Buying The Flush

Client Talking Points

Check Your Levels

Trading the market with a process means you’re equipped with one of the best weapons out there. If you stay within your range and levels and use your process to execute trades, chances are you’ll do well out there or at the very least, you won’t lose money. Our support in the S&P 500 is 1364 and we told you to buy the bounce off of  that level. Sure enough, the market can’t break through that level and heads upward. This is by no means a bullish call. When the S&P 500 is oversold and you’re nearing support, you watch and wait. If support holds, you buy that bad boy and ride it toward your next level of resistance.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

After a long downward slide, TCB has finally turned the corner. The margin has stabilized after the balance sheet restructuring. Loans are growing thanks to the equipment finance business. Non-interest income is more likely to go up than down going forward, a reversal from the past 18 months. Credit quality has a tailwind from a distressed housing recovery in TCB’s core markets: Minneapolis, Detroit and Chicago. On top of this, the CEO, Bill Cooper, is one of the oldest regional bank CEOs, which raises the probability that the bank will be sold. Expectations are bombed out at this point, so we think it’s time to move from bearish to bullish on TCB.


There is improving visibility on 20%+ EPS growth with P/E of only 11x with better content leading to market share gains. New orders from Canada and IL should be a catalyst. Additionally, many people in the investment community are out in Las Vegas at the annual slot show (G2E) and should hear upbeat presentations by management.


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 Petraeus news cycle started as ‘tawdry affair,’ crossed into ‘freakout about national security’ and is now back to ‘tawdry affair.’” -@moorehn


“The whole problem with the world is that fools and fanatics are always so certain of themselves, but wiser people so full of doubts.” -Bertrand Russell




The Macau Metro Monitor, November 14, 2012




Macau CEO Chui says he is confident gaming operators will be able to establish smoking areas before the forthcoming ban on smoking in casinos comes into effect on January 1.  Chui also admitted the private property market is “overheated” and prices are “high”. But he downplayed the situation, saying market fluctuations must be seen as something normal.  Chui also said preparation works for the new border checkpoint between Macau and the mainland continue and are “on schedule”. 



Macau's media cited statistics from casinos that Mainland government officials accounted for a quarter of the high‐end players in Macau, while executives from state-owned enterprises accounted for almost a quarter.



Macau visitor arrivals in package tours increased by 21.9% YoY to 749,496 in September 2012.  Visitors from Mainland China (538,178) increased by 23.7%, with 222,914 coming from Guangdong Province.  There were 100 hotels and guesthouses operating in September 2012, providing 26,083 rooms, an increase of 3,704 (+16.6%) YoY, of which guest rooms of the 5-star hotels accounted for 63.9% of the total.  The average length of stay decreased by 0.18 night to 1.3 nights.


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Collective Enlightenment

“The only thing that makes sense is to strive for greater collective enlightenment.”

-Elon Musk


I was on a plane to Austin, Texas yesterday, grinding through my reading pile, and came across that excellent thought leadership quote in Businessweek from the Founder/CEO of Pay Pal and current Chairman of Tesla, Space X, etc. – Elon Musk.


Then I came across another quote from Amazon’s Founder/CEO, Jeff Bezos: “We don’t want to do me-too things. The people we’ve attracted over time to Amazon want to be pioneers. They want to be inventors. They want to do new things.” (All Things Digital)


And I couldn’t help but do what I should probably do every day in this business – stop everything I am doing that has to do with regressive broken sources and just think about more and more ways to collaborate, innovate, and create. That’s progress.


Back to the Global Macro Grind


What was not progressive was seeing so many people get sucked into buying September’s top. While I am fine with sending you “Buy The Flush Notes” as our long-term TAIL line of 1364 SP500 support holds, I am far from fine with where the bull case goes from here.


It’s not like the risk management signals in September/October haven’t been obvious. Seasoned veterans of going to cash like Baupost’s Seth Klarman (went to 33.5% cash at the time of his note) wrote as recently as October 23rd in his client letter:


“The overall market environment seems increasingly risk to us… US corporate earnings are expected to be lower this quarter. Higher markets in the face of eroding fundamentals can be a toxic combination.”


