June 20, 2013

June 20, 2013 - 20



June 20, 2013 - 10yr

June 20, 2013 - spx

June 20, 2013 - dax

June 20, 2013 - dxy

June 20, 2013 - euro



June 20, 2013 - nik

June 20, 2013 - VIX

June 20, 2013 - yen

June 20, 2013 - oil

June 20, 2013 - natgas

June 20, 2013 - gold

June 20, 2013 - copper

Bubbles Pop

“I wonder how much it would take to buy a soap bubble, if there were only one in the world.”

-Mark Twain


The last of the central planning bubbles left in the world is now popping. It’s called the bubble in super sovereign debt.


Everything else that’s imploding this morning was already popping. That’s not new news.


Gold crashing today isn’t new news either. It’s called capitulation.


Back to the Global Macro Grind


Our Waterfall metaphor was right because the big macro factors signaling this move in bonds was measurable. As both the VOLUME (of debt) and VELOCITY (rates rising) started rising at a faster rate, you could see Bernanke’s policy decision approaching the dam.


And no, it wasn’t a sign to buy the damn dip. At least not in Gold or US Treasuries, that is…


I don’t think it’s helpful to give you live quotes and/or pictures of this bifurcation point in Global Macro market history. Neither do I think you need me to rant and/or remind you on why we saw this Waterfall coming. It’s time to tell you what we’d do next.


Most of the time, risk management starts with the what not-to-dos:

  1. Don’t buy Gold, Silver, or Commodities (our asset allocation to those has been 0% for 6 months)
  2. Don’t buy US Treasuries, or Yield Chasing slow growth Equity ideas like Utilities or MLPs
  3. Don’t buy Emerging Markets (#EmergingOutlows is our Q213 Macro Theme)

Once you cross all that stuff off your list, you run out of places to put your money.


So, slowly, from here you can start to buy back:

  1. US Dollars
  2. US Financials levered to a steepening yield curve
  3. US Consumption Equities whose demand curves enjoy #StrongDollar tax cuts

Remember, it’s summer time – and the list of options is narrow – so take your time.


Since US Equities are really the only place we‘d like you to be (for now), here are the key levels to watch:

  1. US Dollar Index intermediate-term TREND support = $81.21
  2. SP500 intermediate-term TREND support = 1583
  3. US Financials (XLF) intermediate-term TREND support = $18.43

Rates rising at an accelerating rate is big risk, primarily because consensus was not positioned for it. Again, going back to our favorite thermodynamic metaphor (VOLUME + VELOCITY of water rising at an exponential rate as you approach the dam), what we have here this morning is a lot of unprepared white water tourists getting really wet.


If you’ve never tried this at home, don’t try Niagra first. Class VI Whitewater Rafting in  West Virginia will get you all the hands on experience you’ll need. When you participate in markets, you have to respect that there are other people (who may not be able to swim) in your raft. And the risk associated with decisions they are forced to make happens fast.


If you have already hedged your Commodities and/or Fixed Income exposures this morning, you are on the shore. So take the time to think through the opportunity that you are staring at downstream:

  1. This point of max entropy (ripping yields) won’t happen every day – that risk is already over the Waterfall
  2. Rising bond yields is a pro-growth signal backed by accelerating 6 month consumption, employment, and housing growth
  3. Steepening curve (bond yields) = wider Yield Spread = bullish for Financials (XLF) that earn an accelerating return on that

I am sure Bernanke is a wonderful father and a nice man. But, folks, he has failed in being able to arrest gravity. He had no business promising people smoothing economic gravity was possible. That was his mistake. That’s his legacy. It’s also yesterday’s news now. The last of his soapy bubbles is finally popping. And there’s no price where he can buy “price stability” in bonds back.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $104.08-106.64, $81.21-82.18, 96.17-98.83, 2.21-2.46%, 14.76-18.98, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bubbles Pop - Chart of the Day


Bubbles Pop - Virtual Portfolio

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.34%

Wandering Trends

This note was originally published at 8am on June 06, 2013 for Hedgeye subscribers.

“One main factor in the upward trend of animal life has been the power of wandering.”

-Alfred North Whitehead


Rather than get all googly eyed about modern day central planners who are long of social science dogma and short of math, I tend to wander backwards when looking for direction. History is my contextual guide, and so are her credible sources.


