Risk On: NYSE Margin Debt

Margin debt levels at the New York Stock Exchange (NYSE) show the amount of funds customers are borrowing from their brokerage (i.e. levering up). Historically, when NYSE margin debt gets to a +1.5 standard deviation or greater, market risk increases considerably. With current levels above +1.5 and the S&P 500 struggling to maintain its new all-time closing high of 1570, we could very well see a sell off in the US equity market sooner rather than later if history is anything to go by. 


Risk On: NYSE Margin Debt - NYSEmargindebt


Risk On: NYSE Margin Debt - NYSEdebt2

CAG, MKC, GIS – One of these Things is not like the Others

We don’t generally review quarters, but we do like to try and provide context for investors and we think it is important to put CAG into context with the two prior earnings releases in the packaged food sector.

GIS (March 20th) – Beat consensus by $0.07, raised full year guidance by $0.01 at the high and low end (1 quarter remaining).  Implied Q4 guidance is $0.51 per share vs. consensus of $0.59 ($0.08 below).  The company reduced advertising and media spending by 6% in its U.S. retail segment, offsetting some of the weakness on the gross margin line.


MKC (April 2) – Beat consensus by $0.01 (recall that the company had previously guided down this quarter), but lowered Q2 by $0.05 versus consensus.  The company maintained full-year guidance (had already guided down significantly back in the December quarter).


“While brand marketing support was $4 million lower in the first quarter of 2013, the company spent an additional $3 million for increased price promotions and paid allowances to gain distribution for new items” (emphasis added)


CAG (April 3) – Missed consensus by $0.01 ($0.55 versus $0.56), top line was weaker than expected due to a 3% decline in organic volume (troubling), but the company did see the benefit of 3% price/mix.  Importantly, the company increased marketing investment in its base business by 33% year over year (about $0.03 per share in EPS).  CAG maintained full year guidance of approximately $2.15 (one quarter remaining).


To be clear, we are in no way suggesting that EPS and revenue don’t matter.  However, quality matters as well and we view CAG’s EPS miss as a high quality problem in that it represents an investment in the business for the longer-term.


Bottom line for us is that this quarter doesn’t prompt any changes in either our estimates or our thinking on the name and we continue to see CAG as the best combination of value and “story” in the packaged food space.





Robert  Campagnino


Managing Director










Matt Hedrick


Senior Analyst

VIDEO: The Downfall Of JCP


Hedgeye CEO Keith McCullough appeared on CNBC's Fast Money last night and discussed how JCPenney (JCP) is in trouble as the company and its beleaguered CEO, Ron Johnson, struggle with reinventing the brand. Johnson's compensation as CEO is under pressure as the stock continues to see its share price fall further week-after-week. Skip to 1:35 in the video for Keith's full take on the issue.

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.

Morning Reads From Our Sector Heads

Brian McGough (Retail):


New Non-Martha Home Brands Go Live on (via Sourcing Journal Online)


Tom Tobin (Healthcare):


Feud between hospitals, Medicare contractors explodes over fraud bill (via The Hill)


Jay Van Sciver (Industrials):


US Airways Reports Record March Load Factor (via US Airways


Kevin Kaiser (Energy):


Owners With No Skin in the Game - Accounting Conservatism, Innovation, Shareholder Elections, and Passive Management (via Credit Bubble Stocks)


Penn takes aim at Magnum's Eagle Ford assets (via Upstream)


Rob Campagnino (Consumer Staples):


Corn Joins Crop Bear Market on Slow Demand, More Planting (via Bloomberg)


Howard Penney (Restaurants):


Beijing Prepares For Avian Flu (via Bloomberg Businessweek)


Josh Steiner (Financials):


U.S. Regulator, Bank of America Reach Mortgage-Loss Settlement (via WSJ)


Ex-SEC Enforcement Chief Defends ‘Neither Admit or Deny’ Settlements (via WSJ)


S&P Fires New Salvo in Battle With States (via WSJ)



Consuming Europe

Client Talking Points

Focus On Europe

Keeping a close eye on non-US markets is key to being a global macro player. And right now, we're focused on the DAX and FTSE 100 indices in Germany and the UK, respectively. Both were able to hold above our TRADE lines of support again this morning, which is quite meaningful as commodity-focused markets like Brazil and Russia continue to break down.

