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TODAY’S S&P 500 SET-UP – March 6, 2013

As we look at today's setup for the S&P 500, the range is 24 points or 1.35% downside to 1519 and 0.21% upside to 1543.      














  • YIELD CURVE: 1.68 from 1.66
  • VIX  closed at 13.48 1 day percent change of -3.78%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, March 1 (prior -3.8%)
  • 8:15am: ADP Employment Change, Feb., est. 170k (prior 192k)
  • 8:15am: Fed’s Plosser speaks on economy in Lancaster, Penn.
  • 10am: Factory Orders, Jan., est. -2.2% (prior 1.8%)
  • 10:30am: DoE Energy Inventories
  • 11am: Fed to purchase $1.25b-$1.75b notes in 2036-2043 sector
  • 2pm: Federal Reserve releases Beige Book
  • 8:30pm: Fed’s Fisher speaks in San Antonio, Texas


    • 9:30am: Attorney General Eric Holder testifies at Sen. Judiciary Cmte oversight hearing
    • 10am: House Appropriations oversight hearing on Sandy disaster relief, recovery
    • 0am: House Fin Svcs panel meets on Fannie Mae, Freddie Mac role in financial crisis
    • 2pm: Congressional Gun Violence Prevention Task Force hearing on using background checks to prevent criminals, mentally ill from getting gun


  • Kuroda will have limited options for easing at BOJ, ex-board member says
  • Dow index futures higher after closing at record yday
  • Obama seeks budget deal by phoning Republicans in spending talks
  • HSBC sells U.S. consumer, homeowner loans for $3.2b
  • Hewlett-Packard faces mounting pressure to remove Chairman Lane
  • Martha Stewart says J.C. Penney designs ‘absolutely allowed’
  • Home Depot sued by PayOne over patent-infringement claims
  • Artisan Partners seeks to sell 11.5m shrs in 2nd run at IPO
  • Cantor’s Johnson said to join Alcentra for U.K. direct lending
  • Capital One CEO gets cash pay for first time since 1997
  • Drought conditions in U.S. seen improving after snow, USDA says
  • LinkedIn wins dismissal of consumer privacy suit over hacking
  • Hugo Chavez, Venezuela’s anti-U.S. socialist leader, dies at 58


    • Staples (SPLS) 6am, $0.45
    • Fresh Market (TFM) 6am, $0.44
    • Big Lots (BIG) 6am, $1.98
    • Vail Resorts (MTN) 7:15am, $1.69
    • Brown-Forman (BF/B) 8am, $0.70
    • American Eagle Outfitters (AEO) 8am, $0.56
    • Laurentian Bank (LB CN) 8:40am, C$1.29
    • Hovnanian Enterprises (HOV) 9:15am, $(0.10) - Preview
    • Veresen (VSN CN) 1:54pm, C$0.10
    • PetSmart (PETM) 4:02pm, $1.21
    • Semtech (SMTC) 4:30pm, $0.43
    • DryShips (DRYS) 5:00pm, $(0.14)
    • Colony Financial (CLNY) 5:45pm, $0.38


  • Brazil and Colombia Seen by ICO Making Up for Coffee Rust Losses
  • DuPont Faces Another Year of Pigment Price Declines: Commodities
  • Brent Trades Near Four-Day High on Pipeline Halt; Chavez Dies
  • Wheat Falls on Indications World New-Crop Supplies Set to Climb
  • Copper Falls on Concern Demand Is Weak Amid Ample Inventories
  • Gold for Immediate Delivery Falls to $1,574.34 an Ounce
  • Coffee Falls for a Second Day on Brazil, Colombia; Cocoa Drops
  • Iron Ore Trading Doubled to 18.35 Million Tons for February
  • Japan Said to Plan Talks With South Korea on Joint LNG Purchases
  • U.K. Gold Hallmarking at Lowest Since at Least ’07 on Price Gain
  • India Seen Boosting Wheat Exports From Stockpiles Before Harvest
  • China Joining U.S. Shale Renaissance With $40 Billion: Energy
  • Hedge Funds See Coffee Slump as Supplies Grow: Chart of the Day
  • Iron Ore Price Surge Partly Due to Manipulation, NDRC Says


















The Hedgeye Macro Team






American Progress

“He gave the nation the idea of American progress.”

-John Meacham


That’s what John Meacham wrote about Thomas Jefferson in his prologue to the latest brick I tackled on a flight yesterday to San Francisco, California: Thomas Jefferson: The Art of Power.


To his friends, who were numerous and devoted, Jefferson was among the greatest men who ever lived… to his foes, who were numerous and prolific, Jefferson was an atheist and a fanatic, a demagogue and a dreamer.” (Prologue xxiii)


Do you have a vision for your family and firm? Are you a dreamer? I am. And I’m damn proud of it too. Listening to politicians who don’t get liberty, free markets, and the purchasing power of success (#StrongDollar) has run its course. It’s a cycle. And so is American Progress.


