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TODAY’S S&P 500 SET-UP – March 19, 2013

As we look at today's setup for the S&P 500, the range is 27 points or 0.84% downside to 1539 and 0.90% upside to 1566.      














  • YIELD CURVE: 1.70 from 1.71
  • VIX  closed at 13.36 1 day percent change of 18.23%

MACRO DATA POINTS (Bloomberg Estimates):

  • Federal Reserve’s FOMC starts two-day meeting
  • Lagarde, Weidmann, Schaeuble speak at Frankfurt Finance Summit
  • ESM to sell as much as EU2b 182D bills
  • 7:45am: ICSC weekly sales
  • 8:30am: Housing Starts, Feb., est. 915k (prior 890k)
  • 8:30am: Housing Starts M/m, Feb., est. 2.8% (prior -8.5%)
  • 8:30am: Building Permits, Feb., est. 925k (prior 904k)
  • 8:30am: Building Permits M/m, Feb., est. 2.3%  (prior 1.8%)
  • 8:55am: Johnson/Redbook weekly sales
  • 11am: Fed to purchase $2.75b-$3.50b notes in 2020-2023 sector
  • 11:30am: U.S. Treasury to sell 4W bills
  • 4:30pm: API Energy Inventories


    • Obama departs on trip to Israel, Middle East
    • VP Biden in Rome to attend installation of Pope Francis
    • Senate Armed Svcs Cmte hearing on authorization requests for FY2014, Future Years Defense Program, 9:30am
    • US Airways CEO Douglas Parker, AMR CEO Thomas Horton, Consumers Union consultant Diana Moss testify on US Airways-American Airlines merger at Senate Judiciary Cmte panel, 10am
    • House Ways and Means Cmte holds hearing on tax laws, provisions affecting state, local govts, 10am
    • House Financial Svcs Cmte hears from Fed Housing Finance Agency on GSE conservatorships, 10am
    • Senate Banking, Housing and Urban Affairs Cmte votes on Cordray for CFPB, White for SEC, 10am
    • Treasury’s Lew in China for talks w/ President Xi Jinping
    • Senate Finance Cmte holds hearing on President Obama’s trade agenda, 10:30am
    • DOJ’s Elana Tyrangiel, Google’s Richard Salgado testify before House Judiciary hearing on Electronic Communications Privacy Act, 10am


  • Blackstone said to mull outbidding Silver Lake for Dell LBO
  • Samsung preparing wristwatch as it races Apple for new market
  • Ryanair places $15.6b order for 175 Boeing 737-800 planes
  • BlackRock to cut ~300 jobs as Fink extends reorganization
  • JPMorgan Chase won’t face revived suit over silver manipulation
  • Citigroup to pay $730m in crisis bond-lawsuit settlement
  • Home construction starts in U.S. probably climbed in Feb.
  • BofA said to cut head of equities role in Australia
  • Affymax fires 75% of workforce; considers sale, bankruptcy
  • European Feb. car sales decline 10% on deepening recession
  • BMW forecasts unchanged 2013 pretax profit on Europe mkt drop
  • Boeing avoids strike threat; technical workers accept contract
  • Weight Watchers said to set rate on $2.4b bank financing
  • NPS buys back global Gattex rights from Takeda for $50m
  • Corvex asks judge to halt arbitration in CommonWealth suit
  • NFL, Providence plan to have ~$300m to invest in start-ups: WSJ


    • DSW (DSW) 7am, $0.72
    • Rentech Nitrogen Partners (RNF) 7am, $0.55
    • FactSet Research Systems (FDS) 7am, $1.24
    • Alimentation Couche Tard (ATD/B CN) 11am, $0.89
    • Francesca’s Holdings (FRAN) 4:01pm, $0.30
    • Adobe Systems (ADBE) 4:03pm, $0.31
    • Williams-Sonoma (WSM) 4:05pm, $1.29
    • Cintas (CTAS) 4:15pm, $0.62
    • Tourmaline Oil (TOU CN) 5pm, C$0.06
    • Franco-Nevada (FNV CN) Aft-mkt, $0.34
    • Element Financial (EFN CN) Aft-mkt, C$0.07


