Client Talking Points


At the recent US Dollar lows in June ($79.11 is the long-term TAIL risk line of support), the Yen tested 94 vs USD and the S&P 500 was probing 1575. A lot changed in a hurry come the beginning of July, and the USD strengthening off those higher all-time-lows was a big driver of that. Bottom line here right now is the USD needs to hold $79.11 to keep buying US Equity corrections. We continue to keep a close eye on this.


One of my key weekly looks on sentiment is probing its June lows all of a sudden too (that’s actually bullish). This morning’s Bull/Bear Spread is +2170; that’s down -34% from when it peaked at +3310 in the first week of August as the S&P 500 and Russell made all-time highs. Bulls have dropped to a shockingly low level of 43.3%. Professional market top calling? It is still in vogue


Got #AsianContagion? It’s officially a race to the bottom for the Rupee (India) vs the Rupiah (Indonesia). Growth continues to slow as currency-adjusted inflation accelerates in these countries. What's the message here? Don’t buy those equity markets. Don't do it. India was down -1.9% overnight. It is now down -11.8% since July 23 and -6.7% year-to-date.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.


Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016.


Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road.

Three for the Road


Seeing clients in CA yesterday, biggest risk discussion centered on whether USD can hold its June lows vs Yen @KeithMcCullough


"Courage is fear holding on a minute longer."

- General George Patton 


Crash or correction? The S&P 500 and Russell 2000 both closed -3.3% from their all-time highs yesterday, while the Nasdaq closed -2.1% from its year-to-date high.

Thinking Time

“Before I went to jail, I was active in politics as a member of South Africa’s leading organization – and I was generally busy from 7 A.M. to midnight. I never had time to sit and think.”

-Nelson Mandela


Former South African Prime Minister Nelson Mandela had more time to sit and think then most of us will ever get.   He served 27 years in prison, first on Robben Island, and later in Pollsmoor Prison and Victor Verster Prison after being convicted of sabotage and conspiracy to overthrow the South African government.


I’ve recently been reading Mandela’s biography and after reading about how he spent his nights in a damp concrete cell of 8 feet by 7 feet and his days breaking rocks into gravel, I’m not sure I would wish this type of “thinking time” on my worst enemy.  But, thinking time is important for all us, and I will be taking some thinking time myself as my first two week vacation of the last decade looms in the next couple of weeks.


In a book we have cited many times, “Thinking, Fast and Slow”, Nobel laureate Daniel Kahneman describes two modes of thought.  The first is System 1, which is fast, instinctive, and emotional.  The second is System 2 and is slower, more deliberative, and more logical.  The main purpose of his book is to describe the dichotomy between these two kinds of thought.


To illustrate how the two different systems work, answer this before you go on:


A hockey stick and puck cost $1.10 together.


If the stick costs $1.00 more than the puck, what does the puck cost?


If you are like most people, even the highly numerical, it is likely that the price of $0.10 popped into your head.  The correct answer of course is that stick cost $1.05 and the puck cost $0.05, so thus the stick cost $1.00 more than the puck.


In a day and age when we are inundated with more stimuli and decision making opportunities than ever before, it is becoming even more critical to take some Thinking Time to maintain the deep logic of System 2. The fact of the matter is, the self-induced dopamine loops of constant texting, tweeting, googling and emailing diminish our performance. (Well, at least that’s how I’m justifying my vacation to my colleagues :) ) 


Back to the global macro grind . . .


I’m going to take this concept of short term versus long term thinking and apply it to the current battleground stock of the day, J.C. Penney (JCP).  Recently Pershing Square’s Bill Ackman all but admitted defeated in his attempt to turn around the retailer as he resigned from the board of JCP and received permission for Pershing Square to sell the more than 15% of the stock it owns. This is short term capitulation.


At the same time, a number of other hedge funds have been taking sizeable positions at the stock has declined, including Kyle Bass, Soros Fund Management and Perry Capital.   Bass, as reported by Bloomberg is actually buying the debt.  These are long term investment positions.


