Heightened Expectations

Client Talking Points

You Down With ECB?

Rate cuts have become the norm in the "new economy" we live in. The next big one should come out of Europe, specifically from Mario Draghi at the European Central Bank (ECB). The EuroStoxx 600 index was up +3.7% last week, which shows that stocks do expect and care about rate changes. Spain and Italy rallied the most out of the great big melting pot so if Draghi doesn't cut rates soon, it's going to be a mess over there.

Crude Mood

Brent crude oil is in bearish formation across all three of our durations: TRADE, TREND and TAIL. Last week's bounce is unlikely to hold and that's a positive for consumption (Americans are quite fond of lower gas prices). Our immediate-term risk range for Brent crude oil is $97.18-104.09 and there are plenty of speculators who need to unwind their long positions.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company. 


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. 


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. 

Three for the Road


"Consumer spending report at 8:30 kicks off a week chock full of data" -@BenEisen


"Facts are stubborn things, but statistics are more pliable." -Mark Twain


U.S. consumer spending rises 0.2% in March.

Golden Crisis

This note was originally published at 8am on April 15, 2013 for Hedgeye subscribers.

“The difficulty is that no one is ever prepared to move except in a crisis.”

-Paul Volcker


That’s what Paul Volcker had to say about where central planners found themselves post Nixon’s re-election. It was 1973 and the US had just devalued the Dollar for the 2nd time in two years. One of Gold’s great policy driven inflations was on the move.


George Shultz (Treasury Secretary at the time in 1973) “said that the increase in the official gold price from $38.00 and ounce to $42.22 an ounce was a technical change.” (Volcker: The Triumph of Persistence, pg 117)


“Technical”, yep. Technically, both the Nixon/Carter and Bush/Obama central planning teams (back to back Republican/Democrat Administrations) spent their time looking for ways to devalue the currency of the American people. These were the two worst post WWII decades in US Consumer Confidence. When someone takes away your purchasing power, that’s how it feels.


Back to the Global Macro Grind


We’ve affectionately referred to the most recent decade-long inflation in the Gold price as Bernanke’s Bubble. Since both Greenspan and Congress deserve some credit, it’s not entirely fair to blame it all on Ben. But I like to pick on him. So call me a bully.


The fact remains that a 40yr low in the US Dollar (2011) coincided with a 40yr top in Gold and Commodity prices (2011). This all happened on Bernanke’s watch. Historical prices can be annoying; especially if they don’t fit the narrative a professor is trying to paint.


This morning’s move in Gold futures is gnarly. On my scorecard, on our immediate-term TRADE duration, this is almost a 5 standard deviation move to the downside. Gold prices are now officially crashing from their all-time high (-26%).


This shouldn’t surprise any readers of my rants – since cutting our Hedgeye Asset Allocation to Commodities to 0% in September of 2012, then labeling 1 of our Top 3 Global Macro Themes in Q412 “Bubble #3 (Commodities)”, we’ve been crystal clear on this.


It hasn’t been clear to the Gold and Commodity Bulls. One way I like to show their disbelief (that commodity prices can indeed go a lot lower) is the weekly net long positions in futures and options contracts (CFTC data) – on that score, here’s what happened last week:

  1. Gold’s net long position was up +19% wk-over-wk to +56,084
  2. Oil’s net long position finally started to break-down, -4.4% on the week to +196,330
  3. Farm Goods net long position continues to crash, down another -45% last wk to +56,404

In other words:

  1. Gold bulls who thought last week’s -5% decline in price was the bottom will see a new bottom this morning
  2. Oil (which has been in a Bearish Formation in our model for 2 months) will finally start to deflate, faster
  3. Food Prices will remain under pressure providing for a Consumption Tax Cut, globally

Consensus didn’t think this could happen (commodities down, US stocks up) 1, 2, and 3 months ago – but it’s happening. Last week we obviously registered an all-time closing high in the SP500 again (1593) with Commodity prices (CRB Index) down again on the week.


If you look at the complexion of the SP500’s Sector returns for April to-date, it’s the same story (Consumption vs Commodities):

  1. US Healthcare Stocks (XLV) = +4.18% for APR to date
  2. US Consumer Discretionary (XLY) = +2.66% for APR to date
  3. Basic Materials (XLB) and Energy (XLE) = -1.65% and -1.12% for APR to date, respectively

Like I said last week – it’s not that complicated.


What is complicated is explaining to people who are in the business of marketing gold and/or fear that this Golden Crisis is a tremendous opportunity for US politicians to force their conflicted and compromised central planners into getting out of the way on the most ultra dovish US Dollar policy since Nixon/Carter.


This isn’t a conspiracy theory. This is the way monetary policy in this country really works. In late 1971 (Nixon’s re-election campaign), “the president wanted more. The day before Christmas, he told his budget director, George Shultz, “If I have to talk to him (Burns) again, I’ll do it. Next time I’ll just bring him in.” (Volcker, pg 105)


Burns, as in Arthur Burns, was the closest thing to Ben Bernanke that the United States of America ever had (he monetized the US Debt, and De-valued US Dollar). Shortly after Burns left (1978), the speculative bid to the price of Gold left. I still think Bernanke will be gone by the end of his term this year. And the $1700-1900 all-time highs for the price of Gold will be long gone too.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, EUR/USD, VIX, Russell2000 and the SP500 are now $1410-1523, $100.28-105.61, $82.03-82.76, 97.35-102.18, $1.27-1.31, 11.56-13.15, 935-955, and 1571-1601, respectively.


Congratulations to Yale Hockey on winning the NCAA National Championship! Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Golden Crisis - Chart of the Day


Golden Crisis - Virtual Portfolio


The Macau Metro Monitor, April 29, 2013




PricewaterhouseCoopers LLP, resigned this week after a 25-year relationship with Adelson.   A person familiar with the situation said the legal and regulatory scrutiny of LVS was "the overriding issue" behind PwC's resignation.  Personal tension between Adelson and the accounting firm also played a role.  In an SEC filing, Sands didn't cite the reason for the resignation but said the company's longtime auditor hasn't had major substantive disagreements in recent years over accounting and disclosure issues that would have required disclosure in the company's financial statements.


LVS spokesman Ron Reese said there was nothing in Sands' discussions with PwC that would indicate that its decision not to continue as auditor relates to any nonpublic information about litigation or investigations. Adelson's challenging demeanor and demands on the auditors led to a deterioration in the relationship, according to people familiar with the matter.


Auditors resign from clients from time to time over simple matters such as personality disagreements, but it can be a red flag when coupled with an investigation and is something investors should pay attention to, said Lynn Turner, a former chief accountant of the SEC, speaking generally.



SJM CEO So said SJM committed to improving the air quality inside the smoking areas of its casinos.  So said the company was not able to comply straight away with the government standards in all of its properties because the majority were old and were not designed to include smoking and non-smoking zones.  Smoking areas inside 16 of SJM Holdings’ 19 casinos and slot machine parlours did not comply with the government’s minimum air quality requirements, according to a March review by the Health Bureau.  Most of these venues were run by third-party companies.



Hong Kong-listed Louis XIII Holdings Ltd hosted an official groundbreaking ceremony last weekend for its boutique casino-hotel in Cotai, also named Louis XIII.  The company’s executive director Stephen Hung says the hotel’s top suite will cost US$130,000 (MOP1 million) per night, the Financial Times reported.  The former Hong Kong banker says he wants people to patronise the hotel because “it’s the best and the most expensive”.  Hung is planning to include an invitation-only atelier of luxury brands offering bespoke couture at the property.

The company, formerly called Paul Y Engineering, is planning to locate the casino-hotel next door to the residential complex One Oasis, and to include 236 rooms and up to 66 live gaming tables.  The casino is still awaiting formal government approval.



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Predicting The Past

“The problem with the future is that it isn’t as clear as the past.”

