TODAY’S S&P 500 SET-UP – January 24, 2013

As we look at today's setup for the S&P 500, the range is 17 points or 1.06% downside to 1479 and 0.08% upside to 1496.   















  • YIELD CURVE: 1.58 from 1.59
  • VIX  closed at 12.46 1 day percent change of 0.24%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Initial Jobless Claims, Jan. 19, est. 355k (prior 335k)
  • 8:30am: Continuing Claims, Jan. 12, est. 3.2m (prior 3.214m)
  • 8:58am: Markit US PMI, Jan. preliminary, est. 53 (prior 54)
  • 9:45am: Bloomberg Consumer Comfort, Jan. 20 (prior -35.5)
  • 10am: Leading Indicators, Dec., est. 0.4% (prior -0.2%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural gas storage change
  • 11am: DOE inventories
  • 11am: Kansas City Fed Manufacturing, Jan., est. 1 (prior -2)
  • 11am: Fed to buy $2.75b-$3.5b debt in 2020-2022 sector
  • 11am: U.S. Treasury to announce plans for sale of 2Y notes, 5Y notes, 7Y notes
  • 1pm: U.S. Treasury to sell $15b 10Y TIPS


    • Senate in session, House not in session
    • Nom. hearing for Sen. John Kerry, D-Mass., as Sec of State
    • Sen. Dianne Feinstein, D-Calif., to introduce gun legislation
    • U.S., Japan to sign amendment to bilateral income tax treaty
    • HHS, FDA meeting on public health benefits, risks of drugs containing hydrocodone, 8am
    • HHS, NIH meeting on H1N1/bird flu transmission and data management, 9am
    • Senate Health, Education, Labor and Pensions Cmte hearing on mental health system in America, 10am


  • Apple plunges after sales forecast trails est.
  • Asian suppliers fall after Apple’s sales outlook
  • Commerzbank plans to cut as many as 6,000 jobs worldwide, Barclays said to plan 15% job cuts at Asian investment bank
  • Citigroup’s Corbat says pay environment to remain challenging
  • World Economic Forum in Davos continues
  • Delta Air Lines is talking to Airbus, Boeing on buying jets
  • Euro-area composite PMI contracts at slower pace than est.
  • Delphi considers ‘bolt-on’ acquisitions against paying dividend
  • North Korea threatens to conduct nuclear test
  • Three-month suspension of U.S. debt ceiling passed by House
  • FDA approves Roche’s Avastin with chemo for colorectal cancer


