TODAY’S S&P 500 SET-UP – February 28, 2012

As we look at today’s set up for the S&P 500, the range is 15 points or -0.70% downside to 1358 and 0.40% upside to 1373. 












  • ADVANCE/DECLINE LINE: -26 (-298) 
  • VOLUME: NYSE 732.41 (14.27%)
  • VIX:  18.19 5.08% YTD PERFORMANCE: -22.26%
  • SPX PUT/CALL RATIO: 2.36 from 2.26 (4.43%)


BONDS – both the UST 10yr and the Yield Spread are telling you all you need to know about US Growth Slowing sequentially here in FEB. The Durable Goods number is a JAN print and doesn’t really matter in our model – the PMI and ISM prints for FEB (wed and thur) do. 10s failed at 2.03% TREND resistance and then snapped 1.97% TRADE support. No real support now to 1.89% with 10s/2s Spread -4bps already for the wk-to-date. 

  • TED SPREAD: 38.74
  • 3-MONTH T-BILL YIELD: 0.10%
  • 10-Year: 1.93 from 1.93
  • YIELD CURVE: 1.64 from 1.64 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am/8:55am: ICSC/Redbook weekly retail sales
  • 8:30am: Durable Goods, Jan., est. -1.0 (prior 3.0%)
  • 9:00am: S&P/Case-Shiller 20 City, Dec. est. -0.35% (prior - 0.70%)
  • 10:00am: Consumer Confidence, Feb., est. 63.0 (prior 61.1)
  • 10:00am: Richmond Fed, Feb., est. 14 (prior 12)
  • 10am: Fed’s Duke testifies on housing to Senate Banking Committee
  • 11:30am: U.S. selling $40b 4-week bills, $20b 49-day bills
  • 7:15pm: Fed’s Pianalto speaks on economy in Westfield Center, Ohio 


  • President Obama speaks at United Auto Workers legislative conference, 11:30am
  • FDIC holds briefing on quarterly bank industry earnings, 10am
  • House, Senate in session:
    • House Appropriations Committee hears from Attorney General Eric Holder on his agency’s budget, 9am
    • Senate Budget Committee hears from Defense Secretary Leon Panetta and Joint Chiefs Chairman Martin Dempsey on the Pentagon budget proposal, 9:30am
    • Senate Energy and National Resources Committee holds hearing on Interior Department budget request, 10am
    • Senate Agriculture Committee holds hearing to develop a 2012 farm bill, 10am
    • House Energy and Commerce Committee hears from EPA Administrator Lisa Jackson on her agency’s budget request, 10am
    • Senate Banking and Housing Committee hears from Housing Secretary Shaun Donovan and Fed Gov. Elizabeth Duke on the state of the housing market, 10am
    • Senate Appropriations Committee hears from Secretary of State Hillary Clinton on the State Department’s budget request, 10am
    • House Appropriations Committee hears from TSA Administrator John Pistole on his agency’s budget. 11am
    • House Ways and Means Committee hears from Health and Human Services Secretary Kathleen Sebelius on her agency’s budget request, 1pm
    • House Appropriations Committee hears from Energy Secretary Steven Chu on his agency’s budget request,2pm   


  • Rick Santorum, Mitt Romney face off in Michigan, Arizona presidential primaries
  • Orders for U.S. durable goods may have dropped 1% in January on slower aircraft demand, economists est.
  • Supreme Court hears oral arguments in case involving Royal Dutch Shell over whether corporations are immune from tort liability for violations of intl law, 10am
  • JPMorgan holds annual investor day
  • Greek parliament votes on implementation law for austerity measures
  • TomTom falls as much as 19% as 2012 rev. forecast trails est., watch Garmin
  • News Corp., Warner Bros. said to be working with Sandisk, Western Digital to create storage devices for film, TV 


