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Raging Bear: SP500 Levels, Refreshed...

The Good News here is that not everything is as financially geared as some of these horse and buggy whip US Financials and Industrials… If everything was, the US market would be down 6-8% today...

With the XLF (Financials) getting smoked for another -8.5% day, and XLI (Industrials) down another -5%, these are the crosses of leverage that this fine country still has to bear… The New Reality remains this: in an environment where the cost of long term capital continues to rise as the access to it (without government regulation attached) declines, companies geared to those P&L factors lose relevance…

Underneath all of this, after the 11AM refresh of prices, I come out with SP500 support at 670. Yes, that would be a lower low, and yes, that would make Obama just as wrong as every American is in their 401k right now. Lower lows are bearish.

In a raging bear market like this, bounces are to be sold. Unfortunately, for me at least, I did not do enough of that yesterday. In preparation for the next bear market bounce, I have the first line of SP500 resistance at 730 (dotted red line in the chart below).

Keith R. McCullough
CEO & Chief Investment Officer

Want Vs. Need

"It is a capital mistake to theorize before one has data. Insensibly, one begins to twist fact to suit theories, instead of theories to suit facts."
-Sherlock Holmes

Sherlock Holmes is one of my favorite analysts, and I have that quote taped into the insert of my research notebook. Whenever I find myself reaching to be right, that simple reminder brings me back to where I need to be - data dependent.

At the beginning, end, and in between of my every day, no matter where I go... there real market prices are. If you make enough mistakes trading markets like I have, over time you come to respect this reality. Shaping one's thesis to what Nasim Taleb refers to as a "narrative fallacy" is something that anyone one in this business can do. However, if you don't have Warren Buffett's terms and duration (preferred and forever), your storytelling can quickly become problematic - especially when your client, boss, or Mr. Market, takes your capital away or, God forbid, marks it to market...

What people WANT to happen in markets, and what NEEDS to happen are often different things. Obama bashers wanted the man to make a call on the market, and be wrong - for a day at least, he wasn't. China short sellers wanted China's manufacturing growth to crash in 2009 - for the year-to-date, it hasn't. Chinese momentum chasers who were looking for their storytelling of "increased stimulus" to be confirmed last night didn't get that either.

In Asian trading last night, the trading impact of WANT vs. NEED was profound. I am long China via the CAF closed end fund - and for the life of me yesterday, I couldn't understand how anyone would be chasing this ticker into a +14% daily move with the thesis that China's Premier announcing another stimulus is a bullish thing? Stimulus is what floundering economies who are socializing themselves (Japan, USA, UK, etc...) are provided. If Wen Jiabao admitted to needing stimulus last night, I would be selling my entire position here on the open.

In order to achieve sustainably higher prices, what markets NEED is confidence. Confidence is what higher prices are built on, not government supports and stimulus. If you disagree with that, check the math on the USA SP500 price of 696, fully loaded with everyone in the manic media and their brother WANTING bailout moneys.

Overnight, despite not delivering on the manic media's WANT for Chinese stimulus, the Shanghai Stock Exchange had another great day, closing up +1% at 2,221. Now isn't that interesting... a country that is spending what they NEED rather than what the crackberry crowd WANTS. While I think estimates for 8% GDP growth in China are too aggressive, I don't think you can show me any point in American economic history where GDP was growing in the mid to high single digits and the US Government bowed down to populist cries for free stimulus moneys on the order of half a TRILLION dollars...

The New Reality is this. China's opportunity in the 21st century is not unlike that of America's in the 20th or Britain's in the 19th. Because their baseline of per capita GDP is so low, their long term opportunity is too hard for the bearish storytellers to comprehend. Ask the "hedgie", who was "short China" for that +14% move in the CAF, how he felt yesterday. I'm thinking that if his boss or investor got the memo on that accelerating Chinese PMI number, he was covering into the highs of the day - facts are hard to hide from.

Sherlock Holmes would be smiling. Isn't the data on those billion people still residing in China the same as it was when Investment Banking Inc. was long everything "Chindia" in 2007 still accurate? Or has some rogue from Parts Unknown killed off some of that demand and Beijing is making up the numbers on what their real headcount is?

