TODAY’S S&P 500 SET-UP – September 11, 2013

As we look at today's setup for the S&P 500, the range is 32 points or 1.37% downside to 1661 and 0.54% upside to 1693.      










  • YIELD CURVE: 2.48 from 2.49
  • VIX  closed at 14.53 1 day percent change of -7.04%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Sept. 6 (prior 1.3%)
  • 10am: Wholesale Inventories M/m, July, est. 0.3% (pr -0.2%)
  • 10am: Wholesale Sales M/m, July, est. 0.5% (prior 0.4%)
  • 10:30am: DoE Inventories
  • 11am: Fed to purchase $1.25b-$1.75b in 2036-2043 sector
  • 1pm: U.S. to sell $21b 10Y notes in re-opening


    • De Blasio gets most votes in New York Democratic mayoral primary
    • House, Senate in session
    • House Transportation and Infrastructure Cmte to unveil Water Resources Reform and Development Act of 2013, 2pm
    • House Oversight panel meets to review TARP inspector general’s report on Treasury role in Delphi pension bailout, 1:30pm
    • House Financial Svcs panel holds hearing on the Fed at 100 years, 2pm


  • Obama pursues Russian proposal on Syria chemical weapons
  • IBM to sell customer-service business to Synnex for $505m
  • Apple iPhone 5C seen as expensive: analysts
  • Vodafone $10.2b Kabel Deutschland deal under threat
  • Disney delays fifth “Pirates of the Caribbean” film
  • Canada, Ontario sell $1.1b in GM shares
  • Verizon said to plan record bond sale of up to $49b
  • China’s richest man hunts hotel mgmt cos. in U.S.
  • KKR said to weigh teaming with Japan INCJ for Panasonic unit
  • U.K. unemployment unexpectedly falls to 7.7%


    • Dollarama (DOL CN) 7:30am, C$0.78
    • Evertz Technologies (ET CN) 4pm, C$0.14
    • Men’s Wearhouse (MW) 5:30pm, $1.14
    • Vera Bradley (VRA) 4:03pm, $0.32


  • Ruthenium Slides to Eight-Year Low as Hard-Disk Demand Declines
  • Tin Shortage Worsens as Indonesia Rules Curb Supply: Commodities
  • Copper Climbs as Banks Project Stronger Chinese Economic Growth
  • Brent Crude Rises From Two-Week Low as Syria Strike Risk Remains
  • Gold Swings Near Three-Week Low as Obama Seeks Syria Delay
  • Soybeans Gain Before USDA Report Set to Signal Lower U.S. Output
  • Cocoa Rises to 1-Year High in New York on Shortage; Coffee Gains
  • Aluminum Buyers in Japan Said to Win Fee Cut From Suppliers
  • Sugar Harvest in India Seen Beating Estimate to Worsen Glut
  • Hurricane Humberto Is First of Season; Storm Gabrielle Weakens
  • Goldman Expects Decline in Commodities Index in 12 Months on Oil
  • Power Prices to Hold Near 8-Year Low on Weather: Energy Markets
  • China Scrap Copper Imports Surge as Smelters Struggle: BI Chart
  • Gold Decline Seen by Goldman as Fed’s Tapering to Spur Selling


























The Hedgeye Macro Team













End of Their World

This note was originally published September 10, 2013 at 07:58 in Early Look

Greater than the tread of mighty armies is an idea whose time has come."

-Victor Hugo


I’ve spent many early mornings this year attempting to objectively contemplate the end of the world. Despite the Nasdaq (+23% YTD) closing at a fresh YTD high yesterday, on every downtick in US growth stocks everyone and their brother has been worried about it – and there have been big fear-based advertising businesses built on it. How some people get paid is serious stuff.


Our Big Macro Idea in 2013 (that the world wouldn’t end) has drawn the ire of everyone, from the old-boy financial media network, to the newbie ad-platform from parts unknown (Zero Hedge). Many of you have seen the comments they chose to flog in public – in Twitter, on TV, in the press.  Only a very few of us have seen the ugliness of some of the emails some of these characters have sent me.  Least said, soonest mended (word to the wise…)


We will continue to power forward with an idea whose time has come – a transparent, accountable, and trustworthy independent research platform that has zero conflicts of interest. We have no banking, trading, or advertising revenues to pander to. We aren’t banned from the securities industry either, like some of our snottier critics. We’re right where we want to be - standing in the arena of meritocratic debate.


