TODAY’S S&P 500 SET-UP – August 14, 2012

As we look at today’s set up for the S&P 500, the range is 13 points or -0.79% downside to 1393 and 0.13% upside to 1406. 











  • ADVANCE/DECLINE LINE: on 08/13 NYSE -799
    • Down versus the prior day’s trading of 195
  • VOLUME: on 08/13 NYSE 484.08
    • Decrease versus prior day’s trading of -14.49%
  • VIX:  as of 08/13 was at 13.70
    • Decrease versus most recent day’s trading of -7.06%
    • Year-to-date decrease of -41.45%
  • SPX PUT/CALL RATIO: as of 08/13 closed at 1.54
    • Down from the day prior at 1.64 


  • TED SPREAD: as of this morning 33
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.67%
    • Increased from prior day’s trading of 1.66%
  • YIELD CURVE: as of this morning 1.40
    • Unchanged from prior day’s trading 

MACRO DATA POINTS (Bloomberg Estimates)

  • 7:30am: NFIB Small Business, July, est. 91.6 (prior 91.4)
  • 7:45am/8:55am: ICSC/Redbook weekly retail sales
  • 8:30am: Producer Price Index M/m, July, est. 0.2% (prior 0.1%)
  • 8:30am: Advance Retail Sales, July, est. 0.3% (prior -0.5%)
  • 10am: IBD/TIPP Economic Optimism, Aug., est. 46.9 (prior 47)
  • 10am: Business Inventories, June, est. 0.2% (prior 0.3%)
  • 11am: Fed to purchase $4.5b-$5.5b notes due 8/15/20-5/15/22
  • 11am: U.S. Treasury announces plans for auctions of 3-mo., 6-mo., 1-yr. bills; 5-yr. TIPS
  • 11:30am: U.S. to sell $25b 15-day cash management bills in addition to weekly auction of 4-wk bills
  • 4:30pm: API inventories 


    • House/Senate not in session
    • President Obama speaks in Oskaloosa, Iowa. 12:25pm, Marshalltown, Iowa. 4:45pm
    • Mitt Romney wraps up 4-day bus tour in Beallsville, Ohio. Noon
    • NJ Gov. Chris Christie to be keynote speaker at Republican convention, AP says
    • Judge may rule this week on Pa. voter identification law
    • State primary elections in Minn., Conn., Fla., Wis.


  • U.S. retail sales probably rose 0.3%, 1st time in 4 mos.
  • Euro-area GDP contracts 0.2% in 2Q from prior quarter
  • German 2Q GDP slowed less than forecast, France avoids GDP drop
  • Standard Chartered CEO visits New York, may attend hearing
  • Groupon tumbles after 2Q rev. misses ests.
  • Pfizer buys over-the-counter Nexium rights from AstraZeneca
  • New York Fed finds 63% of small firms able to get some credit
  • Doug Whitman denies trading on Polycom tips from Roomy Khan
  • Peregrine CEO Wasendorf indicted on 31 false-statement counts
  • Kodak, creditors extend deadline for digital patents auction
  • Mercedes, Lexus, Audi luxury sedans earn poor crash-test ratings
  • 13F quarterly filing deadline today


    • Home Depot (HD) 6am, $0.97
    • Towers Watson (TW) 6am, $1.24
    • Flowers Foods (FLO) 6:26am, $0.22
    • First Majestic Silver (FR CN) 7am, $0.20
    • Michael Kors (KORS) 7am, $0.20
    • Estee Lauder (EL) 7:30am, $0.16
    • Dick’s Sporting Goods (DKS) 7:30am, $0.64
    • Nationstar Mortgage Holdings (NSM) 7:30am, $0.34
    • Baytex Energy (BTE CN) 8am, C$0.28
    • Saks (SKS) 8am, $(0.09)
    • TJX Cos (TJX) 8:34am, $0.55
    • Valspar (VAL) 8:42am, $0.96
    • Alacer Gold (ASR CN) 9:28am, $0.10
    • Bob Evans Farms (BOBE) 4:01pm, $0.60
    • JDS Uniphase (JDSU) 4:04pm, $0.12
    • Jack Henry & Associates (JKHY) 4:05pm, $0.46
    • Myriad Genetics (MYGN) 4:05pm, $0.34
    • Boardwalk Real Estate Investment Trust (BEIu CN) 5:46pm, $0.74
    • China Gold International Resources (CGG CN) Post-Mkt, NA
    • HudBay Minerals (HBM CN) Post-Mkt, $0.08
    • Pan American Silver (PAA CN) Post-Mkt, $0.33



COPPER – tough to fool the Doctor (or bond yields) here on no-volume inflation rallies – Copper continues to break-down, across durations, failing at 3.43/lb TRADE line support, again. 

