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Top Of The Morning

Client Talking Points

The Low Down

1466-1478 is our risk range for the S&P 500 today. There is plenty of opportunity here to make some sales and take some profits. Buying tops isn’t cool, because that’s when you get smoked and get a margin call from your broker. It’s important to manage the risk and the range of your trades because despite what the Federal Reserve is capable of, the market doesn’t just go up and to the right all the time. Our S&P Sector Model isn’t "perfectly bullish" as it has been recently and combined with yesterday’s close (the Russell 2000 didn’t make another new all-time high), it’s important to realize that the market can get nervous and dive lower. Proceed with caution out there today. 

VIX Tricks

The VIX has been getting hammered nearly every day over the past few weeks as the stock market rose towards infinity and beyond (Sorry, Buzz). We’ll be keeping an eye on it since the VIX signaled immediate-term TRADE oversold at 13.16. When the VIX is at levels this low, there's plenty of risk for a move to the downside in equities.

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.


HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road


“Mantei T'eo will be confessing to Oprah in less than a month ...” -@nickragone2


“Victory goes to the player who makes the next-to-last mistake.” -Grigorievitch Tartakower


Jobless claims drop to five-year low: Initial claims for state unemployment benefits fell 37,000 to a seasonally adjusted 335,000.


The Macau Metro Monitor, January 17, 2013




In 2Q13, another phase of Fountainside's residential units will go up for sale.  The developer Macau Property Opportunities Fund expects that the 42 units will be complete by March.  20 of the units have already been sold and the remaining 18 flats and 4 villas are expected to fetch an average US$800 (MOP 6,400) and US$1,400 per square foot, respectively. 



A total of 8,913 people have been fined for breaking the city's smoking ban since January 1st. 



According to the DICJ, at 5,485, there were 12 fewer tables in 4Q than in 3Q. The number slots decreased by 444 to a total of 16,585 units. Despite sequential drop in number of tables and slots, gross gaming revenues grew 0.8% QoQ. 


S'PORE TO HAVE TWO NEW MRT LINES BY 2030 channelasia.com

Following a review of the Land Transport Master Plan by the Land Transport Authority (LTA), it was announced that Singapore will have 2 new MRT lines and extend the 3 existing lines.  The new lines are Cross Island Line (CRL) and Jurong Region Line (JRL), both of which are expected to be completed by 2030. The extension of the 3 existing lines is expected to be completed by 2025.


TODAY’S S&P 500 SET-UP – January 17, 2013


As we look at today's setup for the S&P 500, the range is 12 points or 0.45% downside to 1466 and 0.36% upside to 1478.                                                                                                                               















  • YIELD CURVE: 1.60 from 1.58
  • VIX  closed at 13.42 1 day percent change of -0.96%
  • RUT – after making a series of all-time highs (higher-highs), the Russell2000 finally flashed a negative divergence into yesterday’s close (closing down -0.33% w/ the Nasdaq up); not a bearish signal on the margin unless confirmed today, so watch that.

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Housing Starts, Dec., est. 890k (prior 861k)
  • 8:30am: Housing Starts, M/m,  Dec., est. 3.3% (prior -3%)
  • 8:30am: Building Permits, Dec., est. 905k (prior 900k)
  • 8:30am: Init Jobless Claims, Jan. 12, est. 368k (prior 371k)
  • 9:45am: Bloomberg Consumer Comfort, Jan. 13 (prior -34.4)
  • 10am: Freddie Mac 30-yr mortgage
  • 10am: Philadelphia Fed., Jan., est. 6.0 (prior 4.6)
  • 10:30am: EIA natural gas storage change
  • 11am: Fed to purchase $2.75b-$3.5b in 2020-2022 sector
  • 11am: U.S. Treasury to announce plans for 10Y TIPS auction
  • 12:05pm: Fed’s Lockhart speaks, Bloomberg Global Mkts Summit


    • Senate not in session
    • SEC Commissioner Gallagher at U.S. Chamber of Commerce
    • Bloomberg Global Markets Summit, w/speakers Atlanta Federal Reserve President Dennis Lockhart, Paul Wolfowitz of the American Enterprise Institute, 8am
    • CFPB holds hearing on mortgage-svcing underwriting rule
    • FDA decisions:
      • NuPathe’s migraine patch
      • Decision date for Santarus, Cosmo ulcerative colitis drug
    • Dept. of Veterans Affairs may award five-year, $5b technology contract; Lockheed Martin, HP, have shown interest


