• run with the bulls

    get your first month

    of hedgeye free


Earnings Slowing

“Betting taxpayer money on similar models seemed unacceptably risky.”

-Neil Barofsky


You can change the word taxpayer to investor, and you’d be making the same point. That’s what Barofsky said in Chapter 5 of Bailout, “Drinking the Wall Street Kool-Aid”, after listening to the New York Fed’s Bill Dudley attempt to explain his risk management process. Dudley is the economist who is now infamous for suggesting there is no real-world food/energy inflation because iPads are cheap.


Don’t blame all the ex-Goldman turned government guys (Paulson, Kashkari, Dudley, etc.) for making the biggest risk-adjusted US taxpayer commitments ever to bailout losing positions. Free-market capitalism is the best path to prosperity, baby! You don’t have to get the fundamentals right anymore. America 2.0 prosperity is all in the money-printing.


Setting aside the 10-13% March-June draw-down in US Equities, some may have had the stock market right “year-to-date.” But that’s not getting the economy right. The last time the economy started to diverge from the stock market like this was in Q3 of 2007. By then “the stock market was up double digits year-to-date”, then poof.   Earnings slowed, and cheap got a lot cheaper from there.


Back to the Global Macro Grind


Like iPads, I guess you can say stocks are “cheap”, but you better not be using the wrong numbers, or that’s where you’ll definitely get some multiple expansion! Cheap gets more expensive as companies guide down revenues and earnings. Ironically (see Chart of The Day), the most powerful side of the bull case in Q4 of 2011 (“earnings are great”) is now the biggest risk.


Here’s a snapshot preview of Q3 2012 Earnings Season:

  1. Fedex (FDX) = $27.3B market cap
  2. Staples (SPLS) = $8.3B market cap
  3. Intel (INTC) = $116B market cap
  4. Norfolk Southern (NSC) = $23.2B market cap
  5. Bed Bath & Beyond (BBBY) = $16B market cap
  6. Adobe (ADBE) = $16.3B market cap

The first 3 of those companies (FDX, SPLS, and INTC) already told you about #EarningsSlowing – they’ve been saying it for almost a month. The last 3 (NSC, BBBY, ADBE) just told you the same thing, but as of last night. Watch those stocks today.


Now maybe fundamentals “don’t matter” and, somehow, at the same time it’s all about stock picking again (always seems to be after the move) – but those maybes might only be maybes until the companies you are invested in report reality.


The storytelling in our profession is always impressive, but it will be really interesting to see who gets sucked into thesis drift (like they did at the Q3 top of 2007) as their “growth is back, earnings are great, and stocks are cheap” thesis of March 2012 comes unglued.


If it’s all about Apple and money printing, that’s a much more acceptable explanation – I get it. I had last week’s Viagra melt-up dead wrong inasmuch as being long the US Dollar and short Commodities this week looks dead right.


Apple is not the economy.


Apple is a great company that is not doing what companies explicitly linked to the global economy without a mega-innovation cycle are doing. FDX + SPLS + INTC + NSC + BBBY + ADBE = $207B in market cap exposed to #EarningsSlowing. AAPL has over 3x that market cap, and expectations are that their earnings may never slow again.


Put another way, Apple is not the economy but it is, increasingly, holding up the US stock market.


The other big thing going on all of a sudden this week is the other side of the Dollar Debauchery trade. Causality (Bernanke’s Policy to Inflate) has its short-term perks, but it also has its correlation risk.


To review:

  1. US Dollar Index was down for 6 consecutive weeks into and out of Bernanke’s to “infinity and beyond” move September 13th
  2. A 6wk draw-down of over 6% in the US Dollar Index took stocks and commodities to 6 week highs
  3. This is the first UP week the US Dollar has had in the last 7 (USD +0.9% week-to-date)
  4. Oil collapsed on that, down -8% in a straight line, breaking our long-term TAIL risk line of $111.44/barrel (Brent)
  5. The immediate-term TRADE correlation between USD and Gold = -0.97; that’s surreal
  6. Gold just failed to make a higher all-time high (versus the post January 25 Bernanke push to 2014 on 0% money in Feb)

So, what do you do with Growth and #EarningsSlowing, laced with a record level of correlation risk on the side this morning? I don’t know. All I can do is stay true to the research and risk management process that got me out of the way before the SP500 was down -4.4% when the music stopped in November of 2007.


