TODAY’S S&P 500 SET-UP – October 2, 2012

As we look at today’s set up for the S&P 500, the range is 21 points or -1.00% downside to 1430 and 0.45% upside to 1451. 













    • Increase versus the prior day’s trading of -658
  • VOLUME: on 10/01 NYSE 672.31
    • Decrease versus prior day’s trading of -19.22%
  • VIX:  as of 10/01 was at 16.32
    • Increase versus most recent day’s trading of 3.75%
    • Year-to-date decrease of -30.26%
  • SPX PUT/CALL RATIO: as of 10/01 closed at 1.68
    • Down from the day prior at 2.01 


TREASURIES – bonds still don’t seem to care about the daily flicker of S&P futures; the 10yr yield hasn’t moved more than a beep in the last 48hrs; long-bond remains in a Bullish Formation as 10yr yields look like they could easily test YTD lows.

  • TED SPREAD: as of this morning 27.42
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 1.63%
    • Increase from prior day’s trading of 1.62%
  • YIELD CURVE: as of this morning 1.40
    • Up from prior day’s trading at 1.39

MACRO DATA POINTS (Bloomberg Estimates)

  • 9:45am: ISM New York, Sept. (prior 51.4)
  • 11am: Fed to buy $1.75b-$2.25b Treasury debt due 2/15/2036-8/15/2042
  • 11:30am: U.S. Treasury to sell 4-week bills


    • House, Senate not in session
    • Obama, Romney make preparations for first presidential debate tomorrow
    • News conference on latest Quinnipiac poll. NPC. 10am
    • SEC hosts discussion on automated-trading technologies. 10am
    • FAA advisory panel holds second day of meetings to review air-traffic control procedures. National Harbor. 8:30am
    • Early voting begins in Ohio


  • U.S. auto sales seen advancing 9.5% in September
  • SEC to investigate high-frequency trading
  • Samsung says Apple iPhone 5 infringes eight patents in lawsuit
  • Former SAC Capital manager tells FBI fund used insider information
  • SAIC loses protest of $4.6b contract awarded to Lockheed
  • Juniper said to cut 500 jobs to reduce costs amid competition
  • U.S. retail sales growth may slow to 4.1% during holiday season
  • Manhattan home inventory falls to 7-yr low
  • Value Investing Congress includes presentations from David Einhorn


    • Mosaic (MOS) 7am, $1.16
    • Acuity Brands (AYI) 8:19am, $0.93


  • Palm Oil Slumps Most Since October 2008 to Lowest in Three Years
  • Rubber Bulls Back as Exporters Cut Most Since 2009: Commodities
  • Soybeans Reach Lowest Price Since July on U.S. Harvest Progress
  • Oil Trades Near One-Week High as U.S. Manufacturing Expands
  • Gold Set to Gain for Second Day After Fed Renews Stimulus Pledge
  • Cocoa Falls as Concerns Ease Over Ivory Coast Industry Changes
  • Iron-Ore Swaps Little Changed as China Holidays Slow Trading
  • Countries Must Refrain From Banning Food Exports, FAO Says
  • Zinc Price Softens in 3Q on Surplus, 9.3% Rise Expected in 4Q
  • Cargill to Stop Using Fuel-Inefficient Ships to Curb Emissions
  • Nuclear Output Seen Falling to 3-Year Low on Refueling Shutdowns
  • Rothschild’s Bashed Bumi Offers ‘Great Trade’: Chart of the Day
  • Rubber May Advance 28% on Ichimoku Chart: Technical Analysis
  • Copper May Gain for Fourth Day on Global Central-Bank Stimulus










EUROPE – after European Equities got slammed last wk (Spain and Italy -6% each), seeing day2 of the bounce; plenty of rumoring going around about when Spain asks for bailouts and reminds the world they’ve been lying about pretty much every number that matters #classy; should end well.






JAPAN – top 3 economy in the world is now seeing both its stock market and economic data collide; after a bearish Tankan yesterday, Nikkei closed down again overnight, taking the draw-down since the global #GrowthSlowing top (March) to -14.3%; #KeyenesianEconomics.










The Hedgeye Macro Team





Selling Cycle Peaks

“The peak in resource investment is likely to occur next year.”

-Glenn Stevens


Not all central bankers are like Ben Bernanke. Some of them, like the Reserve Bank of Australia’s Glenn Stevens, go both ways.


Last night Stevens and the RBA cut rates by 25 basis points to 3.25%. Unlike Bernanke, who hasn’t raised rates since taking over the Fed in 2006, Stevens hiked when he should have. And baby boomer retirees living Down Under on fixed incomes liked it.


