No Reaction







So the Fed basically extended low rates until 2014 yesterday and the market didn’t think much of it. Perhaps they were dealing with the market making debacle over at Knight Capital OR perhaps they were waiting for the real catalyst, which is Mario Draghi amd the ECB. It really matters what happens today at his meeting because if you’ll recall, Draghi is ready to do “whatever” it takes. Too bad they didn't cut rates and said they "may" do open market operations. That doesn't inspired confidence; European stocks hopped into  a freefall afterward.




The Keynesian central planners love to get their tightie whities in a bunch. Perhaps they are finally wising up to the fact that they are the ones perpetuating slowing growth and have gotten exactly where we didn’t want to be. They are realizing that the family on welfare is not so keen on high fuel prices and higher food prices, despite the government assistance. It’s like one of those movies about the Civil War where someone gets shot: we’re going to have to bite down hard and pull through the pain before we’re back to normal.




China’s stock market has basically been going down since April. It tried to go up yesterday but people decided they didn’t really like that. They’re down -14% since May, which doesn’t exactly inspire confidence. The country might have







 Cash:                  Flat                        U.S. Equities:    DOWN


 Int'l Equities:   Flat                        Commodities:    Flat


 Fixed Income:  UP                         Int'l Currencies: Flat









This company is transitioning from cash burn to $75mm annual free cash flow generation thanks to completion of a reimaging program and refranchising of JIB units. Qdoba is the leverage; a maturing and growing store base will bring higher margins. We see 8.5% upside over the next 6-9 months.

  • TAIL:      LONG            



The former Liz Claiborne (LIZ) is on the path to prosperity. There’s a fantastic growth story with FNP. The Kate Spade brand is growing at an almost unprecedented clip. Save for Juicy Couture, the company has brands performing strongly throughout its entire portfolio. We’re bullish on FNP for all three durations: TRADE, TREND and TAIL.

  • TAIL:      LONG



We continue to expect outpatient utilization to pick up in 2H12 alongside stabilization in acuity with ortho and cardiac/ICD volumes supporting both pricing and inpatient admissions growth. Births should serve as a tailwind into year-end, recent and prospective acquisitions offer some upside to 2012/13 numbers and the in place repo offers some earnings flexibility. With European and Asian growth slowing, we like targeted domestic revenue exposure as well.

  • TAIL:      LONG







“KCG owns substantial minority stake in Direct Edge, which has been exploring capital-market opportunities for some time...” -@JustinRBLT




“An economist is a man who states the obvious in terms of the incomprehensible.” – Alfred A. Knopf




$440 million. The loss Knight Capital (KCG) will take from yesterday’s market structure breakdown.


GIL: Early Read


Conclusion: An uncharacteristically mundane quarter for GIL. A penny below consensus yet a penny above GIL’s guidance and the business appears to be in decent shape. The callout is the fact that for the second consecutive quarter GIL is increasing the opacity of its underlying business. Volatility is headed higher in this name. But despite increased opacity, the reality is that the acquisitions and less competition from HBI will give GIL more tailwinds than headwinds in the coming quarters.

The company timed up its new acquisition (Anvil) beautifully last quarter just as Gold Toe is rolling off. This quarter we have GIL announcing that it will no longer report data for the CREST report – just as pricing in the industry is hitting an inflection point. With cotton prices remaining low, manufacturers will be forced to lower pricing now that cotton costs have eased. Some will inevitably hold out longer than others creating price dislocation over coming quarters. The good news is that industry demand is up +4.3% offsetting lower prices this quarter, and Hanesbrands has ceded over $100mm in sales in this space (wide open for GIL). But volatility in this name will be headed higher with the intra-quarter read no longer available.

With 71.3% share in the U.S. Distributor market coming in above the 70% the company expected there’s limited upside for further share gains in this market. As such, this move probably makes sense, but the timing makes it even more difficult given that the company has been layering on acquisitions just at the time when we’d otherwise be looking at the real underlying organic growth. Gold Toe and Anvil accounted for 2-3pts and 5-6pts of growth in Q3, with core growth standing at a more modest modest 4%-5%. In terms of driving sales, the pricing dynamic is arguably at its most critical point over the last few years.


To GIL’s credit, despite slightly lighter than expected gross margins down -437bps vs -331bpsE, the sales/inventory spread in the quarter improved 12pts to +7%. This comes after five consecutive quarters of a negative spread which is bullish for gross margins at the same time product costs are swinging to a tailwind.

As for the FY outlook, no change to top or bottom-line expectations of note implying status quo for Q4.


Despite the opacity, the reality is that the acquisitions and less competition from HBI will give GIL more tailwinds than headwinds in the coming quarters.


GIL: Early Read - GIL






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


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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

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