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Client Talking Points

Corn Collapsing

As growth continues to stabilize, we’ll be keeping a close eye on crude oil. It’s the one commodity that isn’t crashing or falling hard and the one commodity that can bring us right back into #GrowthSlowing. Meanwhile, corn is making a lower-low this morning and gold is failing at its TAIL risk line of $1671. Those gold bugs out there, from hedge funds to grandparents, are in for a rude awakening this morning. At this point, they should be used to it.


The Three Risketeers

Keith was on CNBC’s Fast Money yesterday afternoon and discussed his “Top 3 Risks” for the market: 


1.       #EarningsSlowing

2.       Rising Oil Prices

3.       Japanese Policy


As we kick off another quarter of earnings, risk number one is worth watching. Just because Alcoa (AA) didn't bomb doesn't mean it's smooth sailing ahead. We’ve discussed the implications of higher oil prices in the note above, so that leaves us with Japan. You have Japan following the US in terms of monetary policy (burn the yen) and itching to buy European bonds. It’s truly scary what the Japanese are doing to the economy. These three risks should have every investor questioning their next move in the market.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.


ADM has significantly lagged the overall market in 2012 over concerns that weakness in the company’s bioproducts (ethanol) and merchandise and handling segment will persist. Ethanol margins suffered from higher corn costs, as well as weak domestic demand and low capacity utilization across the industry. Merchandising and handling results were at the mercy of a smaller U.S. corn harvest. Both segments could be in a position to rebound as we move into 2013 and a new crop goes into the ground. With corn prices remaining at elevated levels, the incentive to plant corn certainly exists, and we expect that we will see corn planted fencepost to fencepost.


Margins are in a cycle trough as the USPS is on the brink. FDX is taking more share in the U.S. and following the recent $TNT news flow we think $UPS is in a tough spot.

Three for the Road


“@Hedgeye @CNBC I've been trying to trade on my own for 20 yrs. I never made any real money until I got real time alerts w/@KeithMcCullough.” -@TeaCardman


“Lying increases the creative faculties, expands the ego, and lessens the frictions of social contacts.” -Clare Booth Luce


Mortgage application volume bounced back 10.0% (purchase) in the week ended January 4th, after tumbling 14.8% in the last two weeks of December according to the Mortgage Bankers Association.


TODAY’S S&P 500 SET-UP – January 9, 2013


As we look at today's setup for the S&P 500, the range is 46 points or 1.11% downside to 1441 and 2.05% upside to 1487.















  • YIELD CURVE: 1.61 from 1.62
  • VIX closed at 13.62 1 day percent change of -1.23%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA mortgage applications (prior -10.4%)
  • 10:30am: DoE Inventory reports
  • 11am: Fed to buy $1.25b-$1.75b in 2036-2042 sector
  • 1pm: U.S. to sell $21b 10-yr notes reopening


    • House, Senate not in session
    • FCC Chairman Julius Genachowski speaks at CES, 4:30pm.
    • Israel’s Ehud Barak visits Leon Panetta, 6:45pm
    • SEC holds pre-hearing conference in matter of Deloitte Touche Tohmatsu CPAs, BDO China Dahua CPA Co., 9:30am


  • Clearwire gets unsolicited Dish counterbid to Sprint offer
  • SAC Capital said to raise hedge fund bonuses amid probe
  • AMR sees reasonable possibility of recovery for shrholders
  • Goldman said to be part of Fed-led foreclosure settlement
  • ITC judge may say next steps on Apple/Samsung ruling
  • Blackstone said to seek doubling of credit line to $1.2b
  • China-Japan dispute takes rising toll on top Asian economies
  • First Quantum takes C$5.1b bid for Inmet Mining hostile
  • Apple CEO returns to China amid falling phone market share
  • BOJ to work more closely with Abe at regular policy meetings
  • UBS client pleads guilty in offshore tax case
  • U.S. shopping center demand slows amid sluggish job growth
  • Shell’s mishaps in Artic drilling prompt U.S. govt. review


