TODAY’S S&P 500 SET-UP – February 16, 2012


As we look at today’s set up for the S&P 500, the range is 15 points or -0.31% downside to 1339 and 0.80% upside to 1354. 












  • ADVANCE/DECLINE LINE: -468 (347) 
  • VOLUME: NYSE 806.39 (8.45%)
  • VIX:  21.14 8.19% YTD PERFORMANCE: -9.66%
  • SPX PUT/CALL RATIO: 2.40 from 1.53 (56.86%)


  • TED SPREAD: 38.83
  • 3-MONTH T-BILL YIELD: 0.11%
  • 10-Year: 1.91 from 1.93
  • YIELD CURVE: 1.65 from 1.67 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: PPI, M/m, Jan., est. 0.4% (from -0.1%)
  • 8:30am: Jobless Claims, wk of Feb. 11, est. 365k (prior 358k)
  • 8:30am: Housing Starts, Jan., est. 675k (prior 657k)
  • 8:30am, Building Permits, Jan., est. 680k, (prior 671k revised)
  • 9:00am: Bernanke speaks on community banking in Arlington, Va.
  • 9:45am: Bloomberg Consumer Comfort, week Feb. 12, est. -42.0 (prior -41.7)
  • 10am: Philadelphia Fed., Feb., est. 9.0 (prior 7.3)
  • 10am: 30-yr mortgage rates, Freddie Mac
  • 10:30am: EIA natural gas storage
  • 1pm: U.S. to sell $9b 30-yr TIPS
  • U.S. Treasury to announce 2-, 5-, 7-yr auction sizes 


  • President Obama attends campaign events in California
  • Chinese Vice President Xi Jinping visits Iowa
  • House, Senate in session:
    • House Energy and Commerce Committee hears from FCC Chairman Julius Genachowski on its budget. 9am
    • Senate Energy Committee hears from Energy Secretary Steven Chu on the Energy Department’s 2013 budget request. 9:30am
    • Senate Budget Committee hears from Treasury Secretary Timothy Geithner on the president’s 2013 budget request. 10am
    • House Homeland Security Committee holds hearing on monitoring of social networking and media. 10am
    • House Appropriations subcommittee hears from Defense Secretary Leon Panetta and Joint Chiefs Chairman Martin Dempsey on the 2013 defense budget request. 10am
    • House Appropriations Committee hears from Interior Secretary Ken Salazar on his department’s budget request. 1:30pm
    • House Budget Committee hears from Treasury Secretary Timothy Geithner on the president’s budget request. 2pm
    • Senate Homeland Security Committee hears from Homeland Security Secretary Janet Napolitano on Cybersecurity Act. 2:30pm  


  • Europe is set to make “all the necessary decisions” on Greece rescue on Feb. 20: Luxembourg prime minister
  • Morgan Stanley, UBS may be cut up to three levels by Moody’s
  • U.S. officials said to have intensified their focus on banks, Taiwan in insider-trading probe
  • Summers, Clinton said to be lead contenders for World Bank president
  • IAG says taking AMR stake in bankruptcy is “not on table”
  • Florida foreclosures climb 14% as lenders resume home seizures: RealtyTrac
  • House-Senate negotiators announce payroll deal completed
  • ABB falls as 4Q results show margin pressure
  • Cap Gemini reaches 6-month high on higher margin forecast 


