TODAY’S S&P 500 SET-UP – December 20, 2012

As we look at today's setup for the S&P 500, the range is 21 points or 0.68% downside to 1426 and 0.78% upside to 1447.        















  • YIELD CURVE: 1.51 from 1.53
  • VIX closed at 17.36 1 day percent change of 11.50%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: 3Q GDP, est. 2.8% (prior 2.7%)
  • 8:30am: Personal Consumption, 3Q, est. 1.4% (prior 1.4%)
  • 8:30am: Core PCE, 3Q, est. 1.1% (prior 1.1%)
  • 8:30am: Init. Jobless Claims, Dec. 15, est. 360k (prior 343k)
  • 8:30am: Cont. Claims, Dec. 8, est. 3.200m (prior 3.198m)
  • 9:45am: Bloomberg Consumer Comfort, Dec. 16 (prior -34.5)
  • 9:45am: Bloomberg Economic Expectations, Dec. (prior 4)
  • 10am: Freddie Mac mortgage rates
  • 10am: Philadelphia Fed., Dec., -3.0 (prior -10.7)
  • 10am: Existing Home Sales, Nov., est. 4.90m (prior 4.79m)
  • 10am: Leading Indicators, Nov., est -0.2% (prior 0.2%)
  • 10am: House Price Index, Oct., est. 0.3% (prior 0.2%)
  • 10:30am: EIA natural gas storage change
  • 11am: Fed to purchase $1.5b-$2.25b notes in 2023-2031 sector
  • 1pm: U.S. Treasury to sell $14b 5Y TIPS in reopening
  • 2pm: Fed to sell $7b-$8b notes in 2015-2016 sector


    • Washington Day Ahead
    • House, Senate in session
    • Senate Banking panel holds hearing on rebuilding after Hurricane Sandy, 11am
    • House Intelligence hold closed meeting to consider national security issues posed by Chinese telecommunications companies Huawei, ZTE, 9am
    • SEC holds closed meeting on enforcement matters, 2pm
    • FERC holds monthly meeting on power-grid reliability, 10am


  • IntercontinentalExchange said in talks to buy NYSE Euronext
  • Budget talks deteriorate amid Republican identity shift on taxes
  • AMR said to take steps moving closer to merger with US Airways
  • BofA’s Moynihan said to kill proposal to cut payouts for brokers
  • Google to sell Motorola Home to Arris for $2.35b
  • 3 former Swiss bank advisers charged by U.S. with conspiracy
  • U.S. housing values rose 6% in 2012 for 1st gain in 6 yrs: Zillow
  • Bank of Japan expanded its asset-purchase program for 3rd time in 4 mos.
  • U.K. Nov. retail sales unchanged, median est. 0.4% increase
  • Roche may agree to buy Illumina for $66/shr, L’Agefi says
  • Carl Icahn’s American Railcar sweetened its offer for Greenbrier by 10%, set a deadline of tomorrow
  • Allscripts replaced CEO, said no longer planning to sell itself
  • Pershing’s Ackman to speak at Ira Sohn special event on Herbalife
  • Accenture falls after longer consulting projects crimp rev.


    • Darden Restaurants (DRI) 7am, $0.30
    • ConAgra Foods (CAG) 7:30am, $0.55
    • CarMax (KMX) 7:35am, $0.39
    • KB Home (KBH) 8am, $0.06 - Preview
    • Discover Financial Services (DFS) 8:30am, $1.13 - Preview
    • Neogen (NEOG) 8:45am, $0.27
    • Carnival (CCL) 9:15am, $0.11
    • Micron Technology (MU) 4pm, $(0.20)
    • Red Hat (RHT) 4:04pm, $0.29
    • Tibco Software (TIBX) 4:04pm, $0.37
    • Research In Motion (RIM CN) 4:05pm, $(0.35) - Preview
    • Nike (NKE) 4:15pm, $1.00
    • Cintas (CTAS) 4:15pm, $0.62



OIL – we re-shorted Oil yesterday as it tested immediate-term TRADE resistance of $110.02 Brent; it’s a long way down from here for Oil, especially if the USD holds higher long-term lows here – Down Oil is the bull case for Long Consumer Stocks (we bought back XLP, Consumer Staples) on red yesterday.

  • Brent Crude Trades Near Two-Week High as North Sea Exports Drop
  • Silver Vaults Stuffed Means Price Rising 30% in ’13: Commodities
  • Copper Declines for a Fourth Day in New York on U.S. Budget
  • Gold Climbs in New York After Two Days of Declines; Silver Gains
  • Coal Rebound Seen From Biggest Drop Since 2005: Energy Markets
  • Ethanol Fuel Blend Wall Can Be Eased With Higher Blends, Exports
  • Palm to Test 1,950 Ringgit in Bearish Trend: Technical Analysis
  • Rubber Declines From Seven-Month High on U.S. Budget Concerns
  • Vale Seen Paying $158 Million More for Shipping by Alphabulk
  • Wheat Drops Below $8 a Bushel for the First Time in Five Months
  • Uralkali Sees 2013 Potash Supplies Recovering to 55 Million Tons
  • India Sugar Imports Seen Surging as Global Glut Cuts Prices
  • Chaebol Founder Dismantles Life’s Work as Slump Deepens: Freight
  • Lumber Is Top Pick by Scotiabank Leading 2013 Commodities Rally







ITALY – Italian Retail Sales -3.8% y/y in OCT vs -1.6% SEP continued to worsen and the MIB Index looks very different than the DAX now (DAX making higher-highs vs SEP, MIB making lower-highs); we haven’t been short anything Europe for a while, but Italian stocks looking more interesting now, short side. Timing matters.