My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Treasury Yield, and the SP500 are now $1, $107.46-111.44, $78.56-80.54, $1.29-1.31, 1.72-1.77%, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Earnings Slowing - Chart of the Day


Earnings Slowing - Virtual Portfolio


TODAY’S S&P 500 SET-UP – September 20, 2012

As we look at today’s set up for the S&P 500, the range is 25 points or -0.82% downside to 1449 and 0.89% upside to 1474. 











    • Increase versus the prior day’s trading of -341
  • VOLUME: on 09/19 NYSE 643.72
    • Increase versus prior day’s trading of 1.71%
  • VIX:  as of 09/19 was at 13.88
    • Decrease versus most recent day’s trading of -2.12%
    • Year-to-date decrease of -40.68%
  • SPX PUT/CALL RATIO: as of 09/18 closed at 1.53
    • Up  from the day prior at 1.49 


  • TED SPREAD: as of this morning 26.93
  • 3-MONTH T-BILL YIELD: as of this morning 0.11%
  • 10-Year: as of this morning 1.74%
    • Decrease from prior day’s trading of 1.77%
  • YIELD CURVE: as of this morning 1.49
    • Down from prior day’s trading at 1.51 

MACRO DATA POINTS (Bloomberg Estimates)

  • 7:44am: Fed’s Rosengren speaks in Massachusetts on economy
  • 8:30am: Init Jobless Claims, Sept. 15, est. 375k (prior 382k)
  • 8:58am: Markit U.S. PMI Prelim, Sept. est. 51.5 (prior 51.5)
  • 9:30am: Fed’s Lockhart speaks at Kansas City Fed conference
  • 9:45am: Bloomberg Consumer Comfort, Sept. 16 (prior -42.2)
  • 9:45am: Bloomberg Economic Expectations, Sept. (prior -22)
  • 10am: Philadelphia Fed, Sept. est. -4.5 (prior -7.1)
  • 10am: Freddie Mac mortgage rates
  • 10am: Leading Indicators, Aug. est. -0.1% (prior 0.4%)
  • 10:30am: EIA natural-gas change
  • 11am: Fed to sell $7b-$8b notes due 6/15/2015-8/31/2015
  • 11am: U.S. to announce auction sizes for 2-yr, 5-yr and 7-yr auctions
  • 12pm: Federal Reserve Flow of Funds Report
  • 1pm: U.S. to sell 10-yr TIPS (reopening)
  • 1:30pm: Fed’s Kocherlakota speaks in Michigan
  • 5pm: Fed’s Pianalto speaks in Ohio
  • 6:30pm: Fed’s Bullard gives lecture at U. Notre Dame


    • House, Senate in session
    • Tax treatment of capital gains debated at joint hearing of Senate Finance, House Ways and Means, 10am
    • House Small Business hearing on likely effects of sequestration on government contractors 1pm
    • House Oversight panel holds hearing on Afghanistan, 2pm
    • House Oversight panel holds hearing on Medicare, 2pm
    • House Judiciary holds hearing on regulations, jobs, 10am
    • Senate Homeland Security panel holds hearing on offshore profit shifting and the U.S. tax code, 2pm
    • Senate Commerce releases results of investigation into consumer abuses by moving and storage industry, 10am
    • SEC holds closed hearing on enforcement matters, 2pm
    • FERC holds monthly meeting, 10am


  • Chinese manufacturing survey points to 11th month of contraction
  • Nike to spend $8b buying back shares over 4 years
  • Liberty Global offers to buy remaining 50% of Telenet for $2.54b
  • Spain sells EU4.8b of bonds, most since January
  • BOJ scraps requirement for regular purchases of govt. debt
  • CIC-led group said to pay $2b for 5.6% of Alibaba
  • Norfolk Southern sees 3Q earnings at $1.18-$1.25 vs est. $1.63
  • Bain Capital said to be in advanced talks to buy Apex Tool for $1.5b-$1.8b
  • UBS more cautious on U.S. banks; cuts MS, Citigroup, Goldman
  • Peugeot to sell Gefco stake for $1.04b to help cut debt
  • SEC’s Gallagher says retail bond investors fighting headwinds
  • Billabong bidder drops out leaving A$694m sale to TPG
  • KBW ordered to face lawsuit by trustee for Guaranty Financial
  • Capital Bank raises $180m in IPO, pricing below range
  • GM said to plan bid for Ally Financial’s Europe, Latam ops
  • American Airlines cancels 300 flights on maintenance delays and sick pilots