Back to the Global Macro Grind


At this point, the sequential progress in the US Economic data from December 2012 to March 2013 is glaringly obvious. When my signals tell me to, I have no problem fighting the Fed. But I don’t fight the data.


From US Housing to Employment (they progressed first), to more coincident economic indicators like yesterday’s ISM Services report (best since 2011), the risk management question now isn’t “where do I sell?” It’s “could growth stabilizing become #GrowthAccelerating?”


We analyze a lot of “stuff”, but some of the more forward looking “stuff” comes in the form of new order growth:

  1. ISM Manufacturing New Orders accelerated from 53.3 in JAN to 57.8 in FEB
  2. ISM Services New Orders accelerated from 54.4 in JAN to 58.2 in FEB
  3. PMI Manufacturing New Orders accelerated from 58.2 in JAN to 60.2 in FEB

So, if you use that “stuff” (otherwise known as economic data), you’d answer yes to the question of recent American Progress. But these are new orders, what about new consumption growth tailwinds that we didn’t have in JAN or FEB?


How about Oil prices coming down? Amidst all of the #PoliticalClass fear-mongering about the spending problem they created, could Sequestration = Strong Dollar = Down Oil = Stronger real (inflation adjusted) Consumption Growth?


I’m no atheist, and my loathers can call me fanatic about this Strong Dollar Tax Cut idea all they want, but history sides with the Canadian on this front, bros. As you can see in today’s Chart of The Day, under both Reagan (1) and Clinton (1), American Progress was built on the back of a Strong Dollar, pro growth, recovery.


How does Mr Market score our theme of being long Consumption?

  1. US Healthcare Stocks (very much an American Consumption story) = +11.33% YTD (XLV)
  2. US Consumer Staples Stocks = +10.72% YTD (XLP)
  3. US Consumer Discretionary Stocks = +9.66% YTD (XLY)

Yes. All of those are beating what’s been a fantastic +7.9% YTD return for the SP500. And how does Mr Market score being short (or underweight) Commodity Inflation Expectations?

  1. US Basic Materials Stocks = +3.41% YTD (XLB is the worst performing Sector in the S&P Sector Model)
  2. CRB Index (19 commodities) = -1.35% YTD (awful relative to any major asset class)
  3. WTI Crude Oil = -1.4% YTD (having recently broke our $93.79/barrel TREND line of support)

OK. So being long Consumption growth and short Commodity exposures is still working. How is the end of the world trade going?

  1. Gold = down again this morning to $1574, = down -6.02% YTD
  2. US Treasuries = 10yr Yield up to 1.92% this morning = up +9.09% YTD

Again, if the world was going to end: A) all US economic data wouldn’t have gone from slowing to stabilizing to accelerating (look at the slope of the line) and B) Gold and Treasuries wouldn’t be losing you money in 2013 YTD.


I know, I know. People want to bring up what happened last year, and the year before that. I know, it’s like arguing with my college girlfriend. It was painful. But I got over it.


I don’t live a regressive life. I’m writing about American Progress because we have a tremendous opportunity here. What’s not only been happening for 3 months, but what could keep happening if the #StrongDollar setup remains excites me. It should excite you too.


Look at your screens. Markets are testing all-time highs. Be a leader. Be proud. Cut government spending. Get these people you already have on mute off TV. Let’s get back to what makes this country the most progressive that the world has ever seen. This is our chance.


Our immediate-term Risk Ranges for Gold, Oil (WTIC), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000 and the SP500 are now $1, $89.76-91.98, $81.76-82.38, 91.79-94.68, 12.21-14.63, 910-932, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


American Progress - Chart of the Day


American Progress - Virtual Portfolio

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


The Macau Metro Monitor, March 6, 2013




According to gaming insiders, Jester Bar owned by real estate mogul, Zhang Baoquan, wasn’t the only operator “licensed” to test the cashless casinos.  Sources say “up to 10 licenses were issued or were about to be issued,” when Jester’s was shut down apparently following a Reuters’ dispatch revealing the activities of the casino bar at the Mangrove Tree Resort World. 


A Shanghainese living in Sanya, surnamed Lin, confirmed the “rumors” that “they want to have a special zone for gambling in China. So Sanya officials are very willing to try gaming here.”  Lin said, “There are other bars like this in Sanya. I know at least three. The first time I went to one was three years ago. Many people go there. They open and close all the time. Jesters will open again. They closed it because of troubles during a visit by government officials.” 


A former Galaxy Macau executive, Eric Coskun is managing the casino operations at Jester’s and was subsequently “advised to keep a low profile”.  Hainan is purported to have the most illegal gambling operations in China. 