  • Huntsman (HUN) 6am, $0.28
  • Nexen (NXY CN) 6am, C$0.44
  • SPX (SPW) 6am, $1.75
  • DENTSPLY International (XRAY) 6am, $0.52
  • Penn West Petroleum Ltd (PWT CN) 6:30am, C$0.15
  • Barrick Gold (ABX CN) 7am, $1.26
  • Discovery Communications (DISCA) 7am, $0.69
  • DTE Energy (DTE) 7am, $0.80
  • Duke Energy (DUK) 7am, $0.22
  • Frontier Communications (FTR) 7am, $0.05
  • OGE Energy (OGE) 7am, $0.35
  • JM Smucker  (SJM) 7am, $1.41
  • TRW Automotive Holdings (TRW) 7am, $1.55
  • VF (VFC) 7am, $2.31
  • DirecTV (DTV) 7:30am, $0.92
  • General Motors (GM) 7:30am, $0.41
  • Hyatt Hotels (H) 7:30am, $0.13
  • Health Care REIT (HCN) 7:30am, $0.90
  • Progress Energy (PGN) 7:30am, $0.53
  • Molson Coors Brewing (TAP) 7:30am, $0.70
  • Waste Management (WM) 7:30am, $0.60
  • Apache (APA) 8am, $2.87
  • Reliance Steel & Aluminum (RS) 8:50am, C$0.78
  • Finning International (FTT CN) 8:56am, $0.34
  • PG&E (PCG) 9:04am, $0.85
  • CI Financial (CIX CN) 11:17am, C$0.31
  • Advance Auto Parts (AAP) Pre-Mkt, $0.75
  • Nordstrom (JWN) 4pm, $1.10
  • Allscripts Healthcare (MDRX) 4pm, $0.25
  • DaVita (DVA) 4:01pm, $1.49
  • Aruba Networks (ARUN) 4:03pm, $0.15
  • Applied Materials (AMAT) 4:04pm, $0.12
  • SunPower (SPWR) 4:05pm, $(0.06)
  • Baidu (BIDU) 4:30pm, $5.69
  • EOG Resources (EOG) 4:35pm, $0.87
  • Fairfax Financial Holdings Ltd (FFH CN) 5:01pm, $(2.60) 



COPPER – breaking our mo mo line of 3.88/lb support was one of the many Growth Slowing signals that had us short SPY at 1355 yesterday. This morning, copper = down -1.1% and 10yr UST yields are straight down to 1.91% as well. 

  • Biggest Mining Deals No Promise of Xstrata Bonanza: Commodities
  • Oil Declines From Five-Week High After Greek Bailout Delayed
  • China May Become World’s Biggest Gold User, Beating India
  • Commodities Drop From Six-Month High on Greek Default Concern
  • Gold Drops as Greece Bailout Concerns Boost Demand for Dollar
  • Soybeans Drop as Debt-Crisis Concerns Eclipse China’s Purchases
  • Robusta Coffee Swings Between Gains, Losses; Cocoa Retreats
  • U.K. Natural Gas Contracts Decline on Lower Demand; Power Falls
  • U.S. Says Iran’s Nuclear Breakthrough Is ‘Hype;’ Oil Pares Gain
  • Spain’s Cepsa Secures Crude From U.A.E. in Case of Iran Loss
  • Barrick Gold Earnings Trail Estimates as Mining Costs Increase
  • Rising Pump Prices in China to Cut Refining Loss: Energy Markets
  • Impala Calls for Help to Restart World-Biggest Platinum Mine
  • China Seen Topping India This Year on Gold
  • Gold Demand Fell 2.1% in Fourth Quarter on Jewelry, WGC Says
  • NYSE Liffe Wants to Start Delivery Limits on London Commodities
  • Malaysian Palm-Oil Exports Seen Rising 10%, Paring Reserves 











SPAIN – the Spaniards are selling as much pig paper as they can (34% of their YTD needs) before someone figures out that Growth Slowing is what is going to crush their citizenry next. This morning’s debt auction finally came in at a higher yield (2015 bonds at 3.33% vs 2.86% last) and the IBEX is the 1st major European market to snap my immediate-term TRADE line of 8653 (down -2.1% leading decliners in Europe).






CHINA – after seeing its 1st y/y decline in Export growth in 2yrs (JAN -0.5%), this morning the Chinese reported a y/y decline in Foreign Direct Investment of -0.3% y/y. Chinese government guys called it “grim” (see Bloomberg article) – volumes on the NYSE aren’t the only thing in the world that have slowed to a halt.











The Hedgeye Macro Team





The Macau Metro Monitor, February 16, 2012



The Ministry of Trade and Industry said S'pore GDP in Q4 2011 contracted 2.5% QoQ in seasonally adjusted, annualized terms, smaller than the 4.9% contraction estimated last month.  The government maintained its previous forecast that the economy will grow 1%-3% in 2012, and highlighted uncertainty surrounding the global economy, namely political and economic problems in the euro zone and geopolitical risks arising from the Middle East.



