Bringing the Heat

This note was originally published at 8am on July 19, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Midway upon the journey of our life,
I found myself within a forest dark,
For the straight foreward pathway had been lost."

-Dante Aligihieri, “The Inferno”


Keith is out in California this week meeting with some of our subscribers, so instead of getting up at 2am Eastern time he handed me the baton on the Early Look this morning.  As I was riding the train into New York last night, an article in The New Yorker prompted the theme for this note: heat. (By the way, yes I know hockey players from Alberta aren’t supposed to read The New Yorker, but just indulge me this once.)


Whether you are a believer in global warming, or not, this has been one heck of a hot summer.  The temperature hasn’t necessarily created an inferno, like in Dante’s namesake poem, but, yes, it has been quite hot.  In fact, for the month of June the average temperature in the United States was 71.2 degrees Fahrenheit.  This is two degrees higher than the average for the 20th century.  In aggregate, the average June temperature made the last 12 months the hottest year since record keeping began in 1895.


Not surprising, especially for those amateur psychologists amongst us, the upshot of the heat wave is that according to a University of Texas poll more than 70% of Americans now believe in climate change.  This is up from 52% in the winter of 2011 when we had record snows.  If you didn’t know whether the average person reacts to their most proximate stimuli, now you know.


The downside to Mother Nature bringing the proverbial heat is that much of the more agriculturally oriented parts of this country are experiencing droughts.  According to the National Atmospheric and Oceanic Administration, the country is under the most severe drought since 1955.  Currently, 55% of the contiguous United States is in a moderate-to-severe drought. 


So, inferno? Indeed.


The upshot of a drought is that it provides a bullish backdrop for commodity prices.  Former Hedgeye intern Brennan Turner recently retired from professional hockey and now operates a brokerage business for farmers in Western Canada.  As part of his business he writes a morning note to farmers.  In his note from a couple of days ago, he commented that for Canadian farms, because of the drought in the United States, this year could be like three years in one for both yields and revenues.  As they say, there is always a bull market somewhere. 


The more pressing question for most of us, though, is whether the bull market that has been occurring in U.S. equities over the last week plus is sustainable.  Our view, not to mince words, is no.  In fact, yesterday between meetings Keith ducked into a Starbucks and shorted the SP500 in the Virtual Portfolio. So, we are official time stamped on our bearish view.


The first thing that concerns us is volatility.  As is highlighted in the Chart of the Day, every time that volatility has approached the 15-ish level on the VIX over the past three years, the market has put in an intermediate term top.  Volatility is a great proxy for investor sentiment and currently the VIX is at 16.2.  Complacency, just like heat, is officially here my friends.


The second factor that we are concerned about is earnings.  Wall Street analysts are quite good at engineering earnings “beats”.  This quarter is clearly no exception since as of yesterday 73% of companies in the SP500 had “beat” earnings for the quarter.   Even if the market is excited by this, those of us who are quantitative in nature should not be surprised.


Coming in the Q2 2012 top down earnings estimates for the SP500 were projecting a -2.1% year-over-year decline in earnings.  How’s that for the soft bigotry of low expectations?  So sure, companies are beating very low expectations, but more concerning for the equity market is future earnings estimates.  Currently, earnings growth for Q1 and Q2 of 2013 is expected to be 14%.  Yah, I don’t think so.  Both a lack of real earnings growth and declining future earnings are not a positive catalyst for equities.


Finally, one of our last major worries is Europe.  Just as the Eurocrats finally go on their lengthy summer vacations, the European sovereign debt markets have again taken a turn for the worse.  Overnight, the Spaniards held an auction for 2-5-7 year bonds and bond buyers didn’t exactly bringing the buying heat.  To be precise, bid-to-cover was an abysmal 1.9x versus 4.3x just over a month earlier on June 7th.   Meanwhile the yield on the Spanish 10-year bond is once again back above the 7% handle.


Not to put wood on my bearish inferno this morning, but for those of you who are interested in stock specific ideas our Restaurant research team, led by Howard Penney, is hosting a conference call on Darden Restaurants this morning.  I won’t give away their punch line, but the title of the call is: “Is Darden Too Big Too Perform?” I think you get the drift.  If you are institutional investor and interested in listening in, ping


Our immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Germany’s DAX, and the SP500 are now $1566-1594, $101.29-106.98, $82.88-83.93, $1.21-1.23, 6499-6752, and 1354-1375, respectively.


Good luck out there today,


Daryl G. Jones

Director of Research


Bringing the Heat - Chart of the Day


Bringing the Heat - Virtual Portfolio


TODAY’S S&P 500 SET-UP – August 2, 2012

As we look at today’s set up for the S&P 500, the range is 23 points or -0.88% downside to 1363 and 0.79% upside to 1386. 