  • Brent Crude Falls to Shrink Premium to WTI Before Cyprus Vote
  • Wheat Crop Seen Near Record as U.S. Drought Recedes: Commodities
  • Indonesia, Third-Biggest Cocoa Grower, Poised to Turn Net Buyer
  • Copper Swings Between Gains and Drops Before U.S. Housing Data
  • Soybeans Advance on Speculation U.S. Farmers to Withhold Crops
  • Gold Falls After Three-Day Gain as Stronger Dollar Curbs Demand
  • Robusta Coffee Falls as Vietnam Crop Concern May Be ‘Premature’
  • Rio Tinto Sees Supply Weighing on Iron Ore Prices in Second Half
  • Top Rubber Producers Must Control Output, Indonesian Group Says
  • Consumers to Pay $13 Billion Price as Ethanol Upends Refiners
  • SPDR Gold Trust Holdings Decline to Lowest Level Since July 2011
  • Billionaire Fredriksen Almost Doubles Ship Orders Amid Glut
  • Crude Inventories Climb a Ninth Week in Survey: Energy Markets
  • Thailand to Propose Extending Rubber Export Cut Another Year


















The Hedgeye Macro Team








Command and Control

This note was originally published at 8am on March 05, 2013 for Hedgeye subscribers.

“How do you tell a communist? Well, it’s someone who reads Marx and Lenin.  And how do you tell an anti-Communist? It’s someone who understands Marx and Lenin.”

-Ronald Reagan


As Hedgeye has grown over the past five years, we’ve gone from a ramshackle group of less than ten to a team that is fifty or more with a view to a much higher employee count as our growth continues.   For those of us that started here near day one, it has been an exciting and fulfilling experience.


Many of you that have started you own businesses know full well the management challenges associated with growth – compensation plans, career paths, titles, HR meetings, committees, and so on.  I can’t speak for Keith, but there are certainly times where I wish I could channel my inner Karl Marx and completely control our day-to-day functions.   That, of course, would be a disaster because our company, like most companies, benefits greatly from disparate opinions and personalities.


The caveat to that last point of course is China - a country that has seen fabulous growth and development with top down controlled management.  In 1978, China was one of the poorest countries on the planet with a GDP of roughly one-fortieth of the United States.  As Xiaodong Zhu, a Professor of Economics at the University of Toronto, writes:


“Since then, China’s real per capita GDP has grown at an average rate exceeding 8 percent per year.  As a result, China’s per capita GDP is now almost one-fifth the U.S. level and at the same level as Brazil.  This rapid and sustained improvement in average living standard has occurred in a country with more than 20 percent of the world’s population so that China is now the second-largest economy in the world.”


If President Ronald Reagan were alive today, it would be interesting to hear his assessment of the Chinese economic miracle.  Despite his, and many a dour assessment of Communist economies, China has certainly proven the critics wrong. 


In the short term, yesterday certainly provided some fuel to the proverbial fire for those negative on the Chinese economy this year. China’s CSI 300 index was down -4.6%, its biggest drop since November 10th, the Shanghai Composite was down -3.7% (the most since August 11th), and the Shanghai Property index was down -9.3%.  The decline in the property index was hit on reports that Beijing has introduced new property curbs calling for higher down-payment requirements, higher interest rates on second home mortgages and a 20% tax on individual profits from property sales.


One of the top ideas in our recently launched Best Ideas product was China, via the closed end fund CAF.  Given the performance of Chinese equities noted above, this position is now against us, but our Senior Analyst covering Asia, Darius Dale, addressed this directly yesterday in a note titled, “China Pukes”.  As Darius wrote:


“In short, while we think this latest round of tightening measures is definitely impactful, they are not nearly as negative as we initially feared. The heightened concerns mostly stem from the new 20% capital gains tax on existing home sales; prior to Friday’s announcement, existing home transactions were taxed at a rate of 1-2% of the sale price.


To some extent, today’s “puke” instructs us that our initial interpretation of the tightening measures was not bearish enough. That said, however, rather than react to headline-grabbing 1D % change moves, we turn to our quantitative factoring for true guidance.


