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Grenadier Cigars

This note was originally published at 8am on April 17, 2013 for Hedgeye subscribers.

“Horse manure sprinkled with tobacco.”

-William Silber


That’s what “a cigar aficionado had once told him” (with him being Paul Volcker) about “his favorite A&C Grenadiar cigar.” In 1979, Volcker would take a big pay cut (“earning $57,500 a year rather than the $110,000 salary”) as President of the New York Fed. (Volcker: The Triumph of Persistence, pg 147)


Unlike some of these pretend patriots you see on Political Economy TV today, Volcker took serving his country in the wallet. Like Benjamin Franklin, he was a frugal man. He, like anyone tasked with central planning, had his issues. But one of those wasn’t credibility. The #PoliticalClass didn’t always like him, but history has treated him well, primarily because he earned The People’s trust.


When Bernanke proclaimed that he has “the best inflation track record of anyone since WWII”, it made me sick to my stomach. Today, in 1964, Americans bought their first Ford Mustang for $2,368. That was also a time when JFK explicitly marketed a #StrongDollar. Hopefully, we’re well on our way to deflating Bernanke’s Commodity Bubbles now. Lord knows, we all need a real-world Tax Cut.


Back to the Global Macro Grind


Within the context of the immediate-term risk I ranted about in yesterday’s Early Look, yesterday’s +1.43% rip in the SP500 was critical on all three fronts that matter in one of my most basic 3-factor models:

  1. PRICE – what was 1557 immediate-term TRADE resistance, once again became support (no resistance now to 1601)
  2. VOLUME – up +3.3% versus what I call my TREND average (up days on up volume = good)
  3. VOLATILITY – VIX smoked for a -19.2% down move, closing back below TRADE resistance (14.27); next support 10.53

So, I got a little longer (net), going to 10 LONGS, 7 SHORTS @Hedgeye. Process: as beta (SP500) recovered my TRADE line of support (1557), the first moves I made were A) covering consumption shorts and B) buying consumption longs (we’re bullish on US domestic Hospitals, so Tom Tobin had me buyback HCA on sale).


From both a gross and net perspective, I can obviously get a lot longer than this. I have throughout the last 5 months, and I will continue to buy pullbacks, provided that both the Research and Risk Signals tell me to do so. But I will do it at my own pace. Patience is an asset.


What generalist PMs and individual investors alike have to be getting impatient with is more of the same; especially if they aren’t yet positioned LONG CONSUMPTION vs SHORT COMMMODITIES.


Top Down, the YTD score is very straightforward:

  1. SP500, US Healthcare, and US Consumer Discretionary = +10.4%, +19.7%, and +13.3%, respectively
  2. CRB Commodities Index, Gold, Russia = -4.1%, -17.3%, and -11.5%, respectively

In terms of US Equity Sector performance, so are the month-to-date returns for April at mid-month:

  1.  Healthcare (XLV) +3.76%, Consumer Staples (XLP) +2.62%, Consumer Discretionary (XLY) +1.40%
  2. Energy (XLE) -4.50%, Basic Materials (XLB) -3.04%, Industrials (XLI) -1.72%

In other words, the performance divergence between CONSUMPTION and COMMODITY related investments is accelerating at an accelerating rate. We like that. It’s called convexity.


To be clear, like the conflicted and compromised bureaucrats that Volcker and Thatcher had to take head on in the early 1980s, people who don’t get paid by #CommodityDeflation do not like this. Neither do the dudes who get paid to market Gold commercials.


But, like I said on yesterday’s Global Macro Themes call for Q2 2013 (ping Sales@Hedgeye.com if you want the slides/replay), it’s not my job to pander to fear-based advertising for bitcoins. Neither is it to live a regressive life. What’s happening to Gold and Oil in particular is potentially one of the most progressive economic developments in the last 20 years.


Risk Management Questions I addressed on our Q2 Macro Themes call:

  1. Can the US Dollar Index go to $88, then $98?
  2. Can the Japanese Yen (vs USD) go to 110, then 150?
  3. Can the price of crude Oil drop to $19-56/barrel?