  • Silver Hoard Near Record as Hedge-Fund Bulls Recoil: Commodities
  • Oil Supplies Drop to Four-Month Low in Survey: Energy Markets
  • Oil Rises for First Time in Three Days on Supply Drop Forecast
  • Soybeans, Corn Advance as Drought May Persist in U.S. Midwest
  • Copper Advances as Germany’s Economic Growth Exceeds Estimates
  • Gold Gains in London as Weaker Dollar Spurs Investment Demand
  • Robusta Coffee Falls as Indonesian Supply May Climb; Sugar Rises
  • Fracking Hazards Obscured in Failure to Disclose Wells: Energy
  • Lonmin Mine Violence Kills Nine, Including Two Policemen
  • Philippines Agency Plans to Sell Mining Assets: Southeast Asia
  • Cotton Harvest in Australia Seen Climbing to Record on Water
  • Natural Gas Trades Near Six-Week Low as Cooler Weather Forecast
  • Peregrine Chief Wasendorf Indicted on 31 False-Statement Counts
  • Chalco Will Buy 35.3% Stake in Ningxia Power for $318 Million
  • Japan Seeks to Buy 70,865 Tons of Milling Wheat in Tender
  • Japan’s Executives Swelter in Solidarity to Spare Electricity










GERMANY – some media fanfare on a “better than expected” German GDP print; in other news, Germany’s GDP falls precipitously q/q from +1.7% y/y in Q1 to +0.5% in Q2 – Growth Slowing as inflation accelerates again here in August (probably why German ZEW for AUG was a -25.5 vs -19.7 JULY).


UK – can you stay stagflation? Say it slowly as the FTSE slowly makes lower no-volume highs post the Closing Ceremonies. UK CPI rises to +2.6% y/y in July vs +2.3% in JUN, consistent with what most countries should print JULY/AUGUST. Brent Oil $114 matters.














The Hedgeye Macro Team


2007 Redo

“This book isn’t based on academic theories. It’s based on our experience.”

-David Heinemeir Hansson


What a difference the last 5 years makes. Or did it? The aforementioned quote comes from the introduction of one of my favorite leadership and innovation books. Some of you already have it on your bookshelf. I’ve cited it often since founding the firm – REWORK, by Jason Fried and Victor Heinemeier Hansson.


If you are jammed for time into summer’s end, I read this book in 12 minutes to our team at a workshop meeting – lots of pictures. We like pictures. We’ll show you one of our risk management favorites in today’s Chart of The Day.


Re-work, Re-think, Re-do. Sadly, when it comes to Old Wall Street’s forecasting and risk management processes, there hasn’t been much of that going on in the last 5 years. Instead, broken sources keep re-cycling the same old stuff that sucked people in during Q3 of 2007.


Back to the Global Macro Grind


2007? Pardon? Weren’t we talking about Q308 similarities? Or was it the 1930s? 1987?


Here are 3 Big Macro things that are precisely like 2007:

  1. SALES: GDP Growth led Corporate Revenue Growth Slowing; by Q307, companies were right confused
  2. MARGINS/EARNINGS: stocks were “cheap” if you used peak margins and peak earnings assumptions for 2008
  3. VOLATILITY: US Equity market Volatility got slammed by “rumors” of Bernanke bailouts, rate cuts, etc.

Fast forward to Q3 of 2012:

  1. SALES: Same pattern – but Global GDP growth slowing faster now than it did then (China especially)
  2. MARGINS/EARNINGS: perma-bulls are still using peak margins and prior 2007 all-time high in EPS to justify “cheap”
  3. VOLATILITY: yesterday marked the 1st time since 2007 since the VIX dropped below 14

Since the VIX dropped below 14 eighty nine (89) times throughout 2007, the good news is that you probably have plenty of time to get out of stocks before everyone else has to. There are only 30,000 funds chasing beta at this point.


One question on that: after the shorts have all covered how, precisely, is that going to happen without volume? Probably just a silly risk management question; NYSE volume was only down -42% versus my intermediate-term TREND duration average yesterday. That’s gotta be bullish for someone. Just not Tommy Joyce.


Enough about price, volume, and volatility already – who cares about 3-factor risk when simple 1-factor Fisher Price point and click 50-day moving averages tell us all we need to know in the rear-view mirror?


Let’s deal with my personal baggage instead…


Not that I took it personally, but since I got fired for being “too bearish” in October 2007, I do remember the proceeding birth of my 1st son and the vision for Hedgeye quite vividly. So do the perma-bulls. The SP500 dropped -4.4% in November 2007.


And, that was it.


