Fight Night







The latest data according to our proprietary Hedgeye Election Indicator shows President Obama’s odds of being reelected at 62.4%. Most polls you’ll hear about also put Obama several points ahead of Romney both nationally and on a state-by-state basis. Clearly, Romney needs to execute a major comeback in order to win this election and tonight’s his first chance to do so. The upcoming debates are Mitt’s chance to show he’s got what it takes to turn America around and can visibly improve the economy. Jobs will likely be discussed, but it’ll be interesting to see if they touch on the US dollar and the role of the Federal Reserve at all.




The US stock market continues to amaze and wonder heading into November as the S&P 500 holds above our 1430 TRADE level of support with resistance at 1448. Trading the risk and the range is what we do here at Hedgeye. With the CBOE Volatility Index (VIX) above 15, things could heat up soon without anyone taking immediate notice of the situation. Obama needs to keep the market propped up for about one more month and after that, who knows what’ll happen, especially with Europe acting as the wildcard in all this.






Cash:                DOWN


U.S. Equities:   Flat


Int'l Equities:   Flat   


Commodities: Flat


Fixed Income:  UP


Int'l Currencies: Flat  








Remains our top long in casual dining as new sales layers (pizza) and strong-performing remodels (~5% comps) should maintain sales momentum. The company is continuing to enhance returns for shareholders through share buybacks . The stock trades at a discount to DIN (7.7x vs 9.3x EV/EBITDA) and in line with the group at 7.3x.

  • 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



This company’s on track to post $3Bn in revenues by ’14 – impressive given a $1.5Bn print in 2011. Perhaps more impressive is the breadth of growth drivers that will get it there – women’s, accessories, new underwear platform etc. in addition to footwear. UA is gaining share in both apparel and footwear quarter-to-date. While some may be concerned over the loss of UA’s SVP/Sourcing we’re 8% ahead of the Street in the upcoming quarter and buyers on weakness.

  • TAIL:      LONG







“Do you ever get tired of carrying so many evil secrets around or is it just me?” -@Dasan




“Human Dignity has gleamed only now and then and here and there, in lonely splendor, throughout the ages, a hope of the better men, never an achievement of the majority.” -James Thurber




ADP private sector labor report shows U.S. private sector created 162,000 jobs in September, besting forecasts from economists for 143,000.


The Macau Metro Monitor, October 3, 2012




Nevada state court Judge Elizabeth Gonzalez has rejected Kazuo Okada's request to let him vote on the 25 million shares that were forcibly redeemed in February, at WYNN's annual shareholders' meeting on November 2.  She said Okada didn’t convince her that he was likely to overcome Wynn’s argument that the Board’s business judgment validated the redemption.  Gonzalez’s ruling allows Okada to file a new request.  


Kim Sinatra, Wynn’s general counsel, said one reason stockholders won’t be asked to remove Okada next month is that there are still “lots of investigations.” 



According to Kenneth Kay, LVS's CFO, LVS expects to get the bank loans for it’s The Parisian project in Cotai in place in 1Q 2013.  The company is planning to invest at least US$2.5 billion (MOP20 billion) in the construction of The Parisian, to be located beside Four Seasons, in Cotai.  Sands executives said last month that US$1 billion of the financing would come from the company’s equity base with the remainder coming from international banks.  They expect construction to begin before the end of next month, subject to government approval.



Secretary for Social Affairs and Culture Cheong U. said the drafting of criteria for smoking areas in casinos was “at the final stage”.  The Health Bureau, under Mr Cheong, is drafting the technical regulations.  He said the ban on smoking in casinos would still be enacted on January 1 next year, in less than three months.  Despite the short notice, Mr Cheong said he expected all smoking areas inside casinos to be ready before that.


TODAY’S S&P 500 SET-UP – October 3, 2012

As we look at today’s set up for the S&P 500, the range is 18 points or -1.09% downside to 1430 and 0.16% upside to 1448. 













    • Decrease versus the prior day’s trading of 718
  • VOLUME: on 10/02 NYSE 596.29
    • Decrease versus prior day’s trading of -11.31%
  • VIX:  as of 10/02 was at 15.71
    • Decrease versus most recent day’s trading of -3.74%
    • Year-to-date decrease of -32.86%
  • SPX PUT/CALL RATIO: as of 10/02 closed at 2.56
    • Up from the day prior at 1.68


TREASURIES – the bond market agrees with me more and more by the day that both Growth and #EarningsSlowing matter a lot more than the latest Spanish conquistador whisper; 10yr yield falls again this morning, down to 1.61%; no support to 1.57% and the Yield Spread is compressing to its lowest level (138bps wide) since Bernanke’s Sep14 top.

