TODAY’S S&P 500 SET-UP – October 4, 2012

As we look at today’s set up for the S&P 500, the range is 18 points or -0.96% downside to 1437 and 0.76% upside to 1462. 













    • Decrease versus the prior day’s trading of 196
  • VOLUME: on 10/03 NYSE 665.91
    • Increase versus prior day’s trading of 11.68%
  • VIX:  as of 10/03 was at 15.43
    • Decrease versus most recent day’s trading of -1.78%
    • Year-to-date decrease of -34.06%
  • SPX PUT/CALL RATIO: as of 10/03 closed at 2.55
    • Down from the day prior at 2.56


  • TED SPREAD: as of this morning 26.63
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.63%
    • Increase from prior day’s trading of 1.61%
  • YIELD CURVE: as of this morning 1.40
    • Up from prior day’s trading at 1.38

MACRO DATA POINTS (Bloomberg Estimates)

  • 7am: Bank of England announces interest rates
  • 7:30am: Challenger Job Cuts Y/y, Sept. (prior -36.9%)
  • 7:45am: ECB announces interest rates
  • 8:30am: ECB’s Draghi holds news conference
  • 8am: RBC Consumer Outlook Index, Oct. (prior 50.4)
  • 8:30am: Jobless Claims, Sept. 29 est. 370k (prior 359k)
  • 9:45am: Bloomberg Consumer Comfort, Sept. 30 (-39.6)
  • 10am: Factory Orders, Aug. est. -5.9%  (prior 2.8%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural gas storage change
  • 11am: U.S. to announce plans for sale 3-yr, 10-yr, 30-yr debt
  • 11am: Fed to purchase $1.75b-$2.25b notes due 2/15/2036-8/15/2042
  • 2pm: Fed issues minutes of FOMC Meeting
  • 8pm: Fed’s Bullard speaks in Memphis, Tennessee, on economy


    • SEC member Daniel Gallagher, three officials from agency’s trading and markets unit speak at Sifma market structure conference in New York. 8:45am
    • Cheniere Energy, Royal Dutch Shell, GDF Suez join U.S. Energy Association at conference on global supply. 9am


  • Euro-area, England central banks to keep interest rates at record lows, economists say
  • U.S. same-store sales seen slowing in Sept. from August gains
  • Romney debate tactics may put campaign against Obama ’back on track’
  • U.S. shopping center demand slows as consumer spending stalls
  • U.S. consumer credit delinquencies near 6-yr low, bankers say
  • AT&T said to add first Nokia Windows 8 phone for US market
  • Unilever said to put Skippy peanut butter brand up for sale
  • Teva pulls depression drug generic after FDA says not same
  • Spain meets maximum target at bond auction as 3-yr yield rises
  • 3M scraps Avery label-unit deal as antitrust regulators balk
  • Applied Materials to cut 9% of workforce amid slump


    • International Speedway (ISCA) 7am, $0.08


  • Oil Rises From Biggest Drop in Three Months on Syria Conflict
  • Overlander Leads Sucden to Metals-Trading Dominance
  • Morgan Stanley Backs Gold, Silver, Copper on Demand Outlook
  • Palm Oil Set to Drop After Rebound on Indonesia Tax, Mistry Says
  • Copper Gains in New York as Higher Equities Boost Demand Outlook
  • Soybeans Gain a Second Day as Price Drop May Boost Import Demand
  • Sugar Climbs to Seven-Week High on India’s Imports; Coffee Gains
  • Pan Pacific Said to Offer 15% Cut in Copper Premium for China
  • World Food Prices Jump to Six-Month High as Dairy Costs Rise
  • Iron-Ore Swaps Rise 1.4% in London Trading, Clarkson Data Show
  • Aluminum May Climb to $2,200 on Fibonacci: Technical Analysis
  • Bottom in Coking Coal Price Rests on Supply and Demand Response
  • Danube Decay Hinders Rhine Link to Leave Shippers Blue: Freight
  • Gold Jumps in New York on Signs of India’s Demand, Weaker Dollar






















The Hedgeye Macro Team






Should be good enough – for now.



We continue to think RevPAR growth will moderate, potentially more than expected by the Street.  We are not positive on Lodging stocks and would fade any boost from the MAR Q3 beat.  Here are our detailed thoughts.