The Consumption Game

It's important to pay attention to commodities even if you don't trade them. Coal, corn and copper in particular are all very important to watch right now as consumption increases. An increase in consumption makes for an increase in global growth which helps boost consumption-oriented stocks. We remain bullish on consumption names as a massive divergence continues to widen between consumption assets and commodity assets. The catalyst behind all this is the strong US dollar, which continues, week-after-week, to post gains. Get the dollar right and you get a lot of other things right.

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


"The more crisis-mongering and concern, the better for US stocks #study" -@KeithMcCullough


“I never did give them hell. I just told the truth, and they thought it was hell.” –Harry S. Truman


ADP report says economy added 158,000 private-sector jobs in March, coming in below expectations. Economists' consensus was at 215,000.

Psychological Ballet

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

“There’s a kind of psychological ballet: who will outstare who?”

-John Vaillant, The Tiger


Sound familiar? After a 3-day correction of 1% from the YTD high in the SP500, look into my eyes and tell me how you really feel. And “you should not suddenly turn tail because the scent of fear passes quickly.”


You must back off, slowly, slowly – especially if the tiger has a kill, or if she’s a mother with cubs: she makes a step, you make a step – you must not run away.” (The Tiger, pg 126)


To be clear, I remain bullish – and to the well known newsletter author (who sent me hate mail intraday yesterday) who wants me to roll-over and die… well, I say good luck. “Tigers will bluff-charge the same way bears do and, in most cases, all the tiger wants is an indication of submission.” (pg 150). If this market rips from here, I don’t want his apology – I just want him to publicly admit defeat.


Back to the Global Macro Grind


I know, I know – fights are breaking out and it’s getting gnarly out there. Old Wall guys sending me emails, former Perma Bulls going bearish – it’s all out there right now. It’s a Psychological Ballet. And I like it.


I also liked buying on red yesterday. We bought the SP500 (SPY) after seeing the low-end of our immediate-term Risk Range (1538-1565) tested and tried. After 3 straight down days for US stocks, the US 10yr Bond Yield is down a whole 3 basis points.


End Of World (#EOW) or correction? Who will outstare who into month and quarter-end?


Let’s drop the Siberian tiger stuff and getting into the Global Macro meat of the matter (currencies, countries, fear, etc.):


1.   CURRENCIES: the fulcrum piece of our bullish case on Asian and US #GrowthStabilizing remains the US Dollar. What Cyprus Storytelling gave us this week was an even Stronger Dollar, and Weaker Oil. The US Dollar Index is now up for 6 of the last 7 weeks and, not ironically, the CRB Commodities Index is down for 6 of the last 7 weeks.


2.   COUNTRIES: note that I wrote Asian and US #GrowthStabilizing; so, if you want to freak-out about Europe, just get over it and short Europe – but make sure you sell the right country (we prefer Italy, Russia, and France – in that order, short side). China’s Shanghai Composite ripped a +2.7% move overnight and Germany’s DAX is +0.8% testing 5-year highs. Not #EOW, yet.


3.   VOLATILITY: the epicenter of fear is in both the front-month and term structure of US Equity Volatility (VIX). I’ve written about this exhaustively for 3-months because I want to be Fading Fear (buying High Short Interest, Shorting Gold, Shorting Treasuries, etc.). Front-month VIX just failed at immediate-term TRADE resistance of 14.74 and has no support to 10.77.


I could always smell them. Now that they are sending me idle threats of hereditary right, I can see the Old Wall very clearly now. So what is it, gentlemen? To be long or short of stocks here? Buy or sell?  It really is an ok question to answer, transparently and accountably. I am watching you.


There are two categories of people when it comes to extreme situations… One gets scared first, and then starts thinking; the other starts thinking first and gets scared after the fact. Only the latter survives in the taiga.” (The Tiger, pg 155)


Having made over 2,000 long/short calls (all #timestamped, since 2008), almost 50% of the calls I have made have been on the short side. Inclusive of having to manage plenty of risk to the upside, my batting average on the short side = 79.12%. So A) unlike some of these pundits, I get things wrong and B) I have no problem shorting markets when my process tells me to do so.


Fear of fiction or perceived top-calling wisdoms only computes one way into my process – as contrarian indicators. If it’s the Italian Election or Cyprus that you fear, I am not scared. If you’ve been bearish the whole way up and it’s your reputation you fear, I don’t blame you.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST10yr Yield, VIX, Russell2000, and the SP500 are now $1589-1613, $107.14-109.53, $82.61-83.29, 93.68-97.17, 1.89-1.97%, 10.77-14.74, 933-955, and 1538-1565, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Psychological Ballet - Strong Dollar   Strong America


Psychological Ballet - Virtual Portfolio

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