Before I dig into the stock a little more, I wanted to let you know that our Retail Sectorhead Brian McGough will be doing a deep dive on the stock on August 27th at 1pm. (Ping for details.)  As many of you know, Brian was in early in recommending investors short and/or sell the stock when Ackman got involved.  He then tried to call the turn around and added the stock to our Best Ideas list, but ultimately removed the name at about the current price level on March 14th as there was little evidence of a turnaround and his view was that JCP was dead money (which it was).


The Chart of the Day today is a chart of JCP credit default swaps that shows that while a bankruptcy isn’t a foregone conclusion, there is certainly risk as investors are willing to pay a meaningful premium to insure JCP debt.  Interestingly, while JCP debt has declined versus its peer group over the last couple years, it is not yet at extreme levels.


As examples, per Bloomberg and Forbes, the J.C. Penney 5.65% notes due 2020, yesterday traded up two points, at 73.5.  While the long-tenor 6.375% bonds due 2036 traded up half a point, at 69.5, for a net gain of 3.5 points week over week.  In the loan market, J.C. Penney’s covenant-lite term loan due 2018 (L+500, 1% LIBOR floor) were slightly firmer, recently quoted at 96.5/97. As a reference, the $2.25 billion loan was issued at 99.5 in May.


As McGough noted yesterday, “the fact that JCP hit the liquidity levels it guided toward at quarter-end is notable. Add on the fact that capex next year is guided to be down as far as $300mm, and the liquidity picture looks less pressured. We’d argue that these two factors are the sole reasons why the stock was up today. Why?

Let’s stress test the model. We quarter-ized our model for the next three years using the following assumptions a) JCP reaches 2012 sales per square foot levels in 2015, with a gradual comp lift throughout, b) the company generates 37% gross margins – a level we think there is no structural reason it can’t hit again relatively quickly (we know we'll get pushback on that -- but will happily entertain the debate), EBIT margins don’t turn positive until 2016, c) capex increases by $50mm each year, d) working capital patterns are similar to what we saw before 2012.

In tracking the cumulative liquidity for the next three years, there are two periods where it definitely gets dicey for JCP (the worst is 3Q15 -- in two years) – close enough such that it will likely need to find some asset sales that are not already tied to the GS secured debt offering. But even without assuming a miraculous turn at the company, we don’t get to a big liquidity event.”


So, if there is no major liquidity event for the next three years, there is decent runway for the company to turnaround and the shorter term debt, at the very least, looks reasonably safe.  But what do you think?


Next Thursday at 1pm, we’ll introduce some new information and dig into more of our thoughts.  If the turnaround actually happens, based on historical margin levels, JCP equity is a really cheap option at these levels.


Our immediate-term Risk Ranges are now:


UST10yr 2.71-2.94%


Nikkei 13,6

USD 80.80-81.94

Brent 108.78-110.32

Gold 1


Keep your head up and stick on the ice,


Daryl G. Jones



Thinking Time - JCP COD


Thinking Time - vp 821

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

August 21, 2013

August 21, 2013 - dtr



August 21, 2013 - 10yr

August 21, 2013 - spx

August 21, 2013 - nik

August 21, 2013 - dax

August 21, 2013 - dxy

August 21, 2013 - euro

August 21, 2013 - oil



August 21, 2013 - VIX

August 21, 2013 - yen

August 21, 2013 - natgas
August 21, 2013 - gold

August 21, 2013 - copper


TODAY’S S&P 500 SET-UP – August 21, 2013

As we look at today's setup for the S&P 500, the range is 32 points or 0.63% downside to 1642 and 1.31% upside to 1674.                                   










  • YIELD CURVE: 2.48 from 2.48
  • VIX  closed at 14.91 1 day percent change of -1.26%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Aug. 16 (prior -4.7%)
  • 10am: Existing Home Sales, July, est. 5.15m (prior 5.08m)
  • 10:30am: DOE Energy Inventories
  • 2pm: Release of FOMC minutes from July 30-31 meeting


