When The Going Gets Tough

Client Talking Points

Which Way Did It Go?

Yesterday, the market started off by testing a new all-time high on the S&P 500 (1570), which failed. By the close, the market had fallen and was lucky to hold our TRADE line of support at 1556. If you bought the open or sold the close, you made the wrong move. It's easy to get pulled into the market when everyone around you is suddenly an expert on stocks ("Buy 'em" my father said yesterday). Sometimes you have to be able to step away from the computer and just say no. Yesterday was a good day to do just that. 

Making Moves

While chasing the S&P 500 was not a viable game plan yesterday, taking gains on existing positions, cutting losses and initiating new positions was. Since the S&P 500 and Russell 2000 held their line of support, we bought the Russell via IWM yesterday afternoon. We also cut a macro position that wasn't working and bought a stock that worked in our favor. It's all about timing and watching the signals.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Darden stands to be a beneficiary from a housing recovery and an improved employment picture, which boosts casual dining trends. Darden reported earnings today that beat Wall Street expectations, though net income declined 18%.


With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.


HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road


"Cyprus finance minister Michalis Sarris quits. Who thinks the rest of their govt quits this month?" -@tbuhl


"The point of quotations is that one can use another's words to be insulting." -Amanda Cross


The US Dollar rises while the Euro softens after March PMI data for the euro area showed that activity contracted at an accelerating pace in March, dropping to a three-month low of 46.8.

Fear's Flattery

This note was originally published at 8am on March 19, 2013 for Hedgeye subscribers.

“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 $1569-1605, $107.74-109.93, $82.14-83.13, 93.65-97.10, 1.93-2.02%, 10.77-14.46, 941-958, and 1539-1566, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fear's Flattery - Chart of the Day


Fear's Flattery - Virtual Portfolio


The Macau Metro Monitor, April 2, 2013




Taiwan Affairs Office of China's State Council and China National Tourism Administration have taken measures on anti-gaming to Taiwan authorities, stating that the Chinese government will ban Mainland tourists from visiting Matsu through the "mini three links" policy once Matsu opens gaming business.  However, Matsu has no plan to stop its legislation process for gaming or change its policy of opening gaming sightseeing on the outlying island.  Relevant authorities of Matsu reckoned that investors who intend to invest in gaming business in Matsu should seek to attract global customers rather than simply just targeting Mainland visitors.



The Land, Public Works and Transport Bureau has not yet received a request to extend the development timeframe for land being developed by LVS.  In a regulatory filing with the Hong Kong Stock Exchange on March 21, Sands China Ltd said it “expects to apply” to the Macau government for an extension of the May 2014 deadline.  This deadline for completing Sands Cotai Central casino resort on Cotai was set by the administration.


The possible extension of the completion timetable relates to the as-yet-unfinished third phase of Sands Cotai Central.  The same filing states there are plans for a fourth tower at the property – to be shared by a St Regis branded hotel and including “mixed use space”.



Macau gross gaming revenues grew 25.4% YoY in March to 31.336 BN MOP (30.42 BN HKD, 3.92 BN USD)

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Just Say No

“Do not suffer your good nature to say yes when you ought to say no.”

-George Washington


Raising a firm is something I struggle with sometimes. I endemically trust people who are on my team. I want to believe they’ll succeed. With time, I’m learning that saying yes to everyone’s individual wants isn’t the way to accomplish the team’s goals.


Wants versus needs – it’s an interesting discussion I often have with myself. Do I need to hire? Do I want to grow? Do I need to get bearish? Do I want to be right? Why not just let the market tell me what to do?


On that score, the aforementioned quote inspired me last night. It comes from Chapter 1, “The Early Years”, of Volcker – The Triumph of Persistence. It hung prominently in Paul Volcker’s father’s office, and was “burrowed into young Paul’s brain” (page 15).


Back to the Global Macro Grind


From a behavioral perspective, yesterday was one of the many fascinating market days of 2013:

  1. On the open, the SP500 tested another fresh all-time high at 1570
  2. Into the close, the SP500 tested (and held) our immediate-term TRADE line of 1556 support

Did you chase the open (buy high)? Did you sell the close (sell low)? Or at both psychological pain points in the US equity market day did you Just Say No?


Selling on green and buying on red is a lot harder than it sounds. Sometimes I have to physically force myself to do the opposite of what I feel like I should do (I get up from my desk and go for a walk). For me at least, feeling anything about macro market moves is usually my first mistake. The second is not trusting my signal.


So, just say no buds – it’s ok, really (so is talking to yourself). Oh, and don’t forget to #timestamp all of those decisions so that you are accountable to every time your process answers, as my 3 yr old daughter asks, “yes or no?” Buy or sell?


The decisions I made yesterday were as follows:

  1. Sold 3 LONG positions on the open (OZM, FDX, and HOLX)
  2. Shorted 1 core short idea at 10:18AM (Basic Materials, XLB)
  3. Bought/Covered positions between 12:50PM and the close (CJES, EWM, IWM)

Now some will call that whatever they want to call that. I’m just calling it out as what I did. Whenever I do something, I consider the 2 big parts of our process (the Research View and the Risk Management Signal):

  1. Research View: on the margin, the ISM report released at 10AM EST was bearish (that’s why I sold FDX and shorted XLB)
  2. Quantitative Signal: both the SP500 and Russell2000 held immediate-term TRADE support (that’s why I bought IWM)

Within a 15 point (-0.7%) intraday move on a no-volume day (actually a big move considering how few and far between down moves in US stocks have been), you might just say that I said no to fear – and worked the top and bottom ends of my risk range, both ways.