Back to the Global Macro Grind


Today is what we call an Event Day @Hedgeye, because we are hosting one of our Best Idea Conference Calls on what we believe is a significantly overvalued company called Kinder Morgan. For those of you who follow either our written research from Energy sector all-star Kevin Kaiser or my #RealTimeAlerts, you’ll know we’ve been bearish in both print and #timestamped KMP short sales since the beginning of August.


For the end of the world community that somehow hasn’t called the short side of things that actually go down in 2013 (like Gold, Bonds, or Linn Energy – another short idea from Kaiser), this whole event day thing drives them right squirrel. How dare a “young” and up and coming research and risk management firm interrupt their navel gazing?


Admittedly, I’ve only been making short calls for about 15 years, so I may not know as much as the clients who pay for our work. Every morning of my market life, I wake up assuming that I need to learn something. It’s not my job to assume we’re going to be right – it’s to try to prove myself wrong.


The #OldWall and its media outlets have a different model – they know everything about everything, 5 miles wide and an inch deep:


From our Wall St 2.0 friends at Seeking Alpha > Kinder Morgan Energy Partners (KMP): "There is an outfit that is trying to get this thing down. They are calling it a house of cards. Richard Kinder (the CEO), come on this show. I know they are going to (do) a massive hit job on you. If you want to be able to tell your story, Mad Money welcomes you. This is a stock I like." –Jim Cramer


Mr. Cramer got nowhere with his Sound and Fury in our last public debate – which descended into members of the Old-Boy network trying to suggest we were committing a securities violation with our research call on Linn Energy (LINN).  One has to admire the conviction the man brings to the table today, on what looks like a replay of the same tape. Occasionally wrong, never in doubt.


Whether you’re a media talking head trying to drive advertising revenues, an Old Wall firm that’s banking one of Kinder’s deals, or just a portfolio manger flat out chasing dividend yield because you have to – it’s all cool with us. So is doing our own work on an idea whose time has come.


For those of you who think it’s a big positive that Rich Kinder “bought stock” in KMI here are a few research nuggets to consider as you contextualize that headline:

  1. Kinder bought 500,000 shares = $18M worth of stock = increasing his stake by 0.2%
  2. Kinder holds 241,000,000 shares of KMI = $8.8B (yes, that’s a B, as in $8.8 billion worth)
  3. Kinder receives more than $400M (per year) in dividend and distribution payments from his KMI holdings

In other words, Kinder has more than a few billion reasons to defend both his stock’s crazy valuation and how he gets paid. The old-boy network of Old Wall Street and the media brotherhood are going to help him do that.


After Bear Stearns crashing … and all that we have gone through in the last 5 years as a profession, is this the best the said savants of the closed-network that was Wall St 1.0 can do?


Or, after missing epic declines in both Gold and Bonds (and after trying to freak people out at yet another higher-low for the US stock market at the August lows), is this just the end of their world as they knew it?


We don’t purport to know everything. But we do our own work and we’re looking forward to objective analysis that attempts to refute our well researched opinion. Dial into our call on Kinder Morgan at 11AM (ping for access) and, instead of calling just calling us “young” (Daryl Jones and Todd Jordan are getting old!), please tell us what you think.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.84-3.02%

SPX 1658-1678

VIX 14.73-17.41

USD 81.22-82.68

Brent 111.91-115.19

Gold 1361-1398


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


End of Their World - Chart of the Day


End of Their World - Virtual Portfolio

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A New Light

“Understanding the errors may afford new light.”

-George Gilder


As I was banging around NYC client meetings yesterday, the US stock market was hitting fresh September highs (new YTD high of +23.5% for the Nasdaq), and the sun was shining. It was a great day. It’s been a great year.


On this day in 2001, many of us were devastated. My thoughts are with all my friends and those families who are still feeling that pain. While it will always be there, we still need to find the courage to carry on. We can only do that together.


As families, friends, and firms, we share that opportunity every day. It’s an opportunity to listen to one another and learn from our many human mistakes. Risk managing markets is a lot like life that way. For the open-minded, there is always a light to be found somewhere. Her virtues are time, patience, and change.