    • Cash America International (CSH) 6am, $1.20
    • Keycorp (KEY) 6am, $0.21
    • Stanley Black & Decker (SWK) 6am, $1.28
    • Knight Capital (KCG) 6am, $0.03
    • McCormick & Co (MKC) 6:30am, $1.14
    • Southwest Airlines Co (LUV) 6:45am, $0.07
    • Xerox (XRX) 6:51am, $0.29
    • AO Smith (AOS) 7am, $0.81
    • Colonial Properties Trust (CLP) 7am, $0.33
    • Hubbell (HUB/B) 7am, $1.20
    • International Speedway (ISCA) 7am, $0.56
    • National Penn Bancshares (NPBC) 7am, $0.17
    • Teledyne Technologies (TDY) 7am, $1.08
    • AmerisourceBergen (ABC) 7am, $0.67
    • Ametek (AME) 7am, $0.48
    • Baxter International (BAX) 7am, $1.26 - Preview
    • Celgene (CELG) 7am, $1.32
    • Dover (DOV) 7am, $1.07
    • EQT (EQT) 7am, $0.42
    • Raytheon (RTN) 7am, $1.31
    • EQT Midstream Partners (EQM) 7:05am, $0.40
    • Brunswick (BC) 7:30am, $(0.08)
    • Fairchild Semiconductor (FCS) 7:30am, $0.10
    • 3M Co (MMM) 7:30am, $1.41 - Preview
    • Timken Co (TKR) 7:30am, $0.62
    • Airgas (ARG) 7:30am, $1.07
    • Bristol-Myers Squibb Co (BMY) 7:30am, $0.42 - Preview
    • Kennametal (KMT) 7:30am, $0.64
    • Lockheed Martin (LMT) 7:30am, $1.82
    • United Continental Holdings (UAL) 7:30am, $(0.61)
    • Alaska Air Group (ALK) 8am, $0.71
    • Avnet (AVT) 8am, $0.83
    • Cypress Semiconductor (CY) 8am, $0.04
    • Meredith (MDP) 8am, $0.87
    • WW Grainger (GWW) 8am, $2.61
    • Janus Capital Group (JNS) 8am, $0.14
    • Precision Castparts (PCP) 8am, $2.47
    • Rayonier (RYN) 8am, $0.57
    • Union Pacific (UNP) 8am, $2.16
    • Coherent (COHR) 8:02am, $0.72
    • AVX (AVX) 8:30am, $0.15
    • Deluxe (DLX) 8:30am, $0.88
    • GATX (GMT) 8:30am, $0.54
    • OSI Systems (OSIS) 8:30am, $0.68
    • Old Republic International (ORI) 9am, $(0.05)
    • Informatica (INFA) 4pm, $0.37
    • Microsemi (MSCC) 4pm, $0.52
    • AT&T (T) 4:02pm, $0.45
    • Sterling Financial (STSA) 4pm, $0.52
    • Cirrus Logic (CRUS) 4pm, $1.41
    • JB Hunt (JBHT) 4pm, $0.70
    • Maxim Integrated (MXIM) 4pm, $0.41
    • Select Comfort (SCSS) 4:01pm, $0.32
    • Federated Investors (FII) 4:01pm, $0.40
    • Open Text (OTC CN) 4:01pm, $1.38
    • Flextronics (FLEX) 4:01pm, $0.20
    • Micros Systems (MCRS) 4:02pm, $0.58
    • Covance (CVD) 4:02pm, $0.71
    • Microsoft (MSFT) 4:02pm, $0.74
    • Starbucks (SBUX) 4:03pm, $0.57
    • VeriSign (VRSN) 4:04pm, $0.51
    • Cepheid (CPHD) 4:05pm, $(0.01)
    • E*Trade Financial (ETFC) 4:05pm, $(0.54)
    • Juniper Networks (JNPR) 4:05pm, $0.22
    • ResMed (RMD) 4:05pm, $0.52
    • Tempur-Pedic International (TPX) 4:05pm, $0.55
    • SVB Financial Group (SIVB) 4:14pm, $0.88
    • City National (CYN) 4:15pm, $1.00
    • Glacier Bancorp (GBCI) 4:15pm, $0.28
    • Synaptics (SYNA) 4:15pm, $0.45
    • KLA-Tencor (KLAC) 4:15pm, $0.56
    • QLogic (QLGC) 4:15pm, $0.17
    • Energen (EGN) 4:49pm, $0.74
    • Hancock Holding (HBHC) 5pm, $0.63
    • Iberiabank (IBKC) Late, $0.79


GOLD – both Apple and Gold bulls will be as quiet as NFLX bears this morn; some serious pin action in names where consensus has very strong views; Our AAPL TAIL risk line of $561 remains intact (no position); Gold failed, fast, at $1692 TREND resistance yesterday, and Netflix, well, just look at it if you want to feel like it’s 1999.

  • Gold Seen Extending Rally as Fed’s QE3 to Last Through 2014
  • Sugar Rush Leaves U.S. With Biggest Glut in Decade: Commodities
  • Copper Declines as Codelco Adds to Indications of Ample Supply
  • Oil Trades Near One-Week Low on U.S. Supplies, Seaway Pipeline
  • Gold Drops to One-Week Low as Growth Outlook Curbs Haven Demand
  • Economist Gartman Sells Some WTI Oil and May Get Out Entirely
  • Iron Ore Seen Falling in Second Quarter as China Restocking Ends
  • Robusta Coffee Advances on Stockpiles, Vietnam Crop; Cocoa Gains
  • Brazil Sugar at Ports Rises 23% as Ships Head to Algeria, India
  • China Tracks Errol Flynn to Tasmania in Quest for Wind: Energy
  • HSBC Cuts Gold Allocation on 3-Year and Six-Month View
  • China Zinc Output May Peak in 2015 as Project Pipeline Thins
  • Rubber May Extend Rally After Golden Cross: Technical Analysis
  • Zinc Mine Supply Growth May Slow During Next Eight Years








FRANCE – let’s not talk about Spain’s unemployment going up again (even though they make up the numbers, they still see unemployment rising to 26% in Q4 vs 25% prior); lets talk about the country everyone wants to be: France – French PMI for JAN gets spanked to 42.9 vs 44.6 in DEC (Services PMI down too, 43.6 vs 45.2 last mth), French #GrowthSlowing.





