Bearish Enough?





Bearish Enough? - client talking points




Our quarterly macro themes call takes place today at 11AM and will feature 49 slides in a 40 minute time span followed by anonymous Q&A. We are really fired up to talk about how growth is slowing and how commodity bubbles are bursting. Remember that our friend King Dollar is on a tear and is taking gold, copper and oil down with him.

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



Everyone on the retail side and sellside will argue that if the Dow Jones Industrial Average is up year-to-date, then everything is groovy. Not the case. We are a mere 10 days into the third quarter of the year and check out how bad the three worst performing sectors of the S&P 500 have it:


1.    Industrials (XLI) = down -2.94%

2.    Basic Materials (XLB) = down -2.49%

3.    Energy (XLE) = down -2.12%



That’s a tough question to answer. People are still of the consensus that everything is going to work out in one way or another. The VIX is below 19, so how bad could it really be out there? We are at the start of a breakdown that is part of a bigger, macro-themed picture (see what we did there?) that must be understood. The consensus says the market is “bearish enough” -  we don’t buy that. We can always be more bearish.



Bearish Enough? - asset allocation


Bearish Enough? - assets July11



Bearish Enough? - top long ideas




The bulk of the bad news is on the table following disappointing F2012. Rebased F2013 estimates far more reasonable, and revenues should be supported by our expectations for rising physician utilization, and in the near-term, a flu season that is shaping up as a considerable tailwind.







SS volume accelerated in 1Q12 and employment remains a tailwind to both admissions & mix. We expect acuity to stabilize and births and outpatient utilization to accelerate out of 1Q12, while supply cost management continues as a margin driver and acquisition opportunities remain a source for upside.







The company continues to control its own destiny through investments in all the right areas. We think 30%+ top line and EPS growth for 5+ years. One of its failures, however, has been in penetrating markets outside the US. That will happen. But for now, its failure is a competitive advantage in the face of a strengthening dollar. We like it in sympathy with a LULU sell-off.







Bearish Enough? - three for the road



Tweet of the Day: “Microsoft store directly across from the Apple store. Guess which is full and which is empty?” -@Amaryllis         


Quote of the Day: “The most merciful thing in the world, I think, is the inability of the human mind to correlate all its contents.” –H.P. Lovecraft


Stat of the Day:  Hedge fund withdrawals jump to highest since 2009.





The Macau Metro Monitor, July 11, 2012




The construction of the Zhuhai section of the Guangzhou‐Zhuhai Intercity Railway is scheduled to be complete in September, and a test run will be done in October.  The railway is expected to be open to the public by end of 2012.  The construction of the railway connecting Guangzhou's Sanyanqiao and Zhuhai's Gaolangang will be completed shortly.  Ministry of Railways confirmed its preliminary acceptance and pilot run will be done in October this year.

Watch the Incentives

This note was originally published at 8am on June 27, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Call it what you will, incentives are what get people to work harder.”

-Nikita Khrushchev


Nikita Sergeyevich Khruschchev served as Premier of the Communist Party of Russia from 1958 to 1964. In Russian Communist Party terms, Khrushchev was considered a liberal reformer, especially vis-à-vis his predecessor Stalin.   Although to be fair, a comparison to Stalin is a relatively easy comp in that regard.


The irony of using a quote on incentives from a prominent Communist leader is not lost on me.  Obviously, most attempts at Communism, with China currently being a slight exception, have failed to actually provide the incentives to create economies that are sustainable, flexible, and adaptive.  The root of this is that the actual individuals who underscore any economy do not have the correct incentives in a communist society.


Just imagine, if you will, an economic system in which the harder you work and the more you make, the more the government takes from you.  Sounds crazy, no?  Or perhaps it just sounds a little like the escalated taxation system that we have also developed in the West in which the more you make the more the government takes and then the more they spend.  And then when they can’t take anymore from you without the risk of popular unrest, they just borrow.  Then the governments default and feel shame. 


But I digress.