On this metric, the Shanghai Composite is still healthily bullish from an intermediate-term TREND perspective and continues to support our bullish intermediate-term fundamental bias on Chinese equities. If, however, the now-confirmed immediate-term TRADE breakdown is but a leading indicator for further breakdowns, then we’d happily abandon our bullish bias upon confirmation of that signal.”


In the Chart of the Day, we highlight our quantitative levels that still support being long of China.  In fact, news this morning from China’s Premier Wen last “state of the country address” in which 2013 GDP growth was set at +7.5% and CPI at +3.5% bolsters our thesis.  On the latter point, if CPI actually declines from 4.0%, which commodities support, this is positive for our thesis, especially if combined with what we believe will be a sandbagged GDP number.


The other interesting call-out from Wen’s speech is that China intends to raise its budget deficit by 50 percent to boost consumer spending.  Longer term structural deficit spending is not something that we find overly appealing, but this is likely supportive for GDP targets in 2013.


Changing gears, from an asset allocation perspective, even as many are starting to call for a rotation into bonds, the U.S. 10-year Treasury is holding its 1.84% line. As a result, we continue to see a rotation out of the “end of the world” trade of long gold and treasuries and into U.S. equities in 2013.  There are very large bond investors that disagree with our call, but as always – watch what they do and not what they say.


Since we are on the topic of China, I wanted to end with a quote from Thomas Friedman that on some level summarizes the future:


“When I was growing up, my parents told me, finish your dinner. People in China and India are starving. I tell my daughters, finish your homework. People in Indian and China are starving for your job.”




Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST10yr Yield, VIX, and the SP500 are now $1555-1589, $109.01-112.68, $3.48-3.55, $81.68-82.39, 91.89-94.79, 1.84-1.93%, 12.57-15.61, and 1509-1532, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Command and Control - Chart of the Day


Command and Control - Virtual Portfolio

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The Macau Metro Monitor, March 19, 2013




A trial is scheduled for next week in Nevada state court over claims by HK businessman Richard Suen that he helped LVS win a license to run a casino in the Macau territory in 2002 and that the company reneged on an agreement to pay him a “success fee.” A Nevada appeals court in 2010 reversed a $43.8 million jury award two years earlier in favor of Suen and sent the case back for a new trial.


Clark County District Court Judge Rob Bare in Las Vegas is scheduled to hear arguments today on pre-trial motions.  Jury selection is to start March 27 with opening statements the following week.  Adelson will take the stand April 4, according to court minutes.


Suen has claimed that it was through “guanxi,” a Chinese term for personal or human relationships, that he and his friends helped paved the way with Chinese government and Communist Party officials for the Macau license approval.  Suen said that following meetings in Beijing, LVS offered him and his group a deal, which evidence from the first trial showed was worth as much as $96.2 million if LVS received a Macau gaming license.  The company countered that Suen never provided evidence that linked the Beijing meetings with Macau officials selecting LVS to operate a casino.



China President Xi pointed out that Macau is enjoying a “relatively good period” right now.  However, according to Xinhua, he was quick to add that the city’s future development was also facing a string of challenges.

“I hope to enhance the sense of the Macau Special Administrative Region government and the community to take advantage of favourable timing and conditions, study to solve the outstanding problems that are restricting [Macau’s] development and to lay a solid foundation for Macau’s long-term development,” said Xi.


Meanwhile Macau CEO Chui said that the president and premier stressed the importance of collaboration among the mainland, Hong Kong and Macau.  Chui promised that the Macau government would further strengthen its two main cooperation projects with the mainland, namely the development of Hengqin Island in Zhuhai and Guangzhou’s Nansha district.

Fear's Flattery

“Let those flatter, who fear.”

-Thomas Jefferson


Two years prior to penning his first draft of the Declaration of Independence in 1776, Thomas Jefferson wrote his first significant thought piece. That’s where the aforementioned quote comes from – it was called The Summary View (1774).


In addition to his comment about the British old-boy culture of backslapping, he went on to add that “it is not an American art. To give praise which is not due might be well from the venal, but would ill beseech those who are asserting the rights of human nature…” (Thomas Jefferson: The Art of Power, pg 74)


Less government, more economic freedom, and a strong currency – there is no praise to give those who fear these founding American principles. As corrupt Russians whine about getting taxed in Cyprus, think that through. What scares Putin should flatter us.