ASIA – KOSPI down another -0.8% after snapping its TRADE line of support 2-days ago, taking the correction to -3.3% from the JAN high; something to watch alongside the Hang Seng (2 days of lower-highs) and Shanghai Comp that was also -0.8% overnight and also broke its TRADE line of 2308 support into the close.








The Hedgeye Macro Team





The Macau Metro Monitor, January 24, 2013




On Friday, MPEL will sign the US$1.4 billion syndicated loan backing its Macau Studio City project which is expected to cost over $2.5 billion.  The loan was led by eight mandated lead arrangers and bookrunners, including Bank of China Macau, Industrial & Commercial Bank of China Macau, ANZ, Bank of America Merrill Lynch, Citigroup, Deutsche Bank, Credit Agricole CIB and UBS. 


The five-year deal is split into a US$1.3 billion amortizing loan and a US$100 million revolving credit. The loand has a rate of L+450bps plus commitment fees adding up to an all-in rate of L+483bps and a duration of 4.8 years.



Caesars has joined Hong Kong-listed Lippo Ltd in a casino project in South Korea.  According to a Lippo statement to the Hong Kong Stock Exchange, the two companies agreed on Wednesday to the terms under which they will seek permission from the South Korean government to develop a casino resort in Incheon, a city near the country’s capital of Seoul.  Caesars will own 40% of the venture, Lippo will own 20%, and another partner will hold the remaining 40%.





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Skinning Bears

“The skin of the bear must not be distributed until the bear has been killed.”

-Sir Winston Churchill


That’s what Churchill said after the Allies invaded Italy at Salerno in late 1943. If you’ve ever thought about trying to skin a bear yourself, locals from my neck of the woods would suggest you make sure it’s dead first too.


Risk management lessons in markets and in life tend to rhyme – if you practice common sense, that is. Some people get all religious about this stuff. Others practice some “technical” form of voodoo. I’m more into Churchillian-style strategic thinking myself.


During WWII, Churchill’s strategy was “to assign a larger importance to opportunism and improvisation, seeking rather to live and conquer in accordance with the unfolding event than to aspire to dominate often by fundamental decisions.” (The Last Lion, page 708)


Back to the Global Macro Grind


If your risk management strategy is to A) Embrace Uncertainty and B) react to changing probabilities based on time and price, you’ll be satisfied doing a whole lot of nothing sometimes. Waiting and watching is a risk managed choice.


That’s what we did heading into Apple’s (AAPL) earnings event. Since we didn’t have any fundamental “edge” on the quarter, and our risk management signal (Bearish Formation, TAIL RISK $561) said to stay away, any other decision would have been a gamble.


That doesn’t mean today’s reactions to AAPL (down -8%) or Netflix (up +30%) don’t present opportunities. And that’s the point. The great goals in my life have been scored when preparation meets opportunity. Patience is a virtue.


With the SP500 up for 6 consecutive days (up +4.8% YTD and +10.4% from its mid-November 2012 fiscal cliff freak-out closing low), plenty a stock market bear’s bum has been skinned – but has The Bear been killed?


If your answer to that is yes, you and I (and the T Bay locals) need to have a little chat about wild animals.


To review, there are 2 core components to what we do:

  1. Quantitative Risk Management (Signals, Factoring, etc.)
  2. Fundamental Research

On both, there are a few chinks in the bull’s growth horns this morning.


Quant Signals:

  1. KOSPI (-3.3% correction now from its YTD high) broke TRADE line support of 1985
  2. CHINA (Shanghai Comp), down -0.8% overnight, broke its immediate-term TRADE line of 2308
  3. JAPAN (Yen vs USD) failed to overcome 87.71 resistance again and is trading down hard, -1.2%
  4. Implied volatility in both the Yen and Japanese Equities is rising, fast
  5. Overbought signals across European Equities are being confirmed by lower immediate-term highs
  6. CRB Commodities Index failed at its long-term TAIL risk line of 306 (should snap 300 again today)
  7. Gold failed fast at intermediate-term TREND resistance of $1692
  8. Oil remains sticky, testing a TAIL duration breakout in both Brent and WTIC
  9. Copper, immediate-term TRADE overbought at $3.72/lb is making a series of lower long-term highs
  10. SPX overbought at 1496 and VIX oversold at 12.16 are what they are until they aren’t

Fundamental Research:

  1. Spain’s unemployment hits a higher-high at 26.02% (#PoliticalClass gets paid before The People)
  2. Japanese Exports fall another -5.8% y/y in DEC, despite setting their currency on fire!
  3. France printed a nasty Manufacturing PMI report for JAN, 42.9 (vs 44.9 in DEC)

Of course there are bullish Fundamental Research data points in this morning’s macro grind as well (imagine there wasn’t?). Chinese PMI of 51.9 in JAN was a little better than 51.5 in DEC; Germany’s Manufacturing PMI for JAN came in at 49.8 vs 46 last month, and the US economic data that’s pending (jobless claims today; New Home Sales tomorrow) continues to be bullish.