I realize going both ways isn’t for everyone. If you get that dirty little thought out of your mind for a minute and think like hockey players – we have this little saying about grinding at both ends of the ice: ‘Backcheck, Forecheck, Paycheck.’ And we like that too.


Back to the Global Macro Grind


When Cycles Peak, you want to be selling into them; not buying them because they look “cheap.” When Cycles Peak, cheap gets cheaper. A stock like Caterpillar (CAT) is our Pamela Anderson poster for that on the short side right now.


Hardcore Japanese Keynesians have been trying to “smooth” economic cycles since their local Pawn Star Economist, Paul Krugman, told them to “PRINT LOTS OF MONEY” in 1997. With Japan’s Nikkei having made lower-highs for 20 years (down again last night, -14.3% since #GrowthSlowing started in March, globally), it’s a worldwide wonder how they last.


While stamina matters, what we’ve learned from some of these economists is that their weathered old dogmas can hang around political life for longer than we can stand them. At the same time, their population growth goes negative, and their economic incentives go dark.


There’s a common sense (behavioral economics) explanation for this. As Michael Cox, Director of the Center for Global Markets and Freedom at Southern Methodist University, writes in The 4% Solution:


“Economies grow faster when investors choose to put their money into productive assets rather than government bonds or gold… businesses won’t get started, workers won’t get hired, and the economy won’t grow.”


Sound familiar?


Of course it does. So let’s buy the S&P Futures on a rumor that Spain does more of that, requesting another bailout, based on growth, inflation, and employment results that their politicians continue to make up on the fly. Then, let’s do that in the USA, kick the can to the edge of The Cliff, then have Nancy Pelosi save us from it in the nick of election time.


Perfect. Now back to that money printing, metal, and mining cycle peaking…

  1. The world’s largest miners are already cutting project capex
  2. The world’s largest mining equipment companies are already guiding down from peak capex investment numbers
  3. The world’s most credible central banker, Glenn Stevens, is cutting rates because Australia is right levered to #1 and #2

It’s not just the mining cycle that’s peaking (ask for Jay Van Sciver’s long-cycle notes on CAT’s issues), it’s the SP500’s Earnings Cycle that’s peaking.


While sell-side consensus bulls have only been wrong by 45-72% on US GDP Growth in 2012, the guys who are always bullish still say they nailed it. So let’s look at what they’re forecasting on growth and earnings from here:

  1. After cutting their numbers, the slowest revenue growth for the SP500 since 2008
  2. A magical acceleration in revenue growth for the next 12 months from here
  3. NTM earnings as far as the eye can see, with operating margins expanding 100bps, per quarter!

If corporate earnings go flat to negative for the next 2-3 quarters, the “stocks are cheap” crowd better beg Bernanke for “multiple expansion” on lower earnings, because that’s the only way stocks are going up from here.


I wrote an intraday risk management note titled “Buyem!” around 1430 SPX on Wednesday of last week. On this morning’s rally, do yourself a favor and sellem’ on green before Earnings Season starts next week.


My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, CAT, and the SP500 are now $1, $108.21-112.98, $79.46-80.35, $1.27-1.29, 1.59-1.70%, $82.13-88.05, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Selling Cycle Peaks - Chart of the Day


Selling Cycle Peaks - Virtual Portfolio

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

Once In A Career Short Opportunity: Shipbuilder Valuations

Takeaway: There currently appears to be a once in a career opportunity to short the shipbuilding cycle. Valuation gains in the boom support that view.


Shipbuilder Market Values:  Once In A Career Short Opportunity

  • Mature, Cyclical Industry:  Shipbuilding is a mature, highly cyclical industry.  While the ships have evolved over the years, the nature of the market has not. 
  • Valuation Bubble:  The enterprise value for the four largest South Korean shipbuilders increased over 4x from 2005 to today’s levels, passing a 7x increase along the way.  In mature, cyclical industries, that alone is a significant warning sign.  Samsung Heavy is up 700%-800% from its 1 average share price.  Our cyclically adjusted valuation suggests significant downside from current levels.
  • Falling Utilization:  As deliveries drop steadily in coming years, shipyards will face headwinds not only from reduced capacity utilization, but also from intense price competition and low customer profitability.
  • Once in a Career Opportunity:  Shorting the shipbuilders is an opportunity that only comes around once every 30 years or so.  Assuming our readers retire at a reasonable age, this may be their only opportunity to participate in one of the great capital equipment cycles. 
  • 2035 to 2042:  For speculators who are still trading cyclicals in a few decades, 2035 should be a good buying opportunity for shipyards (most likely Chinese shipyards), when the next replacement cycle is likely to begin.  


