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TODAY’S S&P 500 SET-UP – October 16, 2013














  • YIELD CURVE: 2.37 from 2.33
  • VIX closed at 18.66 1 day percent change of 16.12%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: Mortgage Applications, Oct. 11 (prior 1.3%)
  • 10am: NAHB Housing Market Index, Oct., est. 57 (prior 58)
  • 11am: Fed to purchase $1.25b-$1.75b notes 2036-2043 sector
  • 11:30: U.S. to sell $22b 1Y bills; also 4W bills
  • 2pm: Federal Reserve issues Beige Book
  • 4:30pm: API weekly oil inventory
  • 5:30pm: Fed’s George speaks on Fed’s centennial Oklahoma City
  • 6:45pm: Fed’s Fisher speaks in banking in New York


    • Diplomats from China, France, Germany, Russia, U.S., U.K. meet with Iranian counterparts in Geneva for P5+1 nuclear talks
    • 9:30am: House Oversight and Government Reform Cmte, House Natural Resources Cmte joint hearing on National Park Service’s implementation of govt shutdown
    • 2pm: Campaign to Fix the Debt news conference to urge Congress, President Obama to put in place long-term agreement to address the national debt, with former Defense Secretary Leon Panetta, former OMB Director Jim Nussel


  • Senate leaders press toward debt-ceiling deal with U.S. House in disarray
  • IMI sells dispenser business to Berkshire Hathaway for $1.1b
  • Advance Auto Parts may buy General Parts Intl., WSJ says
  • Goldman must disclose gender-bias complaints, judge rules
  • Twitter picks NYSE for IPO; 3Q revenue more than doubles
  • Teva, Celgene bidding >$700m for Receptos, Calcalist says
  • Herbalife loses bid to have class-action lawsuit dismissed
  • Alibaba profit jumps ahead of biggest IPO since Facebook
  • Yahoo’s forecasts missing ests. as Google takes market share
  • Samsung loses bid to block license order in Apple patent case
  • Samsung SDI says in talks with Tesla to supply batteries
  • Apple said to cut low-cost iPhone 5C orders in 4Q, WSJ says
  • Fiat trial on UAW’s Chrysler shares to begin Sept. 2014
  • Suntrust to eliminate 800 mortgage employees, WSJ says
  • Boeing says it’s aware of Air India 787 panel event
  • NXP says Broadcom chips in WiiU infringe upon patents
  • Plains GP’s dividend vehicle LP raises $2.8b in IPO


    • Abbott Laboratories (ABT) 7:44am, $0.51 - Preview
    • Bank of America (BAC) 7am, $0.21 - Preview
    • Bank of New York Mellon (BK) 6:30am, $0.58
    • BlackRock (BLK) 6:30am, $3.88
    • Comerica (CMA) 6:40am, $0.71
    • KeyCorp (KEY) 6:14am, $0.22
    • Mattel (MAT) 6am, $1.11 - Preview
    • MGIC Investment (MTG) 7am, $(0.11) - Preview
    • Northern Trust (NTRS) 7:30am, $0.77
    • PepsiCo (PEP) 7am, $1.17 - Preview
    • Piper Jaffray (PJC) 8am, $0.48
    • PNC Financial Services (PNC) 6:24am, $1.62
    • St Jude Medical (STJ) 7:30am, $0.90 - Preview
    • Stanley Black & Decker (SWK) 6am, $1.38
    • US Bancorp (USB) 6:45am, $0.76
    • Watsco (WSO) 7:30am, $1.34
    • WW Grainger (GWW) 8am, $3.04 - Preview