There’s always bulls and bears somewhere. Our daily service isn’t to be either – it’s to be objective and opportunistic when risk/reward changes (in any market or security) on the margin.


On the margin, was the Russell2000 making a lower-high yesterday a signal or was it noise? How about the US stock market’s breadth (advancers 46% vs decliners 50%) being negative on an up SP500 day? Why was there no volume (down 9% vs my TREND avg)? Channeling my inner-Churchill, inquiring risk management minds should never, ever, ever, give up asking questions.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST 10yr Yield, AAPL, and the SP500 are now $1, $110.23-112.27, $3.65-3.71 $79.79-80.14 (USD bullish, Yen bearish), 80.71-90.41, 1.81-1.87%, $464-506 (Apple = immediate-term TRADE oversold in the post), and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Skinning Bears - Chart of the Day


Skinning Bears - Virtual Portfolio

Early Look: Japan’s Battle of Diu

This note was originally published at 8am on January 10, 2013 for Hedgeye subscribers.

"He who ate the chick must also eat the rooster, or pay for it."

-Francisco de Almeida, first viceroy of the Portuguese State of India, circa 1508


Dom Francisco de Almeida (1450-1510) was a distinguished Portuguese solider and explorer. Also of noble background as a counselor to King John II of Portugal, he is widely credited with establishing Portuguese hegemony in the India Ocean – paving the way for nearly a century of Portuguese dominance in the Indian Ocean trade.


Before Almeida’s arrival as commander of Portugal’s fourth seaborne voyage to India, the Portuguese Empire had been struggling mightily to establish a stronghold in this globally omnipotent trading hub, failing to cultivate key trading relationships in addition to being denied a meaningful presence at key ports.


The first voyage was commanded by Vasco da Gama (1460-1524), who is credited with captaining the first ships to ever sail directly from Europe to India (1498), rounding the Cape of Good Hope into what was previously believed to be a landlocked Indian Ocean.


Beyond his discovery – which is arguably the most important geographic discovery in the history of globalization – his first voyage was a broad failure, losing roughly half his men and two of his four ships.


The second voyage of eight ships was commanded by Alvarez Cabral, which set sail for India’s port cities in 1500. After an inadvertent detour to the coast of Brazil, Cabral and his depleted crew finally docked in Calicut six months later.


Cabral’s brief stay in the region was highlighted by two violent skirmishes with established parties within the region, which perpetuated more largely unsuccessful trading exploits. He hastily retreated to Lisbon with just five men and one ship.


The third voyage was once again commanded by Vasco da Gama. Setting sail in 1502 with a 15-vessel fleet, da Gama’s primary objective was to uproot the Egyptian power preventing Portugal’s establishment of trading dominance in the region.


To some degree, da Gama found a fair amount of “success” – particularly in combat. His fleet is credited with burning alive 250 men, women and children on a ship, as well as slaughtering 800 fishermen in Calicut. Shortly after his ruthless exploits, he traveled to neighboring Cochin where he defied local wishes and set up a well-forfeited trading factory.


A costly tactical error would have cost the Portuguese all of their progress in India when Cochin was overran by Calicut forces, had it not been for the timely arrival of our “hero” Francisco de Almeida.


Under several years of the viceroy’s leadership, Portugal was able to make solid headway into Indian Ocean trade. His eventual victory over a joint fleet of Gujarat, Egyptian, Calicut, Ottoman, Venetian, and Ragusa forces in the Battle of Diu (1509) cemented Portugal’s dominance within the region and ultimately allowed the empire’s trading and transport strategies to flourish.


It is believed that had Almeida’s son Lourenco de Almeida not been murdered by a joint Gujarat-Egyptian fleet in the First Battle of Chaul, the decisive Portuguese victory mere months later at the Battle of Diu would have eluded the history books. The battle itself was pursued as a personal outlet for Almeida to avenge the death of his son, which is the origin of the highlighted quote above.