  • ADVANCE/DECLINE LINE: on 08/01 NYSE -779
    • Down  versus the prior day’s trading of -528
  • VOLUME: on 08/01 NYSE 1025.21
    • Increase versus prior day’s trading of 15.46%
  • VIX:  as of 08/01 was at 18.96
    • Increase versus most recent day’s trading of 0.16%
    • Year-to-date decrease of -18.97%
  • SPX PUT/CALL RATIO: as of 08/01 closed at 1.26
    • Up from the day prior at 0.97


  • TED SPREAD: as of this morning 35
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.52%
    • Unchanged from prior day’s trading
  • YIELD CURVE: as of this morning 1.29
    • Down from prior day’s trading at 1.30 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: Bank of England rate decision
  • 7:30am: Challenger Job Cuts Y/y, July, (prior -9.4%)
  • 7:45am: ECB rate decision
  • 8am: RBC Consumer Outlook Index, Aug. (prior 47)
  • 8:30am: Initial Jobless Claims, July 28, est. 370k (prior 353k)
  • 8:30am: Continuing Claims, July 21, est. 3.29m (prior 3.29m)
  • 9:45am: ISM New York, July (prior 49.7)
  • 9:45am: Bloomberg Consumer Comfort, July 29 (prior -38.5)
  • 10am: Factory Orders, June, est. 0.5% (prior 0.7%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural gas change
  • N/A: ICSC Chain Store Sales Y/y, July (prior 0.2%) 


    • House meets at 10am; Senate in session
    • Federal Energy Regulatory Commission hosts regulators from 11
    • Asia-Pacific nations for discussion on grid reliability, renewable sources of energy and market regulation, 8:30am
    • House Financial Services subcommittee on domestic monetary policy will hold a hearing to examine parallel currencies and the emergence of alternative forms of money, 10am
    • Senate Banking subcommittee on securities, insurance and investment on “remaining challenges” in the tri-party repo market, 9am
    • House Oversight and Government Reform Committee hearing on “IRS: Enforcing ObamaCare’s New Rules and Taxes”
    • House Energy and Commerce Committee panel hearing on difference for energy development on federal land compared with private property production, 9am
    • House Energy and Power subcommittee holds forum on the Clean Air Act, 2pm
    • Interior Department Acting Inspector General Mary Kendall testifies about review of 2010 offshore drilling moratorium, compliance with subpoenas at House Natural Resources Committee, 10am
    • House transportation committee will hold a hearing to look at contracting out food service on Amtrak, 10am
    • Renewable Fuels Association, Growth Energy hold briefing to discuss drought ethanol production, 12pm


  • ECB President Draghi risks market wrath as pressure for ECB action grows
  • Retailers report sales data for July
  • Knight revenue hit could be $170m after tech issues affected mkt-making unit, JPMorgan says
  • California says tax rev. "at risk" from Facebook’s price drop
  • San Bernardino, Calif., files for bankruptcy protection
  • Coca-Cola said to explore bid for F&N’s beverage business
  • Kinross Gold fires CEO Tye Burt, replacing him with Rollinson
  • Yahoo sued after disclosure of 450k user mames, passwords stolen
  • Apple to seek sanctions for Samsung release in patent trial
  • Sony cuts profit forecast on slowing demand, stronger yen
  • Sharp widens FY net loss forecast to 250b yen, to cut 5k jobs this FY
  • Halozyme immune deficiency drug rejected by FDA as clinical trials halted
  • Murdoch’s A$2b TV bid cleared by Australian regulator
  • Eloqua raises $92m, pricing software IPO at top of range
  • Madoff Trustee sues N.Y. Attorney General to stop Merkin accord


