Lower Highs: SP500 Levels, Refreshed

Takeaway: The storytelling out there on why the market isn’t going straight down is fascinating.

POSITIONS: Short Small Caps (IWM)


The storytelling out there on why the market isn’t going straight down is fascinating. It was in mid-March too. Growth is slowing, globally, at an accelerating rate (inflation policies do that) and the only big part of the bull case that’s left is bailouts.


All the while, like it did in March-April, the broader market continues to make lower-highs on lower and lower volumes. Imagine they took APPL out of the SP500; then the storytelling would get really good.


Across my core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE resistance = 1407
  2. Immediate-term TRADE support = 1401
  3. Intermediate-term TREND support = 1367


In other words, provided that 1401 holds, the market’s range can easily remain tight (1). That 17 point range is less probable on a close below 1407; and a close below 1401 puts 1367 in play, faster.


Central planning is so exciting!



Keith R. McCullough
Chief Executive Officer


Lower Highs: SP500 Levels, Refreshed - SPX

The Relationship Between TMO and FDX

Takeaway: FedEx's revised quarterly outlook spells trouble for TMO as global shipping volumes decrease.

FedEx (FDX) slashed its quarterly outlook yesterday, citing the global economic slowdown as a catalyst for slowing growth. That made us look at the relationship between FedEx shipping volume and Thermo Fisher Scientific’s (TMO) industrial focused Analytical Instruments business. With TMO shares up +27% year-to-date and up +16% alone in the last 3 months, the company is vulnerable to a move to the downside.


In the FedEx press release, FedEx only commented on their earnings guidance which they reduced to $1.37-$1.46 from their June guidance of $1.45-$1.60.  With the off-month reporting, we looked at both FedEx as a leading indicator for TMO (0.78 correlation) and peer UPS coincidently, (0.73 correlation). Take a look at the two charts below. Both the FDX and UPS charts show a decline in both business segments from Q212 onward.



The Relationship Between TMO and FDX - TMO FDX



The Relationship Between TMO and FDX - TMO UPS



If shipping volumes are the indicator of what’s to come, things are not bright for TMO going forward. We are currently short TMO in our Healthcare position monitor.


Takeaway: LVS looks great over the trade and tail durations.

Keith bought LVS in the virtual portfolio at $40.93   



LVS is way down off its $60+ high reached in April of this year owing to a halt in VIP growth in Macau, a rough start from Sands Cotai Central (SCC), and slowing growth in Singapore.  With the stock price cut by a third, we believe concerns have been adequately discounted in the stock.  However, there are signs that growth is picking back up in Macau and that SCC's performance has improved.  We believe September Macau GGR growth will accelerate sequentially from August's +6% and July's +2%. Singapore expectations have moderated to only slight EBITDA growth for 2013 which might actually be too low.


The stock trades at 11x 2013 EV/EBITDA, close to a historical low.  Meanwhile, there are a number of positive upcoming catalysts.  The opening of 2,500 Sheraton rooms at SCC should provide a big boost starting September 20th.  Sheraton is probably the top hotel brand in China and combined with the associated marketing and potential infusion of junket liquidity, should provide more market share juice for LVS as well as grow the market.  Additionally, with its significant free cash flow - enough to easily fund another Cotai project - and low overall leverage, we think LVS could announce a stock buyback.   



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Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

STRIPPING: Is Las Vegas Back On Track?

Takeaway: Paying attention to slot metrics from the latest Strip data, Vegas has a ways to go before it's truly back on track.

Nevada’s July revenue data is set to drop next week and at first glance, gaming revenue will look strong. This would normally be a positive after continuously tepid numbers coming out of Las Vegas over the summer. But ultimately, our Gaming, Leisure and Lodging team believes slots are the most important metric that reflects Vegas growth and we expect another decline in the numbers on a year-over-year basis.


Slot data has been negative since April and July should represent the fourth straight month of consecutive declining slot volume in a period where the Vegas strip should be recovering. That certainly doesn’t work in favor for companies with high exposure to Vegas numbers like MGM Resorts (MGM).



STRIPPING: Is Las Vegas Back On Track?  - July Vegasstrip

We Can Demand Better







Russia is an interesting country and not just for the vodka and YouTube videos that come out of there. It is effectively a high beta market that is closely tied to gold, oil and mining. Commodities matter in Russia – why do you think there’s all these rich oligarchs running around? So should the US dollar rise, Russia is in for a hell of a freefall in regards to their market. Russian stocks are down -21% from the March top.




That’s right. Complacency is for suckers. If we want more stimulus and dollar debauchery, we can get it. Bernanke is willing to hand out round after round of quantitative easing, no matter the end cost. And at this point, with the S&P 500 struggling day after day to stay above 1400, that help will certainly be needed. Consider how bad volumes are in the US equity market. Little-to-no action will move a stock a dollar or more in some cases. Growth is slowing and inflation is rising. I doubt many of you are OK with higher fuel and food prices. The question is: when will you demand better?







Cash:                  DOWN


U.S. Equities:   UP


Int'l Equities:   Flat   


Commodities: Flat


Fixed Income:  Flat


Int'l Currencies: UP  








Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.

