Selling Green: SP500 Levels, Refreshed

POSITIONS: Long Utilities (XLU), Short Consumer (XLY)


Buy red, Sell green. Rinse and Repeat.


My last communiqué was on Tuesday (“Short Covering Opportunity” on 3/6/11 at 11:29AM EST) and it was harder to buy then than it is for the performance chasing community right here and now. We’re right at levels in the SP500 and the VIX where I think this is an easy call to make.


Here are the lines, across my risk management durations, that currently matter to me most: 

  1. Immediate-term TRADE resistance = 1374
  2. Immediate-term TRADE support = 1345
  3. Intermediate-term TREND support = 1283 

With the US Dollar Index breaking out to the upside (above $79.03 TREND support), I am getting more constructive on US Equities – but from a price. On Tuesday my buy/cover line was 1345. It still is today.


Enjoy your weekend,



Keith R. McCullough
Chief Executive Officer


Selling Green: SP500 Levels, Refreshed - SPX








Private payrolls gained by 233k versus expectations of 225k in February.  The unemployment rate stayed at 8.3% but, on the positive side, the labor force participation rate ticked up by 20 basis points to 63.9%.  This was the first uptick since August 2010.  During February, employment in leisure and hospitality increased by 44,000 with nearly all of the increase in food services and drinking places (+41,000).  Since a  recent low in February 2010, food services has added 531,000 jobs.












SBUX: Starbucks’ announcement after the close yesterday, that it is to release a new brewer named Verismo by Starbucks, has been met favorably by investors; the stock is up 3.4% premarket.


SBUX: Starbucks was reiterated “Buy” at Deutsche Bank.  The PT was raised to $59 from $53.


GMCR: Starbucks’ announcement after the close yesterday, that it is to release a new brewer named Verismo by Starbucks, has been met unfavorably by investors in GMCR; the stock is down -14.4% premarket.  Green Mountain has responded by saying that its Keurig brewer uses low pressure to brew non-espresso coffee and tea, meaning Starbucks may not become a direct competitor to its core business.


SONC: Sonic reported 2QFY12 same-store sales at +3.4% (3.5% at franchise drive-ins versus 3.1% for company).


MCD: Despite the returns that McDonald’s generated for shareholders in 2011, Jim Skinner, the CEO of MCD, saw his compensation decline by 10% to $8.8m.


MCD: McDonald’s was reiterated “Conviction-List Buy” at Goldman Sachs.





DNKN: Dunkin’ Brands gained 3.5% on accelerating volume. 


SONC: Sonic declined -7% on accelerating volume yesterday.  The stock cratered on the sales preannouncement.





BWLD: Buffalo Wild Wings is launching its “More March” multi-platform ad campaign in time for one of the busiest months of the year.





EAT: Brinker gained +3.4% on accelerating volume yesterday.






Howard Penney

Managing Director


Rory Green




TODAY’S S&P 500 SET-UP – March 9, 2012

As we look at today’s set up for the S&P 500, the range is 37 points or -1.53% downside to 1345 and 1.18% upside to 1382. 












  • ADVANCE/DECLINE LINE: 1777 (53) 
  • VOLUME: NYSE 716.61 (-10.53%)
  • VIX:  17.95 -5.87% YTD PERFORMANCE: -23.29%
  • SPX PUT/CALL RATIO: 0.98 from 1.74 (-43.68%)


  • TED SPREAD: 39.72
  • 3-MONTH T-BILL YIELD: 0.08%
  • 10-Year: 2.01 from 2.01
  • YIELD CURVE: 1.70 from 1.71 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Trade Balance, Jan., est. -$49.0b (prior -$48.8b)
  • 8:30am: Nonfarm Payrolls, Feb., est. 210k (prior 243k)
  • 8:30am: Unemployment Rate, Feb., est. 8.3% (prior 8.3%)
  • 8:30am: WASDE corn, soybean, cotton, wheat
  • 10:00am: Wholesale Inventories, Jan., est. 0.6% (prior 1.0%)
  • 1pm: Baker Hughes rig count 


    • Obama to speak on economy at Rolls-Royce aerospace facility in Richmond, Va. 12:30pm, then fly to Houston for campaign events
    • CFTC meets to consider issuance of proposed rules, 9:30am
    • House meets in pro forma session, 11am 