It’s all interconnected. And if the answer to all three of those questions were to become yes, all I can say is that A) being long Consumption will be really right, B) being short Commodities will be epic, and C) Putin will be pissed.


Putin? Yes, as in Vlady. Russian geopolitical and said economic-power runs on Oil inflation. He’s been whining in the press for the last few weeks, so expect his next move to be Japanese (devalue the Ruble). Then this flow show party can really get started.


Flow show? No, I’m not talking about my hair. I mean #EmergingOutflows (introduced as our latest Global Macro Theme in yesterday’s conference call). #StrongDollar = bad (for some Emerging Markets). So we’ll have a deeper dive Hedgeye Black Book pending on that. Knock on wood (my hockey head), but horse manure sprinkled with some Hedgeye Macro tobacco has never smelled so good.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, Euro/USD, UST10yr Yield, VIX and the SP500 are now $1284-1399, $99.43-103.99, 95.77-101.70, $1.29-1.31, 1.70-1.77%, 10.53-16.65, and 1557-1601, respectively.


Happy Birthday Laura, and best of luck to you out there today,



Keith R. McCullough
Chief Executive Officer


Grenadier Cigars - Chart of the Day


Grenadier Cigars - Virtual Portfolio

Distant Peoples

“the unnatural task of holding in submission distant peoples...”

-Edward Gibbon


Edward Gibbon was an 18th century British historian who became famous for his 6 volume work, The History of the Decline and Fall of the Roman Empire (published between 1). Contextualizing Roman history is critical in order to attempt to scrutinize the rise and fall of any post 18th century economic empires (Britain, USA, or Japan). Governments plundering their people doesn’t end well.


Alongside Clausewitz (Prussian military theorist), Gibbon was also a favorite of America’s 1st grand strategist in the US State Department, George F. Kennan, whose biography I am waist deep in right now (it starts off slow, but the meat and potatoes of this book start in the post WWII period; I’m studying it now so that I can contextualize Russian policy – a country ETF (RSX) that we re-shorted yesterday).


The reason why I’m highlighting Gibbon’s quote this morning is that it’s FOMC d-day. Via debauching the world’s reserve currency, Ben Bernanke’s Fed has held distant peoples (including those in the US who don’t live in D.C.) in an unnatural submission to a Policy To Inflate food and energy prices. End it man – let #StrongDollar manifest. The People need a consumption #TaxCut.


Back to the Global Macro Grind


For those who were paid to see no inflation at the all-time highs in Oil (2008), Gold (2011), and/or Food Prices (2012), all I can say is shame on you. The People know the truth. And now they are ready to receive the communion of #CommodityDeflation.


I never grew up thinking about which “class” I was in. Class warfare is stated plainly in the opening sentence to Marx’s Communist Manifesto. I’m more of a freedom and meritocracy type of a guy myself. The last word of the last sentence of Darwin’s On The Origin of Species is “evolved.” People who think they can centrally plan other people into submission should evolve too.


To be clear, these are two different ideologies that you see in both political and economic thought. One camp thinks the market and economic system is one that can be “smoothed” and controlled with certainty (policy action). The other believes the global economic system is open, interconnected, and non-linear. You know which camp I’m in.


If you study the last 42 years and back out the Bernanke years (Down Dollar, Up Commodity Inflation to all-time highs), most US market historians understand the power of a #StrongDollar (“tighter” money than you have today, combined with fiscal conservatism). Unless left wing Marxists are levered up on their credit cards at home, I think even they get the #StrongDollar thing too.


So when will Bernanke acknowledge economic gravity and get out of our way?


US economic growth has accelerated from +0.38% in Q4 of 2012 to +2.5% in Q1 of 2013. The US Dollar strengthened the entire way through this #GrowthAccelerating period as #CommodityDeflation took hold.


