“Against the assault of laughter, nothing can stand.”

-Mark Twain


If there was one key takeaway from the Vice Presidential debate last night it was simply this: Biden laughed.  I took an unscientific poll on Twitter and people seem to be split on the actual winner.  Republicans lean towards Ryan and Democrats lean towards Biden.  I think my colleague Keith McCullough probably summed it up best this morning when he wrote to me:


“USA lost credibility as Ryan didn’t deliver in taking Biden’s old politics to task.  Ryan looked like a rookie and Biden looked like a snake.”


But you know Keith, he’s not really known to have an opinion on things …


From a quantitative perspective, the Intrade Presidential contract is basically trading at the same level as it was going into the debate.  According to Intrade, Obama has a 63% chance of retaining the Presidency and Romney is at 37%.  So there you have it, despite Biden’s best attempt at a Mark Twain laughter assault, the Px90 juiced whippersnapper Ryan held his own.


The next two debates will be held between Romney and Obama.  The first one is a town hall format and will be on Tuesday, October 16th and the final debate will be held on October 22nd, with a focus on foreign policy.  Given Obama’s weak performance in the first debate, these will be more closely watched than historical debates. The likelihood is that Obama will perform much better and they too will become non-events.


Even if the debate fireworks are behind us, the election itself is only heating up.  According to the national polls, this race is basically tied.  Based on the average of the last four key national polls, Romney is ahead on average by +0.7 points.  Interestingly, Rasmussen, who has been the most accurate pollster in the last two election cycles, actually now has Obama back ahead.  Undoubtedly the tightness of this race is no laughing matter for those with a party affiliation.


We will be joined with Neil Barofsky on November 7th, the morning after the election, to discuss the potential policy impact.  Neil was the former Special United States Treasury Department Inspector General that was appointed to oversee the Troubled Asset Relief Program, or TARP.  From an investment perspective, the election is critical because it lays the foundation for future fiscal and monetary policy.  In this respect, we think Neil will be the ideal person to discuss post election policy as he knows many of the key players.  If you are not currently an institutional subscriber and would like to become one to get access to the call, email


In the chart of the day, we’ve highlighted U.S. Federal government spending as a percentage of GDP going back to 1947.  The takeaway, which many of you know, is that federal spending has been going up and to the right for almost seven decades.  As we’ve been told by some key Republican insiders, this will be Romney’s primary focus if he is elected. That is, he will look to dramatically shrink the size of the government.


From an economic and investment perspective this could, perversely, be a real negative for economic growth in the short run.  Ultimately though, putting capital back in the hands of capitalists and getting the U.S. fiscal house in order should be positive for the U.S. dollar and economic growth in the long run.  Canada in the mid-90s is a prime example of a modern economy that took its pain, but then rebounded in a meaningful way.


Another positive related to the election is that when it is over, at least it will relieve the uncertainty among decision makers.  This uncertainty is manifested in many ways with a key way being an unwillingness of executives to invest in their businesses. 


My colleague Hesham Shaaban forwarded me an article this morning that encapsulated this point well.  According to this article from Bloomberg, the number of companies saying “profits will trail estimates compares to those who are saying they will exceed them climbed to 4.3:1”.  In a nutshell, when 4 out of every 5 companies in America think the future will be worse than the past, you can not expect hiring to accelerate.


#Earningsslowing is one of our three themes this quarter and clearly is already starting to play out.  At a point, of course, this all gets priced in, but we would just recommend treading carefully in that regard until the end of earnings season as there is stock specific risk associated with the fact that earnings in corporate America are peak-ish.


Speaking of stock specific risk, our retail team will be hosting a conference call on Carter’s, Inc (CRI) this coming Monday.  This won’t be your typical old Wall Street initiation call.  In fact, this is going to be one of those new Wall Street 2.0 calls where we are actually going to tell you that Carter’s is a stock that you should short, or at the very least lighten up on.  Imagine that, a Wall Street research firm making a short call.  I mean, who does that?


Speaking of short ideas, a key one is the little retailer called J.C. Penney (JCP).  Needless to say, even though JCP seem to be getting back into the coupon business by sending $10 coupons to customers as gifts, we still think this is a name to avoid.  On the contrary, our financials team indicated yesterday they thought J.P. Morgan (JPM) would beat numbers this morning and, lo and behold, JPM beat by $0.18.  It seems the fat cat bankers on Wall Street are laughing, as well!


Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $112.66-115.71, $79.26-80.07, $1.28-1.30, 1.64-1.71%, and 1, respectively.


Enjoy your weekend.


Keep your head up and stick on the ice,


Daryl G. Jones


Laughter - Chart of the Day


Laughter - Virtual Portfolio


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 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






real-time alerts

real edge in real-time

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.


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 ( 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 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.

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.