    • IHS (IHS) 6am, $1.01
    • Scholastic (SCHL) 7am, $(1.05)
    • Rite Aid (RAD) 7am, $(0.07)
    • ConAgra Foods (CAG) 7:30am, $0.35
    • CarMax (KMX) 7:35am, $0.52
    • Jefferies Group (JEF) 8am, $0.26
    • Oracle (ORCL) Aft-mkt, $0.53
    • Tibco Software (TIBX) 4:10pm, $0.27
    • Cintas (CTAS) 4:15pm, $0.59



OIL – does Dollar UP matter? We don’t need an opinion on that; fact is that this is the 1st UP wk for the US Dollar Index in the last 7 and oil just got smoked for an -8% drop from the Bernanke Policy to Inflate SEP top; we continue to think that the Bernanke Bubble in Commodities is in the process of popping; long-term tops are processes, not points.

  • Fed Stimulus Fading as Forecasters Say Best Is Over: Commodities
  • Bakken Gain Triples Brent as Trains Oust Pipes: Energy Markets
  • China, India Show Gold Is Expensive Insurance: Chart of the Day
  • Gold Drops as Strengthening Dollar Erodes Demand; Platinum Falls
  • Oil Falls to Six-Week Low on China Slowdown, U.S. Supply Surge
  • Copper Falls Most in a Month on Concern About Global Slowdown
  • Corn Falls as Record Brazilian Harvest May Ease Supply Concerns
  • Sugar Rises as Demand May Rebound After Drop; Cocoa Declines
  • Indonesia Will Relax 2014 Ore Ban to Increase Time for Smelters
  • Rebar Drops Most in 11 Months as Chinese Manufacturing Shrinks
  • China Overtakes U.S. as Largest Crop Importer, WTO Data Show
  • Lonmin Pact With Illegal Strikers Sets ‘Dangerous’ Precedent
  • Cosco May Order Supertankers Amid Rising China Oil Imports
  • Copper to Extend Gain as Resistance Breached: Technical Analysis
  • Chinese, Indians Buy Pink Diamonds as Rarity Clicks, Rio Says
  • Shell Leads LNG Competitors Out to Sea With Biggest Ship: Energy





EURO – if $1.29 EUR/USD doesn’t hold, watch out below for the Euro (no immediate-term TRADE support to $1.26); this is the #1 issue we had w/ Bernanke Expectations, Spread Risk – it’s as obvious b/t the Euro and USD as it is USD and CRB; wicked correlated in the short-term, so stay disciplined with your risk management levels here.










CHINA – never mind what NSC surprised people with (bulk commodity volumes slowing), Chinese stocks have been pounding this into our craws since May (Qe commodity inflation is not demand); Shanghai Comp -2.1% last night to a fresh YTD low (-18% since May); Japan’s attempt to play the Bernanke card was good for a 1-day rally, then Nikkei straight back down -1.6%.










The Hedgeye Macro Team


Takeaway: International protectionism is poised to meaningfully accelerate over the intermediate term.



  • While we view the threat of military intervention as highly improbable, we do think the heightened tension over the Senkaku (Japan)/Diaoyu (China) islands risks facilitating a string of international protectionism – which is already poised to accelerate due to recent political promises out of the Obama and Romney camps.
  • Such protectionism would have dire economic effects globally, with Japanese industrial production and US/EU consumption getting hurt the most – the former due to lower Chinese demand; the latter due to higher import price inflation.
  • Retaliatory measures, while not an acute risk, could beget broader financial market and economic contagion globally. This is a meaningful TAIL risk, given the recent rhetoric and maneuvers of international policymakers.


In recent days and weeks, the geopolitical tensions surrounding China and Japan’s territorial dispute over the Senkaku (Japan)/Diaoyu (China) islands have certainly elevated to a critical level. Currently, outraged citizens across ~85 cities in China are protesting Japanese occupation of what is viewed by the Chinese as their sovereign territory, physically damaging Japanese businesses in the process. To some extent, a fair amount of yesterday’s social unrest was a function of yesterday being the anniversary of the commencement of Japan’s 1931 occupation of China. That being said, however, the situation remains far from resolved. In fact, it appears poised to get a lot worse before it is ultimately resolved.


