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TODAY’S S&P 500 SET-UP – July 11, 2012

As we look at today’s set up for the S&P 500, the range is 22 points or -0.78% downside to 1331 and 0.86% upside to 1353. 











  • ADVANCE/DECLINE LINE: on 07/10 NYSE -955
    • Down versus the prior day’s trading of -340
  • VOLUME: on 07/10 NYSE 727.59
    • Increase versus prior day’s trading of 11.99%
  • VIX: as of 07/10 was at 18.72
    • Increase versus most recent day’s trading of 4.12%
    • Year-to-date decrease of -20.00%
  • SPX PUT/CALL RATIO: as of 07/10 closed at 1.69
    • Down from the day prior at 2.09 


  • TED SPREAD: as of this morning 36
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.52%
    • Increase from prior day’s trading at 1.50%
  • YIELD CURVE: as of this morning 1.26
    • Down from prior day’s trading at 1.24 

MACRO DATA POINTS (Bloomberg Estimates): 

  • 7am: MBA Mortgage Applications (July 6), prior -6.7%
  • 8:30am: Trade balance (May), est. -$48.6b, prior -$50.1b
  • 8:30am: USDA monthly crop report
  • 10am: Wholesale Inventories (May), est. 0.3%, prior 0.6%
  • 10:30am: DoE Inventories
  • 2pm: FOMC Meeting Minutes 


    • President Obama meets with Democratic leaders, closed press, 2:15pm
    • House, Senate in session
    • Senate Finance holds hearing on Medicare physician payments, with testimony from doctors, 10am
    • Senate Judiciary holds hearing on impact on competition of exclusion orders to enforce standard-essential patents, with Acting Asst Attorney General for Antitrust Division Joseph Wayland; FTC Commissioner Edith Ramirez, 9:30am
    • House Agriculture marks up farm bill, 10am
    • House Energy holds hearing on fraud in programs aimed at encouraging production, use of renewable fuels, 10am
    • House Financial Services panel holds hearing on impact of Dodd-Frank financial reforms on mortgage lending, 10am
    • House Small Business holds hearing on Federal Motor Carrier Safety Administration’s Compliance, Safety, Accountability program, with small trucking company CEOs, 1pm
    • House may vote to repeal Obama’s health-care overhaul
    • GSA holds meeting of President’s Management Advisory Board on curbing improper payments to government contractors, 9am
    • Acting Commerce Secretary Rebecca Blank discusses U.S. competitiveness with business, public leaders in San Diego
    • Transportation Secretary Ray LaHood participates in conference call on development of U.S. high-speed rail, 12pm
    • House Small Business holds hearing on Federal Motor Carrier Safety Administration’s Compliance, Safety, Accountability program, with small trucking company CEOs, 1pm 


  • Apple joins Facebook, Google in U.S. talks on mobile-app privacy code
  • Burberry drops on 1Q sales miss; LVMH, luxury competitors fall
  • Chesapeake must pay >$100m over leases, Texas judge says
  • Trade deficit in U.S. probably narrowed on cheaper oil imports
  • Cliffs Natural Resources to sell Sonoma coal-mine stake
  • Sino-Forest to transfer assets to creditors, ends sale process
  • Australia cons. confidence rises to 5-mo. high on rate cuts
  • Spain raises some taxes to raise extra $80b over 2 1/2 yrs
  • Peregrine Financial files to liquidate in bankruptcy after CFTC sues alleging $200m shortfall in client funds
  • Xstrata sets Sept. 7 for vote on $26.4b Glencore bid
  • China car sales beat ests. for fourth straight month
  • Solar cos. plan to tap U.S. loans suspended since Solyndra
  • San Francisco to stop buying Apple computers after co. no longer participates in environmental certification program 


    • Charles Schwab (SCHW) 8:45am, $0.18
    • Marriott Intl (MAR) 5pm, $0.42
    • Texas Industries (TXI) After-mkt, ($0.28) 


