Smell The Truth

“Keep it simple. Tell the truth. People can smell the truth.”

-Steve Wynn


If you’re looking for Steve Jobs like thought leadership, product innovation, and job creation in this country, look no further than Steve Wynn. The guy gets what most of us who have built something from nothing get – he has vision.


If you and your spouse and/or business partners are really going to build something on your own in this good life, you have to, deep down in your bones, believe that people will side with the truth.


If what you deliver is better than what they currently use, both you and your customers win. If you believe that people are dumb – and that they’re generally not smart enough to Smell The Truth, you’ve already lost. Politics might be a better career path.


Back to the Global Macro Grind


Whatever central planners want to throw at us this morning, I say bring it. The only certainty I have in my life is that the sun will rise in the East and, God willing, I will be sitting right here at my post, preparing to play the game that’s in front of me.


Yesterday, we got long again. We bought Apple (AAPL), Michael Kors (KORS), and Taiwan (EWT). We started the day with 7 LONGS, 8 SHORTS and closed the day with 11 LONGS and 3 SHORTS. Progress embraces change. So that’s what we do.


I’m not saying that our Top 3 Global Macro Themes for Q4 2012 have changed this morning. In fact, I’ll reiterate Theme #1 this morning (#EarningsSlowing) as that remains the market’s most important risk. That risk, however, gets overbought and oversold, fast.


The most important driver of the market’s daily beta isn’t AAPL. It’s the US Dollar. If you get that right, you tend to get a lot of other things right. Here’s the refreshed immediate-term TRADE correlation between the US Dollar Index and stocks:

  1. SP500 = -0.95
  2. EuroStoxx600 = -0.97
  3. MSCI World Index = -0.97

Those are wicked high correlations. So, you can either run around like a chicken with his 50-day Moving Monkey cut off on AAPL… or, you can just build a model that probability-weights where the US Dollar is immediate-term TRADE oversold/overbought, and then buy/sell AAPL (or whatever it is that you really like in the US or Global Stock market) using those signals as your headlights.


At the house of Marcus Goldman (when it was private and Partner Capital was on the line every day), they used to evaluate talent by asking themselves if their players could make money if locked in a “dark room” (by themselves) with only their process.


While they may have not put it that way precisely, I just did. Because I think that’s a great way to think about risk management and what it is, precisely, that you do. When everything goes straight down like it did yesterday, what do you smell? Buy or sell?


As a risk management process, smelling buy/sell opportunities should go both ways. That’s why I have had no problem changing my mind in the last 4 weeks. This isn’t politics – in real life business, flip-flopping your opinion is critical to success.


In the immediate-term, in particular for the beta implied in US stocks, there are always positives and negatives to consider.



  1. USD immediate-term TRADE overbought at $80.16
  2. EUR/USD immediate-term TRADE oversold at $1.28
  3. SP500 Immediate-term TRADE oversold at 1434
  4. VIX immediate-term TRADE overbought at 16.74
  5. UST 10yr yield holding 1.64% support
  6. II Bull/Bear Survey compresses by 1,000 basis points to the bear side


  1. Equity Volume is as dead as a doornail, nowhere to be found on last week’s bounce
  2. Tech (the market leader up until 3 weeks ago) is leading the decline
  3. S&P Sector Studies just saw 4 of 9 Sectors snap immediate-term TRADE support (XLK, XLI, XLY, XLB)
  4. KOSPI (South Korea) broke its immediate-term TRADE line again overnight
  5. Oil (Brent) is back above its TAIL risk line of $112.69/barrel
  6. Bernanke and Geithner are still gainfully employed

But, like any risk manager of any professional game, you have to make a call at some point on which way to lean. That’s why I have built a model that removes most of the emotion that I used to have when making those decisions. An emotional Mucker fights too much.


I don’t want to fight you. I want to help you. I don’t always lean, but when I do, I go with the process that most often tells me the truth.