  • TED SPREAD: as of this morning 26.78
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.61%
    • Decrease from prior day’s trading of 1.62%
  • YIELD CURVE: as of this morning 1.38
    • Down from prior day’s trading at 1.39

MACRO DATA POINTS (Bloomberg Estimates)

  • 7:00am: MBA Mortgage, Sept. 28 (prior 2.8%)
  • 8:15am: ADP Employment, Sept. est. 140k (prior 201k)
  • 10am: ISM Non-Manufacturing, Sept. est. 53.4 (prior 53.7)
  • 10:30am: DoE inventories
  • 11:00am: Fed to purchase $4.25b-$5.25b debt


    • Obama, Romney debate jobs and taxes at University of Denver. Moderated by Jim Lehrer of PBS’s NewsHour. 9pm
    • U.S. ITC holds hearing on final investigation of antidumping duties for solar-energy imports from China. 9:30am
    • Senate Homeland Security panel issues findings of two-year bipartisan investigation into fusion centers, which serve as focal points in gathering, sharing information on threats. 9am


  • Services industries in U.S. probably little changed in Sept.
  • Obama, Romney face off in first of three presidential debates
  • China non-manufacturing index falls as economic growth cools
  • Bristol-Meyers returns Plavix, Avapro rights to Sanofi
  • JPMorgan rivals face billions in damages after NY fraud case
  • Boeing lowers growth forecast for global air-cargo market
  • Amerigroup delays investor vote to end Wellpoint deal lawsuits
  • EBA to release figures today on how lenders met a $149b capital target
  • Carlyle Group buys Vermillion to expand beyond private equity
  • Hewlett-Packard hosts analyst day; forecasts may be updated


    • Family Dollar Stores (FDO) 7am, $0.75
    • RPM International (RPM) 7:30am, $0.64
    • Monsanto (MON) 8am, $(0.43)
    • Marriott International (MAR) 4:30pm, $0.40



OIL – bearish is as bearish does; our TAIL risk line for Brent remains just inside of $113 and continues to pressure that popping sound of commodity bubbles; fully loaded, rumors not getting EUR/USD anywhere close to its TAIL risk line of $1.31; from here, Dollar up can easily take commodities lower – we’ll see if Romney can land a punch tonight for USD.

  • Oil Falls to Four-Day Low as U.S. Supply Increases, China Slows
  • Iron Ore Heads for Longest Bear Market in 20 Years: Commodities
  • Corn Crop in China Curbed by August Typhoon May Lift Imports
  • Copper Drops on Concern European Debt Crisis Threatens Demand
  • Nickel Surplus May Expand to Five-Year High on New Mine Projects
  • Malaysia’s Dompok Proposes Crude Palm Oil Export Tax to Be Cut
  • Gold Swings Between Gains and Losses Before U.S. Jobs Report
  • Cocoa Falls After Ivory Coast Sets Farmer Price; Coffee Advances
  • Palm Oil Set to Extend Losses as Stockpiles Climb on Weak Demand
  • Norway Port Set to Boom With Iron Ore Shipped to China: Freight
  • Mining Capex to Slow in 2013 With Metals Prices Under Pressure
  • VLCC Shipping Rates from Arabian Gulf Below October 2011 Lows
  • Dry Bulk Rates for Capesize, Panamax Recover From Recent Lows
  • Soybeans Drop to Lowest Since July on U.S. Harvest, Brazil Rains










SPAIN – so they lied about their GDP numbers for a few yrs and just dropped one of the biggest Service PMI bombs of 2012 (40 in SEP vs 44 in AUG); what’s another 100-300B for dysfunctional banks, amongst political friends? What’s amazing to me is how bad a lot of this global growth data is (France Service PMI 45 vs 49), despite the market’s rally to the September no-volume highs.















The Hedgeye Macro Team






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Mitten and Nobama

This note was originally published at 8am on September 19, 2012 for Hedgeye subscribers.

“If you put the federal government in charge of the Sahara desert, in 5 years there’d be a shortage of sand.”

-Milton Friedman


I’ve used the jocular nicknames of both President Obama and Republican nominee Mitt Romney to emphasize the point that both candidates are having a tough time earning broad national respect.  Before I get into a preview of our election call being held later today (we will be distributing the dial-in and materials later this morning), I actually want to acknowledge both candidates.  Running for President is no easy task and both men should be given some credit for putting it all out there and taking a shot at serving the greater good.