Marriott 3Q12 Review

  • Bottom line:  Results in the Q were solid but not as good as the headline appears.  The big EBITDA beat was largely driven by much lower SG&A.  Operating income of $213MM was $23MM above the high end of MAR’s guidance.  SG&A was $23MM below company guidance.  The balance of the performance was aided by:
    • $2MM higher deferred fees on the Courtyard sale ($7MM actual fees; they guided $5MM)
    • $2MM higher incentive fees
    • $6MM better branding fees (we have very little visibility but we did suspect that they were sandbagging guidance on this line item)
    • Some of the above got offset on the bottom line by higher taxes and lower gains
  • 4Q Guidance is mostly in-line but a bit weaker:
    • RevPAR is weakish
    • SG&A lower than expected but in-line with their guidance
    • Owned, leased, corporate and other unchanged
    • EPS guidance of 55 cents vs prior implied guidance of 58 cents
  • General observations:
    • Total system-wide room count was lighter than we estimated by 0.6% or 3,600 rooms
      • Managed hotel rooms were down 0.8% YoY vs. our estimate of +0.1%; falling short of the our estimate by 2.4k rooms
      • Franchised hotel rooms grew 3.6% vs. our estimate of 3.9%; or 1k rooms below our estimate
  • Absolute RevPAR came in stronger than we estimated for almost every brand aside from Renaissance and Fairfield
  • Owned, leased, corporate housing and other revenue was weaker than we estimated but margins were better than our estimate and above company guidance of $20MM
    • Revenues were $29MM below our estimate and down 21% YoY.  $33MM of the shortfall vs. our estimate is likely due to the exclusion of the revenues from the Courtyard JV which the company did not disclose. 
    • Margins were not impacted by the revenue shortfall given that in the 3Q, margins in this category, excluding termination and branding fees, are typically negative.   This quarter, excluding termination and branding fees, margins for this bucket were a loss of $2MM.
    • The better than guided results in the category were driven by stronger branding fees of $27MM  and $1MM of termination fees in the quarter
  • Fee revenue came in $4MM above our estimate and on the lower of the company guidance of $315-325MM
    • Upside was driven by $2MM of higher deferred fees on the Courtyard JV and $2MM of higher incentive fees
    • Base fees as a % of room revenues were 4.7%, excluding the deferred fees, down 10bps YoY
  • SG&A came in $23MM below MAR’s guidance.  According to the release, there was a favorable litigation settlement in the quarter, offset by higher legal expenses, resulting in $5MM net benefit.  We’re not sure that higher legal expenses should be an offset unless they are one-time or unusual.   If we take the release at face value, then SG&A would have decreased 4% YoY, which is below recent trends: Adjusted SG&A increased 8% in 2011, 4% in 1Q12, and 6% in 2Q12.  Guidance for 4Q also implies at least a 4% YoY decrease in expenses
  • Tax expense was higher than we estimated at 35.6%

Earnings Slowing

This note was originally published at 8am on September 20, 2012 for Hedgeye subscribers.

“Betting taxpayer money on similar models seemed unacceptably risky.”

-Neil Barofsky


You can change the word taxpayer to investor, and you’d be making the same point. That’s what Barofsky said in Chapter 5 of Bailout, “Drinking the Wall Street Kool-Aid”, after listening to the New York Fed’s Bill Dudley attempt to explain his risk management process. Dudley is the economist who is now infamous for suggesting there is no real-world food/energy inflation because iPads are cheap.


Don’t blame all the ex-Goldman turned government guys (Paulson, Kashkari, Dudley, etc.) for making the biggest risk-adjusted US taxpayer commitments ever to bailout losing positions. Free-market capitalism is the best path to prosperity, baby! You don’t have to get the fundamentals right anymore. America 2.0 prosperity is all in the money-printing.


Setting aside the 10-13% March-June draw-down in US Equities, some may have had the stock market right “year-to-date.” But that’s not getting the economy right. The last time the economy started to diverge from the stock market like this was in Q3 of 2007. By then “the stock market was up double digits year-to-date”, then poof.   Earnings slowed, and cheap got a lot cheaper from there.


Back to the Global Macro Grind


Like iPads, I guess you can say stocks are “cheap”, but you better not be using the wrong numbers, or that’s where you’ll definitely get some multiple expansion! Cheap gets more expensive as companies guide down revenues and earnings. Ironically (see Chart of The Day), the most powerful side of the bull case in Q4 of 2011 (“earnings are great”) is now the biggest risk.


Here’s a snapshot preview of Q3 2012 Earnings Season:

  1. Fedex (FDX) = $27.3B market cap
  2. Staples (SPLS) = $8.3B market cap
  3. Intel (INTC) = $116B market cap
  4. Norfolk Southern (NSC) = $23.2B market cap
  5. Bed Bath & Beyond (BBBY) = $16B market cap
  6. Adobe (ADBE) = $16.3B market cap

The first 3 of those companies (FDX, SPLS, and INTC) already told you about #EarningsSlowing – they’ve been saying it for almost a month. The last 3 (NSC, BBBY, ADBE) just told you the same thing, but as of last night. Watch those stocks today.


