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TODAY’S S&P 500 SET-UP – March 12, 2013

As we look at today's setup for the S&P 500, the range is 31 points or 1.43% downside to 1534 and 0.56% upside to 1565.    














  • YIELD CURVE: 1.78 from 1.80
  • VIX  closed at 11.56 1 day percent change of -8.18%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Bus. Optimism, Feb., est. 90.0 (prior 88.9)
  • 7:45am: ICSC weekly sales
  • 8:55am: Johnson/Redbook weekly sales
  • 10am: JOLTs Job Openings, Jan. (prior 3.617m)
  • 11am: Fed to purchase $1b-$1.5b TIPS due in 2017-2043 sector
  • 11:30am: U.S. to sell 4W bills
  • 1pm: U.S. to sell $32b 3Y notes
  • 4:30pm: API weekly inventories


    • House, Senate in session
    • Senate Banking Cmte holds hearing on Cordray, White, 10am
    • House Appropriations panel holds oversight hearing on SEC, 3pm
    • House Appropriations panel hears from Food Safety, Inspection Service Admin. Alfred Almanza at oversight hearing, 10am
    • All FCC commissioners testify at Senate Commerce Cmte’s oversight hearing on FCC, 2:30pm
    • National Transportation Safety Board meets to consider 5 Safety Alerts aimed at reducing number of general aviation incidents, 9:30am
    • Washington Day Ahead


  • HP says Serious Fraud Office investigating Autonomy
  • SEC nominee White to face conflict questions at hearing
  • Cordray nomination at stalemate amid wait for court ruling
  • Citigroup added to team advising Dell buyout group: WSJ
  • Costco 2Q revenue $24.87b misses est. of $24.95b
  • GM share sale brought Treasury $489.9m in February
  • Roman Catholic Cardinals to begin election of new pope
  • U.S. accuses China of cyber espionage that threatens ties
  • Greece in talks with creditors to cut 150,000 civil servants
  • Yandex founders, investors to sell up to $607m of shares
  • Goldman among banks to get lower fees for Japan Tobacco sale
  • Galaxy Securities said to pick Goldman, JPMorgan for $1.5b IPO
  • Suntech gets 2-mth forbearance on $541m in bonds


    • Stage Stores (SSI) 6am, $1.15
    • FactSet (FDS) 7am, $1.24
    • Empire Co (EMP/A CN) 7:03am, C$1.15
    • Laredo Petroleum Holdings (LPI) 7:26am, $0.10
    • Raven Industries (RAVN) 9am, $0.25
    • Acadia Pharmaceuticals (ACAD) 4:01pm, $(0.09)
    • Dole Food (DOLE) 4:06pm, $(0.02)
    • Investors Real Estate (IRET) 4:30pm, $0.17
    • Kennedy-Wilson Holdings (KW) 4:33pm, $(0.08)
    • PetroBakken Energy (PBN CN) After-mkt C$0.13
    • Black Diamond (BDI CN) After-mkt C$0.31


  • WTI Halts Three-Day Advance on Supply; Chinese Refining Declines
  • Gold Sales From Soros Reveal 12-Year Bull Run Decay: Commodities
  • Soybeans Drop on Signs Brazil Is Gaining Market Share From U.S.
  • Gold Futures Advance to Highest This Month on Technical Buying
  • Copper Rises to $7,762 a Ton in London Trading, Erasing Decline
  • Europe Copper Premium Seen Dropping for Second Month by Traders
  • Oil Supplies Climb to Eight-Month High in Survey: Energy Markets
  • Cocoa at 1-Month High as Prices May Have Bottomed; Coffee Slips
  • Gold in India Heading to Lowest Since May: Technical Analysis
  • Ships Reject Unprofitable Cargo to Halt Slump in Rates: Freight
  • Arabica-Coffee Premium Versus Robusta Falls to Lowest Since 2009
  • Europe Gas Carnage Shown by EON Closing 3-Year-Old Plant: Energy
  • Crop Price Ratios Can Foreshadow Crop Planting Decisions
  • Wall Street $100 Million Man Makes Downton Abbey in Vermont Town


















The Hedgeye Macro Team







Risk Sees Me

This note was originally published at 8am on February 26, 2013 for Hedgeye subscribers.