    • Becton Dickinson (BDX) 6am, $1.53
    • Cigna (CI) 6am, $1.42
    • Fortress Investment Group LLC (FIG) 6am, $0.09
    • Quanta Services (PWR) 6am, $0.32
    • Time Warner Cable (TWC) 6am, $1.38
    • Spectra Energy (SE) 6:30am, $0.36
    • Gildan Activewear (GIL CN) 6:33am, $0.67
    • Teradata (TDC) 6:55am, $0.65
    • Cardinal Health (CAH) 7am, $0.72
    • Duke Energy (DUK) 7am, $0.97
    • Enbridge (ENB CN) 7am, $0.38
    • Henry Schein (HSIC) 7am, $1.10
    • Lear (LEA) 7am, $1.29
    • Scripps Networks Interactive (SNI) 7am, $0.87
    • Xcel Energy (XEL) 7am, $0.36
    • Xylem/NY (XYL) 7am, $0.49
    • Teva (TEVA) 7am, $1.28
    • MGIC Investment (MTG) 7am, $0.55
    • Plains Exploration & Production Co (PXP) 7am, $0.64
    • Beam (BEAM) 7:01am, $0.54
    • DIRECTV (DTV) 7:30am, $1.14; Preview
    • General Motors Co (GM) 7:30am, $0.75; Preview
    • Parker Hannifin (PH) 7:30am, $1.91
    • SCANA (SCG) 7:30am, $0.49
    • Sealed Air (SEE) 7:30am, $0.35
    • TECO Energy (TE) 7:30am, $0.35
    • Ariad Pharmaceuticals (ARIA) 7:35am, $(0.28)
    • Ameren (AEE) 7:42am, $0.62
    • Apache (APA) 8am, $2.53
    • Kellogg Co (K) 8am, $0.84
    • Pinnacle West Capital (PNW) 8am, $1.05
    • Spectra Energy Partners (SEP) 8am, $0.40
    • Valeant Pharmaceuticals International (VRX CN) 8am, $0.98
    • CenterPoint Energy (CNP) 8:15am, $0.25
    • Clorox (CLX) 8:30am, $1.27; Preview
    • Denbury Resources (DNR) 8:30am, $0.33
    • Rowan Cos Plc (RDC) 8:30am, $0.49
    • Sempra Energy (SRE) 9am, $0.82
    • Great-West Lifeco (GWO CN) 10:50am, C$0.52
    • Inter Pipeline Fund (IPLu CN) 11:20am, C$0.25
    • IGM Financial (IGM CN) 12:13pm, C$0.75
    • American International Group (AIG) 4pm, $0.60
    • Kraft Foods (KFT) 4pm, $0.66
    • SBA Communications (SBAC) 4pm, $(0.16)
    • Southwestern Energy Co (SWN) 4pm, $0.26
    • American Capital Agency (AGNC) 4:01pm, $1.26
    • CBS (CBS) 4:01pm, $0.59
    • Kodiak Oil & Gas (KOG) 4:01pm, $0.10
    • Pitney Bowes (PBI) 4:01pm, $0.49
    • Sunoco (SUN) 4:01pm, $0.52
    • Molycorp (MCP) 4:01pm, $0.08
    • LinkedIn (LNKD) 4:02pm, $0.16
    • Activision Blizzard (ATVI) 4:05pm, $0.12
    • Fluor (FLR) 4:05pm, $0.92
    • PerkinElmer (PKI) 4:05pm, $0.49
    • SandRidge Energy (SD) 4:05pm, $0.01
    • ON Semiconductor (ONNN) 4:05pm, $0.14
    • Rovi (ROVI) 4:05pm, $0.36
    • Apartment Investment & Management Co (AIV) 4:15pm, $0.41
    • Microchip Technology (MCHP) 4:15pm, $0.48
    • Public Storage (PSA) 5:03pm, $1.51
    • Agrium (AGU CN) Post-Mkt, $5.45
    • Liberty Global (LBTYA) Post-Mkt, $0.16



GOLD – all that glitters is not what the Fed’s groupies were begging for yesterday; no drugs = Dollar up, gold down. The Correlation Risk on that relationship is running at -.7--.8; so no surprise there. TREND and TAIL resistance for Gold remain overhead at 1624 and 1679. 

  • Drought Added to Fedorov Tasks as Russia Joins WTO: Commodities
  • London Overtakes New York as Brent Oil Beats WTI: Energy Markets
  • Iran Loses $133 Million a Day on Embargo as Oil Buoys Obama
  • China Set to Cut Corn Imports as Drought Spurs Record Price
  • Oil Rises a Second Day as U.S. Inventories Decline, ECB Meets
  • Gold Climbs for First Time in Four Days as Korea Buys, ECB Meets
  • Grains Drop as U.S. Rains May Ease Drought and EU Harvests Crops
  • Copper Swings Between Advances, Declines Amid ECB Speculation
  • Coffee Rises in London as Supplies May Be Limited; Sugar Falls
  • Mitsubishi, Mitsui Profits Slide on Iron Ore, Coal Price Slump
  • South Korea Raises Gold Reserves Third Time Since June Last Year
  • South Korea May Stockpile Grains Overseas to Stabilize Costs
  • Monsanto Wins $1 Billion Patent-Infringement Verdict From DuPont
  • Factory Slowdown Means China Silver Need Drops: Chart of the Day
  • Looming Drought in India Risks Sugar Exports as Prices Rally
  • Cocoa Butter Ratios Said to Climb as Processors Use Stockpiles










SPAIN – 1st stock market to back off its drug lord squeeze is the most unhealthy one; watching the IBEX and the Euro very closely here as they both back off TRADE lines of 6726 and $1.23 resistance; stealth signals that Draghi’s bluff will have big impact, if in fact he’s bluffing (immediate-term downside in the Eurostoxx50 of 3.5% if he is).






