Blowback In Commodities

After a near five-year build up in commodity prices courtesy of the Federal Reserve's monetary policy, the bubble is finally deflating. In the last three months, we've seen the CRB Commodity Index, which measures 19 different commodities, fall --7% and gold (GLD) has dropped -6.1% during the same time period. There are plenty of hedge funds and institutional investors who are long gold who are grimacing when looking at charts; gold broke its TAIL risk line of $1671 this morning and can easily fall farther.


Blowback In Commodities - CRBindex

Earnings Expectations Reasonable Relative to #GrowthStabilizing

Takeaway: For the first three quarters of 2013, aggregate earnings comparables look reasonable relative to growth stabilizing

With newsflow fairly thin, Congress now idly prepping for a replay of December’s fiscal debate in February, the media searching for its next, post-Cliff myopic focal point, and econ data flow light, we thought we’d take a quick look at where we are as we head into earnings season


Our quantitative outlook and the preponderance of domestic and global macro data has us sticking with our #GrowthStabilizing view while we continue to monitor the Top 3 Risks to being in equities at current prices – Rising Oil Prices, Japan, & #EarningsSlowing.    As it relates to the 3rd point, below we highlight revision trends/sentiment, growth and margin comps, and quality of earnings trends for the SPX as we head into 4Q12 earnings season and 2013.   




SPX Aggregate Comparables

Topline Comps:  4Q12 has a reasonably hard comp, after that the growth compares ease through 3Q13.  Consensus estimates over the next four quarters show modest acceleration on a Y/Y basis thru 2013.  On a 2Y basis (normalizing for comp volatility) growth estimates continue to decelerate thru 3Q13.  In isolation, modest growth estimates and easing growth comparisons on both a 1Y and 2Y basis sets up neutral-to-favorable within the context of growth stabilizing and leaves some headroom for revenue beats should economic activity & real growth accelerate.  


Operating Margins:  EBIT Margin Comps remain modest in aggregate over the next four quarters with TTM operating margin changes running flat-to-negative.  While the comp setup isn’t particularly challenging we would note that we remain at the top of the corporate margin cycle. After the multi-year run of margin expansion into and out of the great recession, any residual juice left in efficiency gains and headcount reductions has been largely exhausted.  Wage inflation has been running negative on a real basis and with commodity costs down ~2% y/y on the quarter, input costs don’t appear to hold any particular upside here.   In short, the mean reversion risk for margins remains asymmetrically to the downside with earnings negatively levered to topline trends – a dynamic that is likely to remain in place over the intermediate term. 


Earnings:  EPS compares mirror topline trends, easing sequentially over the NTM.  Bloomberg Consensus is currently expecting a modest sales recovery in conjunction with margin re-expansion to drive a re-acceleration in earnings growth on a y/y basis.  On a 2Y basis, consensus expects flat growth thru 3Q13.  On balance, while we would be skeptical of the view that modest topline improvement can drive material operating leverage at this point in the cycle, the expectation for flat growth on a 2Y basis sits as a relatively neutral setup, in our view. 


Other Comp Considerations:

  • 4Q12:  Mgmt will have the crutch of Sandy & fiscal cliff related uncertainty to lean on if results disappoint.  The externalities in the quarter along with the legislative event catalysts just ahead on the timeline offer an easy out for mgmt and investors to dismiss or look past (now rearview) 4Q results
  • 2013 Guidance:  Initial guidance will be fluid and ranging (particularly in sectors like Healthcare & Defense) as managements attempt to handicap the fiscal policy outcomes of the debt ceiling and sequestration negotiations in February.  The uncertainty also offers management any easy avenue for low-balling estimates and conservatively managing expectations.
  • 1Q13:  1Q13 faces a particularly tough comp stemming from favorable weather in 1Q12 and in terms of working days due to Leap Year & the Easter shift.  For those companies levered to weekday traffic/volume, working days shift to a small tailwind in 2Q/3Q13


Earnings Expectations Reasonable Relative to #GrowthStabilizing - SPX Comps   Estimates


Earnings Expectations Reasonable Relative to #GrowthStabilizing - SPX EPS Comps   Estimates


Earnings Expectations Reasonable Relative to #GrowthStabilizing - LT Margins


Revision Trends:  Sentiment has recovered off the early 4Q12 lows but topline growth estimates remain modest.  Aggregate NTM Revision Trends across the SPX saw their most expedited drawdown since late 2008 post the conspicuous growth slowdown and the guide-down torrent that characterized 2Q12 earnings.  Revisions chased guidance lower out of 2Q & subsequently chased prices higher into November only to be stiff-armed by a further deceleration in growth in 3Q12 alongside resurgent EU sovereign concerns and the uncertainties and prospective growth consequences associated with the debt ceiling and fiscal cliff issues. 