“The tiger will see you a hundred times before you see him once.”

-John Vaillant


I’ve never been hunted down by a Siberian Tiger, but I’ll take John Vaillant’s word for it on how that might feel. On page 51 of The Tiger, he partly explains how I felt in very short order yesterday. Risk happens fast. Feelings aren’t what you want to be managing in your portfolio.


How could you not feel this? At 10AM EST yesterday, the SP500 was at 1524, and the Volatility Index (VIX) was at 13.63. I thought we were going to test the YTD high (1530 SPX) and volatility would continue to collapse. I thought wrong.


Actually, if you told me the reason why we were going to have a violent reversal (as in a +39% six-hour energy move in the VIX and the worst US stock market down day since November 7th) was the Italian election, I wouldn’t have changed my position either. I should have.


Back to the Global Macro Grind


Should have, could have, would have – they are all loser excuses people make, so don’t expect me to make them this morning.


We made some good moves yesterday (covered our Yen short at the YTD low, shorted Utilities at the YTD high), but my overall net long position in US Equities was dead wrong. There is no excuse making in my books. The score doesn’t lie; people do.


Whether I think Italy should matter doesn’t matter. It’s what the market says matters that matters. So let’s get on with our day and focus on not making more mistakes.


As I wrote yesterday, I don’t start with the Research View (it actually improved again yesterday with Strong Dollar taking Oil prices down to a 7wk low), I start with the Risk Management Signals – here they are in the USA, across durations (TRADE, TREND, and TAIL):

  1. SP500 broke immediate-term TRADE support of 1502; remains bullish TREND and TAIL with 1463 TREND support
  2. Russell2000 broke immediate-term TRADE support of 901; remains bullish TREND and TAIL with 869 TREND support
  3. VIX ripped through all lines of resistance and moves to bullish TREND provided that 17.18 holds (watch this closely)
  4. US Dollar Index remains in a Bullish Formation (bullish TRADE, TREND, and TAIL)
  5. CRB Commodities Index remains in a Bearish Formation (bearish TRADE, TREND, and TAIL)
  6. US Treasury 10yr Yield broke immediate-term TRADE support of 1.96%; remains bullish TREND and TAIL with 1.84% TAIL support

Then, if I dig inside that 1st factor (SP500) and break it into Sector Style Exposures (dividing the pie into 9 S&P Sectors):

  1. 5 of 9 Sectors are still in Bullish Formations: Healthcare, Financials, Industrials, Utilities, and Consume Staples
  2. 2 of 9 are bearish on both TRADE and TREND durations: Basic Materials and Tech (AAPL = 14.9% of the Tech ETF)
  3. We bought Financials (XLF) into the close yesterday and shorted Utilities (XLU) on the open – both on signals

So, net net net – not a lot has changed here from a Research View perspective. The only S&P Sector that is down YTD is the one we’d expect to be down (Basic Materials), as we expect to see a Strong Dollar perpetuate A) commodity deflation and B) consumption #GrowthStabilizing.


However, that doesn’t mean the Risk Management Signals are going to let us out of The Tiger’s grasp right here and now. Immediate-term TRADE breakdowns force people to make decisions on intermediate-term TREND positioning. And that’s what we need to do next.


Looking at Global Macro risk more broadly, across Global Equity markets:

  1. Japan was down -2.26% last night (after being up +2.4% the day prior) and remains in a Bullish Formation (no TRADE breakdown)
  2. China’s Shanghai Composite was down -1.4% (broke TRADE support of 2321, but held TREND support of 2209)
  3. South Korea’s KOSPI was only down -0.47% overnight and is holding last week’s bullish TRADE/TREND breakout
  4. Brazil’s Bovespa remains bearish TRADE and TREND (that’s not new, and largely because of the Commodity exposure)
  5. Germany’s DAX broke TRADE support of 7670 again this morning; remains bullish TREND and TAIL with TREND support of 7528
  6. Italy’s MIB Index is a bloody mess, down -4.5% this morning and back into a Bearish Formation

So, do we give up on the Research View? Or do we acknowledge that short-term (TRADE) durations breakdown, breakout, and whip around - always stressing our ability to navigate the markets intermediate-term TRENDs?