  • U.S. payrolls may have increased by 210k in Feb. after rising 243k in Jan., economists est.
  • Investors with 95.7% of Greece’s privately held bonds will participate sovereign debt restructuring after govt said it will trigger an option forcing them to take part
  • UPS said to be near deal to buy TNT Express after initial offer of EU4.9b rejected
  • El Paso holds a shareholder vote on $21.1b Kinder Morgan deal
  • Watch video-game makers after NPD reported U.S. video-game sales fell 20% in Feb. to $1.06b
  • Texas Instruments cut 1Q sales, profit forecasts; watch chipmakers, suppliers
  • Molycorp agreed to buy Canada’s Neo Material Technologies for ~C$1.3b ($1.3b) to increase Chinese sales, gain technology
  • Boston Scientific agreed to buy Cameron Health for as much as $1.35b to add a new kind of defibrillator
  • Wal-Mart wins South African lawsuit contesting Massmart takeover
  • London Stock Exchange agreed to buy a majority stake in LCH.Clearnet Group for GBP463m ($613m)
  • NRC deadline for issuing orders on safety improvements developed in year since radiation crisis at Fukushima, Japan
  • No U.S. IPOs expected to price: Bloomberg data
  • SATURDAY: China trade data for February
  • SATURDAY: Kansas Republican presidential caucuses
  • SUNDAY: Daylight savings time: Clocks spring forward in most of U.S. (Europe shifts on March 25) 


    • Hibbett Sports (HIBB) 6:30am, $0.56
    • Ferrellgas Partners (FGP) 7am, $0.79
    • Halozyme Therapeutics (HALO) 7:30am, $(0.15)
    • Ann (ANN) 7:35am, $0.09
    • Carnival (CCL) 9:15am, $(0.05) 


  • Gold Bulls Strengthen as Wagers Reach $131 Billion: Commodities
  • Soybeans Climb to Five-Month High as Brazil Cuts Crop Forecast
  • Oil Rises a Third Day on U.S. Economic Outlook, Greek Debt Swap
  • India to Review Cotton-Export Ban as China Seeks Withdrawal
  • China February Copper Output Rebounds From an 11-Month Low
  • Gold May Rise as Low Interest Rates Boost Demand for the Metal
  • Tocom to Discuss Alliance With CME Next Week, Ezaki Says
  • Copper Traders Probably Added to Wagers That Prices Will Decline
  • Palm Oil Surges to Nine-Month High on Speculation Reserves Fell
  • Rare-Earth Bust Spurs Molycorp’s Biggest Takeover Bet: Real M&A
  • Coffee Falls on Speculation Supplies Will Improve; Cocoa Drops
  • Iran Oil Risk Threatens Peak Profit for Naphtha: Energy Markets
  • Shipping Lines’ Asia-Europe Rate Rise May Fail: Chart of the Day
  • Oil Rises on Greek Debt Swap, U.S. Outlook
  • Copper Gains for Third Day on China Inflation, Industrial Output
  • Rubber Futures Advance as China’s Inflation Eases: Tokyo Mover
  • Chalco to Seek to Raise as Much as 8 Billion Yuan in Share Sale 





















The Hedgeye Macro Team


investing ideas

Risk Managed Long Term Investing for Pros

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.


“That the chance of gain is universally overvalued, we may learn from the universal success of lotteries.”

-Adam Smith, The Wealth of Nations


The concept of risk management is, at least for me, a continual learning process.  Strictly speaking, what I do is research but naturally when discussing ideas with teammates here at Hedgeye, risk is always on and something that is always foremost in our thinking. 


Confidence in the market has increased over the last 6 months and commentary from financial media outlets of all kinds seems to be increasing in its assuredness that the recovery is finally showing some teeth.   A notion confirmed today by Bank of America CEO, Brian T. Moynihan, as he suggests that the consumer using leverage again to increase spending.  He said “purchases by the bank’s credit and debit-card customers have increased 5%-7% for each of the last five months.”  If consumer are levering up again, it is not a positive!


The risk here, clearly, is that the market is attracting those that are trying to chase performance and not what the consensus believes, which is “we have turned the corner.”  When thinking through what the reality of our position is, it’s important to always consider two things.  First, recall how your counterpart gets paid.  Second, it’s paramount to remind oneself that good luck is not a given.  Unfortunately, we humans generally believe ourselves to be, individually, held above the rest in the pecking order of fortune.  This trait, as Smith puts it, is “an ancient evil remarked by the philosophers and moralists of all ages”.  For a contrite buyer of a market top, or the people whose money he or she loses, that is certainly an apt description and something we can all relate to in one way or another.


