Falling Down







Today, we’re not going to talk about the hit 1993 Michael Douglas film where a pissed off, unemployed American is sick of his situation and is out for revenge; we have that occurring on a daily basis already in our country. Instead, let’s focus on how stocks have been down 7 out of the last 8 sessions. Since Bernanke announced he’d be buying every mortgage-backed security he can find, the S&P 500 has dropped -2.8%. With this sort of correction, we’re ready to start buying stocks and that’s what Keith did yesterday if you go and check our Real-Time Alerts. 


We covered shorts, we bought Consumer Discretionary (XLY) and you know why? Because we manage the risk and the range out there. Global Macro signals, quantitative setups and managing risk - that’s the name of the game we play.




Correlation risk has been discussed before but now it has become more important than ever. Two metrics you need to focus on are the CBOE Volatility Index (VIX) and the US Dollar. Get the US Dollar right, you’ll get a lot of other things right, including gold and the euro, should that be your kind of trade. For the VIX, you can look at it to make an educated trade on the S&P 500. Yesterday, the VIX was overbought, up +20% this week. Selling that index is what we would recommend.






Cash:                DOWN


U.S. Equities:   UP


Int'l Equities:   UP   


Commodities: Flat


Fixed Income:  DOWN


Int'l Currencies: Flat  








Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.

  • TAIL:      LONG            



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







“The harder it gets to manage this immediate-term price volatility, the more insider trading (cheating) you'll see” -@KeithMcCullough




In the land of the blind, the one-eyed man is stoned to death.” –Joan D. Vinge




U.S. 2Q GDP Growth Revised Down to 1.3% 



Takeaway: $SBUX is stepping up its K-Cup discounting into quarter-end. Not a good sign for its K-Cup business or the overall K-Cup category

Last minute deals in the final days of the quarter?  Since this is not a typical Starbucks move, the question is: are they straining to hit estimates for the quarter?


The following offer from Starbucks has come to our attention:


“Starting Thursday (9/27) through Sunday (9/30), when you buy any 12-count box of Starbucks K-Cup packs you will receive a 2nd pack free.”


Early this morning, our limited and brief survey of a couple of Starbucks stores revealed no knowledge of the K-Cup promotion.  We are left with the following questions?

  • Was this promotion a last-minute strategy decision by the company?
  • Were the K-Cups not selling well?
  • Is there too much inventory at the moment?
  • Has Green Mountain’s pricing strategy slowed the share gains Starbucks was seeing?

The company began selling K-Cups on June 12th yet already we have discounting like $7.99 for a box of 10 and now, in the final days of the quarter, a buy-one-get-one-free offer has come about.  If demand for K-Cups is so strong, why are we seeing such aggressive discounting across the board?


Starbucks has taken approximately 15% market share in the K-Cup market and this, clearly, has been a negative for other players in the category.  Margins are likely to be pressured in the K-Cup business going forward.




Estimates & Outlook


Consensus 4QFY12 of $0.45 – 21% growth versus 4QFY11 – look aggressive but we expect the company to make the quarter.  5-5.5% same-store sales is a reasonable range to assume for 4QFY12 but we think that the 1QFY13 estimate of 4.9% may not be conservative enough.  Recent commentary from management suggests that the results from EMEA could, once again, disappoint in 4QFY12. The consensus EMEA same-store sales number, per Consensus Metrix, is 0.5%.  We believe a negative comp is in play.  The China/Asia Pacific consensus estimate of 11.7% looks possible; both McDonald’s and Yum Brands continue to post strong numbers in that region.


Overall, we remain concerned that Starbucks are growing expenses faster than revenues as they pursue an aggressive growth strategy on several different fronts.  At a point, we will become positive on Starbucks again, but for now we are waiting and watching. 



Howard Penney
Managing Director

Rory Green


Bernanke's Mess

This note was originally published at 8am on September 13, 2012 for Hedgeye subscribers.

“It took a lot of hard work to get us into this mess.”

-Neil Barofsky’s Dad


The more I learn, the scarier Washington, D.C. gets. The aforementioned quote didn’t come from a politician. It came from Barofsky’s freshly printed tell-all book about crony socialism, Bailout (page 32). That time it was about TARP. This time it’s about Qe. Unless you want to wander on into the next politically perpetuated crisis willfully blind, I highly recommend you read it.


I wasn’t born in this country, but I do love it – and I will fight for its liberties. Hell would freeze over before the Founding Fathers of the Unites States of America signed off on a centrally planned market event like the one an un-elected academic will host today.