    • SEC could vote to introduce legislation requiring cos. to disclose how much more CEOs are paid than rank-and-file workers
    • 9am: Former FDIC Chairman Sheila Bair, PIMCO CEO Mohamed El-Erian discuss U.S. economy
    • 2pm: FOMC releases minutes from July 30-31 meeting
    • Obama meets on Egypt aid cutoff as lawmakers demand action


  • Goldman said to send client requests to exchanges in error
  • J&J said to weigh $3b settlement of its hip implant cases
  • Disgruntled investors eyeing Falcone’s holding co., NYP says
  • JPMorgan said to be near selection of 2 new directors: Reuters
  • Apple said to add music videos from Vevo to expand TV content
  • Office Depot and Starboard agree to settlement on board
  • Kodak bankruptcy reorganization approved by N.Y. judge
  • Subway targets Europe w/as many as 1,000 new outlets in 2014
  • New China Trust said to withdraw ILFC bid on regulator ties
  • Facebook’s Zuckerberg seeks universal Internet access
  • Perry Capital said to build Herbalife stake opposed to Ackman
  • Disney to shutter 10-yr-old Toontown online multiplayer game
  • AT&T sued on refusal to carry Al Jazeera cable network in U.S.
  • Apple iPad’s China mkt share slumps as Samsung tablets gain
  • APA needs to study Envestra finances before making any new bid
  • Toyota’s Lexus Marque to open luxury stores in branding push
  • China Telecom posts 2nd-straight profit gain on iPhone boost


    • AFC Enterprises (AFCE) 5pm, $0.31
    • American Eagle Outfitters (AEO) 8am, $0.10
    • Eaton Vance (EV) 9am, $0.54
    • Energy XXI Bermuda (EXXI) 7am, $0.47
    • Hain Celestial Group (HAIN) 4pm, $0.62
    • Hewlett-Packard (HPQ) 4:04pm, $0.86 - Preview
    • JM Smucker (SJM) 7am, $1.20
    • L Brands (LTD) 4:30pm, $0.60
    • Lowe’s (LOW) 6am, $0.79 - Preview
    • Madison Square Garden (MSG) 7:30am, $0.32
    • PetSmart (PETM) Bef-mkt, $0.86
    • Prospect Capital (PSEC) 4:03pm, $0.30
    • Sears Canada (SCC CN) 7am, C$0.23
    • Semtech (SMTC) 4:03pm, $0.51
    • Staples (SPLS) 6am, $0.18
    • Synopsys (SNPS) 4:05pm, $0.54
    • Target (TGT) 7:30am, $0.95 - Preview


  • WTI Trades Near One-Week Low on Fed Speculation, Libya Restarts       
  • China Gold-Mine Deals at Record After Price Plunge: Commodities
  • Gold Falls as Investors Await Fed Minutes for Stimulus Outlook
  • Corn Retreats for Second Day on Higher Yields; Soybeans Decline
  • Copper Falls as Chinese Manufacturing Seen Continuing to Shrink
  • China Copper Imports Touch 10-Month High on Premium, Arbitrage
  • Japan Watchdog as Tepco Doubter Warns of More Leaks at Fukushima
  • Gold in India May Climb to Record in a Month: Technical Analysis
  • Sugar, Coffee Fall on Emerging Market Currencies; Cocoa Slides
  • China Platinum Imports Grow 20% Yoy on Supply Concerns: BI Chart
  • Cocoa Deliveries in Brazil’s Bahia Decrease 1.6%, Hartmann Says
  • Kenya Fights Off Port Competition With $13 Billion Plan: Freight
  • North Sea Output May Slide as Much as 22% in 2013 on Maintenance
  • Rebar Declines as China Punishes Banks for Some Steel Loans


























The Hedgeye Macro Team













Coaching Corrections

This note was originally published at 8am on August 07, 2013 for Hedgeye subscribers.

“A coach is someone who can give correction without causing resentment.”

-John Wooden


I’ve been blessed with great coaches and teachers in my life. They were never easy on me. Their criticisms didn’t cause any resentment either. To the contrary, they drove me to improve. Trusting your coaches is the first step toward opening your mind.