Now maybe fundamentals “don’t matter” and, somehow, at the same time it’s all about stock picking again (always seems to be after the move) – but those maybes might only be maybes until the companies you are invested in report reality.


The storytelling in our profession is always impressive, but it will be really interesting to see who gets sucked into thesis drift (like they did at the Q3 top of 2007) as their “growth is back, earnings are great, and stocks are cheap” thesis of March 2012 comes unglued.


If it’s all about Apple and money printing, that’s a much more acceptable explanation – I get it. I had last week’s Viagra melt-up dead wrong inasmuch as being long the US Dollar and short Commodities this week looks dead right.


Apple is not the economy.


Apple is a great company that is not doing what companies explicitly linked to the global economy without a mega-innovation cycle are doing. FDX + SPLS + INTC + NSC + BBBY + ADBE = $207B in market cap exposed to #EarningsSlowing. AAPL has over 3x that market cap, and expectations are that their earnings may never slow again.


Put another way, Apple is not the economy but it is, increasingly, holding up the US stock market.


The other big thing going on all of a sudden this week is the other side of the Dollar Debauchery trade. Causality (Bernanke’s Policy to Inflate) has its short-term perks, but it also has its correlation risk.


To review:

  1. US Dollar Index was down for 6 consecutive weeks into and out of Bernanke’s to “infinity and beyond” move September 13th
  2. A 6wk draw-down of over 6% in the US Dollar Index took stocks and commodities to 6 week highs
  3. This is the first UP week the US Dollar has had in the last 7 (USD +0.9% week-to-date)
  4. Oil collapsed on that, down -8% in a straight line, breaking our long-term TAIL risk line of $111.44/barrel (Brent)
  5. The immediate-term TRADE correlation between USD and Gold = -0.97; that’s surreal
  6. Gold just failed to make a higher all-time high (versus the post January 25 Bernanke push to 2014 on 0% money in Feb)

So, what do you do with Growth and #EarningsSlowing, laced with a record level of correlation risk on the side this morning? I don’t know. All I can do is stay true to the research and risk management process that got me out of the way before the SP500 was down -4.4% when the music stopped in November of 2007.


My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Treasury Yield, and the SP500 are now $1753-1785, $107.46-111.44, $78.56-80.54, $1.29-1.31, 1.72-1.77%, and 1449-1474, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Earnings Slowing - Chart of the Day


Earnings Slowing - Virtual Portfolio

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.35%

River Baptisms

“A half-truth is more dangerous than a lie.”

-Saint Thomas Aquinas


The aforementioned quote comes by way of Saint Thomas Aquinas, who, to this day, is still considered among the most influential priests in the history of the Catholic Church as a function of his bridging the gap between ancient philosophical works and theology. While this is certainly not the proper forum to discuss religion in any detail, we do think modern-day financial markets could use a scholar of Aquinas’ caliber to help bridge the gap between the prices of many liquid asset classes and the fundamental data underpinning them.


Furthermore, the Manic Media outlets tasked with delivering us our economic and financial news could certainly use an army of Aquinas-like editors to help bridge the gap between what has occurred and what is reported.


To say that a large portion of the headlines and stories we’ve consumed in recent quarters were delivered in one of the following two formats would be a gross understatement: “ABC Occurred On XYZ Stimulus Speculation” or “[INSERT: Policymaker Name] Signals Further [INSERT: Stimulus Measures; Bailout Funds; etc.]”. In effect, the financial media can be considered guilty of incessantly stoking the broad-based optimism bias of both investors and corporate executives alike in priming news – particularly anything negative – with rumors and expectations for future improvement via “stimulus” or bailouts.


For reference, we use quotations around the word “stimulus” because we have shown repeatedly since 2010 that Policies To Inflate do little beyond stoking commodity price inflation that ultimately slows the pace of economic activity. In fact, if we had a burning Bernanke buck for every article in the last three months that anchored on some form of “stimulus”, Hedgeye would have enough capital to create all of the jobs QE3 is allegedly supposed to produce! River baptisms continue to dominate the heavily-biased study of economics in Western academia.


Take China, for instance. For much of the year-to-date, just about every occurrence in the Chinese economy was reported on in the context of “stimulus”. Moreover, a great deal of what Chinese policymakers have said publically in the YTD has been interpreted as a general update on the size and scope of China’s pending stimulus package. Alas, the bazooka has yet to be spotted and, perhaps more importantly, we continue see limited scope for and probability of a large-scale Chinese stimulus package over the intermediate term. We have published a compendium of work detailing our thoughts on the subject, analyzing the key data series, political catalysts and rationale(s) of Chinese policymakers pertaining to this topic and are happy email them to you upon request.