Whitehead was one of the British math guys (1861-1947) who wandered outside of academia’s box. He co-authored Principia Mathematica with one of the world’s premier strategists (Bertrand Russell) and was an early adopter of what we now call Chaos Theory.


From considering the metaphysical global macro market to the process you have developed to absorb it, what is that you do when markets go against you? What do we do when immediate-term TRADEs wander from the intermediate-term TRENDs? Bull or bear? Personally, I am ok with being called an animal.


Back to the Global Macro Grind


I had a very bad day yesterday. Yes, for those of us who timestamp every move we make, they do happen. But what, precisely, was happening? Was my first move to do more of what wasn’t working? Or was it a better decision to wait and watch?


The good news about today is that Mr Market gives us direct feedback on however we answered those questions. Right or wrong, we are tasked with always questioning the behavioral side of our decision making process. #evolve


To put yesterday’s -1.38% drop (SP500) in context, it was the 5th worst day for US stocks in 2013:

  1. February 28, 2013 = -1.83%
  2. April 15, 2013 = -2.30%
  3. April 17, 2013 = -1.43%
  4. May 31, 2013 = -1.43% 

When I was a younger man trading on simple moving averages and voodoo technical charting systems that my bosses would push down on me, one-factor price moves could really throw me for an emotional loop.


Now I use a baseline 3-factor model that includes PRICE/VOLUME/VOLATILITY parameters and predictive tracking algorithms. And it’s that last little critter (VOLATILITY) that helps me sometimes front-run the proactively predictable behavior of machines.


What all 5 of the worst US stock market down days have in common is front-month US Equity volatility (VIX) seeing a very short-term capitulation to lower TREND duration highs. Here’s that history of VIX closing prices:

  1. February 25, 2013 = 18.99
  2. April 15, 2013 = 17.27
  3. April 18, 2013 = 17.56
  4. May 31, 2013 = 16.30

And yesterday, the VIX closed +7.6% on the day at 17.50.


So, what say you Mr Mucker, TRADE or TREND? That’s easy:

  1. SP500 = bearish TRADE; bullish TREND
  2. VIX = bullish TRADE; bearish TREND 

For those of you who are new to reading my rants, in our model TRADEs are 3 weeks or less and TRENDs are 3 months or more. I built the model this way so that I don’t let my emotions allow me to wander too far away from fundamental research trends.


Freaking out and selling at every higher-low within a bullish TREND is called losing money. And since that would violate Rule #1 in our risk management process, we don’t want to be like that.


Why is the intermediate-term TREND for US stocks bullish and for fear bearish? I think the fundamental research answer to this quantitatively prefaced question is crystal clear – what everyone lives in fear of (#GrowthSlowing) is now #GrowthAccelerating.


Darius Dale will show you this in our Chart of The Day (6 month TREND duration charts)

  1. US Equity Volatility is still crashing (-23% from its Johnny Boehner sequestration fear-mongering high in December 2012)
  2. US Equities (SPY) continue to make a series of higher-lows on selloffs as the VIX makes lower-highs

If the VIX can’t close above 18.99 and the SP500 can’t snap my TREND support line of 1577, what I’ll be doing from here is doing more of what we have been doing for the past 6 months (buying the damn dips in US Consumption and shorting almost everything Commodities).


No, that doesn’t mean I bought all the way down yesterday. It actually meant I did a whole lot of nothing. The SP500’s TRADE line broke, so why hurry when I can either buy lower or buy on another TRADE breakout above 1624 SPX when my convictions are confirmed?


Of all the bubbles Bernanke has helped perpetuate, one of the biggest is fear. The fear of change (rates rising) in this market is pervasive. But don’t wander too far from the TREND here my friends. Shorting fear and buying growth has been right; stay with it until the mathematical signals collide with the fundamentals. If they change, we will.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1361-1419, $100.24-104.42, $82.21-83.32, 98.71-103.02, 2.01-2.23%, 15.31-17.91, and 1601-1624, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Wandering Trends - Chart of the Day

Wandering Trends - Virtual Portfolio


TODAY’S S&P 500 SET-UP – June 20, 2013

As we look at today's setup for the S&P 500, the range is 45 points or 1.10% downside to 1611 and 1.66% upside to 1656.               