    • Fresh Del Monte Produce (FDP) 6 a.m., $0.09
    • Tech Data (TECD) 6 a.m., $1.66
    • Fortress Investment Group (FIG) 6:30 a.m., $0.10
    • Magellan Health Services (MGLN) 6:30 a.m., $0.79
    • Sanderson Farms (SAFM) 6:30 a.m., $0.18
    • Vitamin Shoppe (VSI) 6:30 a.m., $0.33
    • NRG Energy (NRG) 6:45 a.m., $(0.17)
    • Canadian Apartment Properties REIT (CARu CN) 6:51 a.m., $0.32
    • AutoZone (AZO) 7 a.m., $4.04
    • HollyFrontier (HFC) 7 a.m., $1.20
    • Xylem (XYL) 7 a.m., $0.46
    • Office Depot (ODP) 7 a.m., $0.00
    • Bank of Montreal (BMO CN) 7:12 a.m., $1.36
    • Tenet Healthcare (THC) 7:30 a.m., $0.14
    • Viropharma (VPHM) 7:30 a.m., $0.55
    • Ariad Pharmaceuticals (ARIA) 7:35 a.m., $(0.18)
    • Mentor Graphics (MENT) 7:50 a.m., $0.50
    • Rowan Cos (RDC) 8:10 a.m., $0.30
    • Cablevision (CVC) 8:15 a.m., $0.23
    • Ecolab (ECL) 8:25 a.m., $0.70
    • FirstEnergy (FE) 8:30 a.m., $0.75
    • Sempra Energy (SRE) 9 a.m., $1.06
    • DreamWorks Animation SKG (DWA) 4 p.m., $0.31
    • MarkWest Energy Partners (MWE) 4 p.m., $0.49
    • Collective Brands (PSS) 4 p.m., $(0.81)
    • First Solar (FSLR) 4:04 p.m., $1.57
    • Universal Display (PANL) 4:05 p.m., $0.06
    • Kodiak Oil & Gas (KOG) 4:10 p.m., $0.09
    • Chesapeake Midstream Partners (CHKM) 4:15 p.m., $0.43 


OIL – 2 down days in a row is as bullish as bullish does for Global Equity markets. Asia acted as well as it has in FEB last night and US Futures like oil down because they should – it’s good for the 71% (Consumption/GDP). The problem, of course, is that Brent and WTIC only have 2-3% downside in the immediate-term and should resume their inflations thereafter.

  • Soy Stocks Fall Most Since 1996 Amid Brazil Drought: Commodities
  • Oil Declines a Second Day on Concern Price Gains Sapping Demand
  • Copper Rises to Two-Week High on Signs of Stronger Confidence
  • Sugar May Tumble Below 20 Cents on Surplus, F.O. Licht Says
  • Soybeans Climb to Five-Month High as Rains Too Late for Brazil
  • Gold Advances in London as Weaker Dollar Spurs Investor Demand
  • Sugar Falls as Brazil’s Exports Are More Profitable; Cocoa Rises
  • Iron Ore Cuts Monthly Loss on Speculation China Demand to Climb
  • World’s Biggest Tea Auction Halted Over Kenya Tax Dispute
  • Oil Supplies Climb in Survey on Canadian Imports: Energy Markets
  • BP Investors See Spill Deal Narrowing $44 Billion Gap: Energy
  • ONGC, GAIL Plan $2 Billion Bid for Cove, Times of India Says
  • Muddy Waters Losing Support in Stock Market on Latest Calls
  • Tankers Falling 42% as Japan Oil Use Drops
  • China’s Iron Ore Imports May Drop 14% as Domestic Output Gains
  • Newmont Says It’s Too Early to Say Whether Conga Will Proceed
  • Batista’s OSX Debut Offering Buoyed by Oil Output: Brazil Credit 









GREECE – a not so funny thing happened on the way to the risk management forum – with Greek stocks down another -1.6% this morning (leading losers globally), they’ve gone from up +23% to +8% YTD in less than 2 weeks. Big Government Intervention perpetuates volatility. Nice.















The Hedgeye Macro Team



Headed Higher?

“If we do not change our direction, we are likely to end up where we are headed.”

-Chinese Proverb


In my intraday risk management note yesterday titled “Higher-Highs”, I explained why I was buying/covering on red. Fifteen SP500 points higher (+1%), I was tweeting about why I was selling/shorting green up at 1371.


If we do not change our direction, we are likely to get run over.


Back to the Global Macro Grind


Taking a step back, from a positioning perspective here’s what I’ve done since being bullish on everything US Growth and Consumption (pre Ben Bernanke’s Policy To Inflate, pushing US Dollar Debauchery out to 2014, on January 25th, 2011):

  1. Long Inflation
  2. Short Growth

Notwithstanding all of the single security mistakes I’ve made in the last month (11 losing positions out of my last 45), the obvious risk management lesson since January 25thhas been that perma-bulls and perma-bears rarely change direction – at least not quickly.


That’s the immediate-term. That’s also the rear-view mirror. Looking forward, what lessons have growth investors learned over the intermediate to long-term about the relationship between Inflation and Growth?


Until we get through month-end, I do not know the answer to that question. My sense is that there has not been much evolution in the risk management process over the course of the last 2 major growth slowdowns (2008 and 2011), so this time won’t be different.


How am I positioning the Hedgeye Asset Allocation Model into month-end markups (February ends tomorrow):

  1. CASH = 52% (down from 91% on January 25th, before the US Equity market dropped for 4 consecutive days)
  2. FIXED INCOME = 24% (Inflation Protection and Growth Slowing – TIP and FLAT)
  3. COMMODITIES = 9% (Gold – GLD)
  4. INTERNATIONAL FX = 9% (US Dollar – UUP)
  5. US EQUITIES = 6% (Utilities – XLU)

Taking these positions in order, here’s the what I am thinking as of this morning:

  1. CASH: when it’s my own money, it’s going to be a big position at 3yr highs in US Equities – that’s just how I roll
  2. TIP and FLAT: both positions are shining examples of Growth Slowing As Inflation Accelerates (same call I made last year)
  3. GLD: pushing into its 12 consecutive year of going up, this repudiation of Keynesian Economics still looks like my weight
  4. UUP: I just started buying US Dollars back in the last few days as a hedge against Japan’s massive debt maturities in March
  5. XLU: I swapped out of our long Financials (XLF) position yesterday at +13.7% YTD and into Utilities which are down -2.5% YTD

As for International Equities, having a 0% asset allocation at the top of a move is also plainly described as my mistake. We were long China coming out of the December 29th2-year low – and I sold too early. The good news is that we waited until February 16thto sell Chinese Equities (CAF) for a +15.11% gain. The bad news is that China has moved higher since (+11.4% YTD).


Changing direction when markets are Headed Higher is not easy. Neither is buying on red or selling on green. But this is what I do. The process is both malleable and repeatable. I wake up every morning looking forward to fresh opportunities, not dwelling on mistakes.


Some people in our profession don’t like to talk about their mistakes. Many of those people like to call me names my Mom wouldn’t like when I call out our successes. Sadly, this won’t change direction anytime soon either. It’s just the way some people are.


On pages 218-219 of “Thinking, Fast and Slow” in his chapter titled The Illusions of Pundits, Daniel Kahneman nails this difficult topic of success/failure to the boards: “…experts resisted admitting that they had been wrong, and when they were compelled to admit error, they had a large collection of excuses: they had been wrong only in their timing, an unforeseeable event…” etc.


Sound familiar?


Of course it does. Whether you have worked at 4 different hedge funds like I have, or whether this is your first wonderful experience chasing alpha at an asset management firm, you know exactly who the excuse makers are – their operating principles are very different than mine.


The best news I can give you is that it still isn’t too late. We can still Re-think, Re-build, and Re-work all that we do in this profession. Our collective policy, strategy, and capital mistakes provide tremendous opportunity for change. If I didn’t believe that deep down in my gut, I wouldn’t feel like our firm is Headed Higher this morning either.


My immediate-term support and resistance ranges for Gold, Oil (Brent), Utilities (XLU), Inflation Protection (TIP), Growth Slowing (FLAT), US Dollar (UUP), and the SP500 are now $1, $121.93-126.34, $34.72-35.41, $118.11-119.66, $58.01-59.65, $21.71-22.12, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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