My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, AAPL, and the SP500 are now $1, $112.69-115.01, $79.69-80.16, $1.28-1.30, 1.64-1.76%, $630-642, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Smell The Truth - Chart of the Day


Smell The Truth - Virtual Portfolio

CMI Preannouncement Negative for CAT, KMTUY, Not PCAR: On-Road vs. Off-Road

Takeaway: $CMI's lower guidance suggests mining/off-road/power activity was below expectations. Negative for $CAT,$KMTUY. No new information on $PCAR.

Off-Road vs. On-Road: Cummins Lowers Guidance

  • Little Relevance to PCAR, North American Truck OEMs:  Investors already have North American truck orders and already know that they are anemic.  The Cummins’ pre-announcement provides little new information on this market.  North American Class 8 build schedules are already expected to drop.
  • Mining Equipment Slowdown Confirmation:  Cummins specifically cited mining equipment as an area of weakness.  Cummins sells high value engines to off-road markets, mining equipment among them.  Komatsu, for example, is a major Cummins customer. 
  • Class 8 Less Relevant to CMI:  Cummins has diversified away from heavy-duty engines and North America.  Only around 40% of the company’s sales are in the U.S.  Further, global heavy-duty on-road engine, distribution and parts sales are probably less than 1/3 of CMI’s total sales, with the North American heavy-duty market a fraction of that. 
  • Mix Shift: Power generation and off-road vehicles (particularly with Tier IV) have become bigger parts of CMI’s mix.  Medium-duty and light-duty engines, in which Paccar has little or no presence, are significant markets for Cummins but do not have the same positive cyclical drivers as the Class 8 market (e.g. a record old fleet).
  • Brazil & China:  Cummins noted weaker than expected activity in China and had already discussed weakness in Brazil with 2Q results.  While a negative economic signal, Paccar is not currently selling in those markets.
  • Margin Pressure:  We expect Cummins to struggle with the transition from adding emissions controls for on-road trucks, where efficiency is paramount, to off-road vehicles, where efficiency is less relevant.  This transition, along with the challenge of being a supplier to highly consolidated industries, may contribute to weaker margins.
  • CAT, Komatsu, and Weak Industrial Activity: The lower guidance is the latest sign that global industrial activity has weakened, particularly in key emerging markets.  We expect the pre-announcement to impact stocks like CAT and KMTUY, as expectations have yet to fully readjust for these companies, in our view.  While PCAR has reacted in aftermarket trading, there is little new information in the Cummins release relevant to Paccar.

Earnings Season Slowdown


Hedgeye CEO Keith McCullough appeared on CNBC's Fast Money this evening to discuss stocks and earnings season.


Earnings Season truly begins with JP Morgan reporting on Friday. We have both earnings slowing and growth slowing right now. We're currently in a stock picking environment right now. Chevron (CVX) reported after the close today and offered caution on guidance, in line with our stance on earnings slowing.


Apple remains an emotional stock. It could see margin compression going forward if it comes out with new products in its iPhone line. Buyers want to see expansion in EBIT.


Check out the clip above to see Keith and the Fast Money team in action.

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 80.46%
  • SHORT SIGNALS 78.35%

Idea Alert: KORS

Takeaway: The positive quantitative setup matches up with our fundamental view here.


We like KORS on weakness today. We don’t think we can call KORS expensive – particularly with growth getting harder to find, but have been patiently waiting on price. With the stock trading at its near-term TRADE line of support, we are adding KORS on the long-side of our Real-Time Positions.

With seven factors positive across our nine-factor fundamental model reflecting the current state of business and flying in the face of every global macro headwind the rest of the world is seeing, inventories are the only thing we don’t like. But with comps running at 40%+ and store growth at 30%+ it doesn’t matter for now.


Idea Alert: KORS - KORS TTT 9Factor


KORS Risk Management Levels:


Idea Alert: KORS - KORS TTTC




Takeaway: Another currency devaluation may be on the horizon in Venezuela, which joins Argentina on our LatAm FX devaluation watch list.



