TODAY’S S&P 500 SET-UP – June 27, 2013

As we look at today's setup for the S&P 500, the range is 60 points or 2.82% downside to 1558 and 0.92% upside to 1618.                                










  • YIELD CURVE: 2.14 from 2.16
  • VIX closed at 17.21 1 day percent change of -6.82%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Personal Income, May, est. 0.2% (prior 0.0%)
  • 8:30am: Init Jobless Claims, June 22, est. 345k (prior 354k)
  • 9:45am:  Bloomberg Consumer Comfort, June 23 (prior -29.4)
  • 10am: Pending Home Sales M/m, May, est. 1.0%  (prior 0.3%)
  • 10am: Freddie Mac mortgage rates
  • 10am: Fed’s Dudley speaks on labor market in New York
  • 10:30am: Fed’s Powell speaks on monetary policy in D.C.
  • 10:30am: EIA natural-gas storage change
  • 11am: Kansas City Fed Manuf Activity, June, est. 3 (prior 2)
  • 11am: Fed to buy $4.25b-$5.25b debt in in 2017-2018 sector
  • 12:30pm: Fed’s Lockhart speaks on economy in Marietta, Ga.
  • 1pm: U.S. to sell $29b 7Y notes


    • 10am: Senate Banking Cmte hears from Rep. Mel Watt, D-N.C., to be head of FHFA, Jason Furman on his nomination to be CEA chairman, and Kara Stein, Michael Piwowar to be SEC members
    • 10am: House Transportation panel hears from Federal Railroad Administration chief Joseph Szabo on national rail policy
    • 10am: House Ways and Means Cmte hears from acting IRS Commissioner Danny Werfel on agency’s taxpayer targeting practices
    • 10am: Senate Environment and Public Works Cmte holds hearing on federal oversight of chemical plants, including those in West, Tx., and Geismar, La.
    • 10:30am: FCC Acting Chairwoman Mignon Clyburn will seek protection against disclosure of some information stored on mobile devices at agency monthly meeting
    • 10:30am: Qualcomm’s Dean Brenner, CTIA’s Christopher Guttman-McCabe, NTIA’s Karl Nebbia, Defense Dept CIO Teri Takai testify before House Energy and Commerce Cmte on equipping carriers, agencies in wireless era
    • 11am: Center on Budget and Policy Priorities briefing on changing projections in long-term budget outlook, incorporating Social Security, Medicare trustees’ reports, CBO’s May budget baseline


  • EU finance chiefs reach deal on how to handle failing banks
  • New York Times set to sell Globe for ~10% of purchase price
  • U.K. 1Q GDP rises 0.3%, matching previous est.
  • U.K. disposable income in 1Q fell most in 25 yrs
  • HD Supply, CDW raise 31% less than sought after stocks tumble
  • Oracle, to hold call on partnership at 4pm
  • Canada regulators to rule on BCE’s bid to acquire Astral Media, 4pm
  • Eurozone June economic confidence rises to 91.3; est. 90.4
  • German unemployment unexpectedly drops as eco. recovery seen
  • FHFA nominee faces Senate skepticism of skills to oversee GSEs
  • KKR submits formal bid for Bushnell, N.Y. Post says


    • McCormick (MKC) 6:30am, $0.61
    • Commercial Metals (CMC) 7am, $0.18
    • ConAgra Foods (CAG) 7:30am, $0.59
    • KB Home (KBH) 8am, $(0.06)
    • Worthington Industries (WOR) 8:30am, $0.63
    • Empire (EMP/A CN) 9:30am, C$1.33
    • Accenture (ACN) 4:01pm, $1.14
    • Nike (NKE) 4:15pm, $0.74 - Preview


  • StanChart to Build Hong Kong as Metals Center as East Moves
  • Corn Futures Swing to Limits on China-Sized Errors: Commodities
  • Risk of Cookie Shortage Prompts Japan to Test New Wheat Tender
  • WTI Rises for a Fourth Day on U.S. Refining Boost, China Profits
  • Nickel Leads Metals Rebound as Lower Prices Attract Investors
  • Palm Oil Drops to One-Month Low on Rising Soybean Oil Supplies
  • Sugar Falls After Unica Report on Higher Output; Cocoa Declines
  • HKEx, LME and China Beijing Intl Mining Exchange Sign Agreement
  • Rebar Pares Quarterly Loss as China’s Industrial Profit Improves
  • Aluminum Shipments by Japan Decrease For Seventh Month in May
  • LNG in Paradigm Shift as Shippers See Savings: Energy Markets
  • Cocoa Crop in Ivory Coast Seen by Growers Boosted After Rain
  • Colombia Coffee Growers Threaten Road Blocks, Strikes, Protests
  • Corn Declines for a Sixth Day as Record Production Is Forecast






















The Hedgeye Macro Team
















May passenger volume at Singapore's Changi Airport rose 4.7% in May to 4,281,153.  





