Arrow Points Up

“Entropy is time’s arrow.”

-Arthur Eddington


That’s not a new reality. But it’s always an important one to remember. Arthur Eddington was the British astrophysicist who first called entropy “time’s arrow” in his 1927 book, The Nature of the Physical World.


You don’t have to be a physics guru to understand the concept of entropy. The 2nd law of thermodynamics calls entropy the price paid by an ecosystem when energy changes. I love applying that thought to markets – particularly when they are undergoing phase transitions.


“The rates of change of entropy differs for each specific event. All the while the rate of change of time itself is taken to be uniform, ceaseless, and non-negotiable.” (Chaisson, Cosmic Evolution, pg 31)


Back to the Global Macro Grind


Moving fast, and slow. That’s what markets do. If you could have a signal to probability weight that the market’s entropy is about to change fast, you’d take it. Or at least I would. Some signals really matter.


One of the most basic relationships in a market is expected price versus volatility. The key word is expected. The two factors (price and volatility) have to be contextualized across multiple durations.


With those thoughts in mind, let’s look at the price of the SP500 vs front-month US Equity Volatility (VIX):

  1. SP500 is in a Bullish Formation (bullish TRADE, TREND, and TAIL)
  2. VIX is in a Bearish Formation (bearish TRADE, TREND, and TAIL)

Three days ago, points 1 and 2 were not true:

  1. SP500 was bearish TRADE (below 1557)
  2. VIX was bullish TRADE (above 14.82)

In between now and then, you were allowed to make a risk managed move (buy and/or cover) on the explicit signal (SPX breaking out, back above 1557, and VIX breaking down through 14.82). You were also allowed to ignore my signal. It’s a free world, sort of.


I rarely ignore my signal.


Obviously I am simplifying this basic relationship between expected price/volatility. I can front-run the gotcha guys who will say that using front-month VIX instead of the implied term-structure of volatility’s curve is a mistake. But why is it if the signal works?


Mixing theory with practice is a dangerous game. You don’t have to take my word for it on that – try it with your own money at home. Some have mathematical theories. Some have qualitative theories. There’s a lot of baggage in theories that don’t embrace change.


My sense is that consensus still isn’t bullish enough on the SP500. My sense is that consensus isn’t bearish enough on US Equity Volatility. But, to be clear, my senses aren’t based on how I feel. My sense is my signal.


What is the most probable path that consensus considers improbable this morning?

  1. SP500 going to 1603
  2. VIX dropping to 10.97

Do you disagree with that? Why?


On Thursday (last week) at 3PM EST here’s where the market was:

  1. SP500 = 1538
  2. VIX = 18.16

This morning:

  1. SP500 = 1578
  2. VIX = 13.48

The context of this 3-day move (across durations) matters. Intermediate-term TREND support for the SP500 (1515) wasn’t violated on the downside inasmuch as intermediate-term TREND resistance for the VIX (18.89) didn’t break-out on the upside.


Should there be a difference between how you feel about a market when volatility drops 25% in a straight line? Should you make decisions based on feelings? Or should you re-model what’s becoming more or less probable for different expected price and volatility parameters?


I’m asking too many questions this morning. And I apologize for that. Maybe I should have just written a one sentence Early Look that said my model is signaling an up arrow for the SP500, and a down one for VIX to 1603 and 10.97, respectively.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $96.68-104.06, $82.47-83.19, 97.27-101.31, 1.68-1.80%, 10.97-14.82, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Arrow Points Up - Chart of the Day


Arrow Points Up - Virtual Portfolio


The Macau Metro Monitor, April 24, 2013




Melco Crown (Philippines) Resorts Corp, the Philippine unit of MPEL, set an offer price of Ps14 (MOP2.71) per share for its top-up placement, according to several media outlets.  This means the company will raise more than US$370 million (MOP2.96 billion) from the follow-on share sale.  Melco Crown (Philippines) Resorts is selling a total of 1.10 billion shares, including the overallotment option, said UBS, which is managing the offer with Citigroup.

