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TODAY’S S&P 500 SET-UP – May 10th, 2012


As we look at today’s set up for the S&P 500, the range is 21 points or -0.63% downside to 1346 and 0.92% upside to 1367.













  • ADVANCE/DECLINE LINE: on 5/09 NYSE -1080
    • Down from the prior day’s trading of -613
  • VOLUME: on 5/09 NYSE 940.15
    • Increase versus prior day’s trading of 4.2%
  • VIX:  as of 5/09 was at 20.08
    • Increase versus most recent day’s trading of 5.4%
    • Year-to-date decrease of -14.2%
  • SPX PUT/CALL RATIO: as of 05/08 closed at 2.03
    • Up from the day prior at 1.31 



  • TED SPREAD: as of this morning 38.05
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.89
    • Decrease from prior day’s trading at 1.82
  • YIELD CURVE: as of this morning 1.65
    • Down from prior day’s trading of 2.03


MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: Bank of England MPC rate decision, asset purchase target
  • 8:30am: Import Price Index, Apr., est. -0.2% (prior 1.3)
  • 8:30am: Trade Deficit, Mar., est. -$50.0b (prior -$46.0b)
  • 8:30am: Initial Jobless Claims, week of May 5 (prior 365k)
  • 8:30am: WASDE corn, cotton, soybean, wheat
  • 9:30am: Fed’s Bernanke speaks on bank capital in Chicago
  • 9:45am: Bloomberg Consumer Comfort, wk of May 6 (prior -37.6)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural gas storage change
  • 11am: Fed to sell $8b-$8.75b note, 10/15/13 to 1/31/14 range
  • 1pm: U.S. to sell $16b 30-yr bonds
  • 1:20pm: Fed’s Kocherlakota speaks in Minneapolis
  • 2pm: Monthly Budget Stmnt, Apr., est. $30.5b (prior -$40.4b)



  • Bank of England expected to halt bond purchases at GBP325b
  • Cisco forecast 4Q revenue, profit growth that missed ests.
  • Euro diminished in poll showing more than 50% predicting an exit
  • Intel hosts investor day; watch commments on capex, gross margin: Stifel
  • Hong Kong Exchanges said to submit takeover bid for London Metals Exchange
  • Spain takes over Bankia after chairman says he will step down
  • ArcelorMittal beats estimates on U.S. steel-demand recovery
  • Sony profit forecast misses estimates as TV sales decline
  • Australia’s jobless rate falls to 1-year low, currency rises
  • Yanzhou Coal among cos. in talks to buy Vale SA’s stake in an Australian coal mine for more than A$500m, people familiar said
  • U.K. March manufacturing increases more-than-forecast 0.9%
  • Japan posts current-account surplus for a second month
  • Bernanke gets 75% approval rating in Bloomberg global poll
  • Las Vegas, Atlantic City casino monthly figures may be released



  • Big Lots (BIG) raised to overweight at Barclays Capital
  • General Growth (GGP) raised to buy vs neutral at UBS
  • Highwoods Properties (HIW) cut to hold vs buy at Jefferies
  • JDS Uniphase (JDSU) raised to buy vs neutral at UBS
  • Macerich (MAC) cut to neutral vs buy at UBS
  • Tanger Factory (SKT) raised to buy vs neutral at UBS
  • Tesoro (TSO) raised to buy at BofA
  • Tetra Tech (TTI) rated new at Roth, PT $35
  • Vail Resorts (MTN) cut to market perform at Wells Fargo
  • Vertex Pharmaceuticals (VRTX) cut to outperform at RBC Capital
  • Vulcan Materials (VMC) raised to outperform at RBC Capital




  • Oil Snaps Longest Decline Since 2010 as U.S. Jobless Claims Fall
  • Copper Rises as Chinese Trade Figures Spur Stimulus Speculation
  • U.S. Soy Reserves May Fall 31% Before 2013 Harvest, USDA Says       
  • Brazil’s $2 Billion Sugar-Cane Revival Plan Fails: Commodities
  • U.S. Corn Reserves May Double on Record Crops, USDA Says
  • Soybeans Climb on Stockpile Speculation; Corn, Wheat Advance
  • Gold Declines for Fourth Day in New York as Dollar Strengthens
  • Cocoa Falls as Rain May Help Crop in Ivory Coast; Coffee Gains
  • Cotton Drops After Government Report Shows Bigger U.S. Harvest
  • Aluminum Buyers in Japan to Pay Record Fee as Supply Drops
  • Cosan’s $2.4 Billion Acquisition Spree Hurts Debt: Brazil Credit
  • London Oil Trades Beat New York for First Time: Chart of the Day
  • Cooking-Oil Imports by India Seen Advancing for Third Month
  • Florida Orange-Crop Estimate Little Changed, USDA Report Says
  • Arch Coal Lures Lenders With Coal in Ground: Corporate Finance
  • U.S. 2013 Wheat Stockpiles Seen Falling on Increased Exports
  • U.S. Cotton Crop Will Climb 9.2% as Harvested Area Expands

