Feeling Fresh

Client Talking Points

Flying High

Fresh new year-to-date highs in the S&P 500 and Russell 2000 from yesterday’s close? You betcha. Same goes for Japan and China, too. You have to keep in mind that #GrowthStabilizing is part of the global macroeconomic picture; it’s not just the United States that reaps the benefits of a bull market. What’s important is that you don’t get caught up in the frenzy and lose sight of your goals and the amount of risk you’re comfortable with. Our models tell us the following is happening:


  • US Stocks (SP500) immediate-term TRADE overbought in the 1510-1513 range
  • US Equity Volatility (VIX) immediate-term TRADE oversold in the 11.98-12.04 range
  • US Dollar Index immediate-term TRADE oversold at $79.41
  • US Treasury Yields (10yr) immediate-term TRADE overbought at 2.04%


Guess what? China and Japan are overbought, too. Same goes for the Euro and the DAX. Markets go up and until they don’t and with Brent Crude oil approaching $115 a barrel very quickly, that kind of problem can cause growth to slow, causing consumption to slow. See where we’re going here? Still, any market bears are in for a rude awakening if they stick to their plan to short everything and not take advantage of the rallies. 

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.


With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.


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


“So I guess New Jersey is responsible for 2% plus in GDP. That's a lot of tomatoes.” -@ThemisSal


“The world is full of willing people, some willing to work, the rest willing to let them.” -Robert Frost


Jan. ADP Employment Report: Prior 215k, Market Expects 175k , Actual 192k


TODAY’S S&P 500 SET-UP – January 30, 2013

As we look at today's setup for the S&P 500, the range is 21 points or 1.05% downside to 1492 and 0.34% upside to 1513. 














  • YIELD CURVE: 1.73 from 1.72
  • VIX  closed at 13.31 1 day percent change of -1.92%
  • 10YR – what a rip! 10yr yields finally grab the 2% line and swallow it, 2.03% this morning and signaling immediate-term TRADE overbought (yields); asset allocators have to be very defensive now that we have a full month of stocks crushing gold/bonds.

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications (prior 7.0%)
  • 8:15am: ADP Employment Change, Jan., est. 165k (prior 215k)
  • 8:30am: GDP QoQ (annualized), 4Q, est. 1.1% (prior 3.1%)
  • 8:30am: Personal Consumption 4Q, est. 2.1% (prior 1.6%)
  • 8:30am: Core PCE QoQ 4Q, est. 0.25% (prior 0.25%)
  • 10:30am: DoE Energy Inventories
  • 1pm: U.S. to sell $29b 7-yr notes
  • 2:15pm: FOMC Rate Decision


    • Senate in session, House not in session
    • Senate Judiciary Cmte holds hearing on gun control, with witness including Mark Kelly, husband of former Rep. Gabrielle Giffords; Wayne LaPierre, executive VP of NRA
    • World Bank President Jim Yong Kim addresses conference on anti-corruption, global development, 9am


  • Price, timing to be in focus at BlackBerry 10 event
  • U.S. economy probably slowed as spending gain drained stockpiles
  • Pfizer will evaluate whether to divide drug units, CEO says
  • Asian stocks rise to 17-mo high as euro rallies to strongest since 2011
  • Chesapeake CEO McClendon to leave after Icahn, Southeastern push
  • Dell founder said to seek majority control using personal funds
  • Apple fails in bid to increase $1b patent verdict against Samsung
  • Facebook seen reporting faster sales growth on mobile-ad demand
  • Boeing probe seeks data on battery failures before fire
  • Kinder Morgan buys Copano for $3.2b to add gas assets
  • Amazon rises after margin improvement
  • TARP watchdog spars with Treasury on Ally Financial exit plan
  • Morgan Stanley cross-asset strategist Gregory Peters exits firm
  • Ipsen may seek U.S. acquisitions and partnerships, CEO says
  • Toyota recalls almost 1.3m vehicles globally on airbags, wipers
  • Spain’s recession deepens more than forecast as cuts in budget curb demand
  • Oil service companies plunge in Europe as Saipem cuts earning forecast
  • Beijing smog prompts Apple, JPMorgan to distribute face masks to employees


