Happiness Oversold

“The happiness that Jack and Jill experience is determined by the recent change in their wealth.”

-Daniel Kahneman


Across Global Equities and Commodities, this morning our Globally Interconnected Macro Models are signaling the best immediate-term TRADE oversold signal we’ve had in 2012. The perma-bulls have been under siege for 2-3 months. Happiness from their February-March highs is oversold too.


In Chapter 25 of Thinking, Fast and Slow, Kahneman does a great job debunking one of the many dogmas of modern economics. He calls it Bernoulli’s Error – and it’s one that’s pervasive in our profession today. It’s the classic mistake of generalization in assumptions when it comes to utility curves and expectations.


“Bernoulli’s theory assumes that the utility of their wealth is what makes people more or less happy. Jack and Jill have the same wealth, and the theory therefore asserts that they should both be equally happy, but you do not need a degree in psychology to know that today Jack is elated and Jill is despondent.” (page 275)


Back to the Global Macro Grind


At the end of March, if Jack bought Chinese stocks (my son Jack indirectly did), and Jill bought US stocks, Jack is up +5% and Jill is down 7%. So, even if I had a daughter named Jill, Jack would be relatively happier than her if they were going shopping this morning.


If Jill’s Dad was right levered up long in everything US, Asian, and European stocks… and he had a side pocket of Gold, Oil, and maybe a special situation basket that included long JC Penney… Jill and her Dad are going to be eating hot-dogs instead of steaks this summer.


Anyone who has run real-money under the real-time performance pressure cooker for the last 5 years knows precisely what I am talking about. Timing Matters. If you buy high and are forced to sell low, you could wreck your year in a very short period of time.


What does immediate-term TRADE oversold mean?

  1. It doesn’t mean we are all bulled up about Global Growth Accelerating
  2. It doesn’t mean we are bullish on our intermediate-term TREND (3 months or more) duration either
  3. It means that, on a 3 factor basis (price, volume, volatility), stocks and commodities are simply oversold

So the first thing I do with that is start covering short positions. That gets me longer on a net basis. Then I start to slowly take up my gross invested position, selectively, in our best ideas.


I’ve screwed this up enough times to know that you really need to wait and watch on that second part. Your gross long exposure to the market is where you can get run-over; particularly if the market continues to trend lower with no mean reversion bounce.


The good news for US Stocks is that has already happened:

  1. US Dollar Index has been up for 12 consecutive days (new all-time record – all-time is a long time)
  2. US Stocks have been down for 10 of the last 11 days
  3. SP500 and Russell2000 draw-downs from the YTD tops in March-April = -6.7% and -8.7%, respectively

Jill (and her Dad) are not happy. And they probably won’t be until their hard earned capital gets back to break-even. That’s another concept that dysfunctional gamblers don’t quite understand until it’s too late either. The market doesn’t owe you a break-even. Mr Macro Market couldn’t care less about what’s in your pocket either.


The US Stock market (SP500) is down -15.4% and -6.7% from its 2007 and 2012 highs, respectively. That doesn’t mean if you’re up +6.7% from here you break-even. It means you have to be up +7.1% from here to get back to your April 2nd2012 break-even, then up another +10.3% from there to get back to your 2007 high-water mark.


This isn’t easy.


Neither is being happy in this business. But your greed can get overbought and your happiness can get oversold, in the meantime.


Immediate-term TRADE oversold lines, across asset classes in our model are as follows:

  1. SP500 = 1320
  2. Russell 2000 = 770
  3. Nikkei = 8709
  4. Shanghai Composite = 2338
  5. German DAX = 6341
  6. Spanish IBEX = 6548
  7. Gold = $1531
  8. Oil (Brent) = $109.78
  9. Copper = $3.44
  10. Apple = $543

That’s why we bought Apple (AAPL) yesterday. It was immediate-term TRADE oversold right where we bought it at 3:06PM EST. I took our US Equity Asset Allocation up to 12% with that (Cash down to 76%). I’d much rather buy AAPL at immediate-term oversold than buy Tech (XLK) which wasn’t yet signaling the same. Not all happiness gets oversold in the same way, at the same time.


