TODAY’S S&P 500 SET-UP – February 4, 2013

As we look at today's setup for the S&P 500, the range is 19 points or 1.00% downside to 1498 and 0.25% upside to 1517.   














  • YIELD CURVE: 1.77 from 1.75
  • VIX  closed at 12.9 1 day percent change of -9.66%
  • 10YR – with employment #GrowthStabilizing, Treasuries waking up to another 4bps higher in the 10yr Yield to 2.05% this morn as fund flows continue to dominate just about any bear case for stocks that I can find (best start for US Equity flows since 96’). US Stocks up for 5 weeks in a row; no intermediate-term resistance for the 10yr to 2.41%.

MACRO DATA POINTS (Bloomberg Estimates):

  • 9:45am: ISM New York, Jan. (prior 54.3)
  • 10am: Factory Orders, Dec., est. 2.2% (prior 0.0%)
  • 11am: Fed to purchase $2.75b-$3.5b debt in 2020-2022 sector
  • 11:30am: U.S. Treasury to sell $32b in 3M bills, $28b in 6M bills
  • U.S. Rates Weekly Agenda


    • President Barack Obama speaks on gun control in Minn.
    • Obama said yday that U.S. needs rev. w/spending cuts
    • Treasury issues quarterly borrowing estimates
    • Release date for Pentagon’s fiscal 2014 budget; delay expected after fiscal cliff disruptions


  • China services industries expand at fastest pace since Aug.
  • PBOC’s Zhou to step down in March, official newspaper reports
  • Cowen plans to buy Dahlman Rose amid stock-trading slowdown
  • Blackrock sued by pension funds over securities lending fees
  • ntergy says service to Superdome was operating properly
  • Baltimore beat San Francisco 34-31 in Super Bowl
  • Pegasus hires Starwood Capital Hotel chief to run luxury brand
  • Permira, KKR said to work with JPMorgan on ProSiebenSat.1 exit
  • Blackstone fund buys majority stake in seaplane companies
  • Aspen Pharmacare in talks to buy Merck & Co.’s Netherlands unit
  • Zombie love tale “Warm Bodies” No. 1 film with $20m
  • S. Korea boosts diplomacy against possible N. nuclear test
  • U.S. Weekly Agendas: Finance, Industrials, Energy, Health, Consumer, Tech, Media/Ent, Real Estate, Transports
  • New feature: North American M&A Agenda
  • Canada Weekly Agendas: Energy, Mining
  • China Export Rebound, IPad, U.S. Trade: Week Ahead Feb. 4-9


    • Humana (HUM) 6am, $1.07 - Preview
    • TransDigm Group (TDG) 7am, $1.48
    • Simon Property (SPG) 7am, $2.17
    • MWI Veterinary (MWIV) 7am, $1.19
    • Sysco (SYY) 8am, $0.41
    • Clorox (CLX) 8:30am, $0.81 - Preview
    • Gannett (GCI) 8:30am, $0.88
    • Royal Caribbean (RCL) 8:30am, $0.06
    • Mercury General (MCY) 8:30am, $0.23
    • Acme Packet (APKT) 4pm, $0.08
    • Torchmark (TMK) 4pm, $1.31
    • Edwards Lifesciences (EW) 4pm, $0.77
    • Baidu (BIDU) 4pm, $1.30
    • Bottomline Technologies (EPAY) 4pm, $0.23
    • Gilead Sciences (GILD) 4:01pm, $0.48
    • General Growth Properties (GGP) 4:01pm, $0.29
    • Hologic (HOLX) 4:01pm, $0.37
    • Life Technologies (LIFE) 4:01pm, $1.11
    • Power Integrations (POWI) 4:03pm, $0.42
    • Axis Capital Holdings (AXS) 4:04pm, $(1.19)
    • SolarWinds (SWI) 4:05pm, $0.33
    • Anadarko Petroleum (APC) 4:05pm, $0.71
    • Leggett & Platt (LEG) 4:05pm, $0.32
    • Yum! Brands (YUM) 4:09pm, $0.82
    • Symetra Financial (SYA) 4:10pm, $0.34
    • Advent Software (ADVS) 4:14pm, $0.28
    • Hartford Financial (HIG) 4:15pm, $0.28
    • Healthcare Services (HCSG) 4:15pm, $0.18
    • Hillenbrand (HI) 4:23pm, $0.37
    • BRE Properties (BRE) 4:45pm, $0.60
    • Post Properties (PPS) 5pm, $0.65
    • Bristow Group (BRS) 5:05pm, $0.89
    • Idex (IEX) 5:22pm, $0.68
    • Markel (MKL) Post-Mkt, $(2.81)
    • Regal-Beloit (RBC) Post-Mkt, $0.74