    • Albemarle (ALB) 4:03pm, $1.07
    • American Express (AXP) 4:04pm, $1.22
    • Core Laboratories (CLB) 4:07pm, $1.34
    • Crown Holdings (CCK) 5:02pm, $1.08
    • CYS Investments (CYS) 4:01pm, $0.32
    • East West Bancorp (EWBC) 5:30pm, $0.54
    • Ebay (EBAY) 4:15pm, $0.63 - Preview
    • El Paso Pipeline Partners (EPB) 4:05pm, $0.47
    • International Business Machines (IBM) 4:05pm, $3.96 -Preview
    • Kinder Morgan (KMI) 4:05pm, $0.31
    • Kinder Morgan Energy Partners (KMP) 4:06pm, $0.60
    • LaSalle Hotel Properties (LHO) 4:04pm, $1.44
    • Noble (NE) 5pm, $0.70
    • SanDisk (SNDK) 4:05pm, $1.33 - Preview
    • Select Comfort (SCSS) 4:01pm, $0.43
    • SLM (SLM) 4:15pm, $0.59
    • Steel Dynamics (STLD) 6pm, $0.24
    • Umpqua Holdings (UMPQ) 4:05pm, $0.26
    • United Rentals (URI) 4:20pm, $1.59
    • Xilinx (XLNX) 4:20pm, $0.53


  • Copper Slides for Second Day as U.S. Fiscal Standoff Continues
  • WTI Fluctuates Near Three-Month Low on U.S. Debt, Iran Talks
  • Crop Futures Gain as Cold and Wet U.S. Weather May Delay Harvest
  • Gold Swings Above 3-Month Low as Talks Resume on Debt Impasse
  • Robusta Coffee Rises Before Options Expiration; Sugar Declines
  • U.K.’s Oat Harvest Seen at 40-Year High on Spring Planting Gain
  • Rebar Falls to 3-Month Low in Shanghai as China’s Stocks Slump
  • China Metals Usage Seen Exceeding Rest of the World in 2017
  • Next-Year Copper Forecast at Low on Oversupply Outlook: BI Chart
  • Cocoa Deliveries in Brazil’s Bahia Drop 3.3%, Hartmann Reports
  • Palm Oil Is Seen Rallying on Moving Average: Technical Analysis
  • Gas Buyers Poised to Commit on South Korea Atomic Shift: Energy
  • Putin Builds North Korea Rail Link to Circumvent Suez: Freight
  • Iron Ore Prices Seen by UBS at Risk of Declining on Steel Output


























The Hedgeye Macro Team



















The government has no plans to relax its cap on live gaming tables, the Gaming Inspection and Coordination Bureau says.  Yesterday, Standard Chartered Bank said the gaming table cap could be relaxed on Cotai. The bank did not cite the source of its information.  A spokesperson for the casino regulator said the reports were based on rumours.


The government permits the number of new tables to grow by an average of 3 percent a year, restricting casino operators to about 2,000 additional tables over the next 10 years.


Moving Day

This note was originally published at 8am on October 02, 2013 for Hedgeye subscribers.

“The great thing in the world is not so much where we stand, as in what direction we are moving.”

-Oliver Wendell Holmes


Yesterday was one of the most humbling days of my professional life. It was Moving Day @Hedgeye. It was our first full day working as a team in our new Stamford, CT studio office space. We had all hands on deck.


I say studio because that’s what we are building – the next evolution of independent research coming out of our firm will include more simplifying communication tools like visualization and video-streaming. As Albert Einstein said about ideas, “if you can’t explain it simply, you don’t understand it well enough.” More on that as we move forward.


On the humbling part, externally at least, that’s not the first word that tends to come to mind beside my name. I don’t care about that as much as how my teammates and I feel when we are grinding it out together. Alongside my two beautiful children, I’ve never been so proud to see my family and firm move forward so selflessly. Thank you, to all of you, who have been a part of it.


Back to the Global Macro Grind


Selfless, objective, flexible – these aren’t the words you’d use to describe the US government this morning. That means we have to overcompensate for their lack of resolve and prepare for whatever direction they try to take our said free-markets next.


Yesterday was a fascinating day on that score because, after the media monetized all the ad sales associated with “shut-down” drama, markets actually traded on the economic data. As Christian Drake pointed out to me just after 11AM EST on our desk, it’s #OctTaper versus Bernanke.


Put another way, it’s economic gravity (the data) vs. he who promises to bend it (Bernanke). And it’s not just the US stock market that is handicapping this battle of data versus un-elected opinion in real-time. Immediately after the USA posted another “surprisingly” bullish US #GrowthAccelerating ISM report for September (56.2 vs 55.7 in AUG), this is what happened:

  1. Gold got tapered
  2. Oil got tapered
  3. Bonds got tapered

This was kind of cool (for us) because we haven’t liked the Gold Bond thing for all of 2013 (we still have 0% asset allocations to both Fixed Income and Commodities; both are down YTD).


