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We Are American







Americans catch a bad rep sometimes. For whatever reasons, financial professionals and policy makers think they can outsmart the public time and time again. And you know what? That’s simply not the case. Be it the gentleman in Arkansas who pulls money from a mutual fund or the misguided youth protesting with the Occupy Movement in New York, people are catching on and smarting up. They are tired of central planning policy that has killed their ability to generate yield and has created no economic boost that’s tangible. Devaluing the dollar has run its course, and soon the planners and policymakers will have to move on to something that doesn’t involve the word “easing.”




Our focus on the slowing of growth is still alive and beating in our hearts as we shake our head at Bernanke’s failed policies. But in the immediate-term, we have turned our attention to corporate earnings. Make no mistake about it: earnings are slowing. Companies like FedEx (FDX), Intel (INTL), Norfolk Southern (NSC) and Oracle (ORCL) all paint a picture of lower guidance and falling revenues. It’s interesting because this is one thing Bernanke can’t step in and fix with the wave of a magic pen. As we continue farther into the Q312 reporting game, things will likely become worse.







Cash:                  Flat


U.S. Equities:   Flat


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







“’Futures flat as Fed hopes offset Caterpillar’, LOL” -@KeithMcCullough




“The middle of the road is where the white line is-and that's the worst place to drive.” –Robert Frost




5 million. The amount of Apple iPhone 5s sold in just three days.






Thinking That Way

This note was originally published at 8am on September 11, 2012 for Hedgeye subscribers.

“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 $1694-1745, $113.47-115.48, $80.11-81.21, $1.24-1.28, 1.56-1.67%, 823-846, and 1419-1441, 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

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Holding Our Position

“We are holding our position.”

-General George S. Patton


That’s what one of America’s greatest said on the eve of July 31, 1944 when Patton “outlined the basic procedure for his men until war’s end.” In specifically addressing his intentions toward the enemy, he also added that “we’re going to go through him like crap through a goose.” (The Soul of Battle, page 289)


In terms of how I think about our proverbial enemy in Global Economics (The Keynesian Army of Academia), that sounds about right. As I watched a good man win $30,000 after hitting a Hole-In-One yesterday at the Homes For The Brave fundraiser in CT, I said to myself ‘divine intervention!’ Somewhere, something out there is telling me Americans are smarter than our failed policy makers.


After their 2-day Viagra rally, Bernanke’s Bailout Beggars are back on their heels. Our Q2 2012 Global Macro Theme of “The Last War: Fed Fighting” isn’t easy. But it ain’t over till it’s over either. We’re Holding Our Position that Policies To Inflate (Qe3) will only perpetuate the global growth slowdown. We believe that Strong Dollar is the only way to long-term American prosperity.


Back to the Global Macro Grind


Don’t look now, but US stocks are down for 5 of the last 6 days and have done nothing but go down versus the YTD highs established on the day after Bernanke became completely politicized (September 13th, 2012).


From that goose poop intraday high on September 14th of 1474 in the SP500:

  1. US stocks are down -1.2% and -1.9% respectively (SP500 and Russell 2000)
  2. CRB Commodities Index is down hard, from 320 to 305 (-4.8%)
  3. US Treasury Bond Yields are down even harder, from 1.89% to 1.69% (-11%)

Ok, maybe calling it goose poop is a bit much. But if you bought stocks/commodities up there and shorted bonds, and put your nose real close to your P&L since, it’s closer to the truth than a rumor.


On a more serious note, this is getting serious. The Chairman of the Federal Reserve continues to make promises to markets that he cannot keep. Reality here is sad and simple, at the same time:

  1. Money Managers are forced to front-run Bernanke, chasing asset prices higher into central planning events
  2. Then they all need to sell, at the same time, before economic gravity takes hold, and prices correct

This is the anti-thesis of part I of Bernanke’s Congressional mandate (“price stability”). It’s also the #1 reason why A) people won’t hire and B) people won’t invest in this market at a 4.5 year top. Real people with real money don’t trust this market as far as they can throw an NFL replacement ref.


Now, to be fair, the equity bulls who got smoked from March-June have absolutely “nailed it” from July-September – maybe for all of the wrong reasons (#GrowthSlowing) – but nailing it is nailing it when it comes to the score.