    • ADT (ADT) 6am, $0.42
    • Evercore Partners (EVR) 6am, $0.52
    • CGI Group (GIB/A CN) 6:30am, C$0.45
    • MarketAxess Holdings (MKTX) 6:30am, $0.36
    • Northrop Grumman (NOC) 7am, $1.74
    • L-3 Communications (LLL) 7am, $2.12
    • Booz Allen Hamilton (BAH) 7am, $0.37
    • Bank of Hawaii (BOH) 7am, $0.90
    • Rockwell Automation (ROK) 7am, $1.26
    • Valley National Bancorp (VLY) 7am, $0.19
    • Wisconsin Energy (WEC) 7am, $0.41
    • Marathon Petroleum (MPC) 7:03am, $2.10
    • MeadWestvaco (MWV) 7:25am, $0.18
    • Hess (HES) 7:30am, $1.21
    • Silicon Laboratories (SLAB) 7:30am, $0.58
    • Southern (SO) 7:30am, $0.40
    • Manpower (MAN) 7:30am, $0.77
    • Boeing (BA) 7:30am, $1.18 - Preview
    • CommVault Systems (CVLT) 7:40am, $0.32
    • New York Community Bancorp (NYCB) 8am, $0.30
    • Hudson City Bancorp (HCBK) 8am, $0.12
    • Phillips 66 (PSX) 8am, $1.69
    • BOK Financial (BOKF) 8am, $1.26
    • Haemonetics (HAE) 8am, $0.54
    • TCF Financial (TCB) 8am, $0.18
    • Health Net (HNT) 8:15am, $0.38
    • Avery Dennison (AVY) 8:30am, $0.49
    • SEI Investments Co (SEIC) 8:30am, $0.32
    • Cullen/Frost Bankers (CFR) 9am, $0.93
    • ConocoPhillips (COP) 4pm, $1.42 - Preview
    • Qualcomm (QCOM) 4pm, $1.12
    • TFS Financial (TFSL) 4pm, $0.02
    • Align Technology (ALGN) 4pm, $0.22
    • Knight Transportation (KNX) 4pm, $0.22
    • AvalonBay Communities (AVB) 4:01pm, $1.39
    • Electronic Arts (EA) 4:01pm, $0.56
    • Amdocs (DOX) 4:01pm, $0.70
    • Las Vegas Sands (LVS) 4:01pm, $0.60
    • Tractor Supply Co (TSCO) 4:01pm, $1.03
    • Allegiant Travel Co (ALGT) 4:01pm, $0.70
    • ServiceNow (NOW) 4:02pm, $(0.04)
    • Facebook (FB) 4:05pm, $0.15
    • JDS Uniphase (JDSU) 4:05pm, $0.14
    • Citrix Systems (CTXS) 4:05pm, $0.84
    • CACI International (CACI) 4:05pm, $1.63
    • Cadence Design Systems (CDNS) 4:05pm, $0.19
    • Cabot (CBT) 4:05pm, $0.76
    • Acxiom (ACXM) 4:05pm, $0.16
    • Fair Isaac (FICO) 4:05pm, $0.73
    • Tetra Tech (TTEK) 4:05pm, $0.40
    • Intersil (ISIL) 4:05pm, $0.05
    • Fusion-io (FIO) 4:05pm, $0.08
    • Ameriprise Financial (AMP) 4:05pm, $1.47
    • Capstead Mortgage (CMO) 4:10pm, $0.33
    • Duke Realty (DRE) 4:11pm, $0.27
    • Fortinet (FTNT) 4:15pm, $0.15
    • Skyworks Solutions (SWKS) 4:30pm, $0.54
    • Concur Technologies (CNQR) 4:30pm, $0.30
    • MKS Instruments (MKSI) 4:30pm, $(0.00)
    • ST Microelectronics (STM IM) 4:34pm, $(0.07)
    • Murphy Oil (MUR) 5pm, $1.36
    • Triumph Group (TGI) 5pm, $1.42
    • EverBank Financial (EVER) 5pm, $0.31
    • Crown Holdings (CCK) 5:02pm, $0.54
    • Atwood Oceanics (ATW) 5:05pm, $0.92
    • Vanguard Health Systems (VHS) 5:05pm, $0.17
    • Regency Centers (REG) 5:15pm, $0.58
    • SL Green Realty (SLG) 6pm, $1.15
    • Kirby (KEX) 6pm, $0.85
    • MPLX (MPLX) NA, $0.22
    • Owens-Illinois (OI) Post-Mkt, $0.37
    • Methanex (MX CN) Post-Mkt, $0.55
    • Kilroy Realty (KRC) Post-Mkt, $0.62