But it was also cool for the one thing that consensus missed alongside US #GrowthAccelerating for the past 10 months which is, of course, growth expectations embedded in the US stock market.


That’s right anti-Bernanke-policy-to-try-to-bend-gravity-fans:

  1. US Dollar Stabilizing
  2. And #RatesRising
  3. = all-time highs in US growth expectations (growth stocks)

As The Champ used to say “Pardon?”


Indeed, Sir Champ. All-time is a long time, bro – and the proxy for US growth stocks (the Russell 2000) closed at an all-time high yesterday of 1087. That’s +28.0% for 2013 YTD!


Yes, I’m sure whatever partisan #OldMedia channel you were watching nailed that.


I’m sure every fear-mongering and end #EOW (end of the world) idle threat thrown at The Rest of Us by the #PoliticalClass was a risk managed one based on selfless, objective, and flexible analysis too. Up next on cable, “the sun no longer rises in the East.”


Where to from here?


As I wrote in yesterday’s rant, I have no idea. I’m just saying that it was nice to see Mr. Market rub it in Washington’s nose for a few more hours. Today is simply another day to embrace the uncertainty and volatility of it all.


Key intermediate and long-term (TREND and TAIL lines) to keep front and center into Friday’s jobs report:

  1. CURRENCY: US Dollar Index long-term TAIL support = $79.21
  2. BONDS: US 10yr Treasury Yield intermediate-term TREND support = 2.55%
  3. STOCKS: US Stock Market (SP500) TREND support = 1660

To be clear, while US #GrowthAccelerating has been the surprise of 2013, A) that’s now old news and B) the slope of US growth’s line can go anywhere from here.


That’s what Big Government Intervention does – it shortens economic cycles, and amplifies market volatility. There’s a deep simplicity in understanding that too. So keep moving out there.


Our immediate-term Risk Ranges are now as follows (we have 12 Macro ranges in our Daily Trading Range product):


UST 10yr Yield 2.58-2.68%

SPX 1685-1699

VIX 14.71-16.69

USD 80.02-80.75

Yen 97.04-98.76

Gold 1289-1327


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Moving Day - Chart of the Day


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CHART OF THE DAY: Fanfare for the Common Man


CHART OF THE DAY: Fanfare for the Common Man - China Reserves

Fanfare for the Common Man

“You know that the Englishman’s idea of a compromise is? He says, some people say there is a god. Some people say there is no god. The truth probably lies somewhere between these two statements.”

-William Butler Yeats


I would hardly call myself a classical music aficionado, but I do enjoy tuning Spotify into classical music while grinding away in the office.  One of my recent favorites, “Fanfare for the Common Man”, was written by American composer Aaron Copland for the Cincinnati Symphony Orchestra in 1942.  (Incidentally, the Chicago Blackhawks use this as a pre-game song as they enter the ice.)


Copland’s idea for the fanfare came from a speech by then Vice President of the United States, Henry Wallace.   He gave this speech at a time when Americans were debating wartime strategy and America’s role in the post-World War II order.  One of Wallace’s key points in the speech was that any post war peace should be such that it makes the common man better off for the long run.


This morning it seems our two great political parties, and their esteemed leadership, are coming together on a compromise to benefit the common man.  According to reports this morning from our contacts in Washington, the Senate deal that is on the table is to extend U.S. borrowing authority through February 7th and fund the government through January 15th 2014.


Thank goodness that these folks are looking out for the common man by cobbling together a deal that my 11 year old niece could have negotiated.  Despite the short term and non-materiality of this proposed agreement, it still has two hurdles – a) Ted Cruz, or another Senator, could filibuster and delay passage until next week and b) Speaker Boehner in the House could opt not to send the bill to the floor for an up / down vote.