Once In A Career Short Opportunity: Shipbuilder Valuations - 1



Long-term View Suggests Short Opportunity


Once In A Career Short Opportunity: Shipbuilder Valuations - 2

Q4 Macro Themes Conference Call on Monday, October 8th

Takeaway: Please join us for our Q4 Macro Themes Conference Call.

Next Monday, October 8th at 1:30pm EST, the Hedgeye Macro Team, led by CEO Keith McCullough, and DOR Daryl Jones, will be hosting our Q4 2012 Macro Themes Call.


Topics will include:


1.       #EarningsSlowing – Corporate margins are stretched on numerous metrics. Even with financial engineering we suggest there’s limited upside in the results from here.  We expect the gravity of global growth slowing and inflation accelerating to impact consumer and corporate P&Ls alike.


2.       Bubble #3 – Following the tech and housing bubbles, the charts of Bernanke’s Commodity Bubble could not be more crystal clear. So when does this bubble pop?  We’ll continue to take our cues from the US Dollar and weigh the influence of policy and fundamentals across the complex.


3.       Keynesian Cliff – We wrap together an analysis of the U.S. Presidential  race with the nearing US fiscal  cliff.  We discuss the impact of investors potentially shifting their attention away from  Europe and back to the U.S.’s ugly imbalances.


As always, valued mid & top tier clients of our MACRO vertical will automatically receive the materials and dial-in number prior to the call. If you have any questions please contact . 




Hedgeye Risk Management is a leading independent provider of real-time investment research. Focused exclusively on generating and delivering actionable investment ideas, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing. The Hedgeye team features some of the world's most regarded research analysts - united around a vision of independent, uncompromised real-time investment research as a service.



Prior to founding Hedgeye Risk Management, Keith built a track record as a successful hedge fund manager at the Carlyle-Blue Wave Partners hedge fund, Magnetar Capital, Falconhenge Partners, and Dawson-Herman Capital Management. He got his start as an institutional equity sales analyst at Credit Suisse First Boston after earning his Bachelor of Arts in Economics from Yale University, where he captained the Yale Varsity Hockey Team to a Division I Ivy League Championship. Keith is also a Contributing Editor to CNBC TV, Fortune Magazine and author of Diary of a Hedge Fund Manager (Wiley 2010). 



Prior to joining Hedgeye Risk Management, Daryl was the Sector Head for Basic Materials at HIG Capital's hedge fund, Brightpoint Capital. Earlier, Daryl founded the public investment effort at Onex Corporation, a leading private equity firm. At Hedgeye, Daryl covers commodities, geo-politics and major asset classes outside of equities. 


Takeaway: While the consensus bull case has been far removed from anything fundamental, Asian GROWTH data does imply incremental deterioration.



  • The trends across Asian export, import and industrial production statistics continue to come in weak, portending negatively for global growth over intermediate term.
  • US economic growth is particularly at risk, given the relationship between Asian economic activity and that of our own.
  • The list of potential negative TREND-duration economic catalysts is long and their respective probabilities are all rising, not falling. To recap:
    • Some combination of fiscal tightening in the US if the Fiscal Cliff is not completely skirted;
    • An incremental slowdown in global industrial production activity due to continued weakness in the Chinese economy (i.e. Chinese demand fails to match hopeful expectations that anticipate some degree of large-scale stimulus);
    • Outright tightening of Chinese monetary policy or incremental tightening in its property market;
    • A resurgence of European sovereign debt and banking risk (that crisis is far from over);
    • A meaningful acceleration of global geopolitical risk (Israel/Iran? Syria? US consulates?);
    • An accelerated bout of protectionism due to the Sino-Japanese tensions and/or due to Obama/Romney China bashing.
    • A potential Japanese sovereign debt scare; and
    • A noteworthy deterioration in the US labor market as corporations reduce headcount amid cost-cutting initiatives in a desperate attempt to meet lofty consensus EPS forecasts in a slowing top line environment (2007-08 re-do?).


With the inclusion of this morning’s large swatch of SEP PMI data from a number of key countries and economic blocs globally, our call for global growth to continue to slow remains firmly intact. If anything, calls for an outright economic contraction – both domestically and globally are now in play. While we haven’t been calling for this scenario explicitly in our Macro Team’s research notes, we have been debating the subject internally at an accelerating rate of late. Jay Van Sciver, Hedgeye’s managing director of Industrials, hosted a similar debate in print via his 9/28 research report titled, “THOUGHTS ON A RECESSION STRATEGY FOR INDUSTRIALS” (email if you’d like access to Jay and his team’s thought-provoking research).