Contemplating incentives are critical when considering the investment landscape.  As it relates to Europe, one of the more interesting charts I’ve seen recently is that of real euro exchange rates.  The chart was produced by the Peterson Institute for International Economics.  The chart, which is highlighted in the Chart of the Day, indexes real effective exchange rates based on relative labor costs.


This chart shows Germany versus the so called PIIGS – Portugal, Ireland, Italy, Greece, and Spain.  The analysis is staggering in that it emphasizes the massive advantage that Germany gets from having a fixed currency, the euro, across the Euro-zone.  Instead of the currency market acting rational and increasing the value of the German currency, the Germans are given a long term relative advantage by being part of the Euro-zone.


So, on one hand, despite domestic political pressure, Germany is clearly at least somewhat incentivized to protect and sustain the euro.  That said, while the euro does provide Germany with a long term and sustainable economic advantage, the Germans are not incentivized to protect the euro at all costs.  Germany will exist just fine if the euro failed, while for many nations – Italy, Spain, Portugal, Greece, and so on, it will be an unmitigated disaster.  Those nations would effectively be shut out of the international debt markets and would likely experience massive inflation.


Arguable Ray Dalio said this best, when he wrote in a recent note:


“For this reason, we think the popular assumption that the Germans and the ECB (which requires agreement of the key factions within it) will come through with the money to make all these debts good should not be taken for granted. Said differently, we think there are good reasons to doubt that European bank and sovereign deleveragings will be prevented from progressing to the next stage in a disorderly way, without a Plan B in place. This "fat tail" event must be considered a significant possibility.”

As I interpret it, his point is primarily that incentives are not fully in place for Germany and the ECB to provide a carte blanche bailout of Europe.   Therefore, the more likely scenario is that sovereign debt debacle continues in Europe.


And if you don’t want to believe me or Ray Dalio, then take Angela Merkel at her words.  According to reports from last night:


The chancellor told lawmakers a quick move to eurobonds or other forms of joint liability would be constitutionally impossible in Germany and insisted that "supervision and liability must go hand in hand." She said they could only be considered if and when "sufficient supervision is ensured."


Changing topics slightly, this morning we will be launching coverage of the Industrials Sector with Jay Van Sciver.   Hopefully, you won’t hold the fact that he has a Yale degree against him (we certainly don’t).  In addition, he also has over a decade of experience covering Industrials from the buy-side.  Like many of our Sector Heads, he will cover a broad universe and go to where the action is in terms of investable ideas.  In the call today, he is going to discuss some of his investment ideas as well a deep dive on airlines.  Email if you are institutional investor and would like to participate.


Not to totally steal Jay’s thunder, but his initial view of the airlines is not overly positive.  In fact, some airline “stalwarts” such as Delta and United have more than 85% buy ratings from the sell side.   Delta, in particular, is at almost a 52-week high and only 1.2% of its shares are short.   This isn’t totally surprising since Delta is “cheap” on conventional metrics.


Now if this time is totally different for the airlines, Jay may be wrong on his thesis.  That said, it is a little hard to believe that much has changed in this highly competitive industry.  Just like every other period in modern airline industry, management teams are incentivized to shift planes to competitive routes to suck the profits out of those routes and eventually out of the system.


A key catalyst from Jay’s research is the American bankruptcy, which may actually kick start a new bankruptcy cycle.  By the end of Q3, AMR should have lower costs than both Delta and United and these costs will be rapidly passed on to customers.  Since Delta and United cannot rapidly cut costs to compete since many costs involve long tail labor expenses, their profitability will come under increasing pressure in Q3 and beyond. 


I should probably stop there at risk I give away too much and you aren’t incentivized to sign up for Jay’s call at 11am eastern today.  But I will leave you with one quote on airlines from Sir Richard Branson:


“I’ve always said the quickest way to become a millionaire is to start as a billionaire and get into the airline business.”


Of course, Branson has his incentives as well, which are to keep competitors out of the airline business!


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1549-1593, $88.02-93.62, $81.99-82.63, $1.24-1.26, and 1306-1336, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


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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


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