2007's Lessons: SP500 Levels, Refreshed

Takeaway: Dips turn into draw-downs when the least amount of people are positioned for them.

POSITIONS: none on the SPY or Sector ETF side of the idea ledger        


We came into today long defensive (Consumer Staples, XLP) for the bounce in the US Dollar. Dollar up pounds the beta trade (Oil, Energy Stocks, Financials, etc). That’s why we call it the Correlation Risk. In the immediate-term, it matters, both ways.


I sold XLP and made a few short sales that were research driven (HSIC and TXRH) because there is a rising probability that the SP500’s immediate-term TRADE line of 1451 snaps. If and when immediate-term performance chasing snaps in Equities, you’ll see the kind of selling we saw yesterday in Oil. It happens fast.


Across our core risk management durations (TRADE, TREND, and TAIL), here are the lines I am focused on:


  1. Immediate-term TRADE resistance = 1474 (Friday’s Bernanke short squeeze high)
  2. Immediate-term TRADE support = 1451 (under attack)
  3. Intermediate-term TREND support = 1419


In other words, if Growth and Earnings Slowing weren’t a fundamental reality at this point, I’d be buying this dip. But they are, and dips turn into draw-downs when the least amount of people are positioned for them.


2007’s Lessons remain crystal clear in my mind. Eventually, hope for central planners to “smooth” the gravity of the economic cycle slowing runs out of catalysts. That’s why long-term tops are processes, not points.




Keith R. McCullough
Chief Executive Officer


2007's Lessons: SP500 Levels, Refreshed - 9 20 2012 11 34 15 AM

Healthcare Vs The S&P 500

We took a look at the HRM Index’s average year-over-year sales growth and compared it against the S&P 500 (SPX). What we found was that healthcare outperformed the SPX when growth is accelerating relative to the index. Two points made by Hedgeye Healthcare Sector Head Tom Tobin are below, illustrating headwinds that may occur heading into the back half of the year and onward:


• Consensus growth estimates, however, look too optimistic given how fast the macro is slowing; job growth, industrial production, and GDP are all pointing lower into Q412


• QE3 could help, but history suggests Federal Reserve actions are weak and largely equivocal as it relates to its impact on employment.


Healthcare Vs The S&P 500 - healthcareSPX


Higher margin slot play lagging


  • Strip slot revenue as a % of total gaming revenue has been sliding since its near-term peak in April 2009. 
  • This trend is alarming given the higher margin profile of slots versus tables.  The demographics - post baby boomer generations are not playing slots – suggests that the trend will continue.
  • Strong growth in Baccarat play from China drove all of the increase in table revenue vis a vis slot revenue over the past few years.  International visitors accounted for 16% of all Vegas visitors in 2011, up from 13% in 2000.



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UAL: Fare Warning

Takeaway: Margins are under pressure at $UAL as the company faces competition from American Airlines post-bankruptcy and competitive fares.

We’re currently bearish United Continental (UAL) for several reasons, two being real standouts. The cost cuts involved with the American Airlines bankruptcy will allow the airline to emerge leaner with the ability to offer lower fares. American’s gain is UAL’s loss and the company will need to stay competitive in order to compete against American’s cost advantages.


Another issue at hand involves fares across the entire industry. July and August ARC data shows fares declining year-over-year, despite rising costs.  This suggests to us that American’s cost reductions are pressuring industry margins.  A “race to the bottom” for the cheapest flights isn’t what’s going on but staying competitive with price is always a concern.



UAL: Fare Warning - UALchart3mo



There are myriad other issues UAL faces as well including issues integrating with Continental post-merger and weak industry structure. Keith has shorted UAL as a real time position and has yet to close it out.

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.





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