Getting back to the race, the primary issue, which I alluded to above, is that both candidates are struggling with favorability and approval.  As I’ve touched on in previous notes, President Obama’s approval rating is on par with prior Presidents that have not been re-elected.  According to Gallup, the pollster that has tracked presidential approval going back the furthest, Obama’s approval rating is currently at +49.  Typically the share of the two-party vote roughly equates to the President’s approval rating, so on this metric Obama is in a tenuous position.


Fortunately for the Democrats and unfortunately for the Republicans, Romney has very low favorability ratings. In the last five major polls starting in the first week of September, Romney has had an average favorability rating of +43.8.  Even with meaningfully higher Republican turnout, a point I will delve into in more detail on today’s call, this is a favorability rating that is going to make the path to the Presidency challenging for Romney.


Given some of his recent misstatements, Romney does not appear to be doing his campaign any favors.  As such, the media has begun writing him off over the last couple of days.  Some of the more recent headlines include:


“Is This the End of Mitt Romney” –The New Yorker

“The Real Romney Is a Sneering Plutocrat” –New York Magazine

“Thurston Howell Romney” –The New York Times


Actually, now that I’ve put on my analytical lens, those aren’t really broadly representative of the media, though they are broadly representative of the New York media.  The point being that while Romney has not helped his campaign with his recent comments, the interpretation from the media on the coasts and in more liberal bastions is not necessarily representative of how the broad electorate interprets these comments.


The truth is, though, that the Romney campaign, at least so far, has failed to make their candidate broadly appealing.  The last few days of missteps, especially Romney’s comment about 47% of the country being dependent on the government, is likely not a death blow for the campaign, though they surely did not increase Romney’s changes of winning the Presidency either.


The most recent national polls suggest this race remains basically a dead heat.  Respectively, the Rasmussen, Wall Street Journal and Gallup polls have Obama leading on average by +2.  Two nights ago in a small group dinner, pollster Scott Rasmussen suggested to Keith and I that a potential wild card could be the fact that Republican enthusiasm, a proxy for turnout, may be higher than the Democrats by 4 – 6 points.  If this margin is valid, it would put the race in a virtual statistical tie.  (The caveat to these polls is that on other indicators, such as our own Hedgeye Election Indicator, which is highlighted in the Chart of the Day, Obama has 2/3s probability of being re-elected.)


This race is tight enough that clearly there is room for things to changes on the margin to still impact the outcome.  In 2012, based on the Real Clear Politics average, Bush was up +5.9 points versus Kerry.  In 2008, Obama was only up +2.0 points versus McCain.  Obviously Kerry would go on to narrow the margin and Obama would go on to expand the margin.  In fact, Kerry would narrow the race by +4.4 points as Bush’s eventual margin of error was only +1.5.


The Obama strategy so far has been based on playing it safe and pouncing on Romney’s errors, which have helped keep Romney’s favorability ratings low.  Setting the other side’s strategy aside, Romney is actually the only Presidential candidate since 1988 to not get a bounce from his convention so this has been an easy task for the Democrats.  Given that, it is likely time for the Romney campaign to stop with the personal appeals for the candidate and focus on what really matters to the electorate – the economy.  In every gauge of issues, the economy dominates.


In addition, even if his language has been poorly worded, Romney’s attacks on the size and role of the government will continue to resonate with the electorate.  In fact, in a recent Gallup poll, likely voters indicated by a margin of 54 – 39 that they believe the government is doing too much as opposed to not enough.  More importantly, more than six in 10 independents think the government is doing too much.


For the next 50 days, Romney’s messaging should be very simply focused on getting the government out of the way to improve the economy.  Potential voters may not view him favorably (yet), but these are the topics that will resonate with the electorate.


In our call later today, I will be joined by our Financials Sector Head Josh Steiner and Healthcare Sector Head Tom Tobin to discuss the potential impact on their sectors depending on who wins the Presidency and Congress. I will also touch on the outlook for some key asset classes. The big one is the U.S. dollar. 


Based on what we’ve heard from some “in the know” Republican sources, Romney is toying with a massive cut in government spending on the order of $500 billion per year during his first term.  We really won’t know if this is true until if and when Romney is elected, but this kind of deficit hawkishness could be very bullish for the U.S. dollar.


Even as Obama appears to have the edge in many statistical categories, this is a race that is not yet over and if the recently released video of Romney from Mother Jones tells us anything, it may be that this race is just starting to heat up.  As Mao Tse-Tung famously said:


“Politics is war without bloodshed, while war is politics with bloodshed.”




Our immediate-term risk ranges of support and resistance for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1746-1785, $111.87-113.89, $78.48-79.73, $1.29-1.31, 1.75-1.87%, and 1446-1474, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Mitten and Nobama - Chart of the Day


Mitten and Nobama - Virtual Portfolio

Spending Is A Tax

“Milton Friedman reminded us that to spend is a tax.”