  • YIELD CURVE: 2.09 from 2.05
  • VIX closed at 16.64 1 day percent change of 0.18%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Initial Jobless Claims, June 15, est. 340k (prior 334k)
  • 8:30am: Continuing Claims, June 8, est. 2.958m (prior 2.973m)
  • 8:58am: Markit US PMI Preliminary, June
  • 9:45am: Bloomberg Economic Expectations, June (prior -1)
  • 9:45am: Bloomberg Consumer Comfort, June 16
  • 10am: Philadelphia Fed Factory Index, June, est. -2 (prior -5.2)
  • 10am: Existing Home Sales, May, est. 5m (prior 4.97m)
  • 10am: Leading Indicators, May, est. 0.2% (prior 0.6%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: Fed to purchase $2.75b-$3.5b notes in 2020-2023 sector
  • 1pm: U.S. to sell $7b 30Y TIPS in reopening


    • 8:55am: Inter-American Development Bank President Luis Alberto Moreno delivers keynote remarks at Woodrow Wilson Center event on Latin America, Asia relations
    • 9:30am: House Ways and Means Cmte health panel holds hearing on 2013 Medicare Trustees Report
    • 10:30am: Senate Appropriations Cmte marks up several FY2014 spending bills, including the Agriculture, Rural Development, FDA and Related Agencies Appropriations Bill


  • European stocks sink as Bernanke outlines paring of stimulus
  • Goldman Sachs drops Ebix deal as U.S. prosecutors open probe
  • Facebook said to plan unveiling Instagram video sharing
  • Microsoft reverses stance on trading games for Xbox One
  • Men’s Wearhouse founder said ousted amid clash with CEO
  • Ford’s Mulally calls Japan currency manipulator
  • Ford CEO opens $300m China plant as sales surge
  • Fiat judge seen leaving Marchionne in lurch over Chrysler
  • Boeing, Airbus tighten jet-order grip as upstarts falter
  • AirAsia orders $8.6b CFM engines to power A320 planes
  • Airbus explores A380 superjumbo refresher to help sales
  • “Candy Crush Saga” maker said to enlist bankers for IPO
  • Ex-AMD worker seeks probation in insider case on aid to U.S.
  • IEA says U.S. natgas production to accelerate next year
  • Credit Suisse, Baer seen facing delay in U.S. tax deal
  • Five U.K. banks must raise $21.2b total in capital, BOE says
  • Stratasys to acquire 3-D printer rival MakerBot for $403m
  • China manufacturing contraction deepens amid cash pinch
  • Tata wins over IBM, Dell in India as solar cheaper than grid 


    • Pier 1 Imports (PIR) 6am, $0.19
    • IHS (IHS) 6am, $1.05
    • Rite Aid (RAD) 7am, $0.09
    • Kroger (KR) 8:30am, $0.88 - Preview
    • Oracle (ORCL) 4:01pm, $0.87
    • TIBCO Software (TIBX) 4:05pm, $0.19


  • Gold Tumbles to 2 1/2-Year Low as Bear Market Extends After Fed
  • SocGen’s Haigh Sees Gold Lower After Calling Rout: Commodities
  • Commodities From Gold to Oil Slump on Fed Outlook, China Crunch
  • Copper Reaches Seven-Week Low on Fed Concern and China Slowdown
  • WTI Crude Drops a Second Day on Chinese Slowdown, Fed Easing
  • Socgen’s Bhar Sees Silver Sliding to $10-$15 ‘Quite Quickly’
  • Corn Exports From India Seen Climbing to Record on Bigger Crop
  • Gold Imports by India Seen Tumbling 40% This Month From May
  • Gold ‘Bubble’ Is Fit to Burst as Funds Unwound: Chart of the Day
  • Glencore to BP Widen Fuel Oil Price Gap in Spree: Energy Markets
  • Rebar Falls for First Day in Six on Steel Output, China Data
  • LNG Market Will Be Tight Through 2014 on Asia Demand, IEA Says
  • Russia’s Oil Champion Shunned as Putin Weighs Share Sale: Energy
  • SPDR Gold Assets Drop Below 1,000 Tons as $30 Billion Erased






















The Hedgeye Macro Team











FDX: Can FDX Earn $8.00/share in FY 2014?