Whether he wants to accept responsibility or not, Ben Bernanke has signed off on the #1 thing that has been driving stock and commodity markets for the last 2 months – expectations. Up or down, whatever happens today will be Bernanke’s Mess.


Back to the Global Macro Grind


A)     Market up = mess for the economy: that’s right, if the man pushes 0% money out to 2015, 2016, then infinity and beyond, that’s a mess for a lot of people in this country. Just ask a retiree living on a fixed income, or a small business owner. When your cost of living is rising faster than your income, that’s called a tax hike.


B)      Market down = mess for the market: yep, since corporate revenue growth is slowing at its fastest rate since 2008, where do you think corporate margins go from their all-time peak? What do you think a collapse in the Fed’s final bubble (1st it was internet stocks, 2nd housing; now it’s commodities) is going to do to companies like Caterpillar (CAT) who aren’t prepared for that?


But, like it was in October 2007 (up double digits YTD), the “market is up” and we don’t hold the Fed accountable to its mandate? As a reminder, that mandate is:

  1. Price Stability
  2. Full Employment

Meanwhile, this is what we have:

  1. Price Volatility like markets have never ever seen (ever is a long time)
  2. Unemployment that’s higher than where it was on January 20, 2009 (7.8%)

So we better empower this guy to do more of whatever has not worked. And I mean really beg for it. If this insanity can only end in a blow up, I say get on with it so that I can start hiring again and get on with my day.


Since I have nothing else to write about this morning, let’s just review where we stand pre-game (1230PM Bernanke release):

  1. Financials (XLF) are up +3.83% in less than 2 weeks, front-running the Fed
  2. Energy stocks (XLE) are up +3.96% in less than 2 weeks, front-running the Fed
  3. Basic Materials (XLB) are up +3.76% in less than 2 weeks, front-running the Fed

Front-running? Bad word, for people who actually take on the Orange Jump Suit risk to be in the know pre-game. But that’s the game of expectations Ben Bernanke and his group-thinkers have perpetuated; that’s where the money’s at. Follow the money.


If 2 weeks of causality (Fed policy expectations) is too short-term for you, let’s look at the last month instead. Here are the inverse correlations between the US Dollar (down) and everything big that people are being forced to chase (30 day correlations):

  1. Gold -0.96
  2. Silver -0.95
  3. CRB Commodities Index -0.94
  4. Eurostoxx600 -0.86
  5. SP500 -0.74

In other words, get the US Dollar right, and you get everything but the US Economy right. Gold, last I checked, is not a “Full US Employment” trade. It wasn’t in the 1970s either.


Back to the two risk management words never uttered by our Central Planner in Chief (Correlation Risk), if I shorten that back up to 2 week correlations front-running Bernanke, the SP500’s inverse correlation to the US Dollar goes higher to -0.86. That’s because it’s closer to the main event. And that’s being driven by the aforementioned moves in the Financials and Commodities.


As Neil Barofsky says at the end of Chapter 2, “I might be completely on my own” (page 38) in calling Bernanke out on this mess of expectations at this point. But I doubt it.


When I started this firm in early 2008, I vowed to fight Old Washington and Wall Street for the truth. “What is the truth?” If that ruffles the odd feather, I’m doing my job. That’s what Canadian-American Patriots fighting for the purchasing power of their dollars do.


My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, Russell2000, and the SP500 are now $1709-1756, $114-116.22, $79.45-80.94, $1.26-1.29, $1.69-1.77%, 830-846, and 1419-1451, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bernanke's Mess - Chart of the Day


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The Macau Metro Monitor, September 27, 2012




Sheraton Macao Hotel achieved 100% occupancy on Saturday, and 90% occupancy on Sunday, according to a press release from Sands China Ltd.  “Occupancy rates for Sheraton Macao Hotel’s opening weekend far exceeded our expectations,” said Gunther Hatt, executive vice president of operations for Venetian Macau.



Macau Legend Development has plans to build a second casino as part of its HK$5 billion (US$645 million) redevelopment plan for its Macau Fisherman’s Wharf theme park.  The gaming facility would operate under SJM's gaming licence as a third-party promoted casino and it should be ready by 2016 at the latest.


The government’s revised land grant for Macau Fisherman’s Wharf was yesterday published in the official gazette.  The grant detailed enlarging the park’s area by over 23,500 square metres, to 133,000 square metres, but failed to mention a second casino.  Macau Legend also owns the five-star Macau Landmark hotel, which includes the Pharaoh’s Palace Casino.



