TODAY’S S&P 500 SET-UP – September 11, 2012

As we look at today’s set up for the S&P 500, the range is 22 points or -0.71% downside to 1419 and 0.83% upside to 1441. 











  • ADVANCE/DECLINE LINE: on 09/10 NYSE -613
    • Decrease versus the prior day’s trading of 1083
  • VOLUME: on 09/10 NYSE 616.08
    • Decrease versus prior day’s trading of -9.39%
  • VIX:  as of 09/10 was at 16.28
    • Increase versus most recent day’s trading of -13.21%
    • Year-to-date decrease of -30.43%
  • SPX PUT/CALL RATIO: as of 09/10 closed at 1.61
    • Down  from the day prior at 1.82


  • TED SPREAD: as of this morning 30.79
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.67%
    • Increase from prior day’s trading of 1.65%
  • YIELD CURVE: as of this morning 1.43
    • Up from prior day’s trading at 1.41

MACRO DATA POINTS (Bloomberg Estimates)

  • 7:30am: NFIB Small Business Optimism Index, Aug., est. 91.4 (prior 91.2)
  • 7:30am/8:45am: ICSC/Redbook weekly sales
  • 8:30am: Trade Balance, July, est. -$44.0b (prior -$42.9b)
  • 10am: IBD/TIPP Economic Optimism, Sept., est. 46.4 (prior 45.6)
  • 10am: JOLTs Job Openings, July, est. 3.740m (prior 3.762m)
  • 11am: Fed to buy $1.5b-2b notes due 2/15/2036-8/15/2042
  • 11:30am: sell $40b 4-wk bills
  • 1pm: U.S. to sell $32b 3-yr notes
  • 4:30pm: API inventories


    • House, Senate in session
    • Senate Foreign Relations marks up bills including “Increasing American Jobs Through Greater Exports to Africa Act”
    • House Oversight holds hearing on Operation Fast and Furious, 9:30am
    • House Energy panel holds hearing on anti-terrorism standards for chemical facilities, 10am
    • House Energy panel meets on H.R.4255, the “Accountability in Grants Act,” 10:15am
    • House Natural Resources holds hearing on electricity costs, 11:30am
    • House Financial Services panel holds hearing on terrorism risk insurance program, 10am
    • House Ways and Means holds hearing on IRS implementation, administration of health-care law, 10am
    • House Transportation holds hearing on Amtrak passenger rail service monopoly, competition with regional services, 10am
    • American Institute of Certified Public Accountants holds its National Conference on Banks and Savings Institutions, with speakers including Fed Chief Accountant Steven Merriett; Office of Comptroller of the Currency Chief Accountant Kathy Murphy; and FDIC Chief Accountant Robert Storch, 9:55am


  • AIG shrs valued at $18b - ~553.8m shrs at $32.50 each - sold by U.S., converting 4-year bailout into profit for taxpayers
  • Morgan Stanley won dispute with Citigroup over value of Smith Barney, of which it owns 51%: N.Y. Post
  • U.S. trade deficit probably grew to $44b in July from $42.9m
  • Texas Instruments releases mid-qtr update post-mkt
  • Samsung’s request for judge to lift prelim. ban on U.S. sales of its Galaxy Tab 10.1 tablet computer opposed by Apple
  • HarperCollins reached agreement with Amazon, other e- commerce cos. that results in lower prices for electronic books
  • Glencore still waiting for decision from Qatar Holding on whether it will support takeover of Xstrata
  • General Growth rejected investor Bill Ackman’s call to put itself up for sale, said it plans to remain independent
  • Apple may sell as many as 10m redesigned iPhones by end of Sept. according to Piper Jaffray’s Gene Munster; expected to introduce new phone tomorrow
  • Burberry said full-year profit will disappoint amid more “challenging” environment; European luxury cos. drop
  • Infosys unit to buy Marsh & McLennan unit in India: WSJ
  • Assured Guaranty dodged downgrade as Moody’s failed to meet deadline, according to shareholder Wilbur Ross
  • Hiring plans among U.S. corps in 4Q little changed from previous 3 mos, ManpowerGroup said in employment index


    • United Natural Foods (UNFI) 7:30am, $0.51



OIL – so, Oil is only up +31% in basically a straight line since mid-June, and Bernanke will say there’s no inflation this wk; w/ unemployment and median incomes remaining a disaster, this is one of the biggest tragedies of the Qe experiment; what’s good for the few (stock market) is bad for the many (real-inflation adjusted consumption growth).