Obvious is as obvious does, in hindsight.


US Corporate Margins coming off an all-time peak and Bernanke’s Bubbles (commodities) popping are long-term cycle risks. Going off (or saving us from) the #KeynesianCliff that politicians perpetuated in the first place won’t change that.


So where do we go from here? I don’t know. All I know is that we are observing a non-linear and dynamic market ecosystem that gives us an opportunity to change our mind about that, daily.


In the meantime, conditional probabilities give us clues. If, if, then. If a market is bearish TRADE, TREND, and TAIL, then don’t buy it. If a market is bearish TRADE and TREND, but bullish TAIL, then you don’t play hero – you take your time.


With that decision making process in mind, here are some US centric risk management signals to consider, across our core durations (TRADE, TREND, and TAIL):

  1. SP500 = down -6.2% from the Bernanke Top is bearish TRADE and TREND (1419) with long-term TAIL support of 1364
  2. Russell2000 = down -8.8% from the Bernanke Top bearish TRADE, TREND (846) and TAIL (797)
  3. Nasdaq = bearish TRADE, TREND (3069), and TAIL (2937)
  4. Financials (XLF) = bearish TRADE and TREND ($15.58); bullish TAIL ($14.93)
  5. CRB Commodities Index = bearish TRADE, TREND (305), and TAIL (312)
  6. Oil (WTIC) = bearish TRADE, TREND ($88.35), and TAIL ($92.86)
  7. Gold = bearish TRADE (1748); bullish TREND (1704)
  8. Copper = bearish TRADE, TREND (3.61), and TAIL (3.91)
  9. US Equity Volatility (VIX) = bullish TRADE and TREND (16.02); bearish TAIL (19.58)
  10. US 10yr Treasury Yield = bearish TRADE, TREND (1.72%), and TAIL (1.91%)

Global markets reflect our Collective Enlightenment. It will be a great day in this business when best in class risk management and research processes do too.


Our immediate-term risk ranges for Gold, Brent (Oil), US Dollar, EUR/USD, UST 10yr Yield, Copper, and the SP500 are now $1, $105.02-109.41, $80.56-81.34, $1.26-1.28, 1.56-1.69%, $3.41-3.51, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Collective Enlightenment - Chart of the Day


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Surviving Storms

This note was originally published at 8am on October 31, 2012 for Hedgeye subscribers.

“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”

-Charles Darwin


Suffice it to say, from a survival perspective, the last 48 hours have been humbling. As my generator teeters on running out of gas again this morning, I write this Early Look to you under a flickering light with a heavy heart.


We will move forward today. We will adapt and change. We will get through this together.


Yes We Will.


Back to the Global Macro Grind


Today is month-end for October (year-end for many mutual funds). Early morning futures are indicating we’ll get a lift into those month-end markups. Unfortunately, the broader risk management picture of Global Growth and #EarningsSlowing has not yet changed.


From The Bernanke Top (September 14, 2012), US stocks (SP500) and commodities (CRB Index) are down -4.3% and -8.1%, respectively. For October to-date, the SP500 is down -2% and the Tech Sector (XLK) is down -6%.


What will November bring?


I sincerely hope health and safety to the many of us who are in the dark here on the East Coast. But from a stock and commodity market perspective, hope is obviously not a risk management process.


On that score, because I’m really at a loss for words this morning – here are some risk management lines to consider that will be highly influential to US stocks and commodities in the coming weeks:

  1. US Dollar Index immediate-term TRADE breakout line of $79.57 (long-term TAIL support = $78.11)
  2. Euro (EUR/USD) long-term TAIL resistance = $1.31
  3. SP500 TRADE (1431) and TREND (1419) resistance
  4. Russell2000 TRADE (824) and TREND (846) resistance
  5. Tech Sector ETF (XLK) TRADE ($29.62) and TREND ($30.28) resistance
  6. Apple (AAPL) TRADE ($624) and TREND ($640) resistance
  7. US Equity Volatility (VIX) immediate-term TRADE support = 16.61; TAIL resistance = 19.05
  8. CRB Commodities Index TRADE (305) and TAIL (312) resistance
  9. Oil (WTIC) TRADE ($88.32) and TREND ($91.77) resistance
  10. Gold TRADE ($1735) resistance; TREND ($1699) support