  • Boeing’s Dreamliner planes grounded by U.S.
    • Japan Airlines to cancel all Boeing 787 flights Jan. 19-25; Air India, Latam Airlines will also ground its Dreamliners
    • GS Yuasa may take months to complete 787 battery probe
  • Citigroup, BofA among banks releasing earnings this AM
  • Silver Lake close to lining up ~$15b in funds for Dell LBO
  • HP approached by investment bankers about selling assets
  • Rio Tinto CEO steps down, co. taking ~$14b of writedowns
  • JPMorgan said to settle claim with Whale trader’s supervisor
  • AB InBev unwilling to sell Modelo plant for merger approval
  • Goldman Sachs issued $6b of bonds in lender’s largest offering
  • EBay sales beat ests. as Donahoe pushes mobile commerce
  • Trauson says Stryker offers to buy outstanding shrs at HK$7.5 each
  • Wilbur Ross still plans to have IPO of Intl Automotive Components Group; declined to say when
  • Deutsche Bank profited as derivative hid Monte Paschi losses
  • Advanced Micro Devices ex-employees sued over trade secrets
  • GM to invest $1.5b in North America factories this year
  • Sun Life, Khazanah Nasional Berhad to buy CIMB Aviva for $596m
  • Accordia plans to sell ~10 properties to finance shr-buyback
  • Hollywood studios sued over royalties from home video sales


    • Huntington Bancshares (HBAN) 5:55am, $0.17
    • BB&T (BBT) 6am, $0.71
    • UnitedHealth Group (UNH) 6am, $1.20
    • PNC Financial Services Group (PNC) 6:30am, $1.48
    • Fifth Third Bank (FITB) 6:30am, $0.41
    • BlackRock (BLK) 6:30am, $3.73
    • Bank of America (BAC) 7am, $0.20
    • Fastenal (FAST) 7am, $0.33
    • Netscout Systems (NTCT) 7:30am, $0.35
    • Citigroup (C) 8am, $0.96
    • Amphenol (APH) 8am, $0.90
    • Intel (INTC) 4:01pm, $0.45
    • Associated Banc-corp (ASBC) 4:01pm, $0.26
    • American Express (AXP) 4:01pm, NA
    • People’s United Financial (PBCT) 4:02pm, $0.19
    • Wintrust Financial (WTFC) 4:04pm, $0.59
    • Capital One Financial (COF) 4:05pm, $1.59
    • Matthews International (MATW) 4:10pm, $0.42
    • Xilinx (XLNX) 4:20pm, $0.37


  • WTI Oil Rises to Four-Month High to Cut Brent Discount to $15
  • JPMorgan Tops Banks for Third Year as Loans Retreat: Commodities
  • Rio CEO Albanese Steps Down as $14 Billion Writedown Looms
  • Rising Crude Oil May Accelerate Growth of EU Consumer Gas Prices
  • Soybeans Drop From 3-Week High on Rising South American Supplies
  • Gold Poised to Decline in New York Before U.S. Economic Data
  • European 2014 Power Drops to Record as Near-Term Prices Decline
  • Iamgold Sees ‘Peak Gold’ Forging $2,500 Price: Corporate Canada
  • Korean Oil Buyers to Halt North Sea Price Slide: Energy Markets
  • Trough in China PMI, Electricity Output Aids Metals: Bull Case
  • Lukoil, Iraq Agree to Cut Output Target at West Qurna-2 Field
  • Cocoa Butter Stabilizes in Europe as Grinders Boost Processing
  • Palm Oil Declines as India Changes Calculation of Import Taxes
  • Merkel Offshore Wind-Power Dream Stalls as Vow Turns to Bluster
  • Copper Rises on Speculation Chinese Economic Growth Strengthened




YEN – 2-days up, tapped immediate-term TRADE resistance (24hrs ago), then straight back down here today (-0.87%); we re-shorted the bounce and went through why in our Global Macro Themes presentation titled #QuadrillYen this wk; let us know if you want that slide deck. Interesting that Nikkei didn’t go up on Yen down overnight.





