TODAY’S S&P 500 SET-UP – October 24, 2013

As we look at today's setup for the S&P 500, the range is 26 points or 1.05% downside to 1728 and 0.44% upside to 1754.                                                 










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.18 from 2.20
  • VIX closed at 13.42 1 day percent change of 0.68%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Trade Deficit, Aug., est. $39.5b (prior $39.1b)
  • 8:30am: Jobless Claims, Oct. 18, est. 340k (prior 358k)
  • 8:58am: Markit PMI Prelim., Oct., est. 52.5 (prior 52.8)
  • 9:45am: Bloomberg Consumer Comfort Index, 10/20, prior -34.1
  • 10am: Jolts Survey, Sept., est. 3.765m (prior 3.689m)
  • 10am: New Home Sales, Sept., est. 425k (prior 421k)
  • 10am: Freddie Mac mortgage rates
  • 10am: Fed open board meeting on quantitative liquidity rules
  • 10:30am: EIA natural-gas storage change
  • 11am: Kansas City Fed Mfg Index, Oct., est. 2 (prior 2)
  • 11am: Leading Economic Indicators, Sept., postponed (pr. 0.7%)
  • 11am: U.S. announces plans for 2Y, 5Y and 7Y note sales
  • 12:45pm: BoE’s Carney speaks at event in London
  • 1pm: U.S. to sell $7b 30Y TIPS


    • Senate, House out of session
    • 9am: House Energy and Commerce meets on Patient Protection and Affordable Care Act implementation



  • McKesson to buy drug distributor Celesio for $5.4b
  • BofA’s Countrywide found liable for defrauding Fannie, Freddie
  • RR Donnelley to buy Consolidated Graphics for $620m
  • ING Groep raises $974m selling U.S. unit shares at $29.50
  • Fed set to open proposed bank liquidity demand to public comment
  • Boston Scientific to cut 1,100- 1,500 jobs over next 2 yrs
  • Apple fends off $248m demand by Wi-Lan in patent suit
  • Hewlett-Packard is said to be seeking to sell mobile patents
  • YouTube said to plan subscription music service rivaling Spotify
  • AT&T exceeds earnings ests. after adding more subscribers
  • Symantec rev. forecast falls short as turnaround dents sales
  • China’s manufacturing strengthened more than est. this month
  • Credit Suisse 3Q profit misses ests.
  • Volcker rule hedging exemption said disputed by Gensler, Stein
  • Pinterest funding led by Fidelity values startup at $3.8b
  • Sotheby’s faces shareholder calls to sell property, WSJ reports
  • Google experiments with banner ads in search results: NYT
  • Time Warner in agreement to distribute Al Jazeera America: NYT