As a quick refresher, the following link (albeit from the Tokyo governor’s office) details the size, location and the highly controversial geopolitical history of the disputed territories, which lie squarely in the East China Sea: http://www.chijihon.metro.tokyo.jp/senkaku_english.htm. Interestingly, an LDP victory in Japan’s parliamentary elections (due by AUG ’13) will all-but-guarantee this territorial dispute is not resolved efficiently, as all three candidates to replace Sadakazu Tanigaki as the head of the LDP are in favor of Japan’s attempt to nationalize and develop the islands (as are 75% of Japanese voters). It's worth noting that the LDP is currently favored in polls vs. the ruling DPJ by a margin of 31% to 14%.




On the topic of conflict resolution, US Defense Secretary Leon Panetta visited China yesterday (after visiting Japan the day prior) attempting to help mediate the dispute, which comes in the wake of the recent attempt by Japan to nationalize the islands and a recent Chinese sovereign declaration of precise boundaries for the waters surrounding the islands – an act that may lead to heightened pressure to respond with military force if a Japanese vessel invades China’s “sovereign” territory. It is our view that the US would ultimately be forced to side with Japan in the event of a military conflict, given its current use of Japan as a key military base in the region – highlighted by a deal Monday for the US to build a brand-new, anti-missile radar shied on Japanese soil. For now at least, the threat of military intervention remains low.


A threat that is not improbable at the current juncture is large-scale protectionism on the international trade front. Combining their bilateral exports, China and Japan shipped each other $316.1 billion of goods last year  – which would rank their exchange of merchandise as the 34th largest country in the world! More importantly, their economic ties are even more interconnected, given the bilateral exchange of services, foreign and portfolio direct investment, as well as tourism flows. While total dollars are hard to quantify, the key takeaway here is that China and Japan are economically joined at the hip.


Japan, however, is a bit more economically joined at the hip to China than China is to it. In fact on an aggregate basis, Japan relies on Chinese demand 2.5x the rate China relies on it (China-to-Japan = $148.5B or 7.8% of total exports; Japan-to-China = $167.6B or 19.7% of total exports). Moreover, key retailers in Japan look to Chinese end markets for a meaningful portion of their global sales (Nissan at 26%, followed by Honda at 20%) and Fitch Ratings has already threatened to downgrade a host of Japanese companies should the geopolitical dispute drag on. In short, a Japan-China trade war would most likely be more impactful to the Japanese economy than it would be to the Chinese economy – especially considering that the former is more reliant on international demand for growth amid a 20yr-plus economic malaise.


Even beyond end-market protectionism, such as economically-punitive tariffs, China could enact rather destructive measures on Japanese (and global) supply chains by choking off its production and shipment of rare earths – a critical input in just about every modern piece of technological equipment, ranging from cell phones to computers to televisions to light bulbs to missiles. China, which is home to over 90% of the world’s rare earth supplies and 23% of global reserves, has already signaled that its reserves are declining and have recently commenced a round(s) of strategic buying to boost stockpiles and protect the industry from overexploitation.


To be fair to China, this latest measure is in line with their three-year trend of systematically reducing international shipments and production quotas, with a -20% production cut as recently as this AUG. To the extent this trend is accelerated in the name of protectionism, we would not be surprised to see fears of a rare earths shortage develop across the international markets. Keep an eye on the Market Vectors Rare Earths/Strategic Metals ETF (REMX) for signs of this risk; in fact, it could serve as a potential hedge for anyone with international tech exposure in their portfolio (SNE? AAPL?), as those companies would be at risk of margin erosion, on the margin. On the flip side, any potential input cost increases could be passed through to international consumers, which would likely slow consumption growth broadly. How much someone in the US or Spain can afford to pay for an iPhone 5 remains to be seen…




Jumping ship, we briefly wanted to touch on what we see as growing risk that the US and China are headed down a similar path of protectionism, as China’s manufacturing prowess at the expense of the US laborer has become an increasingly hot topic on the US presidential election campaign trail. To that tune, President Obama and Presidential hopeful Mitt Romney exchanged rhetorical blows earlier in the week on the US’s bilateral trade with China. While both candidates appear to be blowing a fair amount of political smoke, we’d be remiss to ignore their aggressive tone towards China and any potential implications of tighter US trade policy towards the Asian manufacturing giant.


Per Bloomberg: “The economy returned to the forefront of the presidential campaign as the U.S. today filed a challenge at the World Trade Organization accusing China of illegally subsidizing exports of automobiles and auto parts. It was the administration’s second complaint related to the auto industry since Obama began his re- election campaign. The aid amounted to at least $1 billion between 2009 and 2011 and benefited as much as 60 percent of Chinese car-parts exports, according to the U.S. The subsidies put U.S. component manufacturers at a competitive disadvantage, which encourages the outsourcing of car-parts production to China, the U.S. said. The U.S. announced the complaint 50 days before the Nov. 6 presidential election and 15 days before early voting starts in Ohio. The state has 54,200 residents employed by the car-parts industry and 12.4 percent of the state’s total employment related to the auto sector.”