Our immediate-term term support and resistance ranges for Gold, Oil (Brent), US Dollar, and the SP500 are now $1, $109.78-112.34, $80.48-81.55, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Happiness Oversold - Chart of the Day


Happiness Oversold - Virtual Portfolio


TODAY’S S&P 500 SET-UP – May 17, 2012

As we look at today’s set up for the S&P 500, the range is 31 points or -0.36% downside to 1320 and 1.98% upside to 1351. 












  • ADVANCE/DECLINE LINE: on 5/16 NYSE -1037
    • Down from the prior day’s trading of -926
  • VOLUME: on 5/16 NYSE 872.49
    • Increase versus prior day’s trading of 0.45%
  • VIX:  as of 5/16 was at 22.27
    • Increase versus most recent day’s trading of 1.37%
    • Year-to-date decrease of -4.83%
  • SPX PUT/CALL RATIO: as of 05/17 closed at 2.34
    • Down from the day prior at 2.35 


  • TED SPREAD: as of this morning 37
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.77
    • Increase from prior day’s trading at 1.76
  • YIELD CURVE: as of this morning 1.48
    • Up from prior day’s trading at 1.47 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Initial Jobless Claims, week of May 12, est. 365k (prior 367k)
  • 8:30am: Continuing Claims, week of May 5, est. 3225k (prior 3229k)
  • 9:45am: Bloomberg Consumer Comfort, week of May 13
  • 9:45am: Bloomberg Economic Expectations, May
  • 10am: Philadelphia Fed., May, est. 10 (prior 8.5)
  • 10am: Leading Indicators, Apr., est. 0.1% from 0.3%
  • 10am: Freddie Mac 30-yr mortgage
  • 11am: Fed to purchase $1.5b-$2b notes in 2/15/2036 to 5/15/2042 range
  • 12pm IMF’s Blanchard speaks in Washington
  • 12:35pm: Fed’s Bullard speaks in Kentucky
  • 1pm: U.S. to sell $13b 10-yr TIPS (reopening)
  • U.S. Treasury announces 2-, 5-, 7-yr auction sizes 


  • Treasury Secretary Tim Geithner discusses economy at Greater Baltimore Cmte. breakfast, 7:30am
  • Commerce Dept. issues final ruling on solar panel imports from China, may impose additional anti-dumping duties, 9am
  • Federal Mine Safety and Health Review Commission meets on whether safeguard notices sufficiently protect workers, 10am
  • Aubrey McClendon, CEO of Chesapeake Energy; and Thomas Farrell II, CEO of Dominion Resources, at Energy Central event, 2pm
  • SEC holds closed meeting on enforcement matters, 2pm
  • U.S. Postal Service announces plan for closing some mail- processing plants
  • President Obama’s schedule TBA
  • House, Senate in session:
    • House Financial Svcs holds hearing on settlement practices of U.S. financial regulators, 10am
    • Senate Finance holds hearing on whether the Social Security Administration is meeting its responsibilities, 10am
    • House Financial Svcs panel holds hearing on ability of U.S. insurance, reinsurance firms to compete internationally, 2pm 


  • Facebook IPO expected to price tonight; current range $34- $38-shr
  • Wal-Mart may show 1Q gross margin pressure in earnings report today
  • Japan’s economy grows a faster-than-expected 4.1% in 1Q
  • Companies mentioned at the Ira Sohn conference yday may move
  • Spain sells EU2.49 billion bonds, just below maximum target
  • JPMorgan’s trading losses have surged in recent days: NYT
  • Canadian Pacific proxy vote today as Bill Ackman seeks seats
  • Paulson says likes CVR Energy as Icahn may resell oil refiner 