  • Platinum Gains to Four-Month High on South Africa Output Concern
  • Mongolia Should Get More Control of Rio Mine, President Says
  • Bulls Rewarded With Best January Rally Since 2006: Commodities
  • Brent Crude Slips From Four-Month High Amid Iran Discussions
  • Soybeans Reach Six-Week High on Threats to South American Crops
  • Zinc Declines From One-Year High as European Equities Retreat
  • Sugar Advances in New York as Speculators Curb Bearish Wagers
  • Iron-Ore Swaps Rally to 15-Month High as China Seen Accelerating
  • Rubber Rallies to 10-Month High on U.S. Car Sales, Weakening Yen
  • Corn Imports by South Korea Seen Climbing on Higher Wheat Costs
  • Land Battles Rise as U.S. Eyes 450,000 Miles of New Pipe: Energy
  • Hedge Funds Racing Oil Refiners to $100 a Barrel: Energy Markets
  • Freezing California Lettuce Boosts Salad Costs: Chart of the Day
  • Shanghai Rebar Rises to Nine-Month High on Service Industry Data








SPAIN – what is the #PoliticalClass getting greased w/ bailout funds on the side, amongst friends? Most Read headline on Bloomberg this morn is about Spanish (Rajoy) and Italian corruption; it’s like watching Lincoln. All the while both the IBEX and MIB indexes has abruptly snapped my TRADE lines of support, looking nothing like Germany.





JAPAN – old Taro Aso was at it again overnight, jawboning the Yen to new lows, breaking the 93 level (en route to 100, then 120) as the Nikkei’s crash (to the upside) moves to +30% since November 13th – seems normal. I couldn’t make this up if I tried but last night Aso said “we can only learn from history”.








The Hedgeye Macro Team





Flows Follow

“You have to be the first one in line. That’s how leaders are born.”

-Ray Lewis


Did global growth stop slowing in mid-to-late November? Is #GrowthStabilizing bad for Gold and Bonds? These questions are now rhetorical ones.


When you want to win a game, you have to teach. When you lose a game, you have to learn.” -Tom Landry


Our congratulations to Ray Lewis and the Baltimore Ravens. #winning


Back to the Global Macro Grind


US Equities were up for the 5th consecutive week and long-term US Treasury Yields continued to breakout to the upside last week (10yr Yield up another +6bps to 2.01%) as fund flows into US Equities continue to surprise on the upside.


How did this all happen so fast?

  1. Sentiment was bombed out in mid-November and short interest was high
  2. Fundamental global economic growth data steadily improved for 2 consecutive months
  3. Equity Fund Flows Followed

The 1st two points of the process were trivial. We wrote about them every day. The last point about flows was the hardest to nail down. While we usually get the memo on flows after the fact, we do know what leads them.


Q: What leads people out of Gold/Bonds and into Equities? A: Growth Expectations.


Example (Gold):

  1. Gold made a long-term lower-high in mid November at $1755/oz (versus the all-time high in 2011)
  2. Gold snapped our intermediate-term TREND line of $1698 in early December
  3. Gold net long positions (futures and options contracts) crashed to 82,081 last week

Crashed? Yes. Last week the bulls (who had been buying Gold contracts the whole way down from October to January) capitulated, selling the net long position in Gold contracts down -24% wk-over-wk.