Look at both the US Consumption side of the US economy (very strong in Q113) and the consumption sectors of the US stock market (here are the inflations and deflations for 2013 YTD):

  1. US Healthcare Stocks (XLV) = +18.68% YTD
  2. US Consumer Staples Stocks (XLP) = +17.31% YTD
  3. US Consumer Discretionary Stocks = +15.12% YTD 


  1. CRB Commodities Index (19 commodities) = -2.3% YTD
  2. Brent Crude Oil = -5.9% YTD
  3. Cattle = -6.7% YTD
  4. Corn = -7.6% YTD
  5. Wheat = -7.9% YTD
  6. Coffee = -9.7% YTD
  7. Sugar -10.8% YTD
  8. Gold = -12.1% YTD
  9. Copper = -13.2% YTD
  10. Silver = -20% YTD

Do you hear me now, Ben? Do more of this. Do more of nothing.


On a 3 month duration, the US stock market gets this inasmuch as it did in 1983-89 and 1993-99 (#StrongDollar periods). Our intermediate-term TREND correlation between the USD and US Stocks (SPY) = +0.72. USD vs Commodities (CRB Index) on a 3 month duration is -0.71. It’ll keep working, unless Bernanke says he’ll devalue the Dollar again. Distant Peoples, Unite!


Our immediate-term Risk Ranges for Gold, Oil, US Dollar, EUR/USD, USD/YEN, UST10yr Yield, VIX, and the SP500 are now $1, $98.07-104.83, $81.58-82.63, $1.29-1.31, 97.11-100.93, 1.66-1.76%, 11.67-14.29, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Distant Peoples - Chart of the Day


Distant Peoples - Virtual Portfolio

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TODAY’S S&P 500 SET-UP – May 1, 2013     

As we look at today's setup for the S&P 500, the range is 35 points or 1.41% downside to 1575 and 0.78% upside to 1610.










  • YIELD CURVE: 1.46 from 1.46
  • VIX  closed at 13.52 1 day percent change of -1.39%

MACRO DATA POINTS (Bloomberg Estimates):

  • Treasury Quarterly Refunding Announcement
  • 7am: MBA Mortgage Applications, April 26 (prior 0.2%)
  • 8:15am: ADP Employment Change, April, est. 150k (prior 158k)
  • 8:58am: Markit US PMI Final, April, est. 52.0
  • 10am: Construction Spending M/m, March, est. 0.6% (prior 1.2%)
  • 10am: ISM Manufacturing, April, est. 50.6 (prior 51.3)
  • 10am: ISM Prices Paid, April, est. 52.6 (prior 54.5)
  • 10:30am: DOE Energy Inventories
  • 2pm: FOMC meeting ends today, est. 0.25% (prior 0.25%)
  • 5pm: Total Vehicle Sales, April, est. 15.30m (prior 15.22m)
  • 5pm: Domestic Vehicle Sales, April, est. 12.00m (prior 12.00m)


    • House, Senate not in session
    • Treasury announces quarterly refunding plans for govt operations, may comment on U.S. debt; Obama in Feb. signed legislation suspending $16.4t debt limit through May 18
    • FOMC releases policy statement at close of two-day meeting


  • Fed seen slowing stimulus with QE cut to $50b by yr-end
  • PREVIEW April Auto Sales: SAAR may post 6th month above 15m
  • U.S. manufacturing probably grew at slower pace in April
  • Facebook seen reporting sales jump as mobile-ad options expand
  • T-Mobile USA to debut on NYSE today after MetroPCS combination
  • ING U.S. unit prepares IPO led by “unsung heroes” of AIG bailout
  • SEC weighs cross-border swap rules amid calls to restrict reach
  • BMC Software gets >$6.5b bid from Bain, Golden Gate: Reuters
  • Schwab sues BofA, other banks over alleged Libor manipulation
  • China manufacturing expanded at weaker pace in April
  • Yahoo discussions over Dailymotion stall, French official says
  • DreamWorks posts surprise 1Q profit aided by “The Croods”


