TODAY’S S&P 500 SET-UP – February 28, 2013

As we look at today's setup for the S&P 500, the range is 87 points or 4.42% downside to 1449 and 1.32% upside to 1536.     














  • YIELD CURVE: 1.64 from 1.66
  • VIX  closed at 14.73 1 day percent change of -12.69%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:15am: Fed’s Lockhart to speak on banking in Atlanta
  • 8:30am: GDP Q/q, 4Q revision, est. 0.5% (prior -0.1%)
  • 8:30am: Personal Consumption, 4Q revision, est. 2.3%
  • 8:30am: Core PCE Q/q, 4Q revision est. 0.9% (prior 0.9%)
  • 8:30am: Init. Jobless Claims, Feb. 24 est. 360k (prior 362k)
  • 9am: NAPM-Milwaukee, Feb., est. 52.0 (prior 51.3)
  • 9:45am: Chicago Purchasing Mgr, Feb., est. 54.0 (prior 55.6)
  • 9:45am: Bloomberg Consumer Comfort, Feb. 24 (prior -33.4)
  • 10am: Freddie Mac weekly mortgage-rate survey
  • 10:30: EIA natural-gas storage change
  • 11am: Kansas City Fed Manf. Activ., Feb., est. -1 (prior -2)
  • 11am: New York Fed Executive VP McAndrews holds press briefing on household debt in New York
  • 12:30pm: Fed’s Raskin speaks on banking in Atlanta
  • 8:00pm: Fed’s Evans speaks in Des Moines, Iowa


    • 9am: House Armed Services subcmte hearing on impact of budget cuts on acquisition, programming
    • 10am: Joint Economic Cmte of Congress hearing on state of U.S. economy
    • House Judiciary Cmte panel meets on impact of Obama admin regulations on jobs, economy, global competitiveness


  • Senate plans symbolic votes as $85b budget fight to begin
  • Boeing 3-Part fix won’t end 787 grounding quickly, FAA says
  • RBS said will sell a stake in Citizens unit in U.S. in ~2 yrs
  • Regency to buy Southern Union for $1.5b in shale move
  • Wal-Mart U.S. chief administrative officer Tom Mars to leave
  • Wal-Mart struggles to restock store shelves as U.S. sales slump
  • AOL COO Arthur Minson is said to weigh resignation
  • Sierra Nevada, Embraer win U.S. contract with $950m value
  • GM said to be targeting up to 20% growth for Volt cars this yr
  • Groupon forecast misses ests., raising pressure on CEO Mason
  • Ahold to buy back shrs as 4Q profit miss ests.
  • Lew confirmed as U.S. Treasury chief plunges into deficit fight
  • Tudor said to plan 1st equity funds since Pallotta left in ’09
  • J.C. Penney’s lowest sales in decades Show Johnson stumbling
  • Abe nominates Haruhiko Kuroda as next Bank of Japan governor
  • Draghi says ECB in no rush to tighten policy as inflation slows
  • U.S. foreclosure deals drop as lenders approve more short sales
  • MGA seeks to revive trade-secret lawsuit claims against Mattel
  • MBIA swaps rise as cites “substantial doubt” over unit


    • Canadian Imperial Bank of Commerce (CM CN) 5:35am, C$2.09
    • Catamaran (CCT CN) 6am, $0.35
    • Iron Mountain (IRM) 6am, $0.25
    • Newcastle Investment (NCT) 6am, $0.27
    • Sears Holdings (SHLD) 6am, $0.98
    • Valeant Pharmaceuticals (VRX CN) 6am, $1.21
    • Visteon (VC) 6am, $0.82
    • Royal Bank of Canada (RY CN) 6am, C$1.32
    • Toronto-Dominion Bank (TD CN) 6:30am, C$1.93
    • Ocwen Financial (OCN) 6:34am, $0.50
    • Kohl’s (KSS) 7am, $1.63
    • LKQ (LKQ) 7am, $0.23
    • WPX Energy (WPX) 7am, $(0.08)
    • MGIC Investment (MGIC) 7am, $(1.67)
    • ANSYS (ANSS) 7:09am, $0.74
    • Chico’s FAS (CHS) 7:15am, $0.20
    • AltaGas Ltd (ALA CN) 7:30am, C$0.47
    • Domino’s Pizza (DPZ) 7:30am, $0.60
    • Halcon Resources (HK) 7:30am, $0.03
    • George Weston (WN CN) 8am, C$1.09
    • Cablevision Systems (CVC) 8:30am, $0.09
    • Rowan (RDC) 8:45am, $0.48
    • Deckers Outdoor (DECK) 4pm, $2.58
    • Esterline Technologies (ESL) 4pm, $0.61
    • Gap (GPS) 4pm, $0.71
    • Sotheby’s (BID) 4pm, $1.10
    • Kodiak Oil & Gas (KOG) 4:01pm, $0.13
    • Molycorp (MCP) 4:01pm, $(0.30)
    • New Gold (NGD CN) 4:01pm, $0.13
    • Universal Health Services (UHS) 4:01pm, $0.93
    • (CRM) 4:05pm, $0.40
    • SandRidge Energy (SD) 4:05pm, $0.00
    • Splunk (SPLK) 4:05pm, $0.02
    • Medivation (MDVN) 4:09pm, $(0.46)
    • McDermott International (MDR) 4:10pm, $0.23
    • Mentor Graphics (MENT) 4:10pm, $0.55
    • Omnivision (OVTI) 4:18pm, $0.41
    • Integrys Energy Group (TEG) 5:07pm, $0.95
    • National Bank of Canada (NA CN) 6pm, C$2.02
    • Endo Health Solutions (ENDP) Post-Mkt, $1.55
    • Great Plains Energy (GXP) Post-Mkt, $0.02


