Cave Dwellers

This note was originally published at 8am on March 25, 2013 for Hedgeye subscribers.

“New is always bad. Never not be afraid.”



If you don’t know who Grug is, take your kids to see The Croods – the latest American computer-animated family film by Dreamworks that opened this weekend. Nicolas Cage crushes it in this one. We loved it!


The movie starts with scarier stuff than Cyprus (Croods fend it off), then Grug’s daughter introduces herself: “My name is Eep and this is my family, the Croods. We never had the chance to explore the outside world because of my Dad’s one rule: Never leave the cave.”


I know – I’m too bullish about US Equity markets, life, etc. these days. But, sometimes, it’s ok to look on the bright side. If you have a fear-mongering Cave Dweller in the office, maybe you should take him to see the movie too. Everyone needs to leave the cave.


Back to the Global Macro Grind


There are plenty of things to worry about out there – and, from a time and price, that will include US Equities too – but for now, the most bullish TREND in America remains your friend: #StrongDollar = Stronger America. Period.


We’ll dig deeper on the Dollar on our upcoming Q2 2013 Global Macro Themes presentation, but for now it’s important to review why US Equity Markets are testing all-time highs into the end of Q1 (our Q113 Themes):

  1. #GrowthStabilizing – US GDP Growth bottomed, sequentially, in Q4 of 2012; upside vs consensus in Q1/Q2 2013
  2. #HousingsHammer – consensus is not yet Bullish Enough on US employment and housing reflexivity
  3. #QuadrillYen – as the US Dollar strengthens on domestic factors, it’s picking up the relative (Burning Yen) trade too

What’s good for the US Dollar is bad for Commodities:

  1. US Dollar Index = +0.5% last week to $82.53 (up for 6 of the last 7 weeks)
  2. CRB Commodities Index = -0.6% last wk to 294 (down for 6 of the last 7 weeks)

What’s good for the US Dollar is also bad for Commodities Correlation Risks:

  1. 30-day inverse correlation between USD and Brent Crude Oil = -0.97
  2. 30-day inverse correlation between USD and High Grade Copper = -0.94
  3. 30-day inverse correlation between USD and Rough Rice = -0.86

Rice? Grug didn’t know how to boil water, but it’s still the world’s top consumed food these days.


And that’s the other big thing going on out there this year in Global Equity markets – not all markets are going up as the US Dollar does.


A)     Emerging Markets that don’t have a US Dollar peg are seeing local inflations (inflation is priced in local FX)

B)      Emerging Markets whose Equity Markets are commodity-linked are losing (Brazil = down -9.4% YTD)


On that score, note the following Global Equity market divergences:

  1. SP500 and Russell2000 = +9.1% and +11.4% YTD, respectively
  2. MSCI Emerging Markets (EM) Index = -3.8% YTD
  3. MSCI Emerging Markets (EM) Index = -1.9% last wk vs the Dow -0.013%

If you want to freak yourself right out, there are plenty of securities and markets out there where you can do that. After all, there’s always a bear market somewhere – and the top 3 bearish TRENDs in our macro model continue to be:

  1. Japanese Yen
  2. US Treasuries
  3. Commodities

Within the Commodities Deflation trend, consensus first saw Copper imploding as a “bearish growth signal.” Now, consensus is calling it what it is this morning – the biggest build of Copper inventory on the LME (London Metals Exchange) since 2003. What if you bought SPY in 2003?


Yep, LME Copper inventory is up +76% YTD. With supply that high and the Correlation Risk in Copper to #StrongDollar ripping, who cares about anything else? It certainly doesn’t mean the world is ending either.


The End of World (#EOW) trade has great marketing programs and tends to get priced into Gold in a hurry. Last week’s net long position in Gold (per CFTC futures/options data) exploded to the upside by 63% week-over-week (to 70,193 net long contracts).