    • Haemonetics (HAE) 6am, $0.46
    • Iron Mountain (IRM) 6am, $0.27
    • ADT (ADT) 6am, $0.43
    • Humana (HUM) 6am, $1.80
    • Knight Capital Group (KCG) 6am, $0.04
    • Genesee & Wyoming (GWR) 6am, $0.89
    • Coventry Health Care (CVH) 6:30am, $0.81
    • Blackbaud (BLKB) 6:30am, $0.20
    • Progressive Waste Solutions (BIN CN) 6:30am, $0.20
    • Loblaw (L CN) 6:30am, C$0.47
    • SPX (SPW) 6:30am, $0.26
    • CVS Caremark (CVS) 7am, $0.79 - Preview
    • Merck (MRK) 7am, $0.79 - Preview
    • Time Warner (TWX) 7am, $0.74 - Preview
    • Radian (RDN) 7am, $(0.09)
    • Chesapeake Energy (CHK) 7am, $0.25 - Preview
    • WEX (WEX) 7am, $0.96
    • Amtrust Financial (AFSI) 7am, $0.73
    • Jean Coutu Group (PJC/A CN) 7am, C$0.26
    • American Tower (AMT) 7am, $0.82
    • Jones Group (JNY) 7am, $0.15
    • Comcast (CMCSA) 7am, $0.51 - Preview
    • El Paso Electric (EE) 7am, $0.12
    • Viacom (VIAB) 7am, $0.95 - Preview
    • AllianceBernstein (AB) 7:02am, $0.36
    • Avista (AVA) 7:05am, $0.69
    • ViroPharma (VPHM) 7:30am, $0.17
    • Hyatt Hotels (H) 7:30am, $0.08
    • Energizer (ENR) 7:30am, $1.28
    • Hospira (HSP) 7:30am, $0.44 - Preview
    • Sealed Air (SEE) 7:30am, $0.18
    • Exelon (EXC) 7:30am, $0.68
    • Clean Harbors (CLH) 7:30am, $0.33
    • IntercontinentalExchange (ICE) 7:30am, $1.97
    • MSCI (MSCI) 7:30am, $0.54
    • Pinnacle Entertainment (PNK) 8am, $0.19
    • Cott (BCB CN) 8am, $0.09
    • Devon Energy (DVN) 8am, $0.55 - Preview
    • Mastercard (MA) 8am, $6.17
    • Phillips 66 (PSX) 8am, $1.89 - Preview
    • Arrow Electronics (ARW) 8am, $0.88
    • IPG Photonics (IPGP) 8am, $0.70
    • KKR Financial (KFN) 8:20am, $0.35
    • Clorox (CLX) 8:30am, $1.05
    • Rowan (RDC) 8:30am, $0.52
    • PDC Energy (PDCE) 8:30am, $0.16
    • MFA Financial (MFA) 8:30am, $0.21
    • Allergan (AGN) 9am, $0.96
    • Expeditors Intl of Washington (EXPD) 9am, $0.39
    • Enbridge Energy Partners (EEP) Bef-mkt, $0.17
    • Cameco (CCO CN) Bef-mkt, C$0.08
    • Unum Group (UNM) 4pm, $0.78
    • Covance (CVD) 4pm, $0.72
    • MedAssets (MDAS) 4pm, $0.29
    • Walter Energy (WLT) 4pm, $(0.90) - Preview
    • Equity One (EQY) 4pm, $0.29
    • Acadia Healthcare (ACHC) 4pm, $0.20
    • Genpact (G) 4pm, $0.22
    • Caesars Entertainment (CZR) 4pm, $(1.46)
    • Kimco Realty (KIM) 4:01pm, $0.32
    • CBS (CBS) 4:01pm, $0.68 - Preview
    • New Gold (NGD CN) 4:01pm, $0.10
    • Impax Laboratories (IPXL) 4:01pm, $0.20
    • Pioneer Natural Resources (PXD) 4:01pm, $0.97
    • Cornerstone OnDemand (CSOD) 4:01pm, $(0.08)
    • Synchronoss Technologies (SNCR) 4:01pm, $0.28
    • DexCom (DXCM) 4:01pm, $(0.17)
    • Las Vegas Sands (LVS) 4:01pm, $0.67 - Preview
    • Healthcare Realty Trust (HR) 4:02pm, $0.32
    • Shutterfly (SFLY) 4:02pm, $(0.14)