Some call it trading. Others call it timing. Many call both trading and timing bad things – and for good reason. If I didn’t have a repeatable process to signal a probable risk range, I wouldn’t be risk managing intraday moves either.


No matter what I said yes or no to yesterday, now I have to deal with today:

  1. ASIA: mixed as Equity Indexes continues to make higher-lows and higher-highs; Yen overbought; Nikkei oversold.
  2. EUROPE: strong moves from important support levels for both the DAX and the FTSE on ok PMI data
  3. USA: US Dollar remains Strong Like Bull; 10yr Yield at low-end of our risk range; US Equity futures up

So, we’ll start the day with 13 LONGS and 8 SHORTS @Hedgeye. Two of those 8 SHORTS are Treasuries (TLT) and the Yen (FXY). And the question I have in my mind is why wasn’t I more aggressive getting longer?


It’s in my nature (no matter how bullish I am on US growth or stocks) to be relatively conservative in my net long positioning. But Mr Market doesn’t care about my nature. So I have to work on finding a way to just say no more to my natural instincts.


Our immediate-term Risk Ranges for Gold, Oil, US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1, $108.95-111.44, $82.53-83.38, 93.07-96.12, 1.83-1.94%, 12.14-14.34, 935-955, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Just Say No - Chart of the Day


Just Say No - Virtual Portfolio


TODAY’S S&P 500 SET-UP – April 2, 2013

As we look at today's setup for the S&P 500, the range is 15 points or 0.33% downside to 1557 and 0.63% upside to 1572.     










  • YIELD CURVE: 1.60 from 1.59
  • VIX closed at 13.58 1 day percent change of 6.93%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am: ICSC weekly sales
  • 8:55am: Johnson/Redbook weekly sale
  • 9:45am: ISM New York, March (Prior: 58.8)
  • 10am: Factory Orders, Feb., est. 2.9% (Prior: -2.0%)
  • 10am: IBD/TIPP Eco Optimism, April, est. 45.5 (Prior: 42.2)
  • 11am: Fed to buy $1.25b-$1.75b in 2036-2043 sector
  • 11:30am: U.S. to sell 4W bills, $25b 52W bills
  • 1pm: Fed’s Kocherlakota speaks in Grand Forks, N.D.
  • 1:30pm: Fed’s Lockhart speaks in Birmingham, Ala.
  • 4:30pm: API energy inventories
  • 7:30pm: Fed’s Evans, Lacker speak in Richmond, Va.


    • House, Senate not in session
    • President Obama meets with Singapore’s Prime Minister Lee Hsien Loong
    • IMF Managing Director Christine Lagarde speaks at World Resources Institute, 2:30pm
    • Sec. of State John Kerry meets with South Korea’s Minister of Foreign Affairs and Trade Yun Byung Se, 3:30pm


  • Ford, GM, others report U.S. auto sales; SAAR may be 15.4m
  • Euro-area unemployment rate rises to record 12%
  • Dell CEO says business unit making progress amid LBO talks
  • North Korea to restart nuclear reactor shut by disarmament deal
  • Foreigners sell most Korean stocks since May on yen, tension
  • Nasdaq accepts credit rating risk in quest to expand with ESpeed
  • Vodafone rises; FT Alphaville blog reports AT&T/VZ working on joint takeover bid
  • Obama said to consider Ray McGuire and Orin Kramer for Treasury
  • Cyprus govt. officials are seeking easier bailout terms in talks with representatives of EU, IMF today
  • Nuance jumps after Carl Icahn reports 9.3% passive stake
  • Small-business insurance market from health law delayed a year
  • Abe says BOJ may miss price target if global economy changes
  • Cyprus seeks more time to meet budget targets in bailout talks
  • Spain to alter 2013 GDP target to 1% contraction vs 0.5%: Reuters
  • U.K. financial firms may hire 4,000 in 1H on growth outlook
  • Bank-card delinquencies lowest in >18 yrs: ABA


    • McCormick (MKC) 6:30am, $0.56
    • Oxford Industries (OXM) 4pm, $0.70
    • Global Payments (GPN) 4:01pm, $0.89
    • Team Inc. (TISI) 4:01pm, $0.01
    • G-III Apparel Group (GIII) aft-mkt $0.40


  • WTI Crude Little Changed as Survey Suggests U.S. Stockpiles Rose
  • Raw-Material Bull Market Fading as Supply Expands: Commodities
  • Rubber Poised for Third Surplus in 2013, Extending Price Slump
  • Copper Swings in New York on Seven-Month Low and China Factories
  • Vitol Group Starts Global Grain Trading From Singapore, Geneva
  • Gold Swings as Investors Weigh Slowing Physical Demand, Crisis
  • Crop Prices Rebound as Declines May Attract Consumers, Investors
  • Commodity Bear Markets Expand on Rising Supplies of Corn, Silver
  • Palm Oil Futures Gain as Decline to Three Month Low Spurs Buying
  • Hong Kong as World-Beater Cut in London Metal by Mandarin Li
  • Crude Stockpiles Surge to 22-Year High in Survey: Energy Markets
  • Republican Born Roosevelt Digs Deep for Texas Oil Found With CO2
  • Yen Makes Tokyo Rubber Better Bet Than China: Chart of the Day
  • Rubber’s Slump Into Bear Market Draws Export Curbs From Thailand






















The Hedgeye Macro Team