43
    • Citigroup (C) 8 a.m., $0.52
    • Wells Fargo & Co (WFC) 8 a.m., $0.72
    • McMoRan Exploration Co (MMR) 8 a.m., $(0.13)
    • Cree (CREE) 4 p.m., $0.26
    • Fulton Financial (FULT) 4:30 p.m., $0.20
    • American Water Works Co (AWK) 4:30 p.m., $0.33
    • Linear Technology (LLTC) 5 p.m., $0.38
    • Bank of the Ozarks (OZRK) 6 p.m., $0.49
    • Adtran (ADTN) 8 p.m., $0.46




COPPER – the breakout above our intermediate-term TREND line of $3.45/lb last week helps bust a huge +3.1% meltup this morning to $3.75/lb; TAIL resistance remains overhead at $3.99, but this move should force capitulation on the short covering side.

  • Consumer Electronics Frenzy Tops $1 Trillion as Tin Rebounds: Commodities
  • Commodities Rise Most in Two Weeks Amid Speculation China May Ease Policy
  • Copper Nears Four-Month High on Chinese Growth, Falling Production At Rio
  • Oil Rises to Three-Day High as Saudi Arabia Is Seen Targeting $100 Crude
  • Gold Climbs to One-Month High on China Easing Outlook, Weakening Dollar
  • Coffee Gains for a Second Day as Colombian Harvest Declines; Sugar Rises
  • Soybeans, Corn Advance as China May Ease Policy After Slowdown in Growth
  • India Increases Tax on Bullion Imports as Government Seeks to Lift Revenu
  • Posco 2011 Profit Declines as Demand for Steel Wanes, Missing Estimates
  • Persian Gulf Debt Risk at Two-Year High on Iran Hormuz Fears: Arab Credit
  • Best Refiner Returns on Naphtha Since May Show China Boom: Energy Markets
  • Sino-Forest Rallies on Outlook for China Asset Recoveries: Canada Credit
  • Morgan Stanley Favors Gold, Copper on Investment Demand, Global Shortage
  • Commodities Rally on Optimism China May Ease Policy












GERMANY – can you say ZEW? Biggest m/m pop in the German confidence reading ever – and ever is a long-time; DAX +1.7% to +7.2% for 2012 YTD! And finally immediate-term TRADE overbought here. Germany has done a great job, all things considered, keeping unemployment low and fiscal conservatism intact.






CHINA – Chinese stocks up +4.2% overnight and we’ll take that on the long side with a smile as Chinese GDP beats bombed out expectations w/ a +8.9% y/y Q4 print and, more importantly, a re-acceleration in Industrial Production in DEC to +12.8% y/y vs +12.4% NOV + a big re-accel in Singapore’s Exports to +9% y/y in DEC vs +1.4% NOV











The Hedgeye Macro Team




Expert Cues

“Expert intuition strikes us as magical, but it is not.”

-Daniel Kahneman


This weekend I finally started reading Daniel Kahneman’s “Thinking, Fast and Slow” and was pleasantly surprised to see him cite one of my favorite American thinkers, Herbert Simon (read “Models of My Life”), in the Introduction:


“The situation has provided a cue; this cue has given the expert access to information stored in memory, and the information provides the answer. Intuition is nothing more and nothing less than recognition.” (Thinking, Fast and Slow, page 11)


Pattern recognition is the fulcrum principle of Chaos Theory. While neither Kahneman nor Simon have drawn that parallel to Global Macro Risk Management, if they did what we do every day I think they probably would have.


Back to the Global Macro Grind


While consensus has spent 2012 caught in the vacuum of 2011’s news (European Crisis and Growth Slowing), we’ve been letting this globally interconnected marketplace of colliding factors give us cues on Growth Slowing’s Bottom (Q1 Hedgeye Macro Theme):

  1. Strong US Dollar = Stronger US Consumption, Confidence, and Employment
  2. Deflating The Inflation = Growth Slowing at a slower rate in Asia (China in particular)
  3. German Fiscal Conservatism = Bullish German Stocks on both our TRADE and TREND durations

There should be no surprises about what’s happening in US, Chinese, or German stocks this morning. Our leading indicators have been giving us Crystal Clear Cues for the last 3 weeks. That’s why we have our largest asset allocation to US Equities in over a year. That’s why we’re long Chinese and Hong Kong Equity exposures. That’s why we’ll open this morning with no European shorts.


In the order that these Expert Cues appear in my notebook this morning:


1.   CHINA – closing up +4.2% overnight, the Shanghai Composite had its best move since October of 2009. Growth Slowing in China is a 2-year stale story that we have signaled in real-time. Looking at the higher-frequency economic data that was reported closest to now (the December data, not the quarterly), China appears to be seeing Growth Slow at a Slower Rate. Chinese Industrial Production for DEC accelerated to +12.8% y/y (vs +12.4% in NOV). Meanwhile, Singapore’s Export Growth for DEC jumped to +9% y/y (vs +1.4% in NOV). You’ll recall we use Singapore as a leading indicator for Eastern demand.


2.   GERMANY – trading up another +1.7% to an impressive +7.2% for 2012 YTD, the German DAX is proving that this morning’s concurrent indicator of confidence (the German ZEW reading) was better than bad for good reason. It was actually the biggest 1-month pop in the ZEW reading ever – and ever is a long time. Germany is proving that fiscal conservatism can support strong domestic employment (6.8% vs USA’s 8.6%). Not pandering to the political winds of the Keynesian bailout beggars should also be commended.