Covering the Industrials space lends Jay a real-time, direct gaze upon the economic cycle – both domestically and globally; in covering Asia, I am afforded a similar boon. Asian economies – particularly the trade and production-heavy countries like Hong Kong and Singapore – tend to possess a leading-to-concurrent relationship with US economic statistics, which is both trivial and intuitive, given their place in the global production cycle. Other key stats worth noting:


  • Exports account for roughly 33% of Asia’s GDP in aggregate;
  • The US and EU combine for roughly a third of Asia’s export destinations;
  • 40-50% of intra-regional trade within Asia is basic and intermediate goods meant for re-export outside of the region, increasing the combined US and EU share of Asian exports to somewhere closer to two-thirds;
  • The Asia-Pacific region is home to the world’s eight-busiest container ports and 17 of the top 25; and
  • Asian exports account for far and away the largest share of US imports (32.7%).


With this backdrop, we find it alarming that our amalgamated Asian Export, Import and Industrial Production series (weighted by exports, imports and GDP, respectively) continued to trend negatively in AUG.


On the Export front, Asian shipments declined -2.9% YoY in AUG (vs. -3.2% in JUL); on a three-month moving average basis, our indicator slowed to -1.1% YoY from +2.5% prior.  




On the Import front, Asian demand slowed to -4% YoY in AUG (vs. +1.9% in JUL) – nearly a 3yr-low. On a three-month moving average basis, Asian Imports slowed to -0.6% from +2.9% prior.




On the Production front, Asian Manufacturing Activity slowed to +2.1% YoY (vs. +3.5% in JUL) – also near a 3yr low. On a three-month moving average basis, Asian Industrial Production slowed to +3% YoY from +4%.




Looking to the slowdown in Asian Exports more closely, the following two charts highlight the aforementioned relationship between Asian and US GROWTH data. Specifically, since JAN ’07 Asian Exports YoY have registered a +0.93 concurrent correlation with US Imports YoY and a +0.86 leading (1MO) correlation with US Durable Goods New Orders YoY. The latter would imply continued weakness in US Durable Goods New Orders growth here in SEP (i.e. the AUG stink-bomb wasn’t a one-off).






On the domestic import front, we have shown empirically how crucial that statistic is to US Real GDP growth – especially given that PCE accounts for ~70% of the US economy (and the production of the goods component is largely outsourced to Asia) . While this is likely to be counterintuitive to traditional macroeconomic modeling (imports are a drag in standard GDP calculus), one cannot argue with the relationship detailed in the following charts:






For more details on this relationship and why today’s ISM Manufacturing Index beat hardly matters in the grand scheme of things, refer to the following two notes:


  • CHART(S) OF THE DAY – NOT ENOUGH PURCHASING POWER TO BOOST GROWTH (4/12): In the charts below, we highlight the fairly symbiotic relationship between U.S. import demand and headline economic growth, as well as what that means for the 1Q12 GDP report.
  • WE DON’T MAKE WIDGETS – TLT TRADE UPDATE (5/1): The math would suggest it is prudent to fade bullish manufacturing and export data at these prices, given their low predictive value for economic growth. Growth Slowing remains our fundamental outlook for the U.S. economy over the intermediate term.


Looking to Asia’s SEP Manufacturing PMI data (i.e. data that actually does matter to domestic and global GROWTH), the few series we’ve received to-date suggest continued weakness:



  • SEP Manufacturing PMI: 49.8 from 49.2
    • Input Prices: 51 from 46.1
    • New Orders: 49.8 from 48.7
    • New Export Orders: 48.8 from 46.6
    • Employment: 48.9 from 49.1
    • Output: 49.8 from 50.9
    • Backlogs: 46.5 from 45.1
    • Imports: 47.7 from 47
  • SEP HSBC Manufacturing PMI: 47.9 from 47.6; 11th straight month of “contraction” (signified by a reading < 50)


  • SEP Manufacturing PMI: flat at 52.8; a 9MO-low


  • SEP Manufacturing PMI: 44.1 from 45.3


  • SEP Manufacturing PMI: 45.6 from 46.1


  • SEP Manufacturing PMI: 49.2 from 47.9


Keep an eye out for Singapore and Hong Kong’s Manufacturing PMI releases (OCT 2 and OCT 7, respectively) as we tend to anchor on those two countries as a barometer of global growth over all others in Asia (ex China). All told, Asia is warning us that global GROWTH continues to slow and is signaling to us incremental risks that it surprises our already-bearish expectations the downside over the intermediate term. Key TREND-duration catalysts on the negative front include:


