This note was originally published at 8am on August 21, 2012 for Hedgeye subscribers.

“Golf is a game in which one endeavors to control a ball with implements ill adapted for the purpose.”

                -Woodrow Wilson


Yesterday I took a few of my colleagues out to play in a charity golf tournament at The Course at Yale.   For those of you who haven’t played it, the Yale course is not for the faint of heart.  It has some incredibly challenging holes replete with hazards in the most untoward places.  The more we became engrossed in golf yesterday, and marginally removed from stock market operating, the more I actually began to see the parallels between the two.


Now as anyone will tell you, I am far from a great golfer.  But just as a broken clock tells time twice a day, every round I pull a few shots out of thin air that make me look like a veritable Arnold Palmer, albeit a younger and more Canadian version.  In between my great shots, of course, were many less than spectacular shots.  The bad shots, though, made me think more strategically about the game and I realized that if I could stay out of trouble – avoid the sand traps, out of bounds, and water hazards – I could still score reasonably well.


In short, the key parallel between golf and investment management: avoid the looming hazards and you will remain competitive.  The caveat to this point is that in golf there are hazards that are not so obvious to the casual observer.  The wild card hazard yesterday on the course was my colleague, and Hedgeye’s Asia Analyst, Darius Dale.


Darius is a novice golfer but was a lineman in college and still has the strength of a few normal men.   Needless to say, when he winds up on the tee, it’s best to hide behind your cart if you are within a few fairways.  Being the risk manager he is, Darius is not afraid to yell - fore!  Collectively, we appreciated this risk management aspect of his golf game.


Speaking of avoiding hazards, the rumors coming out of Europe this morning imply that the Europeans hope to avoid any future sovereign debt sand traps.  This morning the Telegraph is reporting that Jorg Asmussen, Germany’s director at the ECB, is supporting unlimited purchases of peripheral debt.  This plan is in line with Draghi’s plan, though is in conflict with the German Bundesbank.  This article also re-stated the report from Der Spiegel on the weekend that suggested the ECB was studying plans to cap Spanish and Italian yields.  (It seems both Greece and Portugal have been all but forgotten!)


Purportedly, the key criteria to trigger this plan is a formal request from Spain for a bailout from the EFSF/ESM and agreeing to the fiscal terms therein.  On a positive note, the market appears to be of the view that Spain will get onside as the Spanish bond auction yesterday was seemingly successful.  Specifically, Spain sold its maximum target of €4.51 billion of 12-18 month bills this morning. The 12-month average yield was 3.070% versus 3.918% on July 17th, 18-month average yield 3.335% versus 4.242% on July 17th.  Further, the bid-to-cover was a veritably euphoric 2.4x.


In the Chart of the Day today we show Spanish 10-year yields going back one year.  The Spanish 10-year has backed off of its highs, so it seems that the rumors the ECB may change the lay of the course and bring out some bigger clubs (The Bazooka Driver?), which have had at least a marginally positive impact on Europe’s debt woes.  The history of the last couple of years has indicated that any proposed solution in Europe has typically been short term in nature and never quite as good as the rumors in Der Spiegel.  Of course, perhaps this time is truly different . . .


Switching clubs briefly, our Energy Analyst Kevin Kaiser recently did an update on the key factors he sees as supporting the price of oil and wrote the following:


“The fundamentals (read: supply and demand) warrant lower oil prices, but expectations for easier monetary policy and fears of supply disruptions (geopolitical risk) have lifted prices recently.  Note that the oil market has shrugged off actual data in favor of events that may or may not occur – the Fed has not gone to QE3, Europe has yet to implement a comprehensive solution to its debt crisis (if there is one), and there has been little aside from increased rhetoric out of Iran and Israel – yet oil continues to trade higher in expectation of some or all of those events.” 


On the last point, it seems the rhetoric is at the very least heightening, especially according to reports from The Times of Israel this morning.   Well it is quite possible this is saber rattling by the Israeli government, the report was very specific and as such we wanted to highlight it below (emphasis ours):


“Israel’s Prime Minister Benjamin Netanyahu “is determined to attack Iran before the US elections,” Israel’s Channel 10 News claimed on Monday night, and Israel is now “closer than ever” to a strike designed to thwart Iran’s nuclear drive.