OIL – our model says Brent Oil > $115/barrel is a new problem for Global Consumption, and the market is testing that level today; Consumer Discretionary stocks (XLY) were the only red sector in the US yesterday; our growth expectations start to see headwinds w/ Oil +7.5% higher vs where we started making the #GrowthStabilizing call in Nov-Dec.













ASIA – when it gets almost as good as it can get (in the moment) it looks like Asia did last night: Japan +2.3% to overbought (+28.3% Nikkei since Nov13!), Shanghai Comp +1% (+21.6% since Dec3!), and the KOSPI recovered TREND line support (1959) closing +0.43% at 1964. Headlines getting frothy right on time.








The Hedgeye Macro Team






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IL January approvals are solid albeit a deceleration from December



On January 28, the Illinois Gaming Board (“IGB”) released a list of all licensees, which included 1,143 licensed establishments, implying the approval of 188 incremental establishments, a deceleration from December, but still a solid month.  January compares to 350 grants in December and 105 in November.  To date, there have been no establishment licenses revoked and 35 establishments have been denied licensure. One terminal operator had its license revoked along with 22 terminal operators and 1 manufacturer that have been denied licensure.  Currently, 2,500 establishments are pending approval, a 1% decline from December and a 6% decline from peak in November.  IGB appears to be cutting into the backlog.


Each location is allowed a maximum of 5 machines so the 1,143 approved locations imply a current maximum market size of 5,715.  On October 10th after 3 weeks of testing, the IGB allowed 65 establishments to go live with VLT gaming.  In the September quarter, BYI and WMS recognized several hundred game sales into IL.  In the December quarter, most suppliers will recognize revenues associated with placements in this market.  The only company to report, IGT recognized revenue on 1,100 VLTs sold to IL in the December quarter, 200 of which were shipped in the September quarter.


Our sources tell us that as of December 31st there were 2,855 VLTs installed in IL which is-in line with our running estimate of 3,000 VLTs shipments into IL in 2H2012.  We also stand by our prior estimate of a 10,000 unit market by the end of 2013.  We expect that most of the VLT sales (upwards of 75%) will come with some sort of financing, but most will be accounted for as for-sale machines.


Our understanding is that ASPs should be around $12k range.  The consensus is that VLTs will win about $100 on average per day, with a large range depending on the location.  We believe that distributors receive a 10-15% cut of the purchase price as their commission, with the big suppliers paying on the low end of that range and some of the smaller guys paying at the higher end of that range.  Typically, distributors take the machines on a consignment basis, meaning that suppliers cannot recognize revenues until the machines are placed in the establishments.



Distributor:  3

Manufacturer:  3 (including Speilo and Konami)

Supplier:  5

Technicians:  29

Terminal handlers:  143

Terminal operators:  14

Establishments:  2,500 pending

Wind and Rain

“Wind extinguishes a candle and energizes fire.”

-Nassim Taleb


On my way to Kansas City, Missouri last night I started reading Taleb’s new book, Antifragile. The aforementioned quote is the opening sentence to his prologue. It’s an interesting introduction. He uses a basic contrast of a few elements, and makes up a new word (what he calls the opposite of fragility).


While Taleb doesn’t market himself this way, there is a lot of Chaos Theory at the core of his framework. From an economic policy perspective, he is anti-academic dogma, anti-government, etc. “This is the tragedy of modernity: as with neurotically overprotective parents, those trying to help are often hurting us most.” (pg 5) And I’ll obviously second that.