THE HEDGEYE DAILY OUTLOOK - daily commodity view





US DOLLAR – forget Greece, get the US Dollar right and you’ll get a lot of other things right. US Dollar index up for 6 consecutive days and US Stocks down for 6 consecutive days – the USD Correlation Risk is screaming at -0.90 USD vs SPX right now and that’s why Gold and Oil refuse to bounce too. Correlation Risk isn’t perpetual, but when in the soup, it matters.







FRANCE – so you’re saying socialism is a ‘buy on the news’, eh? Non, non, mes amis – France flashing another negative divergence this morning, leading losers in Europe at -0.6%, taking the CAC’s draw-down from the March top (when European and US Growth Slowing accelerated on the downside0 to -14%.







CHINA – trade balance out last night just tells us more about what we already know – Growth Slowing in Asia marked the highs for both the Hang Seng and the Sensex all the way back in February. This is not new and it’s primarily why China continues to act pretty well on bad economic “news” (+0.1% overnight and +10% for 2012 YTD – my favorite Global Equity market).










The Hedgeye Macro Team

Howard Penney

Managing Director





KSS: Reactive


It’s about time. KSS is finally taking steps to adjust its pricing strategy a full quarter after JCP implemented its new EDLP approach in February. We’re rarely (if ever) a fan of reactive strategies and this one is no different. KSS will now be more aggressively fighting for share – that’s great, but others have already been taking it for the last 3-months now such as Macy’s, the off-pricers (TJX/ROST), etc. Increased competition in the mid-tier that will ultimately drive increased margin pressure is here and officially heating up. This isn’t good for KSS, or the companies that rely heavily on this channel for distribution such as CRI, HBI, GIL to name a few.

That said, KSS posted a very low quality SG&A driven beat for the quarter with both revenues and gross margins coming in soft. A few points of note here:

  1. Revenues were light. We knew that last Thursday and now KSS is going to try to drive traffic with lower pricing. This didn’t work out so well for JCP. We expect an uphill battle ahead for KSS as well. Not good.
  2. Gross margins also came in below expectations. While some portion of this degradation was due to the new pricing initiative, KSS’ sales/inventory spread is virtually unchanged and still among the worst in the mid-tier. That’s very gross margin bearish over the intermediate-term.
  3. SG&A was the saving grace in the quarter coming in $66mm lower yy. We’d prefer to see KSS invest in remodeling some of its tired store base rather than pulling this lever so heavily to make EPS. It may indeed help manage earnings near-term, but that’s no good for F13 earnings growth sustainability.

All in, KSS is guiding Q2 down, but maintaining full-year expectations implying a more bullish view on 2H results. A strategy change of this magnitude is hardly a 1-qtr transformation – just ask Ron Johnson. This not only takes up the risk embedded in management’s guidance substantially, but it also increases the mid-tier competitive environment.

Here are a few more details regarding Q1 results:

Pricing: the newly implemented lower price strategy resulted in gross margins -220bps vs. guidance of -160E & the street -151E.


Opex: KSS beat this morning on a ~$70mm reduction in SG&A spend to offset comps coming in light (+0.2% vs +1E).


Core Contracting: E-commerce sales were not given in the press release, but if we assume 10% growth in 1Q12 (on 40% growth in FY2011), new store sales suggest the core business contracted -0.2%.


Guidance: 2Q guidance per the press release is $0.09-$0.17 below consensus at $0.96-$1.02 vs. $1.13E driven by sales +2%-3% vs. +3.1E and comps flat to +1% vs. +1.2E. The delta seems to be primarily attributable to lower
priced sales driving the top line. The street is looking for Q2 Gross Margins to be -94bps- they may come in closer to -150bps. For the full year, KSS reiterated EPS of $4.75 vs. $4.74E suggesting some back half improvement
relative to expectations. Guidance suggests 2H earnings of $3.10-$3.16 vs. $3.03E which seems to be driven by better positioning for back to school and the lower pricing.


Inventories: Inventories were +7% in 1Q12 vs. +5% in 4Q11. As a result of first quarter revenues +2% vs. slightly negative in 4Q11, the sales/inventory spread improved 1 pt sequentially though remains -5%.