But Gold bulls have been going back to this Cave Dweller well of fear for the last 6 months. So that’s not new. Neither is Gold’s price not reacting to the fear-born expectation that it out-performs. Gold is down again this morning, testing $1605 support.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST 10yr Yield, VIX, and SP500 are now $1599-1619, $106.97-108.66, $3.36-3.48, $82.15-83.25, 94.07-96.71, 1.89-1.97%, 10.78-14.92, and 1543-1565, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Cave Dwellers - Chart of the Day


Cave Dwellers - Virtual Portfolio


TODAY’S S&P 500 SET-UP – April 8, 2013

As we look at today's setup for the S&P 500, the range is 26 points or 0.40% downside to 1547 and 1.27% upside to 1573.   










  • YIELD CURVE: 1.49 from 1.49
  • VIX closed at 13.92 1 day percent change of 0.22%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Fed’s Pianalto speaks in West Palm Beach, Fla.
  • 11am: Fed to purchase $1b-$1.5b notes in 2017-2043 sector
  • 11:30am: U.S. to sell $35b 3M bills, $30b 6M bills
  • 7:15pm: Fed’s Bernanke speaks at Atlanta Fed conference
  • U.S. Rates Weekly Agenda


    • President Obama travels to Connecticut to discuss gun policy
    • Washington Week Ahead


  • Alcoa reports 1Q after the close, beginning earnings season
  • UPS appeals EU rejection of $6.7b TNT Express merger
  • Macy’s, Martha Stewart return to trial if no settlement made
  • Icahn says he won’t waive right to Dell proxy fight: WSJ
  • Dell board ready to repay Icahn for offer-related expenses
  • Adelson returns to stand in $328m suit over Macau deal
  • Merck starts fresh trial on claims Fosamax causes broken legs
  • Chesapeake to keep stake in FTS after value declines: WSJ
  • GE said to be near purchase of Lufkin Industries: WSJ
  • AB InBev has pact in principle with U.S. on Modelo takeover
  • Occidental Chairman Irani should retire, shareholder says
  • Pentagon to seek less for missile defense in FY 2014 budget
  • GM Holden cuts 500 Australian workers citing currency strength
  • Exchanges begin using limit up/limit down circuit breakers
  • Ex-News Corp. COO Chernin said to bid $500m for Hulu site
  • “Evil Dead” tops N.A. box office w/ $26m in sales
  • China’s local debt may be double audit figure: ex-official
  • U.S. Weekly Agendas: Finance, Industrials, Energy, Health, Consumer, Tech, Media/Ent, Real Estate, Transports
  • North American M&A Agenda
  • Canada Weekly Agendas: Energy, Mining
  • U.S. Budget, Bernanke, China, Masters: WK Ahead April 8-13


    • Alcoa (AA) 4:03pm, $0.08 - Preview
    • A Schulman (SHLM) 4:01pm, $0.40


  • Copper Climbs Before Chilean Miners Give Start Date for Strike
  • Hedge Funds Cut Bets Most Since ‘08 as Prices Slump: Commodities
  • Wheat Climbs as China Purchases Almost 1 Million Tons From U.S.
  • Gold Falls in London as Stronger Dollar Curbs Investment Demand
  • WTI Rebounds in New York After Biggest Weekly Drop in Six Months
  • Soybeans Climb as Drop to Lowest in Three Months Attracts Buyers
  • Sugar Rebounds After Bearish Bets Reach Record; Coffee Gains
  • Trust in Gold Not Bernanke as U.S. States Promote Bullion Tender
  • Iron-Ore Swaps Extend Gains as Chinese Mills Seen Restocking
  • Palm Oil Stockpiles in Malaysia Seen Declining Most in Two Years
  • Sundance Scraps Hanlong’s $1.18 Billion Iron Ore Takeover
  • Sewer Bonds Now Saving Power as Simon Property Uses Pace: Energy
  • Bullish Gas Bets Jump as Supply Glut Disappears: Energy Markets
  • Rebar Futures Climb as Rising China Demand May Trim Inventories






















The Hedgeye Macro Team











Just Charts: Employment Data

Just Charts: Employment Data - image001


Just Charts: Employment Data - image002


Just Charts: Employment Data - image003


Just Charts: Employment Data - image004


Just Charts: Employment Data - image005


Just Charts: Employment Data - image006


Just Charts: Employment Data - image007


Just Charts: Employment Data - image008


Just Charts: Employment Data - image009


Just Charts: Employment Data - image010


Just Charts: Employment Data - image011

real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.