  • Gold Heads for Biggest Monthly Drop Since May as ETPs Slide
  • Rhodium Beating Platinum to Palladium on Car Sales: Commodities
  • Wheat Rises as U.S. Export Demand May Increase After Price Drop
  • WTI Oil Set for First Monthly Drop Since October as Supply Rises
  • Copper Swings Between Gains and Declines Amid Lack of Demand
  • Coffee Extends Gains in London on Reduced Sales; Sugar Advances
  • Palm Seen Dropping to Four-Year Low on MACD: Technical Analysis
  • Gold Demand in India Seen Rebounding After Import Tax Maintained
  • Coffee Exports From Indonesia Dropping Even With Record Crop
  • Mongolia Plans to Charge Rio’s Oyu Tolgoi Interest on Tax
  • Shell Sees Solar as Biggest Energy Source After Exiting Industry
  • India Left Gold Taxes Unchanged as Imports Continue, Group Says
  • Investors Dumping Gold Means Slump to $1,400: Chart of the Day
  • Palm Drops to Six-Week Low as Malaysian Inventories to Stay High


















The Hedgeye Macro Team







The Macau Metro Monitor, February 28, 2013




Neptune’s name has surfaced in connection with Bo Xilai.  Bo, who remains in custody awaiting his own trial, has been identified as having financial links to Lian Zhuozhao aka Lin Cheuk Chiu, the brother of Neptune chairman Lin Cheuk Fung.  Chinese magazine Caijing claimed Lian was the real power behind Neptune and that Lian had helped numerous high-profile individuals launder money through underground banks.


Caijing claimed that Lian – dubbed “the king of gambling on the high seas” for his former role in running Neptune's casino-cruise line operations – had alleged ties to a number of prominent figures currently residing in Chinese jails.  Caijing now reports that Bo Xilai, his wife Gu Kailai and assorted family members are being investigated over alleged ties to VIP gaming rooms linked with Lian.


Given that the Caijing story has been widely republished amid a variety of Chinese media, including acknowledged pro-Beijing newspapers, it seems Beijing is indeed trying to send a message ahead of incoming Party boss Xi Jinping’s official first day in office next month, but that message may be directed at corrupt officials more than junket operators.



It will include 1,600 hotel rooms, as many as 500 gaming tables and 2,500 slot machines.  It is scheduled to open in mid-2016.



MGM China's Pansy Ho said she believe the adjustment of VIP/mass ratio is a positive sign: “The gaming industry is expecting an adjustment in the ratio due to more facilities offered by casino-resorts. VIP has been growing much faster than the mass section but we can see a tendency that the discrepancy is narrowing and this is a positive development.... It doesn’t mean the VIP market will experience sudden changes (drops), but it’s not expected to maintain double-digit expansion.”  She expects a faster growing pace by the mass market as casino-resorts continue to add more non-gaming elements into their business portfolio.


She believed the new project would not have serious problems finding croupiers to operate despite the fact that several major projects are starting up in the Cotai area in coming years.  She expected the industry to coordinate in securing human resources. For the project as a whole, she estimated that 5,000 – 6,000 workers will be needed after its completion in 2016. 


Pansy Ho did not comment on Beijing’s new leadership, reportedly taking tougher actions against Macau junket operators in order to prevent mainland officials or criminals from coming to the city and using the casinos for money-laundering purposes. She stressed that these are mere news reports so far and that there’s been no clear indication or assertion by the (central) government on possible controls. 