    • Children’s Place Retail Stores (PLCE) 6am, $1.06
    • Sears Holdings Corp (SHLD) 6am, $(0.67)
    • Buckle (BKE) 7am, $0.76
    • Cato (CATO) 7am, $1.07
    • Wal-Mart Stores Inc (WMT) 7:04am, $1.04
    • Dangdang (DANG) 7:28am, $(0.22)
    • Dollar Tree Inc (DLTR) 7:30am, $0.97
    • Precision Castparts Corp (PCP) 8am, $2.27
    • Advance Auto Parts Inc (AAP) 8:30am, $1.81
    • Computer Sciences Corp (CSC) 8:30am, $0.20
    • GameStop Corp (GME) 8:30am, $0.54
    • Ross Stores Inc (ROST) 8:30am, $0.93
    • Teekay LNG Partners LP (TGP) 8:30am, $0.51
    • Teekay Corp (TK) 8:30am, $(0.35)
    • Teekay Offshore Partners LP (TOO) 8:30am, $0.38
    • Zumiez Inc (ZUMZ) 4pm, $0.11
    • Gap Inc/The (GPS) 4pm, $0.45
    • Intuit Inc (INTU) 4pm, $2.48
    • Autodesk Inc (ADSK) 4:02pm, $0.47
    • Aruba Networks Inc (ARUN) 4:03pm, $0.16
    • Applied Materials Inc (AMAT) 4:04pm, $0.24
    • Brocade Communications Systems Inc (BRCD) 4:05pm, $0.12
    • Inc (CRM) 4:05pm, $0.34
    • Aeropostale Inc (ARO) 4:15pm, $0.13
    • Youku (YOKU) 4:30pm, $(1.19)


  • Chalco Target as Mongolia Seeks to Bar State Deals: Commodities
  • Oil Trades Near Six-Month Low as ECB Curtails Greek Bank Lending
  • China Seen Toppling India as Biggest Gold Market on Demand
  • Gold Demand Fell 4.6% in First Quarter on Lower Jewelry Buying
  • Gold Rebounds as Slump to This Year’s Low Spurs Investor Buying
  • Copper Rises on Speculation About Further Fed Growth Measures
  • Wheat Set for Longest Winning Streak Since January on Dryness
  • London Metal Exchange Reports Net Income Declined 19% Last Year
  • Gas Breaks Oil Link as Gazprom Price Power Fades: Energy Markets
  • Cotton Stockpiling in China to Continue as Reserves Expand
  • CME Pulls Grain-Trade Plan Two Weeks After Bid to Match ICE
  • Gold May Beat Silver Rallying to $1,600: Technical Analysis
  • China Postal Express IPO to Fund Online-Shopping Push: Freight
  • Rubber Climbs Most in Four Months on Japanese Growth, Crude Oil
  • Oil Rises From Six-Month Low on Japan Data
  • Hong Kong Bourse Should Lose Monopoly If It Wins LME, Says Rival
  • First Indian Shale Gas Seen Four Years Off as China Output Nears






 US DOLLAR –get USD right, and you’ll get most other things big beta right. USD is immediate-term TRADE overbought as Gold, Oil, SPY, AAPL etc go immediate-term TRADE oversold. If you’re going to cover shorts and dip your toes on the long side of this thing, this is the spot (for a trade).






SPAIN  - way oversold after it crashed; mean reversion bounces across Europe haven’t happened yet, but they will (if they don’t, our entire profession should just go to 100% cash and pray). Spanish stocks go green after the bond auction #encouraging, for a trade.






CHINA up +1.4% overnight after taking a good hard look at our 2336 TREND line of support and holding it; Shanghai Comp has outperformed SP500 by more than +1100bps since April 1st; that’s the most bullish thing we can tell you (next to down oil) for Global Growth.










The Hedgeye Macro Team


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The Macau Metro Monitor, May 17, 2012




1Q GDP in Singapore grew 1.6% YoY or an annualized 10% QoQ, marginally higher than the initial estimate of 9.9% growth.  This missed the median estimate in a Bloomberg survey of a 10.6% gain.  