DAX – starting to make a series of lower-highs and also leads losers in European majors this morning – Euro up +0.5% to $1.33 starting to annoy some European exporters; this is the Currency War.












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Not Easy

“I found the PM not easy to talk to.”

-Eleanor Roosevelt


That’s what Eleanor Roosevelt said about her dinner discussions with Winston Churchill in the early 1940s. That’s what I’ve heard plenty of analysts say over the years in this business about their PMs too.


From a leadership perspective, what makes a good PM (Portfolio Manager)? What makes a great one? I’d love to hear your thoughts, because my sense is that there is a best practices answer developing. We are all hostage to the narrow scope of our own personal experiences and confirmation biases.


Of all the hedge fund PMs I’ve had the opportunity to work with, I’d say that Jon Dawson (former Dawson Samberg) was the easiest to talk to. When you are a young analyst, that’s helpful – having a good coach helps you learn. As you mature into a senior analyst, then a junior PM, it’s easy to start talking to yourself.


Back to the Global Macro Grind


This game isn’t easy. That’s why I like to play it out loud. It’s the ultimate test of the mind. You have to be disciplined but flexible; aggressive, but calm; and patient, but nimble.


Staying in it to win it on the long-side of both US (and Global) Equities for the last 6 weeks hasn’t been easy. The first 17 days of January have left the SP500 stuck right at a 5-year closing high of 1472. I have 6 points of immediate-term upside left.


Contextualizing what that means to me doesn’t start with valuation – it starts with price performance:

  1. From the recent freak-out Fiscal Cliff low (NOV15) of 1353, the SP500 is up 119 pts (+8.8%)
  2. From the Bernanke Top (SEP14 intraday top of 1474), the SP500 is down 2 handles
  3. From the all-time SP500 high (OCT2007), the SP500 is still down -5.9%

Since buying tops isn’t cool (if you bought the SEP14 top, you had to slog for 4 months and be up +8.9% to get back to break-even), you want to be really careful when a market starts signaling that is might be done making higher-highs.


Particularly if you are paid to beat a relative performance bogey, that’s precisely why it’s so hard for PMs to sell-high, and then buy everything back lower. How do you know when a market is going to put in an immediate or intermediate-term top?




Now I am hardly suggesting my PM process is perfect on this front, but it’s better than bad. It’s been built out of making mistakes. And if you ask any absolute return PM in this business with a good to great long-term track record, I guarantee you they tell you this: the key to performing is eliminating big mistakes.


So let’s try to not do that.


If the market takes another run at the bears today, it may very well turn out to be as big a beta mistake being really long US Equities for the next 3 weeks as it was being short them for the last three.


I’m not just randomly choosing this morning to say that – my signals are all about price/volume/volatility:

  1. Last night was the 1st night in the last 10 trading days that my S&P Sector Model wasn’t what I call “perfectly bullish”
  2. Yesterday’s close also featured a fresh new negative-divergence with the Russell2000 not making a higher-high
  3. Since the prior closing high for the Russell (884) was an all-time high, that might matter – all-time is a long time
  4. Healthcare (XLV) signaled its 1st lower-high in my model of the year (it’s the #2 Sector at +4.5% YTD)
  5. Financials (XLF) signaled its 2nd consecutive lower-high in my model for the yr (it’s the #1 Sector at +4.6% YTD)
  6. US Equity Volume registered a bearish signal (SP500 tested making new highs on a down -19% volume signal)
  7. US Equity Volatility (VIX) signaled immediate-term TRADE oversold at 13.16
  8. US Equity Market Breadth was negative (44% advancers vs 52% decliners) with the SP500 at the highs

Apple had a 1-day move that explained some of this market skew (Nasdaq up vs Russell down). And that’s where having a quantitative view on a big index name like AAPL helps contextualize the rest of what I am being told to look at.


Since the core principle of how I think about risk management is to Embrace Uncertainty, I don’t know (and don’t really care to attempt to predict), what my signals are going to tell me. I have learned to shut-up, and just listen to them.


It’s not easy to listen. But, as my man Hemingway said, “I like to listen. I have learned a great deal from listening carefully. Most people never listen.”


