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TODAY’S S&P 500 SET-UP – November 28, 2012

As we look at today's setup for the S&P 500, the range is 36 points or 1.14% downside to 1383 and 1.43% upside to 1419.        















  • YIELD CURVE: 1.35 from 1.38
  • BONDS – you can love to hate them on “valuation”, or just buy them on dips and smile into yr end; UST 10yr yield makes another lower-high last wk, dropping to 1.62% (from 1.69% at the start of the wk); no support to 1.55%.

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Nov. 23 (prior -2.2%)
  • 10am: New Home Sales, Oct. est. 390k (prior 389k)
  • 10:30am: DoE inventories
  • 11am: Fed to buy $1.75b-$2.25b notes due 2/15/36-11/15/42
  • 12:15pm: Fed’s Tarullo speaks in New Haven
  • 1pm: U.S. to sell $35b 5Y notes
  • 2pm: Fed’s Beige Book Economic Survey


    • House, Senate in session
    • President Barack Obama, House Speaker John Boehner hold meetings with Goldman Sachs CEO Lloyd Blankfein, other business leaders to discuss fiscal cliff
    • Pandora CEO Joseph Kennedy to testify at music-licensing hearing by House subcommittee
    • U.S. will auction ~3.8k blocks covering about 20.5m acres off Texas coast in western Gulf of Mexico, first sale of oil, gas exploration leases under Obama administration’s five-year plan for developing Outer Continental Shelf
    • Ex-BP Plc vice president, two former well-site supervisors arraigned on criminal charges for actions after 2010 oil spill
    • Treasury holds meeting of President’s Advisory Council on Financial Capability, with Undersecretary for Domestic Finance Mary Miller, 8am
    • House Energy and Commerce panel holds hearing on waste, fraud and abuse in Medicare, 10am


  • Fed said to weigh forcing foreign banks to boost capital in U.S.
  • Goldman’s Blankfein among 13 CEOs meeting with Obama today
  • Groupon board said to consider CEO change amid growth slowdown
  • Costco to pay out $3b with $7/shr special cash div.
  • Smith & Nephew buys assets of Healthpoint Bio for $782m cash
  • Google said to oppose consent decree in any FTC antitrust deal
  • Samsung says IPhone relies on patented technology in U.K. trial
  • BP seen paying billions more in oil spill claims after deal
  • Hewlett-Packard’s war of words escalates with Autonomy’s founder
  • Tobacco companies must admit lying on products, U.S. judge rules
  • Obama urged to declare emergency as Mississippi water levels ebb
  • Fiscal-cliff pressure is on for cuts to entitlement programs


    • Fresh Market (TFM) 6am, $0.26
    • Jos A Bank Clothiers (JOSB) 6am, $0.56
    • Yingli Green (YGE) 6:07am, $(0.61)
    • CGI Group (GIB/A CN) 6:30am, C$0.42
    • JA Solar (JASO) 6:33am, $(0.21)
    • Express (EXPR) 7am, $0.17
    • Suburban Propane Partners (SPH) 7:30am, $(0.91)
    • ANN (ANN) 8am, $0.74
    • American Eagle Outfitters (AEO) 8am, $0.39
    • Golar LNG Partners (GMLP) 8:30am, $0.56
    • TiVo (TIVO) 4pm, $(0.24)
    • Aeropostale (ARO) 4:01pm, $0.29
    • Guess? (GES) 4:03pm, $0.44
    • Semtech (SMTC) 4:30pm, $0.43
    • Pall (PLL) 5pm, $0.66
    • Workday (WDAY) Aft-mkt, $(0.49)
    • Post Holdings (POST) Aft-mkt, $0.35


  • Oil Trades Near One-Week Low on Supply Gain, U.S. Budget Concern
  • DuPont Sends in Former Cops to Enforce Seed Patents: Commodities
  • Gold Declines for a Third Day in London on Improving U.S. Data
  • Olam Says No Insolvency Risk as It Rebuts Muddy Waters Claims
  • Copper Declines on Concern About Progress of Fiscal-Cliff Talks
  • U.S. May Double Soybean Exports to Russia After Obama Signs Law
  • Soybeans Drop From Two-Week High as South American Concern Eases
  • Sugar Falls as Harvesting Progresses in Brazil; Cocoa Declines
  • Copper Demand in China to Improve Next Year, Aurubis Says
  • India Iron Ore Dilemma May Reshape Seaborne Market: Outlook
  • Coal Heads for Best Quarter Since 2010 on Cold: Energy Markets
  • Larger Gold Miners Outperform Metal; Smaller Rivals Trail
  • Copper Faces Resistance in London at $7,865: Technical Analysis
  • Iranian Tanker Leaving Greek Island After Cargo Investigation