Conclusion: There is such a wide disconnect between economic reality and what HBI presented after the close. We’ve been so negative on it, but even if this stock is down 20%, we’d sell every share we owned. HBI said it should get to ‘True Earnings Power in 2H’. That’s what concerns us most. I can make a better case for a Zero than $25.



Is it me, or was this quarter simply surreal? Seriously. For those of you short it, congratulations. It’s going to be a good day for you. But today we’ll see downgrades and capitulation, and now we have to focus on what’s next. But after going the model (several times over) we’re coming up with '12 earnings about $0.90 (37%) below the mid-point of guidance.  


We can bicker about pricing vs cost inflation all we want. But we’re beginning to get concerned about a much bigger tail risk – liquidity. That’s when the logic of looking at this name on a trough multiple on trough earnings is simply flawed.


That’s perhaps the ultimate value trap. An 8x pe on the bottom of management’s guidance suggests a $18-19 stock. But what the market will likely do if our model is right is model this on EBITDA (as it should for such a highly levered company). Assets in this space have historically traded between 3-5x EBITDA. On our 2012 numbers, 5x EBITDA gets you $3.50 per share. At 4x, you’re looking at a donut and the bondholders will be sweating it out.


Let’s look at the Majors…

1)      HBI’s credibility is blown. It was just 13 weeks ago that the company said that it mis-judged the extent to which retailers would tighten inventories. So it reset earnings expectations. Mgmt said that cotton costs are not a profit issue but more of a timing issue, and that pricing was holding and elasticity was not a problem. Then it revealed that WMT cut massive Just My Size program in favor of private label. This happened after price increases went into effect.  How is that not a problem with price elasticity?

2)      This quarter, HBI takes down 1H guidance by $0.30 due to severe price competition in the wholesale distributor channel for its Imagewear (ie screenprinting) segment.

  1. No problem with pricing/elasticity? C’mon…in gauging elasticity, you need to look at the entire portfolio. A PM can’t look at his book of 50 stocks, and say that he outperformed the market if he excludes the 15 that underperformed.
  2. This category is about 40% of Outerwear, but only 8% of total company sales. How does that add up to a $0.30 EPS hit?
  3. HBI noted that ¼ of its Imagewear sales are what it refers to as ‘highly competitive.’ That’s only $95mm. At a 20% incremental margin (which is probably too high if they are right about it being so competitive), then we get to a $0.15 earnings hit if all of it completely goes away. The only way we can get to $0.30 is if half of this business (again, at a generous 20% margin) goes away entirely. I guess that’s possible, but it’s not what they indicated.

3)      Management noted that ‘Aside from the Imagewear business, they are doing quite well.’ Huh? Excluding Imagewear they’re guiding to flat sales for the next 2 quarters. They’re ‘pleased’ with flat? Flat stinks.

4)      ‘Solidified’ 2012 pricing is baked into guidance. Wasn’t Innerwear price baked into guidance six months ago, and Imagewear competition/prices baked into guidance three months ago? Why should we believe it now?

5)      Still plan for international to reach $1bn by mid decade and for Consumer Direct to be a growth driver. In the quarter, they were +0.6% and -1.6, respectively. They don’t sound like growth engines to me.

6)      I have no way to get anywhere close to the company’s $400-500mm in free cash flow guidance in 2012.

7)      HBI gave the political answer about changes at JCP – that it’s excited about the change. They might lose a little hosiery business there, but that’s all that’s in their plan. That’s a binary outcome, imho. JCP is about a 5%-6% customer for HBI. Family dept stores = 15%. Mass channel = 50%+. Ron Johnson at JCP is going to competitively bid out each section in the stores to see which brand wants it more. JCP might get the revenue, but it will be at a lower margin. PLUS, any special product workup is going to upset Kohl’s, Target, WalMart, Sears, Macy’s, Dollar Stores, etc… This will be a domino effect with or without HBI. Also, be sure to remember that price competition at retaisl in higher end categories is often funded by discounts in more commodity categories (ie discounts on Polo at Macy’s will be paid for by Jones Apparel Group, PVH’s Dress Shirt biz, and underwear vendors like HBI).