    • Pharmacyclics (PCYC) 4:02pm, $0.21
    • MetLife (MET) 4:03pm, $1.30
    • CACI International (CACI) 4:05pm, $1.65
    • Allstate (ALL) 4:05pm, $1.30
    • Con-way (CNW) 4:05pm, $0.27
    • Atmel (ATML) 4:05pm, $0.03
    • Hanger (HGR) 4:05pm, $0.26
    • Tetra Tech (TTEK) 4:05pm, $0.40
    • JDS Uniphase (JDSU) 4:05pm, $0.11
    • Mid-America Apartment Communities (MAA) 4:05pm, $1.19
    • Sovran Self Storage (SSS) 4:05pm, $0.83
    • Corporate Executive Board (CEB) 4:05pm, $0.63
    • Endurance Specialty (ENH) 4:05pm, $1.09
    • ExlService (EXLS) 4:05pm, $0.40
    • PHH (PHH) 4:05pm, $0.39
    • Facebook (FB) 4:05pm, $0.13 - Preview
    • Visa (V) 4:05pm, $1.81
    • Yelp (YELP) 4:05pm, $(0.06)
    • Rovi (ROVI) 4:05pm, $0.46
    • Prudential Financial (PRU) 4:07pm, $1.88
    • Lincoln National (LNC) 4:10pm, $1.10
    • Boston Beer (SAM) 4:10pm, $0.62
    • SS&C Technologies (SSNC) 4:10pm, $0.43
    • Western Gas Partners (WES) 4:10pm, $0.38
    • Fidelity National (FNF) 4:15pm, $0.40
    • Northeast Utilities (NU) 4:15pm, $0.66
    • Intrepid Potash (IPI) 4:15pm, $0.19
    • KAR Auction Services (KAR) 4:15pm, $0.32
    • C&J Energy Services (CJES) 4:20pm, $0.57
    • Atwood Oceanics (ATW) 4:30pm, $1.22
    • Essex Property Trust (ESS) 4:30pm, $1.88
    • Concur Technologies (CNQR) 4:30pm, $0.24
    • Charles River Laboratories (CRL) 4:30pm, $0.71
    • Sabra Health Care REIT (SBRA) 4:30pm, $0.48
    • Eagle Rock Energy (EROC) 4:30pm, $0.08
    • CVR Partners (UAN) 4:30pm, $0.47
    • Federal Realty Investment Trust (FRT) 4:30pm, $1.12
    • Tesoro (TSO) 4:31pm, $0.70
    • Avis Budget (CAR) 4:35pm, $0.02
    • RenaissanceRe (RNR) 4:45pm, $3.04
    • BioMed Realty Trust (BMR) 4:45pm, $0.39
    • Marriott International (MAR) 5pm, $0.40
    • WGL Holdings (WGL) 5pm, $1.47
    • Canfor (CFP CN) 5pm, C$0.49
    • TeleTech Holdings (TTEC) 5pm, $0.31
    • Triumph Group (TGI) 5pm, $1.60
    • Orient-Express Hotels (OEH) 5pm, $(0.13)
    • Hornbeck Offshore Services (HOS) 5pm, $0.30
    • Constellation Software (CSU CN) 5pm, $1.74
    • Concho Resources (CXO) 5pm, $0.78
    • Murphy Oil (MUR) 5pm, $0.98
    • Atmos Energy (ATO) 5:01pm, $1.32
    • PolyOne (POL) 5:05pm, $0.26
    • Integrys Energy (TEG) 5:08pm, $1.60
    • Brookdale Senior Living (BKD) 5:12pm, $(0.04)
    • Vectren (VVC) 5:30pm, $0.67
    • MDU Resources (MDU) 5:45pm, $0.23
    • Archer-Daniels-Midland (ADM) Aft-mkt, $0.50
    • Curtiss-Wright (CW) Aft-mkt, $0.41
    • Pengrowth Energy (PGF CN) Aft-mkt, C$0.01
    • Macerich (MAC) Aft-mkt, $0.79
    • Pason Systems (PSI CN) Aft-mkt, C$0.35
    • CVR Refining (CVRR) Aft-mkt, $1.58
    • Western Gas Equity Partners (WGP) Aft-mkt, $0.12
    • HudBay Minerals (HBM CN) Aft-mkt, C$0.02
    • Bell Aliant (BA CN) Aft-mkt, C$0.40
    • Realogy Holdings (RLGY) Aft-mkt, $(0.44)