  • Soy Reserves Smallest in Four Decades After Drought: Commodities
  • Nuclear Repairs No Easy Sale as Cheap Gas Hits Utilities: Energy
  • Oil Supplies Fall to Five-Month Low in Survey: Energy Markets
  • Oil Trades Near Three-Week High on Outlook for Economic Stimulus
  • Corn Advances as Harvest Progress in U.S. Confirms Crop Damage
  • Copper Seen Declining on Speculation Two-Day Rally Was Overdone
  • Gold Advances on Outlook for Further Stimulus at Fed Meeting
  • Robusta Coffee Tracks Arabica as Investors Buy; Cocoa Advances
  • OPEC Sees ‘Abundant’ Oil Supply, May Cut 2013 Demand Estimates
  • Qatar Holds Out on Glencore Bid as Davis Heads for Xstrata Exit
  • Chemical-Tankers Seen Rallying 50% as Fleet Proves Busy: Freight
  • Sugar to Pile Up as Global Demand Stays Weak, Kingsman Says
  • Russia Volumes, LNG Cargoes to Weigh on Gas to 2013, SocGen Says
  • Talisman CEO Switch Speeds Up Sale Speculation: Corporate Canada
  • India’s Goa Bans Mining After Panel Pegs Loss at $6.3 Billion
  • German Next-Month Power Falls Before Court Ruling on Euro Fund









SPAIN – not clear what Rajoy was thinking by telling the truth, but Spain is now on the tape opposing bailout conditions; that’s good for another lower-high (since March) in Spanish Equities (and the Eurostoxx50); $1.28 Euro isn’t good for German exports either.






ASIA – USD down is all good and fine for short-term politics (Bush did the same using Bernanke), but it’s bad for the rest of the world via commodity inflation; this continues to slow Asian growth and you can see that in the 2 big Asian Equity markets (China and Japan) that continued lower last night (-0.7%) after their 2-day squeeze.










The Hedgeye Macro Team

Correcting All Of This

This note was originally published at 8am on August 28, 2012 for Hedgeye subscribers.

“My government, will correct all of this.”

-Stephen W. Kearny


General Stephen Watts Kearny was one of the central figures in mid 19th century Western American history. Albeit for very brief periods of time, he was the Military Governor of both New Mexico (1846) and California (1847).


The aforementioned quote comes from Chapter 12 of the most recent book I’ve been reading on the conquest of the American West, Blood and Thunder, where “On August 14th, 1846, two days after the Navajo raid on Las Vegas, General Kearny marched with his Army of the West into the town’s central plaza…” and proclaimed his mystery of ill-fated central planning faith.


Within 6 months (January of 1847), Kearny’s “government” was nowhere to be found as the dead (scalped) body of the Governor he put in place in New Mexico (Charles Bent) “lay naked on the floor in a congealed pool of blood.” (page 221) The risk management lesson here is one that is never the same, but usually rhymes – beware of short-term government promises.


Back to the Global Macro Grind


Stock and commodity markets appear to have been promised that European and American central planners are once again going to provide them the elixir of a no-volume but “up year-to-date” life in Jackson Hole, Wyoming this weekend.


That’s all good and fine, until it isn’t. Super Mario Draghi just cancelled his trip to the central planning summer play-land of the modern American West, and the Gold price doesn’t seem to be pleased by that turn of events this morning – not one bit.


As a refresher on how the market’s game of front-running both the Fed and ECB works, both political pandering entities are charged with keeping market prices up through money printing, bailout promises, and currency debasement.