Back to the Global Macro Grind


One of the most obvious changes I’ve had the pleasure and privilege in seeing in our client base over the course of the last 5 years is dismissing many of the economic dogmas of academia. You (as in the buy-side) are way ahead of the world on that.


Yes, these are early days. Change takes time. But we are finally getting broad-based and cross-disciplinary support on this front from some of the most coincident indicators there are – books.


Whether it’s from the behavioral side of economics (Dan Kahneman’s Thinking Fast, and Slow) or the more recent applications of Chaos Theory to market-based economics (George Gilder’s Knowledge and Power) it’s getting out there – and the new light I wake up to every morning certainly feels good.


In Chapter 7 of Knowledge and Power, Gilder does a great job summarizing the history of economic theory:


“During much of the century, they clustered in tribes around three or four major totemic light sources: Adam Smith, with his magical self-extending markets; John Maynard Keynes, with his amazing self-fulfilling demand… Meanwhile Hayek and Samuelson defended the spontaneous order and equilibrium of Walras and Marshall.” (pg 62)


All the while, the entrepreneurial spirit of capitalists crushed Smith’s invisible hand; Keynes government spending ideas morphed into multipliers of mass currency destruction; and some people who gave up on both Smith and Keynes just decided to be Hayekian because they had no idea what else to sign up for…


Like most fictional stories in human history, enlightenments like the one we are experiencing in economics put all of these dogmas to bed. Eventually, everyone who gets it moves on. And we have the opportunity to start growing intellectually again.


I don’t worship at the altar of a social science. I’m not a Hayekian. I’m no Keynesian either. I am Mucker. I have my own team and market based models. Here’s what Mr. Market has been telling me to think about for the last 10 months:

  1. Bullish on the US Dollar
  2. Bullish on US Growth Stocks
  3. Bearish on almost everything Slow-Growth (Gold, Bonds, etc)

In our multi-factor, multi-duration model, the 2nd derivative matters most (visually speaking, it’s the slope of the line). That’s why we’ve been bullish on US #GrowthAccelerating. A #StrongDollar and #RatesRising perpetuate that.


For those of your friends who are still locked-down in the dark ages by their textbooks and compensation structures, here’s a friendly fact for them on how impactful a “weak currency” was to “export growth”:

  1. US Dollar Index hit a 40yr low in Q2 of 2011 (post Nixon abandoning the Gold Standard in 1971)
  2. US Net Exports in Q4 of 2011 were down (as in negative) -0.6% in terms of their quarterly contribution to US GDP

In other words, a strong currency coincides with a strong country. Strength in currency = strength in consumption, confidence, and character. This is not a new light I am shining on our failed academic institutions this morning. This is economic history.


And yes, after moves like we’ve had to start September (the US Dollar has been up for 4 weeks in a row and the SP500 is up +3.12% for the month-to-date), it’s scary to be chasing the stocks you could have bought with the VIX 20% lower in August…


So don’t do that – the SP500 and QQQ’s are immediate-term TRADE overbought (within their bullish TREND), so sell some of what you bought when everyone was whining about another opportunity to buy things on sale. And enjoy the rest of your day.


UST 10yr 2.86-3.03%


VIX 14.18-15.34

USD 81.42-82.64

Yen 98.79-100.98

Brent 111.63-114.86


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


A New Light - Chart of the Day

A New Light - Virtual Portfolio

Reminder: Conference Call Today at 11am EST: Are Energy Drinks Harmful?

Today at 11:00am EDT we will be hosting an expert conference call titled "Are Energy Drinks Harmful?  A Debate with Dr. Deborah Kennedy".  


On the call we will host a lively debate with Dr. Deborah Kennedy about energy drinks and what may be looming for energy drink producers in the future.  A live Q&A session will be held directly after the call for all listeners. 


Dialing Instructions

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 835129#





  • What's the science behind caffeine consumption?
  • Where does the medical community stand on energy drinks and caffeine in foods?
  • What legal action has been taken against energy drink makers?
  • How have energy drinks been regulated and what could the future hold?




Dr. "Deb" is the founder of Build Healthy Kids and has been at the forefront of nutritional studies and consumer awareness for almost two decades. Her experience ranges from pediatric nutrition and nutritional oncology to product development and kids' education programs.