That was it for the storytelling. That was it for the “world is awash with liquidity” thing. That was it for the academic theory that “shock and awe” rate cuts to zero were going to free we centrally planned beasts from the shackles of our own thoughts.


Where to next?


The only thing I can predict, with 100% certainty, from here is that this is not 2007. This is 2012. And next year will be 2013.


What will get #GrowthSlowing to stop slowing? Will it be a bird or a plane? Or will Keynesian Economics finally provide the long lasting elixir of life that its group-thinkers have so often promised (growth) but never delivered?


I don’t know.


What I do know is that if you are buying US stocks at lower long-term highs (-10.3% versus October 2007 and -1.1% versus April 2012) at anything < 14 VIX, you either think 1990s growth is coming back and/or that this all ends well.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, and the SP500 are now $1, $110.36-115.42, $81.76-82.59, $1.23-1.24, 6, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


2007 Redo - Chart of the Day


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President Obama's Reelection Chances

President Obama is undeterred by the likes of Paul Ryan. His chances of being reelected increased by 80 basis points (0.8%) to 59%, the highest reading since May according to the Hedgeye Election Indicator. That could soon change as Paul Ryan and Mitt Romney begin to pounce on undecided voters in battleground states.


Hedgeye developed the HEI to understand the relationship between key market and economic data and the US Presidential Election. After rigorous back testing, Hedgeye has determined that there are a short list of real time market-based indicators, that move ahead of President Obama’s position in conventional polls or other measures of sentiment.


Based on our analysis, market prices will adjust in real-time ahead of economic conditions, which will ultimately shape voters’ perception of the Obama Presidency, the Republican candidates and influence the probability of an Obama reelection.  The model assumes that the Presidential election would be held today against any Republican candidate. Our model is indifferent toward who the Republican candidate is as the sentiment for Obama and for any Republican opponent is imputed in the market prices that determine the HEI. The HEI is based on a scale of 0 – 200, with 100 equating to a 50% probability that President Obama would win or lose if the election were held today.


President Obama’s reelection chances reached a peak of 62.3% on March 26, according to the HEI. Hedgeye will release the HEI every Tuesday at 7am ET until election day November 6.



President Obama's Reelection Chances - HEI



Daryl Jones, Director of Research at Hedgeye, appeared on CNBC this afternoon to discuss what’s going on with stocks. He talked about recent market gains Groupon (GRPN) earnings. He discussed the company’s business model and low barrier to entry. 

PETM (Correction): Mind the Commodity Exposure

Takeaway: $PETM's commodity inputs on its food biz (53% of revs) are ripping due to the drought. That's not helping its intermediate-term mgn outlook.

Conclusion: The last time PETM had a big increase in food as a percent of mix, margins were off by 110bps. It has diversified into services since, but the run in relevant commodities is a strong consideration at peak profitability and productivity levels. Not an outright short. But keep an eye on these risk factors if you have exposure.



While PETM might not be an obvious company to watch as it relates to input price exposure, history shows that we need to keep tabs.  About 53% of PETM’s business is in the food category, which is the primary traffic driver and is significantly impacted by corn, chicken and beef prices.  The company can pass through some of this, as people obviously still have to (and want to) feed their pets.


But the last time there was a meaningful increase in food as a percent of mix (from 53% to 57% in ’06-08) EBIT margins came down from 8.0% to 6.9%. That might not seem like a lot, but PETM took comps higher by relying on categories other than food (services such as grooming, adoptions, training, vet services), has since recovered that margin loss by a factor of 2x, and is now sitting at peak margins.


With relevant commodities up 20%+ yy – which is not being helped by the drought – we need to be mindful of the sustainability of PETM’s current comp level at its existing margin trajectory.


The Street has generally not taken a stand on PETM in either direction headed into Wednesday’s print. The consensus is at the high end of management’s $0.61-$0.65 guidance, short interest is around 7-8% of the float (reasonable), and there’s a fairly even dispersion between Buy and Neutral ratings.


In the grand scheme of big box retail, this is actually a decent-enough business that is managed well. The category is one where sales are fairly predictable, it is not difficult to differentiate from the Wal-Marts of the world, inventory is easier to manage ( fish, parakeets and hamsters die at a lesser rate than apparel inventory goes out of fashion). Furthermore, compares don’t get tough on the top line for another two quarters. So PETM hardly screens as a great short here.


But given current productivity and profitability levels, we need to keep in mind any margin headwinds that are building in its cost base.



Figure 1: There's little evidence that PETM can pass through enough commodity exposure to consumers to preserve margins.

PETM (Correction): Mind the Commodity Exposure - petm1


Figure 2: Food as a Percent of mix has fluctuated.

PETM (Correction): Mind the Commodity Exposure - petm2


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