I make a lot of mistakes. And since I’m the front man for this Hedgeye show, that means every mistake I make is front-and-center in the arena of public market debate. That’s not a bad thing. That’s right where I want to be.


What I do isn’t for everyone. I get that. But the first 5 years of building this firm alongside my teammates has given me a keen appreciation for having the opportunity to make mistakes in an open and accountable forum. It speeds my learning process.


Back to the Global Macro Grind


One of the toughest things to do in US Equities in 2013 has been to coach myself through market corrections. The new normal correction can last anywhere from 4 hours to 4 days. I know, it’s end of the world type stuff. Remember, nothing is normal.


So, from its all-time closing high of 1709 in the SP500 last week, what will the latest US stock market “correction” be?


A)     -0.9% to 1693?

B)      -1.9% to 1676?

C)      -4.6% to 1630?


Yes, that is a Hedgeye Poll. If you have time, ping me with A, B, or C. One of the most important aspects of working in an open/transparent forum of debate is collaboration. I’m pretty sure the days of opaque #OldWall sentiment checks are dead.


Since I actually need to #timestamp an answer to this question, I’ll choose B.


That’s the highest probability choice because the S&P futures already showed me they can snap my mo mo line of 1693 support this morning. And there’s very little fundamental and/or quantitative evidence that 1630 is in play, yet.


What is the “mo mo” line?


That’s the line I use to front-run the machines. It’s home brewed. It’s my most immediate-term risk management duration. It’s especially useful for day-trading, scalping, etc. Label me long-term cycle guy or Mucker, I’m cool with both. Better to scalp, than be scalped.


Put another way, across our core risk management durations:

  1. SP500 immediate-term mo mo line of support = 1693; and 1714 is resistance (our Daily Risk Range)
  2. SP500 immediate-term TRADE support = 1676
  3. SP500 immediate-term TREND support = 1630

The upside down of the is US Equity front-month volatility (VIX):

  1. VIX mo mo risk range = 11.71-13.72
  2. VIX immediate-term TRADE resistance = 14.64
  3. VIX immediate-term TREND resistance = 18.98

In other words, the bullish TREND in US Equities (and bearish TREND in Fear) isn’t in the area code of being challenged, yet. Therefore, if contextualized within the framework of our risk management process, you woke up every morning reminding yourself to not “fight the TREND”, I’d wholeheartedly agree with that. I’d rather fight the Fed than fight things like math and/or gravity.


One of the biggest challenges I have personally is trying to communicate risk management strategies to clients who all have different risk profiles, holding periods, etc. Through consistent feedback and criticism though, I’ve learned that there’s only one answer to this challenge: keep doing what I do - be Duration Agnostic, and keep working on communicating what that process means.


In my humblest of dreams, that would be my happiest retirement: that my teammates and I were successful in not only communicating our multi-factor, multi-duration Global Macro risk management process – but that the players and peers that we coached trusted us.


Trust isn’t allocated. You have to re-learn how to earn it, every day. We have a long road of learning and teaching ahead.


Our immediate-term Risk Ranges are now as follows (*we have 12 Macro Risk Ranges in our Daily Trading Ranges tool now too – as an example, this morning I’ve attached all of them; the bracketed “bullish” or “bearish” comment is on our TREND duration (3 months or more) whereas the range itself is on our most immediate-term duration):


UST 10yr 2.56-2.73% (bullish on yield)

SPX 1676-1714 (bullish)

Nikkei 13489-14137 (bullish)

FTSE 6536-6694 (bullish)


VIX 11.71-13.72 (bearish)

USD 81.49-82.43 (bullish)

Euro 1.31-1.33 (bullish)

Yen 97.01-98.94 (bearish)


Brent 107.23-109.79 (bullish)

NatGas 3.21-3.46 (bearish)

Gold 1274-1317 (bearish)

Copper 3.05-3.18 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Coaching Corrections - Chart of the Day


Coaching Corrections - Virtual Portfolio

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