According to one banker quoted by, the deal attracted strong demand, including from international investors.  The proceeds of the share sale will go towards the cost of furnishing and operating the Belle Grande Manila Bay resort, a US$1-billion gaming complex MPEL is developing in the Philippines in partnership with Philippine-based Belle Corp.  The resort is set to open in mid-2014.




PNRA reported 1Q EPS $1.64 vs. consensus of $1.65 and SSS of 3.3% which missed the 4.3% consensus expectations.  The company pulled the weather card, citing an impact of -1.0% to -1.5% impact from traffic.  The quality of the earning was low in the quarter as EPS benefited $0.05 from resolution of tax matters.  The company left the full year guidance unchanged at +17-19% growth or $6.89-$7.01 (including an extra week).


During 1Q13, traffic was -2.4% vs. expectations of -0.9%, which was a sequential decline of -240 basis points from 4Q12.  Even adding back the weather impact of 1.5%, traffic declined 90 basis points sequentially. 


The bulls will likely highlight that the March and April comparable sales growth numbers seem back on track, with March running at +4.7% and the first 27 days of April seeing comparable sales growth at +5% at company locations.  Assuming +5.5% in traffic and mix this still suggests negative traffic and we expect traffic to remain pressured for the balance of the year.  Considering the national cable marketing effort that kicked off in February, as part of the higher advertising spending plan for 2013, this is a red flag.


Our short thesis remains intact and we expect consensus estimates to be revised down over the coming weeks.  Management maintaining FY13 guidance has heightened the risk that 2H13 earnings miss expectations.


The company is hosting its EPS conference call at 8:30am ET.  We’ll post on anything incremental after the call.



Howard Penney

Managing Director


Rory Green

Senior Analyst

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TODAY’S S&P 500 SET-UP – April 24, 2013

As we look at today's setup for the S&P 500, the range is 46 points or 1.38% downside to 1557 and 1.53% upside to 1603. 










  • YIELD CURVE: 1.49 from 1.48
  • VIX closed at 13.48 1 day percent change of -6.32%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, April 19 (prior 4.8%)
  • 8:30am: Durable Goods Orders, March, est. -3% (prior 5.6%)
  • 8:30am: Durables Ex-Trans, March, est. 0.5% (prior -0.7%)
  • 8:30am: Cap Goods Orders Nondef Ex Air, March est. 0.3%
  • 8:30am: Cap Goods Shipments Nondef Ex Air, March, est. 1%
  • 10:30am: DOE Energy Inventories
  • 11am: Fed to buy $1.25b-$1.75b notes in 2036-2043 sector
  • 1pm: U.S. to sell $35b 5Y notes


    • VP Joe Biden attends service for MIT police officer killed during Boston Marathon bomber manhunt
    • 9am: NTSB concludes meeting on how Boeing, FAA approved the 787’s lithium-ion batteries
    • 10am: House Transportation, Infrastructure Cmte hearing on freight transportation system
    • 10am: Full cmte markup of H.R. 807, which would require gov. to prioritize obligations on debt held by public in event the debt limit is reached
    • 10am: House Natural Resources Cmte marks up H.R. 3, “Northern Route Approval Act,” to approve construction, operation, maintenance of Keystone XL pipeline
    • 10am: House Fin. Svcs panel hearing on Sallie Mae wind-down as government-sponsored enterprise
    • 10:30am: Joint Economic Cmte hearing on long-term unemployment
    • 12:30pm: Sen. Sherrod Brown, D-Ohio, Sen. David Vitter, R-La., to disclose details of their “too big to fail” banking measure, including “exact” capital requirements
    • 2pm: House Oversight and Government Reform Cmte hearing on Fisker Automotive’s DoE loan, witnesses incl. founder Henrik Fisker