Looking back on this week it reminds me that there is something to learn every day in this business.  Writing this morning piece is something that is forcing  me to do something publically that I have tried to do privately at the end of each week, which is assess the week and any lessons that can be taken from it.


Sitting here after the first four days of the week, my macro question is “what is driving this market?” 


On Monday, the S&P had its biggest one-day decline of 2012, -1.54%, on the notion that the bailout plan for Greece was going to unravel (a credit event related to Greece looks to be on the cards today).  On Wednesday, the improving jobs picture – at least according to the ADP Employment report – helped the market move higher by +0.69%.  Yesterday, the market rallied another 1% as private debt holders agreed to convert 85% of Greece’s debt to new securities in the “biggest sovereign debt restructuring in history”. 


Ever is a long time and Greece certainly matters, if only because of the possible repercussions in broader Europe in the event of a disorderly default.  However, the S&P500 being bid up yesterday despite claims disappointing was interesting.


It is impossible for anyone, least of all myself, to state with certainty why market prices moved in any direction on a given day, but the Wall Street Journal’s report that the Federal Reserve may engage in “sterilized QE” which will please all of the people (inflation hawks and doves) all of the time.  Surely, that rumor of Fed intervention abounds anytime the equity market shows any weakness belies the supposed confidence that investors feel in being long this market. 


The Hedgeye Financials team has conducted some tremendous research into the initial claims data that is usually so important for market sentiment; much of the recent upsurge in equity prices is attributed to improving employment conditions as shown by the trend in claims.   


One would think, then, that a disappointing initial claim print yesterday – albeit one week’s data point – may have had more of an impact on a market that has gained so handsomely in recent months. The “Ghost of Lehman” (as the financials team has called it) distortion in the claims dataset, which has been a headwind and is set to turn into a headwind gradually in the summer months, may have helped boost equity prices over the last six months; the question at this point is whether or not a series of disappointing jobs numbers will lead to a commensurate retracement in the S&P.


That question is perverse to read and it feels perverse to write.  Surely deterioration in the underlying fundamentals, especially the all important jobs picture, should lead to a sell off.  The S&P is up 8.6% year-to-date and up 102% from the March2009 low.  Still, with the QE is the go-to strategy the instant any “concerns” creep into the market, will a pause in the jobs picture have any impact on equity prices at all? 


What’s increasingly difficult to discover at this point is truth.  The truth is not always beautiful, as Lao Tzu wrote.  In the case of our financial “markets”, the truth would likely be downright ugly.  Maybe a truth, as Jack Nicholson might say, that we couldn’t handle.  My aim is not to vilify actors in or prescribe solutions for the ills facing our economy.  As a equity analyst, looking back on this past week and thinking about the pending jobs report, my conclusion is that the rumors of intervention by central banks is deterring people from truth and thus market prices might not reflect reality.


Even in vain, the quest for truth must be sustained.  Yesterday was cheering on inflation - Dollar down, Euro up, oil up, gold up, and XLI and XLB were the best performers.  It’s the type of move that has corroborated many of the points that our Macro team has argued recently.  First, inflation slows consumption.  McDonald’s – one of the most macroeconomic-immune companies of the past four years – mentioned inflation as an issue for its business in its press release yesterday.  Second, at this point investors need to embrace uncertainty and stay nimble.  With the VIX at 17, there is plenty of complacency in the market that “we have turned the corner” and not reflecting increased inflation.


If good news is good and bad news is QE, surely the only way is up!  Looking at a simple chart of short term interest rates versus the S&P shows that the frequency and amplitude of stock market cycles has increased coincident with the implementation of easy money policies.  The lack of truth in financial markets is rendering trust impossible and that is illustrated clearly in the volatility of the past few years.  As buyers up here, it is worth asking whether or not we are overvaluing the chance of gain.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1, $123.98-126.89, $79.02-80.12, and 1, respectively.


Function in Disaster; Finish in Style


Howard Penney 


UGLY TRUTH - EL Chart 3.9


UGLY TRUTH - vp 3 9

Phony Promises

This note was originally published at 8am on February 24, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

"It's the easiest thing in the world to make phony election-year promises about lower gas prices."

-Barack Obama


Markets don’t lie; politicians do. With the US Dollar getting pulverized to fresh YTD lows yesterday ($78.82 US Dollar Index), the price of oil ripped to new YTD highs.


The President of the United States said nothing about gasoline’s immediate-term -0.8 correlation to the US Dollar – he blamed “the Middle East and Wall Street Speculators.”