Despite Gold and Silver being down another -0.2% and -1.1%, respectively, this morning, from an immediate-term TRADE duration perspective this is obviously an interesting contrarian indicator. But what does it tell you about longer-term growth expectations?


What has the Treasury Bond market been telling you?

  1. 10yr US Treasury Yields made higher-long-term lows in November-December in the 1.57-1.61% range
  2. 10yr US Treasury Yield broke out above our intermediate-term TREND line of 1.73% in mid-December 2012
  3. 10yr US Treasury Yields are up another 5 basis points this morning (that’s a lot in a day) to 2.05%

At the same time, the HYG (High Yield) and Junk (JNK) Bond ETFs finally broke my immediate-term TRADE lines of support last week. With Investment Grade and Junk Bond yields up another +1.9% and +3.3% last week, that was new for this cycle (not new at turns in other major cycles).


The concept of buying “High Yield” debt (that has record low yields) is far from simple; especially if people start to bake in that Ben Bernanke’s money printing days are over. This is why we are so focused on the slope of growth expectations for:

  1. Global GDP Growth
  2. US Employment Growth
  3. US House Price Inflation Growth

All 3 of these factors can drive Gold/Bond prices down until people actually start to believe we could re-flate the Commodity Inflation Bubble (which peaked alongside Gold in 2011). Which, in turn, could slow growth (again). That’s why:

  1. CRB Commodities Index closing 1 point inside of our long-term TAIL line of 306 last week is a NEW concern
  2. Oil Prices up another +1.8% and +2.9% on WTIC and Brent last week are a mounting concern
  3. 5-year Breakevens up +6.5% last week in the US (Bernanke’s former inflation expectations bogey) matter too

Whether you were bullish or bearish throughout this 2-month move doesn’t matter anymore. Today is a new day. You are either first on the line to register what is changing on the margin in macro, or you are not. We’ll do our best to stand alongside you.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, 10yr UST Yield, and the SP500 are now $1, $114.19-116.87, $79.01-79.71, $1.34-1.36, 90.67-93.12, 1.96-2.11%, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Flows Follow - Chart of the Day


Flows Follow - Virtual Portfolio

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FTC Taking a Look at Herbalife?

This morning, the NY Post reported that Herbalife (HLF) was the target of a federal law enforcement investigation.

It appears that Pershing Square’s commentary was not the catalyst for this investigation, but rather a series of complaints that had been levied against the company over the course of a number of years.

We saw some sort of investigation as a virtual certainty given the high profile nature of the debate over HLF’s business model.  We also suggested that the stock gets much more interesting on the weakness associated that headline, but not immediately.  Bottoming is a process, and so are federal investigations.


Further, Pershing Square’s founder is scheduled to present at the Harbor Investment Conference on February 13th – it appears probable that his short position in HLF will be a (the?) topic of discussion.

Perversely, a lower stock price will ultimately work to the company’s benefit if it moves to buy back stock in aggressive fashion, as the company will be able to deploy it’s finite resources to repurchase a larger number of shares, which is what matters to the extent future news flow can be a catalyst for a short squeeze.  We actually think it makes sense for the company to play possum here, and allow its stock to drift lower in the coming weeks.

For investors, we continue to think the best course of action right now is to do nothing.  We have seen this play before when we covered the tobacco sector, and the day to buy the stocks is not the day the trial starts.  Investors should recognize that this data point does get one substantial piece of negative news flow that we were anticipating out of the way, and therefore takes us one step closer to the day the stock becomes investable.

Finally, in order to offer some balance to our prior expert call on the subject of multi-level marketing, we are hosting Anne Coughlan – she is a professor at the Kellogg School of Management specializing in distribution channels.  The call is tentatively scheduled for the 14th.  Investors may recognize the name from the HLF investor day, held earlier in the year.

Bottom line, we view today’s news as wholly consistent with the way we see the saga playing out – we caution investors to remain engaged in the news flow, but on the sidelines for the time being.