Motivated by the pain of a lost child, Almeida’s hasty foray into battle helped the Portuguese Empire finally overcome the headwinds to Portuguese dominance of the world’s most important trading route at the time.


If this colorful story of persistent failures preceding ultimate triumph reminds us of anything, it’s modern-day Japan. Plagued by persistent deflation (10YR average annual CPI = -0.2%) and nonexistent growth (10YR average annual nominal GDP growth = -0.7%), the Japanese economy has long been failing to establish itself as anything remotely resembling vibrant, dynamic or just plain healthy.


If Japan is the modern-day version of the Portuguese Empire – oft seeking, but not finding – then Japanese policymakers have undoubtedly been reincarnated versions of Vasco da Gama and Alvarez Cabral, multiplied many times over.


For over ten years now, Japanese policymakers have implemented a variety of “counter-structural” strategies (i.e. there’s absolutely nothing cyclical about Japan’s economic malaise) designed to overcome deflation and perpetuate nominal GDP growth: perpetual ZIRP, quantitative easing, comprehensive monetary easing, bloated sovereign deficits, etc.


All have failed to deliver the Japanese economy the inflation and nominal growth it has so desperately sought.


Enter recently-elected prime minster Shinzo Abe, who we think has a chance to be Japan’s modern-day version of Francisco de Almeida. Abe, head of the ruling Liberal Democratic Party (LDP), can indeed be said to be motivated by the “blood of a son”.


The LDP has long been the dominant political party in Japan. With the exception of a brief 11-month period between 1993 and 1994, the LDP was in power from 1995 through 2009, when it was flat-out dominated by rival Democratic Party of Japan (DPJ) in the AUG ’09 general election (308 to 119 seats).


On the strength of party leader Shinzo Abe’s pledge to proactively pursue a nominal growth target of +3% and an inflation target of +2%, the LDP was able to take back control of the Lower House to the tune of 294 seats vs. only  57 for the DPJ in the DEC ’12 general election.


Focused intently on the previous failures of Japanese policymakers (particularly the central bank) to deliver the goods, Abe has adopted a very open and aggressive anti-deflation stance in the media. His appointment of Taro Aso as Finance Minster is yet another signal that he is prepared to do what it takes to win Japan’s version of the Battle of Diu.


As outlined in our 12/26 note titled: “JAPAN TO LOOSEN FISCAL POLICY AS WELL”, the following is a list of the strategies we think Abe will purse to emulate Almeida’s success in the 1509 version of the battle – which the latter won by leading off with a massive naval bombardment that was followed up by the larger Portuguese ships pelting enemy vessels from afar with technically-advanced weaponry that was far superior to that of their opponents:

  • A +2-3% joint Diet-BOJ INFLATION target (likely at the JAN 21-22 BOJ board meeting);
  • A meaningful expansion of public expenditures and “large scale” stimulus package (additional details in the coming weeks);
  • A VAT hike delay (discussions to begin in late 2013);
  • The LDP wins a majority in the Upper House pending elections late-JUL/early-AUG, paving the way for a full-fledged assault on Japan’s public finances;
  • An erosion of BOJ independence, with the BOJ governorship and two deputy governorships eventually assumed by politicized puppets (late-MAR/early-APR); and
  • Experimental monetary POLICY – particularly a foreign asset purchase program (likely several weeks after the previous catalyst materializes).

All told, we are of the view that a true phase change in the Japanese economy is definitely underway. While some may still be viewing Abe through the same lens as previous Japanese policymakers, we think it will continue to pay to be short the Japanese yen with respect to the intermediate-term TREND and long-term TAIL.


And while we continue to view incremental monetary Policies To Inflate and expansionary fiscal POLICY as reflationary for Japanese equities and supportive of regional sentiment in the near term, we continue to flag material risk of Japanese currency and sovereign debt crises borne out of those same policies with respect to the long-term TAIL.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, VIX, and the SP500 are now $1642-1671, $110.28-112.82, $80.26-80.81, $1.29-1.31, 1.84-1.96%, 13.34-16.03, and 1446-1491, respectively.


Darius Dale

Senior Analyst


Early Look: Japan’s Battle of Diu - Chart of the Day


Early Look: Japan’s Battle of Diu - Virtual Portfolio


Early Look

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