The unemployment rate for March - May 2013 was 1.8%, down by 0.1% point over the previous period (February-April).


Trade of the Day: EVEP

Takeaway: We re-shorted EV Energy Partners (EVEP) at 9:45 AM at $36.90.

Hedgeye “Energy Jedi” Kevin Kaiser is seeing darkness, his old friend in EVEP. It is rising back to immediate-term TRADE overbought, within a very bearish TREND. So we are re-Shorting EV Energy Partners and their need to raise capital again.


Trade of the Day: EVEP - EVEP



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What the Fed Needs

Takeaway: The Fed does not need an economist to run it. Perhaps it needs someone able to meet operating budgets.

(Editor's note: The following commentary was originally posted on Fortune.)


Scientists observing bird flight patterns tell us the lead goose in the migratory V-pattern switches back and forth between looking ahead and looking back. It constantly checks the formation behind and adjusts its position to make sure it remains at the point of the flock. Periodically, the lead goose swerves out and another moves up to replace it, going through the same drill of lead, reposition, lead, and reposition.


What the Fed Needs - Geese


President Obama made noises last week about Bernanke's future, comments which are being read as a clear signal that Bernanke will leave the Fed when his current term expires. Hot speculation was set off when President Obama said Bernanke has been on the job "longer than he was supposed to." Will Bernanke be fired? Will he be allowed to serve out his term? Is he in the Presidential doghouse? Commentators are furiously connecting the dots as pundits smack themselves on the forehead saying, We shoulda known when Bernanke failed to show at this year's global central bank confab at Jackson Hole, Wyo. What could all this mean?


Bernanke's term as Fed Chairman runs through January 31, 2014. His term as a member of the Federal Reserve Board ends January 31, 2020. Speculation aside, there seems little point in letting him go at this juncture ("Maybe President Obama didn't look at his teleprompter when he made that remark," one commentator mused.) President Obama is not up for reelection, and with the wheels of the economy grinding, it's too late for someone else to step in and take either credit or blame.


Of course there are those who wish he'd never gotten the appointment in the first place. Hedgeye has taken exception with Bernanke's policies from the beginning -- starting well before him. Bernanke is in many respects not a leader, but rather a follower of the Alan Greenspan-Henry Paulson-Tim Geithner school of coddling the rich. We have been firmly in favor of a Volcker-like jolt, one that pushes all the pain into a short time frame, then gets it out of the way.


At the same time, we wish to state for the record that we have tremendous admiration for Bernanke's intelligence, for his dedication, and for the profound commitment he has brought to his stint in public service. Serving as the appointed Head of Bloody Everything is a damned-if-you-do/damned-if-you-don't proposition under the best of circumstances. It does not take a Princeton Ph.D. to recognize that Bernanke has not been faced with the best of circumstances.


The question remains, though, how much of that is his fault?


Bernanke's approach has been to stimulate the financial markets, and with them the major banking and financial firms. It is not clear to us that Bernanke ever believed the multiple trillions of dollars in guarantees, free profits on Treasury spreads, and actual cash handouts were ever going to turn into actual loans to America's businesses. Bernanke's read of the Great Depression -- a topic on which he is famously a world-renowned expert -- is that the government did not do nearly enough. And history may in fact judge him in a positive light. In a society with so many freedoms tugging at the strings of policy -- and with such a compromised and conflicted process driving both legislation and the regulatory process -- it can't be simple to manage the economy from the top down.


Or can it?


As Hedgeye CEO Keith McCullough has repeatedly observed, the most predictable and constant effect of government intervention is to increase volatility in the marketplace by accelerating economic cycles, rather than letting things play out in their own time. We do not know how one measures societal pain, but we have always been of the opinion that a Volcker-like short, sharp shock to the system would have been far healthier than the extended malaise we have lived through over nearly three presidencies.