But where do they go from here? In March perma-bulls said “3-4% growth is back, earnings are great, and stocks are cheap.” Today, we have both Growth and Earnings Slowing, but something like 216,000 global “easings” which are, allegedly, going to trump earnings season.


In addition to what Fedex (FDX), Intel (INTC), Staples (SPLS), Norfolk Southern (NSC), Bed Bath & Beyond (BBBY), and Oracle (ORCL) have previewed in the last 2 weeks, here’s the Growth and #EarningsSlowing Update from Caterpillar (CAT) last night:

  1. CAT cut 2012 and 2015 guidance without a lot of specifics
  2. Management hinted that 2012 Revenues would “come off” by about $2 Billion Dollars
  3. Management insisted cutting 2015 guidance from $15-20 in EPS to $12-18 in EPS was “not a guidance cut”

So, in our Research Meeting today I’ll ask our new long-cycle master Industrials Managing Director, Jay Van Sciver, if it’s “not a guidance cut”, what specifically does that goosy stuff smell like to you?


To review: when people say “stocks are cheap”, this CAT puke example really speaks to the heart of what that might mean. Cheap is cheap if the company can actually deliver on revenue and earnings expectations. “Cheap” gets cheaper when companies guide down:

  1. If you bought CAT in February 2012 at $116, assuming $20 in 2015 EPS, you paid what you thought was 6x EPS on 2015
  2. If you shorted CAT in February at $116, assuming $12 in 2015 EPS, you shorted it at 10x hopeful 2015 EPS

Ok, so 6-10x is cheap, I guess, if you use 2015! I’d need at least 6 Bud Lights and a 50% chance at Powerball to put my name on a 2015 forecast right now, by the way.


In the meantime, what about 2013? What if the company can’t drive earnings above $9 for the next 3yrs? What does Chinese “construction off 40%” (per CAT management) mean to Q3 and Q4 of 2012 revenues and earnings assumptions?


If you are long CAT, we’re guessing you don’t know the answer to those questions this morning. That’s ok, neither does CAT’s management. Therefore, goose or no goose, we are Holding Our Position: Short CAT as growth and earnings slow.


My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $106.73-111.44, $1, $78.85-80.63, $1.28-1.30, 1.63-1.79%, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Holding Our Position - Chart of the Day


Holding Our Position - Virtual Portfolio


The Macau Metro Monitor, September 25, 2012




SJM CEO Ambrose So said regarding his Cotai project, “These are not projects you can do in two days. They take around three years to complete. So it’s not a matter of life and death who gets over the line first in terms of [government] permission."  So reiterated his hopes of getting 600 to 700 live gaming tables for its Cotai project. He also admitted that the recent shareholder battle over the control of Greek Mythology Casino, one of SJM Holdings’ satellite casinos, had hurt the gaming operator’s gross gaming revenue market share.  “We will try our best and hope we can achieve our target of about 30% [market share].”


The number of imported workers in Macau reached a new all-time high in August.  According to official data from the police released today, Macau had a total of 107,400 imported workers by the end of August, 61% of whom came from the mainland.  This was the second month in a row in which a new all-time high for imported workers was set.


TODAY’S S&P 500 SET-UP – September 25, 2012

As we look at today’s set up for the S&P 500, the range is 16 points or -1.02% downside to 1442 and 0.08% upside to 1458. 













  • ADVANCE/DECLINE LINE: on 09/24 NYSE -586
    • Decrease versus the prior day’s trading of 526
  • VOLUME: on 09/24 NYSE 625.57
    • Decrease versus prior day’s trading of -65.42%
  • VIX:  as of 09/24 was at 14.15
    • Increase versus most recent day’s trading of 1.22%
    • Year-to-date decrease of -39.53%
  • SPX PUT/CALL RATIO: as of 09/24 closed at 2.59
    • Up from the day prior at 1.21 


TREASURIES – as wrong as we were that Bernanke couldn’t go to infinity is as wrong as his market call looks all of a sudden, especially in the eyes of who has had #GrowthSlowing nailed for all of 2012 (the bond market); 10yr UST yield literally straight down since peaking post Bernanke Sept13 day from 1.89% to 1.69% last (Yield Spread at 2wk lows).