8)      Perhaps the biggest positive is that Even the company finally used cash to retire $200mm in debt. But what’s notable here is that – if we’re right on the model – it will be better served to have more cash on hand to meet debt service to the extent that cash flow gets tight.


In the end, as noted above, we can’t  think of a single reason to own this stock as the risk reward does not start to look remotely interesting until it’s a single digit name.


Brian McGough


Soybeans, rice, and beef prices led the way during the past week, registering modest price increases as chicken wing prices also gained.  Coffee prices declined almost 10%.









Beef prices are a significant cost for many companies within the restaurant space but we are highlighting WEN, JACK, CMG and TXRH.  For WEN and JACK, this is particularly relevant as roughly 20% of their respective COGs baskets are comprised of beef.  The chart of live cattle prices, below, shows how strong the momentum is in beef prices currently.  Corn and wheat prices declined over the last week is a bearish sign for beef prices, on the margin, but a far more substantial decline will be required to meaningfully impact price.  Supply and demand dynamics still, in aggregate, point to a continuation of elevated prices.




The supply of beef in the U.S. remains low and production is expected to remain low for years.  According to CattleNetwork, several factors play into the motivation for an expansion of beef cow numbers.  While the January 2012 inventory report did highlight a 1% increase in beef replacement heifers and roughly 37,000 more heifers expected to calve in 2012 versus 2011, these metrics showed significant declines in 2011 versus 2010.  For 2011 and 2012 combined, beef heifers expected to calve dropped dramatically and total beef cow numbers during 2011 declined by almost 970,000. Prospects for future prices, in terms of livestock prices and retail beef prices, as well as profit margins and weather factors, will all impact motivation for an expansion in beef cow numbers.  Here is the full article.  As long as feed costs remain high, and cattle feeders are enduring negative margins, a rapid increase in supply will be difficult.




Demand for US beef remains high.  Record exports in 2011 are being followed up by rising demand both from domestic consumers and global markets.





Coffee prices dropped -9.4% over the past week.  Coffee on the spot market is now 20% cheaper than it was this time last year.  Coffee costs have impacted PEET heavily, as is evidenced by its below-expectations earnings in 4Q that were reported last night (the stock is down today).  The current trend in coffee prices could be positive for PEET over the longer term. 




Reduced robusta coffee exports from Vietnam have helped send prices higher over the past week.  India cut its coffee export forecast for the crop year to September by 0.7%. 




Coffee prices have declined on concern that demand for commodities will soften after weaker-than-forecasted retail sales data caused concern among investors that the recovery may be faltering.





Commodity cost inflation for BWLD will step up in 1Q with 2Q being the most unfavorable compare if prices remain elevated, as wing prices bottomed in 2Q10.




The six-week moving average egg sets number declined by -5.2% for the week ended 2/11 versus a year ago.  The contraction of the chicken supply looks like it is going to continue.




As beef prices go higher, we expect the food service industry to shift focus to chicken to alleviate cost pressures.


WEEKLY COMMODITY CHARTBOOK - egg sets wing price






























Chicken – Whole Breast


WEEKLY COMMODITY CHARTBOOK - chicken whole breast



Chicken Wings














Howard Penney

Managing Director


Rory Green


China to the Rescue? – Again?

Conclusion: We continue to hold the belief that China will not be a source of dumb capital to be used to help Europe fund its bailout mechanisms – if so, it would have done so already in OCT/NOV at much lower prices. Furthermore, we are of the belief that China will continue to demand concessions in return.


It’s clear that speculation around China’s [pending] involvement in funding the Eurocrat Bazooka matters to global financial markets, particularly considering a short-seller’s fear of: “China to buy everything.” What remains unclear to us, however, are the key details around China’s involvement: “When, how, and to what extent?”


The “why” is a given: in aggregate, Europe is China’s largest export market, accounting for nearly 19% of mainland Chinese shipments in 2011 (*Hong Kong and Singapore also re-export a great deal of Chinese products as well).


China to the Rescue? – Again? - 1


Moreover, with Chinese exports falling -0.5% YoY in JAN on sequentially-slowing YoY growth in shipments to Europe (-3.2% YoY in JAN vs. +7.2% YoY in DEC), the heat is incrementally on Chinese policymakers to come to Europe’s aid – particularly in light of this morning’s weakening European growth data (slowing GDP growth across the board).


China to the Rescue? – Again? - 2


Going back to the most important questions of: “when, how, and to what extent”, we continue to get left in the dark as far as the key details are concerned, leaving our Global Macro team with a thirst for more data in this regard. Consensus speculation on what the Chinese can do (as opposed to re-positioning according to what they will do) carries a great deal of risk at current prices.


This we know – the Chinese can channel investments into Europe via the following three avenues:

  1. An incremental rebalancing of its $3.2 trillion away from USD, GBP, or JPY assets and into EUR assets on the margin;
  2. Incremental investment from China Investment Corp, the nation’s $400B+ sovereign wealth fund; and
  3. Potentially through state-owned financial institutions such as China Development Bank and Export-Import Bank of China.

Moreover, PBOC Governor Zhou Xiaochuan did come out and say that the five “BRICS” countries all hold a “very positive attitude towards helping Europe”, they must continue to wait for the “right time and right opportunity” to invest. He went on to echo Premier Jiabao’s recent commentary that, “China hopes for more innovation from Europe to provide more lucrative products that are truly appealing to Chinese investors.”


All told, we continue to hold the belief that China will not be a source of dumb capital to be used to help Europe fund its bailout mechanisms – if so, it would have done so already in OCT/NOV at much lower prices. Furthermore, we are of the belief that China will continue to demand concessions in return (including real austerity, which is not equal to the promise of future austerity). Refer to our SEPT ’11 note titled “China to the Rescue?” for more details.


Below is a collection of our published remarks from 4Q that chronicle China’s [often-alleged] commitment to financing the Eurocrat Bazooka. The key themes of “when”, how”, and “to what extent” remain paramount:



  • China is allegedly to create a new investment vehicle to manage $300B in EU/US assets. The fund is to mimic SAFE Investment Corporation Ltd., which yields ~$570B, has 65.8% of its assets in FDI and equity securities. If this new fund is real and anything like SAFE, it won’t be used to bail out ailing EU sovereigns. It will, however, look to buy European corporate assets on the cheap – something EU leaders haven’t been particularly in favor of (protectionism).
  • We continue to hammer away on our view that Asia will not be there in size to help lever the EFSF or some other form of E.U. bailout. Zhu Guangyao, China’s Vice Foreign Minister in charge of European affairs, had this to say regarding the use of China’s $3.2 trillion in FX reserves: “China can’t use its $3.2 trillion in foreign exchange reserves to rescue European nations… Foreign reserves are not revenues. China can’t use its reserves to fund poverty alleviation at home or to bail out foreign countries… Now is not the time for China to have a contingency plan in the event a Eurozone country defaults on its debts or exits from the 17-nation single currency. The government has already done its part to help Europe, which has the wisdom and strong economic fundamentals to solve its sovereign debt crisis.”