    • 3M (MMM) 7:30am, $1.75 - Preview
    • Alaska Air (ALK) 6:01am, $2.14 - Preview
    • Alexion Pharmaceuticals (ALXN) 6:30am, $0.79 - Preview
    • AllianceBernstein  (AB) 7:02am, $0.39
    • Altria (MO) 6:58am, $0.64 - Preview
    • Autoliv (ALV) 6am, $1.34
    • AutoNation (AN) 6:15am, $0.77
    • Avnet (AVT) 8am, $0.88
    • Ball (BLL) 6am, $0.93
    • Boston Scientific (BSX) 7am, $0.09 - Preview
    • Bunge (BG) 6:30am, $2.23
    • Cameron Intl (CAM) 7:30am, $0.83
    • Celgene (CELG) 7:20am, $1.54 - Preview
    • Cenovus Energy (CVE CN) 6am, $0.48 - Preview
    • Coca-Cola Enterprises (CCE) 7am, $0.80
    • Colfax (CFX) 6am, $0.53
    • Colgate-Palmolive (CL) 7am, $0.73 - Preview
    • Diamond Offshore Drilling (DO) 6am, $1.16 - Preview
    • Domtar (UFS) 7:30am, $1.24
    • Dow Chemical (DOW) 7am, $0.54
    • Dunkin’ Brands (DNKN) 6am, $0.43 - Preview
    • EQT (EQT) 7am, $0.49
    • FLIR Systems (FLIR) 7:30am, $0.32
    • Ford Motor (F) 7am, $0.38 - Preview
    • Franklin Resources (BEN) 8:30am, $0.87
    • GNC (GNC) 8am, $0.76
    • Goldcorp (G CN) 8am, $0.20 - Preview
    • Hercules Offshore (HERO) 7am, $0.07 - Preview
    • Hershey (HSY) 6:58am, $1.01
    • Husky Energy (HSE CN) 7am, $0.54 - Preview
    • International Paper (IP) 7am, $0.93
    • Janus Capital (JNS) 7am, $0.17
    • KKR (KKR) 8am, $0.58
    • Lazard (LAZ) 7am, $0.36
    • McKesson (MCK) 7:31am, $2.04 - Preview
    • Mead Johnson Nutrition (MJN) 7:30am, $0.80 - Preview
    • Noble Energy (NBL) 7:23am, $0.96
    • Patterson-UTI Energy (PTEN) 6am, $0.28
    • Potash of Saskatchewan (POT CN) 6am, $0.41
    • Precision Castparts (PCP) 6am, $2.83
    • Precision Drilling (PD CN) 6am, $0.16 - Preview
    • PulteGroup (PHM) 6:30am, $0.37 - Preview
    • Rayonier (RYN) 8am, $0.46
    • Raytheon (RTN) 7am, $1.33 - Preview
    • Reliance Steel & Aluminum (RS) 8:50am, $1.20
    • Rogers Communications (RCI/B CN) 6:45am, $0.97 - Preview
    • Royal Caribbean Cruises (RCL) 8:31am, $1.64 - Preview
    • Shaw Communications (SJR/B CN) 8:15am, $0.33 - Preview
    • Sirius XM Radio (SIRI) 7am, $0.02
    • Southwest Airlines (LUV) 6:25am, $0.34 - Preview
    • Starwood Hotels & Resorts (HOT) 6am, $0.64 - Preview
    • Timken (TKR) 7:30am, $0.88
    • TRowe Price (TROW) 7:29am, $0.97
    • Under Armour (UA) 7am, $0.66 - Preview
    • United Continental (UAL) 7:30am, $1.55
    • USG (USG) 8:30am, $0.24
    • Valley National Bancorp (VLY) 8am, $0.15
    • Vantiv (VNTV) 7am, $0.41
    • Wabtec (WAB) 8:06am, $0.76
    • Xcel Energy (XEL) 7am, $0.77
    • Xerox (XRX) 6:49am, $0.25
    • Yandex (YNDX) 6am, $8.89
    • Zimmer Holdings (ZMH) 7am, $1.24 - Preview


    • (AMZN) 4pm, $(0.10) - Preview
    • Applied Micro Circuits (AMCC) 4:05pm, $0.03
    • BioMarin Pharmaceutical (BMRN) 4:01pm, $(0.31) - Preview
    • CA (CA) 4:05pm, $0.72
    • Cabot Oil & Gas (COG) 5:59pm, $0.17
    • Cerner (CERN) 4:01pm, $0.36 - Preview
    • Chubb (CB) 4pm, $1.90
    • Cincinnati Financial (CINF) 4pm, $0.63
    • Cliffs Natural Resources (CLF) 4:22pm, $0.75 - Preview
    • Compuware (CPWR) 4:13pm, $0.09
    • Deckers Outdoor (DECK) 4pm, $0.72
    • Eastman Chemical (EMN) 4:30pm, $1.64
    • Express Scripts  (ESRX) 4:01pm, $1.08
    • Flowserve (FLS) 4:04pm, $0.84
    • Informatica (INFA) 4:05pm, $0.32
    • Ingram Micro (IM) 4:05pm, $0.53
    • KBR (KBR) 4:09pm, $0.70
    • KLA-Tencor (KLAC) 4:15pm, $0.65
    • Manitowoc (MTW) 4:27pm, $0.32
    • Maxim Integrated (MXIM) 4pm, $0.40
    • Microsoft (MSFT) 4:01pm, $0.54
    • NCR (NCR) 4:02pm, $0.68
    • NetSuite (N) 4:05pm, $0.08
    • Outerwall (OUTR) 4:01pm, $0.88
    • Principal Financial (PFG) 4pm, $0.87
    • Qlik Technologies (QLIK) 4:05pm, $0.03
    • ResMed (RMD) 4:05pm, $0.58
    • Superior Energy Services (SPN) 4:15pm, $0.42
    • Synaptics (SYNA) 4:15pm, $1.23
    • Theravance (THRX) 4:05pm, $(0.79)
    • VeriSign (VRSN) 4:05pm, $0.57
    • Western Digital (WDC) 4:15pm, $2.05 - Preview
    • Wynn Resorts (WYNN) 4:02pm, $1.67
    • Zynga (ZNGA) 4:03pm, $(0.04)