-John Lewis Gaddis


On a flight to Denver yesterday I had the opportunity to dig into John Lewis Gaddis’ most recent history book, George F. Kennan. Gaddis, professor of Military and Naval History at Yale, won the Pulitzer Prize for Biography with this book last year.


Kennan’s life is obviously a fascinating one, and I’ll draw on some of his Russian thoughts in upcoming Early Looks, but what I found most interesting was the deep simplicity of Gaddis’ process in writing about history. Empathy is a primary focus.


“The writing of biography particularly requires empathy, which is not the same as sympathy. It asks a very simple question: What exactly would I, knowing what they knew then, have done differently?” (pg 146).


Back to the Global Macro Grind


Last week I geeked out with some Chaos Theory in order to attempt to explain what it is that I do. In many ways, my Early LookContext Matters” draws, partly, on the process that Gaddis explains. Research and Risk Factors are my content and time is my context.


If my contextualization of time doesn’t have empathy, can it be considered objective? Of course not. That’s why Predicting The Past in markets and economies isn’t as trivial as it sounds. There are often two competing sides to the story.


One side of market history that doesn’t require qualification is the score. What a market price did and when is a fact. You may not like the facts, but that certainly doesn’t mean they cease to exist. For the last 5 months, the US Dollar and US Stocks are up; Commodities down.


Moreover, from a historical GDP reporting perspective:

  1. Q1 2013 US GDP #GrowthAccelerated to +2.50% (versus +0.38% in Q412)
  2. Q1 2013 US Consumer Services #GrowthAccelerated to +1.46% (versus +0.27% in Q412)
  3. Q1 2013 Export #GrowthAccelerated to +0.4% (versus -0.4% in Q412)

Dollar Up = Exports Up? Qu’est ce que c’est mes amis? Oui oui, c’est l’economie, eh! 


I can write that in the French tongue of Charles de Gaulle (who thought devaluing the French Franc was the best path to economic prosperity). I can translate it into Krugman/Bernanke if you’d like too. But facts don’t lie; economists and politicians do – and a strong currency has always been good for consumers in the United States of America.


I know. KM, that is so Q1 – this is Q2, and what have you done for me lately?


Well, so far, the US stock market has scored the 1st month of Q213 (April) as follows:

  1. SP500 +0.83%
  2. US Healthcare Stocks (XLV) +3.3%
  3. US Consumer Discretionary Stocks (XLY) +2.8%
  4. US Basic Materials Stocks (XLB) -0.70%
  5. US Energy Stocks (XLE) -2.7%

Looks like the performance divergence between Consumption (XLV, XLY) and Commodities (XLB, XLE) is widening. And with Brent Oil failing at $104.09 resistance again this morning, that is a very good thing (for Consumers).


Inclusive of last week’s dead cat bounce from oversold lows, YTD Commodities performance has not been pretty:

  1. CRB Commodities Index -3.3% (versus SP500 +10.9%)
  2. Oil (Brent) -4.6%
  3. Corn -11.1%
  4. Gold -13.3%
  5. Copper -13.3%

While some continue to plead that Commodities crashing is a bearish “internal indicator” for economic demand, I can’t for the life of me find that chapter in either 1983-89 or 1 US economic or stock market history.


That said, I am empathetic to their plight.


Plight (defined): “a situation, especially a bad or unfortunate one.” (


To be crystal clear on this, this week I fully expect both Ben Bernanke (Fed) and Mario Draghi (ECB) to continue with their storytelling plight that the world needs to devalue. The FOMC will descend from the high mountain of central planning on Wednesday. Then it’s the ECB’s turn on Thursday. As we’ve been saying for the last few weeks, the probability of the ECB cutting rates is going up, not down.


So what if that happens? What if the ECB either cuts rates or alludes to cutting rates? Since it’s all about expectations, market history has already answered part of that for you. The EuroStoxx600 outperformed all major regional indices last week, closing +3.7% - and it’s seeing some follow through buying/covering again this morning.


