TODAY’S S&P 500 SET-UP – January 7, 2013

As we look at today's setup for the S&P 500, the range is 43 points or 2.21% downside to 1434 and 0.72% upside to 1477. 















  • YIELD CURVE: 1.63 from 1.64
  • VIX closed at 13.83 1 day percent change of -5.01%
  • BONDS – if Treasury yields backed off for real (below our TAIL risk line of 1.84%), we’d stop harping on this – but that’s not happening this morning; for the 1st time in a year fund flows are marginally tilting away from fixed income towards equities – maybe that’s a sign of a short-term equity market top; maybe it means we’ll keep making higher-highs; we don’t know – but its new.

MACRO DATA POINTS (Bloomberg Estimates):

  • 11am: Fed to purchase $1.25b-$1.75b in 2036-2042 sector
  • 11:30am: U.S. to sell $32b 3M, $28b 6M bills
  • U.S. Rates Weekly Agenda


    • ITC to announce final decision in patent-infringement case by Vitec unit over television, movie-studio lighting, 5pm


  • Banks win watered-down liquidity rule after Basel Grp deal
  • Celgene, Onyx, others to give updates at JPMorgan conf.
  • Citigroup said to seek stock buybacks in capital plan: WSJ
  • Sikorsky poised to win $6.8b U.S. helicoper contract
  • Hulu CEO Jason Kilar says he plans to leave co. by April
  • Google patent offers probably won’t end Microsoft, Apple suits
  • Nvidia unveils Tegra 4 mobile processor to spur smartphone push
  • Cerberus plans to sell most of Aozora stake valued at $1.7b
  • Flowers Foods, Bimbo said bidding for Hostess Brands: WSJ
  • Terra Firma to sell Odeon theater chain: FT
  • Sony, BMG to bid for Parlophone, other EMI labels: FT
  • Deal in foreclosure case may come as early as today: NYT
  • US Air pilot leaders back interim labor deal on AMR merger
  • “Texas Chainsaw” in #1 at wknd box office, “Django” #2
  • U.S. Weekly Agendas: Finance, Industrials, Energy, Health, Consumer, Tech, Media/Ent, Real Estate, Transports
  • Canada Weekly Agendas: Energy, Mining
  • ECB, China Trade, Chavez, Oscar Noms: Week Ahead Jan. 5-12


    • Commercial Metals (CMC) 8am, $0.17
    • Team (TISI) 4:01pm, $0.60



GOLD – they tried to bounce it into Friday’s close, then again this morning – failed at both our TRADE and TREND lines of resistance; watching that TAIL line of $1671 closely as the downside gap opens up in our model (ie lower intermediate-term lows are signaling as probable).

  • Oil Declines a Third Day; Morgan Stanley Sees Supply Recovery
  • Bulls Add to Wagers for First Time Since November: Commodities
  • LBMA’s Best Gold Forecaster Hochreiter Says Bull Market Is Over
  • Gold Swings Between Gains and Drops in London on Stronger Dollar
  • Copper Falls as Report May Show Weaker German Factory Orders
  • Asia Naphtha Crack Rebounds; BP Sells Gasoil, Fuel: Oil Products
  • Sugar, Coffee Gain in New York on Index Rebalancing; Cocoa Rises
  • Hedge Funds Raise Brent Crude Net-Longs to Nine-Month High
  • U.K. Natural Gas Jumps Most Since August as Statoil Cuts Output
  • Shell Leads S. Africa on Record Oil Rush as Coal Falters: Energy
  • Iron Ore-Import Wave Seen by Morgan Stanley Boosting Shipping
  • European Oil Demand Outside CIS Declines Along With Production
  • U.S. Corn, Soy Reserves on Dec. 1 Seen Dropping to Nine-Year Low
  • Corn Climbs From Six-Month Low as Rains Threaten Argentine Crop










TAIWAN – never mind growth stabilizing, Taiwanese export growth just accelerated, big time, from 0.9% NOV to +9.0% in DEC on Chinese demand; mostly every Asian market (equities, bonds, FX) is signaling the same thing that it has for a month; growth isn’t slowing anymore – couldn’t have said that 6 months ago.