Despite the denials from Sanya’s government stating no gaming operations were ever officially sanctioned “it’s obvious that Zhang Baoquan has had the tacit approval of central government officials, even if only by turning a blind eye on the tycoon’s operations,” a gaming expert told the Times.


Don't Hurry Mistakes

This note was originally published at 8am on February 20, 2013 for Hedgeye subscribers.

“Let’s not make our mistakes in a hurry.”

-Dwight D. Eisenhower


The 34th President of the United States was a process guy. He was also a world class Risk Manager. Getting the US out of Korea, averting the French invitation to Vietnam (1953), and avoiding the ongoing threat of engaging China or Russia in nuclear war is his legacy now. If you are a Portfolio Manager in this game, your legacy is your track record – and it’ll be the mistakes you don’t make that matter most.


But what kind of team culture should you foster to ensure you aren’t missing something? Do you accept the blame for your team’s mistakes, or do you point fingers? Is there an open forum for people who report to you to disagree with your position? If they do so and have sloppy reasoning, do they expect to be taken to task in front of their peers in kind?


I’m an athlete who believes in transparency, accountability, and trust. I have biases. But they are based on experience. There are a lot of great players – and even more good teams. But only few Championship Teams can repeat. To do that, your players can’t be scared to make a mistake. At the same time, they have to be disciplined so that their mistakes don’t blow up everything the team has worked for.


Back to the Global Macro Grind


Particularly when a market is in a Bullish Formation (Bullish on all 3 of our core risk management durations: TRADE, TREND, and TAIL), not getting squeezed (on the short side) can save the team from having a lot of losses.


If you accept that bullish and bearish formations (Gold is in a Bearish Formation, so is the Japanese Yen) can get immediate-term TRADE overbought and oversold, at a bare minimum you won’t be making the same mistakes over and over again in a hurry. You’ll wait.


It’s taken me at least 13-15 years to learn this the hard way. Getting squeezed is part of a short seller’s life. And guess what, I still have to re-learn the same lesson, weekly. This game isn’t easy. That’s why I try my best to make decisions on the signal now, instead of the noise.


To simplify what I mean by making high-probability decisions:


  1. Don’t be in a hurry to sell something until you get an immediate-term TRADE overbought signal
  2. Don’t be in a hurry to buy something until you get an immediate-term TRADE oversold signal
  3. Don’t eat yellow snow


Or, as President Eisenhower used to tell his brother Milton, “Never get in a pissing match with the skunk.” (Ike’s Bluff, pg 57)


Yes, I am sure there are some really smart people out there who have found a way to not have to deal with process, real-time decision making , etc. But I can almost guarantee you that what they do ends up having a higher realized level of volatility than what we do.


To put some meat on this bone, here are some immediate-term TRADE overbought signals in our models this morning:


  1. SP500 is immediate-term TRADE overbought at 1533
  2. Russell2000 is immediate-term TRADE overbought at 934
  3. Consumer Staples Sector ETF is immediate-term TRADE overbought at $38.06
  4. Kimberly Clark (KMB) is immediate-term TRADE overbought at $92.31
  5. Fedex (FDX) is immediate-term TRADE overbought at $107.39


First, note that I have no immediate-term TRADE overbought signals to act on in any of our long Asian Equities positions. Singapore (EWS) has immediate-term upside, and so does China (which we bought via CAF on an immediate-term TRADE oversold signal yesterday).


Second, I am agnostic on the direction of the signal. It works the same way for both my longs and shorts. Yes, we like and are long of Fedex (FDX), but A) that’s not new (we bought it when we went bullish on US Equities in late November) and B) what is new is that it gave me its first immediate-term TRADE overbought signal in at least the last few weeks.


Third, using immediate-term TRADE overbought signals is another way to hedge market (beta) risk. So, I can be bullish on US Equities on my intermediate-term TREND duration and A) realize I might get an overbought signal in SPY this morning but B) not force myself to short something consensus like SPY, and stock and sector pick on a better signal instead (shorting XLP and KMB into yesterday’s close).


I am certain that there are better ways to do this – and I assure you that before I retire, I will find better ways. But for now, this is how my team rolls because this process is both repeatable and helping us not hurry mistakes.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, and the SP500 are now $1596-1617 (Gold remains in a Bearish Formation but is immediate-term TRADE oversold), $116.51-118.71, $80.25-80.83, 92.63-94.49, 1.97-2.05% and 1518-1533, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Don't Hurry Mistakes - Chart of the Day


Don't Hurry Mistakes - Virtual Portfolio

FDX: Deutsche Post Shows FedEx Express Can Get There

Takeaway: Deutsche Post reaches top end of our base case fair value range. Both near-term and long-term, DHL signals a better environment for FDX.