KSS: Reactive  - KSS SIGMA


Casey Flavin



Matt Darula




Loss of Confidence

This note was originally published at 8am on April 26, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The failure of the Knickerbocker Trust was just the beginning of a more general loss of confidence.”

-Jim Rickards


Anyone who has been in this business for more than the last 5 years knows what the biggest problem is for the US stock market – confidence. The People do not trust the financial system and all of its central planning puppetry. Therefore, The People are not giving the asset management community the number one thing they want – fund flows.


No Confidence. No Flows. No Volume.


That’s not new this morning. Neither is the world’s reaction to the US Federal Reserve’s un-elected Central Planner in Chief’s Policy to debauch the US Dollar in a repeated, but fleeting, attempt to inflate stock and commodity prices.


Sure, the price of Oil and Gold are up on the Dollar Down move. But they are up less than they were on Bernanke’s moves to Qe1, Qe2, and Qe3 (Bernanke’s latest war on the American Consumer (and Saver), pushing 0% interest rates on fixed income savings accounts to 2014 was a hybrid Qe3). We don’t think he has an iQe4 upgrade in his bailout bag during the General Election debate.


The reason why I used another one of Jim Rickards’ quotes (page 49 of Currency Wars) this morning is that it’s a critical one to consider in terms of why the US Federal Reserve Act of 1913 was established in the first place.


I’ll let you read Rickards book to form your own opinion on this, but the upshot of the problem was that NYC bankers, traders, etc. have always had the same problem – at a point, they take on too much risk with other people’s money, and they blow up.


In any other business, you’d be accountable for those losses and your business would go away. Post the 1907 Crisis, when banks like Knickerbocker literally blew up, banking and capital markets related companies have worked very hard at making sure that they have an un-elected man at the Fed that they can both appoint and politicize for their own compensation purposes.


The Fed was created to bailout banks, not American consumers.


Back to the Global Macro Grind


While it’s both shocking and sad (but expected), Ben Bernanke was able to get through an entire press conference yesterday without mentioning the words “US DOLLAR.”  What might be an even more glaring national embarrassment was that not 1 American journalist asked him about it either.


For those of us who aren’t paid to be willfully blind, here’s how real-time market expectations work:

  1. The Fed’s Monetary Policy drives the direction of the US Dollar
  2. The US Dollar, since it’s the world’s reserve currency, drives real Dollar adjusted expectations in liquid asset prices
  3. The inflation or deflation of asset prices (commodities in particular) drives the slope of Global Consumption Growth

I have my B.A. in Keynesian Economics from Yale. I don’t need a Ph.d in that dogma to explain to me how obvious the relationship is between the US Dollar and its purchasing power. Try it with your own money at home – you’ll get the point.


Despite Spain crashing again (Spanish stocks down -22% since February), even the Euro is strong versus the US Dollar this morning. The #1 Most Read Headline on Bloomberg: “Bernanke Prepared To Do More.” And the US Dollar Index is down for the 6th out of the last 7 weeks.


Our models show that Global Consumption Growth has never NOT slowed with oil above $96/barrel. Pick your vintage, Brent or WTIC, last I checked nothing happened in Iran overnight either. Prices of $104 and $119 per barrel, respectively, don’t lie; politicians do.


Does money printing matter? Does the amount of Dollars (World Reserve Currency) matter relative to World Oil Reserves? Of course they do. In 1990 the ratio of US Money Supply (M3)/Proved Oil Reserves = 4.1x. Today, that ratio = 10.7x. Reversing this factor alone would get you $75-80 oil, and the 99% would love that.


Got 1990s? Look at our Chart of The Day, then pull up a long-term chart of Oil – and you’ll see what I mean by Loss of Confidence:

  1. US Consumer Confidence tracked between 80 and 140 during the 1990s (this week it hit 69.2 for April)
  2. US Dollar Index Averaged $92.93 during the 1993-1999 expansion (avg GDP was 3.84%, so demand did what to oil?)
  3. Average price per barrel of WTIC Oil during 1993-1999 expansion = $18.63/barrel (not a typo)

It’s the US Dollar Stupid. That’s what real people use when they buy gas at the pump. So, if you’re part of a Keynesian crack house in Washington that’s addicted to devaluing the credibility and currency of the American people, shame on you.


If you want to try the “counter factual”, get your conflicted and compromised Fed friends to raise interest rates on Sunday night and tell me how many call options on oil you want to buy in front of that.


If you want to tell me Oil is up because of Iran, show me something going on in Iran. If you want to tell me Oil is up because global demand is up, show me where growth isn’t slowing.