Italy and France are dysfunctional economies being managed by a socialist #PoliticalClass (not new news – this is the 62nd Italian government since WWII). Brazil is going down for the reasons we think are bullish for the #1 research factor in our model (commodity deflation is a global tax cut for consumers).


Risk Sees my position. It sees yours too. It’s never “off.” It’s always on, and whether it was a SP500 price of 1524 (10AM EST) or 1487 (4PM EST), evidently it goes both ways, fast. I’ll be doing a lot of waiting and watching for the next few days, to make sure yesterday’s 6hr move wasn’t an emotional head-fake.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST10yr Yield, and the SP500 are now $1549-1612, $112.61-116.38, $80.72-81.98, 91.65-94.41, 1.84-1.96%, and 1479-1502, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Risk Sees Me - Chart of the Day


Risk Sees Me - Virtual Portfolio


The Macau Metro Monitor, March 12, 2013




According to filings, Steve Jacobs alleges that Sheldon Adelson became "enraged" with the then-head of Macau's government, Chief Executive Edmund Ho, because of decisions made by Ho regarding condos that Sands was trying to sell in Macau.  The filing calls Adelson's alleged order a "threat" against Ho, but it doesn't specify how Jacobs was supposed to threaten the official.


Jacobs says Adelson ordered him to tell Ho that he was indebted to Adelson for settling a lawsuit to protect Ho.  Jacobs says Adelson's instructions were to remind Ho that "Adelson had settled a lawsuit paying $40 million" to help Ho "and that he [Ho] owed Adelson."  Jacobs said he refused to carry out the order, which he considered "improper," and reported it to the company's then-general counsel and to Chief Operating Officer Mike Leven.


Adelson said in his statement that he holds Ho "in the highest regard."



At the end of 4Q, the Gaming Sector had 54,835 employees, up by 9.2% YoY.  In December 2012, average earnings (excluding bonuses and allowances) of full-time employees reached MOP18,040, up by 7.9% YoY. Job vacancies totaled 2,144 at the end of 4Q 2012, down by 130 YoY.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.51%
  • SHORT SIGNALS 78.32%

Beautiful Rage

“How with this rage shall beauty hold a plea?”



As our Director of Research, Daryl Jones, said on CNBC last week, “this is the most hated rally we’ve ever seen.” Hating the truth isn’t cool. But, as the late Andre Gide noted, “it’s better to be hated for who you are, than to be loved for someone you are not.”


Reality is that if you hate this market, you are raging against one of the more impressive 4-month changes in Asian and US growth prospects that we have seen in a decade. Cheering for the end of the world isn’t cool either.


A strong US currency, at the big turns (for both Reagan in the early 1980s and Clinton in the early 1990s), can be a Beautiful Rage. If sustained, it’s a pro-growth signal. So, from here, to have or not to have a #StrongDollar, remains the question.


Back to the Global Macro Grind


One of the most obvious places we’ve been monitoring Bear-Rage is in the term-structure of US Equity Volatility (VIX). At every lower-high (and lower-low) we’ve seen in the front-month VIX, many have still held onto their future fear expectations. That’s not working.


Looking at the Front-end of Fear (where front-month VIX is trading):

  1. VIX was down another -8.2% yesterday to close at a fresh 5yr low of 11.56
  2. VIX just crashed (and quickly), down -40% from its FEB25, 2013 “Italian Election” day lower-high
  3. VIX has been crashing, down -49%, from its DEC28, 2012 Congress New Year’s Eve lower-high

When I say lower-highs, I mean long-term lower-highs. And this has really been our point throughout the last 2-3 months. What was long-term support for the Front-end of Fear (14-15 VIX), is now solidifying itself as intermediate-term TREND resistance.


Just to put some risk management levels around that – across our core risk management durations:

  1. VIX immediate-term TRADE resistance = 13.98
  2. VIX intermediate-term TREND resistance = 16.21
  3. VIX long-term TAIL resistance = 17.18

So, the Front-end of Fear is being pulverized into what we call a Bearish Formation (bearish across all 3 of our core risk management durations – TRADE, TREND, and TAIL).