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Bull/Bear Narratives

“Evolution does not rely on narratives, humans do.”

-Nassim Taleb


That’s just a money quote from Taleb on page 207 of Antifragile. Apparently Jaime Dimon liked the book so much, he called his bank antifragile. I assume he wasn’t talking about the Bear Stearns part. If you’d like my review of the book, please send me a note.


Reviewing the Bullish Narrative for US and Asian stocks requires one to evaluate the bearish one. The big one our institutional clients debate with me comes from a player I respect, Francois Trahan. His Bearish Narrative is grounded in inflation concerns.


His call is a lot like mine was at the end of 2010. I get that inflation expectations rising would be bad. But our call is Strong Dollar will drive the opposite – Commodity Deflation. That’s not just a narrative; that’s precisely what we have been seeing for all of February.


Back to the Global Macro Grind


Strong Dollar = Commodity Deflation? That’s also what we have been seeing for 2013 YTD:

  1. US Dollar Index +2.3%
  2. CRB Commodities Index -1.0%
  3. SP500 +6.3%

Within the SP500’s +6.3% YTD return, the worst performing Sector ETF is Basic Materials (XLB) which is down -1.54% for February and underperforming badly at +2.34% YTD. If you want to be bearish on something, be bearish on Commodities and related stocks.


There’s also a Nouveaux Bear camp that thinks Commodities falling is the leading indicator that A) Global Economic Growth is going to slow and B) the US stock market is going down in flames. I have debated Dennis Gartman on this 2x on live TV in the last week.


Finally, there’s the central planning camp (led by Ben Bernanke) that is still bullish on the stock market’s “valuation”, and never thought we had the inflation we are deflating to begin with (Bernanke said in his testimony “I have the best track record on inflation since WWII”).


So, what is the Bearish Narrative?


A)     Trahan: Debauched Dollar will drive us back to the bubble highs in Oil (2008), Gold (2011), and Food Prices (2012)

B)      Gartman: Strong Dollar will drive Commodity Prices down, if Oil, Gold, Corn, etc go down, stocks are going down

C)      KM: I’m actually just bearish on The Taro Aso and The Bernank lying to uninformed people


I usually have a decent Bearish Narrative on something (like the Yen here), but the bear case for Asian and US stocks is all over the place right now. Maybe that’s why the only down day for stocks in the last 4 came on a catalyst that none of these bears had to begin with (Italian Election). That’s not a research call, that’s being right for the wrong reasons (otherwise known as luck).


Another Q: KM, what about The Correlation Risk (inverse correlation vs USD) call that you used to trade Macro on during 2010-2012? First, Correlation Risks are not perpetual. And, second, our intermediate-term TREND correlation model is changing, big time, right now:

  1. Intermediate-term TREND correlation between US Dollar and CRB Index = -0.96 (short Commodities!)
  2. Intermediate-term TREND correlation between US Dollar and SP500 = +0.33
  3. Intermediate-term TREND correlation between US Dollar and MSCI Asia (Equities) = +0.52

In other words, both the Americans and the Chinese are loving Strong Dollar in more ways than one. It’s taking down Energy and Food Inflation. And it’s a tax cut that our central planning overlords are unable to provide.


That’s great for the one thing we haven’t had, sustainably, under either the Keynesian Bush or Obama regimes – real (inflation adjusted) economic growth. Of course, the government is always my Bearish Narrative, but I think my bullish one for stocks is still intact.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, and the SP500 are now $1, $110.67-112.68 (Oil is bearish TRADE and TREND now; a very bullish catalyst for the economy), $81.28-82.13, 91.71-94.67, 1.85-1.96%, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bull/Bear Narratives - Chart of the Day


Bull/Bear Narratives - Virtual Portfolio

Game Plans and Chocolate Choices

This note was originally published at 8am on February 14, 2013 for Hedgeye subscribers.

“All I really need is love, but a little chocolate now and then doesn't hurt!” 

-Charles M. Schulz, Peanuts.


As I set about to find an appropriate theme for the Early Look this morning, I was reminded that it is Valentine’s Day.  Now just how I was reminded of Valentine’s Day is interesting in and of itself; watching the news get interrupted by yet another commercial for Kay Jewelers pitching their seemingly endless collection of heart-shaped charms and sparkling pendants.  Of course TV isn’t the only place I have been inundated with a Valentine’s Day message to exercise consumerism.  All I had to do was to walk into my local pharmacy or discount store where I had to snake my way around displays of candy boxes in every shape, size, and assortment.  Honestly, without these less-than-subtle reminders, Valentine’s Day might sneak up on me unnoticed and Hallmark might miss the sale of one additional card.


