Bearish TREND: S&P 500 Levels, Refreshed

Takeaway: Our top Hedgeye Global Macro Theme for Q4 of #EarningsSlowing continues to play out at an accelerating rate.

POSITIONS: Long Utilities (XLU), Short Industrials (XLI)


Our top Hedgeye Global Macro Theme for Q4 of #EarningsSlowing continues to play out at an accelerating rate. Half way through Earnings Season, we see no reason to back off that fundamental research view.


From a quantitative perspective (different from the research view), the bearish TREND signal remains. Across our core risk management durations, here are the lines that matter to me most:


  1. Intermediate-term TREND resistance = 1419
  2. Immediate-term TRADE support = 1391
  3. Long-term TAIL support = 1354


In other words, now that the SP500 is slicing through its April 2012 highs (and there’s no Fed put), long-term TAIL support is back in play.


On growth, 1/3 of this morning’s GDP print came from a Government Spending (contributing +0.71% out of nowhere, after 8 consecutive quarters of declines!). That’s going to matter as the legacy media figures it out.




Keith R. McCullough
Chief Executive Officer


Bearish TREND: S&P 500 Levels, Refreshed - SPX

The Romney USD/Energy Play

We hosted an expert call with Ken Bickers on the November election  this week and the outcome of his model shows Romney winning by a landslide. Romney says he would open up drilling on federal lands and offshore - that’s great for energy, right? Not really. A Romney win is bullish for the US dollar and when the dollar goes up, oil goes down; correlation is a beautiful thing.


From Hedgeye Energy Analyst Kevin Kaiser, here are the winners and losers if Romney wins the election:


  • Relative losers: crude oil E&Ps, refiners, oilfield services, renewables/clean.  Oil prices fall and Romney cuts subsidies to the renewable/clean energy companies.  Less regulation, more offshore drilling, Keystone XL, and a better tax environment are all well and good – but won’t move the stocks.
  • Relative winners: coal producers.  Romney is pro-coal, opposing looming EPA

The Romney USD/Energy Play  - energyUSD

PCAR: Simply The Best

Paccar (PCAR) remains our top long idea for the Industrials sector. The company is executing well, taking market share in a cyclically depressed industry and put up a solid quarter this week. As Navistar (NAV) struggles with customer perception of its engines and financial stability, PCAR looks to benefit from NAV’s share loss.


PCAR: Simply The Best - PCAR chart

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.

Shifting Expectations

Client Talking Points

Shifting Expectations

By now it’s pretty obvious that one of our big Q4 Macro themes, #EarningsSlowing, has taken effect and is widespread throughout the market. What’s interesting is that while we’ve been shouting about this since late February, the Old Wall is finally changing their stance on earnings. Consensus numbers and price targets are shifting at the banks and brokers; only took them nearly a year to get it right.

The Bernanke Top

Some people will tell you that stocks are “cheap” here. We say “they can get cheaper” because they can. Take technology for instance. Since the Bernanke Top (September 2012), the XLK ETF is down -10%, AAPL is down -14% and AMZN is down -15%. And on top of it, they’re missing on earnings. So while you might want to rush in and be a buyer, we warn that technology can get a lot cheaper. 

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Remains our top long in casual dining as new sales layers (pizza) and strong-performing remodels (~5% comps) should maintain sales momentum. The company is continuing to enhance returns for shareholders through share buybacks . The stock trades at a discount to DIN (7.7x vs 9.3x EV/EBITDA) and in line with the group at 7.3x.


Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.


While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

Three for the Road


“The problem with political jokes is they get elected.” -@Giggles270346


“History is the version of past events that people have decided to agree upon.” -Napoleon Bonaparte


Apple profit rises 24% on iPhone sales. 


Takeaway: BYI delivers a beat in the face of high expectations and a challenging competitive and macro environment.



Bally’s performance this quarter earned some stripes in justifying its premium group multiple.  Despite the higher bar set for the Company and challenging macro and competitive environment, they still managed to beat expectations.  Gross margins for all segments in of their business were better than we projected, and we were a cent ahead of the Street in terms of EPS.  Also encouraging was the continued buyback activity in the quarter and the re-upping of the buyback authorization.  Raising guidance was the clincher.


The biggest upside surprise in the quarter for us came from gaming operations.  We expected good growth in the Q due to strong WAP placements but actual results beat our number by 3%.  Margins were a little weaker than expected, but that did not impact EPS, as BYI benefited from the WAP link in NJ.  The results were particularly impressive given the reclassification of some low yielding centrally determined games into systems.  Assuming that Michael Jackson and Grease continue to perform well, gaming operations is poised to easily exceed $400MM in FY13.


Gaming equipment sales also beat our estimate by 5%, but the beat was due to earlier than expected shipments of VLTs to the Atlantic Lottery Corporate and the sale of 175 VGTs into IL which we didn’t expect to hit until next quarter.  We estimate that the VLT and VGT units boosted revenues by $11MM and EPS by $0.07-$0.08 this quarter.  However, SG&A was also likely boosted due to the sales commission component of that number.  Therefore the net affect was likely a lot lower. The one glaring negative in the quarter were international sales which are likely to continue to disappoint in the near future.


Systems revenue, while in-line with our estimate, generated better than expected margins.  Given the pending pickup in new system installs, which carry lower margins, we’re not going to get too excited about the high margin in the quarter.  However, as iVIEW DM continues to make traction and as more applications like NASCAR progress, margins should lift over time.  Top-line would have actually missed our number if not for the reclassification of certain centrally determined games.  To be honest, we’ve been asking BYI’s for years why those units weren’t in systems to begin with since that’s there they belong.


Given the results posted this quarter, the continued momentum of BYI’s WAP games, anticipation of NASCAR, continued improvement in replacement cycle, and the final opening of the VGT market in IL, coupled with visibility on their systems business, we believe that the stock can continue to work in the near-term. 


This note was originally published at 8am on October 12, 2012 for Hedgeye subscribers.

“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 $1761-1792, $112.66-115.71, $79.26-80.07, $1.28-1.30, 1.64-1.71%, and 1426-1446, respectively.


Enjoy your weekend.


Keep your head up and stick on the ice,


Daryl G. Jones


Laughter - Chart of the Day


Laughter - Virtual Portfolio

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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.