The TV station’s military reporter Alon Ben-David, who earlier this year was given extensive access to the Israel Air Force as it trained for a possible attack, reported that, since upgraded sanctions against Iran have failed to force a suspension of the Iranian nuclear program in the past two months, “from the prime minister’s point of view, the time for action is getting ever closer.”


Asked by the news anchor in the Hebrew-language TV report how close Israel now was to “a decision and perhaps an attack,” Ben-David said: “It appears that we are closer than ever.”


Obviously, the Israel government makes statements to the media for strategic reasons and much of this could well be rhetorical.  That said, one thing I’m pretty sure of is that at a VIX of 14.02, the tail risk of an Israeli strike on Iran is not even remotely priced into the U.S. equity markets.  To some, my emphasis on the article above may be construed as fear-mongering, but in reality it is just like golf – you need to be aware of the hazards on the course.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are now $1614-1628, $113.21-115.49, $82.21-82.81, $1.22-1.24, 1.74-1.88%, and 1408-1419, respectively.




Keep your eye on the ball,


Daryl G. Jones

Director of Research 


Fore! - Chart of the Day


Fore! - Virtual Portfolio


Gaming revenues were likely up solidly in July but should anyone get excited?



The answer is no.  Our opinion likely won’t stop the initial euphoria that Vegas is back, baby.  When Nevada releases July statistics in the middle of next week, gaming revenues will look strong.  However, we think even a cursory review of the underlying metrics will reveal yet another soft month.  July faces a very easy hold comparison on both slots and tables.  We continue to believe that slot volume is the most important barometer of Strip health, and this metric will likely show another YoY decline.


We are projecting gross gaming revenues to increase 14-18% assuming normal slot and table hold percentages.  However, we expect slot and table volume (ex baccarat) to fall YoY.  Slots held at only 6.5% last year versus a normal 7.0% - mainly due to the accounting quirk of month end falling on a weekend.  July 2012 will benefit from a June accounting catch up where the month ended again on a weekend.  Meanwhile, table hold was only 10.3% against a normal 12.0%. 


Despite the lower gaming volumes, July wasn’t a disaster.  July 2012 is down a Friday and a Saturday.  However, we do think investors may overreact positively to the initial revenue print and the Vegas stocks, particularly MGM, will trade off following the initial euphoria.


We were positive on MGM late last year and at the beginning of 2012 on improving slot volumes.  However, the slot business turned negative in April and so did we.  July should represent the 4th straight month of declining slot volumes in a period where the Strip should be in recovery mode.  Not good.




TODAY’S S&P 500 SET-UP – September 4, 2012

As we look at today’s set up for the S&P 500, the range is 18 points or -0.54% downside to 1399 and 0.74% upside to 1417. 











  • ADVANCE/DECLINE LINE: on 08/31 NYSE 1174
    • Increase versus the prior day’s trading of -1294
  • VOLUME: on 08/31 NYSE 746.07
    • Increase versus prior day’s trading of 45.80%
  • VIX:  as of 08/31 was at 17.47
    • Decrease versus most recent day’s trading of -2.02%
    • Year-to-date decrease of -25.34%
  • SPX PUT/CALL RATIO: as of 08/31 closed at 1.84
    • Up from the day prior at 1.42


  • TED SPREAD: as of this morning 34.33
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.57%
    • Increase from prior day’s trading of 1.55%
  • YIELD CURVE: as of this morning 1.35
    • Up from prior day’s trading at 1.33

MACRO DATA POINTS (Bloomberg Estimates)

  • 8:58am: Markit US PMI Final, Aug., est. 51.9
  • 10am: ISM Manufacturing, Aug., est. 50.0 (prior 49.8)
  • 10am: ISM Prices Paid, Aug., est. 46.0 (prior 39.5)
  • 10am: Construction Spending M/m, July, est. 0.4% (prior 0.4%)
  • 11:30am: U.S. to sell $32b 3-mo, $28b 6-mo bills
  • 4pm: USDA Crop-condition reports


    • Washington Week Ahead: Democrats to Rally for Obama in N.C.
    • Democratic National Convention: Re-nomination of Obama and Biden, speakers include First Lady Michelle Obama
    • House, Senate not in session
    • Clinton seeks unified Asean front to ease disputes w/ China


