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TODAY’S S&P 500 SET-UP – November 30, 2012

As we look at today's setup for the S&P 500, the range is 13 points or 0.70% downside to 1406 and 0.22% upside to 1419.     















  • YIELD CURVE: 1.36 from 1.36
  • BONDS – Treasuries haven’t cared, at all, about the no volume performance chase in US Equities into another month end; #GrowthSlowing expectations continue to dominate both bond yields and fund flows; 10yr down from 1.69% at the start of the wk to 1.62%.

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Personal Income, Oct. est. 0.2% (prior 0.4%)
  • 8:30am: Personal Spending, Oct. est. 0.0% (prior 0.8%)
  • 8:30: PCE Deflator M/m, Oct. est. 0.1% (prior 0.4%)
  • 9am: NAPM-Milwaukee, Nov. est. 47.0 (prior 43.3)
  • 9:45am: Chicago Purchasing Mgr, Nov. est. 50.5 (prior 49.9)
  • 11am: Fed to buy $1.75b-$2.25b notes due 2/15/36-11/15/42
  • 1pm: Baker Hughes rig count
  • 5pm: Fed’s Stein, Kocherlakota at panel discussion about evaluating large-scale asset purchases at Boston Fed


    • House may vote on overhaul of U.S. work visa system, establish new kind of green card for foreign students who graduate in U.S. with advanced degrees in sci/tech
    • Deadline for Barclays to respond to FERC proposal for $470m in penalties for alleged market manipulation
    • American Gas Association holds a news conference to outline vision for natural gas in 2013, 9am
    • CFTC Chairman Gary Gensler speaks at agency’s 2012 Research Conference on key issues in derivatives markets
    • American Trucking Associations hosts final day of conference on expanding use of natural gas as a trucking fuel, with executives from UPS, Navistar, Swift


  • Supervalu says in active sale talks; Cerberus talks said to stall
  • TNT, UPS propose steps to satisfy EU competition requirements
  • Zynga loosens ties with Facebook in order to seek growth
  • MSCI index changes effective as of mkt close today
  • VeriSign to discuss .com registry agreement
  • Health Management to hold call on allegations on “60 Minutes”
  • ITC Judge Pender may release finding in HTC vs Apple case
  • U.S. regulators not granted access JPMorgan emails to investigate potential energy-market manipulation, judge rules
  • Steven Cohen testified to SEC on share sales, FT says
  • Univerity of Michigan professor linked to SAC Capital trades resigns
  • Hostess wins final bankruptcy court approval to shut down, unwind assets
  • Microsoft said to plan next Xbox console for 2013 holiday season


    • United Natural Foods (UNFI), 7:30am, $0.46
    • Genesco (GCO) 7:31am, $1.33
    • WhiteWave Foods (WWAV) Pre-Mkt, $0.17
    • Exco Technologies (XTC CN) 4:30pm, C$0.14


  • Oil Heads for First Monthly Gain Since August on Economic Growth
  • Sugar Traders Most Bearish in Two Months on Brazil: Commodities
  • Gas Pricing in U.K. Is No Libor as Probe Begins: Energy Markets
  • Codelco Seeing Solid Interest From China for Copper Contracts
  • Copper Advances to Five-Week High on China Growth Optimism
  • Shanghai Copper Stockpiles Drop to One-Month Low, Lead Increases
  • Gold Extends Monthly Gain in London as Physical Demand Improves
  • Felda Global Profit Slumps 40% on Lower Palm Prices, Production
  • Rebar Rises First Day in Five as Discount to Spot Spurs Buying
  • Aluminum Demand Growth in China Seen Least in More Than 10 Years
  • Hong Kong Bourse in $1 Billion Placement for LME Purchase
  • Asia to Boost West African Crude Imports to Most in Six Months
  • Mistry Predicts Palm Oil Bear Market in 2013 on Supply, Reserves
  • Fonterra Fund Surges Above Offer Price on Yield, Asia Links









GREEECE – remember where the bulls were at the beginning of the wk? Greece was the catalyst, then it failed – Athex going out on the lows for the wk, down -9% from the OCT lower-highs; European economic data this morning is just plain bad (Italy unemployment 11.1% = 13yr high; German and French Consumer Spending down y/y).





JAPAN – one way to fool some of the people that the economy is good is to devalue your currency; Japan gets that – Yen testing 7mth lows again this morning at $82.62 vs USD and that’s good for a +10% squeeze in the Nikkei off the OCT lows – all the while, life in Japan gets worse (Exports at 3yr lows, despite the debauchery).








The Hedgeye Macro Team




Fish Stories

This note was originally published at 8am on November 16, 2012 for Hedgeye subscribers.

“Many men go fishing all of their lives without knowing that it is not fish they are after.”

-Henry David Thoreau


The thing with fishing trips is they end more often with stories of massive fish that were on the hook, rather than actual proof of the whopper.  The best evidence of catching a trophy fish is of course taking a picture of it.  My colleague Keith McCullough and I went fishing off of Long Island more than a decade ago with some buds, back when we were hedge fund pups, and caught a whopper.  Being the accountable market operators we are, we actually took a picture of it and it is featured in today’s Chart of the Day.