RUSSIA – the RTSI is beating the Chinese to the crash table this morning, down -1.2%, breaking the -20% barrier again for the 2nd time since September; Oil (Brent) failed at our long-term TAIL line of $111.48 resistance and there’s a commodity bubble unwinding.




CHINA – moves to within a hair of crash mode overnight (Shanghai Comp down another -0.9% to 1973 = -19.9% from its March #GrowthSlowing top); remember our baseline 3-factor model on global growth: China/Copper/BondYields.








The Hedgeye Macro Team




Collective Enlightenment

This note was originally published at 8am on November 14, 2012 for Hedgeye subscribers.

“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 $1704-1748, $105.02-109.41, $80.56-81.34, $1.26-1.28, 1.56-1.69%, $3.41-3.51, and 1364-1397, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Collective Enlightenment - Chart of the Day


Collective Enlightenment - Virtual Portfolio

Blaming The Market


Hedgeye CEO Keith McCullough appeared on CNBC's Fast Money this evening to discuss the market, politics and what the future holds for investors as we close out the year.


Political headlines and the fiscal cliff are concerns for the market, but they don't control the market. Keith noted that you have stocks in China going lower, the commodity bubble popping and corporate earnings slowing. It's fun to blame big market moves on a single catalyst, but it's not reality.


Watch the clip of Keith on Fast Money above.

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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.

CRI: Idea Alert. Shorting.

Takeaway: This is a core short idea and one that we see with 20%-30% downside from current levels.

We added CRI on the short-side of our Real-Time Positions on green today. This is one of our core short ideas and one that we see with 20%-30% downside from current levels.

We went into 3Q (10/25) and outlined in our CRI Black Book on 10/15 that we didn’t expect a miss due to an inflection in margins (i.e. product costs turn favorable), but that we expect the reality of our thesis – lack of product differentiation and increasing competition resulting in pricing/margin pressure – to play out more visibly in Q4 and into 1H F13. We had investors short the bounce on earnings and Keith is doing the same here today on lower highs.

In short, we think there is a disconnect between what management (and investors) think margins can get to and what will ultimately transpire. There’s a full 3pt spread between our margin estimates and consensus. Wholesale revenues just turned negative for the first time in 9-quarters and retail comps remain a concern with underlying (2yr) Carter’s and OshKosh comps decelerating with a tougher setup ahead over the next 2 quarters. With price increases no longer holding (a new development as of 3Q call), we think the lack of product differentiation/ segmentation will prove margin expectations overly optimistic.


To request our detailed CRI Black Book with complete analysis, please contact .

CRI Setup by Duration:

CRI: Idea Alert. Shorting. - CRI TTT

CRI Risk Management Levels:

CRI: Idea Alert. Shorting. - CRI TTT Chart



CRI SIGMA is starting to roll:

CRI: Idea Alert. Shorting. - CRI S

FDX: Process Positive on Purple

Takeaway: FDX can work in several ways, from cost cuts to improved inventory trends. We like the win-win dynamic in an uncertain, stall speed economy.

FDX: Process Positive on Purple

  • The Cycle:  The Express & Courier services industry cycle is driven primarily by economy-wide inventory levels, which are currently high relative to trend.  However, excess airfreight capacity, declines in global trade and the relative pricing of containerized freight have also been headwinds for express volumes.  Those headwinds have reversed recently or are likely to in coming quarters.  In addition, FedEx Express has significant cost reduction opportunities that can drive share price upside independent of the cycle, in our view.
  • Industry Structure:  The Express & Courier services industry has an attractive industry structure.  The industry is highly consolidated, with rational competitors, fragmented customers and few relevant suppliers. 
  • Valuation:  We think that FDX provides the best cyclically adjusted valuation opportunity in the group, with upside to our base case in the 30-70% range (bear $85, base $120-$150, bull $180).  Critically, our ~$85/share bear case model suggests little potential downside from current levels if our thesis fails.  In addition to improved operating conditions, we believe FedEx Ground is likely to displace UPS as the dominant US parcel ground operation.
  • Favorable Risk Balance:  With key cyclical factors apparently turning FedEx's favor, several sizeable internal cost reduction opportunities available, and market share gain potential in both US ground and Europe express, a lot can go right at FedEx.   While there are risks to our thesis (as always), we think that FDX represents an extremely attractive risk/reward balance at current levels.