Call with questions.




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst


Yum! Brands remains one of our favorite names for 2013, despite the China controversy in January which, given the nature of the event, took many people by surprise.  For people looking for a longer-term idea in consumer, we think they would be hard pressed to find a more attractive opportunity than YUM at these levels.  YUM reports 4Q12 EPS on 2/4.  

It’s only February 1st and, already, so much has happened in such a short period of time.  Since YUM hosted its analyst meeting on December 6th, the following sequence of events has transpired (annotated in chart below):


1. 12/18-12/20: A story emerges that a Chinese chicken supplier had “used excessive additives in chicken feed”.  We believe the stock has been punished three additional times for the same story being rehashed in the media news cycle since first emerging

2. 1/07: YUM guides down FY12 EPS and warns that, as a result of negative media exposure, KFC China significantly impact during last two weeks of the year

3. 1/10: YUM CEO issues online apology

4. 1/17: Argus downgrades to Hold.  Xinhua publishes article stating that KFC supplier didn’t process sick chickens

5. 1/18: Shanghai vows “severe” punishment on KFC “violation”, according to the China Daily

6. 1/25: Bronstein, Gewirtz, & Grossman LLP announces a class action lawsuit against Yum! Brand.  Xinhua says, “Shanghai finds excessive animal drugs in Yum Chicken”.

7. 1/30: Yum! Brands shares cut to market perform versus outperform at Bernstein


YUM: TOO BEARISH OR TOO BULLISH? - yum media cycle



It is worth noting that, between the Analyst Meeting on December 6th and today, there has been a significant swing in consensus expectations for 4Q12, 1Q13, and FY13 EPS:

  • 4Q consensus EPS on 12/6 was looking for $0.84 or 12% y/y growth.  Now expectations are for $0.82 (9% growth)
  • 1Q13 consensus EPS on 12/6 was looking for $0.84 or 6% y/y growth.  Now expectations are for $0.80 (1% growth)
  • FY13 consensus EPS on 12/6 was looking for $3.67 or 13% y/y growth.  Now expectations are for $3.57 (10% growth)


Sentiment Swing


Sell-side sentiment on YUM has changed drastically in the last six months.  The percentage of buy ratings among sell-side analysts covering the stock peaked at just over 70% in May (29% hold, 0% sell).  The latest reading is 55% buy, 41% hold and 3.5% sell. 



It’s Not All China


News flow on YUM is focused almost exclusively on China and none of it is positive.  The company needs to do its part to counteract the negative stories (often repetitive rehashes) to highlight the positive things that are happening within the company.  As we highlighted in December, Yum! Brands is a resilient company because of its diversification.  It is perceived to be a “China-stock”, and China is an important component of its future, but 42% of the company’s operating profits are derived from markets outside of China. Over time, this and other attributes have led to steady gains in its share price and consistent EPS growth while competitors such as SBUX have seen more volatility over the years. 


YUM: TOO BEARISH OR TOO BULLISH? - yum mcd sbux opinc



Reaction to Chinese News May Be Overdone


The company has resolved its issues with the Chinese government and, as concern over the food scandal gradually dissipates, the company should be able to spend a greater portion of its time focusing on continuing to grow the business.   We expect the management team to articulate a clear plan of action to reach out to the Chinese consumer, including the acceleration of new food introduction schedules in the market.  It would also not be surprising to hear of an increase in the China division’s advertising budget with a view to reassuring the Chinese consumer that KFC is a trustworthy brand.



US Business Transformation From Class Clown to Teacher’s Pet


The US business is now a bright spot in the company’s press release, after years of disappointment.  We expect Taco Bell, in particular, to be a positive with same-restaurant sales at roughly 6% versus consensus of 5.5%.  On a consolidated basis, operating margins are expected to improve by 87 bps to 13.8%, driven by the US and YRI, offset by China.  Seasonally, YUM’s business tends to produce its thinnest margins in the fourth quarter. 



Howard Penney

Managing Director


Rory Green

Senior Analyst





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