JAPAN – hello my old friend volatility! The Japanese are pulling a Bernanke here and getting the same results (inflated stock market and no economic recovery); Japanese Exports down -4.1% y/y in NOV is a certified economic disaster and they just upped their asset purchase fund to 76 TRILLION Yens (from 66T) and the market didn’t think that was enough!








The Hedgeye Macro Team





Slowing revenue growth could put focus on costs

  • Gaming employee wage growth in Macau has accelerated consistently since 2009 and Macau CPI even faster.   The government estimates CPI in 2013 to grow at 6%, similar to 2012.
  • Indeed, the president of the Macao Hotel Employees Association said that hotel employees are asking for at least a 6% salary increase next year.
  • With GGR growth of +30%, costs were not such a glaring concern.  With 2013 GGR growth expected to slow into single digits (our estimate is +9%), margin expansion may be limited.
  • We are particularly worried about Wynn’s margins since its GGR may only be flat in 2013. 



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FX War

“You can’t expect to have war all the time.”

-Winston Churchill


You can’t expect markets to keep going up or down all the time either. Especially in the middle of a Global Currency War, risk moves fast. So you have to keep moving out there. We call it managing the risk of the market’s range.


In addition to the aforementioned quote, in 1940, “Churchill told his War Cabinet that Roosevelt’s message came as near as possible to a declaration of war and probably as much as the President could do without Congress.” (The Last Lion, page 100)


After Paris fell to the Germans, that didn’t happen. Politically, Roosevelt wasn’t ready to commit. Militarily, America wasn’t yet ready either. Not unlike the FX War you are watching in markets today, timing and expectations matter. Ask the French.


Back to the Global Macro Grind


After being on the sidelines (relative to the US and Europe) since 2006, the Japanese are going to engage in the FX War, big time. That’s what Abe’s LDP party win promised, but the timing of Japan’s engagement doesn’t happen all at once.


The Bank of Japan (BOJ) told the market that it will expand its bailout fund (asset purchase fund) to 76 TRILLION Yens last night (that’s a lot of Yens). But, from a market expectations perspective, that wasn’t enough to keep the Yen down!


All the while, Japan’s economy continues to head deep into the cesspool of Keynesian policy promises. Japanese Exports (it’s an export economy) were reported at -4.1% year-over-year for November. That’s right, despite their recent successes setting their currency on fire, “cheaper exports” are not reacting to the FX War Policy To Inflate.


Sound familiar?


Of course it does. Charles de Gaulle tried it. Failed. The British tried it in the 1960s. Failed. Nixon/Carter tried it in the 1970s. Failed. Japan tried it in the 1990s. Failed. Now they are all trying it, at the same time, and it’s failing.


And I mean failing from an economic perspective. Any buffoon with a money printing machine can inflate his stock market if he devalues the currency that market is priced in. Chavez devalued. The Venezuelan stock market is +305% YTD.


If the Japanese start to double and triple down on the 76 TRILLION Yens, just when the US and Europe feels safe from theirs, Japan may very well end up being the next sovereign credit crisis in 2013.


Follow the bouncy ball:

  1. Japan Real Estate and Stock Market Bubble implodes. Print “lots of money”, economy fails, stocks rally, fail, rally, fail.
  2. USA Real Estate and Stock Market Bubble implodes. Print “lots of money”, stocks rip, economy doesn’t; rally, fail.
  3. European Real Estate and Stock Market Bubble implodes. Print “lots of money”, yep – need to do more of that, rally!

This gargantuan experiment of Keynesian academic dogma (Bernanke calls it “innovation”) started with America advising Japan to “PRINT LOTS OF MONEY” in 1997 (Paul Krugman). So why can’t a lie that cannot live end where it started?


Every risk management exercise should start with a simple question that doesn’t have an answer (yet).


Back to our current positioning:

  1. Long US Consumption Stocks (bought Consumer Staples, XLP, on red yesterday)
  2. Short Commodities (re-shorted Oil yesterday on green)
  3. Out of the way on Fixed Income (cut our asset allocation to 0% last week)

Now maybe buying anything that’s been propped up by Policies To Inflate doesn’t make sense. Once every asset class that hasn’t been locked down (stocks, bonds, commodities) has been artificially inflated, isn’t the only risk that remains deflation?