The Hedgeye Macro Team





The Macau Metro Monitor, January 7, 2013




According to data from the police, a total of 580,844 tourists visited Macau between December 30 and January 3, up by 4.92% YoY.  The Border Gate remained the busiest checkpoint with 660,000 movements.



The ticket prices for the ferry service between the Inner Harbour and Zhuhai have increased by 50%,  The Macau Daily Times cited local Chinese media reports saying that the ferry operator Yuet Tung Shipping Co Ltd has increased the price from January 1.  A one-way ticket now costs MOP30 (US$3.75), while a two-way trip costs MOP40.

Daily Trading Ranges

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Finish The Job

“Give us the news and we will finish the job.”

-Winston Churchill


That’s what Churchill said to President Roosevelt in the spring of 1941 as the British were still pleading for America’s hand in taking down one of Germany’s most important ships - The Bismarck (The Last Lion, page 359).


With the US Dollar on the cusp of another long-term breakout from its bombed out base, that’s what I am still begging for. President Obama, get the Fed and Congress out of our way and we will let free-market pricing Finish The Job.


Strong Dollar, Strong America.


Back to the Global Macro Grind


The US Dollar was up smartly last week. Closing +1.1% to $80.50, that was the 11th week out of the last 15 that the US Dollar Index closed flat to up. And the global economy liked it.


For the US stock market to have its best up week in a year on an up week for the US Dollar is not only progressive, but very new. If you want any chance at sustained US and Global Economic Growth, you need to see this Dollar strength confirmed.


For what feels like forever, we have warned of the Fed/Congress (monetarily and fiscally) perpetuating what we call The Correlation Risk (Debauched Dollar = Inflated Asset Prices, not real-inflation adjusted economic growth).


To be clear, this opportunity for the US Government to get out of the way is fleeting – but we just saw, on a very immediate-term basis, what that could look like if Obama gives us that news.


Look at these positive 15-day immediate-term TRADE correlations:

  1. US Dollar vs. SP500 = +0.48
  2. US Dollar vs. MSCI Emerging Markets Index = +0.79
  3. US Dollar vs. US Treasury 10yr Yield = +0.62

Again, these are very immediate-term changes in the Global Macro Risk Factoring of the market – but they are not new to US and Global Economic history. During both the Reagan (1) and Clinton (1) sustained US Economic Growth periods, we had A) Strong Dollar and B) Deflated Commodity prices.


*Class Warfare fans: that would be good for lower-income populations and bad for the only class I’ll call a “class” - the #PoliticalClass.


Importantly, if I push the duration of these US Dollar correlations out to 120-days (i.e. when we were of the view that Global Growth was still slowing), here’s what the negative Correlation Risk looks like:

  1. USD vs SP500 = -0.75
  2. USD vs MSCI EM = -0.73
  3. USD vs UST 10yr Yield = -0.57

In other words, the Weak Dollar, Slow Growth world can come back in a hurry if policy makers think more policy that hasn’t worked is the answer. That said, for now (as in what someone needs to forward to Axelrod to read right now), as global economic growth goes from SLOWING to STABILIZING:


A)     The US Dollar has stopped going down

B)      Commodities have stopped inflating

C)      Both Bonds and Gold have started to go down (relative to stocks), big time


That last point is driving Gold/Bond bulls nuts, because it too is very new. But it makes sense. That’s precisely the reason why most growth investors who own Gold now didn’t buy it in the 1990s. Absolute returns were a lot higher in productive assets (Tech).


Last week’s signals from the US Treasury market were both explicit and fundamentally driven:

  1. Global Growth Data (across Europe and Asia in particular) continued to stabilize/accelerate
  2. US Employment Data continued to stabilize
  3. Tim Geithner said he’s leaving

All of this was good news for both global growth and the US Dollar. They have both causal and correlated relationships. They are also reflexive. And they are screaming at us from a quantitative risk signaling perspective:

  1. US Treasury 10yr Yield long-term TAIL risk breakout line = 1.84% (TREND support under that at 1.70%)
  2. Yield Spread (10yr minus 2yr, a good proxy for marginal slope of growth) = +19 basis pts wider wk-over-wk
  3. US Dollar Index moved back into a Bullish Formation (bullish on all 3 of our core durations: TRADE/TREND/TAIL)

There’s a very unique opportunity for the President of the United States to provide both American savers and those starving from food/energy inflation globally to Finish The Job here. Yes We Can buy into him just getting US government out of the market’s way.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $110.01-113.06, $3.63-3.75, $80.24-80.58, $1.30-1.32, 1.84-1.96%, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Finish The Job - Chart of the Day


Finish The Job - Virtual Portfolio


On Friday, we were given the chance to pen Hedgeye's Early Look.  This product is usually written by our CEO, Keith McCullough, with his take on markets, the economy, and politics.  If you do not receive the Early Look, and would like to, please email


Our stab at the Early Look for 1/4/13 is below.