3.   USA – holding above both my long-term TAIL line (1267 support) and the closing high of October 29th, 2011 (1285), the SP500 is proving that Strong Dollar = Strong Consumption works where it matters in the American economy – on 71% of US GDP Growth. Neither we (nor the US Treasury Bond Market) are suggesting US Growth is great, but the US Currency and Equity markets aren’t signaling a US recession either. Provided that the US Dollar remains strong (Romney winning in South Carolina this week will continue to help), we think US Growth’s Bottom could very well be happening in Q411 through Q112.


With Expert Cues in hand, we derive our summary positioning in the Hedgeye Asset Allocation Model

  1. Cash 58% = down from 70% at the end of 2011
  2. US Equities = 18% (Consumer Discretionary, Consumer Staples, Utilities – XLY, XLP, and XLU)
  3. Int’l Currency = 15% (US Dollar – UUP)
  4. Int’l Equities = 9% (China and Hong Kong – CAF and EWH)
  5. Fixed Income = 0%
  6. Commodities = 0%

That’s a very different mix in my asset allocation than what I was carrying from April-November of 2011. I’ve moved from a big allocation to Growth Slowing at an accelerating rate (Long Fixed Income) to long Growth Slowing’s Bottom (Long Equities).


What hasn’t changed is my position in the US Dollar and Commodities. I still think that Strong Dollar = Deflates The Inflation, so look for me to potentially short some Commodities today.


Having a repeatable risk management process isn’t magical. Neither is it perfect. It’s just what we do.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, Shanghai Comp, German DAX, and the SP500 are now $1, $110.20-114.33, $1.25-1.28, $80.72-81.97, 2, 6151-6329, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Expert Cues - Chart of the Day


Expert Cues - Virtual Portfolio

China Slowdown, S&P Bull Catalyst or Danger Signal?


There are signs that WMS may be pulling forward earnings.

WMS will report earnings next week and while we don’t think the bottom line number will be as awful as recent quarters, quality should be low.  More importantly, beyond the quarter, we see cracks in the health of WMS’s underlying business.  It seems like WMS is continuing to pull earnings forward - never a good sign.  Some warning signs are:

  • WMS is booking Revel units in the December quarter – the only supplier to do so.  It seems strange to rush this booking since no cash will be received for several quarters, if not longer.
  • WMS is the only “Big 5” supplier to sell units to Maryland Live rather than lease them, thus boosting near-term profits at the expense of a long-term, steady cash flow stream
  • If our estimates are correct, WMS will be the only supplier to post a YoY decline in replacements
  • WMS was the only supplier to take a material charge in Mexico.  Either WMS was operating in some grey areas or everyone else’s accounting is that much more aggressive.

Turning to the December quarter, this quarter may mark the 5th straight quarter that WMS misses Street expectations.  Our best guess is that WMS reports $0.28, falling 2 cents short of consensus, although it’s possible they make the quarter through the cost side. 


FQ2 2012 Projections:

$103MM of product sales at a 51% margin

  • 5.3k new unit sales with 3.2k from NA
    • 680 new units and 2,500 replacements
    • WMS shipped just over 300 units to Revel in the December quarter. We believe that it may be the only large manufacturer recognizing revenue from Revel in that quarter. We’re pretty sure that WMS will also be booking receivables rather than collecting cash for their placement (as are all the other manufacturers shipping to cash poor Revel).  The only other opening/expansion of any size is the Northern Edge Navajo Casino in AZ.  WMS booked shipments to both Kansas facilities and Miami Jai Lai last quarter.
    • While replacements will be up sequentially, we’re pretty confident that they will be down YoY
  • ASP of $16.1k, down 3% YoY and QoQ.  With higher pricing than the other products, the xD platform contributed 32% of sales in the September quarter.
  • $17.5MM of other product sales
    • Conversion kit sales will be down materially QoQ as September was an ‘unusual’ quarter for WMS.  We assume that WMS sells 2,500 kits
    • WMS also noted that used game sales have plateaued.  We assume that 2k used games were sold in December – but at more ‘normal’ prices then what was realized in the September Q.
  • Despite realized cost reductions in the production of BB2 and xD cabinets, margins should be roughly flat sequentially.  September benefited from an outsized number of conversion kits sales which have over 90% margins.

Projecting $68MM of gaming operations revenue at a 79% gross margin:

  • We expect a small decline in the install base (45 units) and slightly lower yields due to seasonality

Other stuff:

  • R&D: $26MM
  • SG&A: $35MM
  • D&A: $23MM
  • Interest and other income: $2MM
  • Tax rate: 35.5%


No change to January projection


Average daily table revenue (ADTR) dropped from HK$782m per day in the first 8 days of January to HK$546m this past week.  However, volumes typically fall off dramatically prior to the Chinese New Year (CNY) celebration.  While the second week of January’s ADTR only increased 3% this year versus last year, ADTR was an estimated 30% higher than the corresponding lead-in week to CNY last year.  Our HK$23-24 billion (+32-40% YoY growth) January forecast remains unchanged.




Market shares were relatively consistent with last year with the exception of a shift of about 200bps back to SJM from LVS.



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