TODAY’S S&P 500 SET-UP – September 18, 2013

As we look at today's setup for the S&P 500, the range is 34 points or 1.45% downside to 1680 and 0.54% upside to 1714.                                        










  • YIELD CURVE: 2.47 from 2.48
  • VIX  closed at 14.53 1 day percent change of 1.04%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Sept. 13 (prior -13.5%)
  • 8:30am: Housing Starts, Aug., est. 920k (prior 896k)
  • 10:30am: DOE Energy Inventories
  • 2pm: FOMC Rate Decision, Sept., est. 0%-0.25% (pr 0%-0.25%)
  • 2:30pm: Fed’s Bernanke holds news conference on FOMC meeting
  • 9:30pm: BoJ’s Kiuchi speech and press conference
  • BoJ’s Kuroda speaks in Tokyo


    • President Barack Obama speaks to Business Roundtable on economic proposals aimed at job creation
    • Financial Accounting Standards Board, Intl Accounting Standards Board joint public roundtable meeting in London
    • 10am: House Armed Svcs Cmte hears from military heads on 2014 defense budget
    • 10:15am: Energy Sec. Ernest Moniz, EPA Admin. Gina McCarthy testify before House Energy and Commerce Cmte on combatting global warming
    • 2pm: House Ways and Means panel hearing on IRS’s exempt organizations division
    • 2pm: Cary Sherman, CEO of Recording Industry Assn of America; Randall Rothenberg, CEO of Interactive Advertising Bureau, testify before House Judiciary hearing on voluntary agreements in intellectual property


  • JPMorgan said to agree to pay $200m to SEC over London Whale
  • Drop in home loans keeps Fed from tapering MBS purchases
  • Starwood property said to plan deal for Waypoint Management
  • Dow Chemical suspends sale of plastics additives on low bids
  • Sega said to win auction to buy bankrupt game co. Index
  • Electronic Arts elevates sports video unit head to CEO: WSJ
  • Boeing’s larger 787 completes test flight
  • Auto-parts co. Visteon may move to Hong Kong listing: CEO
  • Sharp to raise as much as JPY166b through share sale
  • Apache to sell $112m in Canadian assets in 2 separate deals
  • Dollar Tree takes up $2b share buyback; enters JPM agreements
  • Volkswagen may build small SUV in Tennessee
  • Tesla CEO Musk sees driverless cars road-ready in 3 years: FT
  • Walgreen moves workers to private health care exchange
  • AT&T to expand in Latin America with America Movil: Reuters
  • Pandora wins licensing dispute against songwriters, publishers
  • Blackberry introduces new Z30 handset with 5-inch screen


    • Apogee Enterprises (APOG) 4:30pm, $0.25
    • Clarcor (CLC) 6:26pm, $0.66
    • Cracker Barrel Old Country Store (CBRL) 7am, $1.35
    • FedEx (FDX) 7:30am, $1.50 - Preview
    • General Mills (GIS) 6:56am, $0.70 - Preview
    • Herman Miller (MLHR) 4pm, $0.38
    • Manchester United (MANU) 6am, $(0.03)
    • Oracle (ORCL) 4:01pm, $0.56 - Preview
    • Steelcase (SCS) 4:01pm, $0.26


  • Gold Declines a Third Day to Six-Week Low Before Fed Statement
  • China’s Choking Cities Means Job Cuts at Steel Town: Commodities
  • WTI Crude Rises for First Time in Four Days Before Fed Decision
  • Copper Climbs Before Federal Reserve Concludes Policy Meeting
  • Corn Rebounds From One-Month Low as U.S. Insurance Claims Rise
  • Coffee Rebounds in London Before Vietnam Crop; Sugar Declines
  • Aluminum Cuts Seen by Wood Mackenzie Too Small to Reduce Glut
  • German Power Premium Most Since ’98 Tests Voters: Energy Markets
  • Rebar Falls to Seven-Week Low as Purchases Slow, Iron Ore Drops
  • U.K. Millers Poised to Buy British as Sun Boosts Wheat Quality
  • Australia Sugar Cane Crop Seen Curbed in 2014 If Drought Spreads
  • Goldman Sees Commodity Consumption Signs of Life Outside China
  • Coffee Supply Gains Spur Bearish Price Outlook: Chart of the Day
  • Iron Ore Seen Extending Slump by UBS as Global Supplies Increase


























The Hedgeye Macro Team













6 Fun (Frightening?) Fed Facts

“The great thing about fact based decision is that they over rule the hierarchy.”

-Jeff Bezos


Many of our large institutional investing clients we speak with here at Hedgeye remain focused (and rightfully so) on the direction of leadership at the Federal Reserve. Given their focus, we thought we would go ahead and highlight a few fun (frightening?) facts about the mighty Fed:


6 Fun (Frightening?) Fed Facts - press


1) The greatest long term period of economic growth in the United States? That was between the Civil War and 1913 when there was no Fed.