    • Helen of Troy (HELE) 7:30am, $1.14
    • Constellation Brands (STZ) 7:30am, $0.55
    • Shaw Communications (SJR/B CN) 8am, C$0.46
    • Pricesmart (PSMT) 4pm, $0.62
    • Ruby Tuesday (RT) 4:02pm, $(0.06)
    • Texas Industries (TXI) 6pm, $(0.31)



COMMODITIES – with the exception of Oil (which is a big exception as it will, at some pt, slow growth), Bernanke’s Commodity Bubble continues to deflate; Corn making a lower-low this morning and Gold is failing at its TAIL risk line of $1671 again; we covered gold so that we can re-short it on this bounce; manage the risk of the range proactively.

  • Brent Crude Halts Two-Day Gain as U.S. Oil Inventories Increase
  • Alcoa Sees Aluminum Use Climbing on China Recovery: Commodities
  • Gold Trades Little Changed at $1,659.31 an Ounce in London
  • Wheat Rises on Outlook for Lower 2013 Stockpiles; Corn Steady
  • Copper Rises on Speculation About Revivals in Biggest Consumers
  • Robusta Coffee Rebounds as Roasters, Investors Buy; Cocoa Falls
  • Cold Weather to Aid India Wheat Crop to Record for Seventh Year
  • Iron Ore Seen Set for Bear Market After Restocking Rally Fades
  • Rubber Advances for Second Day as China May Step Up Purchases
  • Lead Premium Paid in Europe Said to Almost Double for This Year
  • EU Carbon May Decline to Record as Glut Expands: Energy Markets
  • Chinese Bauxite Production Holds Key for Aluminum Markets
  • China Said to Plan Sale of Government Cotton Stockpiles
  • U.S. Drought Persisting Seen as Threat to Corn, Soybean Supplies





EUROPE – the short squeeze to higher-highs in European stocks continues; Italy’s MIB Index leading the charge this wk, up another +1.1% this morning crossing the 17,000 line and making a higher-high; remember that, unlike the USA, European corporates aren’t comping all-time peak margins; most of their stock markets are cheaper on a cyclically adjusted basis too.





ASIA – the Shanghai Composite corrected a whole 3 basis pts overnight and both the Nikkei and Hang Seng reversed back into the green; KOSPI down -0.3% was controlled and most importantly held both TRADE (1980) and TREND lines of support; Thailand said no more rate cuts for now as the economic demand side of the picture improves.








The Hedgeye Macro Team




Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Bull/Bear Class

“The first question to be answered is this: What constitutes a class?”

-Karl Marx


Most classically liberal economic historians will recall that Karl Marx and his ideology of #ClassWarfare went out on a low note. The aforementioned quote comes from the final chapter of Marx’s “Capital” in 1894 – not surprisingly, it was called “Classes.”


Capital” was published long after Marx and Engels issued their now infamous “The Communist Manifesto” (1848). It wasn’t unlike some of the fear-mongering pablum you hear from American politicians today – a political strategy born out of crisis.


In Britain, they called this mid-19th century economic crisis The Hungry Forties. Charles Dickens’ “A Christmas Carol” was published in 1843 as a progressive answer to the regressive social-fear being perpetuated by Marx, Carlyle, Malthus, etc. I’m the son of a firefighter and a teacher – I wasn’t raised thinking about Marx’s first question. I don’t think it’s healthy to lead from that perspective either.


Back to the Global Macro Grind


I don’t believe in Class Warfare. It’s a cowardly top-down ordering of humanity by our leaderless #PoliticalClass that attempts to pin us against one another for their political gain. The only class war I see in this country is between them, and the rest of us.


I don’t believe in being part of the Perma-Bull or Bear Class either. That’s so Old Wall. It’s such a marketing thing too. I believe in freedom of choice and bottom-up personal liberties. That includes being able to change my mind.


I guess that means I’d be a bad politician.


To review my decision making process – there are two big parts:


1.       The Fundamental Research Process

2.       The Quantitative Risk Management Process

They are not the same thing. Neither do they always agree. When the research and risk management signals are aligned, I either get loud about my rising conviction or I tone it down and reverse course.