Our immediate-term Risk Ranges for Gold, Oil (Brent), Corn, US Dollar, USD/YEN, UST10yr Yield, and the SP500 are now $1, $109.08-110.85, $7.12-7.41, $79.33-79.98 (USD is overbought), 88.06-89.85 (we re-shorted Yen via FXY yesterday), 1.81-1.89%, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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Growth Stabilizing

This note was originally published at 8am on January 03, 2013 for Hedgeye subscribers.

“It is gone forever.”

-Jeremy Grantham


That’s what legendary investor, Jeremy Grantham, started off his Quarterly Letter with in November. It was titled “On the Road to Zero Growth” and was published right around the time that the Barron’s cover read “Are We Headed For A Recession” (November 12, 2012).


I have a tremendous amount of respect for Grantham’s long-term TAIL risk work, but that doesn’t mean I always agree with him; especially on timing. For the last six weeks, our Global Growth Model has explicitly disagreed with A) a global recession and/or B) anything that remotely resembles 1% US growth, never mind 0%.


Since the mid-December cover of The Economist was titled “A Rough Guide To Hell”, I think being relatively bullish on stocks (and bearish on both Bonds and Gold) here is still the contrarian call to make. I don’t make calls on forever.


Back to the Global Macro Grind


I’ll come back to the multi-duration, multi-factor, risk management support for the aforementioned research view in a few minutes. First, let’s just take a moment to respect what yesterday was – easily the most bullish 1-day move for growth expectations in at least a year.


  1. After holding its 1419 line of TREND support, the SP500 ripped to within 0.8% of its September 2012 intraday high
  2. The Russell 2000 closed up +2.9%, making an ALL-TIME higher-high at 873 (versus 865 in April of 2011)!
  3. Both VOLUME and VOLATILITY signals finally confirmed the PRICE moves – and it was broad based, across sectors


In our multi-duration S&P Sector Model, all 9 sectors are bullish on all 3 of our core risk management durations (TRADE, TREND, and TAIL) for the first time since December of 2011. We call those Bullish Formations.


Yes, in spite of the Fed and Congress – global growth stabilized as expectations for future Fed Intervention came down huge (CFTC Futures and Options net long contracts dropped -49.5% from their all-time top in September to the December lows).


Now what?


Rather than using Grantham’s duration (his 0% growth forecasts extend out to the years 2030-2050 – yes, you can fire me if I ever try durations like that), let’s focus on where at least 90% of money managers have to focus on these days – the intermediate-term TREND.


  1. Let’s start with where US GDP Growth is at – at least +2-3%, not 0 to 1%
  2. You can get mad about how Obama is getting to +2-3% (spending), but you also have to understand it
  3. Government spending is tracking +9.5% on an annualized basis – that’s a big pop


*Reminder: GDP = C + I + G + (EX-IM). So, given that Congress just yard-saled the can on spending cuts, the G (government spending), is not going to be a headwind for Q113 GDP either. It might be in Q2 or Q3 – we’ll let you know when we think we know.


And a lot can happen in between now and Q2. What if the employment report tomorrow starts getting consensus thinking about a 6% handle on the US unemployment rate?


Oh, no you didn’t Bernanke – you didn’t take your “experimentation” too far in targeting random numbers now did you? 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…


I have no idea what the unemployment rate is going to be tomorrow – but what I can tell you is that:


  1. Yesterday’s Employment component of the US manufacturing PMI reading accelerated to 52.7 in DEC vs 48.4 NOV
  2. Weekly US Jobless Claims have been tracking well below our critical employment growth level of 385,000
  3. Both Bonds and Gold have been signaling this shift in employment growth stabilizing for the last 3 weeks


Again, this doesn’t mean I am bullish on US growth forever. To the contrary, what I am really telling you is to really respect that Big Government Intervention perpetuating short-term economic cycles works both ways.


Growth scares work just as well on the upside as they do on the downside. And if the market is sniffing this one out right, wouldn’t it be ironic and deserving, all at once, for Ben Bernanke’s latest policy expectations gamble to pop the biggest bubble of them all – bonds.


Fund flows out of bonds and into stocks would come back to this market in a hurry. The US stock market perma-bulls have been waiting for that train since 2007. If #GrowthStabilizing holds, that loco market machine may have already left the station.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1671-1690, $110.39-112.61, $3.61-3.77, $79.49-80.14, $1.31-1.33, 1.78-1.85%, and 1429-1474, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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