Estimates have stabilized into year-end and are likely to track sideways over the next couple months as investors tread water moving through earnings and the debt ceiling/sequestration event catalysts that will peak in late February. On balance, expectations have rebased and the hurdle on sentiment isn’t particularly high given the weakness of the last few quarters the ongoing, prevailing fiscal policy uncertainty. 


Examining the historical, temporal  trend in annual estimates over the last few years reveals some consistencies.  Generally, new year optimism and favorable seasonal adjustment factors within the reported economic and employment data support growth estimates through 1Q.  As the mismatch between the optimism embedded in early year expectations and real and reported growth in 2Q/3Q emerges - due to inflationary, growth slowing impacts of fed policy initiatives and the reversal of seasonal adjustments in the data -  expectations get tempered and growth estimates fail to confirm their early year exuberance.   We’ll see if 2013 breaks the trend – while the impacts of seasonal adjustments in the reported government data will be largely the same as previous years, the debt ceiling/sequestration uncertainty will likely weigh on estimates and the Fed appears largely impotent here in regards to accelerating balance sheet expansion.    



Earnings Expectations Reasonable Relative to #GrowthStabilizing - SPX NTM Revision Trends


Earnings Expectations Reasonable Relative to #GrowthStabilizing - SPX Indexed Estimates


Earnings QualityA quick-quant means for assessing quality of earnings is to look at the distribution of beats/misses clustered around the zero line.  The Spread between companies missing by a small margin and beating by a small margin should be fairly normally distributed (or skewed modestly positive).   If the spread moves excessively positive its an indication that managements (in aggregate) may be more involved in messaging earnings by managing accruals to get to the number.  


Below we looked at the Spread between the number of companies beating estimates by less than 3% and the number of companies missing estimates by less than -3%.   The longer term quarter-to-quarter trend is somewhat equivocal (& complicated by big event impacts) but its interesting to note that the spread is again beginning to rise over the last few quarters as sales growth has slowed & margin levers are largely exhausted.  Something to keep an eye on as not all “E’s” in P/E are created equal.  We’ll also take a comb through our aggregate SPX financials to look at cash vs. accrual earnings trends as well.  


Earnings Expectations Reasonable Relative to #GrowthStabilizing - SPX QE Sales


Earnings Expectations Reasonable Relative to #GrowthStabilizing - SPX QE OM



Christian B. Drake

Senior Analyst


HOUSING: Bouncing Back

Nearly every data point to come out of the housing market in the past month has been positive, save for MBA mortgage applications. With this morning’s data, we finally see mortgage volume bouncing back 10% (purchase) for the week ended January 4 after tumbling 14.8% in the last two weeks of December. Next week’s data is capable of another bounce to the upside considering that this past week’s data still includes the New Years eve/day week. As we head further into the new year, we remain bullish on housing stocks and housing-levered financial stocks.


HOUSING: Bouncing Back - YoY purch Shark Chart   make 1 normal


HOUSING: Bouncing Back - purch short term normal


HOUSING: Bouncing Back - purch QoQ normal

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 80.52%
  • SHORT SIGNALS 78.67%

Bullish: SP500 Levels, Refreshed

Takeaway: This market A) remains in a Bullish Formation and B) continues to signal higher-lows and higher-highs.



At every higher-low, literally, this contra-indicator stream I built for myself on Twitter tweets bearish. That’s bullish.


So is a strengthening Dollar, weakening Gold/Bonds, stabilizing global growth, etc…


Across my core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE overbought = 1490
  2. Immediate-term TRADE support = 1447
  3. Intermediate-term TREND support = 1419


In other words, this market A) remains in a Bullish Formation and B) continues to signal higher-lows and higher-highs.


That’s just bullish too.



Keith R. McCullough
Chief Executive Officer


Bullish: SP500 Levels, Refreshed - SPX

Bottoms Up

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




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