The Economic Data calendar for the week of the 8th of April through the 12th is full of critical releases and events. Attached below is a snapshot of some (though far from all of the headline numbers that we will be focused on.



STZ and BUD - Drama Nears Conclusion and Something to Think About as You Prepare Your Taxes

Late Friday, Constellation Brands provided an update regarding its joint (along with Anheuser-Busch InBev) negotiations with the Department of Justice.  STZ announced that the parties had reached an agreement in principle that was “substantially in line” with the revised transaction and that the parties had approached the Court to request one final stay of the proceedings until April 23rd in order to finalize the documents associated with the DOJ’s consent decree.

This all but ends the drama associated with Anheuser Busch InBev’s acquisition of Grupo Modelo and the associated Crown transaction, after much hand wringing (some of it my own) and at least three downgrades of Constellation Brands (at $30/share).  We won’t belabor our view of the companies involved, it’s been consistent from the start – we see STZ fairly valued at $50/share, but recognize that mid-cap managers may chase this name subsequent to the DOJ’s final approval.  We prefer BUD toward $110 per share and suspect that the name could see money flows with the deal in the rear view mirror.


What we would prefer to comment on now, with tax day right around the corner, is what the Department of Justice has done for you, the U.S. taxpayer, during this process.  From the DOJ’s website:


“The goal of the antitrust laws is to protect economic freedom and opportunity by promoting free and fair competition in the marketplace.  Competition in a free market benefits American consumers through lower prices, better quality and greater choice. Competition provides businesses the opportunity to compete on price and quality, in an open market and on a level playing field, unhampered by anticompetitive restraints. Competition also tests and hardens American companies at home, the better to succeed abroad.”


Sounds reasonable, right?  Or…


When the DOJ filed its lawsuit to block this deal, we took issue with more than a few statements made in the brief and saw them as counterfactual to the current state of affairs in the U.S. beer industry.  At the heart of our disagreement with the DOJ’s position was this notion that the 6.5% market share owned by Grupo Modelo in the U.S. somehow represented a significant counterweight to the pricing intentions of the other 93.5% of the market.  Or that the decisions made by Grupo Modelo on pricing were a permanent state of affairs.  We could keep going, but you get the point.  In an effort to combat an unlikely decrease in competition, here is what the DOJ has accomplished:

  1. Forced a U.S. company (STZ) to substantially increase its debt burden by all but compelling ABI’s sale of production assets in Mexico to STZ
  2. Increased capital investment ($400 million over three years by STZ) and employment in Mexico

Here’s what would have happened had the DOJ done nothing, in our estimation – a better run Modelo increases sales in the U.S. through a more focused Crown, retailers and consumers are happier on the margin and the government collects a few extra bucks in terms of duties on increased beer imports.


Unfortunately, under our scenario, the DOJ doesn't get to puff its chest and say that it fought for Joe Six Pack (literally).


Happy Tax Day!


Enjoy the weekend,




Robert  Campagnino

Managing Director




Matt Hedrick

Senior Analyst


Editor’s Note: We have made some changes to your Investing Ideas newsletter this week to serve you better. We have added a section called Investing Ideas Updates, which incorporate the latest comments from our research team’s Investing Ideas’ stocks. We have also included links to the latest Stock Reports, which discuss each Investing Idea stock in detail.