  • Gold ETP Holdings Cap Record Drop Wiping $17.9 Billion in Assets
  • China Affair With Cheap Diamonds Heats Mass Market: Commodities
  • U.S. Mint Sales of Gold Coins Advance to Highest in Three Years
  • Brent Crude Declines a Second Day as Global Supplies Increase
  • Copper Slides on Weaker-Than-Estimated Chinese Manufacturing
  • Gold Falls as Investors Weigh Fed Meeting With ETP Holdings Drop
  • Wheat Slides as World Supply Rebound Makes Up for Kansas Losses
  • Sugar Swings in New York on Delivery Speculation; Cocoa Stable
  • Cash for Doomed Crops Means U.S. Farmers Avoid Disaster Costs
  • Biofuel Pioneer Forsakes Renewables to Make Gas-Fed Fuel: Energy
  • Biggest Brazil Smelter Says Copper Demand Is Exceeding Capacity
  • WTI Set to Tumble If It Fails to Breach $100: Technical Analysis
  • Cocoa Deliveries From Brazil’s Bahia Little Changed: Hartmann
  • Cheapest Europe Naphtha Seen Losing Asian Luster: Energy Markets























The Hedgeye Macro Team












Today we bought Lennar (LEN) at $40.59 a share at 1:55 PM EDT in our Real-Time Alerts. We sold the LEN long higher last week and now I'm getting an immediate-term TRADE oversold signal. We remain bullish on #HousingsHammer (and love the 18% short interest in this stock). 



SPB - A Miss, But Some Good with Not So Good

SPB reported Q2 EPS of $0.44, $0.08 below consensus.  The stock is not well-followed or particularly well-modeled, but the results are still likely below expectations.  More important than the EPS result, in our view, was that the company maintained its FCF guidance (the basis of the story is in an accelerating free cash flow profile) and continues to believe that it can delever its balance sheet by over $200 million in 2H.  With leverage to one of our key macro themes (housing) in the form of its newly acquired hardware and home improvement business and guidance of approximately $4.50 per share in FCF in ’13, SPB is an interesting story in a sector without a lot of interesting stories.

If this name were to be weak tomorrow (below $55), we would be buyers.  The name isn’t for everyone, admittedly – it trades by appointment and long/short investors would likely get frustrated having to hedge it out.  However, in terms of potential upside, we think it is definitely worth doing more work on the name.

What we liked:

  • Remains on pace for $240 million of FCF in ‘13
  • Still on track to delever balance sheet by $200 million in 2H
  • Good quarter in Global Pet Supplies - +3.3% constant currency growth
  • Newly acquired Hardware and Home Improvement business was +10.6% year over year top line

What we didn’t like:

  • Going through the press release and updating the model – tighten it up, people
  • EPS missed consensus, but that is not the meat of the story
  • Sales in just about every segment were down (but for the pro forma results in Home and Hardware and Global Pet Supplies) with total firm constant currency organic revenue declining 1.5%
  • Global Batteries declined 1.8% and the commentary indicated that the company gained share in North America – with consensus modeling just a 1% top line decline in ENR you can probably rest a touch easier tonight before tomorrow’s EPS result
  • Home and Garden declined 7.0%, confirming what we suspect (and is likely widely known) will be a weak quarter at SMG.  At $42, we suspect lighter results were largely priced in at SMG, at $45, we are a little less sure.  Also, SPB management specifically pointed out that the company does not participate in the fertilizer, seed or mulch big business – may have been to clarify, or may have been a sign those categories were weaker overall.

Bottom line, keep this one on your radar screens and be a buyer on material weakness.


Call with questions,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst