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TODAY’S S&P 500 SET-UP – October 12, 2012

As we look at today’s set up for the S&P 500, the range is 20 points or -0.48% downside to 1426 and 0.92% upside to 1446. 













  • ADVANCE/DECLINE LINE: on 10/11 NYSE 909.00
    • Increase versus the prior day’s trading of -737
  • VOLUME: on 10/11 NYSE 646.68
    • Increase versus prior day’s trading of 9.45%
  • VIX:  as of 10/11 was at 15.59
    • Decrease versus most recent day’s trading of -4.30%
    • Year-to-date decrease of -33.38%
  • SPX PUT/CALL RATIO: as of 10/11 closed at 1.72
    • Up from the day prior at 1.67


  • TED SPREAD: as of this morning 24.36
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.69%
    • Increase from prior day’s trading of 1.67%
  • YIELD CURVE: as of this morning 1.42
    • Up from prior day’s trading at 1.41

MACRO DATA POINTS (Bloomberg Estimates)

  • 8:30am: Producer Price Index M/m, Sept. est. 0.8%
  • 8:30am: PPI Ex Food & Energy M/m, Sept. est. 0.2%
  • 9:55am: University of Michigan Consumer Sentiment, Oct. preliminary, est. 78.0 (prior 78.3)
  • 11am: Fed to buy $1.75n-$2.25b notes due 2/15/2036-8/15/2020
  • 12:35pm: Fed’s Lacker speaks in Charlottesville, Va.
  • 1pm: Baker Hughes rig count


    • Dodd-Frank rules take effect that require companies to begin tallying derivatives trades to determine whether they cross $8b threshold for being designated swap dealers subject to heightened capital and collateral standards; CFTC also will require companies to tally foreign-exchange swaps, forwards
    • Interior Secretary Ken Salazar, Senate Majority Leader Harry Reid, D-Nev., make announcement on renewable energy and public lands, 1:30pm
    • Education Secretary Duncan answers Twitter questions about federal student aid, tools available to help students, families make informed decisions about financing higher education, 4pm


  • Telefonica agreed to sell its Atento call-center division to Bain Capital, with enterprise value of EU1.04b, including debt
  • WellPoint reorganizes in interim CEO Cannon’s 1st major move
  • TPG withdraws A$694m offer for Billabong as talks end
  • Softbank shares fell as operator said it’s in talks to invest in Sprint Nextel, said to be seeking control
  • S&P put Softbank’s long-term outlook on creditwatch negative, citing announcement on Sprint Nextel talks
  • Kraft said to be putting its Breakstone’s sour cream, cottage cheese business up for sale, may be worth ~$400m
  • Gary Gensler, chairman of CFTC, said he’d be willing to serve 2nd term as head of the agency
  • Carlyle given another month to consider making Chemring bid
  • Family that controls Champion Technologies said to be seeking sale of the closely held company
  • Nasdaq, setting up derivatives trading system in London, will seek more than 10% market share in its first year of operation
  • JPMorgan expects investment-banking fees from U.S.-listed Chinese cos. to surge this year as they step up acquisitions
  • Pfizer appealed judge’s order that CEO Read testify in person at federal trial on claims against anti-smoking drug Chantix
  • Samsung Electronics won bid to continue selling newest Galaxy Nexus smartphone in U.S. during appeal
  • Apollo Global, Oaktree Capital said to have rejected Nine Entertainment’s debt restructuring proposal, countered by offering funds managed by Goldman a smaller stake in the co.
  • Honeywell expects to boost aerospace sales in Asia by 7% a year, double the pace in U.S.
  • VMware said partnership with Cisco will change after its $1.26b acquisition of Nicira
  • Answers Corp., which lost bid to buy About.com from New York Times in Aug., has other plans to grow through acquisitions
  • Morgan Stanley execs said to have told partner in Rhinebridge structured investment vehicle that mortgages underlying SIV may cause it to fail
  • Best Buy plans to match Amazon pricing in holiday season: WSJ
  • Presidential Debate, China GDP: Week Ahead Oct. 13-20


    • JPMorgan (JPM) 7am, $1.20 - Preview
    • IGate (IGTE) 7:03am, $0.38
    • Wells Fargo (WFC) 8am, $0.87 - Preview
    • Webster Financial (WBS) 8am, $0.46
    • DiamondRock Hospitality (DRH) 8am, $0.19


  • Oil Heads for First Weekly Gain in Month on Middle East Tension
  • Copper Traders Most Bearish Since June on Economies: Commodities
  • Malaysia to Reduce Palm Oil Export Tax, Abolish Duty Free Quota
  • Copper Drops on Concern Demand Will Fade Amid Global Slowdown
  • Soybeans Drop as Global Supply Concerns Ease After USDA Report
  • Gold Seen Gaining in London as Weaker Dollar Spurs Investment
  • Sugar Declines on Speculation Demand Is Waning; Cocoa Advances
  • Sugar Cane Farmers Should Get 70% of Revenue, India Panel Says
  • Iron-Ore Forecast Lowered at HSBC on Weakening Chinese Demand
  • CO2 Storage May Aid Oil Company Revenue, Avoid Decommissioning
  • Oil May Fall as Rising Output Boosts Stockpiles, Survey Shows
  • Rubber in Shanghai Set to Extend Bull Rally: Technical Analysis
  • Twin-Peak Rally Seen Boosting Grains in First Quarter of 2013
  • Palm Oil Tumbles as Malaysia to Abolish Duty-Free Exports Quota






















The Hedgeye Macro Team







The Macau Metro Monitor, October 12, 2012




Sands China welcomed 1.19 million visitors during Golden Week, a 39% increase YoY.  Occupancy was 100%.  



S'pore GDP in 3Q fell 1.5% QoQ in-line with a Bloomberg News Survey estimate of -1.6%.  On a YoY basis, the economy grew 1.3%.    The Trade Ministry maintained their stance of a modest and gradual appreciation of the local dollar.  “For the rest of the year, growth could be weighed down by the subdued global economic conditions. Expansion in transport engineering and construction will help counter the impact of a slowdown in advanced economies on manufacturing and wholesale trade, and the Singapore economy “remains on track” to grow by 1.5% to 2.5% this year, said the Trade Ministry.



Prime Minister Lee Hsien Loong said his government is still "watching anxiously" the social effects of the integrated resorts in Singapore, even as the resorts have proven successful in terms of business, government revenue and urban planning.  "From a social point of view, we would like to say that it has been alright, but it is early to say, because the casinos have been operating only for two years and a half."  Lee noted that the share of Singaporean casino-goers has stabilized at 1/4, "which is about what we have expected".  The total amount of gambling has stayed about the same after the casinos opened, but the amount of compulsive gambling - "the very extreme cases" - has increased slightly, he added.







The Oracle of Delphi

This note was originally published at 8am on September 28, 2012 for Hedgeye subscribers.

“A great number of people think they are thinking when they are merely rearranging their prejudices.”

-William James


In investing, there is no hiding from your prejudices.  If your prejudices trump your intellectual honesty, then you probably won’t be in this business for long, regardless of whether you are on the sell side, buy side, or the dark side.


Since it is political season in the United States, prejudices are as heightened as they have ever been.   Unfortunately, the nature of the two-party system in the United States has evolved to a state where supporting the party trumps rational analysis.  The political overlords speak and those who are politicized vote according to party lines. But I digress . . .


In reference to the title of this note, the Oracle of Delphi was an ancient Greek figure that was at the height of power around 1600 B.C.  She supposedly spoke for Apollo and answered questions for the Greeks, and foreigners, about many topics including: colonization, religion, war, and power.  The Oracle purportedly knew all and people listened.


For a period of time, the Oracle exerted disproportionate influence over the Greek world and was consulted before every major decision.  Obviously, most of us do not run our organizations or investment teams based on the proclamations of an oracle.  And thank goodness for that. 