Back to the Global Macro Grind


To fear, or not to fear – remains your risk management question. Clearly, living in fear of the US Equity Futures indicated down 20 handles was no way to live yesterday; buying on red was.


To review the lower-highs (see Chart of The Day) of Front-Month Fear (US Equity Volatility, VIX):

  1. December 28th, 2012: people freak-out on New Year’s Eve on a Congress concern; VIX down -41% since
  2. February 25th, 2013: 1-day freak-out over an Italian Election; VIX down -30% since
  3. March 18th, 2013: 1-hour freak-out over taxing money launderers in Cyprus; VIX down -11% from the open

In other words, from a Behavioral perspective, the stock market’s implied fear is:


A)     Coming on lower-quality “crisis” story-telling

B)      Becoming more and more short lived


No, I will not navel gaze with Old Media sources who make-up crisis stories in order to sell ad space. Instead, I will call them to account; especially if they are the same people who have missed this entire 4 month rally. It’s un-becoming.


There will be a time to fear the market’s internal signals. And while I am probably blind to them again this morning, there is nothing I can do about that. I go with my process, not the inevitable and humbling force that will be the market eventually going against me.


To review: there are 2 big parts to our process – the Research View and the Risk Management Signals. In terms of the Research View, the fulcrum point of our bull case since December has been #StrongDollar. It got stronger, again, yesterday – and:

  1. That makes this the 6th week in the last 7 of an up US Dollar Index, $82.79 last
  2. Commodities (CRB Index) have been down for 6 of the last 7 weeks, in kind
  3. Commodity Deflation keeps A) the Fed on hold and B) a Consumption Tax Cut in play

Good getting better in terms of US Consumption is good for a Q113 (vs Q412) sequential US GDP acceleration and, at the same time, the wealth effect on the two big things that matter (your house price and stock market portfolio) going up, at the same time.


What could go wrong? Well, that’s easy - the things that have been going right (US employment and housing). #HousingsHammer remains one of our Q113 Global Macro Themes, and we’ll be very interested to see this week’s US Housing data (Housing Starts come out today; Existing Home Sales/Inventory on Thursday). Jobless Claims on Thursday is important too.


All the while, the Global Macro Risk Management Signals continue to tick:

  1. Japan’s Nikkei held TRADE and TREND support and led Asian Equities higher last night, closing +2%
  2. China’s Shanghai Composite held TREND support (2206) and rallied +0.8%, making another higher-low
  3. South Korea’s KOSPI recovered TREND support (1975) after dipping below it on Cyprus fears (for a day)
  4. Germany’s DAX continues to hold a Bullish Formation (Russian mob footing bailout bills is good for Merkel)
  5. Russia’s RTSI stock market index continues to break down (bearish TREND), down -12% since topping in JAN
  6. Brazil’s Bovespa remains bearish TREND as well (Commodity Stock markets are not like Consumption ones)
  7. Gold failed at its 1st major line of resistance (TRADE = $1605, TREND $1659, TAIL $1681)
  8. Treasury Yield (UST 10yr) held TRADE support (1.91%) and long-term TAIL risk support of 1.84% remains intact
  9. Japanese Yen (vs USD) failed at TRADE resistance (93.65) and remains in a Bearish Formation
  10. US Equity Volatility (VIX) failed at 14.46 TRADE resistance and remains in a Bearish Formation

Net, net, net – what all this means is that chariots of Cypriot fire haven’t changed the view we’ve held since December. In fact, they’ve improved it. Don’t forget that money leaving Europe and Japan goes somewhere. US currency and equity finally has the flows.


Will we get run-over by a legitimate market fear? For sure – I just don’t know when (so let me know, if you know!). In the meantime, we want to be long of growth (Asian and US Stocks) and short of fear (Gold, Treasuries, Yen). It’s been a flattering position.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1, $107.74-109.93, $82.14-83.13, 93.65-97.10, 1.93-2.02%, 10.77-14.46, 941-958, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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