Managing money is a little like fishing.  You can tell tall tales of your performance, but at the end of the day you need to be able to show the results.  In that sense, I’m pretty certain 2012 it is going to be a year of great tales but few whoppers reeled into the boat.  Simply, this has not been a year in which navigating the global macro waters has been easy.


All year we’ve been spinning the tale of both slowing growth and declining corporate earnings, but for much of the year the market shrugged off these concerns.  Now, of course, these concerns are front and center again.  As always, the most dangerous markets of all are those that go up in the face of declining fundamentals because ultimately those markets will have further to fall. 


In the global macro waters this morning, there are a number of key points to consider:


1.   Chinese leadership – After much speculation, the final names of the seven gentlemen (down from nine) that will run China was announced.  The conclusion is that they are more “conservative”.  The key takeaways are that we are likely to see fewer human rights reforms and likely a more tepid pursuit of economic growth.   Under the outgoing leaders, China experienced a decade of 10% growth and passed both Japan and Germany to become the second largest economy in the world.  At the very least, that growth rate will decelerate.


2.   Japanese easing – The Japanese equity markets are up almost 2% this morning, but don’t confuse that move with economic growth.   The LDP is widely expected to win in the December 16th election and LDP President Abe put his cards on the table and is calling for “unlimited easing” to achieve a 2 – 3% inflation target.  Ironically, or not, one of our top ideas yesterday was shorting the Yen.  Email sales@hedgeye.com if you’d like to get our Senior Asia Analyst Darius Dale on the phone to discuss this thesis.


3.   American political dysfunction – Today, President Obama is set to meet with key Congressional leaders as formal negotiations on the fiscal cliff begins.  Obama unofficially began the negotiations on Wednesday when he said in a press conference that he expects tax increases for wealthy Americans to be part of any deal.  This is a much more aggressive stance than the House Republicans were willing to accept in the prior negotiations, so it is unlikely to be accepted this time either. 


Of the three macro points highlighted above, the most pressing concern from a current and future growth perspective is clearly the fiscal cliff, or as we call it The Keynesian Cliff. Unfortunately, the election did not solve much in the way of giving either party a mandate to solve this issue.  At the table today, we have exactly the same cast of characters: President Obama, Senator Harry Reid, Senator Mitch McConnell, Congresswoman Nancy Pelosi, and Congressman John Boehner.  As Yogi Berra would say:


“It’s déjà vu all over again.”


To the extent that the participants get away from a grand plan, it may actually be a positive for the markets.  Simply, there is an immediate term catalyst.  In six weeks, dramatic spending cuts and tax increases go into effect, to the tune of some $500 billion annualized.  If this short term catalyst can be taken off the table it is likely to at least calm equity markets.  This would of course imply rational action from Washington, D.C. 


Since it is unlikely, based on recent history, that the elected officials in Washington act rationally, perhaps they will act in a more bi-partisan spirit.  Senator McConnell’s opening statement seems to suggest that, too, is unlikely.  As the Senator stated:


“I was glad to hear the President’s focus on jobs and growth and his call for consensus. But there is no consensus on raising tax rates, which would undermine the jobs and growth we all believe are important to our economy. While I appreciate and share the President’s desire to put the election behind us, the fact is we still have yet to hear an actual plan from the President for addressing the great economic challenges we face. What’s needed now is a realistic and specific proposal from the President that can actually pass the Congress.”


It’s pretty clear, so far, that tax hikes on the rich won’t pass Congress, so President Obama’s opening gambit may ultimately be a sign that we are in for a very volatile next six weeks.


Our immediate-term risk ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1714-1748, $108.19-111.10, $3.41-3.47, $80.58-81.33, $1.26-1.28, 1.53-1.68%, and 1346-1364, respectively.


Enjoy the weekends with your families and all the best to Yale Football up in Cambridge!


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Fish Stories - Chart of the Day


Fish Stories - Virtual Portfolio

Crude Correlations

Our adage of "get the US dollar right and you'll get a lot of other things right" reigns true across multiple asset classes. With the US dollar appreciating in value since September of this year, Brent crude oil has gone the opposite way, dropping in value as the dollar rises. We believe there's room for further downside in crude oil but the US dollar will need to continue to strengthen.


Crude Correlations - 1yearoil

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%


In-line with us but below the Street



"The second quarter was a period of achievements and challenges. Similar to other regional gaming operators, we experienced softening net revenues during September and October. Cost containment efforts led to increased adjusted EBITDA and margins at several of our properties; however we could not overcome the softness in our Mississippi business."