  • Apple to return $55b more to investors as growth slows
  • Apple says to have new products in the fall, in all 2014
  • Boeing faces 2nd day of Dreamliner U.S. safety investigation
  • United sends first 787 for installation of new battery system
  • Too-big-to-fail bill due today faces opposition in Senate
  • Patriot Coal wins court permission to probe Peabody spinoff
  • Anadarko seeks dismissal of investor suit over 2010 gulf spill
  • BMC said to get separate bids from KKR, Bain buyout groups
  • Dell approves retention bonuses for execs amid buyout talks
  • Clearwire sets May 21 date for vote on Sprint’s takeover offer
  • Toyota outsells GM for 5th quarter amid yen-led recovery
  • Billabong extends talks with Sycamore for A$287m bid
  • FedEx shuts out UPS to win $10.5b in Postal Service work
  • ZTE signs patent-licensing deal w/Microsoft over smartphones
  • Payday loan restrictions said considered by 3 U.S. agencies


    • Ashland (ASH) 6am, $1.54
    • Carlisles (CSL) 6am, $0.84
    • Thermo Fisher Scientific (TMO) 6am, $1.29
    • Whirlpool (WHR) 6am, $1.90
    • WR Grace (GRA) 6am, $0.80
    • WellPoint (WLP) 6am, $2.38
    • Evercore Partners (EVR) 6am, $0.45
    • Cenovus Energy (CVE CN) 6am, C$0.46 - Preview
    • Praxair (PX) 6:05am, $1.39
    • Prosperity Bancshares (PB) 6:05am, $0.84
    • Timken (TKR) 6:30am, $0.80
    • MarketAxess Holdings (MKTX) 6:30am, $0.37
    • Wyndham Worldwide (WYN) 6:30am, $0.67
    • Eli Lilly (LLY) 6:30am, $1.05 - Preview
    • Barrick Gold (ABX CN) 6:31am, $0.86 - Preview
    • Procter & Gamble (PG) 6:58am, $0.96 - Preview
    • Meritage Homes (MTH) 7am, $0.25
    • Northrop Grumman (NOC) 7am, $1.73 - Preview
    • Omnicare (OCR) 7am, $0.87
    • Valley National Bancorp (VLY) 7am, $0.18
    • Lorillard (LO) 7am, $0.64 - Preview
    • Tupperware Brands (TUP) 7am, $1.13
    • Asbury Automotive (ABG) 7am, $0.67
    • Teledyne Technologies (TDY) 7am, $0.97
    • EMC/MA (EMC) 7am, $0.40
    • Ford Motor (F) 7am, $0.37 - Preview
    • Motorola Solutions (MSI) 7am, $0.67
    • Sprint Nextel (S) 7am, $(0.34) - Preview
    • Metro (MRU CN) 7am, C$1.01
    • Rockwell Automation (ROK) 7am, $1.29
    • NASDAQ OMX Group (NDAQ) 7am, $0.62
    • General Dynamics (GD) 7am, $1.50 - Preview
    • Lumber Liquidators Holdings (LL) 7am, $0.42
    • Corning (GLW) 7:10am, $0.24
    • RPC (RES) 7:15am, $0.25
    • Rollins (ROL) 7:15am, $0.16
    • Owens Corning (OC) 7:28am, $0.19
    • Hess (HES) 7:30am, $1.59 - Preview
    • T Rowe Price (TROW) 7:30am, $0.89
    • Waste Management (WM) 7:30am, $0.41
    • Lithia Motors (LAD) 7:30am, $0.71
    • Silicon Laboratories (SLAB) 7:30am, $0.55
    • BankUnited (BKU) 7:30am, $0.45
    • Boeing (BA) 7:30am, $1.49 - Preview
    • Southern (SO) 7:30am, $0.50
    • Canadian Pacific Railway (CP CN) 7:30am, C$1.22
    • Allegheny Technologies (ATI) 7:30am, $0.12
    • Sherritt International (S CN) 7:46am, C$0.05
    • Iconix Brand (ICON) 8am, $0.52
    • Silgan Holdings (SLGN) 8am, $0.47
    • Wabtec (WAB) 8am, $1.41
    • Dr Pepper Snapple (DPS) 8am, $0.46
    • New York Community Bancorp (NYCB) 8am, $0.26
    • SUPERVALU (SVU) 8am, $0.11
    • Prologis (PLD) 8am, $0.40
    • Medicines (MDCO) 8am, $(0.27)
    • TC Pipelines (TCP) 8am, $0.64
    • Mine Safety Appliances (MSA) 8:30am, $0.63
    • SEI Investments (SEIC) 8:30am, $0.34
    • AVX (AVX) 8:30am, $0.15
    • Avery Dennison (AVY) 8:30am, $0.58