-Edward Prescott


On my flight to Denver last night I finally got through half of The 4% Solution. The aforementioned quote from Prescott (Professor of Economics at Arizona State) is representative of what you’ll find in the book - historical reminders that will get you to think.


Thinking, instead of reacting to the daily-double on Spanish bank bailout rumors, matters. History is littered with short-term policy decisions that resulted in long-term structural risks. History is also a guide for those of us who want a solution for a better future.


Not all “economist” ideas are dumb. Some of the simplest ones are just too hard for politicians to swallow. As Vernon Smith (Professor of Economics at Chapman University) suggests, “cutting government spending, as opposed to cutting interest rates… could be a critical step to recovering from a financial crisis” (The 4% Solution, page 50). Try getting Bernanke or Geithner to say that.


Back to the Global Macro Grind


Enough of the thinking already – if the Europeans print another $100-300B to bailout Spain, and Timmy backstops it with his friends from France via the IMF, the Eurocrats can blow that dough right down a rat-hole faster than you can, baby. Bull market.


After being down for 8 of the last 12 days (SPX closed up a marginal +0.09% as someone spiked AAPL into yesterday’s close) US Equity futures aren’t down yet this morning because the Europeans turned to Rumor On.


Risk off, Rumor On. That’s the political ticket. Or is it?


Tonight we’ll see if Romney can land a punch. If he can’t, I think he’s out cold. If I were him, I’d bring some music to Obama’s wide open economic chin.


Here’s where the US economy finds itself after a -69% GDP slowdown in 6 months to 1.26%. It’s a Bush/Obama Keynesian Trifecta:

  1. Rising Corporate Taxes (at 39.2% USA has the 2nd highest corporate tax rate (next to Japan) in the world (The 4% Solution, pg 48)
  2. Less than 50 days to the Fiscal Cliff (Pelosi and Geithner are going to save you from what they perpetuated, allegedly)
  3. Less than 1-3 months (depending on how they change the rules) on bonking the Debt Ceiling (again)

So, you can save yourself $50,000 a year sending your kid to Keynesian Economics School to come up with a solution like this:

  1. Cut Corporate Taxes to Canada’s levels (28%)
  2. Whack what it costs to employ everyone getting paid by Big Government in Washington, DC
  3. Fire Bernanke, replace him temporarily with Volcker, and bring back Strong Dollar

I’m not in Denver to run for office. But I think I could give Obama a good go on stage tonight if they let me. Americans are sick and tired of losing and being lied to. If you need a Canadian to be your Gladiator in this public economic Forum, I’m game.


Now that that’s off my chest, back to the market…


Last Wednesday, I said “Buyem!”, yesterday I wrote a Risk Manager note in the morning titled “Sellem!” What else do you expect me to do when watching this clown show? This is no longer about anything other than every man and woman fighting for what they have left.


Like I said on the Morning Client Call yesterday (every day at 830AM EST), “I’m just a man in a room” barking about this stuff. Whatever my ideas may be, they don’t superimpose systemic risk on the world’s consumption growth like Bernanke’s ideologies do.


Here are some multi-factor, multi-duration, risk management thoughts supporting why I sold stocks on green yesterday:

  1. US Dollar Index has held its long-term TAIL line of $78.11 support
  2. EUR/USD has failed, again, at its $1.31 TAIL risk line of resistance
  3. SPX vs VIX is breaking down (again) to the bear side, as VIX holds its long-term TAIL of 14-15 support
  4. SP500 snapped its immediate-term TRADE line of 1451; no support to 1430 on the same duration
  5. Russell2000 is back below its March 26th closing high of 846 (making lower long-term highs now)
  6. Bonds (UST 10yr 1.61%) continue to confirm that Growth and #EarningsSlowing matter more than Spanish rumors

If we don’t have the political spine to cut corporate taxes and government spending, at the same time, we’ll look more and more like Japan (or Spain). Don’t believe me? Give it 4 more years.


Sure, it will take some short-term commodity and stock market pain (like it did in the early 1980s and early 1990s) but, in return, we’ll get our hard earned currency back. That will drive oil prices lower, and US consumption higher.


Strong Dollar, Strong America – my name is Keith McCullough and I support this message.


My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, Russell2000, and the SP500 are now $1, $109.07-112.86, $79.54-80.29, $1.27-1.29, 1.57%-1.64%, 829-846, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Spending Is A Tax - Chart of the Day


Spending Is A Tax - Virtual Portfolio

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