Virginia McDowell- CEO of ISLE



  • Miss in Mississippi; other regions performed well
  • Natchez entrance ramps have been repaired but still limited access to the property
  • Cape Girardeau - ramping up to ISLE's expectations
  • FQ2:  $2.5 million cost - sub-note offering in July
  • $75.5MM in cash; $1.18BN debt ($38MM outstanding in revolver, $300MM 7.75% senior notes, $350MM new subnotes, $4MM other debt)
  • FQ2:  debt increased by $30MM; Capex: $46MM.  
  • Leverage cap: increased a couple of tenths to 5.9x, should start to trickle down as Cape Girardeau ramps up
  • Borrowing capacity: $200MM; $1.3MM cap interest



  • Cap interest and pre-opening will go away when Nemacolin ramps
  • No Cape Girardeau in FQ2 results
  • $1 million in increased legal costs--will not continue going forward
  • Nemacolin budget went up since previous estimate occurred when construction was on hold waiting for regulatory decision
  • REIT conversion in the future? 
    • PENN may be an one-off situation
    • ISLE doesn't have the size or leverage to do something similar
  • Nemacolin feeder markets:  Morgantown, WV and Nemacolin
  • Credit amendments:  function of timing;  before amendment, there was an expectation that Nemacolin would be open by now.  Because of the delay in Nemacolin, ISLE needed more room in their credit agreements.
  • Capex guidance:  $80-90MM (for balance of fiscal year 2013)- $20-30MM will be for Nemacolin;
  • Vicksburg essentially done; renovation of Lake Charles will be done by end of FY 2013. 
  • Cash from Biloxi: ~$50MM
  • Target leverage:  around 5x

SSS Hat Trick, JWN Out

Takeaway: With retailers behind the revenue eight ball coming out of November, margin risk is elevated headed into an already promotional holiday.

Despite talk of strong Thanksgiving sales, November disappointed as this morning’s Retail Sales confirms with 11 companies missing expectations compared to 5 beats. Simply put, Sandy significantly impacted sales (perhaps the most valid weather related scapegoats in years) putting retailers behind the eight ball headed into December – that’s just reality. While still early in the quarter, if retailers have a shot at hitting 4Q comp outlooks it’s most likely going to come by way of increased promotional activity in what was already expected to be a highly promotional holiday. Enter margin risk.

The other callout is the SSS hat trick with JWN becoming the third retailer in as many months to pull out of the sample along with TGT and KSS. This represents ~36% of the SSS sample withdrawing at year end. The days of this exercise are numbered.


The most notable company specific (negative) callout is KSS. Follow through on strong October sales was critical re the company’s optimistic holiday outlook, but November sales didn’t comply. With in-store inventories up +12% on revenues down -5%, it appears the company is trying to keep margins high. With the rest of retail looking to reaccelerate sales in December after a slow start to the quarter, this puts one of the more aggressive retailers on inventory in precarious shape heading into what is likely to be an even more promotional holiday season.


SSS Hat Trick, JWN Out - SSS Sample

FL: Solid Update for Top Long

Takeaway: One of our top longs, FL’s sales are tracking ahead of plan and the setup is increasingly favorable into year-end

This note was originally published November 27, 2012 at 13:42 in Retail

As a follow up to FL’s recent 3Q results, we think a reacceleration in athletic footwear industry sales after a slow start to November and a favorable near-term setup suggest a strong finish into year-end. We are also positive on FINL and NKE, which is another top long idea.

Consider the following on a TRADE basis (3-weeks or Less):

  • Athletic footwear sales have come in up +5.3% over the last two weeks after coming in down -6% in the first two weeks of November accelerating sequentially each of the last 3-weeks.
  • As seen in the chart below, continued underperformance in the other channels cause weekly sales to significantly understate performance in the Athletic Specialty channel (i.e. FL, FINL, DKS, etc.).
  • Basketball continues to be a significant driver with trailing 3-week domestic sales accelerating sharply higher +27% from +15% over each of the prior four weeks.
  • With FL reporting comps up +MSD through the first half of November despite the industry down -6% and sales over the last two weeks running +5%, we believe FL comps are tracking well ahead of the “upper end of mid-single digit” comp plan.
  • With a favorable setup through year-end and shift towards basketball in Europe, we expect more opportunity for further upside in performance.
  • Retailer sales gains over the holiday weekend were heavily reliant on deep promotional activity. We think athletic footwear retailers (FL/FINL) were substantially less impacted and benefitted from more full-priced sell through with several new launches hitting over the holiday week. Moreover, while several apparel and home furnishing retailers offered free shipping on certain items for the first time, there was no incremental hit to footwear retailer margins as free shipping has become standard.


The longer-term TREND (3-Months or More) & TAIL (3-Year or Less) call:

  • Still in the early stages of its turnaround, FL is not solely reliant on the ‘footwear cycle’ for growth.
  • A return to new store growth for the first time in over 6-years will augment comps benefitting from higher growth and higher margin businesses (i.e. Women’s, Apparel, and Kids).
  • After a decade of inventories outpacing sales growth and contracting margins under Matt Serra, FL has posted positive sales/inventory growth and margins expansion over the last three years under Ken Hicks.
  • We’re see more opportunity for upside performance over the intermediate-term and are looking at $3 in earnings power next year approaching $3.50 in F14.

FL: Solid Update for Top Long - FW App Table

Source: NPD Weekly POS Data


FL: Solid Update for Top Long - FW 1YR


FL: Solid Update for Top Long - FW Cat


FL: Solid Update for Top Long - FW Channl



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