We think the next president may want to consider a substantive shift in policy. The Fed does not need an economist to run it. It may not even need someone with a deep understanding of the financial markets. Increasingly, as our elected government has abdicated its responsibility for decision-making, the nuts and bolts of running the economy has been handed over to appointed experts. Perhaps the Fed needs to be run like a business. Perhaps the Fed needs someone with experience meeting operating budgets, hiring and managing employees, and tracking flows in the economy to stay on budget. We never need to stay within a budget as long as we have unlimited access to the printing press. Maybe the next Fed chair should be the owner of a major plumbing supply house or a machine-tool shop.


What the Fed Needs - benn


Bernanke's task has been made more difficult by the fact that major economies' central banks are all pushing on the same accelerator. From Japan to Europe, printing presses are running 'round the clock to create liquidity, in hopes it will stimulate the global economy. This has had the effect of making Bernanke's QE "To Infinity and Beyond" what folks in the hedge fund world call a "crowded trade." When one smart person buys a cheap stock, they can make money with it. When everyone piles into the same "smart idea," two things happen: First, it drives the price to levels where there is no more profit to be made by the next buyer, and it sucks the liquidity out of the market, leaving holders with no one to sell to. In the ultimate crowded trade, the profits vanish and the next move is down. Usually way down. Usually with a thud.


In his most recent testimony, Bernanke expressed himself as "surprised" that interest rates have edged up recently. This is not occurring in a vacuum. This week Keith writes, "The last of the central planning bubbles left in the world is now popping. It's called the bubble in super sovereign debt." May we flatter ourselves to point out that Bernanke should have been subscribed to Hedgeye's research?


The impenetrable aspect of the Fed policy game is that we don't actually know what Chairman Bernanke thinks. The game is played as much with carefully selected public utterances as with actual open-market transactions to add liquidity. (We know there is also a theoretical policy option to decrease liquidity, but it has long been treated as hypothetical. Bernanke is like a driver who never learned that cars have brakes.)


Our take on Bernanke's performance is that he acknowledges the markets are moving away from his ability to control them. QE or not QE is no longer the question. Having led from the front, checking market reactions assiduously along the way -- and having apparently followed Americans' most ardent policy desire by focusing on employment and housing -- Bernanke is now trying to get out of the way gradually enough that the entire edifice does not collapse like a 10-story building into a vast sinkhole.

Podcast: Keith Talks Shop

Hedgeye CEO Keith McCullough appeared on TRN's "FLASHPOINT LIVE" this past weekend with Sam Sorbo and Marius Forte to discuss the markets, economy, the ultra-easy Bernanke Fed and much more. Click on the podcast below to listen.


GIS – Not Much To Like

General Mills is on the tape with Q4 2013 and FY results. Q4 EPS was in line with consensus at $0.53 and the top-line beat at $4.41B vs $4.32B. For the FY, adjusted EPS totaled $2.69 vs $2.56 a year ago and net sales rose 7% to $17.8B. The stock is trading down to ~ $48 (nearly where it was at when it released its Q3 results) and we have concerns about its business mix and 2014 outlook.


While net sales grew 7% in for FY 2013, 6% was composed of new business acquisitions (primarily Yoki), masking weakness in its base business. Certainly 2013 was a strong year of investment, but the company did not see profitability in yogurt (Yoplait) despite heavy investment and the cereal category remains a laggard, both of which compose two of its top three business segments.  We think that due to this underlying weakness, particularly in the U.S., and given its forecast for a 3% COGS headwind in FY 2014, the company will be challenged to meet and beat its expectations, as we expect only modest improvement from its yogurt segment, and are projecting a slower recovery in volumes across the entire business compounded by muted to slowing growth globally.


 What we liked:

  • International sales profit of +24% with growth across every region; outperformance from Latin America (+116%) despite devaluation of the Venezuela bolivar
  • Net sales of Bakeries & Foodservices in FY declined -1%, but operating profit rose 10% to $315M
  • 2014 to maintain 7% FCF yield; increase dividend by 15%; and buy back 2% of the stock

What we didn’t like:

  • Gross Margin declined on the quarter from 37.2% to 34.8% and for the FY from 36.9% to 36.1%
  • FY U.S. retail sales up a mere 1% to $10.6B, with Y/Y net sales weakness in Yoplait (-5%), Frozen Foods (-3%), and Big G (-0.2%)
  • Reliance on margin management to combat 3% COGS headwind in 2014

Below we outline our quantitative levels on GIS. The stock is currently trading between its immediate term TRADE and intermediate term TREND levels. We maintain a bearish bias.


GIS – Not Much To Like - ww. gis


Matthew Hedrick

Senior Analyst

Early Look

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