  • 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



LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TAIL:      NEUTRAL







“Stagflation: Finland Q2 GDP -0.1% Y/Y vs 2.2% in Q1” -@KeithMcCullough




“The reason there are so few female politicians is that it is too much trouble to put makeup on two faces.” –Maureen Murphy




Spain banks raise share of Spain debt to 32.3% from 30.9% in June.





Currency Wars

This note was originally published at 8am on August 22, 2012 for Hedgeye subscribers.

“The first panacea for a mismanaged nation is inflation of the currency; the second is war.  Both bring a temporary prosperity; both bring a permanent ruin.  But both are the refuge of political and economic opportunists.”

                -Ernest Hemmingway


Anyone who has analyzed the United States federal budget understands that this fine country spends a lot on its military.  In fact, based on estimates from the nonpartisan Congressional Budget Office defense spending, that is considered discretionary, will total $635 billion in fiscal 2013. This is more than 52% of the total discretionary budget of the U.S. government and just under 20% of total federal government spending.


In terms of all global defense spending, the  U.S. is dominant.  According to the Stockholm International Peace Research Institute’s (SIPRI) 2012 Yearbook, the U.S. spends more than 40% of the combined global military spending pie.  The next four countries on the list are as follows: China at 8.2%, Russia at 4.1%, the UK at 3.6%, and France at 3.6%. 


Since the U.S. spends the most on defense on a gross dollar basis and as a percentage of GDP at 4.7%, it is obvious that the U.S. has solidified its so-called “hyper power” status as the world’s primary military power.  As a Canadian, I can assure you that I appreciate the powerful U.S. military and the people that currently serve and have served in the military.  But as a global macro analyst, it is difficult not to question whether the U.S. is overspending, if not at least spending inefficiently.


The most recent military spending controversy occurred last month when a well-connected supplier received a contract to produce oil pans for $17,000 a pop.  (If I could get a deal like that, I might even consider getting out of the research business!) Yesterday, in fact, the ever-controversial Grover Norquist made the following statement regarding wasteful defense spending:


“Conservatives need to remember that, just as spending money on something called education doesn't mean people are educated and spending money on welfare doesn't mean it adds to the general welfare calling something national defense doesn't mean it is. It may not be. It may undermine national defense if it's a waste of resources, if it's a misallocation of resources.”


Later today the CBO will release its updated budget and economic outlook, we will analyze this update in a note, but we certainly do not expect positive news from the CBO.  It’s important because the direction of the U.S. budget is a key factor that will drive the value of the U.S. dollar over time. 


The obvious conclusions from the CBO’s reports will likely be that the U.S. needs to drastically cut spending and that an effective growth policy needs to be implemented to juice revenue.  On the military spending front, an improved spending outlook will come from more efficient spending and also more unique ways of waging war.


To the last point, next Wednesday at 11am we will be hosting a conference call with Jim Rickards, the author of Currency Wars: The Making of the Next Global Crisis. A key catalyst for writing this book was that Rickards has been a long time consultant to the Department of Defense and has participated in large-scale economic war games. 


Rickards’ view is that the U.S. is already facing national security threats via economic warfare including: clandestine gold purchases from the Chinese, to hidden agendas of sovereign wealth funds, to explicit threats from the Russians about diversifying away from the dollar.  In an even more controversial stance Rickards believes that the biggest economic threat we currently face may well be from an overly exuberant Federal Reserve Chairman in Ben Bernanke.  While it sounds like Rickards is carrying Hedgeye water so to speak, we actually disagree on a number of key points and will be pushing him on some of his more extreme views.


On the call with Rickards we will also provide you with our updated investment views on the major currency pairs.  Our institutional subscribers will automatically get access to the call, if you are not a current institutional subscriber but would like to participate, please email


Now as for the war that is currently going on in your portfolio, I have a couple of points to highlight this morning.  Near the close yesterday, we released a note that emphasized the quantitative set up, which is what we call an “outside day”.  This occurs when the SP500 trades higher than the previous close intraday but then closes below it.  From a fundamental perspective, this suggests that there is likely a good overhead supply of stock for sale at that level.


The inability of the SP500 to break through that key level is even more negative when combined with where we see investor sentiment, which is in a word: complacent.  For starters, as we’ve stated repeatedly, the VIX at/or near the 15.0 level has consistently signaled a time to sell equities over the past three years.  After yesterday’s action, the VIX also became bullish from a TRADE duration in our models. This implies the VIX has even more upside in the short term. Further, the bull/bear spread from the U.S. Investors Intelligence Poll is now 2,260 basis points wide to the bull side.  So, yes investors are leaning long.


And on the old global growth watch, Japan posted a -8.1% decline in exports on a year-over-year basis.  Not surprisingly, exports to the European Union were down -25% and to China were down -11.9%.  But don’t worry, Japan is only the fourth largest economy in the world . . .


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are now $1617-1642, $113.52-115.18, $81.91-82.46, $1.22-1.24, 1.75-1.82%, and 1409-1419, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Currency Wars - Chart of the Day


Currency Wars - Virtual Portfolio

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