Show me something. But don’t show me another complete embarrassment like yesterday’s Fed Press Conference. The concept of “price stability” (Fed mandate) does include the currency in which prices are paid. The Loss of Confidence in this country is rightly placed.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1633-1655, $118.64-120.77, $78.97-79.44, and 1377-1394, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Loss of Confidence - Chart of the Day


Loss of Confidence - Virtual Portfolio

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 80.48%
  • SHORT SIGNALS 78.35%

American Pilots

“American and British pilots were forced to learn about this lethal athlete the hard way.”

-Ian Toll


Don’t blame the pilots. Blame the politicians. They were willfully blind to obvious risks and put our bravest in the sky anyway. That’s one of the key risk management and leadership lessons I learned from Ian Toll’s excellent new book about WWII, Pacific Crucible.


“The Mitsubishi A6M Zero was a dog-fighting champion, and aerial acrobat that out-turned, out-climbed, and out-maneuvered any fighter plane the Allies could send against it… The Zero had been placed in service in the summer of 1940, almost 18 months before Pearl Harbor… it was yet another example of the fatal hubris of the West in the face of plentiful evidence..” (pages 52-53)


I read about war because it educates me on winning and losing. Every decision counts. Decision processes matter. There has been “plentiful evidence” that the US Dollar has been driving The Correlation Risk in Global Macro markets since 2007-2008. There has also been an outright obfuscation of facts by Western Academics who have chosen to ignore it. It’s un-objective and un-American.


Back to the Global Macro Grind


The US Dollar is up for the 7thconsecutive day and US Stock Futures are indicated down for the 7thconsecutive day. There is absolutely zero irony in this causal relationship. Policy expectations drive currency prices.


In the absence of immediate-term expectations for an iQe4 upgrade of Gold and Oil price inflation from Ben Bernanke, the US Dollar has arrested its decline – and stocks and commodities have arrested their ascent.


Here’s a real-time update on the surreal Correlation Risk (inverse correlations between the USD and asset prices) developing:

  1. SP500 = -0.90
  2. Euro Stoxx = -0.92
  3. CRB Commodities Index = -0.94
  4. WTIC Oil = -0.89
  5. Gold = -0.89
  6. US Equity Volatility (VIX) = +0.93

Yes, you’ll notice that in the Romper Room that has become Keynesian Economic Policy outcomes, one of these things is not like the other – one of these things just doesn’t belong. It’s called volatility.


The US Federal Reserve has a 2-stroke mandate:

  1. Price “stability”
  2. Full Employment

We have neither. We have price volatility like the world has never seen. And we have forced American Pilots of other people’s hard earned moneys to chase their own tails of performance going after short-term and short-sighted Policies To Inflate.


As US Dollar Debauchery has only proven to Slow Global Economic Growth via accelerating short-term food and energy price inflations, now world markets have to deal with the other short-term side of the trade:

  1. Growth Slowing (until it slows at a slower rate)
  2. Deflating The Inflation (Bernanke’s Bubbles in Oil, Gold, etc. are popping)

When these 2 things are happening at the same time, you just cannot ignore the capital losses. They happen real fast.


That said, what’s been fascinating about this -4.6% draw-down in the SP500 from its April 2nd, 2012 top (capital loss from the Russell2000 March 26th, 2012 top = -6.9%) isn’t the absolute performance impact, but the Storytelling.


The Most Read (Bloomberg) headline this morning epitomizes the storytelling of the Old Wall: “Dow Falls For 6th Day In Longest Losing Streak Since August On Greece.


On Greece? C’mon. Americans in this profession are better than that.


You can look at real-time market signals (leading indicators) in 2-ways at this stage of the Fed Fight:

  1. What’s happened on the margin (draw-downs) from the YTD tops in February-April
  2. What’s happened YTD

The YTD thing is all about the Storytelling. Just don’t do it with my money. Last I checked, the SP500 is still down -13.5% from its willfully blind 2007 high and needs to be up almost +16% (from here) just to get The People and their 301ks back to break-even.


Everything that happens on the margin in markets matters most to the American and Global Macro Pilots who are trying to manage your money’s real-time risks. What happens on the margin is what drives fear and greed. It’s also what builds or destroys confidence.


If you don’t have planes or markets that the pilots can trust, you’re one step closer to losing whatever is left of the money they are willing to flow back to the politicized decision making process that’s driving markets.