A lot of chocolates and gifts are bought for Valentine’s Day.  According to the National Retail Federation, the average male will spend $175.61 this Valentine’s Day on gifts, jewelry, roses, chocolates, dates and more.  Women will spend just less than $89.  It is estimated that more than 58 million pounds of chocolate will be sold in the days leading up to Valentine’s Day. All totaled, it is estimated that $13.19 Billion will be spent. 


Those same commercials that last night reminded me of Valentine’s Day were also omnipresent both before and after Tuesday evening’s State of the Union message.  Thinking about the marketing effectiveness surrounding Valentine’s Day, I wonder if a similarly unavoidable marketing reminder of the rising United States debt, the current Federal deficit, and pending sequestration cuts would drive more timely decision making by the male and female constituents of congress.  I bet they made their respective Valentine’s decisions before today!


From candy and gifts to the State of the Union.

Tuesday evening’s address seemed to me a rambling list of the wonderful things this administration is hoping to set in place during the balance of Obama’s term in office.  And whenever I hear “hope”, I am now conditioned to question the means behind the anticipated “hoped-for” event.  The President spoke of expansive government involvement ranging from building roads and bridges to pre-kindergarten education for four year olds, and from Social Security and Medicare to energy independence.  Very little discourse was aimed at the funding of these proposals.  Like walking into displays of chocolates around Valentine’s Day, does it not make sense to discover which ones are favored by your sweetheart first?  Certainly, buying every option in the store so as not to neglect that one special favorite is less than efficient, if not financially impossible. 


Not knowing what chocolates are favored, would you elect to push off Valentine’s Day a couple months if you could?  Would you kick the can down the road and address the decision later?  What if Valentine’s Day could not be delayed or postponed?  What then of your chocolate choices?


At Hedgeye, we tend to simplify our thinking wherever possible and bring complicated matters down to sporting metaphors where appropriate.  In this case, I think of the Federal budget as the foundation of any game plan for our government.  Pending decisions for our congressional leaders seem too easily kicked down the road.  Congress has failed to pass a Federal budget since 2009!  How should we expect our leaders to make decisions that potentially influence our enemies and allies alike, positively and negatively, without a game plan?  I played for some Hall of Fame coaches in Herb Brooks and Bob Johnson.  Like Keith and Daryl, I also played for the legendary Tim Taylor at Yale.  Whether it was hockey, football, volleyball, softball, tennis, golf, or any other sport, there was always a game plan!


The Federal Debt level is fast approaching $16.5 Trillion.  It is estimated that 2013 will add another $900 Billion-$1 Trillion.  Rienhart and Rogoff will argue that “Countries with debt to GDP ratios above a certain level (90%) tend to experience slower economic growth.”  It certainly appears that the U.S. has reached the point where our debt levels significantly dampen growth.


Of particular interest to me during the State of the Union speech were the President’s plans projecting out a decade and longer.   At Hedgeye we talk about duration and believe projections longer than three years out are highly subject to forecasting error.  Already the US economy is showing anemic growth.  The most recent figures showed a decline of -0.1% in US GDP during the fourth quarter.  The CBO office is projecting 1.4% growth for fiscal 2013.  And projecting 2.6%, 4.1%, and 4.4% in ’14, ’15, and ’16 respectively.  Unfortunately, much of the US expenditure projections are not as flexible or easily manipulated as the revenue and economic growth assumptions.


Just for reference, the average US GDP growth rate over the past ten years was 1.7%.  What is the real plan and how does Congress make it flexible enough to adjust for the game changing and to embrace the unknowns?


And what about the sequester and Congress?  Referring to Congress after the State of the Union speech by President Obama, House Speaker John Boehner stated,  “None of them have ever lived under a sequester.  For that matter, neither have I…This is going to be a little bleak around here when this actually happens and people actually have to make decisions.”    A sobering thought during times when decisions have to be made that will affect the lives and finances of so many.


My Valentine’s wish is for Congress to develop a game plan; one with real metrics, transparent to voters, and offering accountability.


As for chocolate choices, I know yours will be easier than the decisions that face our Congressional leaders.  My Valentine’s Day game plan is simple.  My wife will wake to a card on the counter under a package of Reese’s Cups.  And I am likely to read my card from her as I down a handful of plain M&M’s with my morning coffee.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, and the SP500 are now $1641-1667, $116.98-118.91, $79.71-80.31, 92.78-94.46, 1.96-2.01%, and 1510-1526, respectively.


