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Get Shorty: Rolling Over

Takeaway: Fundamentals are rolling over like US durable goods, so we think an opportunity to short some expensive stocks is coming up very soon.

Post-Bernanke party, when stocks have ripped 50-100% higher in just a few months, energy is one place where we’re looking for short ideas. Fundamentals like durable goods, growth and demand are beginning to roll over and with stocks at expensive prices, we think there’s room for a pullback. Growth is still slowing - remember that.


S&P500 revenues will be +2.2% YoY in the 3Q – adjust that for inflation and real revenue growth has gone negative.  And lately many companies are missing estimates and guiding lower, so the forward outlook is not much better. The question is how high of a multiple can some of these companies trade at in terms of price-to-earnings? 20x? 60x? 100x? Things seem to be getting worse in the market and the economy, not better.



Get Shorty: Rolling Over  - image002

The Sky Is Falling







Chicken Little had it right. Replace the word “sky” for “economy” and he’s spot on. Yesterday’s durable goods print dropped -13.2% for August, an astonishingly awful number. We posted a chart on Hedgeye.com which we implore you to take a look at. Titled “This Is What A Recession Looks Like,” the chart showcases durable goods numbers since 2000. And guess when we saw big time drops like yesterday? In 2000 and in 2007; two years when we encountered bubbles/crises of epic proportions. Things are still really bad out there, folks. Don’t let anyone tell you otherwise just because it’s a Friday.




We’re surprised that Mitt Romney’s promises to hold China accountable as a currency manipulator haven’t resonated more with the American public. Meanwhile, the Chinese yuan hit a new record versus the dollar this morning at 6.2856. This can be attributed to strong corporate demand and institutional investors getting out of short positions ahead of the long holiday weekend in China. Keep in mind that China is under economic pressure, too. Their artificial housing market has tanked and commodity demand has plummeted over the past year.






Cash:                UP


U.S. Equities:   DOWN


Int'l Equities:   DOWN   


Commodities: Flat


Fixed Income:  Flat


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” -@Grainmonster




“A good listener is usually thinking about something else.” –Kim Hubbard




Corn futures hit an 11-week low of $7.1625 a bushel.





Early Look

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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.

The Oracle of Delphi

“A great number of people think they are thinking when they are merely rearranging their prejudices.”

-William James


In investing, there is no hiding from your prejudices.  If your prejudices trump your intellectual honesty, then you probably won’t be in this business for long, regardless of whether you are on the sell side, buy side, or the dark side.


Since it is political season in the United States, prejudices are as heightened as they have ever been.   Unfortunately, the nature of the two-party system in the United States has evolved to a state where supporting the party trumps rational analysis.  The political overlords speak and those who are politicized vote according to party lines. But I digress . . .


In reference to the title of this note, the Oracle of Delphi was an ancient Greek figure that was at the height of power around 1600 B.C.  She supposedly spoke for Apollo and answered questions for the Greeks, and foreigners, about many topics including: colonization, religion, war, and power.  The Oracle purportedly knew all and people listened.


For a period of time, the Oracle exerted disproportionate influence over the Greek world and was consulted before every major decision.  Obviously, most of us do not run our organizations or investment teams based on the proclamations of an oracle.  And thank goodness for that. 


Ironically, one of the most effective decision making methods is called the Delphi technique, which involves assembling viable options that are then voted on independently until a quorum is reached.  As Michael O’Malley wrote in a recent blog for the Harvard Business Review:


“As the Marquis de Condorcet (http://en.wikipedia.org/wiki/Marquis_de_Condorcet) showed (in the collective wisdom proof), good, unbiased decisions are made if a solution space is well sampled and the final judgment is determined by independent decision-makers. One of the attributes that determines the range of options that bees ultimately consider is genetic diversity. The greater the diversity in the bees' DNA, the more sensitive they are to different conditions and circumstances, and the more options the hive is able to gather. More diverse hives are better at everything and more productive than less diverse ones.”


Thus, the key to effective decision making is to assemble a group of diverse individuals with independent voices. 


