Stuff Changes

This note was originally published at 8am on April 10, 2013 for Hedgeye subscribers.

“We are made of the same stuff of which events are made.”

-Ralph Waldo Emerson


That’s the opening volley from astrophysicist Eric Chaisson in one of my favorite risk management books, Cosmic Evolution. What’s up with that? What’s up with a chaos theorist prefacing his ideas with the penmanship of a mid-19th century American essayist? It’s all about the storytelling folks. As Taleb recently wrote in Antifragile, “evolution does not depend on narratives, humans do.”


While finding the deep simplicity of the Global Macro point that matters can often feel like finding Waldo himself, Chaisson channeling Emerson is consistent with our discipline of Embracing Uncertainty. Emerson was labeled as a “transcendalist” – he preached individualism and self reliance; he did not support dogmatic and/or traditional organizations.


We’re human, so we want things about markets to make simple sense within our organizational boxes. But markets change, fast and slow. Sometimes they make sense. Sometimes they don’t.  In the heat of a thermodynamic moment, does every phase change make sense to everyone? Does that change care if you understand it? Of course not. Best we can do is try to keep up.


Back to the Global Macro Grind


Keeping up with the US stock market hasn’t been easy for the #PTCs (professional top callers). Every time the SP500 sells off to a higher-low (1540 on Friday), they claim victory. Every time we rally off those higher-lows to higher all-time highs, I hear crickets.


Crickets? What are crickets? Do you hear them on the floor of the NYSE? Crickets – you can hear the hum when something was supposed to happen, and didn’t. #crickets


While I am not entirely sure what kind of a risk management process top-calling is, it fits within the confirmation biases of consensus. My tally is up to 28 high profile PMs, strategists, pundits, etc. who are currently still trying to call the top in US stocks. Maybe this time is different – maybe they’ll all nail it, at the same time. Maybe not.


Quantifying sentiment in markets is probably the hardest thing to do – I’ve tested and trialed almost every voodoo signal I have been issued on this front, and I am left with very few that I’d actually act on. Let’s consider those few:


1.   Sentiment Spread – the II Bullish/Bearish survey data doesn’t tell me much on most metrics other than its historical spread (ie Bulls minus Bears). This morning, that spread is +2990 basis points wide. Over a decade of my tabulating/monitoring this spread, a relatively safe sell zone is +3500-3700 basis points wide. A relatively safe buy zone is 900-1500 basis points wide.


2.   Exhaustion (VIX vs SPX) – while plenty will quibble with this for theoretical reasons (“front month doesn’t reflect sentiment” … “term structure matters more”, etc. etc.), for me it’s just a signal that I’ve built for myself that works most of the time. The problem with it is that it’s not signaling all of the time. So I have to wait on it.


If you’ve studied thermodynamics, you’ll agree that waiting for a certain amount of entropy matters before you register a certain amount of consequential change (energy). That’s one way to conceptualize my VIX/SPX signal. What I am waiting on is:


A)     SPX immediate-term TRADE oversold

B)      VIX immediate-term TRADE overbought


Sounds simple, because it is – after you’ve incorporated multiple-factors across multiple-durations in order to contextualize that immediate-term moment. In other words, it’s a lot easier to roll with the conclusion after the process signals it.


I’m not submitting that I haven’t been run over by my signals once in a while. Nor am I suggesting that either the Sentiment Spread or the VIX/SPX signal are stand alone silver bullet signals. They are just two of the many tells I use instead of gnomes.


Just to roll through putting the aforementioned into action:

  1. On Friday morning, the SP500 was immediate-term TRADE oversold at 1540
  2. On Friday morning, the VIX was immediate-term TRADE overbought at 15.23

So, our #RealTimeAlerts (immediate-term signaling product) acted, aggressively on that, covering shorts and buying stocks (including the SPY itself). This is not about taking victory laps – this is about being accountable to what I do and why. I feel like putting my process out there like this makes it better. Sharp clients question it; so do my analysts internally. In the end, for me at least, that’s a win.


The other side of the buy/cover signal is to have the discipline to sell/short on the bounce. We’ve seen that for a few days since the Friday lows, and now, as the SP500 makes another all-time high, we’ll get another SPX overbought/VIX oversold signal too.


Will that happen at VIX 12.21 and SPX 1576? I don’t know. And that’s the point. Embracing Uncertainty in a non-linear and dynamic ecosystem like this is what I do. Stuff Changes. So I need to change alongside it.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1544-1585, $103.86-107.78, $3.29-3.47, $82.23-83.34, 96.12-100.05, 1.71-1.82%, 12.21-14.51, and 1561-1576, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Stuff Changes - Chart of the Day


Stuff Changes - Virtual Portfolio

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

Early Look

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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


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


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    • 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
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    • 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
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    • Corning (GLW) 7:10am, $0.24
    • RPC (RES) 7:15am, $0.25
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    • 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
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    • 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
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    • Silgan Holdings (SLGN) 8am, $0.47
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    • 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


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  • 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











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