  • TED SPREAD: as of this morning 27.09
  • 3-MONTH T-BILL YIELD: as of this morning 0.11%
  • 10-Year: as of this morning 1.69%
    • Decrease from prior day’s trading of 1.71%
  • YIELD CURVE: as of this morning 1.43
    • Down from prior day’s trading at 1.45 

MACRO DATA POINTS (Bloomberg Estimates)

  • 7:45am/8:55am: ICSC/Redbook weekly sales
  • 9am: S&P/Case-Shiller 20 City (M/m) SA, July, est. 0.8%
  • 10am: Conference Board Consumer Conf. Index, Sept., est. 63.2
  • 10am: Richmond Fed Manuf. Index, Sept., est. -6 (prior -9)
  • 10am: House Price Index (M/m), July, est. 0.6% (prior 0.7%)
  • 11am: Fed to purchase $4.5b-$5.5b notes due 11/15/2020-8/15/2022
  • 11:30am: U.S. to sell $40b 4-week bills
  • 1pm: U.S. to sell $35b 2-year notes
  • 4:30pm: API inventories


    • Obama set to speak at United Nations
    • IMF releases portions of Global Financial Stability Report, including “The Reform Agenda: An Interim Report on Progress Towards a Safer Financial System,” 10:30am
    • DARPA program manager Richard Ridgway discusses military’s use of mobile hotspot technology at Military Antennas Summit, 8am
    • FCC Chairman Julius Genachowski discusses broadband challenges at Vox Media event, 10:30am


  • Apple’s use of thin display seen driving iPhone 5 supply shortfall
  • Spain sells EU4b of bills meeting maximum traget
  • Schaeffler sells $2b stake in Continental to cut debt
  • Billionaire Ellison increases Oracle credit line to $4.5b
  • Digital Domain sale to Chinese-Indian venture approved by court
  • Diego in talks to buy United Spirits stake: WSJ
  • Nasdaq, Amazon to partner on cloud storage of financial data
  • Foxconn resumes production at China plant after worker brawl
  • Warner Music says Cohen resigns as CEO of recorded music
  • Providence Equity Partners sells stake of under 10%: WSJ
  • BAE CFO Lynas said to hold same role in proposed EADS merger
  • AT&T to market business mobile security to consumers in 2013
  • Chevron under EPA probe for avoiding refinery monitors in 2009
  • California offers lowest interest rate in $1.75b bond sale


    • FactSet Research Systems (FDS) 7am, $1.17
    • Vail Resorts (MTN) 7:30am, $(1.56)
    • Carnival (CCL) 9:15am, $1.43
    • Synnex (SNX) 4pm, $0.93
    • Jabil Circuit (JBL) 4:02pm, $0.58
    • Copart (CPRT) Post-Mkt, $0.33



OIL – getting a +0.5% bounce this morn, but remains a bearish TAIL risk situation in our signaling model as long ast $111.44 Brent remains resistance; interesting that the US equity futures aren’t up w/ oil up; EUR/USD down again trumping that, as it should. 

  • Oil Rises in New York on Speculation Last Week’s Drop Overdone
  • Pork Supply Shrinks to Lowest Since 1975 on Drought: Commodities
  • Copper Stockpiles in Shanghai Bonded Warehouses Seen at Record
  • Silver in ETPs Set for Record as Central Banks Ignite Demand
  • Soybeans Set to Rebound From Six-Week Low on Importer Purchases
  • Kazakhstan Expands Gold Reserves as South Korea Buys 16 Tons
  • Palm Oil Snaps Five Days of Losses as Declines Deemed Overdone
  • Oil Supply Rises Third Week Post Isaac in Survey: Energy Markets
  • Bearish Bets on Potash Decline at Fastest Pace Ever: Options
  • Iron Ore’s Rebound Poised to Peter Out on Weak Demand, ANZ Says
  • Western Europeans Munch the Most Chocolate Globally, U.K. Leads
  • Einhorn’s Losing Gold-Miner Strategy Endorsed: Chart of the Day
  • Japan’s Nuclear Exit Extending Record Profit for Golar: Freight
  • Pork Supply Shrinks to Lowest Since 1975
  • Copper Advances in London After Report of Stabilization in China









GERMANY – the Germans, meanwhile, told the French to go fly a kite this weekend on timing and are “now losing patience with Spain”; Merkel comments have dominated my tweet-stream sources since 430AM EST as European stocks move back to their lows; ITALY is down -4.7% (MIB Index) since Bernanke’s Infinity & Beyond say (Sep13).














The Hedgeye Macro Team

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