  • Hugo Chavez may use his renewed mandate and outlook on life to accelerate his socialist agenda in Venezuela.
  • “Doing more” likely implies an acceleration of social spending and a potential FX reserve-financing currency devaluation.
  • If we’ve learned anything from the 1990s-early 2000s, it’s that weird things happen to emerging markets when the USD breaks out sustainably (Mexico’s Tequila Crisis, Brazil’s Hyperinflation Saga, the Asian Financial Crisis and Sovereign Defaults by Russia and Argentina). Watch that DXY quote into and through the US general election, the Fiscal Cliff, and the Debt Ceiling negotiations!


Hugo Chavez, fresh off a 10 percentage point victory in recent Venezuela’s presidential election and a potential victorious battle with cancer (three surgeries in the past 15 months), may use his renewed mandate and outlook on life to accelerate his socialist agenda in Venezuela – Latin America’s most oil-rich nation (211.2 billion barrels; 15.3% of world proved reserves). The “slim” victory – Chavez’ narrowest of his four total: 1998 = 16 ppts.; 2000 = 22 ppts.; 2006 = 26 ppts. – may actually put pressure on him to “do more” to maintain what he believes to be social and economic stability in Venezuela.


From a practical standpoint, “doing more” may look like the following:


  • Since taking office in 1999, he’s expropriated  more than 1,000 companies or their assets in the name of his socialist agenda.
  • He’s perpetuated a near -40% decline in the country’s international FX reserves as the central bank has been repeatedly forced to transfer the funds to an off-budget fund known as Fonden that Chavez uses to finance public expenditures on social programs.
  • A -50% currency devaluation back in early 2010 helped briefly stem the decline in FX reserves, but they’ve since resumed their downward trend.






Given his history of unstable monetary policy, it’s no surprise to see Venezuelan inflation flirt with rates north of +35% YoY in recent years; it’s since come down to +18.6% YoY in AUG ’12.




If “doing more” does, in fact, imply an acceleration of social spending and a potential FX reserve-financing currency devaluation, we’d be remiss to not signal risk to clients who hold assets denominated in VEB or those that invest in USD debt issued by Venezuelan entities whose revenue streams are denominated in VEB. A declining price of crude oil across international markets over the intermediate term (a view consistent with our 4Q12 Macro Theme titled: Bubble #3) would also perpetuate devaluation fears. It’s worth noting that Venezuelan dollar debt had been Latin America’s best-performing YTD (+32%) largely on hopes of a regime change, though Chavez’ reelection has likely contributed to cracks resurfacing in Venezuelan financial markets:


  • Post the election, the VEB has fallen -2.3% week-to-date to a record 12.58 per USD in the unregulated market, where it is trading down -31% YTD (LeChuga Verde);
  • Yields on state oil company Petroleo de Venezuela SA’s USD bonds due 2017 rose +55bps to 11.73% (Stuttgart Stock Exchange); and
  • The benchmark IBC Stock Index is down -16% week-to-date, after closing up +31% wk/wk last week (now up “only” +189.8% YTD).


If you were fortunate to have been on the near +200% hyperinflationary ride up in Venezuelan stock market YTD, we suggest now might be a good time to book some gains. Most likely, however, you probably weren’t; still, to the extent any of the companies in your portfolio have outsized exposure to Venezuela we think it’s worth paying attention to these key risks and developments.


If we’ve learned anything from the 1990s-early 2000s, it’s that weird things happen to emerging markets when the USD breaks out sustainably (Mexico’s Tequila Crisis, Brazil’s Hyperinflation Saga, the Asian Financial Crisis and Sovereign Defaults by Russia and Argentina). Watch that DXY quote into and through the US general election, the Fiscal Cliff, and the Debt Ceiling negotiations!


Darius Dale

Senior Analyst

AXP: Growth Slowing

American Express (AXP) is experiencing the pandemic sweeping the financial world known as #GrowthSlowing. Using data from First Data, we’ve seen Amex credit volumes decline on a year-over-year basis. The company also faces headwinds in the form of a slowdown in consumer spending and tough comps for the month of September.


As for the Bluebird partnership with Walmart (WMT) that was announced yesterday, this is a positive for AXP. It’ll give the company access to the high-growth debit card market and revenue from fees associated with the card.


AXP: Growth Slowing  - Amex vs. First Data quarterly


AXP: Growth Slowing  - spendtrend Qrtly YoY

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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.