Guys like Vikram Pandit, who built his hedge fund using "long India" as one of his big theories, are learning right now that the storytelling of a place called "Chindia" was fiction. The fact is that India got hammered again last night, losing another -2.9%, taking the Sensex Index to down -15% for 2009 to-date. Unlike China, India's currency (the rupee) looks like what it is, an emerging market currency with no-confidence on the offer. Unlike China, India could run negative GDP growth with positive mid single digit inflation. That would be bad - and that's what the marked to market prices of Indian equities having been telling you that your NEED to understand.

Despite rallies in China and Japan, Korea was down modestly overnight. They have the worst performing currency in Asia right now - that's not new. What is new is that when you pile their leverage issues on top of an accelerating cost of global capital (bond market's are breaking down), things can go from really bad, to toxic... in a hurry.

Korea is not China, and neither is Hong Kong. Despite the Chinese telling us that all is well, the Hang Seng index lost another -0.97% overnight - how could that be? Don't those who WANT everything that resembles China to go up NEED to get paid? Well, yes... they do... but that doesn't mean they will.

Hong Kong is not unlike Switzerland or Dubai for that matter right now. What these countries NEED is for the last 25 year cycle of cheap money and its high velocity of availability to continue. What the global market WANTS is to mark all of these countries and the companies operating within them to ditch their addiction to leverage (General Electric?). That's The New Reality.

Do I WANT the SP500 and Nasdaq to go higher this morning? Of course, I am long both. Does the market NEED to go higher every day? Of course not...

Let's keep it real out there, and not "Insensibly, twist fact to suit theories, instead of theories to suit facts"...

In the immediate term, my upside/downside targets in the SP500 are balance at +4% and -4%, respectively (683 and 738).

Best of luck out there today.



  • QQQQ - PowerShares NASDAQ 100 - We bought QQQQ on a down day on Monday.

  • SPY - SPDR S&P500- We bought the etf perhaps a smidgen early with the S&P500 at 715, yet will take it at a discount.  The market is also close to three standard deviations oversold.

  • CAF - Morgan Stanley China fund - The Shanghai Stock Exchange is up +22% for 2009 to-date. We're long China as a growth story, especially relative to other large economies. We believe the country's domestic appetite for raw materials will continue throughout 2009 as the country re-flates. From the initial stimulus package to cutting taxes, the Chinese have shown leadership and a proactive response to the credit crisis.

  • GLD - SPDR Gold- We bought gold last Thursday with the S&P500 in the red and gold down. We believe gold will re-find its bullish trend.

  • TIP - iShares TIPS- The U.S. government will have to continue to sell Treasuries at record levels to fund domestic stimulus programs. The Chinese will continue to be the largest buyer of U.S. Treasuries, albeit at a price.  The implication being that terms will have to be more compelling for foreign funders of U.S. debt, which is why long term rates are trending upwards. This is negative for both Treasuries and corporate bonds.

  • DVY - Dow Jones Select Dividend -We like DVY's high dividend yield of 5.85%.

  • VYM - Vanguard High Dividend Yield -VYM yields a healthy 4.31%, and tracks the FTSE/High Dividend Yield Index which is a benchmark of stocks issued by US companies that pay dividends that are higher than average.
  • LQD -iShares Corporate Bonds- Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates in the back half of 2009 that bonds will give some of that move back. Moody's estimates US corporate bond default rates to climb to 15.1% in 2009, up from a previous 2009 estimate of 10.4%.

  • SHY -iShares 1-3 Year Treasury Bonds- On Thursday of last week we witnessed 2-Year Treasuries climb 10 bps to 1.09%. Anywhere north of +0.97% moves the bonds that trade on those yields into a negative intermediate "Trend." If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yield is inversely correlated to bond price, so the rising yield is bearish for Treasuries.

  • UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. The Euro is down versus the USD at $1.2567. The USD is up versus the Yen at 99.4850 and up versus the Pound at $1.4144 as of 6am today.

CKR – Disappointing Numbers

The good news is that in period 1 Hardees’s same-store sales increased 3.2% vs. 1.6% last year. The bad news is that Carl's Jr.’s comparable sales decreased 3.6% vs. a 1.4% increase in the prior year. In the current environment discounting is the only way to generate incremental traffic and management has no intention of “trying to compete with free because, no matter what anyone says, you can't make that up on volume."