The Trade Ministry maintained its forecast for 2012 GDP growth of 1-3%.  “Singapore’s growth momentum has picked up, anchored by a strong upturn in the manufacturing sector.  Nevertheless, the recovery in the global economy remains fragile and vulnerable to downside risks.  A disorderly sovereign debt default in the Eurozone that would hurt the global economy and Singapore’s export-dependent industries cannot be ruled out," the Trade Ministry said.

ANF: 1Q12 Scorecard


The tattoo that the market inked on ANF today surprised us initially, given that we saw a (modest) headline beat, bullish margin outlook, and an incremental improvement in inventories– making for one of the more positive setups in retail in 2H. Sales are off, clearly, but margins are so strong such that guidance is in-tact. Let’s face it, top line expectations for ANF are not exactly high these days – at least that was our sense. In any other week, we think that these factors would have offset much of the revenue miss.


But unfortunately, most of ANF’s sales shortfall was in Europe, and it is reporting this in conjunction with a complete Euro freak-out in the market about a bank run and potential break-up of the Euro Zone. To be clear, our Macro team (which has traded the Dollar/Euro with extreme precision over a four-year scorecard) has a strong view that this will not happen – at least not in the near future – and that we’re seeing capitulation in the Euro.


Nonetheless, most of the people that trade names like ANF are likely to get caught up in the anxiety around weakness in US tourist markets, cannibalization in Europe (the tonal change of which was new), and the company’s comments about Macro. Heck, just to get a retailer to pronounce the word Macro is hard enough. At least they have a process (inventories, costs, etc…) to deliver results in a tough climate.  


When we model ANF, we get to EPS next year over $3. But today, it’s at 15x management’s EPS guidance for FY12. Clearly people who are increasingly concerned about traffic shriveling up on the vine can build to a number closer to $2. We can’t. But we can see how it can be done. Slap a low/mid teens multiple on that bad boy and you’re looking at 25% downside from here. We think that will prove to be a money-losing call over a 12-month time period. But for the next 1-2 quarters, ANF needs a catalyst to the upside to change people’s minds on the direction of earnings – otherwise it’s multiple on guidance will drift lower.


ANF: 1Q12 Scorecard - ANF SIGMA


Deltas in Forward Looking Commentary?


In order to properly measure performance relative to original expectations, we look at management’s First quarter results relative to Management guidance as well as any updates to previously provided full year 2012 outlook:


ANF: 1Q12 Scorecard - ANF Delta in commentary


Highlights from the Call


Top line Results: +10% overall

Comp: -5% with men's and women's performing comparably

US incl DTC Comp: +4%

International Comp: negative though economics remain strong (overall int'l +42%)

ANF: -4%

Kids: -11%

Hollister: -5%

Cannibalization/macro impacted international comps

Looking for strong earnings growth in 2H with peak cotton costs in the rear view



Opened 7 new Hollister stores internationally including 3rd new store in China with another 2-3 planned openings

Hong Kong ANF flagship opening in August

China remains a key priority



Opened Hamburg ANF flagship

Opening 3rd ANF in Munich later in the year

London- opened combined Hollister and Gilley Hicks store


Direct to Consumer: +40%

  • International business grew faster than the overall rate of growth
  • Margins remain strong
  • Will drive growth through increased international awareness and investment spending
  • US retail comps +4%, AUR up slightly
  • Happy with Spring Merchandise

Europe performance measured based on:

  • Performance relative to other stores in the mall
  • Are volumes consistent with original expectations when deal was approved
  • Are stores achieving annualizaed 30$ four wall margin
  • Is DTC growing at a healthy rate

Gross Margin: -241bps

  • Due to less promotional environment & slight better AUR

MGA: +9%

  • Increase due to marketing, equity compensation

Stores and Distribution expense: +14%

  • Store occupancy 179mm

EBIT Margin: -390 on 160bps of expense deleverage


Inventory: +44% above plan due to lower sales

  • Have adjusted receipts for the balance of the year based on inventory




  • GM slightly below last year
  • Modest deleverage of operating expenses

Full Year:

  • Comps down MSD based on modestly positive US comp and mid teen negative international
  • Greater than $250mm in revenue contribution from 2011 store openings as well as 2012 openings
  • Substantial recovery in 2011 GM erosion driven by international mix benefit and AUC improvement in Fall
  • FY2012 diluted EPS of $2.50-$2.75





  • Business was tougher than 4Q, Hollister moved from comping positive to negative
  • Difficult compares in 1H
  • Remain confident that stores opening today are hitting 30% four wall margin on conservative volume
  • ANF is its own biggest competitor internally in Europe
  • Haven't seen huge division between Northern and Southern Europe
  • Expect pricing to be up slightly in the Spring and down slightly in the fall
  • Pricing will be down more aggressively at ANF vs. Hollister in the Fall season

Tax rate:

  • Slightly below 35% for the full year


  • Macro is the biggest factor in the downtrend in Europe, Cannibalization is secondary
  • Now planning cannibalization into future modeling and macro environment to remain unchanged
  • No impact on Hollister unit growth plan, even with cannibalization performing to plan
  • Have pulled back some ANF openings due to lower economic expectations resulting from cannibalization
  • Even after adjusting for cannibalization, London flagship traffic remains ahead of expectations


  • Expect rate of growth to moderate significantly at the end of Q2

Gross Margin:

  • AUR in the US business was up
  • Markdowns were better than expected

Share Repurchase:

  • No additional buybacks included in guidance relative to Q1


  • Hoping to raise the AUR for the balance of the year
  • Flagship pricing mix has been adjusted- difficult to tell how results have changed
  • Expect AUR will be raised but will respond quickly if competition is reducing pricing


  • Had originally reduced guidance based on lower comps
  • Now that comps have been reduced again, guidance is unchanged due to better than expected GM
  • Big piece of the improved GM outlook is due to better AUC outlook
  • Slightly higher AUR assumption


  • Doing a lot of business is Ginza however to enter the market quickly, Ginza flagship deal was uneconomical
  • With better economics, the store would be more profitable


  • Negotiating for a flagship in China next year
  • There is a lot of business to be done in China
  • Pleased with start in China- need to treat china like Europe with real estate in best centers
  • First store in Shanghai- good store gaining momentum
  • Opened in secondary city where stores are meeting plan but less aggressive
  • First store in Beijing should not have been in a 3rd rate mall, performing below expectations
  • Optimistic about all brands in China
  • Hollister store in Hong Kong would be rated in the top stores list

US Stores:

  • Comp decline in tourist stores due to fewer tourists vs. brand issue

Consumer patterns

  • Traffic is down in flagship locations which is driving volume
  • Clearly see traffic down in US tourist stores

Divisional Margins

  • 700bps decline in DTC margin driven primarily by YoY sourcing cost impact (rates in 2011 not sustainable, expecting mid 40s rate)
  • International margin decline- big piece of decline also from sourcing with some deleveraging of expenses resulting from the negative comps
  • US margins less impacted by sourcing costs- markdown taken in Q4 disproportionately benefitted Q1

Women's business

  • Women's bottoms business is good
  • Short business is good

AUC reductions

  • Expected down DD in 2H
  • Have made substantial progress with costs mostly locked


  • Continue to make progress on fashion
  • The business will continue at a good rate
  • Always in chase mode for fashion- good thing
  • Less promotional and anticipate trend to continue


  • Being to use social media for international marketing particularly in China
  • Big pushes around creating awareness with openings in China

Mobile Technology:

  • Working so all online interaction is mobile and able in both the US and international
  • Currently 20% of online traffic coming from mobile

Domestic Store closures:

  • Planning 180 closures through 2015
  • Closed 5 stores in Q1
  • Will have an update later in the year after speaking with landlords

FX impact for the full year

  • Will be less than the (-$50mm) full year impact provided in Feb
  • Euro assumption for the full year similar to current spot rate

Gilley Hicks

  • Performed well on a comp basis in the first quarter
  • Very happy with the progress of the business



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