Macau CEO Fernando Chui Sai On denied that the Secretary for Economy and Finance Francis Tam and the Secretary for Transport and Public Works Lau Si Io were giving conflicting messages over a possible casino for Studio City, which Chui said is eligible to apply for a gaming floor. 

He was quoted by TDM as saying that the project originally contained a casino in the construction application submitted to the government, but the project was later transferred to MPEL, which did not include a casino in its first construction plan submitted to the Secretariat of Transport and Public Works.  Only later on did Melco file an application to a department under the Secretariat for Economy and Finance for a gaming venue inside Studio City.  



Macau unemployment rate for June-August 2012 held stable at 2.0% in comparison with the previous period (May-July 2012).  Total labor force increased to 351,000; the labor force participation rate stood at 72.3%, up by 0.1% point over the previous period. 

Barking Buyem!

“A dog is not considered a good dog because he is a good barker.”



There are a lot of things I love about Eastern culture. One of them is the deep simplicity of their quotes. If I need to channel my inner-Buddha this morning to make a buy call, so be it.


Back to the Global Macro Grind


So, after a 41 handle (-2.8%) drop in the SP500 from the Bernanke “Buy Everything” top, US stocks have been down for 7 out of the last 8 days. I heard more crickets than I heard bulls yesterday. Weird.


Sometimes I like to bark. And sometimes that means my cage gets kicked by my central planning overlords too. But that’s ok. I’m just that dog in your life that never goes away. I have big teeth. And when I say “Buyem!” (with a smile), I kind of look like a little bull too.




That’s what my intraday note at 11:18AM EST was titled yesterday. In addition to the list of 7 long ideas I listed in yesterday’s Early Look note, we made the following moves:

  1. Covered Gold (GLD) at immediate-term TRADE oversold
  2. Bought Taiwan (EWT) at immediate-term TRADE oversold
  3. Covered Discover Financial (DFS) at immediate-term TRADE oversold
  4. Bought Consumer Discretionary (XLY) at immediate-term TRADE oversold
  5. Covered Burger King (BKW) at immediate-term TRADE oversold

In other words, when I start barking buy/cover or sell/short, it’s always based on the same repeatable process. Infrequently do I get all of my Global Macro signals at the same time as I get my bottom-up (single stock) signals. But when I do, that’s when I lean long or short. The process works both ways.


This is where I can get a lot better at this game, and I will. With more reps, mistakes, and successes, I’ve learned the game by playing it. Sure, some of my lovers out there will say “he does it with a paper portfolio”, and that’s fine. I hear them barking too. But I highly doubt they’d have the guts to show the entire world every move they’ve made for the last 5 years anyway.


From the day that I started this company, I’ve believed in one very simple set of Canadian-American principles: Transparency, Accountability, and Trust. I care less about the tone of my barking than I do the results. This game can be loud and it can get messy. Anyone who wants me to hold some high level of Ivy League gravitas wants me to be someone I am not.


Back to the why…

  1. Immediate-term TRADE oversold is as oversold does
  2. Immediate-term TRADE overbought in both Bonds (UST) and the Buck (USD), complimented that equity oversold signal
  3. Immediate-term TRADE overbought at VIX 17.37 was another critical intraday risk management signal

US Equity Volatility’s (VIX) inverse correlation to the SP500 is as relevant (some of the time) as SPY versus USD is. Never mind the pooch metaphors, those signals were yelling at me yesterday.


With my Correlation Risk signal in hand, I then looked forward at my Global Macro Calendar Catalyst playbook, which had the following bullish catalysts:

  1. Q2 US GDP report (this morning) will only add fuel to the Bernanke Bailout fire
  2. Both month and quarter-end markups for Q3 2012 are in play in between today and Monday
  3. China’s Golden Week (and 18th Party Congress) is pending for the next 2 weeks

That last one only matters in terms of the manic media’s perma-perpetuating of rumors about China “stimulus.” All it takes is for Chinese stocks to stop going down and they’ll say it’s because something big is coming. The Shanghai Composite got just that overnight, having one of its biggest bounces (off the lows) in weeks (+2.6%).


We have 12 LONGS and 3 SHORTS for this morning’s open. It’s probably fair to stop calling me a bear now – just call me a dog. You can pet and feed me with bullish data points. I won’t bite.


My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are now $1, $106.41-111.44, $79.22-79.98, $1.28-1.30, 1.62-1.71%, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Barking Buyem! - Chart of the Day


Barking Buyem! - Virtual Portfolio

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