  • Rhodium Glut Diminishing on Record Global Car Sales: Commodities
  • Coal King Even With Australia’s Costliest Carbon: Energy Markets
  • Sudan Crude Marooned Off Singapore Shows Trade as War Victim
  • Corn Climbs Before Report That May Show Smaller Harvest Forecast
  • Oil Rebounds From One-Week Low as U.S. Crude Stockpiles Decline
  • Gold Climbs Most in a Week as Slowing Global Growth Spurs Demand
  • Copper Seen Rising as Wen Indicates Spending May Climb in China
  • Food Prices Seen by OECD and FAO Rising in Next Decade on Oil
  • Rubber Drops as China Truck-Sales Data Highlight Demand Concern
  • Palm Oil Drops on Concern Reserves May Rise as Exports Decline
  • Drought-Fueled Corn Rally Squeezing ADM Profit: Chart of the Day
  • Fortress CEO Sees Pulp Rally or Going Private: Corporate Canada
  • Indonesia Seeks Resolution to Japan Talks Over Mineral Exports
  • Corn Rallies Ahead of USDA Crop Report
  • Bullish Sugar Risks to Persist Amid Brazil Backlog, Sucden Says
  • India Said to Cancel Sale of Wheat From Reserves to Glencore
  • Truck Sales Slumping for Third Month in China Cuts Rubber Demand 























The Hedgeye Macro Team


Big Mac

“I am the literary equivalent of a Big Mac and fries.”

-Stephen King


I’m not going to admit this because my brother is a McDonald’s franchisee. I am going to put it out there because this is really the key to what you really need to know this morning – I love the Big Mac!


As are all things here in the Haven, that’s a multi-factor, risk managed, statement. Not only do I eat Big Macs (weekly), but I wear the Big Macro jersey for Hedgeye with pride.


I am right fired up for our Big Macro Quarterly Themes Call this morning. We’ll be hosting it (49 slides in 40 mins) with the customary anonymous client Q&A at 11AM EST.


As a reminder, last quarter my team nailed the #GrowthSlowing and #BernankeBubbles popping (Gold, Oil, etc.) calls. I’d be lying to you if I said we weren’t looking to land a few fat TAIL risked whales this morning too.


Our Top 3 Themes are going to be as follows:

  1. Growth Slowing’s Slope – what our GDP models see in Q3 for USA, China, and Germany vs consensus.
  2. The Cliff – as in the 112th Congress kind; will #GrowthSlowing pull forward the Debt Ceiling Debate?
  3. Obama vs Romney – pickles or no pickles? You do need a risk management plan under either scenario.

Back to the Global Macro Grind


After 4 consecutive down days (another 33 point draw-down), the SP500 storytellers who have been telling you to buy stocks “because they are cheap” at VIX 15-16 are going to get one of the many opportunities to buy’em cheaper again this week.


Growth Slowing matters. Most people get that by now. But the narrative of #EarningsExpectations becoming a big market liability has finally perforated the almighty media’s top headlines.


We’ve been saying short pro-cyclical Sectors (Industrials, Basic Materials, Energy) since we made our #GrowthSlowing call in March. That’s not a victory lap – that’s just the score. These S&P Sectors are getting pounded on #EarningsExpectations in July.


Only 10 days in, here’s the S&P Sector scoreboard for Q3 to-date:

  1. Industrials (XLI) = down -2.94%
  2. Basic Materials (XLB) = down -2.49%
  3. Energy (XLE) = down -2.12%

But, but, the Dow is “up for the YTD.” So everything is just fine, right?


Right. Right.


There’s a reason why Canadian McDonald’s franchisees refuse to launch anything that resembles eating a yellow snow cone too. Whether you think the average human being on this earth is “smart” or not, there are some things people just get.


The world’s economic growth is not fine. Neither is the perma contention of the Q1 bulls that “people are too bearish.” Maybe at 27 VIX in May (when the II Bull/Bear Spread pancaked to flat) consensus was bearish enough. Not here.


If you bought stocks at 1374 SPX and VIX 16 last week, you certainly didn’t get that call from us. Anything in the area code of 14-16 VIX has been the closest sell signal you can find to a layup as there has been in US Equities since 2008.


Back to the II Bull/Bear Survey, check this thing out (reported this morning):

  1. Bulls rise from 42.5% to 44.7%
  2. Bears are unchanged at 24.5%
  3. Bull/Bear Spread = 2020 basis points wide!

Away from what I am watching and eating, that’s the super little secret of my risk management morning. The general population of investors who are telling themselves consensus is Bearish Enough are simply lying to themselves inasmuch as I would be if I told you I don’t also love the Filet O’ Fish.


If you’d like access to this morning’s Q3 Big Macro Themes call, please email .


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, German DAX, and the SP500 are now $1, $97.56-103.01, 82.61-83.81, $1.21-1.24, 6, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Big Mac - Chart of the Day


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Debt Ceiling: Déjà Vu All Over Again?

Takeaway: Based on our math, the debt ceiling may be technically breached by late November, which may introduce a new and critical factor ahead of the November elections.