Storytelling can be sad.


Back to the Global Macro Grind


This whole “clean energy” rant appeals to people. My office is on an Ivy League college campus – trust me, I get it. What I clearly don’t get is how both Bush and Obama’s economic “advisors” concluded that the best long-term path to economic prosperity is through currency devaluation. Both Carter and Nixon tried this. So did Charles de Gaulle. It doesn’t work.


You know, there are no quick fixes to this problem.” –Obama (in Miami yesterday)


Really? There actually is a quick fix. And since our central planners love those, you’d think they’d at least be forced to debate it. A Strong Dollar Policy – in both MONETARY and FISCAL action = down oil, hard.


I know the Energy “experts” disagree, and that’s fine – all the more reason to try the one policy idea neither Bush nor Obama tried. Give one of these “experts” some inside info that Ben Bernanke is going to come out with a “surprise rate hike” on Sunday night, and you’ll see more Oil men buy puts than a Congresswoman from the 112th.


I wrote about this yesterday and had a proactively predictable responses from partisan people. The minute you credit Reagan for anything, the Democrats cringe. The second you compliment Clinton on anything fiscally conservative, the Republicans whine.


Only inside the Bubble in American Politics could partisanship make us all feel so willfully blind…


Back to the data: look at the long-term chart of Oil vs the US Dollar. It doesn’t lie. 

  1. US Dollar Index > $90 = bearish for Oil
  2. US Dollar Index < $90 = bullish for Oil 

Again, during the 1980s and 1990s, not only did the price of oil routinely trade in the $18-22/barrel range (using long-term decade averages here folks, not Iraqi points on the cart), markets EXPECTED it to. 

  1. 1983-1989 = average price of oil (WTI) = $22.16/barrel
  2. 1993-1999 = average price of oil (WTI) = $18.63/barrel 

*note, I use 1983 and 1993 to take out the 1981-82 and 1991-92 US recessions, which, ostensibly, would be your “low demand” years - if you’re asking a run-of-the-mill supply/demand Keynesian, that is…


Expectations drive markets. Period. And the entire world expects Ben Bernanke and Tim Geithner to debauch the US Dollar with the President of the United States having their backs.


How else can you explain Obama not mentioning the US Dollar once during the State of the Union address? Correlation isn’t causality. We get that. But correlations on a 30-day to 3-year basis are extremely high, and so is causality on a 40 year-basis. It was a Republican President (Nixon) who abandoned the Gold Standard in order to debauch the dollar in 1971 and proclaim “we are all Keynesians now.”


Reality 101: In an America where we try to make it ok for losers to win, I’m not going to convince someone that they are accountable for something that is very wrong in this country in 900 words or less. So now I’ll just get on with my day.


I couldn’t make this up if I tried, but Bloomberg’s #1 Economic Headline today is “STOCKS, OIL CLIMB ON GLOBAL ECONOMIC RECOVERY.”


Meanwhile, everything other than Gold, Energy, and Basic Materials stocks (inflation expectations rising), is signaling that Global Growth Slowing here sequentially in February is the case: 

  1. The SP500 is still down -13% from its 2007 peak (tell your broker you need to be up +15% from here to get back to breakeven)
  2. US Treasury Yields (10-year) have dropped back below my intermediate-term TREND line of 2.03%
  3. The Yield Spread (10s minus 2s) is down 3bps day-over-day
  4. Spain, France, and Italy are all making lower-highs in the face or Economic Stagflation
  5. CRB Commodities Index (18 commodities) = +2% for the week vs the SP500 +0.1%
  6. Oil prices are up +3.4-4.8% on the week with the US Dollar down almost 1% (and the Yen is collapsing)

Japanese Yen collapsing? Yes, it’s not headline news, yet – but it will be. The Yen is down, literally, in a straight line to the tune of -6% for the month of February to-date. I think this looks eerily similar to the initial cliff dive of the Euro in April of 2011. Japan, like Europe at this time last year, is about to enter a phase of massive sovereign debt monthly maturities (57.1 TRILLION Yen in March).


Is it going to be different this time? USA and Japan have to rollover $3.0 TRILLION and $3.2 TRILLION in debt (in debauched dollars) in 2012 and oil prices over $100/barrel have never not slowed Global Economic Growth. Or are we hearing Phony Promises about an economic recovery, again, during an election year?


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1742-1787, $119.81-124.61, $78.70-79.07, and 1354-1369, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Phony Promises - Chart of the Day


Phony Promises - Virtual Portfolio