    • USG (USG) 8:30am, $0.08
    • OSI Systems (OSIS) 8:30am, $0.74
    • NuStar Energy (NS) 8:55am, $0.43
    • Cullen/Frost Bankers (CFR) 9am, $0.96
    • NuStar GP Holdings (NSH) 9:05am, $0.38
    • Toromont Industries (TIH CN) 11:15am, C$0.25
    • Euronet Worldwide (EEFT) Bef-mkt, $0.37
    • Stryker (SYK) 4pm, $1.01
    • QUALCOMM (QCOM) 4pm, $1.17
    • Sterling Financial (STSA) 4pm, $0.35
    • Open Text (OTC CN) 4pm, $1.30
    • Texas Capital Bancshares (TCBI) 4pm, $0.83
    • Crocs (CROX) 4pm, $0.34
    • Coherent (COHR) 4pm, $0.84
    • Interface (TILE) 4pm, $0.14
    • ARRIS Group (ARRS) 4pm, $0.24
    • Knight Transportation (KNX) 4pm, $0.18
    • Whiting Petroleum (WLL) 4pm, $0.91
    • Varian Medical Systems (VAR) 4pm, $1.02
    • Cliffs Natural Resources (CLF) 4:01pm, $0.33
    • LSI (LSI) 4:01pm, $0.12
    • On Assignment (ASGN) 4:01pm, $0.18
    • Bally Technologies (BYI) 4:01pm, $0.85
    • Tractor Supply (TSCO) 4:01pm, $0.62
    • Crown Castle International (CCI) 4:01pm, $0.04
    • Montpelier Re Holdings (MRH) 4:01pm, $0.90
    • Akamai Technologies (AKAM) 4:01pm, $0.46
    • Equinix (EQIX) 4:01pm, $0.76
    • Stericycle (SRCL) 4:02pm, $0.88
    • Service International (SCI) 4:03pm, $0.22
    • CNO Financial (CNO) 4:03pm, $0.20
    • Lender Processing Services (LPS) 4:03pm, $0.65
    • Zynga (ZNGA) 4:03pm, $(0.04)
    • Morningstar (MORN) 4:03pm, $0.58
    • Glimcher Realty Trust (GRT) 4:04pm, $0.14
    • Citrix Systems (CTXS) 4:05pm, $0.63
    • F5 Networks (FFIV) 4:05pm, $1.06
    • Cadence Design Systems (CDNS) 4:05pm, $0.20
    • Flowserve (FLS) 4:05pm, $1.95
    • Fair Isaac (FICO) 4:05pm, $0.63
    • Jarden (JAH) 4:05pm, $0.23
    • Waste Connections (WCN) 4:05pm, $0.33
    • Clearwater Paper (CLW) 4:05pm, $0.52
    • Fusion-io (FIO) 4:05pm, $(0.07)
    • Angie’s List (ANGI) 4:05pm, $(0.17)
    • PetroLogistics (PDH) 4:05pm, $0.68
    • ServiceNow (NOW) 4:06pm, $(0.03)
    • Aflac (AFL) 4:07pm, $1.62
    • Tyler Technologies (TYL) 4:07pm, $0.30
    • Equifax (EFX) 4:09pm, $0.87
    • Symetra Financial (SYA) 4:10pm, $0.34
    • Cheesecake Factory (CAKE) 4:15pm, $0.42
    • Ryland Group (RYL) 4:15pm, $0.28 - Preview
    • Western Digital (WDC) 4:15pm, $1.77
    • CoreLogic (CLGX) 4:15pm, $0.37
    • Brandywine Realty Trust (BDN) 4:15pm, $0.34
    • Lam Research (LRCX) 4:15pm, $0.37
    • Selective Insurance (SIGI) 4:15pm, $0.38
    • CoStar Group (CSGP) 4:15pm, $0.44
    • Oil States International (OIS) 4:15pm, $1.82
    • Aspen Insurance Holdings (AHL) 4:15pm, $1.10
    • Assurant (AIZ) 4:15pm, $1.55
    • Raymond James Financial (RJF) 4:19pm, $0.78
    • Xilinx (XLNX) 4:20pm, $0.45
    • Churchill Downs (CHDN) 4:30pm, $0.11
    • Graco (GGG) 4:30pm, $0.73
    • Susquehanna Bancshares (SUSQ) 4:30pm, $0.23
    • MKS Instruments (MKSI) 4:30pm, $0.03
    • Duke Realty (DRE) 4:37pm, $0.26
    • PTC (PMTC) 4:58pm, $0.36
    • Mullen Group (MTL CN) 5pm, C$0.50
    • Hill-Rom Holdings (HRC) 5pm, $0.50
    • EverBank Financial (EVER) 5pm, $0.29
    • NewMarket (NEU) 5:01pm, $4.82
    • TAL International (TAL) 5:01pm, $1.05
    • Capstead Mortgage (CMO) 5:15pm, $0.32
    • Terex (TEX) 5:27pm, $0.28
    • Lundin Mining (LUN CN) 5:35pm, $0.09
    • Teradyne (TER) 6pm, $0.03
    • Kirby (KEX) 6pm, $0.91
    • Cabot Oil & Gas (COG) 6:02pm, $0.24
    • O’Reilly Automotive (ORLY) 6:30pm, $1.35
    • Methanex (MX CN) Aft-mkt, $0.73