  • Some combination of fiscal tightening in the US if the Fiscal Cliff is not completely skirted;
  • An incremental slowdown in global industrial production activity due to continued weakness in the Chinese economy (i.e. Chinese demand fails to match hopeful expectations that anticipate some degree of large-scale stimulus);
  • Outright tightening of Chinese monetary policy or incremental tightening in its property market;
  • A resurgence of European sovereign debt and banking risk (that crisis is far from over);
  • A meaningful acceleration of global geopolitical risk (Israel/Iran? Syria? US consulates?);
  • An accelerated bout of protectionism due to the Sino-Japanese tensions and/or due to Obama/Romney China bashing.
  • A potential Japanese sovereign debt scare; and
  • A noteworthy deterioration in the US labor market as corporations reduce headcount amid cost-cutting initiatives in a desperate attempt to meet lofty consensus EPS forecasts in a slowing top line environment (2007-08 re-do?).


The list is long and their respective probabilities are all rising, not falling. The interconnected nature of the expectations game and macroeconomic reflexivity are the key behavioral components to watch – particularly with regards to the latter point. But don’t just take our word for it; CAT, SPLS, FDX and IHS have all had a thing or two to say about the deteriorating global growth outlook in recent weeks.


Perhaps those companies are one-offs. What if they’re not? What if US corporations start to aggressively manage earnings by meaningfully slowing the pace of SG&A, R&D and CapEx spending – all at [roughly] the same time? These are the key questions we think you and your respective teams should be focused on at the current juncture, especially in the context of incessant Policies To Inflate out of the Federal Reserve.


For a refresher on our TREND and TAIL thoughts on global growth, please refer to the following notes:


    • With the inclusion of this morning’s swath of global PMI data, we continue to receive confirmation that our call for global growth to slow is proving accurate.
    • Looking ahead, we see the confluence of downside risks to growth as being both more probable and more impactful over the intermediate term.
    • Those risks include, but are not limited to: Fed policy-sponsored commodity price inflation; a renewed debt ceiling debacle in the US and a potential government shutdown in Japan – the world’s third largest single-nation economy; inadequate Fiscal Cliff resolution; and a continued deceleration in global industrial production as Chinese policymakers surprise consensus expectations for economic stimulus to the downside. Further austerity measures and/or financial market contagion is likely to continue weighing on the slope of European growth as well.
    • From our purview, the key question to debate from here is not whether policymakers are poised to deliver more [failed] stimulus policies, but rather if the reflexive and interconnected nature of the global economy starts to perpetuate an acceleration to the downside with respect to real GDP growth over the intermediate term.  
  • DEBUNKING THE STRUCTURAL BULL CASE (8/15): We see downside risk in the US equity market over the intermediate term as the structural bull thesis is riddled with shortcomings.
  • THINKING OUT LOUD RE: GLOBAL GROWTH (8/10): New data points, including negative revisions to the official growth forecasts out of Singapore and Hong Kong, affirm our bearish conviction on the slope of global growth with respect the intermediate-term TREND duration. Applying a longer-term lens, would argue that the incessant policy responses out of the global central planning cartel over the last ~5yrs have set us up for broadly weak economic fundamentals for the foreseeable future.
  • ARE US EQUITIES SUFFERING FROM COGNITIVE DISSONANCE? (8/8): We see a similar see a similar pattern in consensus storytelling and a similarly-asymmetric price setup as we did in the previous occurrences of our being bearish at cyclical tops in the US equity market and “risky assets” broadly (1Q08, 1Q10, 1Q11, 1Q12).
  • GLOBAL G/I/P UPDATE: THREE QUICK HITS FOR THE ROAD (8/3): Global GROWTH/INFLATION/POLICY dynamics are poised to incrementally deteriorate in 2H12, leaving bailout hopes or central planning speculation as the only factors in support of a bullish bias on “risky assets” from here. As we learned in late 2007/throughout 2008, those catalysts have the potential to leave a great deal of investors caught offsides.
  • CAT-CALLING CAT: GROWTH SLOWING’S SLOPE JUST GOT A BIT MORE SLIPPERY (7/25): We continue to expect that global economic growth will be skewed to the downside over the intermediate term – both relative to current readings and also relative to currently-elevated expectations. Moreover, we would view the inflationary impact of any incremental LSAP program out of the Federal Reserve as a negative shock to reported growth figures globally – particularly when considering how weak the world economy is currently.
  • HAVE US CORPORATE EARNINGS GONE TOO FAR? (7/20): When analyzed outside the vacuum of short-termism associated with quarterly reporting, US corporate profit margins appear particularly overstretched – from both an operational and a social perspective. This has potentially dire implications for corporate earnings growth over the long term.


Darius Dale

Senior Analyst

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.