  • Merkel/Monti lead diplomatic push as Draghi plan takes shape
  • EU outlook cut by Moody’s on Germany, France, U.K. risks
  • Manufacturing in U.S. probably stagnated amid global slowdown
  • Light-vehicle sales rate may have climbed to 14.2m in August
  • Valeant to purchase Medicis Pharmaceutical for $2.6b
  • P&G directors face own challenges while keeping tabs on McDonald
  • Euro-Area July producer-price inflation holds at 2 1/2-yr low
  • Lufthansa cabin crew expand German strikes in salary dispute
  • ‘Posession’ claims top film slot on sales of $21.3m
  • Intel, eBay, Pandora present at Citi Tech conference


    • Smithfield Foods (SFD) 6am, $0.45
    • Campbell Soup (CPB) 7:30am, $0.38 - Preview
    • Finisar (FNSR) 4pm, $0.14
    • Francesca’s Holdings (FRAN) 4:01pm, $0.24
    • Forest City Enterprises (FCE/A) 4:02pm, $0.06
    • Guidewire Software (GWRE) 4:05pm, $0.04
    • Bloomin’ Brands (BLMN) After-mkt



OIL – never, in human history, has > $100 Oil not perpetuated real (inflation adj) growth slowing. Maybe this time is different. Its probably not. Yield Spread (10s-2s) moved back to +133bps wide this past wk, only 10bps away from its slowest growth (implied) since 2008.

  • Cotton Glut Extending Slump as Levi’s Costs Slide: Commodities
  • German Power Swings at 7-Year Low Curb Trading: Energy Markets
  • Dockwise Profits Aided by U.S. as Mine Sweepers Deploy: Freight
  • Soybeans, Meal Climb to Records on U.S. Drought, Stimulus Bets
  • Oil Advances to Highest Price in a Week on Stimulus Speculation
  • Gold Seen Rising on Prospects for Further Central-Bank Stimulus
  • Copper Seen Falling as EU Credit Rating Fuels Crisis Concern
  • Iron Ore Trading Rose to Record Last Month as Prices Plunged
  • Cocoa Rebounds as Supplies May Lag Behind Demand; Sugar Advances
  • Record Gold Sales to Iran Profit Lira Bondholders: Turkey Credit
  • India Rules Out Duty-Free Import of Raw Sugar on Local Supplies
  • U.S. Shale Glut Means Gas Shortage for Mexican Industry: Energy
  • Obama Gets Fossil-Fuels Boost After Green-Jobs Revolution Fades
  • Soybeans, Meal Climb to Records on Drought
  • Iron Ore Drops to Near Three-Year Low on China Growth Concerns
  • U.K. Lawmakers Urge 2015 End for EU Sugar Quotas Capping Output









EUROPE – lower-highs across the board in European squeeze tapes as the markets w/ less short interest (FTSE, Swiss, etc) fall first this morn; how many more rumors, plans, etc do they have? We will see, but the FTSE just snapped my 5781 TRADE line.






CHINA – somewhere in between golf and time w/ the kids this weekend, China reminded us that PMI sub 50 remains and that they won’t deliver the stimuli drugs w/ Oil at $116/barrel. Shanghai down another -0.75% overnight (-17% since May).










The Hedgeye Macro Team

Early Look

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No More

“And so he urged his countrymen: No more.”

-Hampton Sides (Blood and Thunder)


That’s what the head of the Navajo warriors, Manuelito, said to his people before ultimately succumbing to General Sherman’s troops. Maybe we’re going down versus the Fed’s Bailout Beggars too, but it won’t be without one heck of a fight.


Last week ended with a Draghi bagging the Jackson Hole meeting and Ben Bernanke doing nothing that resembled what he was allegedly going to do only 2 weeks prior. Rumor versus reality is a widening spread.


“What is the truth (Ray Dalio)?” Stocks continue to make lower-highs as bonds continue to make higher-lows. I urge all of you to join me in calling for No More of what has not worked. Otherwise, you’ll have $130-150 Oil and 1970s stagflation all over again.