Bottoms are processes, not points. We humbly suggest you fly these risky skies of Federal Reserve sponsored Price Volatility with the credible analytical sources out there who have actually landed the planes for the last 5 years.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, and the SP500 are now $1, $110.23-113.89, $79.42-80.28, $1.29-1.31, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


American Pilots - Chart of the Day


American Pilots - Virtual Portfolio


A slight beat from our estimate and we were above the Street



  • In March, first junket licenses were issued. They believe that it will help them in the intermediate term. They are confident that there will be more licenses issued over the next 12-18 months. First IMA's started operating in May. 
  • Raised funds that will enable them to pursue new projects; their location remains disadvantaged

  • Issued largest bond offering in S'pore in March
  • EBITDA margin: 48%
  • Gained market share in mass - due to better promotional spending
  • 1Q VIP hold rate: 3.4%
  • Remain committed to growing the company with new projects


  • No comment on location of their new project other that they will likely announce something in the next 12-18 months.  Not interested in Europe.  JV/direct investment are both possible.  If they went into Japan, they would go in with a partner. 

  • Balance of 2012 capex for West Zone: S$500MM; Not all the capex in the quarter is related to West Zone - there is a timing differential in paying contractors for past work already completed.  They will likely not pay all the 500 in 2012 though. 
  • Total S'pore capex so far (ex. WC, land): S$5.5BN
  • Cannot allocate tables to the IMAs   
  • They are only at the beginning of hiring IMAs. There will be very minimal revenue impact from the IMAs over the next few months. The very tight regulatory process allows them to go through with the government of what is allowed and what is not allowed.  It's a very structured learning.  So if and when the IRA allows other junkets to come in, they will know how to best utilize them- especially if the rules get modified.

  • RC volume share: 49%; mass drop: 47%
  • Rolling win mix on a net revenue basis was 36%
  • Mass hold %: 22.8% 
  • Net revenue share: not comparable since they deduct more costs 
  • No change on the VIP commissions; they continue to be very cautious on giving credit.  Do not want to overextend themselves.  They give a higher rebate to customers to get an early payment.
  • RC volume growth QoQ was +29%
  • Mass floor revenue QoQ: +8%; slot growth was higher relative to tables
  • 2,440 slots in end of 1Q; 702 ETGs
  • No changes on government regulations on advertising.  What the government did is simply clarify what was ok or now.

  • Still a few pending IMAs that have not been rejected
  • Hotel occupancies are not constant since they have to reserve rooms for the VIP; not concerned about the decline in occu and margins QoQ. Added 200 more rooms in 1Q. Hotel margins: 60%
  • Margins on USS and everything else is where there is upside
  • Rentals should be finished (West Zone) in 4Q 2012; costs will ramp up in the next few quarters but margins for 2013 will be better
  • Next few quarters will be focused on USS; once break-even point passed (6,000-7000 visitors), there is $0.80 per $ flowthrough to bottom line
  • 1Q Table count: 562 tables (MASS/VIP%: 1/3, 2/3); in terms of capacity, "they are almost there."
  • 1Q: 8,400 average visitors in USS; attendance went up 14% YoY
  • 1Q pre-opening: $2MM 
  • The significance of the IMA contribution depends on which ones get approved.  At most, IMA can contribute 30-40%. 
  • VIP hold rate may stabilize around 3.0-3.1% but that's just a guess
  • IMA don't collect debt at this point but they guarantee it

  • Continue to be cautious on extension of credit for rest of year



  • Group revenue of S$787MM and S$EBITDA $376.4MM 
  • Non-gaming revenue up 16% YoY
  • USS grew its daily average visitations by 14% to 8,400 visitors at an average spending of about S$88. Hotel business improved as occupancy rate increased from 79% to 86% with an average room rate of S$338. However, overall revenue for first quarter of 2012 was affected by lower win percentage and business volume in the premium player business when compared to first quarter of 2011. 
  • On quarter to quarter basis, overall casino gross revenue grew by 9% as a result of higher business volume in all gaming business segments.
  • Consequently, the Group’s net profit for the first quarter of 2012 was S$211.5 million as affected by the revenue mentioned above and higher depreciation with the opening of new attractions in USS, the Maritime Experiential Museum, Equarius Hotel and Beach Villas compared to first quarter of 2011. This was mitigated by lower finance costs in first quarter of 2012 as a result of lower effective interest rates and lower loan principals.
  • On 12 March 2012, the Company issued S$1,800 million 5.125% perpetual capital securities at an issue price of 100 per cent. The perpetual capital securities were issued for the Company’s general corporate purposes as well as to finance capital expenditure and expansion of its business.
  • The Group spent a total of S$262.4 million for construction work-in-progress and other property, plant and equipment during the financial period.

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