At the same time, management wants to blame rain in Southern California as the reason for the sluggish trends at the Carl’s Jr. concept. The fact is that rain may have had an impact on the current period sales trends, but that should not be mistaken for 5 months of decelerating trends at Carl’s Jr.

It’s hard to single out a reason why Carl’s Jr. is slipping, but value for the money is going to be the one that appears at the top of the list. Carl’s Jr. has always been more expensive than any of the other “big three” competitors and the focus on value by its competition is a major issue for the company, particularly in the current environment. Holding the line on value becomes harder to do as the decline in traffic trends begin to accelerate.

Trading at 4.3x NTM EV/EBITDA, CKR is one of the cheapest stocks we follow and deservedly so. In addition to the core concept losing market share to the “big three,” management at CKE is one of the least shareholder-friendly management teams in the restaurant industry.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


Copper futures are reached 3-month highs today as the anticipation of increased infrastructure spending in new Chinese stimulus measures. We have been watching copper closely since the beginning of the year as the signals of increasing demand have become more pronounced. For those of you who listened to our morning call yesterday, we indicated that copper had broken out quantitatively and we saw serious follow through today.

As we position ourselves for the re-flation trade it’s important to keep in mind that the increased buying by Chinese industrials that we noted this morning in our PMI post is just the tip of the iceberg. Although it will be months before ground is broken on the major projects in the interior and there is a lot that can happen between now and then, but the Chinese government has already signaled a willingness to hold hard assets in lieu of Treasuries and these infrastructure projects will need much in the way of basic materials. If things play out in China like we suspect, this could only be the beginning of the move for the good Dr. Copper.

Daryl G. Jones
Managing Director

Andrew Barber


The Isle of Capri conference call was the first time a casino company discussed lowering “pricing” on slot play. As we noted in our 07/18/08 note, “I’LL HAVE A SLOT MACHINE, HOLD THE WINNINGS”, hold percentage has been steadily increasing for years. Slot “tightening” and game mix shift toward video and penny slots were the main culprits. Effectively, consumers have received fewer and fewer payouts for their dollars wagered. Maybe that’s the price for higher entertainment value.

The charts below show the slot hold percentage trends over time for the Las Vegas Strip, Atlantic City, and Missouri. Missouri is used as a proxy for the regional markets due to readily available data in that state. Slot hold percentage in Las Vegas and AC experienced similar increases. Pricing power in Missouri was much greater, no doubt due to the limited license nature of that market which limits competition. With the exception of Mississippi (unlimited licenses), the other regional markets generated similar increases in hold percentage to Missouri.

I’m not sure whether ISLE’s decision to lower the slot hold percentage in certain markets represents an industry wide cut. However, it is a signal that “pricing” has gone up for too long and has probably peaked and the economy may keep the payout ratio in check.

This is a trend that investors should follow closely. Depending on the tax rate in the jurisdiction, flow through rates on a change in hold percentage can run from 50-90%. To show you the materiality of this issue, take a look at the Strip over the past 15 years. The hold percentage increased from 5.4% to 7.0% over that time. The 160 basis point improvement on 2008 slot volume represents about $650-700 million in profits to the Strip.


The ISM report for February arrived above consensus estimates, but at levels that were far from positive. The business conditions index, derived from surveys of purchasing and supply executives, declined for the fifth consecutive month, registering at 41.6 versus January’s 42.9. The price index declined for the fourth month in a row after the previous 65 consecutive months of increases while the new orders and employment indices also registered at negative levels.

The data, although grim, is not without some positives. It is interesting to note that the only industry in which surveyed respondents reported an increase in all three categories of prices paid, employment and new orders was Real Estate, where managers also reported decreased inventories for the month. This data appears at first blush to support the thesis spelled out in Howard Penney’s Feb. 24 post on the decelerating rate of declines in home sales; that the real estate market could be close to a bottom.

We will keep our eye on manager survey data as it arrives, constantly testing each investment thesis.

Andrew Barber

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%