Taxing Profits

“The fuel that makes people work is profit.”

-Tom Girdler


If you want to know one of the critical business leadership differences between Obama and FDR, I highly recommend reading the book I just finished reviewing, Freedom’s Forge, “How American Business Produced Victory in WWII”, by Arthur Herman.


The aforementioned quote comes from an excellent chapter (page 244) near the end of the book titled “Victory Is Our Business.” Being a businessman, I absolutely loved it.  Empowering the best and brightest of this country to lead is the answer, not Congress.


Tom Girdler was a steel man. He was tough; he was an innovator; and he knew how to get things done. Bill Knudsen and Henry Kaiser (key FDR businessmen) were doers leading from the front too. These guys would put Harry Reid and Johnny Boehner to shame.


Back to the Global Macro Grind


If you want to tax me and my profits, that’s fine – I’ll just have less money to hire with. So just know that. I am not Warren Buffett. Most of us aren’t. Using him as a beacon for making the USA more like France is a joke. It’s elitist too.


The US stock market took an intraday nose dive yesterday after Harry Reid spoke about whatever he was trying to say. Today’s market “catalyst” is Obama “speaking with business leaders.” A market that hangs on the government’s next move is no “free” market. Yes They Can do this – and yes, they (Bush and Obama, Republicans and Democrat politicians) built this.


This is called a bubble in US Politics. So, when you are forced to live in a bubble of Big Government Intervention (government has been taxing and slowing growth in this country for a decade), what do you do?

  1. You buy Bonds (10yr UST Yield falls again this morning to 1.62%)
  2. You hold a large Cash position (our asset allocation to Cash = 58%)
  3. You pray that someone issues you more cash now (special dividend)

Prayer, of course, is not a risk management process for your portfolio – but if God is listening, he can provide you some perks. Check out these “special dividends” from the likes of Las Vegas Sands (LVS) and Costco (COST) in the last 48 hours. Special.


Now, if you aren’t long Costco this morning, you aren’t getting anything special (US futures down 5). If you are Costco, you are explicitly telling your investors that what you see coming down the pike isn’t special either. Taxing Profits changes behavior.


In other globally interconnected news:

  1. Chinese stocks move to within a hair of crash mode (-19.9% since March)
  2. Russian stocks move back into crash mode (-20.1% since March)
  3. Brazilians stocks are only down -17.6% since March (not quite crashing yet)

Perma Bull marketing firms used to call the B, R, and C (Brazil, Russia, China) a big component of the “BRICs.” Remember those? Those were the big growth engines of the world, until Bernanke started taxing their profits.


There are two big taxes that I, the businessman, can see, real fast:

  1. Tax Rate
  2. Rising Expenses

In the people business (provided that you give your employees great benefits like healthcare, dental, etc.), costs to run a small business in America are going up. If you work for the US Political Bubble and don’t get that, try it with your own money.


In Global Cycle businesses (transports, mining, etc.), when Bernanke devalues the currency in which your cost of goods sold (food, energy, etc.) are primarily priced, your margins are going down.


Since long-term commodity, healthcare, etc. inflation is sticky, there’s deleverage to your profits when global growth slows (sales slow faster than your costs). Then businesses are forced to right size their cost structure (i.e. fire people).


And on and on the profit cycle goes…


Or so it should. This is the fulcrum fault line in Keynesian Economic (Central Planning) assumptions – these people that both Bush and Obama empowered aren’t business people. They are academics who fundamentally believe they can “smooth” the profit cycle.


In March 2012, when we started making the global #GrowthSlowing call, this is why we got so loud about it. Yes, Bernanke was able to suspend the pricing of this economic gravity for 3 months. But now we are all hostage to it, again.


On Qe3, Emerson said that “for every benefit you receive, a tax is levied.” On taxing under the veil of class warfare, Andrew Jackson reminded Americans that “the wisdom of man never yet contrived a system of taxation that would operate with perfect equality.”


I’m here to remind you that a tax is a tax – and it’s up to you to figure out who is in your back pocket before it’s too late.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $107.52-110.38, $3.43-3.56, $80.06-80.63, $1.28-1.30, 1.55-1.68%, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Taxing Profits - 44. tax


Taxing Profits - 44.vp


The Macau Metro Monitor, November 28, 2012




Ambrose So said, “Most hotels in Cotai will be 5-star ones; we want to meet the different needs of a wider range of customers, in the hope of their longer stay in Macau…It is a good direction, if we could have more affordable hotel accommodation in order to satisfy a varied spectrum of customers."  Dr. So also expressed his agreement with the proposal put forth by Angela Leong for a complete smoking-ban in casinos. “I think it’s doable. The wind air curtain that divides 50 percent of the smoking area with the remaining smoke-free areas is never effective. Eventually, after two or three years, you have to give in to the ban all together, why not do it now?” Furthermore, SJM said they may consider expansion into the Hengqin new zone, “It depends on how the customers change,” So reflected. 



The Marine Life Park at RWS in Singapore has drawn 12,000 people since it opened last Thursday.  Saying it is pleased with the response over the first weekend of operations, a Marine Life Park spokesman said it believes the numbers will increase in coming weeks when "our overseas marketing picks up and if the weather turns, hopefully, dry for our Adventure Cove Waterpark".  Besides the waterpark, the other allure is S.E.A. Aquarium which currently has 40,000 animals from 500 species.


Admission tickets for the S.E.A Aquarium and Adventure Cove Waterpark are sold separately at $29 per attraction for adults, and $20 per attraction for children and senior citizens.

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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.