At the same time, it will be important to monitor what the US Bond market thinks about risk. The 10-year US Treasury Yield has been as good a leading indicator as any on US growth in 2012 – here are the levels that matter most in our model:

  1. UST 10yr TRADE resistance = 1.81%
  2. UST 10yr TREND support = 1.72%
  3. UST 10yr TAIL resistance = 1.91%

In other words, if the 10yr yield can’t find a way to breakout > 1.91% in the coming weeks and months, the high probability situation in our model is that US growth will remain below 2% in Q4.


All the while, Chinese demand will be an open question. While our research and risk management views currently say that the “China has bottomed” crowd has no confirming data to support that claim, our views are always subject to real-time change.


Across risk management durations in our model, here are the lines that matter most on the Shanghai Composite:

  1. Immediate-term TRADE resistance = 2112
  2. Intermediate-term TREND resistance = 2151
  3. Long-term TAIL resistance = 2294

When an asset class is bearish across all 3 of our core risk management durations, we call that a Bearish Formation (when last price is above all 3 we call that a Bullish Formation). We don’t have to be bullish or bearish. We simply have to embrace uncertainty, change our minds, and adapt as the data does. That’s how we survive storms.


Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, 10yr UST Yield, and the SP500 are now $1691-1721, $106.21-109.97, $79.57-80.45, $1.28-1.30, 1.72-1.81%, and 1391-1419, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Surviving Storms - DXY


Surviving Storms - aa. vp

DKS: Not Much Room For Error

Takeaway: Nice print from DKS. But don’t chase it. The space should buoy the fundamentals. But NKE, FINL, FL are better buys. UA is better to sell.

We were asked several times today if we’d chase DKS on today’s print. The answer is No. In order to buy it here we need to be able to argue a sustainable 5-7% comp growth rate over the next 2-3 quarters to get to the earnings upside needed to justify a $50 stock. Recall that with DKS’ prime locations and escalating rent minimums, it generally needs a 3-4% comp without excessive discounting to leverage occupancy costs.

While we wouldn’t buy it, we wouldn’t short it, because the fundamentals of the athletic space in the US are simply too good, and should continue to be that way through at least the first half of 2013. As it relates to DKS, the times investors have really made money long and short have been when the company’s comp performance has deviated meaningfully from these levels. It’s quite difficult to argue either of those right now. Yet, at least.

With the completion of this year, DKS is likely to complete the best 3-year comp run in its public history. The only period that comes close was ’05-’07 – but that was a) a relatively solid economy, and b) just after its top competitor (Sports Authority) was just taken private and handed market share to DKS. Are we going to tack on ANOTHER year – especially when Golf Galaxy is going against some particularly hard compares? We’d consider it…but our concern is that the consensus is already there.


Yes, there’s more than just comps. We know that. The company is getting more efficient, it is doing a better job branding itself with key vendors, and just put up a 47% growth rate albeit off a low base accounting for ~2pts of top-line growth (though the 2-year change held steady vs 2Q levels). Also, DKS just put in its new AZ DC that should facilitate another 300 stores (50% growth from here). That is not to say that we NEED 900 stores, but the company can certainly get them if it so chooses. But at 17x next year’s earnings, would we rather own DKS, NKE, or RL? You can pretty much take your pick (within a point or so). That’s a no brainer for us. We’ll take content over distribution in this space in a heartbeat.

We’d look elsewhere – specifically NKE, FINL and FL – in that order for long  exposure here. If you have to short something, we’re still compelled to hang on to our UA short thesis here – as the company is going to incur some near-term pain in order to achieve the longer-term share gains that we definitely think will come.

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