2) Prior to the creation of the Federal Reserve, the estimated rate of inflation in the United States was 0.5%. It is estimated to be at 3.5% in the ensuing century.


3) The permanent income tax was introduced the same year as the Federal Reserve.


4) Congress promised in 1913 that if the Federal Reserve Act was passed ... it would eliminate the business cycle.


5) The value of the U.S. dollar has declined, by some estimates by more than 95% since the Fed was created.


6) There have been 10 recessions since 1950 (arguably many Fed induced).


I borrowed some of these points above from a blog called End of the American Dream. It kind of begs the question, as Jeff Bezos would say, whether the best fact-based decision is to overrule the Federal Reserve hierarchy in its entirety.  


Now take a moment to ponder the points outlined above, and then ask yourself: Would ending the Fed be the worst decision the Federal Government ever made?




6 Fun (Frightening?) Fed Facts - feral


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MNST and Is there Regulatory Risk in Energy Drinks?

Last week we held an expert conference call titled "Are Energy Drinks Harmful?" with Dr. Deborah Kennedy, a pediatric nutrition and expert on energy drinks (click for: podcast replay and presentation). Below are our main conclusion on the regulatory concerns and evolution of the space based on Dr. Kennedy’s presentation and our own work.  Further below, we size up MNST, which we’re bearish on from a quantitative perspective; however we remain bullish on the outperformance of energy drinks over the beverage category.


Key Considerations for the Industry

The FDA has left the door open for the amount of caffeine that energy drink (ED) manufacturers may put in their products. We do not see this stance changing over the near to intermediate terms, why?

  1. The effects of caffeine are difficult to measure and are subjective to the consumer based on such factors as age, sex, weight, and existing medical conditions.
  2. There is no accepted standard for measuring caffeine.
  3. The FDA does not wish to open a pandora’s box until there’s more scientific evidence on caffeine: if energy drinks caffeine levels are regulated, what’s next, coffee? This is a can of worms that we do not believe will be addressed by the FDA over the intermediate term.


Longer Term Risks

  • Over the longer-term, keep in mind that the FDA has put a limit on the amount of caffeine in soda drinks, 71mg. A similar limit could be placed on energy drinks over time. However, we expect the FDA to assess increased scientific studies on caffeine and energy drinks but ultimately be slow to act to issue a similar limit to soda drinks for energy drinks.
  •  As Dr. Kennedy suggested, we think there’s a higher probability that energy drinks are banned for sale to kids under 12 years of age.
  • A ban on the marketing of energy drinks targeted at kids.
  • We do not expect energy drinks to be move behind the counter.


MNST – Bearish Stock, Bullish Category

MNST is a stock that currently is set-up bearish across our quantitative intermediate term TREND price level of $57.56 (dancing below the level, up 3.5% since last Friday). 


MNST and Is there Regulatory Risk in Energy Drinks? - zz. mnst


We continue to believe that energy drinks will maintain their outperformance over the beverage market. That said, MNST fundamentals have significantly eroded over the past 5 quarters. Below we show MNST’s top and bottom line Bloomberg consensus estimates for reference.  We believe this slide in performance is attributable to both weak overall beverage trends, including poor weather conditions across recent quarterly results, and litigation concerns. On the last point, we think that the existing litigation is now largely behind the company, as are the associated media headlines, which should buoy sentiment. Our call with energy drink expert Dr. Kennedy only furthered our opinion that despite health concerns related to energy drinks, the FDA is not in a position to act over the near to intermediate term on caffeine content for the reasons we highlighted above.   Finally on a comp basis, you’ll notice much more favorable comparisons over the next four quarters, which could prove a tailwind.  We’ll be watching our quantitative levels to see if MNST can overcome its bearish intermediate term set-up before we consider it on the long side.


MNST and Is there Regulatory Risk in Energy Drinks? - z. mnst sales


MNST and Is there Regulatory Risk in Energy Drinks? - z. mnst eps


-Matt Hedrick

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%

Replay: Podcast and Slides of E-Cig Call with Victory CEO

Today the Hedgeye Consumer Staples team hosted an expert call on electronic cigarettes featuring Brent Willis, a leading consumer products executive and Chairman and CEO of Victory Electronic Cigarettes. Below are links to a replay podcast and presentation slides. 


Podcast: CLICK HERE 

Presentation: CLICK HERE


We encourage you to listen as Brent provides insight into the rapidly evolving electronic cigarette story – perhaps the first truly new consumer category in over a decade.


With e-cigarettes currently only representing a 1% share of the entire tobacco market, Hedgeye sees a significant runway for large and small e-cigarette companies to meet growing demand for alternatives to traditional tobacco.  But we believe the implications of this technology go far beyond merely replacing tobacco with a product that is viewed as healthier and cleaner.  Some major firms recognize the e-cigarette phenomenon as a key part of societal change, one of a number of disruptive new technologies that are changing the way we live.