Back to the Global Macro Grind


Both US and Global Equities were down again last week (2 consecutive down weeks for the SP500, 1 month lows for Asia). Both Treasury Bonds and Commodities were up. The latter perpetuates #GrowthSlowing expectations in the former.


But no worries. Everyone who drives to work, eats food, and sends their kids to school this week understands the very basic P&L problem associated with cost of living rising as nominal wages are falling:

  1. American median incomes = down -5% since 2009
  2. US Dollar = down -5% since January 20, 2009
  3. Oil (WTIC) = +150% since January 20, 2009

Almost everyone, that is…


Mostly everyone else understands the concept of long-term lower-highs (stocks) and higher-lows (bonds) as well.  Here’s what’s happened in the last 2 weeks as we setup for risk managing September:

  1. US Stocks (SP500) = down -0.85% (from 1418) to 1406 on Friday
  2. European Stocks (Eurostoxx600) = down -1.8% (from 272) to 267 this morning
  3. Chinese Stocks (Shanghai Comp) = down -3.5% (from 2118) to 2043 this morning

All the while:

  1. US Equity Volatility (VIX) = up +30% from its YTD closing low (2wks ago)
  2. Commodities (CRB Index) = up +1.9% (from 303) to 309 this morning
  3. US Treasury Yields (10yr) = down -14% (from 1.81%) to 1.55% this morning

So, who on God’s good earth profits from this economic model? If you bought bonds, volatility, and commodities 2 weeks ago, you did. But what % is that of the global population? Did higher prices in those 3 things perpetuate economic growth, or slow it?

If you bought Gold 2 weeks ago (we didn’t because we didn’t think Bernanke would go to Qe4 – and he didn’t), that’s up +4.8%. Great trade! But what does that mean? It means that the purchasing power of US Dollars continues to be debauched.


Are institutional investors long Gold? You bet your Madoff they are – and with headlines dominating your every day like this: “Gold, Near 5mth High, Seen Gaining on Prospects for More Stimulus” (Bloomberg), why shouldn’t they be?


Weekly CFTC data implies Gold buyers ramped bets on Bernanke right back up to where they were before they started falling in March (+19% wk-over-wk to almost 132,000 contracts).


Those are called expectations. Instead of jobs and economic growth, that’s what Bernanke really stimulates and, in doing so, perpetuates the US growth slow-down via commodity inflation.


This is why our Global Macro Model continues to nail  #GrowthSlowing calls at these shortened economic cycle turns well ahead of consensus. Our models adjust, real-time, for Dollar Debauchery and Oil Inflation.


How long can inflation of market prices be masked as “economic growth”? Not for long. Each and every one of these Qe experiments gives markets shorter-term pops and more volatile reversals.


So, if you bought Gold (or Commodities) at the month-end markup of February 2012, or if you bought it there at lower-highs on Friday, the probability just went straight up (like the asset price did) that they will now come down again.


That’s called Deflating The Inflation. And while Bernanke wants you to believe that you’ll have no more of that (maybe ever), I’ll repeat what we all can’t afford any more of – policies to inflate asset prices that, in turn, slow growth.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are now $1, $113.69-116.57, $81.11-81.91, $1.24-1.26, 1.55-1.64%, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


No More - Chart of the Day


No More - Virtual Portfolio

Bonds. James Bonds.

This note was originally published at 8am on August 20, 2012 for Hedgeye subscribers.

“This is a serious problem, although it is not as dramatic as sort of an epidemic.”

                -James Bond


Author Ian Fleming created James Bond, code named 007, in 1953 and subsequently featured him in twelve novels and two short story collections.  Bond was an intelligence officer in the Secret Intelligence Service and a Royal Naval Reserve Commander.   Fleming based this fictional character on many of the intelligence officers and commandos he met during World War II.  Interestingly, the name James Bond came from American ornithologist James Bond, a Caribbean bird expert and author of the definitive field guide Birds of the West Indies. (Don’t worry, I haven’t read it either.)


Over the course of the Fleming’s twelve novels and the twenty-two James Bond movies (the highest grossing series ever at $4.9 billion), Bond utilizes his astute intelligence gathering capabilities, combined with various gadgets, including an exploding attaché case, to save the world from a myriad of threats.  If Bond were a research analyst studying today’s markets, the U.S. bond markets may be considered an emerging epidemic in his analytical purview. 