In the world of manic markets, the 2011 debt ceiling crisis seems like a lifetime ago.  In reality, the deal to extend the debt ceiling in 2011 was reached on August 2nd, just under a year ago.   In fact, President Obama signed the Budget Control Act of 2011 into law on August 2nd.   This was the date that the Department of Treasury estimated that the borrowing authority of the U.S. federal government would be exhausted.


In true lagging indicator fashion, Standard and Poor’s downgraded the credit rating of the U.S. government a few days later. As outlined in the chart below, the U.S. equity markets, not surprisingly, were very volatile into and out of this.  In fact, the volatility was comparable to the 2008 financial crisis with the Dow dropping north of 5.5% on August 5th alone. 


Debt Ceiling: Déjà Vu All Over Again? - chart1


Ironically, the debt ceiling had been successfully raised 70+ times from 1960 heading into the summer of 2011.  The advent of the Tea Party elevated the debate on federal government debt and spending and turned a routine Congressional legislative activity into a major political football.  The Tea Party pushed their Republican colleagues to reject any proposal that did not also incorporate immediate and sizeable spending cuts.


As noted above, the ultimate compromised proposal was the Budget Control Act of 2011 which had the following key provisions:


Debt Limit 

  • Debt was increased by $400 billion immediately;
  • The President could request a further increase of $500 billion, which Congress could veto with a 2/3rds majority; and
  • The President could request a final request of $1.2 -> $1.5 trillion, subject to the same super majority.

Deficit Reduction

  • The bill outlined $917 billion of cuts over 10 years in exchange for the initial increase;
  • The bill established the Joint Select Competitive Committee on Deficit Reduction to agree to cut at least an additional 1.5 trillion over the next 10 years; and
  • If the Joint Committee did not come to an agreement on a bill of at least $1.3 trillion in cuts, then Congress could grant a $1.2 billion increase in the debt ceiling but this would trigger across the board $1.2 trillion in cuts equally split between security and non-security spending.

The widely discussed “Fiscal Cliff” in 2013 is a function of both a potential roll back of the broad Bush tax cuts and the automatic spending cuts outlined in the provisions of the Budget Control Act.  In our Q3 2012 themes call tomorrow, we will go into a discussion of the “Fiscal Cliff”.  In addition to this fiscal cliff and potentially even more pressing, is the issue of once again bumping into the debt ceiling.


In the table below, our Healthcare team outlines three different scenarios when the U.S. may hit the debt ceiling.  In the analysis, we show an aggressive scenario, base case scenario, and a conservative scenario.  In the most aggressive scenario, the debt limit is breached on November 28th, 2012.  In the most conservative scenario, the debt limit is breached on January 14th, 2013.  In the aggressive scenario, the debt limit becomes a key issue in the 2012 election.  On the other hand, if the debt limit is pushed into January, it becomes an issue just as the fiscal cliff becomes reality.  


Debt Ceiling: Déjà Vu All Over Again? - chart2


As our Healthcare team emphasized in a recent note, the post election period looks potentially very frightening as both the Fiscal Cliff and Debt Ceiling back up on each other within weeks.  The post election period between November 6th, and the deadline for the “Fiscal Cliff” on January 1, 2013 may be more uncertain than last summer when volatility skyrocketed.


The wild card as it relates to some resolution of either the Fiscal Cliff or the Debt Ceiling may well be the increasing likelihood that U.S. Employment and GDP will still be growing at a vulnerable pace.  In effect, it seems highly unlikely that a standoff over the Fiscal Cliff or the Debt Ceiling will materialize in the very short term as either or both items will likely induce a recession.  That, of course, assumes that our politicians will act rationally, which is of course is not very likely in an election year.



Daryl G. Jones

Director of Research





Rethinking Capital

Here’s the deal: Barclays has a mess on its hands that is not going to go away anytime soon no matter how many executives resign. In fact, the LIE-BOR situation has been exacerbated if anything and has spread to Germany where Deutsche Bank is now under investigation. What’s going on is that regulators and market participants are beginning to take a good hard look at banks and their tangible common equity relative to total assets.



Rethinking Capital - BANKS capital



Glass-Steagall is long gone. It shouldn’t have been destroyed in the first place. What is happening is a paradigm shift in which the public will demand that Barclays break up its traditional banking unit from its investment banking unit (Barclays Capital).


This trend will continue all over Europe and eventually, may reach the U.S. But think about this for a minute: Barclays currently has a market capitalization of about $20 billion. It has around $2.1 trillion in gross net exposure to derivatives. In other words, the bank is well undercapitalized. We think that should a spinoff occur, Barclays Capital alone would need $20 billion in addition capital, which will be difficult to raise.

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