Hedgeye believes the e-cigarette category is poised to reach sales of $1-2 Billion this year – up from $500 Million in 2012 – and to show significant growth over the coming years.  Certainly there are many questions yet to be addressed, including how this new segment will be regulated?  Yet the pace of innovation, marketing, and distribution has already brought significant awareness to the category and the early data shows encouraging signs of strong repeat purchase behavior. We are excited about the developing investment opportunities as this category gains visibility.


DISCLOSURES : Victory (ECIG) is a newly-public company with limited trading history and liquidity. Hedgeye has no investment opinion on Victory and no current plans to publish research on the company.   Certain Hedgeye executives may at some point become involved in a transaction with Victory or related entities.   This presentation is for information purposes only.


CPI Data Marginally Better For Restaurants

The BLS released CPI data for the month of August this morning.  In aggregate, all measures continue to screen negatively for the restaurant industry.  On the margin, however, August marked a slight improvement in food price trends.

  • Core CPI ticked up 10 bps in August to +1.8%
  • Food at home remained flat at +1.0%
  • Food away from home fell 10 bps to +2.0%
  • The Restaurant Value Spread, which measures the difference between food at home and food away from home, fell 10 bps to -1.0%
  • The spread between food at home and core CPI widened by 10 bps to -0.8%
  • The spread between food away from home and core CPI narrowed by 20 bps to +0.2%

Despite the sequential moves that, on the margin, are positive for the restaurant industry, the overall environment is not exactly conducive to driving consumer demand.  The restaurant value spread is still -100 bps, suggesting that it is currently more affordable for consumers to eat at home than to eat out.



The charts below highlight these important food price trends.



CPI Data Marginally Better For Restaurants - chart11


CPI Data Marginally Better For Restaurants - chart222


CPI Data Marginally Better For Restaurants - chart3


CPI Data Marginally Better For Restaurants - chart44


CPI Data Marginally Better For Restaurants - chart55




Howard Penney

Managing Director


Jones: What's Weighing on Mr. Market Right Now?

Editor's note: What follows below is a brief complimentary excerpt from Hedgeye's "Morning Newsletter" which is sent out weekday mornings before 9:00am. While Hedgeye CEO Keith McCullough typically writes these newsletters, periodically another member of our team jumps in and offers up our latest thoughts. This morning's note was written by Daryl Jones, Director of Research. To learn how you can subscribe please click here.)


Jones: What's Weighing on Mr. Market Right Now? - wallstreet1


Former Harvard President Larry Summers made a big decision late Sunday to withdraw his name from consideration to replace current Federal Reserve Chairman Ben Bernanke.  Now technically speaking, the fact that five Democrats intended to vote against him in committee kind of forced his hand, but nonetheless a decision was made.


In the short run, Mr. Market viewed this development as somewhat positive as stocks were up broadly with the SP500 up 0.57%.  (Strangely, the bell weather master limited partnership, Kinder Morgan Partner (KMP), underperformed and was down -1.50%.) President Obama then chose to come out and spoil the Wall Street party as Obama indicated he will not negotiate an extension of the U.S. debt ceiling as part of the budget fight. 


Slight digression, yes the debt ceiling debate is looming again.  As Yogi Berra said, this is déjà vu all over again.  You may recall, in 2011 Congress raised the debt ceiling to $16.7 trillion, an increase of over $2 trillion.  Currently, based on projections from the Treasury department, the federal government could hit the debt ceiling as soon as mid-October.


In the chart of the day, we highlight a chart from the Bipartisan Policy Center that shows that the debt ceiling is likely to be breached to between October 18th to November 5th.   Technically speaking, the United States hit its debt limit on May 19th, but as my colleague Christian Drake has written about, via a number of extraordinary measures, the ceiling has been extended, but these measures will run out at some point in the time frame noted above at which point the federal government will only have enough tax revenue to cover about 68% of its bills.


Incidentally, and for those that don’t have their calendars in front of them, the “X-date” is just over a month away.  And just think, most investors are worried about who is going to be the next Chairman / Chairperson of the Federal Reserve!  Given the uncertainty around the direction of policy, a looming fiscal crisis, and the fact that U.S. equities have performed quite well in the year-to-date, it should be no surprise that some savvy investors like Stan Druckenmiller are indicating they are largely underinvested.


We certainly get the risks, but one point that has and will continue to benefit equities, is bond outflows.  Since May we have seen $116 billion fixed income fund outflows, which is the largest absolute bond outflow in history.


Interestingly though, as our Financials team pointed out yesterday,  as a percentage of beginning fixed income assets-under-management, the current 2013 draw down is the smallest in history on a percentage basis. The 2013 running outflow has been just 2.9% of outstanding bond funds, well below the past outflows in 2003-2004 where 5.0% of outstanding bond funds were redeemed and the 14% of bond funds that were drawn down in the 1994-1995 outflow.  So while there are certainly risks looking for equities, the continuation of bond outflows will be a meaningful tailwind.