Probably not. That’s the whole point about the FX War – you can’t have deflation all of the time. Ask the government.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $105.95-110.02, 3.57-3.62, $79.15-79.91, $1.31-1.33, 1.73-1.85%, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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The Macau Metro Monitor, December 20, 2012




Hotel employees are asking for at least a 6% salary increase next year as visitor numbers grow and are staying longer on average, according to Lei Pou Loi, president of the Macao Hotel Employees Association, who said hotel guests stay as long as 1.9 nights comparing to just 1.4 nights by overall visitors.  Asked of the possibility of a double-digit hike, Lei said that although they hope for the best, such scale is most unlikely, given the fact that cheaper foreign laborers are readily available in the market.



History Matters

This note was originally published at 8am on December 06, 2012 for Hedgeye subscribers.

“Few soldiers knew the history, and most didn’t give a damn.”

-Michael Sallah


Sound familiar? History matters. And that doesn’t just hold for the Geneva Conventions (1949). It holds for the Constitutional and economic history of the United States of America too. We shouldn’t give a hall pass to the willfully blind.


The aforementioned quote comes from a chilling book that I am reading right now about Vietnam: Tiger Force - A True Story Of Men and War, by Michael Sallah and Mitch Weiss. It won the Pulitzer Prize in 2004 and is a glaring example of how groupthink can dominate decision making by men abusing authority.


When it comes to the big rules in life, most of us follow them. Some don’t. But when we catch them, they pay the price. What is the free-market price we are willing to pay the #PoliticalClass in this country? Giving up our children’s liberties violates the US Constitution. It may not matter in the moment. But I am guessing that if we keep this up, it eventually will.


Back to the Global Macro Grind


After the market close yesterday Timmy Geithner proclaimed his mystery of faith that “we’ll fall off the cliff if taxes don’t rise.” Really? Is that a threat? Or is he abusing his political power to do more of what many men and women before him have? Fear monger.


Geithner is one of the more unique authorities of the US #PoliticalClass because he has spent 54% of his born life working for the US government. That’s a long time – and boy has he raised a lot of debt and government spending along the way.


As a reminder, this generational (and Constitutional) debate in America isn’t just about raising the #PoliticalClass’ “revenues”:

  1. It’s about DEBT (raising the Debt Ceiling requires Congressional approval – yes, that’s a rule)
  2. It’s about SPENDING (real US government spending just ripped at an annualized rate of +9.5% in the last 3 months)
  3. And, of course, it’s about TAXES (Geithner calls them revenues because that’s how he gets paid)

Marxists wanted this – so now they have it. This is class war. The #PoliticalClass vs. The Rest of Us.


And if Geithner wants to try to scare the hell out of us threatening to “go off the cliff”, he can go ahead and try – but I for one am not scared of this man. If he was “deeply” worried about this, why in God’s good name was he ramping Government Spending (for the 1st time in 5 quarters) in the last 3 months? Why did he and Obama cheer Bernanke on, printing money and monetizing more US Debt?


Sadly, we all know the answers to these questions.


In other central planning news, Citigroup (C) pulled the ole bait and switch on Geithner and Co. and decided to fire 11,000 people yesterday. If you didn’t know how crony socialism works, here’s the deal: Geithner bails out his boys with your tax dollars, they grease each-other politically saying that they “saved” jobs, then fire everyone so that they can keep getting paid.


The Financials (XLF) liked that yesterday. Meanwhile Apple (AAPL) was collapsing (you only need to be up +30% from here to get back to September’s price to break-even). Now that growth and earnings have slowed, maybe that’s the new bull case – firing people.


What’s a better bull case?


From a US Economic Growth perspective, the only bull case that I can see as sustainable remains Strong Dollar, Down Commodities. Bernanke’s Bubbles (Commodities) are popping, and that’s potentially a very good thing for both US and Global Consumers if Obama just tells Bernanke to get out of the way.


What are the odds of that happening? Low.


Morgan Stanley (MS) is out with a version of the call Goldman (GS) made yesterday (Bloomberg: “Morgan Stanley Backs Gold, Corn, and Beans as Best Picks for 2013”). I smiled when I read that. Our call remains the exact opposite – has been since March 2012.


Despite Goldman pleading that the commodities “super cycle isn’t ending”, it’s pretty clear to us that it has already ended. Whether it’s Freeport McMoran (FCX) or the Gold Miners (GDX) getting blasted yesterday, it’s all one and the same thing to us – over-owned.


The other side of commodities (and their related equity “plays”) melting down since The Bernanke Top (SEP 2012) is of course buying consumption oriented exposures.


That’s why we bought US Housing (ITB) on red yesterday, and reiterate our favorite big cap Consumer long ideas: Starbucks (SBUX), Nike (NKE), and Yum Brands (YUM) this morning.


Our Financials and Housing Sector Head, Josh Steiner, will be hosting a housing call tomorrow at 11AM EST titled: "Could Housing's Recovery Go Parabolic in 2013?" If you’d like access to the call, please ping


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1684-1711, $108.61-110.05, $3.54-3.68, $79.61-80.19, $1.29-1.31, 1.58-1.66%, and 1404-1419, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


History Matters - Chart of the Day


History Matters - Virtual Portfolio

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