Happy Valentine’s Day!


Bob Brooke

Managing Director


Game Plans and Chocolate Choices  - Chart of the Day


Game Plans and Chocolate Choices  - Virtual Portfolio

JCP: Sweet Emotion

Takeaway: We think JCP has big support at its pre-market range of $18-$19. It’s not for the faint of heart, but we think it’s in the high $20s in a yr

Conclusion: There's a tremendous amount of emotion in this one (almost all negative), and we think that JCP has tremendous support at its pre-market range of $18-$19.  As surprised as we might be to the market’s reaction, we’re not going to argue with it – the same way we didn’t argue with the 24% peak-to-trough squeeze over the past 4-weeks. What we will do is prepare for an opportunity to get heavier in an name where our conviction is growing. Regardless of what the consensus thinks, the metrics that matter (cash, internet, eps) came in at or better than our model, and we remain confident in the cadence of shop rollouts needed to make this model work. This is definitely a ‘hold your breath’ name over the near-term. But we think it is in the high $20s in 12 months.


We’ve gotta say up front that we’re surprised to see the stock trading at the same level after hours that it was when we were seeing liquidity-fueled downgrades, $12-15 price targets on supposed equity offerings, and story-telling about Icahn buying JCP bonds as a backdoor way to push Ackman’s second-largest holding into bankruptcy.



Yes, the results were bad. But the comp was right in line with the -30%+ speculation that was widespread before the quarter. The only thing that was unexpected was the atrocious -640+bp decline in gross margins during the quarter. But let’s actually give RJ some credit (we have not given him any yet). He did what he had to in order to clean inventories to be ready for what will be a very big year for the company. Being heavy on legacy product while shops are being converted would be the end for him.


Also, as an aside, we liked the element of humility that Johnson brought to the equation (“last year’s pricing mistakes were all my fault”), which is a stark contrast to the hubris we painstakingly observed last year.   


As it relates to shop rollout plans, he reiterated plans for 20 Home shops in over 500 (of the 700 being converted) stores by May. He highlighted what we already knew…that Home-related dollars in JCP stores are 25% of where they used to be (10% of square footage down from 20%, and productivity down below $100/ft vs prior levels nearing $200.) We’d only been modeling 30 shops added in 2013, and still come out bullish – now we’re thinking that they probably beat that (see our shop/comp algorithm math below).


Lastly, let’s not forget about the cash. That’s the first number we looked at when JCP printed. Despite management’s original goal of $1bn, we’d have been content (based on our liquidity math) with $500-$700mm. We got $850mm. On top of that, the company built up to a liquidity cache of $3.1bn. By our math, that will fund 2013’s operating loss, working capital, and 2 years of capex.


Could This Really Happen?

While we model all our names out 3-5 years in full detail (3-years is our TAIL duration), we never make an investment case based entirely on something that is likely to happen 5-years down the road. But for a name that looks so egregiously overpriced today on a negative earnings and cash flow base, we think it’s a must to at least understand the margin trajectory.


In the end, our model (which we’re happy to provide) gets JCP up to $3.15 per share in earnings (keeping in mind that JCP lost over $2 per share in 2012). Initially, that sounds outrageous to our ears. But we assume the following…

a)      JCP adds 100 shops per our models in the tables below.

b)      Sales per square foot only need to hit $166

c)      Revenue gets to $18.7bn, a level it saw in 2008.

d)      Gross Margins stay below 37% -- despite management’s 40% target.

e)      SG&A gets to 26% of revenue. It starts growing again in 2014, but is leveraged by comps in ‘14-‘17

f)       No financial deleverage.

g)      No NOL carryforward usage.


What kind of multiple is fair on those results – keeping in mind that it will be on a parabolic margin and earnings recovery. Perhaps 15x earnings, or maybe 6-7x EBITDA? That suggests a stock price of about $47. Yes..we know. 2017 is an eternity away. But let’s discount that back annually by 15% and we get to a price of $27 in a year, and then $31, $36, $41, and $47 for 2014-17, respectively. We know that’s trying to get real cute with price scenarios. But we want to illustrate what this company could look like if management executes on the shop rollouts and regains share that it handed off to competitors like Macy’s Kohl’s, Gap, Target, and off price apparel retailers.   


JCP: Sweet Emotion - chart1jcp1


JCP: Sweet Emotion - chart2jcp2


JCP: Sweet Emotion - chart3jcp3

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