We’ll let others summarize the FDX quarter and will instead focus on the development of key value drivers.  For us, the one factor that matters most is the Express margin.  FDX needed to “show” Express margin progress and the company delivered.  That should be a positive set-up heading into the core of the FDX’s restructuring in FY14 and FY15.  We see further evidence in the quarter that FDX will execute on its plan to improve Express margins, likely taking the share price significantly higher.  We will also be looking for the 10-Q, which should be out tomorrow.


Express Operating Margin Strong:  FedEx Express is not dead yet.  Instead, it is improving margins and growing total volume (IP+IE, Domestic).  Capacity reductions, a younger fleet and, perhaps most importantly, the use of commercial lift for International Economy volume drove the highest quarterly segment margin since the tight market of FY4Q 2010.  Importantly, the margin gain was from what some pejoratively refer to as “self-help”, not a strong Express environment.  Management's tone when discussing International Economy (IE) vs. International Priority (IP) seemed clearer and more positive than it had previously.  


FDX: Can FDX Earn $8.00/share in FY 2014? - k1



Why Did Express Margins Expand Now? This is the first quarter we expected to see any benefit Express restructuring because this is the first quarter since the restructuring is in place (see “Clock Starts Now”). The early results are encouraging and there should be more to come.


$8.00 In FY14 EPS? Given the strong FY4Q 2013 Express margin and the further improvements expected in FY14, a 6% Express margin for next year is not unrealistic.   FedEx Ground reported strong growth and margins, putting >$2 billion in operating income within reach.  Assuming another decent year for Freight, it is not a big stretch to model FY2014 adjusted EPS at just under $8.00/share. 


Why was guidance so weak?  It seems pretty obvious that management sandbagged guidance, refusing even to elaborate on it in Q&A.  Even though management claimed that they did not play the conservative guidance game, we do not precisely believe them.  In a long-term restructuring, it is much more attractive to progressively raise guidance than to cut/raise/cut/raise the way a true 50/50 guidance expectation could force them to.  Besides, the guided EPS growth barely accounts for the improved pension expense next year, let alone the profit improvement demonstrated in the quarter and expected in the restructuring. 


Capacity & Capital Spending:  Some may have been disappointed by the higher than expected capital spending number.  Our opinion is that the faster FDX gets rid of old aircraft, the better. If they were adding capacity to grab market share, we would worry.  Instead, the capital spending is being directed at replacing high cost, out of date aircraft.  In the international express market, International Economy should increasingly be handled through the asset light FedEx Trade Networks (FTN). 

“We are not buying any airplane capacity for growth. The airplanes that we are buying are for replacement. We're replacing the 727s and, as Alan mentioned, the last one flies Friday, with 757s, ditto  the A310s. The 767s start coming in, in September and those are very high  ROIC activities with the existing volumes. It's not growth at all, and the  777s are replacing the MD-11s over the next 10 years and I think we've got 18 more of them on order over the 10 years. So, there is no capital in  airplanes. We're not putting capital in the business for growth. We're simply replacing the assets that we have.” – Fredrick W. Smith


Express Margin Gains May Slow From Here:  FedEx Express finally moved to fix the capacity/international mix issue this quarter with a sizeable initial benefit.  That pace of margin expansion may be difficult to duplicate and we expect more of a lumpy/seasonal grind higher from here.  The moving of the Investors and Lenders meeting out a year may suggest that there is less incremental news coming and more focus on delivering what the company has already outlined. 

“I'd say the one thing that we're a bit disappointed on, we probably should have moved a bit faster on some of our capacity because we thought that the mix would be a little bit different than it ended up, but it's like Ground and Express, we're happy to get either one and we just have to manage properly within those segment demands from the customers.” – Fredrick W. Smith


Significant Upside:  Although we do not usually like sum of the parts valuations for a number of reasons, the one below helps illustrates the kind of much upside available if FDX is able to execute on its plan to expand margins.  We continue to believe that FDX represents one of the best longer-term opportunities in the Industrials sector.


FDX: Can FDX Earn $8.00/share in FY 2014? - k2

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