Here’s the update on what US Dollar Debauchery has done for this 30-day bull run in stocks and commodities (inverse correlations between USD Dollar Index and the big stuff people are speculating on):

  1. Gold = -0.85
  2. Silver = -0.87
  3. Oil (WTIC) = -0.81
  4. CRB Index = -0.74
  5. CRB Raw Industrials Index = -0.79
  6. SP500 = -0.83

European and Global Equities alike get even more pop on the Fed’s Qe rumoring with 30-day USD inverse correlations for the EuroStoxx600 and MSC World Equity indices currently running at -0.88 and -0.86, respectively.


So, your “governments” are going to “correct all of this” by attempting to convince you that asset price inflation (commodities in particular, because that’s what’s driven the beta of the equity indices) is growth.


*note to real-world consumer self: inflation is not growth.


Maybe that’s why old Chavez is having such a tough time in the Venezuelan national polls, falling behind Radonski for the first time in a long time by a fairly wide margin (47.7% to 45.9%) despite the Venezuelan stock market being up +153% YTD!


Pardon? You mean people aren’t as stupid as politicians think they are? You mean the stock market being “up year-to-date” doesn’t reflect the fully bought and paid-for political messaging of the common man’s economic health?


Venezuela, by the way, devalued its currency in the last year. See Darius Dale’s Chart of the Day for what looks suspiciously Weimar Republic, 1920s style.


Maybe I have this wrong. Maybe Americans are truly as dumb as the politicians who are making these short-term broken promises of “price stability, full employment, and economic growth”…


Maybe I don’t.


Now that 2 of the world’s Top 4 economies (China and Japan) have guided down their GDP growth expectations this month (Japan did last night), maybe someone sane out there is starting to figure this out too. The US Treasury Bond market certainly just did.


Looking at what’s happened to market prices in the last week isn’t the end of this story, but it’s certainly instructive:

  1. US Treasury Yields have dropped -13% in basically a straight line (from 1.89% to 1.64% on the 10yr this morning)
  2. US Stocks (the SP500 and Russell2000) have fallen from their mid-August highs to make lower-highs versus March
  3. US Equity Volatility (VIX) = +22% “off the lows” (in a week), bouncing hard off our 14-15 TAIL risk zone
  4. Asian Equities: China made a fresh YTD low yesterday (-16.5% since May); Japan = -12% since the March top
  5. European Equities: DAX, CAC, IBEX – pick your index have all made lower-highs on lower and lower volumes
  6. US Dollar Index = down -3% in August, from its top to bottom

I know, I know. This whole Currency Correlation thing doesn’t fit the Bernanke/Geithner narrative because someone in their group-thinking Keynesian business schools told them “correlation is not causality.”


Someone better tell that to the entire market that’s keying off the causality that is the latest rumor about what Bernanke does next then, because US Dollar bets (CFTC contracts) just went from +311,000 on the bull side in June to -132,000 on the bear side pre Jackson Hole.


Correcting All of This will be abrupt. What started as a localized grievance against money printing (late 2007) and bank bailouts (2008-2009) now moves to a national debate about the stability of your hard earned currency and long-term (inflation adjusted) economic health.


Our immediate-term risk ranges of support and resistance for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr Treasury Yields, and the SP500 are now $1640-1679, $112.28-114.26, $81.11-82.01, $1.23-1.25, 1.63-1.76%, and 1401-1419, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Correcting All Of This - Chart of the Day


Correcting All Of This - Virtual Portfolio


The Macau Metro Monitor, September 11, 2012




Wynn Macau vice chairman Allan Zeman said WYNN would fund its new Cotai project through debt and internal resources.  The project is estimated to cost US$4 billion (MOP32 billion) and should take around four years to build.


Zeman, who heads Hong Kong-based Lan Kwai Fong Holdings Ltd, a company investing in entertainment, also said he would consider investing in a bar and restaurant strip in Macau if the right piece of land became available at a reasonable price.



China new loans was the highest of any August on record.  New local-currency lending was 703.9 billion yuan (US$111 billion) in August, easily surpassing the 600 billion yuan Street estimate.  






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Thinking That Way

“I wouldn’t be doing my job if I started thinking that way.”

-Neil Barofsky


In one of the more riveting introductions to a book I have read in some time (Bailout – “An Inside Account of how Washington Abandoned Main Street While Rescuing Wall Street”), that’s what former Special Inspector General for TARP, Neil Barofsky, told former Assistant Secretary of the Treasury for Financial Stability, Herb Allison.


