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The Four Horsemen

"On the road we're somebody else's guests - and we play in a way that they're not going to forget we visited them."

- Knute Rockne



With Keith and Daryl on the road across the pond I've been tapped to pen this morning's Early Look. In doing so, I'll bring an alternate angle to the morning missive compared to my hockey colleagues since my foundation was forged on the gridiron.


In 1924, the Four Horsemen as they were coined comprised Notre Dame's spirited backfield under legendary football coach Knute Rockne. During their three year run together ('22-'25) they only lost two games. They weren't the biggest, nor the fastest, but together they were dominant.


At Hedgeye, we have our own spirited foursome who delivered on our Best Consumer Ideas call on Monday. With the most recent addition to the team, Rob Campagnino, launching Consumer Staples coverage in December, the records have yet to be written, but that's precisely the spirit of Hedgeye's new Best Ideas product - we'll be keeping score real-time with #timestamps. Later I'll hit on four (IGT, JCP, KMB and BKW) of the nine Best Consumer Ideas presented.


First, let me highlight two new process improvements we introduced to Institutional Hedgeye clients on the call, our Best Ideas Product and new Consumer Coverage initiative that I will be spearheading personally. In brief, the Best Ideas Product will highlight only the Best Ideas from each sector firm-wide (4-8 per year). Clients will be notified of changes and additions to this list through Black Books and research notes.


Our Consumer Coverage offering provides a customized approach to conveying our top calls across all of Consumer, beyond just the Best Ideas. Drawing on my experience covering the Retail sector over the last 4+ years, I am working alongside each of our Four Horsemen infusing original content, analysis and risk management (quant/factor overlay) to select clients. For more information on either of these new offerings, please contact us at


Back to our horsemen. Similarities can be drawn between each consumer sector head and Rockne's horsemen - quarterback (Harry Stuhldreher), fullback (Elmer Layden) and two halfbacks (Jim Crowley and Don Miller) by comparing sector beta (not physiques).


We have Rob Campagnino (Consumer Staples) representing the lowest relative beta - our 'three yards and a cloud of dust' fullback, two halfbacks in Howard Penney (Restaurants) and Brian McGough (Retail), and our high-beta quarterback in Todd Jordan (Gaming, Lodging and Leisure). A sorted bunch indeed, but I look forward to taking the field with these guys. Before we hit on some Ideas, let's cover a little ground on where we stand on the consumer and sectors.


Our view on the consumer here is one of concern of slowing demand from lower-to-middle income earners and underperformance of the companies over-indexed to this demographic. Meanwhile, the latest results out of Hermes and Michael Kors suggest the higher-end consumer remains resilient. Among the factors at play here include payroll tax increases of 2%; at the same time we're seeing a surge in gas prices over the last 3-weeks to historic February highs. The reality is that a pinch on consumer wallets near-term from both ends does not improve sentiment nor spur spending.


Another factor on the horizon to consider is the wealth effect of an improving housing market. As highlighted in our Q1 Macro Themes call, our #HousingsHammer theme suggests that house prices will increase due to lower supply, rising demand and stabilizing mortgage purchase application activity. This is positive indeed, but it will take time to manifest after which point it will take more time for people to actually feel better about their financial position. The timing here will more likely be measured not in months, but years.


As for sectors, regardless of what duration you pull over the last year, the Staples Sector SDPR ETF (XLP) and Consumer Discretionary (XRT) have consistently outpaced the S&P 500. Year-to-date alone the XLP and XRT are up +7.3% and +8.7% respectively versus the S&P's encouraging +6.5% start.


A look at the chart below reflects this recent performance. Interestingly, yet not surprisingly, the move in price has not been supported in kind by a corollary move in upward earnings revisions with investors seeking yield. This is reflected in a valuation premium in likely sectors (Utilities, Health Care and Staples) 1.4x-2x standard deviations above recent history. The next closest sector? You guessed it, Consumer Discretionary clocking in with a 0.8x STD premium.


While these levels suggest peaky valuations, we're not trying to call a top, but simply recognize that it may be prudent to look beyond fundamentals alone when considering long positions at these levels. As a result, our list of longs consists of largely event/catalyst-driven stories. Fortunately, there are plenty of stocks that fit that criteria for those committed to playing Consumer.


