TODAY’S S&P 500 SET-UP – January 4, 2013

As we look at today's setup for the S&P 500, the range is 42 points or 1.88% downside to 1432 and 1.00% upside to 1474.     















  • YIELD CURVE: 1.67 from 1.65
  • VIX closed at 14.56 1 day percent change of -0.82%
  • BONDS – massive 3wk move in Treasuries and now Bond Yields are in a Bullish Formation (bullish TRADE, TREND, TAIL) now that they took out my 1.85% TAIL risk line (1.96% last); no intermediate-term resistance in the 10yr to 2.4% and our asset allocation to Fixed Income remains 0%.

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Nonfarm Payrolls, Dec., est. 153k (prior 146k)
  • 8:30am: Unemployment Rate, Dec., est. 7.7% (prior 7.7%)
  • 10am: Factory Orders, Nov., est. 0.4% (prior 0.8%)
  • 10am: ISM Non-Manf. Composite, Dec., est. 54.0 (prior 54.7)
  • 10:30am: EIA natgas storage
  • 11am: DoE weekly inventories
  • 1pm: Baker Hughes U.S. rig count
  • 1:15pm: Plosser speaks in San Diego on real business cycles
  • 1:30pm: Lacker speaks in Baltimore on economic outlook
  • 3:30pm: Yellen speaks in San Diego on systemic risk
  • 5:30pm: Bullard speaks to economists in San Diego


    • House, Senate meet to count electoral votes for president
    • House to vote on $9.7b for national flood insurance program
    • CFTC holds closed meeting on enforcement matters, 10am


  • Payrolls in U.S. probably held gains in Dec. as economy grew
  • JPMorgan faces sanction for refusing to provide Madoff docs
  • Abbott, J&J, Sanofi said to show interest in Bausch & Lomb bid
  • Moody’s, S&P, Fitch must face fraud claims in Rhinebridge suit
  • Cohen’s SAC fund tops most-profitable list amid insider probes
  • Berkshire ex-executive Sokol won’t face SEC action, lawyer says
  • Wal-Mart creates new role to oversee alternative format stores
  • Facebook testing free calling on message app: L.A. Times
  • Best Buy, Toys R Us say Wal-Mart misleading in ads: WSJ
  • Euro-area manufacturing, services shrink more than estimated
  • Euro-area Dec. consumer prices rise 2.2% in yr, est. 2.1%
  • IBM insider case analyst agrees to U.S. return, court told
  • ECB, China Trade, Chavez, Oscar Nominees: Wk Ahead Jan. 5-12


    • Finish Line (FINL) 6:45am, $0.10
    • Mosaic (MOS) 7am, $0.88, preview


GOLD – getting plastered this morning, down another -2% (Silver down -5%) as the world comes to realize that there are many unintended consequences associates w/ A) #GrowthStabilizing and B) Bernanke’s experiment in unemployment targeting; if this jobs picture continues to improve, we think Gold continues lower – oversold here today.

  • Oil Declines for a Second Day as Fed Discusses Curbing Stimulus
  • Gold Seen Rallying From Worst Streak in Eight Years: Commodities
  • Copper Declines Most in Two Weeks as Fed Signals Stimulus End
  • Soybeans Rebound on Speculation Demand May Rise Following Slump
  • Gold Set for Worst Run Since 2004 as Fed Sees End to Purchases
  • Sugar Falls to Two-Week Low on Surplus; Coffee and Cocoa Slide
  • SHFE Metal Stockpiles Expand as Copper Rises to Eight-Month High
  • West African Cocoa Premiums Said to Drop on Better Crop Outlook
  • Palm Oil Advances as Malaysian Shipments May Gain on Tax Revamp
  • Uranium Rebound Seen as Japan Considers Nuclear: Energy Markets
  • Mississippi Seen Navigable Through Jan. 26 After Rock Removal
  • Oil May Increase as Economic Growth Spurs Demand, Survey Shows
  • Gold May Drop to $1,600 on Moving Averages: Technical Analysis
  • Rebar Advances to Five-Month High as Demand Increases in China










JAPAN – in what might be the end of Keynesian policy “experimentation” gone gnarly, the Japanese are literally torching their currency at this pt (Yen down another -1.1% this morn) and the Nikkei is going Weimar style republic (+25.2% since mid OCT!); all the while, Japanese economic growth is one of the few majors in the world still slowing – this should end well.








The Hedgeye Macro Team




CHART OF THE DAY: Foot Soldiers Or Generals?


CHART OF THE DAY: Foot Soldiers Or Generals? - Chart of the Day

Foot Soldiers Or Generals?

“His outward appearance seemed indifferent and unconcerned over the wretchedness of his soldiers…although French and Allies shouted into his ears many oaths and curses about his own guilty person, he was still able to listen to them unmoved.”

-Jakob Walter, German soldier under Napoleon


Two hundred years ago, following one of the most brutal military campaigns in history, thousands of young European men traipsed through the snow of East Prussia, half-dead.  The Diary of a Napoleonic Foot Soldier, by Jakob Walter, is a harrowing but thoroughly enjoyable account of what it was like to serve in Napoleon’s Grand Armée during the ill-fated invasion of Russia in June 1812.  Given that one is as likely to be born in one country, at one time, as another country at another time, I am particularly grateful I was not one of the 600,000 Napoleonic soldiers that crossed into Russia in mid-1812.  Of the 140,000 that were left to retreat from Moscow, only 25,000 actually crossed back over the border in December 1812 to begin the long walk home.