And, all the while, all you’ll hear from the hedge fund community is how the “term structure” of VIX doesn’t agree. In other words, consensus doesn’t agree with higher-highs in US stocks (perpetuated by lower-lows in volatility). That’s why it keeps working.


Bridgewater’s Ray Dalio outlines what an oversupply in consensus hedge funds has meant for returns. The correlation of hedge fund returns to US stock market beta = +0.9. If you want to be freaking out about something, freak-out about that.


Why is the asset management business changing? Well that’s pretty simple. It’s called evolution. Plenty of our pension fund, mutual fund, and RIA clients are changing what it is that they do as this globally interconnected game of global macro risk changes.


That has big implications. Don’t forget that the RIA (Registered Investment Advisor) community is as large (in terms of assets under management) as the hedge fund community.


Country, Currency, Commodity, etc. ETFs and the like are allowing lower-fee structures and strategies to compete, head-to-head, with Global Macro Hedge funds. Don’t fear that – competition is a beautiful thing too.


Some other tactical points to consider (in the immediate-term) as the VIX is crashing:

  1. Things that are crashing tend to bounce, fast – so watch what US stocks do once VIX tests our 11.21 oversold level
  2. SP500’s immediate-term Risk Range of 1 is finally signaling more downside than upside in US stocks
  3. Immediate-term Risk Ranges change as fast as price, volume, and volatility factors do – so keep moving

We’re not suggesting that we are smarter than anyone else. We have a broad spectrum of clients we are collaborating with. We are using quantitative signals and research to highlight what we think are becoming more probable non-consensus market moves.


In order to convince you that our risk management process is both flexible and dynamic, we have to Embrace Uncertainty. Selling certainty is like selling fear; over long periods of time, you’ll get run over by being anchored to either one or the other.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1, $109.51-110.98, $82.21-82.93, 93.56-96.81, 1.95-2.09%, 11.21-13.98, 928-951, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Beautiful Rage - Chart of the Day


Beautiful Rage - Virtual Portfolio


The following is a brief summary of why we want to be LONG DRI at these levels.  We will be hosting a black book conference call entitled "DRI: The Unthinkable Long Case" on Thursday, March 14th, at 1:00pm EST. to talk through in more detail the summary thoughts below.   


By way of background, we initiated a short call, “The Unthinkable Short Case”, on DRI on July 19th, 2012.  The following is a recap of our prior stance:

  • Accelerated unit growth masking other issues
  • Cash burn was unsustainable
  • Waning ability of Darden to be all things to all people (buyback, dividend, growth, fortress balance sheet)
  • Secular macro headwinds were changing the industry’s operating environment
  • Leverage outlook was set to impede future growth
  • Declining ROIIC


The current setup for the stock looks like this:

  • Stock price depressed but dividend yield highly supportive at these levels
  • Unit growth is being reined in (albeit modestly)
  • Secular nature of industry change being acknowledged
  • Guidance is for EPS to decline 11% in FY13 and little-to-no earnings growth in FY14
  • Promotions underperforming
  • Underinvestment in Olive Garden showing in results
  • LongHorn no longer a jewel in the crown
  • Significantly lagging peers in international expansion efforts
  • Self-evident that managing portfolio is proving difficult


But on the bright side:

  • The investment community has become far more bearish on the stock
  • Room for improvement with the “Big 3” (Olive Garden, Red Lobster, LongHorn) same-restaurant sales growth is lagging the benchmark (Knapp Track) by 340 bps
  • Management is outwardly admitting past mistakes and the reality of the environment it is operating in
  • Potential changes within the C-Suite could greatly improve the company’s prospects – can current roster turn things around?


In the end the Low-Hanging, Bountiful, Fruit are too sweet not to harvest

  • Tremendous cash flow potential
  • Huge real estate value
  • Non-core, under-utilized assets that can be sold at rich valuation
  • Core assets represent a classic reorganization opportunity
  • Market’s valuation of the whole is far below what we believe the sum of the parts would represent in a reorganization/breakup
  • G&A rationalization opportunities
  • Buying the stock today, an argument can be made that investors get Olive Garden  for free!


We see the current setup as a "win-win" for the stock:






Howard Penney

Managing Director


Rory Green

Senior Analyst


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