Even if not an epidemic, bond issuance levels this year have been staggering.   Firstly, in the municipal bond market in the United States, as of May, issuance is up 70% compared to the same period in 2011.  Secondly, in the U.S. corporate bond market issuance is up 5% year-over-year, but has seen a serious acceleration in the last few months with investment grade issuance up 54% and high yield up 30% in July 2012.  Finally, according to Lipper Research, bond ETFs have seen the eighteenth consecutive month of net inflows.


So, is there is a bond epidemic / bubble?  Given the stance of the global central banks to keep interest rates at artificially low levels, it is likely not an epidemic that is going to end in the short term.  In fact, we are actually aggressively allocated to U.S. government bonds as we think equities are at an extreme and growth is continuing to slow.  Certainly though, James Bond, the research analyst, would be gathering his intelligence and watching and waiting for an opportunity to sell the high yield bond market.


As we show in the Chart of the Day below, which we have aptly named, From the Central Banks with Love, the high yield market is at a generational low in yield.  Obviously when studying a corporate bond, there are a number of factors to analyze in determining whether it is overvalued or undervalued.  Certainly, the overall interest rate environment is critical, but ultimately the prospects of the company are the drivers of a junk bond’s value, especially given the bond’s inferior position in the capital structure.  Therefore, given that yields in the junk bond market are literally at generational lows, it implies that default risk is also close to an all-time low.  Personally, I’d need a few James Bond-esque martinis before I’d believe that last point to be an accurate assessment of default risk.


Speaking of bonds, Der Spiegel reported this weekend that the ECB may set a specific threshold to cap periphery bond yields at its meeting in September.  The immediate reaction in the European sovereign debt markets is, not surprisingly, positive as credit default swaps are trading tighter across the board.  As well, the Spanish 10-year is back down to 6.19%.  Even if positive in the short term, broad intervention in a large market speaks to another epidemic, the epidemic of government intervention in the free markets.  Random intervention by governments does not build confidence in the markets.  And confidence is what is sorely missing in the European debt markets.


In the latest sign that global growth is slowing, the Shanghai Composite hit a fresh three and a half year low this morning.   The Chinese equity markets may not always garner headlines in the U.S. financial media, but nonetheless China remains the engine for global growth and as China goes so goes marginal global growth.  Thursday will give us some important insights on Chinese and global growth as flash PMIs are reported for China, Europe and the United States.


Keith is back in Thunder Bay this week taking some time off with his family ahead of what is going to be a busy next few months at Hedgeye, so we will be highlighting some of the key calls from our broader research team this week.  This will be kicked off this morning with our Financials Sector Head Josh Steiner and our Retail Sector Brian McGough leading our morning client call at 830 a.m.  Email if you like to ask them any questions, or get access to the call.


Although we are currently not short it in the Virtual Portfolio, one of McGough’s favorite short ideas has been J.C. Penney.   We’ve been consistently short JCP for the past fifteen months and will likely look to re-short when we see our level.  McGough had the following to say after JCP’s recent earnings announcement:


“We won't bother with the full financial review. Comps down -22%, down 33% and a ($0.67) loss pretty much sums that up.


But that's the past. We invest for the future. One thing that matters in investing for the future is believing in who is running the ship. We initially figured that Johnson's Apple halo would have lasted 18-24 months. But about 5-minutes into his commentary today, his credibility stood up, ran out the door, and got hit by a bus.


Last quarter, his level of arrogance around communicating the message was bothersome. He spoke to the Street like we were toddlers, or at least retail novices. He glossed over the bad, and played up whatever positive statistic he could find. A JV mistake for a new CEO.”


As it relates to CEO Ron Johnson at J.C. Penney, or really any CEO of a large public company, perhaps Ian Fleming said it best when he wrote:


“Once is happenstance. Twice is coincidence.  Three times is enemy action.”




Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are now $1601-1624, $110.89-115.21, $82.20-82.89, $1.22-1.24, 1.72-1.87%, and 1406-1419, respectively.



Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Bonds.  James Bonds. - Chart of the Day



Bonds.  James Bonds. - Virtual Portfolio


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