From our purview, Obama is clearly elevating China’s “unfair” trade policies on his political agenda – likely to dodge pre-election heat from pro-business supporters that claim he hasn’t done enough during his first term in office to protect American corporations from having to outsource labor costs in order to remain competitive. As it stands, we anticipate that a large portion of Obama’s tough talk will die down after the election (assuming his likely victory); conversely, a Romney victory would accelerate protectionist measures aimed at unwinding China’s competitive advantages, given his repeated claim to label China as a currency manipulator (and thereby invoking highly-punitive measures against China) on his first day in office.


In the short-run, meaningful anti-China trade measures are likely to lead to higher US consumer and producer price inflation, as increased cross-border transactional costs get passed through to US consumers and businesses. To the extent China retaliates with measures of its own, we could see US businesses like YUM and NKE that have a large [and growing] Chinese footprint suffer on their respective top-lines.


Stay tuned – as if the next 3-6 months weren’t going to be eventful enough!


Darius Dale

Senior Analyst

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.


Revenue diversity is fine but has it gone too far?


  • Non-gaming (room, food & beverage, and entertainment) revenues accounted for 62% of total Strip revenues in Fiscal Year 2011 (ending June 2011), far higher than its 49% proportion seen 15 years ago
  • Vegas operators e.g. MGM, CZR, STN, have been more dependent on hotel revenue growth.  Unfortunately, Vegas REVPAR growth is trending negative in Q3 compared with a 15.4% growth rate in 2011, as it has become difficult to push rates higher.
  • Our big issue continues to be that fewer young people are playing slots and slots are the highest margin revenue stream in Vegas



The Healthcare Nightmare

Takeaway: Romney's against the ACA and will repeal it if elected while Obama believes this is for the greater good of our nation. Voters will decide.

President Obama successfully got his Affordable Care Act through Congress much to the chagrin of Republicans. Now it’s time to examine what that means for Medicare spending going forward. Hedgeye Healthcare Sector Head Tom Tobin discussed entitlement reform, spending and each candidate’s opinion on ACA during today’s client call discussing the 2012 presidential election.


It should come as no surprise that Mitt Romney is heavily against the Affordable Care Act, calling it a “$2 trillion entitlement we don’t want and certainly can’t afford.” He has noted that should he become president, he’ll repeal the act.



The Healthcare Nightmare - TOBIN uninsured



Looking at the above chart, you can see that uninsured Americans are generally younger and aren’t big consumers of medical services. Medical services consumption increases with age, with those over 55 making up the lion’s share of expenditures. The CBO currently estimates that 11 million people will be added to Medicare and 19 million to private insurers due to the ACA. The act increases total medical spending by between +3.1%* to +6.7%.


Someone has to pay for this and you can easily see why Romney is against having taxpayers foot the bill. Obama believes that the ACA is for the greater good. Votes are likely to choose a candidate based on their current medical and financial situation. It’s one more factor that gives us reason to believe the election is too close to call.



The Healthcare Nightmare - TOBIN election

Election Economics

Takeaway: This election is simply too close to call. Economic data favors Romney while state polling data favors Obama.

On today’s client call discussing the upcoming presidential election, Hedgeye Director of Research Daryl Jones focused on the role economic data will play with regard to each candidate. Current battleground state polls show Obama ahead in every state save for North Carolina and no Republican has ever won an election without winning Ohio, which is cause for concern for the Romney camp. But the caveat to state polling data could be economic studies which tell a different tale.



Election Economics - JONES election



Two University of Colorado professors, one from Boulder and one from Denver, have put together an

Electoral College forecast model to predict who will win the 2012 presidential election and the result is

bad news for Barack Obama. The model, which uses economic indicators from all 50 states, shows 320 electoral votes for Romney and 218 for Obama, pointing to a Mitt Romney victory in 2012.


This kind of Electoral College model developed by the team of Bickers and Berry is the only one of its kind to include more than one state-level measure of economic conditions -- both national unemployment rates as well as per capita income. We are of the opinion that this election is too close to call; if you go with state polling, it’s a win for Obama. Those who agree with Bickers and Berry see Romney winning in November.

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.