  • CAG: Consumer Staples sector head Rob Campagnino (@HedgeyeStaples) says ConAgra’s earnings “disappointment” – they reported $0.55, a penny less than consensus – is a high-quality problem.  The company continues to do the right thing, increasing their marketing spend in their core business by a third, and maintaining full-year earnings guidance. (Please click here for the latest CAG Stock Report.)
  • HOLX: Health Care sector head Tom Tobin (@HedgeyeHC) sees new replacement of diagnostic mammography units for the first time since late 2008.  Hologic is poised to ride the crest of this replacement cycle wave, which Tobin believes is the start of a long-term growth trend in this critical health technology.  As the recognized leader in accurate detection of cancers, and elimination of false positive results, HOLX should benefit from additional insurance spending under the Affordable Care Act. (Please click here for the latest HOLX Stock Report.)
  • DRI: Restaurants sector head Howard Penney (@HedgeyeHWP) says casual dining trends should improve as housing continues to strengthen – housing mirrors the formation of new family units, and families eat out.  Darden’s quarterly earnings beat Wall Street expectations, though on a double-digit revenue decline. (Please click here for the latest DRI Stock Report.)
  • FDX: Industrials sector head Jay Van Sciver (@HedgeyeIndstrls) says with margins at a 30+ year low, and trailing the competition by as much as 7%, FedEx has abundant opportunities for cost reductions.  Meanwhile, FedEx Ground continues to take market share from UPS.  In a breakup, either the Ground or Express could be worth more than the whole company trades for today. (Please click here for the latest FDX Stock Report.)
  • MPEL: Gaming, Lodging & Leisure sector head Todd Jordan (@HedgeyeSnakeye) says recent highs in this stock should not fool investors: Melco Crown Entertainment continues to be misperceived.  Jordan says management has done an effective job and multiple expansion should take the stock higher, reflecting the more stable reality of this company. (Please click here to see the latest MPEL Stock Report.)



Hedgeye CEO Keith McCullough (@KeithMcCullough) wrote Friday morning, “We are well aware that this week’s news on the jobs front (both Non-Seasonally-Adjusted Rolling Claims and the Monthly Jobs Report) weren’t good; at least not as good as the employment news has been.  That’s now another market opportunity – what if next week’s jobless claims improve?” 


McCullough warns Friday’s market downdraft, triggered by weak non-farm payrolls, could be a head fake.  The S&P index held Keith’s support levels (using his proprietary quantitative models) and signaled a higher overhead resistance level.  What if oil prices continue to fall?  What if the dollar continues to strengthen?  What if mortgage rates get pushed back down again?


What, indeed?



THE GOOD NEWS   Call it “not as bad as you thought news.”  Financials sector head Josh Steiner says the labor market looks much softer than it really is.  Labor statistics are confusing right off the bat, because More Jobs is not at all the same as Less Unemployment – Friday’s non-farm numbers highlights the lopsided relationship between the measures. 


Looking at some key measures of GDP at year-end 2012, there are upward trends in overall demand for US products, both domestic and for export, and increased domestic investment.  The Government component of GDP was flat to slightly down, perhaps partly related to the Sequester.  Hedgeye has said the Sequester is fundamentally positive because it cuts government spending.  The markets seem to agree, driving recent strong action in both the Dollar and US equities.  Against this, Thursday’s Initial Jobless Claims number was widely viewed as a negative surprise, while Friday’s non-farm payrolls report added to fears the recovery is running out of steam.


THE BAD NEWS   Analysts generally track Initial Jobless Claims using seasonally-adjusted figures.  On that basis, this week’s Claims number was pretty dismal.  Steiner favors non-adjusted figures, and using these, Steiner says Initial Claims continued to improve, if only mildly.  Steiner notes that Easter came early this year – March instead of April – throwing off seasonally-adjusted comparisons in everything from employment, to food and entertainment, to retail and beyond.  So there’s Bad News, and Less Bad News: the seasonally-adjusted figures looked awful, while the non-adjusted figures were still trending slightly positive over last year.  Friday’s report shows labor growth is cooling, but one statistic does not a bear market make. 




Industrials sector head Jay Van Sciver highlights private equity in a sector that is generally neglected by big money.  He cautions that KKR’s buyout last month of industrial pump maker Gardner Denver shouldn’t be read as open season across the sector, but there may be some momentum.  “The best LBO shops in the industrials sector go after idiosyncratic deals,” writes Van Sciver.  A highly cyclical sector “can be death sentences for highly leveraged entities,” he writes.  Think of paying $75 million a year for a star outfielder, then seeing him bat 0 for 30.  You’re sure you’ll get your money’s worth some day. 