Herb was one of Hank Paulson and Timmy Geithner’s guys. He was also the former CEO of Fannie Mae and President of Merrill Lynch. While objectively analyzing the biggest taxpayer bailout in US history, Allison told Barofsky “you’re really hurting yourself” and asked him “have you thought at all about what you’ll be doing next?”


Evidently Barofsky had thought about it. He decided to tell the truth. Meanwhile, as we test 4.5 year highs, memories are short and storytelling is back. I, for one, haven’t forgotten the lessons of 2007-2008. The truth is, neither should you.


Back to the Global Macro Grind


After 3 weeks down, US stocks had 2 up days, then a down day. After 4 months down, Chinese stocks had 3 up days, then a down day. What is the truth? With the price of Oil up +31% since late June, is economic growth going to magically appear?


To Review:

  1. Dollar Down inflates asset prices (stocks and commodities) in the short-term
  2. Rising Inflation Expectations slow real (inflation adjusted) economic growth in the long-term
  3. As Growth Slows, begging for bailouts (and more Dollar Debauchery) is what Old Wall Street does

This is not new. In fact, what’s quite sad about it at this stage of the game is that everyone knows precisely how it works. How else would you explain the following?

  1. CFTC bullish futures and options contracts testing all-time highs (1.33 million contracts) as demand slows
  2. Gold speculative contracts up +35% and +10% wk-over-wk in the last 2 weeks, respectively (pre Fed meeting)
  3. Again, Oil prices up +31% in a straight line (bull contracts pushing 200,000) since mid-June as global growth has slowed

And, again… these are just questions. I wouldn’t be doing my job if I didn’t ask them that way.


Another risk management question about the current #BailoutBull rally in stocks and commodities is how does this all end? One of the easiest ways to answer that question is reversing what’s driven asset prices higher (Dollar Down). What happens when the Fed runs out of communication ammo and the largest Ball Under Water trade (Dollar Up) in US history rips to the upside again?


Sadly, at this point, Obama, Geithner, and Bernanke know the answer to that question just as well as Vladimir Putin does. President Bush understood it too. We call it the Correlation Risk. Central planners don’t call it anything because that would be an admission of the most obvious risk in the world right now. It would also make them accountable for it.


Here’s the update on that (Correlation Risk between the US Dollar and everything else on our immediate-term TRADE duration):

  1. Gold -0.92
  2. Silver -0.88
  3. Copper -0.89
  4. CRB Index -0.89
  5. SP500 -0.73
  6. Eurostoxx600 -0.77

In other words, with the US Dollar on 3-month lows, mostly everything Big Macro that moves on no-volume these days has gone straight back up to lower long-term highs. All the while, the US Dollar continues to make higher long-term lows (see chart).


As a result, the next calamity in stocks and commodities will be no different than the one we just saw from the March highs to the June lows. Every one of these centrally planned debaucheries of the currency ignites shorter-term rallies and steeper corrections.


It also perpetuates structural long-term growth slowing, globally. And why the Fed can’t figure out the why on that is very simple – they haven’t run real-time businesses that have to meet payrolls. Therefore, they don’t get expectations.


Thinking That Way, for anyone who hasn’t spent their entire life getting paid by the largesse of the US Government’s broken policy promises, isn’t tyrannical. It’s just common sense.


My immediate-term support and resistance risk range for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr US Treasury Yield, Russell2000, and the SP500 are now $1, $113.47-115.48, $80.11-81.21, $1.24-1.28, 1.56-1.67%, 823-846, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Thinking That Way - Chart of the Day


Thinking That Way - Virtual Portfolio


Takeaway: We expect sequentially better performance for $MCD comps in August versus July but will likely remain on the sidelines for 4-5 mos

McDonald’s reports August sales results tomorrow morning before the market open.  Global growth slowing is still the primary headwind for MCD but we expect sequentially better comparable store sales, at least in the United States.