Here are four callouts among the nine Best Ideas discussed Monday, which also included CAG, CAKE, and ASCA (long) and PNK and UA (short):


IGT (Long) - After refocusing on game content and digesting several poor acquisitions to establish online gaming, the stock is at an inflection point with a rebound expected in ROIC. Growing replacement demand and new domestic and international markets should drive multi-year bull slot market. In addition, substantial share repurchase activity expected to continue with accelerating FCF. Bearish sentiment and 11x EPS multiple do not reflect the 20%+ earnings growth we expect. One of the better looking long-term longs as its nowhere near 5yr or all time highs = bullish formation with TREND breakout line of 14.26.


JCP (Long) - Near-term sentiment is too bearish at a time when the delta in top-line is likely to get better. We think improving sales trajectory with comps turning positive in 3Q and improving dot.com will drive the stock higher. Liquidity remains a concern, but we don't see it surfacing over the intermediate-term. TREND breakout above $20.41 is when the long works quantitatively, below that is all storytelling.


KMB (Short) - Top-line growth is masking deteriorating earnings quality at peak valuation. EBIT growth is largely derived from unsustainable restructuring savings and a slowing commodity benefit that swings to a headwind in 2013. Notably, the stock closed at $89.90 flirting with quantitative TRADE support at $89.81 - below that is where you press.


BKW (Short) - Never 'fixed' during its stint as a private company, the outlook for the U.S. and Canada (60% of total) is deteriorating. Some North American franchisees are tracking well below expectations. Decelerating comps are likely to compress BKW's industry high multiple. The stock is breaking down through both TRADE (17.45) and TREND (16.78) lines of support - short it here.


With the calls on the board and #timestamped, the Four Horsemen are off and running. For a replay of our Best Consumer Ideas call and slides, contact


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, and the SP500 are now $1, $116.98-118.91, $79.71-80.31, 92.78-94.46, 1.96-2.01%, and 1, respectively.


We are off to a strong start YTD, however, as my Hall of Fame coach Dick Farley liked to remind this Eph, "keep your head on a swivel."


Casey Flavin

Director of Consumer Research and Sales



The Four Horsemen - Chart of the Day


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The Macau Metro Monitor, February 13, 2013




According to the Macau Government Tourist Office, since the Lunar New Year holidays started, on Sunday, the number of total visitor arrivals to Macau has been growing at a double-digit rate.

Yesterday, Macau welcomed close to 167,000 visitors, a significant growth of 28.4% YoY.  Of those, over 114,000 came from the mainland, up by a staggering 35.8%.  From Sunday (February 9) until Tuesday (February 12), Macau had already welcomed almost 478,000 visitors, an increase of 21.8% YoY.


TODAY’S S&P 500 SET-UP – February 13, 2013

As we look at today's setup for the S&P 500, the range is 16 points or 0.62% downside to 1510 and 0.43% upside to 1526.  














  • YIELD CURVE: 1.74 from 1.72
  • VIX  closed at 12.64 1 day percent change of -2.32%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Feb. 8 (prior 3.4%)
  • 8:30am: Import Price Index M/m, Jan., est. 0.8% (prior -0.1%)
  • 8:30am: Advance Retail Sales, Jan., est. 0.1% (prior 0.5%)
  • 10am: Business Inventories, Dec., est. 0.2%  (prior 0.3%)
  • 10:30am: DoE Inventory Reports
  • 11am: Fed’s Bullard speaks in Arkansas on economy
  • 11am: Fed to purchase $1.25b-$1.75b in 2036-2042 sector
  • 1pm: U.S. to sell $24b 10Y notes
  • 5pm: Fed’s Dudley gives welcoming remarks at “Video Festival Finals” in N.Y.