  • Gold ETPs Head for Record Monthly Drop as $20 Billion Wiped Out
  • Mysterious Lake Threatens Ethiopian Sugar Ambitions: Commodities
  • WTI Crude Climbs to One-Week High on ECB Rate Cut Speculation
  • Gold Resumes Climb as Physical Purchases Temper Drop in Holdings
  • Copper Rises as Commodities Advance Amid Stimulus Speculation
  • Corn Drops for Third Day as Drier U.S. Weather May Speed Sowing
  • Arabica Coffee Rebounds as Prices Fell Too Far; Sugar Advances
  • Lead Premium in Europe Said to Extend Drop on Battery Slump
  • Rebar Jumps Most in Five Weeks After Drop Spurs Investor Demand
  • Barrick Profit Tops Estimates as Costs Rise Less Than Expected
  • Kansas-Wheat Premium to Chicago Grain May Jump: Chart of the Day
  • Rubber Climbs to One-Week High as Weakening Yen Boosts Appeal
  • Midwest Diesel Gains as Farmers Sow Record Crop: Energy Markets
  • Record Carbon Plunge Means Pain for Europe’s Utilities: Energy
  • Mint Runs Out of Smallest American Eagle Gold Coin on Sales






















The Hedgeye Macro Team











HBI: Sorry, But It’s Not A Staple

Takeaway: This might not be a short, but the reasons against buying this stock stack up very quickly the way we see it.

Conclusion: This stock had so much going its way over the past year to enhance its multiple. While we can't point to any specific catalysts that would make the stock go down, we think that nearly every multiple-enhancer is in the final stretch. We can think of very few reasons to own this stock today. 