If the Europeans cut rates, that’s bad for the Euro – good for the US Dollar – bad for Commodities - and good for US Consumers. Bernanke disagrees with me on that. Unfortunately, history doesn’t side with his version of the story. Neither does the US stock market or her economy. Ben, empathize with economic gravity – and please, get out of the way. Devaluing the Dollar again would be a disaster.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1, $97.18-104.09, $82.04-83.32, $1.29-1.31, 97.21-100.92, 1.66-1.76%, 11.77-14.63, 928-955, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Predicting The Past - Chart of the Day


Predicting The Past - Virtual Portfolio


TODAY’S S&P 500 SET-UP – April 29, 2013  

As we look at today's setup for the S&P 500, the range is 31 points or 0.96% downside to 1567 and 1.00% upside to 1598.










  • YIELD CURVE: 1.46 from 1.45
  • VIX  closed at 13.61 1 day percent change of -0.07%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Personal Income, March, est. 0.4% (prior 1.1%)
  • 8:30am: Personal Spending, March, est. 0.1%  (prior 0.7%)
  • 8:30am: PCE Deflator M/m, March, est. -0.1% (prior 0.4%)
  • 8:30am: PCE Core M/m, March, est. 0.1% (prior 0.1%)
  • 10am: Pending Home Sales, M/m, March, est. 0.9% (prior -0.4%)
  • 10am: Pending Home Sales, Y/y, March (prior 5.0%)
  • 10:30am: Dallas Fed Manf. Activity, April (prior 7.4)
  • 11am: Fed to buy $1.25b-$1.75b notes in 2036-2043 sector
  • 11:30am: U.S. to sell $29b 3-mo. bills, $24b 6-mo. bills
  • U.S. Rates Weekly Agenda


    • House, Senate not in session
    • Milken Institute hosts Global Conference, a gathering of 3000 leaders in business, finance, government, public policy. Speakers include Former U.K. Prime Minister Tony Blair, U.S. Congressional Majority Whip Eric Cantor


  • Bayer to buy Conceptus for $1.1b to add contraceptives
  • JPMorgan names Zames sole COO as Bisignano joins First Data
  • Valeant merger talks w/ Activis said to stall over pricing
  • Mitsubishi UFJ said to seek Morgan Stanley’s trust business
  • Capstone acquires BHP’s Arizona copper mine for $650m
  • ANA to resume 787 scheduled service on June 1, CEO Ito Says
  • China may approve 787 commercial service next month: WSJ
  • Two hedge funds said to take stakes in JCPenney: N.Y. Post
  • Jarden offers 90p-shr cash for Sprue Aegis
  • “Pain & Gain” opens as wknd’s top movie with $20m
  • Euro-area April economic confidence declines more than forecast
  • China industrial profit growth slows as economic recovery wanes
  • U.S. Weekly Agendas: Finance, Industrials, Energy, Health, Consumer, Tech, Media/Ent, Real Estate, Transports
  • North American M&A Weekly Agenda
  • Canada Weekly Agendas: Energy, Mining
  • ECB, Fed, Facebook, Buffett, Derby: Wk Ahead April 29-May 4