FDX:  Deutsche Post Shows FedEx Express Can Get There


  • Industry Likely Improving:  In our November 2012 Express & Courier Black Book, we highlighted what we thought was an inflection point in the Express industry.  Deutsche Post’s report suggests that the environment for the integrators is likely improving.  FedEx reports on March 20th, so a positive read on the environment is encouraging.  DHL Express reported fourth quarter organic revenue growth of 6.8% - not bad for a quarter in which the US and Eurozone were apparently in contraction.
  • Americas & Asia:  Deutsche Post commented that the best growth “in percentage terms” was in the Americas, where FDX has the dominant market presence.  It does not appear to be a market share gains by DHL Express, but rather market growth.  In addition, Deutsche Post suggested that volumes in Asia on the freight forwarding side picked up in the back end of the year, another important time definite market for FedEx.  They said that airfreight was still down YoY, but less so.  We have seen better Asia air cargo data, as noted here.
  • Deutsche Post Was Able To Fix Its Express Margin:  The Express industry is structured for good returns, in our view.  The industry is increasingly consolidated with high barriers to entry and rational competitors.  Deutsche Post focused on improving express margins, as described in early 2011: “On Express margins, it is our expectation that margins will continue step by step to increase over time. Our aspiration, as we talked about in the Capital Markets Day, is we get at least equal to industry leading margins ….” –Lawrence Rosen, CFO 3/10/2011.  DHL Express was able to execute on this restructuring and achieve much stronger margins.  DHL Express also started in a much worse state than FedEx Express is now starting, in our view.  


FDX:  Deutsche Post Shows FedEx Express Can Get There - h1



  • What FedEx Expects: Compare DHL’s management comments to those FedEx management on FedEx Express’ margin expansion prospects “ I think it will be a combination. There'll be small stair-steps, but it'll mostly be momentum that will drive this. Again, we are talking about thousands of people here. So, as we reorganize around that with a very limited backfill behind that, we have to space these folks out. So, there'll be May, then there'll be some August, and then there'll probably be some November and then there'll be some in next May, and I don't have clear visibility of that except I know where we'll be in fiscal 2015 with pretty good certainty.” – Alan Graf 12/19/12   Restructuring at FedEx Express is likely to be a multi-year process, but the leverage on a large revenue base should make it worth the wait. 
  • Matching Competitors:  We put out our estimate for Deutsche Post’s 2012 Express margin in our Best Ideas slide deck last Wednesday.  It turns out to have been about 20-30 basis points higher, with a portion of that beat driven by a stronger in the fiscal 4Q.  (note: adjusted for one-time benefits)


FDX:  Deutsche Post Shows FedEx Express Can Get There - h2



  • Asia Pacific Express Slightly More Consolidated:  Deutsche Post believes that it gained about four points of market share in Asia over the past couple of years, with that gain coming from the “Other” category and potentially TNT.  If TNT is losing share in Asia, it might accelerate FedEx’s decision-making on a potential transaction.  If TNT is deteriorating, the rationale for buying sooner might be stronger.  We would highlight that the list of countries included in the initial sample is much narrower, so Deutsche Post appears to be comparing apples and oranges, leaving it difficult to read much into the share shift.


FDX:  Deutsche Post Shows FedEx Express Can Get There - h3




FDX:  Deutsche Post Shows FedEx Express Can Get There - h4



  • Is FDX Losing Share in Americas to UPS?:  At first, that is the way the Deutsche Post data look.  However, the 2012 DHL data includes a number of additional countries, including Brazil, Argentina and Colombia.  FedEx did note that “In the U.S. Express volume share segment, we retain a clear lead over the competition. And while our volume share was down last year, on a year-over-year basis, again, that was primarily due to our yield management activities” Michael Glenn 10/10/12.  We suspect any shift has been fairly small, consistent with the US share chart from the FedEx analyst day and that most of the shift in the charts has been due to the inclusion of additional countries in the Americas sample.

 FDX:  Deutsche Post Shows FedEx Express Can Get There - h5





FDX:  Deutsche Post Shows FedEx Express Can Get There - h6





FDX:  Deutsche Post Shows FedEx Express Can Get There - h7



  • Strategy in Couriers:  We continue to believe that FDX offers some of the best upside in the Industrials sector, with fair value per share in our base case model between $120-$150 and a bullish model at $180.  As discussed in our November 2012 Black Book, we also believed Deutsche Post itself provides excellent exposure to the improving trends in the Express & Courier industry.  Our base valuation range for Deutsche Post of Eur 15-Eur 20 was achieved very quickly since then and the risk/reward appears less favorable at these levels.  We would prefer FDX over DPW GY and UPS at these levels.


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