The Federal Reserve does not exactly fit this mode as highlighted by the backgrounds of the current board members:


-          Chairman Ben Bernanke – formerly a professor at Princeton and a Ph.D in economics;

-          Vice Chair Janet Yellen – formerly a professor at Berkeley and a Ph.D in economics;

-          Elizabeth Duke – formerly a senior banking executive at various regional banks;

-          Daniel Turollo – formerly a professor at Georgetown and a law degree from Michigan;

-          Sarah Raskin – formerly Commissioner of Financial Regulation for the State of Maryland and law degree from Harvard;

-          Jeremy Stein – formerly professor at Harvard with a Ph.D in economics; and

-          Jerome Powell – formerly Assistant Secretary of the Treasury and law degree from Georgetown.


Clearly, the nature of the Federal Reserve board is more akin to a group of oracles than a manifestation of the Delphi technique.  The key error we’ve made in assessing the Fed’s willingness to continue to ease is that we believed they were “in a box” due to the data and the political cycle.  Groupthink, of course, is not always rational.


Regardless of whether we agree or disagree with the Fed, we are back to playing the game in front of us.  Printing money is inherently an inflationary action and will ultimately slow growth.  As we have seen this year, printing money will also inflate equities until the printing presses stop or they get trumped by growth and inflationary concerns.


On the growth front, yesterday the durable goods report dropped -13.2% in August from the prior month.  Largely, this was driven by a drop in aircraft orders, so there is probably a one-time negative and likely non-reoccurring factor here,  but still it is what it is . . . pretty negative.


As it relates to currency, the Chinese yuan hit a new record versus the dollar this morning at 6.2856.  The pundits are speculating that this is due to strong corporate demand and financial institutions getting out of short positions ahead of the week long Chinese holiday.  While Hedgeye won’t be taking a holiday next week, our man on China, Darius Dale, will be writing the Early Look next week to give an update on China.


Needless to say, we are still on the sidelines as it relates to the world’s second largest economy.  We are also on the sidelines as it relates to the idea that we will see meaningful stimulus from the Chinese in the short term.  Despite this, the Shanghai Composite was up another +1.4% today on the back of being up +2.6% yesterday.  Up +4% in two days is solid, but the anecdotes from China continue to be negative.  On the back of Caterpillar saying construction demand was down -40%, we have Nike saying this morning that demand is worse than expected.


Anemic demand from Chinese is crushing the U.S. coal market.  Currently, metallurgical coal from the Appalachian region is trading hands at $52 or so, while it costs $65 - $75 to produce.  Given these economics it is no surprise that we have recently seen a bankruptcy in the sector with Patriot Coal recently filing for Chapter 11.  In our Q4 themes call next week, we will be discussing more companies that have bagel (bankruptcy) risk.


Regardless of potential bagels, we have plenty of long idea and I’ll send you into the weekend with a couple of our top ones:

  1. Las Vegas Sands (LVS)
  2. Urban Outfitters (URBN)
  3. Paccar (PCAR)

Ping for details.


Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are now $1, $111.44-113.17, $79.36-80.36, $1.27-1.29, 1.61-1.71%, and 1, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Head of Sales and Research


The Oracle of Delphi - Chart of the Day


The Oracle of Delphi - Virtual Portfolio


TODAY’S S&P 500 SET-UP – September 28, 2012

As we look at today’s set up for the S&P 500, the range is 19 points or -0.91% downside to 1434 and 0.40% upside to 1453. 













  • ADVANCE/DECLINE LINE: on 09/27 NYSE 1479
    • Increase versus the prior day’s trading of -678
  • VOLUME: on 09/27 NYSE 634.05
    • Decrease versus prior day’s trading of -14.15%
  • VIX:  as of 09/27 was at 14.84
    • Decrease versus most recent day’s trading of -11.72%
    • Year-to-date decrease of -36.58%
  • SPX PUT/CALL RATIO: as of 09/27 closed at 1.82
    • Down from the day prior at 1.84


  • TED SPREAD: as of this morning 27.40
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.62%
    • Decrease from prior day’s trading of 1.65%
  • YIELD CURVE: as of this morning 1.38
    • Down from prior day’s trading at 1.40

MACRO DATA POINTS (Bloomberg Estimates)