Ironically, one of the most effective decision making methods is called the Delphi technique, which involves assembling viable options that are then voted on independently until a quorum is reached.  As Michael O’Malley wrote in a recent blog for the Harvard Business Review:


“As the Marquis de Condorcet (http://en.wikipedia.org/wiki/Marquis_de_Condorcet) showed (in the collective wisdom proof), good, unbiased decisions are made if a solution space is well sampled and the final judgment is determined by independent decision-makers. One of the attributes that determines the range of options that bees ultimately consider is genetic diversity. The greater the diversity in the bees' DNA, the more sensitive they are to different conditions and circumstances, and the more options the hive is able to gather. More diverse hives are better at everything and more productive than less diverse ones.”


Thus, the key to effective decision making is to assemble a group of diverse individuals with independent voices. 


The Federal Reserve does not exactly fit this mode as highlighted by the backgrounds of the current board members:


-          Chairman Ben Bernanke – formerly a professor at Princeton and a Ph.D in economics;

-          Vice Chair Janet Yellen – formerly a professor at Berkeley and a Ph.D in economics;

-          Elizabeth Duke – formerly a senior banking executive at various regional banks;

-          Daniel Turollo – formerly a professor at Georgetown and a law degree from Michigan;

-          Sarah Raskin – formerly Commissioner of Financial Regulation for the State of Maryland and law degree from Harvard;

-          Jeremy Stein – formerly professor at Harvard with a Ph.D in economics; and

-          Jerome Powell – formerly Assistant Secretary of the Treasury and law degree from Georgetown.


Clearly, the nature of the Federal Reserve board is more akin to a group of oracles than a manifestation of the Delphi technique.  The key error we’ve made in assessing the Fed’s willingness to continue to ease is that we believed they were “in a box” due to the data and the political cycle.  Groupthink, of course, is not always rational.


Regardless of whether we agree or disagree with the Fed, we are back to playing the game in front of us.  Printing money is inherently an inflationary action and will ultimately slow growth.  As we have seen this year, printing money will also inflate equities until the printing presses stop or they get trumped by growth and inflationary concerns.


On the growth front, yesterday the durable goods report dropped -13.2% in August from the prior month.  Largely, this was driven by a drop in aircraft orders, so there is probably a one-time negative and likely non-reoccurring factor here,  but still it is what it is . . . pretty negative.


As it relates to currency, the Chinese yuan hit a new record versus the dollar this morning at 6.2856.  The pundits are speculating that this is due to strong corporate demand and financial institutions getting out of short positions ahead of the week long Chinese holiday.  While Hedgeye won’t be taking a holiday next week, our man on China, Darius Dale, will be writing the Early Look next week to give an update on China.


Needless to say, we are still on the sidelines as it relates to the world’s second largest economy.  We are also on the sidelines as it relates to the idea that we will see meaningful stimulus from the Chinese in the short term.  Despite this, the Shanghai Composite was up another +1.4% today on the back of being up +2.6% yesterday.  Up +4% in two days is solid, but the anecdotes from China continue to be negative.  On the back of Caterpillar saying construction demand was down -40%, we have Nike saying this morning that demand is worse than expected.


Anemic demand from Chinese is crushing the U.S. coal market.  Currently, metallurgical coal from the Appalachian region is trading hands at $52 or so, while it costs $65 - $75 to produce.  Given these economics it is no surprise that we have recently seen a bankruptcy in the sector with Patriot Coal recently filing for Chapter 11.  In our Q4 themes call next week, we will be discussing more companies that have bagel (bankruptcy) risk.


Regardless of potential bagels, we have plenty of long idea and I’ll send you into the weekend with a couple of our top ones:

  1. Las Vegas Sands (LVS)
  2. Urban Outfitters (URBN)
  3. Paccar (PCAR)

Ping sales@hedgeye.com for details.


Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are now $1769-1785, $111.44-113.17, $79.36-80.36, $1.27-1.29, 1.61-1.71%, and 1434-1453, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Head of Sales and Research


The Oracle of Delphi - Chart of the Day


The Oracle of Delphi - Virtual Portfolio

Beating The Street


Earnings Season truly kicks into full gear with JP Morgan (JPM) and Wells Fargo (WFC) reporting tomorrow morning. Hedgeye CEO Keith McCullough appeared on CNBC’s Fast Money this evening to discuss financials, earnings and what the future of the market might hold for investors.


Technology is also becoming worrisome for traders with the Technology SPDR (XLK) down -3% for the month of October and Apple continuing its decline, down -10% from the “Bernanke Top.”


Watch the video posted above for Keith’s full take on the market.


Takeaway: $JPM - It looks to us like the company will beat estimates by 4-8 cents net of one time items and DVA, primarily on reserve release (again).

This note was originally published October 11, 2012 at 13:48 in Financials

Key Drivers of the Quarter:


* NIM - Consensus is too bullish. Consensus is looking for 2.46% vs. last quarter's 2.47%. This may be optimistic. In the chart below we take a look at the trendline in JPMorgan's net interest margin since 1Q10. It's been decreasing at a rate of 8 bps per quarter, and should be at 2.39% in 3Q12. We realize the company chalked up a portion of 2Q12's NIM decline to hedge ineffectiveness that should reverse in 3Q. That's possible, and clearly what the street has modeled, but it's also possible that the ongoing QoQ compression in the yield curve robs them of another 8 bps. 




* Loan Growth - Consensus may be too bullish. Consensus is looking for 1.56% sequential loan growth, whereas the trend line would suggest 0.85% QoQ growth. It's certainly possible that the company could have chosen to originate and retain a larger amount of mortgages this quarter. It would make sense to do so - it would help both their NIM and loan growth, and they certainly wouldn't have had to compete aggressively to do so with mortgage volume up 70% YoY in 3Q. That said, the trendline suggests that Consensus is looking for roughly double what the company has delivered in the last 8 quarters.




* Net Interest Income - Consensus is too Bullish. With margin and loan growth expectations rather high, we think the product of those two variables is also too high. Consensus is modeling $11.32 billion in net interest income, but if we're right on margins (down 8 bps QoQ) and loan growth (+85 bps QoQ) then NII should look more like $10.84 billion. That shortfall of $478 million equates to around 8 cents per share after-tax. A more simplistic approach of just trend-lining the NII yields a slightly less pessimistic scenario of -$270 million, or 4-5 cents per share after tax (we show this in the chart below). 




* Non-interest Income - Unclear. Consensus is looking for $13.02 billion, which is up $2 billion from $11.03 billion in 2Q12. Obviously the big wildcard here is how much is being modeled for further CIO losses and how much will there actually be. The company has said to expect another $1.7 billion in losses in a worst case scenario. It's unclear what the street is modeling on this line, making apples to apples comparisons difficult. Mortgage banking will be the other line that should show notable sequential change. We're estimating mortgage banking revenue may be higher by $250-500 million sequentially. Given the uncertainty around CIO, we think investors will be focused on the core numbers here. Outside of a potential CIO surprise (up or down), we see little reason to think non-interest will be a disappointment vs. expectations this quarter.


* Credit - Consensus is too Bearish. Consensus is looking for $1.37 billion in provision expense and $741 million in reserve release. As we published in our H8-based sector preview a few days ago, we think the Street is underestimating reserve release by almost 60%. Collectively, the street is looking for $2.3 billion in reserve release, whereas the H8 is suggesting a number closer to $5.4 billion. If we assume that as a proxy for JPMorgan, then the actual reserve release should be closer to $1.7 billion, or roughly $1 billion higher. This should add roughly 17 cents to the bottom line print vs. expectations.