In mid-November, both the research and risk management signals changed to bullish on both Global Growth’s Slope (stabilizing instead of slowing) and equity market direction (the SP500 held its long-term TAIL support line of 1364). So, we changed.


That doesn’t mean this morning’s risks have gone away (I listed my Top 3 Risks in yesterday’s Early Look):

  1. #EarningsSlowing
  2. Rising Oil Prices
  3. Japanese Policy

It simply means I don’t wake up at the top of every risk management morning looking for confirming evidence to my current positioning. To review that position from an asset allocation perspective this morning:

  1. We have our highest Global Equity asset allocation in a year
  2. We have a 0% asset allocation to Fixed Income
  3. We have a 0% asset allocation to Commodities

So, when the research and risk management signals are lined up, I don’t beat around the bull or bear bush – I make the call. No, that doesn’t mean this should be the pension fund asset allocation of the government of Qatar – it simply means that for my hard earned wealth, I like equities, straight up, over bonds.


Our bearish call on Commodities isn’t new. We have been making it since March of 2012. It’s probably a little long in the tooth, so we covered our Gold (GLD) and Gold Mining (GDX) shorts on red this week after getting immediate-term TRADE oversold signals. That doesn’t mean I am bullish on Gold; it just means I can re-short it on the bounce at my immediate-term TRADE overbought signal.


This is a tough game. There are multiple durations and multiple risk factors to consider. But it’s proven to be a lot tougher ever since the SP500 topped in 2007, Oil topped in 2008, and Gold topped in 2011. We try not to buy tops.


Has the SP500 topped for 2013?


I don’t think so. In fact, if the front-end of Earnings Season delivers (the Financials report first with Wells Fargo on Friday and  they will have relatively strong growth due to the strength in both Housing and the Yield Spread), Mr Macro Market may have this right.

  1. The Financials (XLF) are already the best performing S&P Sector at +3.5% YTD
  2. The 2-day correction in the SP500 came on a DOWN volume signal (volume is now accelerating on the UP days)
  3. US Equity Volatility (VIX) risk management signals are telling me the VIX wants to make lower-lows

So, we’ll see if I am right or wrong on this. That’s why we keep score. In the meantime, if you ever see me becoming perma anything, send me a friendly reminder that it’s time to retire to the class of mediocre minds who are inflexible.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Corn, US Dollar, EUR/USD, UST 10yr Yield, VIX, and the SP500 are now $1, $110.23-112.71, $6.80-6.89, $79.99-80.72, $1.29-1.31, 1.84-1.96%, 13.34-15.11, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bull/Bear Class - Chart of the Day


Bull/Bear Class - Virtual Portfolio


The Macau Metro Monitor, January 9, 2013




MGM China has received official approval from the Macau government for its Cotai project.  MGM Cotai will include a five-star hotel, gambling space and open areas on a 17.8 acre site.  MGM China reiterated in a statement that the resort, with a budget of $2.5 billion, will include approximately 1,600 hotel rooms, 500 gambling tables and 2,500 slot machines as well as restaurant, retail and entertainment offerings.  Construction, for which the company still needs government approval, is expected to take up to three years.

The Marshmallow Experiment

This note was originally published at 8am on December 26, 2012 for Hedgeye subscribers.

“Strength does not come from physical capacity.  It comes from an indomitable will.”

-Mahatma Gandhi


It is a quiet week at Hedgeye and in the markets this week.  Keith is spending some time with his family, so I’ve been handed the pen on the Early Look.  My family decided to take a little vacation in the Canadian Rockies for the holidays.  As a result, this note is coming to you from Banff, Alberta in all of its -30 degrees Celsius glory.


Similar to most vacations, I’ve taken an opportunity in the downtime to do some reading.  The most interesting book I’ve picked up this holiday season is called, “Willpower”, and was written by Roy Baumeister and John Tierney.  This is not one of those books in which the title has a double meaning - the book is in fact about will power. 


As the authors write, when psychologists attempt to identify the key traits that lead to positive outcomes in life they consistently come up with two: intelligence and self control.  Interestingly, the first trait, intelligence, is considered to be somewhat innate and researchers have thus far been unable to permanently increase a person’s intelligence.  Self control, on the other hand, can be improved.  In fact, according to Baumeister and Tierney, improving self control, or willpower, is the surest path to a better life.


One of the most interesting studies that support the relationship of willpower to positive life outcomes is the Marshmallow Experiment.  This experiment was conducted by Stanford psychologist Walter Mischel in 1972 and its original objective was to study how children learn to delay gratification.  In the experiment, four year olds were put in a room alone and told that they could eat a marshmallow whenever they wanted, or if they waited until the experimenter returned they would get two marshmallows.


Interestingly, Mischel’s daughters attended the school where the Marshmallow Experiment occurred, so he kept hearing anecdotes about the marshmallow kids from his daughters after the experiment had ended.  Naturally, this led Mischel to do follow up research on the children that had participated in the experiment. 


The follow up research showed that those four years olds who were able to hold off for the second marshmallow had SAT scores that were on average 210 points higher, earned higher salaries, had lower body mass indexes, and lower rates of divorce.  The results of this experiment surprised many academics, since prior to this experiment it was thought that childhood characteristics were not accurate predictors of future success.


Since discipline is an attribute of most great investors, I’m sure many of those men and women that went on to have great careers as stock market operators would have waited for the second marshmallow.  As for politicians, I’m not so sure.  If the most recent policy stalemate implies anything, it is that elected officials don’t really want any marshmallows.  The caveat over the last 24 hours is that President Obama has made the decision to end his Christmas vacation early and will return to Washington, D.C. today, thus the futures are up this morning.  Santa Claus Rally anyone?


So, even as President Obama is coming back in hopes of getting his proverbial second marshmallow, it remains very unlikely that the fiscal cliff gets resolved in 2012.  Senator Mitch McConnell, who has been a catalyst for prior bargains, is having none of it this year as he looks toward a re-election campaign in 2014 and recently stated:


“We don’t know what Senator Reid will bring to the floor.  He is not negotiating and the president is out of town.  So I don’t know what they are going to do over there.”


The Republicans in the House, of course, have also not been able to accomplish much. Speaker Boehner’s attempt before the holidays to get his members to support a tax increase on incomes over $1 million was not successful. The likely reality is that we are looking at a short term solution that allows Congress more time to negotiate.  If this reminds you of the definition of insanity, doing the same thing over and over again and expecting different results, it should.


The other major concern related to the influence of politicians is the debt ceiling.  According to the most recent data from the Treasury Department, the total outstanding U.S. government debt was $16.30 trillion as of December 21th.  This is just shy of the statutory debt limit of $16.39 trillion, a number which is likely to be violated in early January 2013.


So, where is Washington on resolving the looming breach of the debt ceiling? Well, according to InTrade, the online prediction market, the odds of the debt ceiling being raised by year-end are currently at 10%.  Similar to the fiscal cliff, our elected officials have decided to wait until both of these issues are directly upon us and volumes are back in the New Year.  I suppose this is a version of waiting for two marshmallows, albeit not a positive version.


Clearly, if we get past the inability of the politicians in Washington to put their partisan bickering aside and reach a workable solution to both the fiscal cliff and debt ceiling, then 2013 may shape up to be a positive year for equities.  As Keith has been writing, global growth seems to be bottoming (one of the more recent supportive global data points this week is Taiwanese Industrial Production hitting a nine month high on Monday), commodity inputs look to be on a deflationary path, and housing in the U.S. is poised for a parabolic recovery in terms of home prices.


The last point is critical for growth surprising on the upside in the U.S. as the value of the consumer’s home has historically shown a high positive correlation to their discretionary spending intentions.  A sustained housing recovery is the proverbial marshmallow that many U.S. focused investors have been patiently waiting for over the last five years.  Based on our models, 2013 could well be the year where that happens.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1636-1671, $106.21-109.77, $3.49-3.58, $79.13-79.99, $1.30-1.33, 1.70-1.85%, and 1419-1450, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Marshmallow Experiment - Chart of the Day


The Marshmallow Experiment - Virtual Portfolio