Having not read it yet, the questions I have with this highly-promoted book are threefold: 1. Is there anything new here that I can apply to my risk management process? 2. Is it a book for market practitioners or an attempt to become academic in its own right? and 3. Will it help me save and make people money? I’ll review it and let you know.


Back to the Global Macro Grind


After seeing both the SP500 and Russell2000 close at fresh YTD highs yesterday (all-time high for the Russell) and then seeing China and Japan close at new highs again overnight, the question is: was being long stocks and out of Gold, Bonds, etc. just dumb luck?


Well, Nassim says, “I’d rather be dumb and antifragile than extremely smart and fragile, any time.” But I don’t think any man, woman, or child aspires to be dumb, do you? Thinking you are smarter than the Mr. Market – well, that’s an entirely different problem.


The most brainless/emotionless risk management exercise I can do to assure myself I am no smarter than anyone else, is shut up and listen to the price/volume/volatility signals in my Global Macro model. Here’s what they are signaling today in the USA:

  1. US Stocks (SP500) immediate-term TRADE overbought in the 1 range
  2. US Equity Volatility (VIX) immediate-term TRADE oversold in the 11.98-12.04 range
  3. US Dollar Index immediate-term TRADE oversold at $79.41
  4. US Treasury Yields (10yr) immediate-term TRADE overbought at 2.04%

These immediate-term signals are A) contextualized by my intermediate-term TREND and long-term TAIL durations and B) augmented by my research team’s fundamental updates (we have a morning meeting every day at 830AM EST).


In Asian Equities, the most important immediate-term TRADE signals this morning are as follows:

  1. CHINA – Shanghai Composite +1% overnight to immediate-term TRADE overbought at 2391
  2. JAPAN – Nikkei225 +2.3% overnight to immediate-term TRADE overbought at 11,124
  3. S.KOREA – KOSPI +0.43% overnight, recaptures TREND support (1959) but remains below 1976 TRADE resistance

In Europe:

  1. EURO – versus the USD, the Euro is immediate-term TRADE overbought at $1.35
  2. GERMANY – the DAX is immediate-term TRADE overbought at 7887
  3. ITALY – the MIB Index (equities) snapped immediate-term TRADE support of 17,714 this morning

All the while, Oil prices are testing an important breakout level of $114.79 (Brent). Wind and fire, meet another element: rain. Oil prices rising from these levels will be a brand new headwind to Global #GrowthStabilizing.


So, there’s a lot going on out there – but there always is.


Markets don’t care about your positions or processes. That’s why they tend to impose the most amount of pain on most of the people, all at the same time. That’s also why studying the Behavioral side of markets is as important as considering their fractal dimensions.


Got pain? Perma stock market bears are going to need a heck of a lot of rain to tone down this bullish bonfire. For 2 months The Pain Trade has been to the upside in stocks (and to the downside in Treasury Bonds).


That’s not new. Waking up to snow this morning in Kansas City is new. So I had to A) adapt or B) freeze when I walked over to Sonic to get breakfast.


Every day we are offered an opportunity to Embrace Uncertainty and risk adjust our decisions accordingly. If we’re scared of Black Swans and/or uncertain about our process’ ability to absorb uncertainty, I guess Taleb would say we aren’t antifragile.


One way to not be emotionally fragile is to keep moving.


Now that this morning’s Consensus Signal of The Day pinned a new high (II’s Bull/Bear Spread moves to +3,200 basis points wide to the Bullish Side – it was only 960bps wide in mid-November), you can sell some stocks at our immediate-term TRADE overbought signals. It may not be Taleb’s answer to the game – but for me, it’s just another solid risk adjusted decision to make.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, USD/YEN, 10yr UST Yield, and the SP500 are now $1, $112.71-114.79, $3.65-3.72, $79.41-79.98, $1.33-1.35, 89.88-91.66, 1.92-2.04%, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Wind and Rain - Chart of the Day


Wind and Rain - Virtual Portfolio

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