“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.


Rory Green

Senior Analyst


FRIDAY'S EARLY LOOK - Chart of the Day

All Is Calm

This note was originally published at 8am on December 24, 2012 for Hedgeye subscribers.

“All is calm, all is bright.”

-Garth Brooks


One of my favorite holiday history songs is Belleau Wood, by Garth Brooks. It’s a song about a truce between US and German soldiers in 1918. The first WWI Christmas truce came between British and German soldiers in 1914.


“Through the week leading up to Christmas, parties of German and British soldiers began to exchange seasonal greetings and songs between their trenches; on occasion, the tension was reduced to the point that individuals would walk across and talk to their opposite numbers bearing gifts.” (Wikipedia, Christmas truce)


Then across the frozen battlefield another’s voice joined in…

Until one by one each man became a singer of the hymn.” (Garth Brooks)


Back to the Global Macro Grind


I’ll keep it relatively tight this morning – just economic data and risk management levels.


But first, here’s how I’d summarize our GIP (Growth, Inflation, Policy) model right now:

  1. Globally (across countries in our model), growth has been stabilizing now for almost a month
  2. Inflation continues to deflate, providing the real-time tailwind to this shift from growth slowing to stabilizing
  3. Both Treasury Bond and Gold prices do not like this (they like #GrowthSlowing)

Global Macro Economic data:

  1. Taiwan printed its highest Industrial Production number in 9 months this morning (+5.9% NOV vs +4.8% OCT)
  2. Singapore reported a 2-yr low in Consumer Price Inflation (CPI) this morning (+3.6% y/y NOV vs +4% OCT)
  3. CFTC Futures & Options net long contracts hit a 6 month low (-5.6% wk-over-wk to 758,256 contracts)

That last point is one of the most critical we have been focused on since making our Bubble#3 (Commodities Bubble) call - 1 of our Top 3 Global Macro Themes @Hedgeye for Q42012. It’s also what’s driving the shift in our model from growth slowing to stabilizing.


To put the market’s expectations for lower commodity prices in perspective:

  1. Total net long contracts are -43% below their all-time (Bernanke Bubble) peak of September 2012
  2. Gold net long contracts (down -13% last wk to 112,421) hit their lowest level since August 2012
  3. Corn contracts are getting cobbed, down another -22% last week to 175,631 (lowest since July 2012)

Now maybe the Policy to Inflate thing gets plugged back into your life in January, but the probability of Qe6 superimposing new all-time highs for commodity inflation versus those that have been bubbling up for the last decade is relatively low.


Across the board, our risk management signals concur:

  1. CRB Commodities Index = 294 (flat last week in an up tape for Global Equities) remains in a Bearish Formation
  2. Gold = down another -2.2% last week to $1657/oz, snapped our long-term TAIL risk line of $1671
  3. Silver = down another -7.1% last week led losers in the commodities complex, followed by Palladium at -4.8%

Yes, this is me pushing my thesis for Strong Dollar = Strong America. With the US Dollar making a series of higher long-term lows (up for 9 of the last 13 weeks), that’s the most bullish thing I can tell you this Christmas. Let free-market prices win the day.


But for just one fleeting moment, the answer seemed to clear…

Heaven’s not beyond the clouds, it’s just beyond the fear.” (Garth Brooks, Belleau Wood)


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1640-1671, $106.20-109.59, $3.52-3.58, $79.09-79.99, $1.31-1.33, 1.70-1.85%, and 1419-1450, respectively.


Merry Christmas and Happy Holidays to you and your loved ones,



Keith R. McCullough
Chief Executive Officer


All Is Calm - Chart of the Day


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