  • 8:30am: Personal Income, Aug., est. 0.2% (prior 0.3%)
  • 8:30am: Personal Spending, Aug., est. 0.5% (prior 0.4%)
  • 8:30am: PCE Core (Y/y), Aug., est. 1.6% (prior 1.6%)
  • 9am: NAPM-Milwaukee, Sept., est. 45.0 (prior 42.9)
  • 9:45am: Chicago Purchasing Manager, Sept., est. 53 (prior 53)
  • 9:55am: UMich Confidence, Sept. F, est. 79 (prior 79.2)
  • 11am: Fed to buy $1.5b-$2b notes due 2/15/2036 to 8/15/2042
  • 1pm: Fed’s Fisher speaks in Dallas on economy
  • 1pm: Baker Hughes rig count


    • Obama leads in latest swing-state polls as first debate nears
    • Financial Stability Oversight Council meets to choose first nonbank companies likely to be branded potential risks to financial system
    • FDIC holds Consumer Research Symposium; panelists include Fed officials, 8am
    • CFTC holds closed meeting on enforcement matters, 10am
    • SEC holds meeting of Dodd-Frank Investor Advisory Cmte, 10am
    • WTO sets up panel to decide whether U.S. broke global commerce rules with anti-subsidy duties affecting $7.3b of Chinese products
    • Acting Commerce Secretary Rebecca Blank speaks at Council on Foreign Relations on policies to promote manufacturing, 12pm
    • FCC open meeting on licensing, operating rules for satellite services; economic, innovation opportunities of spectrum through incentive auctions; mobile spectrum holdings, 10:30am
    • Homeland Security Secretary Janet Napolitano speaks at cybersecurity summit, 8am


  • Spanish banks scheduled to release results of stress tests today
  • Monti says ECB conditions, IMF role hinder bond-buying requests
  • Yuan climbs to strongest level since 1993 on China stimulus
  • Euro-region inflation unexpectedly accelerated in September
  • Xstrata split with Glencore on terms as deadline nears
  • FSA to oversee Libor in streamlining of tarnished benchmark
  • U.S. criminal Libor probe said to seek London trader interviews
  • Sony to invest $645m in Olympus
  • Hartford to sell life-insurance unit to Prudential Financial
  • U.S. Debate, ECB Bond Buying, Spain: Week Ahead Sept. 29-Oct. 6


    • Finish Line (FINL) 7am, $0.44
    • Walgreen (WAG) 7:30am, $0.56 - Preview
    • American Greetings (AM) 7:30am, $0.14


  • Sumitomo Sees Higher Copper Fees in 2013 as Supplies Increase
  • Copper Bulls Retreat on Concern Stimulus Not Enough: Commodities
  • Crude Oil Poised for Quarterly Gain Before U.S. Spending Report
  • Gold Seen Extending Best Quarterly Gain Since 2010 on Stimulus
  • Copper Heads for Quarterly Gain on Reduced Euro-Crisis Concern
  • Corn Slides to an 11-Week Low Before USDA Report; Wheat Declines
  • Cocoa Advances Most in Three Weeks in London; Coffee Declines
  • Domestic Cuts May Make India a Net Importer of Iron Ore by 2015
  • Brazil Has 24.8 Million Tons of Sugar for Export, Datagro Says
  • Oil May Fall on Weaker Economy and Higher Output, Survey Shows
  • Airlines Threatened by Costliest Fuel Since 2008: Energy Markets
  • Shale Takeovers Loom as Texas Discounted in Australia: Real M&A
  • Xstrata Split With Glencore on Terms as Deadline Nears: Energy
  • India’s Goa Iron Ore Ban Likely to Have Minimal Effect on Market






















The Hedgeye Macro Team

To Infinity and Beyond

This note was originally published at 8am on September 14, 2012 for Hedgeye subscribers.

“Two things are infinite: the universe and human stupidity.  And I’m not sure about the universe.”

-Albert Einstein


As much as we and other market prognosticators (and even trained economists) have criticized Chairman Bernanke’s monetary policies, he went ahead yesterday and put on the big boy gloves of monetary policy.  In the Fed’s statement yesterday, quantitative easing was, as Buzz Light Year would say, extended to infinity and beyond.


In using the Einstein quote above I’m not suggesting anyone on the Federal Reserve board is stupid.  In fact, they are obviously all very intelligent.  While I would give myself the odds in a game of hockey, I’m pretty sure anyone on the Fed could beat me in a game of one-on-one Sudoku (if that even exists).  Of course, what they may be missing is the impact of their policies on the real economy. 