    • UNS Energy (UNS) 6am, $0.18
    • Education Realty Trust (EDR) 6am, $0.14
    • CNA Financial (CNA) 6am, $0.71
    • Loews (L) 6am, $0.84
    • Medidata Solutions (MDSO) 6:30am, $0.23
    • Eaton (ETN) 6:30am, $0.78
    • Roper Industries (ROP) 7am, $1.22
    • Senior Housing Properties (SNH) 7am, $0.44
    • OneBeacon Insurance (OB) 7am, $0.28
    • Compass Minerals (CMP) 7am, $1.12
    • Armstrong World Industries (AWI) 7am, $0.39
    • Penske Automotive (PAG) 7:30am, $0.62
    • Energen (EGN) 8am, $1.21
    • Tenneco (TEN) 8am, $0.65
    • Health Net (HNT) 8:15am, $0.41
    • Mercury General (MCY) 8:30am, $0.47
    • Old National Bancorp (ONB) 9am, $0.26
    • Capitol Federal Financial (CFFN) 9am, $0.12
    • Choice Hotels International (CHH) Bef-mkt, $0.27
    • Extra Space Storage (EXR) Bef-mkt, $0.44
    • International Rectifier (IRF) 4pm, $ (0.38)
    • Integrated Device Technology (IDTI) 4pm, $0.01
    • J&J Snack Foods (JJSF) 4pm, $0.63
    • Cognex (CGNX) 4pm, $0.32
    • CBL & Associates Properties (CBL) 4pm, $0.51
    • Texas Roadhouse (TXRH) 4pm, $0.35
    • Express Scripts Holding (ESRX) 4:01pm, $0.98 - Preview
    • General Growth Properties (GGP) 4:01pm, $0.23
    • Arch Capital Group (ACGL) 4:01pm, $0.96
    • SBA Communications (SBAC) 4:01pm, $ (0.21)
    • Buffalo Wild Wings (BWLD) 4:01pm, $0.99
    • Allison Transmission (ALSN) 4:01pm, $0.19
    • Wesco Aircraft Holdings (WAIR) 4:01pm, $0.27
    • Plum Creek Timber (PCL) 4:02pm, $0.32
    • Hanover Insurance (THG) 4:05pm, $1.05
    • Alexandria Real Estate Equities (ARE) 4:05pm, $1.11
    • Macquarie Infrastructure (MIC) 4:05pm, $0.32
    • Riverbed Technology (RVBD) 4:05pm, $0.24
    • HeartWare International (HTWR) 4:10pm, $ (1.21)
    • Hertz Global Holdings (HTZ) 4:11pm, $0.17
    • Hartford Financial Services (HIG) 4:15pm, $0.82
    • CapitalSource (CSE) 4:15pm, $0.14
    • PartnerRe (PRE) 4:15pm, $2.38
    • Advent Software (ADVS) 4:15pm, $0.30
    • Erie Indemnity (ERIE) 4:15pm, $0.73
    • Community Health Systems (CYH) 4:30pm, $0.85
    • Cleco (CNL) 4:35pm, $0.48
    • Investors Bancorp (ISBC) 5pm, $0.24
    • Masco (MAS) 5pm, $0.14
    • Post Properties (PPS) 5:01pm, $0.70
    • Newmont Mining (NEM) 5:03pm, $0.76 - Preview
    • Jacobs Engineering Group (JEC) 10pm, $0.83
    • Suncor Energy (SU CN) 10pm, $0.76
    • Helen of Troy (HELE) Aft-mkt, $0.94
    • Innophos Holdings (IPHS) Aft-mkt, $0.78


  • Silver Slump Lures Buyers as Waiting Time Rises in Singapore
  • Gold Bears Defy Rally as Goldman Closes Short Wager: Commodities
  • WTI Crude Rises to Near Two-Week High; OPEC Basket Above $100
  • Gold Climbs as Higher Physical Demand Counters Decline From ETPs
  • Nickel Advances on Speculation of Producer Cuts; Lead Declines
  • Corn Reaches a One-Week High Amid Speculation Planting Slowed
  • Robusta Coffee Falls as Traders Sell After Rally; Cocoa Drops
  • India Sugar Reserves at Five-Year High Set to Avert Imports
  • Hedge Funds Raise Bullish Gas Bets for 10th Week: Energy Markets
  • Palm Oil Snaps Four-Day Rally After Indonesia Cuts Export Tax
  • Swiss Bank Pictet’s Water Fund Boosted by Mideast Shortage
  • Copper Rout Spurs Chile Rate-Cut Bets as CDS Jumps: Andes Credit
  • Keystone Pipeline Support Enlists Oil Firms to U.S. Jews: Energy
  • Sugar Mills in Thailand Battle Strengthening Baht as Prices Drop






















The Hedgeye Macro Team