ASIA – once we get through the whatever part from Draghi this morning, the drug addicts are going to have a hard time convincing all of Asia that economic growth slowing wont slow faster w/ Brent Oil at $106; China straight back down last night (-14% since May); Japan down -16% since March; and KOSPI backs off TREND resistance again, hard.











The Hedgeye Macro Team


Market Slavery

“Nature has made no man a slave.”



What would the #OldWall’s manic media mouthpieces do without this week’s central planning events? What would we all do without the drugs that promise to suspend economic gravity? What would we wake up to this morning if markets were actually free?


Alcidamas was a popular Greek philosopher in 4th century BC who Victor Davis Hanson cites at the end of Chapter 8 in “The Soul of Battle.” That quote precedes an excellent chapter in human history titled “And All of Greece Became Independent and Free.”


It’s too bad that when we use the word free in today’s marketplace, the first thing that comes to mind is getting a sticker.


Back to the Global Macro Grind


US Stocks closed down for the 7th day in the last 9 yesterday, but no worries, we have a central plan on tap at 745AM EST that is going to whip this sucker right back up to a level where perma-bull marketers can say “but the market is up year-to-date.”


Everything in the land of nodding (other than where the entire street gets paid - fund flows, volumes, and performance), is just dandy right now. Buy, hold, and pray.


I have absolutely no idea what this conflicted and compromised central planner is going to tell us today. All I can assure you is that there’s at least -3.5% downside in the EuroStoxx50 and a stiff move to $1.20 in the EUR/USD if he doesn’t deliver the drugs.


Bernanke didn’t crack open the cocaine lines yesterday, and for that, I give him a golf clap. What his pseudo sober decision did to the rest of Global Macro markets was proactively predictable:

  1. US Dollar went straight back up (+0.7% on the day, closing above an important TRADE line of $82.95 support)
  2. Gold went straight back down (down a full 1% where we covered our short position at $1603 support)
  3. US Stocks went down, then up, then back down as underperforming hedgies got whipped around, again

What happens next?


I have no idea. Once I get Draghi’s Italian Job, I’ll let you know. Until then I can only wait and watch for “whatever” as I score ranges, probabilities, and risk managed scenarios – like I do every morning.


On that front, here’s a morning dump for you in US markets:

  1. US Dollar Index remains in a Bullish Formation (bullish on all 3 of our risk management durations, TRADE/TREND/TAIL)
  2. US Treasury Yields (10yr) remain in a Bearish Formation (bearish on all 3 of our risk management durations)
  3. US Treasury Yield Spread (10s minus 2s) = +129bps wide and continues to compress; very bearish economic signal
  4. SP500 immediate-term risk range of 1, with its intermediate-term TREND line right in the middle of that (1376)
  5. US Equity Volatility (VIX) remains in a Bullish Formation with intermediate-term TREND support = $17.62
  6. US Equity Volume studies are as nasty as I have ever measured them in my career (+16% on yesterday’s down move)
  7. Russell2000 negatively diverging from SP500, already bearish TRADE and TREND, closing down -1.7% yesterday
  8. S&P Sector Studies continue to flag on 3 Sectors (out of the 9 majors) as buys (Healthcare, Consumer Staples, Utilities)
  9. S&P Sectors recently snapping both TRADE and TREND lines = Consumer Discretionary, Transports, and Basic Materials
  10. Energy (which is asset price inflation, not growth) continues to be the best performer on a 1-month duration

On that last point, Keynesian central planners get their tighty whities in a bunch. I think that’s primarily because it implies that they themselves are perpetuating #GrowthSlowing by infusing a market wedgie of expectations that jams commodity prices higher.


#tighty #whitie #wedgie – none of those words spell checked on my PC, weird.


What might also seem a bit odd to the beggars for more of what isn’t working is what’s going on in the rest of the world this morning:

  1. Chinese Stocks, after having 1 up day, went straight back down last night (Bearish Formation, down -14% since May)
  2. Japanese Equities remain no volume/no bid (Bearish Formation, Nikkei225 down -16% since March)
  3. South Korean Equities (KOSPI, great leading indicator) backed off TRADE resistance of 1881 again last night

Oh, right – the rest of the world, per the Fed and ECB, is really the West. Damn them people in the East who eat inflated food and consume derivatives of $106/barrel Brent Oil.