After Keith got off CNBC’s Fast Money last night, he and I had a long discussion about the quarter.  Let’s be honest, we’ve been leaning too bearishly this quarter.  Coming into the quarter, we actually believed that the Fed would be in a box because the data didn’t currently support incremental easing and that the Fed wouldn’t ease ahead of the election.  Obviously, we were wrong on both those points.


Conversely, we’ve been spot on in terms of our view on general economic growth this quarter and this year.  Ultimately, economic activity will drive both company fundamentals and the broader stock market.  In the shorter term, of course, other factors can override these fundamentals. 


So while we weren’t levered long in to this new market high (in fact, we are actually short the SP500), our risk management process has also enabled us to not have major blow ups.  Step #1 for us is always to minimize our losses.  Start by not losing money, and you will get your shot to generate returns.


A popular refrain yesterday in the media and around some areas of Wall Street was that Bernanke and the Fed are the only ones focused on doing anything about the abysmal jobs market.  I have to admit, I find this view a little nonsensical. From a practical sense, printing money does very little to encourage companies to hire.  Further, it has actually done very little to encourage banks to lend more broadly.


On the last point, and I will admit this is anecdotal, I ran into a friend who is one of the larger real estate developers and condo owners in a small New England city.  I assumed that extending the duration that rates will be held at 0% and further monetizing of MBS would be beneficial for those in real estate.  His response was that I was right, for those that can get a loan this is a very good thing.  But, according to him, for the large percentage of the population who doesn’t have a 20% down payment or stellar credit rating, it is far less relevant.  On some level, this likely explains why mortgage applications have not accelerated with rates at all-time lows.


The most critical economic issue with printing dollars to infinity and beyond is the inflationary impact.  Ironically, shortly before the Fed released its statement yesterday, PPI hit a three year high in terms of month-over-month growth.  But forget that spurious government data, what about the real economy you say?  Well, in the Chart of the Day today we actually looked more closely at the impact of commodity inflation on the real economy.


As the chart shows, going back to 2008 gasoline has exceeded $4 in mid-2008, in mid-2011, in early 2012, and now. The corresponding result, as the chart shows very vividly, is that economic growth slowed and we then saw a corresponding correction in equities, despite infinitely loose monetary policy.


Not to scare you this morning, but inflation from these levels shifts our growth slowing scenario squarely into potential recession territory. We don’t use the R word frivolously.  In fact, the last time we emphasized recession as a probable scenario was back in March of this year.


Whether we get aggressive on the recession call will be data dependent, but we are comfortable continuing with the idea that global growth is slowing. In this vein, later this morning we will be doing a 15-minute call on Caterpillar Inc. (CAT) outlining our long-term bearish thesis.  Our Industrials Sector Head Jay Van Sciver is relatively new to Hedgeye, but hasn’t been afraid to make a bold call. This one will be no different.  The key tenets of his thesis on CAT are as follows:

  • Resource company investment is near cyclical highs and set to decline.  Other end markets do not appear poised to replace this tailwind;
  • CAT has been adding capacity and building inventory into what we believe will be a peak in demand; and
  • Our cyclically adjusted valuation for CAT implies a stock price range of $50 – 70.

This is going to be a quick call with a lot of data, so grab a coffee and join us at 11am.  If you are an institutional subscriber and don’t have the dial in, please email sales@hedgeye.com and we will get it to you.


Before I let you head into this weekend, the other point related to extending QE to flag is that if equity markets continue to inflate, it will likely be positive for President Obama’s re-election chances.  To wit, our Hedgeye Election Indicator has his chances of re-election at an all-time high at 61.9% and this corresponds closely with InTrade at 64.5% odds.


Incidentally, if you are confused by the global economy, you are in good company.  In his most recent letter to investors, legendary investor Howard Mark writes that the “world seems more uncertain than any other time in my life.” 




Our immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1721-1779, $114.49-118.01, $79.04-80.67, $1.27-1.30, 1.70-1.80%, and 1427-1463, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


To Infinity and Beyond - Chart of the Day


To Infinity and Beyond - Virtual Portfolio

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