We wrote on April 24th that we saw “plenty to be concerned about” regarding the outlook for McDonald’s sales trends.  Macroeconomic factors remain a headwind for the company.  The company’s value proposition in the U.S., relative to the competition, is less compelling in 2012 than it was in 2011 with price – at roughly 3% – in line with Food Away from Home CPI versus last year when the spread was roughly -50 basis points.  We believe that MCD is closer to the bottom than the top, but are looking for catalysts before become vocal on the long side. 


Macro Growth Slowing Matters


Growth continuing to slow in Asia, Europe, and the U.S. is a headwind for MCD sales growth.  Europe is more difficult to calibrate since it is difficult to know which market will drive a beat or miss in any given month.  China seems to be a decent proxy for APMEA which is not entirely surprising given its importance for global and regional growth. 





Sales Preview


Below we go through what we would view as good, bad, or neutral comparable restaurant sales numbers for McDonald’s three regions.  For comparison purposes, we have adjusted for historical calendar and trading day impacts (but not weather).


Compared to August 2011, August 2012 had one less Monday and Tuesday and one additional Thursday and Friday.  In addition, Ramadan ended on August 18th, 2012, versus August 30th, 2011.  This will have a positive impact on August 2012's numbers.


U.S. – facing a compare of 3.9%, including a calendar shift of between 0.0% and -0.7%, varying by area of the world.


GOOD: A print above 3.5% would be received as good by investors as it would imply calendar-adjusted two-year average comparable store sales above the trend in July.   Last month, McDonald’s traffic was negative and investors will be looking for a clear signal that this was merely a one-off and not part of a trend.  We are anticipating a print of 3% for MCD U.S. in August.


NEUTRAL: Same-restaurant sales growth of between 2.5% and 3.5% would be received as neutral by investors as it would imply calendar-adjusted two-year average comparable restaurant sales growth roughly level with trends in July.  This is a difficult quarter to measure on a sequential basis given the Ramadan shift but we believe that investors are not anticipating a sequentially worse headline, even excluding the benefit in August from Ramadan.


BAD: A print below 2.5% would imply calendar-adjusted two-year average comparable restaurant sales growth below the trend from July.  Given the disappointment that July’s results brought for McDonald’s investors, a deceleration in underlying trends on a sequential basis would be decidedly negative for the stock.


MCD AUG SALES PREVIEW - mcd us comps preview



Europe – facing a compare of 2.7%, including a calendar shift of between 0.0% and -0.7%, varying by area of the world.


GOOD: A same-restaurant sales number in excess of 4% would be considered a strong result because it would imply, on a calendar-adjusted basis, two-year average trends showing stabilization after several months of volatility.   We are expecting a print of 3.6% for MCD Europe in August.  We expect the Olympics to have provided a year-over-year boost to sales in some markets like the U.K., which have been driving the Europe division in recent months.


NEUTRAL: 3-4% would be a neutral result for Europe as it would imply trends roughly in line with expectations and, following a negative print in July, would provide some reassurance of MCD’s ability to take share on an ongoing basis.


BAD: A print below 3% would imply a significant sequential deceleration in calendar-adjusted, two year average trends and, possibly, negative calendar-adjusted comparable sales growth.


MCD AUG SALES PREVIEW - mcd eu comps preview



APMEA – facing a compare of -0.3%, including a calendar shift of between 0.0% and -0.7%, varying by area of the world.


GOOD: Same-restaurants sales growth of 5% or more would be received as a good result as it would imply calendar-adjusted two-year average trends roughly flat versus July.  The trend in APMEA comps has been bearish over the last few months and any stabilization would likely be well-received.  On July 23rd, management cited weakness in Japan and consumer caution in China, particularly in tier-one cities where McDonald’s stores are most heavily concentrated.


NEUTRAL:  A print between 4% and 5% would be considered neutral for investors as it would be roughly in line with consensus, per Consensus Metrix.


BAD: Below 4% would imply a sequential deceleration in calendar-adjusted two-year average trends from June to July.  This would be severely bearish as it would imply a sharper deceleration from July to August than there was from June to July.


MCD AUG SALES PREVIEW - mcd apmea comps preview



Howard Penney

Managing Director


Rory Green


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.68%