As we beg the Italian for more of what the British are chastising Chinese swimmers for using, let’s get a medal count:

  1. China = 30 medals
  2. USA = 29 medals
  3. Japan = 17 medals

Not sure what that means for Global Macro other than China is not Japan.


In the spirit of winning, let’s just play the game that’s in front of us out there today. At the end of the day, Market Slavery to the next central plan or not, we can fight this for a lot longer than our overlords can remain in office.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, and the SP500 are now $1, $105.29-107.84, $82.35-84.03, $1.20-1.23, 6, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Market Slavery - Chart of the Day


Market Slavery - Virtual Portfolio


The Macau Metro Monitor, August 2, 2012




According to sources from Business Daily, Sands regained the second spot in the monthly casino gross gaming revenue ranking in July at 22% share.  Galaxy's share came in third at 19%.  SJM Holdings Ltd remained the market leader, with a stable 26% stake.  The market shares for the other operators are as follows:  MPEL-13%, WYNN-11% and MGM-9%.




Junket operator Asia Entertainment & Resources Ltd (AERL) announced that beginning next month it will be changing its remuneration model to a revenue sharing model for all of its three VIP rooms--at StarWorld, Galaxy Macau, and Venetian Macau.  Currently, all AERL VIP rooms are under a fixed commission model of 1.25% of rolling chip turnover.  By shifting to a revenue sharing model, the company says it believes it can generate commission of “over 1.30% of rolling chip turnover, and in addition, be able to negotiate on additional allowances and other incentives, thus increasing revenue and ultimately, net income,” it explained in a press release.



Singapore visitation increased 8.77% to 1,146,246 visitors in May.



Will the Debt Ceiling Be Déjà Vu All Over Again?

Conclusion: Our analysis shows us that another breach of the debt ceiling is imminent later this year.  In 2011, the SP500 had a drawdown of -16.8% around the debt ceiling debate.

Last summer during the debt ceiling debate, the U.S. equity markets were volatile to say the least.  In the chart below, we highlight the VIX and the SP500 from July 22nd to August 8th 2011, which shows the massive increase in volatility and downside in equities that occurred as the debt ceiling debate, and a potential breach, reached its fervor.  In fact, in that period the SP500 had -16.8% drawdown.


Will the Debt Ceiling Be Déjà Vu All Over Again? - spx.vix.2011


Our Healthcare Team has done a substantial amount of work on the next potential breach of the debt ceiling.  In the table below, they come up with three scenarios – aggressive, base case, and conservative – that outline potential dates for the next breach in the debt ceiling.  In the aggressive scenario that date is November 28th, in the base case that date is December 11th, and finally in the conservative case the breach doesn’t occur until January 14th of 2013. 


Will the Debt Ceiling Be Déjà Vu All Over Again? - chart2


With the most recent budget data from the Treasury department, we are increasingly comfortable with our base case scenario in which the breach occurs before the end of the year.  Specifically, the Treasury indicated they will issue $276 billion of debt in calendar Q3 of 2012 and $316 billion in calendar Q4 of 2012.  So in total, the projected issuance will take the overall debt balance to $16.4 trillion, or $53 billion above the debt ceiling.


The debt ceiling debate last summer was about as contentious as possible and finally did reach a compromised solution, though not after creating massive confusion and uncertainty in the markets.  Given that this is an election year, it is unlikely that this issue even gets touched until after the fall elections that occur on November 6th 2012.  Thereafter, the new government will have 22 days to avert another debt ceiling crisis in our aggressive scenario.  Reaching an agreement quickly in this period is unlikely unless one party controls both the executive and legislative branches.


The electoral scenario under which either the Democrats or Republicans control both the Presidency and Congress currently appears very unlikely.  As it relates to the Presidency, Obama currently has a meaningful lead in the Hedgeye Election Indicator, he is at 57.5% on Intrade, and has a two point lead versus Romney in the real clear politics poll aggregate.  Conversely, in the most Generic Congressional poll from Rasmussen, the Republicans are up by three points.  This is validated by Intrade as well, as Intrade has the Republicans at a 51% probability of controlling the Senate and 82% of controlling the House of Representatives.


Will the Debt Ceiling Be Déjà Vu All Over Again? - Chart3


Clearly, a split part government is a likely scenario post the elections this fall.  As a result, so is deadlock on major issues, such as the debt ceiling.  As Yogi Berra once said, “It’s déjà vu all over again.”  This is increasingly likely to be the case with debt ceiling later this fall. 




Daryl G. Jones

Director of Research



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