A couple of the more entertaining rumors emanating from China in recent weeks were centered around actions by the China Securities Regulatory Commission and the National Development and Reform Commission. Last week, it was reported that Chinese stocks rallied over +2% during the last 90 minutes of trading on a rumor that the CSRC was going to hold a press conference to announce measures to boost the stock market after the close. The event turned out to be a previously-scheduled meeting with no major reforms or announcements to speak of. We’re sure you remember the CNY1 trillion of infrastructure initiatives from early SEP that got a large swath of the financial media and international investment community to both celebrate and cheer on further stimulus measures (“globally coordinated easing” was the catch-phrase of the day). Since then, Xu Lin, head of the planning department at the NDRC, has come out and blatantly refuted the consensus interpretation of the event:


“The recent accelerated infrastructure project approvals did not mean the government is rolling out more stimulus. These projects are already in our plan... [The] 4-trillion yuan package of state spending and tax cuts announced in 2008 stoked inflation and sparked concern local governments took on more debt than they can afford.”

– Xu Lin speaking to reporters at Peking University on SEP 17, 2012


Of course, Chinese policymakers could emerge from Golden Week next week or from their 18th Communist Party Congress in the second week of NOV with plans to materially reflate their ailing economy. The desire to pursue social and economic stability – particularly on the inflation and employment fronts – is great among Communist Party officials and, per the latest China Beige Book from CBB International LLC, the percentage of mainland companies reporting net firings increased +700bps QoQ to 20% in 3Q.


Despite obvious growing pressure to “do something” (as IMF Director Christine Lagarde would put it), we continue to take the view that Chinese policymakers have a much longer horizon for economic planning than most Westerners are able to comprehend through the prism of democracy. Xi Jinping and Li Keqiang (China’s likely future President and Premier) will be in power for a decade. Do you think it’s in their best interests to perpetuate China’s “unstable, unbalanced, uncoordinated and unsustainable” growth model (per current Premier Wen Jiabao) by reflating the Chinese economy just ahead of or early in their administration? Perhaps, though we’d argue anyone taking a longer-term view would be keen to anticipate the negative impact of a mid-regime property market bust and subsequent financial crisis upon Chinese economic growth and social stability. Unlike most Western financial market participants, the Politburo does not operate in the vacuum of YTD gains or with respect to some year-end bonus pool.


All told, the Chinese economy will continue to grow; it probably just won’t grow as fast or necessarily in the same manner as international investors and corporations have become accustomed to. That’s one of the core tenets of prospect theory, specifically in that myopic loss aversion from the status quo occurs not just from present states, but also from future states that were previously assumed to be true.


In this light, how will companies like Caterpillar Inc. and Fortescue Metals Group Ltd. react when the Chinese “stimulus” bazooka they’ve all been anticipating to varying degrees does not show up? How will international investors respond to this potential scenario? After accounting for 43.9% of global real GDP growth since 2008, does China even matter anymore? Why can’t everyone just buy the SPDRs and hold on for dear life until the data starts to improve?


While we are certain that none of these questions have easy answers, we are convinced that they need to be pondered by anyone managing risk in today’s choppy Global Macro environment. Best of luck out there, everyone.


Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield and the SP500 are now 1, 106.78-110.99, 79.60-80.23, 1.27-1.29, 1.58-1.69 and 1, respectively.


Darius Dale

Senior Analyst


River Baptisms - Chart of the Day


River Baptisms - Virtual Portfolio

COH/Idea Alert: Eight is Enough

Takeaway: Eight reds and one green on a nine-factor fundamental model looks bad even before the poor quantitative setup.

We think COH is a short here. Yes, the brand is very good, but the company only scores positive on one of our nine-factor fundamental model that we include a summary of below. Eight negative factors is enough for us to be bearish across at least a TRADE and TREND duration. Add to that the current trading level (i.e. lousy quantitative setup) and it’s time to reinsert COH into the short side of our ledger.


To be clear, if Keith covers on red over the near-term, don’t wonder “But I thought McGough thought COH was a short?”  The answer is that over a TREND duration, I do. There is literally nothing to get excited about until next summer. Then there could be money to be made long…who knows. But until then, Keith will TRADE in and out as risk management levels suggest.


One might argue that the Street thinks it’s a short too, with short interest tripling since midsummer. But it still sits at only 5.5% of the float. Furthermore, of the 33 analysts that cover COH, there’s not a single Sell rating, and Buy ratings are near all time peaks. (Check out Nike – the stats are the exact opposite).


COH/Idea Alert: Eight is Enough - coh poduration


Coach Risk Management Levels

COH/Idea Alert: Eight is Enough - coh TTT chart 2


Coach Looking Risky In Our SIGMA Analysis

COH/Idea Alert: Eight is Enough - cohsigma4


Does ANYONE Hate It? You'd think that with its growth rate being cut by 80% it might have some more critics?

COH/Idea Alert: Eight is Enough - coh 4

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