    • Confirmation hearing for Treasury Sec nominee Jacob Lew
    • Sens. Elizabeth Warren, D-Mass.; Sherrod Brown, D-Ohio; Jack Reed, D-R.I., hold news conference on importance of CFPB, urge confirmation of Richard Cordray as director. 2:30pm
    • U.S. Chamber of Commerce hosts transport infrastructure summit
    • Energy Dept., FERC hold meeting on coordination between natural gas, electricity markets. 9am
    • House Financial Svcs Cmte hears from FHA Commissioner Carol Galante on agency’s Nov. report to Congress that revealed FHA may need taxpayer bailout. 10am
    • U.S. Chamber of Commerce holds transportation infrastructure summit with Rep, Bill Shuster, R-Pa., Ingram Barge Co. CEO Craig Philip, Nick Atkins, CEO of American Electric Power, representatives from UPS, IBM, Lowes Hotels, JetBlue, 8:30am
    • Senate Judiciary Cmte hears from Homeland Security Sec. Janet Napolitano on immigration law. 9:30am


  • Obama paints wider role for govt. in middle class revival
    • Says U.S. will begin trade talks with 27 nations of EU
    • Seeks minimum wage boost to bolster economy
    • Proposing oil-funded trust to curb gas prices
  • Apple said to have team of 100 developing wristwatch computer
  • Copper cos. file court challenge to JPMorgan ETF approval
  • G-7 roils currency markets with split on concern over yen
  • CME’s Gill says would consider joining overseas consolidation
  • Legg Mason said to name Joseph Sullivan CEO
  • Moody’s authorizes $1b of stock buybacks after price drop
  • Goldman Sachs CEO Blankfein says he’ll stay for a while
  • Morgan Stanley triples Mexico staff
  • BlackRock picks Morgan Stanley’s Shedlin as CFO
  • Batteries for 787 can’t be shipped on passenger planes: UN
  • Brill Building said to sell Allied Partners for $200m
  • Novartis’s $67k marrow drug fails to win U.K. agency backing
  • Swiss impose capital buffer to calm overheating housing mkt
  • MSCI announces quarterly index changes after mkt close
  • Citigroup’s bank rating upgraded to stable by Moody’s


    • Proto Labs (PRLB) 6am, $0.26
    • Acorda Therapeutics (ACOR) 6am, $0.16
    • Calpine (CPN) 6am, $(0.05)
    • MEMC Electronic Materials (WFR) 6am, $0.02
    • Blackbaud (BLKB) 6:30am, $0.24
    • Calumet Specialty Products Partners LP (CLMT) 6:30am, $0.69
    • WellCare Health Plans (WCG) 6:30am, $1.31
    • Manitoba Telecom Services (MBT CN) 6:30am, C$0.61
    • Thomson Reuters (TRI CN) 7am, $0.55
    • Dean Foods Co (DF) 7am, $0.30
    • Henry Schein (HSIC) 7am, $1.21
    • Deere & Co (DE) 7am, $1.40 - Preview
    • Duke Energy (DUK) 7am, $0.64
    • Lorillard (LO) 7am, $0.76
    • WhiteWave Foods (WWAV) 7:30am, $0.17
    • Hyatt Hotels (H) 7:30am, $0.12
    • Hospira (HSP) 7:30am, $0.54 - Preview
    • Sonoco Products Co (SON) 7:30am, $0.54
    • Atlas Air Worldwide Holdings (AAWW) 7:39am, $1.74
    • Dr Pepper Snapple Group (DPS) 8am, $0.85
    • Mine Safety Appliances Co (MSA) 8:30am, $0.55
    • CAE (CAE CN) 8:30am, $0.16
    • Finning International (FTT CN) 9am, C$0.56
    • Saputo (SAP CN) 11:58am, C$0.66
    • Itron (ITRI) 4pm, $0.64
    • ArthroCare (ARTC) 4pm, $0.37
    • Mondelez International (MDLZ) 4pm, $0.37
    • NVIDIA (NVDA) 4pm, $0.29
    • KapStone Paper and Packaging (KS) 4:01pm, $0.27
    • Morningstar (MORN) 4:01pm, $0.56
    • NetApp (NTAP) 4:01pm, $0.56
    • Equinix (EQIX) 4:01pm, $0.59
    • TripAdvisor (TRIP) 4:02pm, $0.27
    • Portfolio Recovery Associates (PRAA) 4:03pm, $2.00
    • Whole Foods Market (WFM) 4:03pm, $0.77
    • MetLife (MET) 4:03pm, $1.18
    • CenturyLink (CTL) 4:04pm, $0.68
    • Sovran Self Storage (SSS) 4:05pm, $0.82
    • Rovi (ROVI) 4:05pm, $0.44
    • ValueClick (VCLK) 4:05pm, $0.51
    • Cisco Systems (CSCO) 4:05pm, $0.48
    • Applied Materials (AMAT) 4:05pm, $0.03
    • Ingram Micro (IM) 4:05pm, $0.58
    • Weight Watchers International (WTW) 4:05pm, $0.87
    • Zillow (Z) 4:05pm, $0.00
    • Cloud Peak Energy (CLD) 4:10pm, $0.50
    • Corrections ofamerica (CXW) 4:10pm, $0.41
    • j2 Global (JCOM) 4:15pm, $0.61
    • Intrepid Potash (IPI) 4:15pm, $0.25
    • Pioneer Natural Resources Co (PXD) 4:15pm, $0.88
    • Oceaneering International (OII) 4:20pm, $0.72
    • ION Geophysical (IO) 4:30pm, $0.13
    • C&J Energy Services (CJES) 4:30pm, $0.67
    • Charles River Laboratories International (CRL) 4:30pm, $0.60
    • Washington Real Estate Investment Trust (WRE) 4:42pm, $0.46
    • Home Capital Group (HCG CN) 5pm, C$1.68
    • Taubman Centers (TCO) 5pm, $0.97
    • Agnico-Eagle Mines Ltd (AEM CN) 5pm, $0.46
    • Kinross Gold (K CN) 5pm, $0.21
    • TAL International Group (TAL) 5:01pm, $0.95
    • EOG Resources (EOG) 5:01pm, $1.35
    • Sun Life Financial (SLF CN) 5:10pm, C$0.45
    • Calloway REIT (CWTu CN) 5:34pm, C$0.45
    • Euronet Worldwide (EEFT) Post-Mkt, $0.47
    • Avis Budget Group (CAR) Post-Mkt, $(0.07)
    • Boardwalk REIT (BEIu CN) Post-Mkt, C$0.74
    • Liberty Global (LBTYA) Post-Mkt, $(0.07)


