ENERGY: Low Inventory

Takeaway: We're busy exporting and demand for fuel is a bit weak - people are trying to conserve gas, not burn it, when it's at $4 a gallon.

US energy product inventories are low, particularly gasoline and diesel fuel. Despite US refineries cranking at full speed and utilizing a high level of capacity, there are several reasons why we’re running low on gas and diesel. First, we’ve been increasing exports of fuel, sending diesel to Europe and gasoline to South America. We’ve also undergone a drop in refined product exports. Lastly, we’ve had weak domestic demand for refined products. People are busy trying to conserve gas when it’s $4 a gallon.


Provided the export market stays open, we expect product stocks to remain depressed relative to prior levels, which is positive for refining margins.



ENERGY: Low Inventory - INVENTORY 1



ENERGY: Low Inventory - INVENTORY 2


Another Tale Of Slowing







By now, you’ll clearly understand our case on growth slowing here in the United States. But what about corporate earnings? Are they also slowing? As Sarah Palin would say: “you betcha!” Right now everyone is busy filling themselves on goblets of QE3 Kool-Aid. There’s no worry about getting things “right” in the market. And yet, big corporations seem to know that things aren’t exactly peachy. Remember when Fedex (FDX) came out a month ago and issued lower guidance and then reported earnings and everyone seemed to forget about their previous announcement? Or take Staples (SPLS) which did the same thing. The truth of the matter is that corporate earnings are slowing along with growth and the economy isn’t better because of more QE, it’s getting worse. Keep in mind that Apple (AAPL) is not the economy or the market.




It has been six consecutive weeks of the US dollar Index falling lower and lower – nearly 2 months since the investment community rallied around the currency for a “Dollar Holler” as I like to call it. We wonder what it’ll take for confidence to construct itself again in the dollar. It seems that no one wants to even bother with it post-Bernanke speeches and it makes sense. He’s busy devaluing our currency while driving up food and fuel prices. We wonder why any of the retail crowd or mass market American public would want this to happen. It’s not like QE is going to get them out of foreclosure or get them a new job.







Cash:                  UP


U.S. Equities:   DOWN


Int'l Equities:   Flat   


Commodities: Flat


Fixed Income:  Flat


Int'l Currencies: Flat  








Our conversations with Wendy’s franchisees indicate that sales have been trending sequentially higher in 3Q versus 2Q. We believe the company is about to announce the end of the company’s Sisyphean breakfast initiative after a prolonged “testing” phase. Given the capital demands on the company over the next few years as it invests to upgrade its asset base, shifting capital from the distraction that has been breakfast is a positive. The tail is less certain as it will take years for the system to rejuvenate the asset base and push out the older franchisees that don’t want to make the necessary investments to bring the asset base in line with contemporary industry standards..

  • TAIL:      NEUTRAL            



Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • 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







“Bank Of America To Fire 16,000 By Year End” -@zerohedge




“I could prove God statistically.” –George Gallup




Jobless Claims drop less than expected, down 3000 to 382,000; Wall Street expected 373,000.






The Macau Metro Monitor, September 20, 2012




Sands China is planning to invest at least US$2.5 billion (MOP20 billion) on Site 3.  Sheldon Adelson said that construction is set to begin in 60 days.  The project, to be named “The Parisian”, will include 3,000 hotel rooms and have an Eiffel Tower replica.



According to a source close to the matter, it is “unlikely” that the Macau government will approve any new casino land grants this year.  The government is currently analyzing requests filed by both MGM China and SJM.  MGM China’s land request proposal is the one closer to approval, but it is only likely to receive the final nod in 2013.



Singapore's Changi Airport handled 4.28 million passengers in August, +10.9% YoY.




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Gambling #Unlimited

This note was originally published at 8am on September 06, 2012 for Hedgeye subscribers.

“Rather than a gambler, he was a speculator with an eye for good risks.”

-Carl Sandburg


That’s a quote from one of the better opening chapters I have read in 2012, “God’s Chosen Instrument”, in Jay Cooke’s Gamble – “The Northern Pacific Railroad, The Sioux, and The Panic of 1873.” (by M. John Lubetkin)


Few in this profession want to admit that there is a degree of gambling in what they do. But what, per se, would you call what we have all been forced to do in the last 6 months? Even if you have perfect inside information on what Draghi is going to do this morning, the market could do the exact opposite of what you think it should do on that.


Inside information? If you don’t think someone always knows something, you need “more time” on the job too. That’s as old as Jay Cooke’s legend in becoming the “financier of the Civil War.” One of the market’s richest men (before it all crashed in 1873), “Cooke bought members of Congress, bribed 2 Vice Presidents, built churches…” (page 1) etc., but still blew up his unlimited capital bet, in the end.


Back to the Global Macro Grind


#Unlimited – that’s what she said. As in the woman who wrote this morning’s manic media headline on why the US stock market futures were up 8 handles. “Stocks rise on possibility of unlimited ECB bond buying.”


Imagine that for 3 more minutes. Never mind the most money ever printed into a central planning event… ever… by 9AM EST, “unlimited” moneys will fall from the heavens, Gold will go to $3000 and Oil will go to $200?


The storytelling out there is just getting awesome.


I’m short Gold here. On balance, until turning bearish on Gold in Q1 of 2012, I have been a Gold bull since 2003. I have #timestamped 35 long/short positions in the GLD since founding the firm in 2008 (been right 30x).  


The more wrong I am on Gold (from here), the more right I’ll be on #GrowthSlowing.



  1. Inflation is not growth
  2. Inflation slows growth

So, if you are still hoping for economic growth, but at the same time want the Italian Eurocrat to go “unlimited”, Weimar-style, on the printing presses this morning, just be careful what you are cheering for.


Rather than roll the bones on what rumor is going to hit my tweet-stream next, this is what I am going to do on green this morning.


Drum-roll: sell.


That’s not my perma position (7 of my last 10 booked gains have been on the long side, and we’ve bought almost 50 tickers since the May-June 2012 lows). That’s just what I do (on green) at the high end of what we call our Risk Management Range.


When I give you my Risk Ranges at the bottom of the Early Look every morning, those are the immediate-term ranges of price risk that I am using to make my buy and sell decisions. Rather than a gambler, I’m just good at being disciplined, not swinging at outside pitches.


Since I wasn’t a good baseball player (I am Canadian), what other choice do I have? It’s hard enough to hit the big fat fastball of perfect information in this market when you feel like you see your pitch.


If markets haven’t humbled you yet, they will. If central planners think they have markets nailed now, they are about to get nailed.


With those long-term risk management realities vs. short-term rumors in mind, here are your risk ranges, across asset classes this morning:

  1. US Dollar Index = 81.11-81.89
  2. EUR/USD = 1.24-1.26
  3. US Treasury 10yr Yield = 1.54-1.63%
  4. CRB Commodities Index = 303-309
  5. SP500 = 1398-1414
  6. VIX = 16.91-18.92
  7. Russell2000 =  812-825
  8. Shanghai Composite = 2016-2089
  9. Nikkei (Japan) = 8532-8768
  10. EuroStoxx50 = 2407-2475
  11. DAX (Germany) = 6899-7065
  12. IBEX (Spain) = 7357-7611
  13. Oil (Brent) = $111.96-115.36
  14. Gold = $1675-1712
  15. Copper = $3.47-3.52

People can call me a gambler. They can call you a lover. They can call us “perma” whatever they want if the storytelling makes them feel certain about something that’s uncertain. The only thing I am certain about this morning is what my process is telling me to do next.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Gambling #Unlimited - Chart of the Day


Gambling #Unlimited - Virtual Portfolio

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

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