*Opex - Consensus is about right. Consensus is modeling $15.45 billion in 3Q12 operating expense. This compares with 2Q12 opex of $14.97 billion. The company has given guidance on this line to expect operating expenses to be flat with 1H12 levels, which averaged $15.2 billion, exclusive of $3 billion in litigation reserve build. The rationale given was higher legal costs and mortgage production-related expenses, both of which seem to be playing out as expected based on the news flow intra-quarter. For reference, this is also fairly consistent with the last 10 quarters trendline, which would suggest a 3Q12 opex of $15.6 billion. As such, it looks like consensus may be overestimating operating expenses by roughly $250 million. Obviously there's the potential that the company is guiding conservatively here. 


* Bottom line - Consensus is too Bearish. With all the big pieces being considered, it looks to us like the company will beat estimates by 4-8 cents net of one time items and DVA, primarily on reserve release (again). That said, there will be a eye-popping number of one-time items and adjustments necessary to get from the reported number to the real number. We think the JPMorgan print will set the tone for a generally positive 3Q12 earnings season from the Financials.


* Sector Strategic Outlook. As we see it, there are five key, positive tailwinds for the Financials and only one big headwind. The tailwinds we see are: (1) Political, Romney's momentum is finding its way into multiples, (2) Jobs, jobless claims are moving lower and have a tailwind through February, (3) Housing, collateral values are stabilizing and transaction activity is improving. Autocorrelation is the most important factor in housing, (4) QE Infinity, Financial stocks love QE for multiple reasons: it's inflationary, it bids up their securities holdings, (5) Earnings, as enumerated above, we think the earnings season will be, on balance, positive for the Financials. Against this, we see one very large risk: The Fiscal Cliff. Our macro team has written extensively on this subject. 


From a timing standpoint, we see upside between here to the election driven by earnings, QE and the election, but after the election we would be very cautious until the market has a clear understanding of what to expect from Congress and the President on the Cliff.


Joshua Steiner, CFA




Robert Belsky



FNP: The Y Chromosome

Takeaway: Here's a peek inside a Jack Spade store for those not fortunate enough to have been in one. It's a big idea. $FNP

We think that Kate Spade is one of the most exciting growth stories in retail today. But most people overlook the fact that there is a Y Chromosome element component of Kate Spade. His name is Jack. With less than a dozen stores open thus far, it has justifiably been under the radar. But one thing is unusual about Jack. With so few stores and virtually no critical mass, it is making money.    


A store opened up 5 days ago in New Canaan, CT, and has seemingly gotten off to a very good start. A few thoughts...


1. Only 15-20% of the store is merchandise that falls into the 'murse' category. These guys 'get it' that we cannot expect men to buy leather goods to the same extent that women do. 


2. The biggest takeaway is how pristine the merchandising approach is. Look at t he first snapshot below. They don't simply unpack boxes and fill the shelves and racks with goods. Rather, they have each item in every size on the rack. No more and no less. Your size is there to try on, and then the item you buy comes from the stock room with the original unit going back to the rack. It simply looks crisp and neat. It's an approach that most brands wish they could execute like this.


3. The best selling item in the store is a $750 'hard fabric' jacket that is a collaboration with hunting brand Barbour. Jack takes the product, slims it down, tweaks the colors, and makes the fabric more fashion forward. It's quite impressive. 


4. Great collection of wallets -- all at price points below $100.


5. Most murses are in the $200-$400 range. They're definitely not yet tapping into the upper echelons of price points in leather goods. 


We fully realize that this is a) a single anecdotal view as it relates to Jack Spade, and b) minute as it relates to the bigger issues related to investing in FNP today (ie Juicy blowing up). But great retail concepts are rare. This is one of them.



This is about as clean as it gets. Small, medium and large. If you buy it, they get one from the stock room for you.

FNP: The Y Chromosome - 10 11 2012 3 18 32 PM


Slightly distorted  (thank you iPhone 5) panoramic view of one side of the store.

FNP: The Y Chromosome - js2

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%