GOLD – being long Gold as US employment and housing continue to stabilize (ITB Housing ETF +3.8% yesterday in the US) doesn’t work. Finally getting an immediate-term TRADE oversold signal at $1641/oz, but Gold remains in a Bearish Formation.

  • Corn Slides as Wheat Reaches Seven-Month Low on Rain Speculation
  • Cameco Sees Japan Uranium Recovery After Fukushima: Commodities
  • Platinum’s Premium to Gold Widens to 17-Month High on Zimbabwe
  • Lead Rises a Second Day on Speculation China Will Resume Buying
  • Oil Trades Near One-Week High; IEA Trims Global Demand Forecast
  • Palm Oil Inventories in Malaysia Miss Estimates, Futures Slump
  • Cocoa Seen Gaining in London as Manufacturers May Build Reserves
  • Oil May Head to $100 With Two-Year Support: Technical Analysis
  • Blackstone to OSG Win Record Tanker Rates on Export Ban: Freight
  • Copper Companies File Court Challenge to JPMorgan ETF Approval
  • Record Gulf Coast Exports Fuel Terminal Logjam: Energy Markets
  • Astra Agro Sells 7,000 Tons of Crude Palm Oil in Auction (Table)
  • Preview: Rio Tinto Earnings to Focus on $5b Cost-Savings Plan
  • Palm Oil Drops as Stockpiles in Malaysia Hold Near Record Level








FRANCE – broke our TRADE line 3 weeks ago and continues to flash another negative divergence versus squeeze tapes (Greece and Spain) this morn; if you are hunting for shorts, hunt in France – the economic data sucks relative to USA/Germany.





KOSPI – re-captures our intermediate-term TREND line of 1961 (post the NKorea headline noise); so that fixes 1 major equity market risk (for now); Bovespa and Sensex continue to signal bearish however.








The Hedgeye Macro Team





Wind and Rain

This note was originally published at 8am on January 30, 2013 for Hedgeye subscribers.

“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 1510-1513 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 $1649-1676, $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 1492-1513, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Wind and Rain - Chart of the Day


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