We think HBI is a ‘do nothing’ stock here (and that's being generous). Yes, we give the company a golf clap for taking up EBIT by 8x vs last year despite a decline in its top line, and by doing more to de-risk its balance sheet than most companies we’ve seen in a while.


But on the flip side, we simply have a tough time getting too excited about most parts of this story. Management keeps touting this company as a Consumer Staple. Sorry to say, but Staples a) usually don’t have sales down 2.8% in a given quarter, b) find a way to grow International sales at a rate greater than the US core (they were down 5% in dollars and +1% in local currency), and c) don’t face a +740bp change in gross margins due to a (favorable) swing in commodity prices.


We’re not trying to be punitive in our description of this company, but as it relates to valuing the stock, we can’t call it a Staple. Is 14-15x earnings and 9x EBITDA an egregious multiple for a company like this? As long as the current earnings trajectory sustains itself we think it’s fair – and we think that guidance for this year is probably doable. That's the sole factor that prevents us from shorting it.


But we can’t argue for multiple expansion for the following reasons.

a)      Sales were down 2.8% in 1Q, and to hit the company’s guidance we need to see sales growth accelerate to a low-single digit rate throughout the remainder of the year. A couple of points in growth is hardly heroic, and sales have picked up in recent weeks – as such we have no reason to think they’ll miss. But banking on a sales acceleration and multiple acceleration is not where we want to be.


b)      Same goes for the gross margin. There was 840bp improvement in 1Q – and only 100bp was driven by the company’s own ‘innovate to elevate’ initiative. The other 740bp was sheer commodity cost recovery. Those benefits are completely recovered within the next two quarters. Then we’re back to a gross margin that is 100% based on company pricing, innovation and efficiency initiatives. Again, we’ll be more generous with multiple expansion when we’re just entering the positive side of a potential gross margin recovery. Here, we’re nearing the end.


c)       Similarly, SG&A is up by $30-$40mm this year due to higher media spend – which alone accounts for about 3-4% growth in aggregate SG&A. That’s a big number for a company that considers it a victory when it grows its top line by 3%. Don’t get us wrong, we usually like when companies invest in their brands – it’s one of the more ‘Staple-like’ things that HBI is doing. It’s also one of the things that gives us a bit of confidence that we probably see sales tick up a couple of percent in the back half. But unfortunately, spend comes first and revenue comes second. It’s how the world works. And that reality rarely enhances multiples.


d)      Lastly, we have yet to meet a single HBI owner who has not had ‘delevering the balance sheet and improved use of cash’ as one of the top two reasons for owning the stock.  HBI has a) paid down 30% of its debt over the past year, b) just initiated a dividend, and c) has set expectations for the added pay-down of its $250mm 8% (expensive) senior notes in 4Q13. Our point here is that anticipation of all of this has helped the multiple, but it’s highly unlikely that we’ll see anything related to the balance sheet that get people incrementally more positive over the next year.


So…the punchline is that we can’t necessarily point to a catalyst to make this stock go down. But we think that valuation is relatively full, we need to bank on sales accelerating while commodity benefits are waning and media spend is headed higher, and there are no more positive surprises related to the balance sheet to sweeten the deal. Short interest has been lower only once – back in May of 2010 – but the difference is that today, there’s absolutely no shortage of insider sales.


It’s tough for us to find reasons to buy this stock today.


HBI: Hedgeye Sentiment Monitor -- Insiders Selling Strength

HBI: Sorry, But It’s Not A Staple - hbi sentiment


HBI SIGMA: Still In Sweet Spot, But Getting Worse On The Margin

HBI: Sorry, But It’s Not A Staple - hbi sigma



Today we sold our position in FedEx (FDX) at $92.99 a share at 1:49 PM EDT in our Real-Time Alerts. We originally bought FedEx at $91.93 a share at 3:29 PM EDT on 4/18/13 and #timestamped it. We'll book our buck and continue to risk manage the FDX range within our bullish long-term TAIL view.



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