There is one data point out this morning that gives me great confidence that the debt ceiling will be resolved orderly.  No, it’s not that credit default swaps are trading lower, that Libor is benign, or that gold has been selling off, but rather that the ultimate contrarian indicator, a ratings agency, Fitch specifically, placed the U.S. credit ratings on negative watch yesterday.


Back to the global macro grind . . .


A major call-out this morning is the Shanghai Composite which is down almost -2%.  This weakness is being driven by the property sector which is under pressure based on local news reports that longer term regulations could be in place soon for controlling property in China.


Being the price and market driven analysts we are, the move in Chinese equities this morning is certainly a red flag in our notebooks, but isn’t changing our more positive view on China.  In the Chart of the Day today, we highlight China Foreign Exchange Reserves, which have continued to build even as money has left other emerging markets in recent quarters.


Admittedly, though, China is hard to ignore as it compromises more than 30% of the world’s foreign currency reserves.  Japan is a not so close second at about 10%.  After that we have Saudi Arabia, Switzerland and Russia rounding out the top 5.


From the currency war perspective, there is certainly a bit of People’s Bank of China manipulation going on as exports were admittedly a little soft in September and the Chinese Yuan is eclipsing twenty year highs.   Of course no rational person could blame the PBOC for playing games with their reserves as the U.S. central bank continues to confuse the market with its intentions.  To taper, or not to taper, that is the question?


Sadly, if we can actually get the debt ceiling and government shutdown resolved in the next day or so, then all eyes will once again be fixated on the Fed.  We’d be remiss this morning if we didn’t at least highlight how ineffective the program of quantitative easing has been.  Hat tip to David Einhorn from Greenlight Capital for flagging this in his recent investor letter:


“In August, the San Francisco Fed published an economic research paper that estimated that the $600 billion spent on QE2 added a meager 0.13% to real GDP growth in late 2010 (about $20 billion) and that the benefit fades after two years. Given that, what practical difference does it make whether the Fed buys a monthly $85 billion or $75 billion or no additional securities at all for that matter?”


Buying any good, even say jelly doughnuts, as Einhorn highlights, has a more direct impact on economic activity than QE.  After all, that is actually how the real economy works.  We buy and sell goods and the velocity of money grows the economy naturally.


Interestingly, based on the math above, the Fed could actually be the worst investor in history.  Just imagine a $600 billion capital allocation that generates a 0.13% return! Even there my 11 year old niece could do much better.


Our immediate-term Risk Ranges are now:


UST 10yr yield 2.66-2.73%


VIX 15.21-17.63

USD 80.11-80.67

Brent 110.01-112.05

Gold 1


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Fanfare for the Common Man - China Reserves


Fanfare for the Common Man - z  vp 10 16


Takeaway: We still like the company, a lot. But, short-term pressure in the casual dining industry is forcing us to take a step back.

We are removing CAKE from the Hedgeye Best Ideas list as a LONG.



Getting Out of the Way

We remain extremely cautious on the casual dining segment and are not comfortable being long the name heading into the 3Q13 print.


In addition, its looks like industry sales trends are off to a slow start in 4Q13, which leads us to believe it could be a disappointing fourth quarter.


A couple of weeks ago, we posted a research note highlighting the bull case for CAKE.  To be clear, it remains one of our favorite casual dining names and we plan to revisit it on the long side when the time is appropriate.  Our call is more about a tumultuous casual dining environment, and the potential short-term pain it could cause, than it is about the company itself.  In fact, we would not be comfortable being long any casual dining names heading into earnings season.  If you need to be long something, we suggest looking to the quick-service segment, where we continue to like CMG, YUM and KKD.


The chart below highlights the correlation between the ICSC US Retail Chain Store Sales Index and CAKE’s comparable restaurant sales.  As depicted, the ICSC Index ticked down in 3Q and this trend has continued into 4Q.  According to Consensus Metrix, CAKE’s comparable restaurant sales in 3Q and 4Q are expected to increase +0.4% and +1.7%, respectively.  We believe these estimates are too high and should come down.




Also, we’d be remiss not to note – the slowdown in sales we are seeing in the early part of October coincides with lower consumer confidence numbers, as reported by the daily Gallup confidence reading.




Howard Penney

Managing Director