Dr. Deb made national headlines from a March 2013 Build Healthy Kids newsletter in which she warned her subscribers that energy drinks can be dangerous, and told kids to "Never drink energy drinks: They can harm you" (alongside a cartoon skull 'n" crossbones and a generic energy drink can). Monster (MNST) took issue with Dr. Deb's language, and demanded that she retract the "defamatory statements" and correct them or else Monster would draw a legal suit. Following the action, she gained the support of Senator Richard Blumenthal (alongside Senator Richard Durbin and Congressman Edward Markey), who addressed Monster CEO Rodney Sacks in a letter stating that it's unclear why Monster would single out Build Healthy Kids since the company was never named and considering that Monster does not target the Build Healthy Kids demographic. To date, there is no formal legal suit against Dr. Deb or Build Healthy Kids.    


Dr. Deb has worked at Yale, Columbia, Tufts and Cornell University. She is a coauthor of Beat Sugar Addiction Now! for Kids and author of Nutrition Bites. She is currently working on her third book which deals with children's eating personalities. 

RH: $8.00 in 2018?

Takeaway: People are asking the wrong questions about RH. THE key question is when it will earn $8.00 per share. We think the answer is 2018.

Conclusion: People are asking the wrong questions about RH. THE key question is when it will earn $8.00 per share. We think the answer is 2018.



It was absolutely painful listening to analysts grilling management on the RH Q&A wanting to be spoonfed precise guidance in the coming quarters. We love math as much as anyone – probably more. But seriously…this is a company that should earn about $1.50 per share this year, and people are asking for guidance on items that account for maybe a nickel a share?  Here’s a better question… How long will it take for RH to earn $8.00?


Our current math suggests that we’ll see that number around 2018. That’s $6.50 in incremental earnings in 5-years. Put a different way, that’s a 40% earnings CAGR. Use that as ammo next time anyone tells you that RH is too expensive or that ‘they already missed it’. If you want to use a simple PEG on today’s 12-month forward earnings, you’re looking at a $90 stock within 1-year based on our model. 2-years is $125, 3-years is $175. You get the idea… If you want to review the detailed modeling assumptions, join us for our Best Ideas call on RH in 2-weeks. (We did one at the IPO at $32, and while the stock has worked, we think that the thesis has evolved to an even greater unrealized degree.)


Now…here are a couple of puts and takes on the quarter.

1)      The print itself was solid. Right in line with our model with adjusted EPS coming in at $0.49 vs the Street at $0.42.


2)      Revenue was in-line with our above-consensus estimate, but the composition was off. RH comped 26%, which was well-below our expectation of near 40% and the consensus of 29%. But the RH Direct business (not in the comp) came in meaningfully higher, accounting for 47% of total sales. They washed each other out. But people will always want to see the comp higher. I guess it just sounds better. This ordinarily wouldn’t matter – but with a 9.4% run in the stock 10-days leading into the quarter – the company really needs perfection to keep the treadmill going. 26% is sub-perfect.


3)      On the flip side of that, RH guided up 3Q revenue by nearly 7% -- setting expectations for higher comps (high 30s). No one is upping revenue guidance in the consumer space these days. The confidence management has in its business is extreme.


4)      RH eliminated the Fall Source Book – the 8 pound catalogue package that your mailman hates delivering. We give the company all the credit in the world given the sheer costs associated with the mailers and limited economic benefit. The marketing dollars will be spent with more experiential forms of advertising.


5)      Combining the higher comp expectation for 3Q with the cost saves from the elimination of the mailer, RH raised EPS guidance to $0.27-$0.29 vs. the Street at $0.16. Again, a huge delta in guidance change.


6)      RH appears to be on a track of Gross Margin recovery. After weakness in 1H, 3Q GM should be closer to flat, with full recovery by 4Q.  


All in, the reported numbers were excellent. The cadence of strategic change to achieve the long-term earnings growth we’re looking for was there. The revenue composition combined with investors badgering management about guidance to a greater degree than usual is not going to help the stock. But we’re talking a very short window. 2H square footage is accelerating, comp is improving, and gross margins are on the rebound. And all of this is in the context of what we think is an extremely favorable 5-year growth trajectory. 


RH: $8.00 in 2018? - rhrhrhrhrhr

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 80.46%
  • SHORT SIGNALS 78.35%