Why Now(-ish)?

Cost Reductions - Better Late than Never:  The FedEx Express division is operating at a ~30 year low in margins.  The company has just turned its attention to improving margins in that division, as opposed to adding capacity.  The cost reduction opportunities, like swapping out 727s for more efficient aircraft, are unusually straight-forward.  It is a valid criticism, in our view, that these cost reductions should have been implemented some time ago.  Nonetheless, if margins return to historic or peer levels, the value of just the FedEx Express division could exceed the current market value of FDX, by our estimates.


FDX: Process Positive on Purple - 1



FedEx Ground Winning:  Investors we speak with frequently believe that UPS’s single network is superior to FedEx’s separate Ground and Express networks.  While there may be advantages in the UPS model, the reality is that UPS is steadily losing market share to FedEx Ground, in large part because of higher labor costs.  FedEx Ground has margins that we believe to be equal to or better than those of UPS’s ground operations, even though FedEx Ground has less than half UPS's scale.  At some point, the market may reprice FDX to account for this soon-to-be dominant franchise.  We also think that legal risks to the FedEx contractor model are lower under the current structure.


FDX: Process Positive on Purple - 2



FDX Ground Advantage Reflected in Market Share Trend


FDX: Process Positive on Purple - 3



Four External Headwinds:  Inventories, Containership Rates, World Trade Volume and Airfreight Capacity are important drivers of FedEx Express’s business.  The inventory to sales ratio is currently high relative to trend.  That has historically been a (rare) signal to buy Airfreight Logistics, by our estimates.  The price of containerized freight relative to airfreight reversed in the second quarter and airfreight capacity has begun to tighten in recent months.  World trade usually grows, but contracted in 3Q. 


1.  Inventories: The secular decline in the inventory to sales ratio stopped in 2005 and the ratio has spiked higher this year.  Both FDX & UPS shares are at or below their 2005 prices, despite significant business gains since then.


FDX: Process Positive on Purple - 4



2. Container Shipping: The trend of cheaper ocean rates relative to air rates appears to be reversing as the relative price gap has been narrowing since Q1 of 2012.  


FDX: Process Positive on Purple - 5



3.  World Trade: World export volumes have been down recently, but historically world trade has grown faster than world GDP.


FDX: Process Positive on Purple - 6



4. Air Freight Capacity: Weak volume growth amid relatively normal capacity increases has resulted in slack capacity.  A reversal of this trend should be positive for the group.

FDX: Process Positive on Purple - 7



TNT Deal:  At worst for FDX, the UPS/TNT deal would result in a more consolidated industry and distracted competition.  However, we believe that FDX is a potential buyer for the European express assets that have been a regulatory sticking point in the transaction.   A stronger European presence would improve Fedex Express’s global network, in our view.


FDX: Process Positive on Purple - 8



Valuation & Strategy

Win-Win Positioning:  From a strategy perspective, FDX should prove more resilient than the Industrials sector in a recession.  However, if the economy snaps back, cyclically stretched areas like inventories and world trade should drive improved results at FedEx.  While we may be a bit early in entering FDX, we like the win-win dynamic in an uncertain, stall speed economy.




F Jay Van Sciver, CFA

Managing Director

120 Wooster St.

New York, NY 10012

Race To The Top Or Bottom?

Looking at four major equity indices (S&P 500, Dow Jones Industrial Average, Nasdaq Composite, Russell 2000), we can see that the Nasdaq has been the best performer year-to-date. And up until mid-September, everyone would have laughed at you if you suggested that stocks would undergo a downturn later in the year. But since the September Bernanke Top, these indices are struggling to hold on to their gains. As growth slows and corporate earnings slow, it's tough being a bull.


Race To The Top Or Bottom? - image001

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