But the waiting…!


Two additional factors in favor of private equity deals in industrials: it’s an unlikely sector, which means there may be hidden value waiting to be discovered, and there is some $1 trillion in Private Equity cash waiting to be invested.  Unlike you and me, PE managers can’t sit on their cash.  They charge investors a 2% management fee, even on uninvested funds.  You’d better believe there’s pressure to put that money to work.


Other items from the sector:

  • Recent manufacturing and rail data flash a slowdown in March, after rapid growth in January-February.  This may lead companies to issue conservative guidance for the current quarter.
  • Early truck tonnage stats show an upswing after a poor showing last year.  Continued growth in the sector could somewhat mitigate the dour outlook from manufacturing and rail – but a downturn will be seen as confirmation.
  • Factory orders, while probably priced into the markets, are further confirmation of stabilization in industrial activity, after a poor 2012.
  • North American agricultural equipment sales appear well above replacement demand, indicating the sector may be immune to stimulus from agricultural prices.
  • Housing activity continues strong, which continues to bolster Van Sciver’s bullish view on outdoor power equipment.
  • Last, but not least – domestic airlines are supposed to be “reaping the benefits of consolidation through strong pricing.”  Van Sciver says they are really just repeating the tired old narrative of “We’ve changed!  We’ve restructured!  We’ll make lots more money now!”  We remind our readers that the corollary is: “Unless we don’t.”



The SEC requires public companies to make “full and fair disclosure” of material information.  In the past, senior executives would have a “one-on-one” their favorite Wall Street analyst – whose research would magically have the best projection of the company’s earnings.  Now many companies issue Guidance, a public disclosure of management estimates of future revenues, expenses and earnings.


This is an improvement, but still far from perfect.  There’s a “guidance game,” where certain companies always come in with actual earnings reports that are just a little bit better than their guidance.  There are special cases, such as publicly traded oil & gas Master Limited Partnerships who provide guidance on how much they expect to distribute to shareholders.  Again, distribution targets can be met from sources other than actual business revenues, further muddying the accounting waters.  And there are companies that miss their guidance numbers altogether – though note that Wall Street only calls it a “miss” if the actual earnings are below the guidance levels.  Apparently investors don’t mind if companies use accounting skullduggery, as long as their stock prices go up.


While guidance is intended to level the playing field, note that the biggest investors can still purchase an edge, as reported in the Financial Times (April 1st,  “US Research Highlights ‘Cash For Access’ Risks.”)  Citing an academic study released in January, the article says some hedge fund managers “are paying as much as $20,000 an hour to meet a chief executive,” and “informed hedge fund managers… typically generated an excess return of 3.7 per cent in the month following a meeting with management.”  This practice, known in the trade as “corporate access,” indicates the SEC still has a way to go in the realm of Full and Fair Disclosure.


The Wall Street Journal called attention to trends in guidance (April 1st, “Investors Ignore Negativity at Their Peril”) noting that, though the S&P 500 had recouped all its bear market losses, “people in the market with legal inside information are surprisingly cautious.”  FactSet reports the highest ratio of companies in the S&P 500 issuing negative guidance (over 3 ½ to 1) since they started keeping records, in 2006.  And though analysts’ earnings outlooks for these companies has ratcheted down considerably, the average stock price for companies issuing negative guidance is practically unchanged – half of them actually went up in the days immediately following negative guidance announcements.  There seem to be excessive upside reactions when companies issue positive guidance (Netflix stock was up over 60% following enthusiastic guidance) and not enough of a negative reaction to downward guidance. 


We expect most companies issuing negative guidance to report within – or slightly better than – the range of expectation.  Earnings guidance is what management wants you to think of their company right now.  While you don’t have to agree with them, you shouldn’t ignore them.


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.