  • Jesse Wang, executive vice president of China Investment Corp, the nation’s sovereign wealth fund, recent comments affirm our conviction in the view that China will not be a source of dumb, unlimited capital to finance the Eurozone bailout, but rather a source of smart money looking for attractive investment opportunities in distressed real assets: “The fund wouldn’t be the main channel if China helps tackle the sovereign debt crisis... However, if during such a process there are good investment opportunities in Europe and if CIC’s investment helped the destination company or country to recover and developed the economy, that would be indirect support.” Commerce Minister Chen Deming shared those views in his recent remarks: “While China has always been supportive of Europe’s rescue efforts, these will mainly depend on the euro zone itself… China will definitely be a part of any help offered by the global community… We are willing to further reform and further open our market, but other economies must be more open to us in return.”
  • In China, Gao Xiqing, president of China Investment Corp (the country’s sovereign wealth fund) had this to say regarding the potential of them reallocating assets to aid in the Euozone bailout: “When we talk about international investments, we must consider whether they serve our interests… We can’t say that we’re a generous nation and we can help you at whatever economic costs to us.” Additionally, Jin Liqun, chairman of the board at China Investment Corp, had this to say as well: “China cannot be expected to buy the highly risky bonds of euro-zone members without a clear picture of debt workout programs.” 
  • Two Chinese officials reiterated our view that China is unlikely to take part in bailing out Europe as a source of uninformed, unlimited capital. Zhang Tao, director of the international department at the PBOC suggested that China needs further details regarding the options for bailing out Europe: “At present there’s no specific plan that people have clear understanding of,” he said. Zhu Guangyao, vice finance minister, had similar remarks regarding the EFSF: “There’s no concrete plans yet so it’s too early to talk about further investments in these tools.”
  • Chinese Vice Finance Minister Zhu Guangyao confirmed our belief that China would not be a source of “dumb capital” for the EFSF, publically demanding more details about the “technicalities” of the fund. Additionally, China Investment Corporation (sovereign wealth fund) Chairman Jin Liqun said that “Europe is not really short of money” and publically challenged the European populace to “work harder”, “longer”, and “be more innovative”.

Darius Dale

Senior Analyst


We’re expecting another disappointing quarter from Genting. 



Our property level EBITDA estimate of S$390MM is about 5% below consensus.  Based on our proprietary analysis of government tax data, we believe that the Integrated Resorts in Singapore generated Gross Gaming Revenue (GGR) of S$1.94BN, down 5% QoQ but up 13% YoY.  MBS reported GGR of S$1.01BN, implying that RWS produced only S$930MM compared to S$975MM in 3Q11. 


Part of the issue is that Singapore growth may be somewhat tapped out as we wrote about in ‘SINGAPORE Q3 REVIEW’ on 11/11/11.  RWS also experienced a several week delay in the grand opening of the Equarius Hotel and Beach Villas (opening tomorrow) and its slot/EGT expansion – both originally slated to open by Christmas.  We suspect that management walked down Q4 expectations in January but it looks like numbers still need to come down.  We noticed a change in tone from when we spoke with the company in mid-January, compared to the tone in late November.  In late November, their expectation seemed to be for a big sequential increase in VIP similar to Q4 2010.  However, management was much more cautious in January – shifting the focus on what they need to do to get Phase 2 of their resort open later in 2012 rather than near-term growth.





We estimate that RWS will report net revenue of S$769MM and EBITDA of S$390MM.   RWS did S$375MM of EBITDA last quarter on S$789MM of revenues which included a large bad debt charge of S$38MM.  Without the abnormally high bad debt charge, 3Q EBITDA would have been S$408MM. However, 3Q also benefited from high hold of 3.17%.

  • Gaming revenue, net of commissions of S$626M
    • Gross VIP revenue of S$485MM and net revenue of S$254MM
      • We expect RC volume to increase sequentially to S$17BN, down 21% YoY due to more conservative credit extension and the proximity of Chinese New Year to Jan 1.  This likely reduced what could have been two VIP visits to versus just one last year.  Last year, RC volumes increased 39% from 3Q to 4Q.
      • Hold of 2.85%
      • Rebate of 1.25%
    • Gross Mass table of S$297MM and S$239MM net of gaming points - Gaming points equaled 4% of drop or S$58MM
    • $152MM of slot and EGT win
      • The incremental slots/EGT expansion was installed the second week of January vs. by Christmas as originally scheduled
  • Non-gaming revenue of S$144MM
    • Hotel room revenue of S$35MM
      • There should be a sequential pick up in occupancy due to the holidays
    • S$23MM of F&B and other revenue
    • USS revenue of S$86MM
      • Transformers opened on December 3rd
      • The quarter also benefited from school holidays
  • Gaming taxes of S$89MM
  • Implied fixed costs of S$181 – similar to last quarter

Hedgeye Statistics

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

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%