Few individuals have left as indelible a mark on history as Napoleon Bonaparte.   That he was born in Corsica of Italian heritage but went on to gain the title “Emperor of the French” is indicative of the strength of personality he possessed.  All of his courage and decisiveness meant little without the contribution of his subjects.  Napoleon understood this; it is estimated that between 1800 and 1815, he raised approximately two million conscripts, or 7% of the population, in France alone.   Was the future of 18th Century France (or 1930’s Germany or Russia) dictated by the common man’s wishes or a charismatic leader dragging a country toward his vision?  This question has no definitive answer but it can serve as a loose metaphor for policy versus demographics in our contemporary economy.  While demography is concerned with the passive role people play in economies, the roles of the common man and policy maker in driving economic growth are important to consider in 2013.  Harry Dent, author of several books on demographics and its importance states: “it’s Homer Simpson that drives our economy, not Ben Bernanke or Barack Obama!”


I recently did some long overdue reading on demography.  While my understanding of the subject is tenuous at best, it is clear to me that understanding the role of demographic and technology cycles is key to understanding what drives our economy over the long term.  Hedgeye Healthcare Sector Head Tom Tobin and his team have produced some excellent research that anchors off these topics.  Recently, his work has suggested that household formation, maternity, and pet ownership (WOOF) rest on a similar age demographic and are likely to see corresponding strength.  While the increasingly short-term nature of our industry has marginalized such thought processes, we continue to believe that identifying investment themes that deviate from consensus but are supported by long-term cycles can lead to highly actionable ideas.


Considering some of the key demographic trends pertaining to the consumer economy offers interesting long-term insights.  In terms of the sector my team covers, restaurants, the core demographic of casual dining companies tends to be the 45-65 YOA cohort.  For any consumer industry executive, decelerating population growth among age cohorts with a high propensity to spend money on your goods or services will act as a top-line headwind.  Pertaining to the restaurant industry, it is clear that for many years executives’ lives were made easier by a rising demographic tide.  We believe that casual dining is facing a painful adjustment due to excessive unit growth.  Trading opportunities on the long side will remain, on immediate-to-intermediate-term bases, but we see casual dining as a group that will experience consolidation for a number of years.  It is no coincidence that the management teams that are most demonstratively aware of the demographic headwind are running the companies whose shares we are relatively positive on (EAT – at a price).  Darden Restaurants (DRI) is one company that we became bearish on in July.  One of the key issues we took with management’s strategy was its growth trajectory and we continue to believe that it is overly aggressive relative to the fundamental performance of its chains and the overall health of the industry.  The quote, below, from Brinker (EAT) CEO, Guy Constant, highlights the reality of the situation facing his industry and his company’s awareness of it:


“…We've had to deal with those questions internally because as a company that's only ever been in a growth space, it's been an adjustment for us to adjust to running a business in a more mature space now than we did before. But knowing then that history, we believe, is repeating itself, that helps you understand what you need to do in order to survive in this space.”


While long-term demographic and technology cycles dictate economic growth, from an investment perspective, it is self-evident that policy has a significant impact on market prices as well as the duration and amplitude of economic cycles.  The market, after all, is not the economy.  Previously, I have wondered if forming an opinion on government policy is a worthwhile exercise.  Long-term cycles seem to bear out over time regardless of government policies (give or take a few years).  In recent times, our macro team’s process of focusing on Growth, Inflation, and Policy has proven effective in identifying key inflection points in markets, globally.  Moreover, the level of government intervention in markets implores investors to form an opinion on policy and to update it, regularly.  For example, investors in gold that have ignored policy, and the expectations around it, have had a difficult time of late. 


Our view of policy makers in the US (and almost everywhere else) has been decidedly negative.  Keith wrote in yesterday’s Early Look: “What if Bernanke is what he usually is – wrong on his growth forecasts? What if unemployment rate expectations start to fall towards 6.5% in 2013 instead of in 2017? Inquiring Bond and Gold bulls would like to know…”  Yesterday we saw gold and bonds get crushed on the expectation that Bernanke could be forced to call back his troops if expectations of employment growth improve sufficiently.  Every general meets his Waterloo.  The only question is when.


Timing, as always, is the critical factor in investing but even more so in life.  After all, if not for timing, we could have been Napoleonic foot soldiers.


Have a great weekend,


Rory Green

Senior Analyst


Foot Soldiers Or Generals? - Chart of the Day


Foot Soldiers Or Generals? - Virtual Portfolio

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Today we shorted EZ CORP (EZPW) at $20.15 a share at 3:19 PM EDT in our Real-Time Alerts. Along with Cash America (CSH), EZ CORP will be one of the pawn shop operators affected by gold’s recent downturn. When gold falls, it takes pawns down with it. We remain bearish on the stock through Q1 2013.




MNST - Buying Mispriced Growth

When we initiated coverage of the consumer staples sector a couple of weeks back, we highlighted two "broken" growth stories as being interesting - MJN (+5.9% since 12/17) and MNST (-1.4%).  Admittedly, MJN's market share and pricing issues in China were easier to get comfort with versus the more open-ended spectre of the possible regulation of energy drinks, but we see the outcomes as ultimately being the same - investors will go back to paying a premium multiple for the underlying growth profile in both stories.


It is our belief that the FDA has as much business regulating energy drinks as we do - which is to say, right around no business at all.  And while the timing of a likely favorable outcome is unclear, we believe that investors will be rewarded for picking their spots in this name, as we did today.


MNST - Buying Mispriced Growth - MNST Mispriced


MNST - Buying Mispriced Growth - MNST T T



Robert  Campagnino

Managing Director