  • WTI Oil Rises for First Time in Four Days on China Manufacturing
  • Platinum Shortages Extending as Car Sales Quicken: Commodities
  • Gold Climbs on Bets Federal Reserve Stimulus Will Boost Demand
  • Copper Swings Between Gains and Drops on Chinese Interest Rates
  • Wheat Climbs in Chicago as Demand Gains for Supplies Out of U.S.
  • Rubber Advances From Two-Week Low on China Manufacturing Data
  • Potash Corp. Reports 28% Price Slump as Uralkali Raises Output
  • Raw Sugar Near Erasing Brazil Santos Fire Gains; Coffee Advances
  • Asia Boosts West African Crude Oil Imports to 21-Month High
  • Rebar Falls Amid Concern China to Introduce New Property Curbs
  • Fukushima Radiation Prompts Uranium Price Cuts: Energy Markets
  • Singh Spends $2.2 Billion to Triple Oil Reserve: Corporate India
  • China Thermal Coal Imports May Wane in 4Q as Spreads Narrow
  • World Rubber Consumption Seen Climbing as Tire Demand Gains


























The Hedgeye Macro Team














Soft Tyranny?

“The will of man is not shattered, but softened, bent, and guided…”

-Alexis de Tocqueville


If we need a French guy to tell us what, precisely, is wrong with an un-elected US Federal Reserve whose Chairman has unlimited power over both the value of your currency and rate of return on your savings, so be it.


“… men are seldom forced by it to act, but they are constantly restrained from acting. Such a power does not destroy, but it prevents existence; it does not tyrannize, but it compresses, enervates, extinguishes, and stupefies people, till each nation is reduced to nothing better than a flock of timid and industrious animals, of which government is the shepherd.”


Isn’t it sad? But which part is the saddest? Is it the cowardice in free-market leadership, or the groupthink grounded in how much people will pander to a man that gets them paid? I don’t know anymore. I read this Tocqueville passage at a picnic table at a rest stop in Maine last night. I lit up a cigar, and I felt like I was going to puke.


Back to the Global Macro Grind


The thought of Gold ripping and #GrowthSlowing because an un-accountable central planner doesn’t allow economic gravity to get marked-to-market makes me sick to my stomach. I run a small business in America. I have a payroll to meet and people to inspire – it gets a lot tougher when the economy slows than when it’s accelerating.


Not that anyone in Washington cares, but I’ll be fine. I started this firm during the thralls of 2008 when Bernanke thought the “shock and awe” rate cuts to 0% were going to save government from itself. So I can take a P&L punch. But if the buck keeps burning and rates keep falling, Bernanke, Obama, and “progressive” Republicans are going to knock some people right out.


I don’t agree with everything he says or thinks, but I think Mark Levin has this part of it right: “The nation has entered an age of post constitutional soft tyranny” (The Liberty Amendments, pg 4). And I’m not talking about politicized social issues or anything outside of my domain of required reading – I’m talking about the economy and markets.


How else would you describe a market that hangs on every breath of what an un-elected body @FederalReserve says and/or hints next? Forget the soft stuff – this is hard core tyranny.


So, after being the US #GrowthAccelerating bulls for the better part of the last year, how do we reposition for?


1.       Down Dollar

2.       Rates Falling

3.       #GrowthSlowing


Whether you like the probability of these things occurring or not, it’s officially rising. But you already know that. You can see the “growth style factors” in your portfolio slowing.


Yesterday’s US stock market correction (from the all-time highs) was led by the Financials (XLF). The only S&P Sectors in our 9 Sector Model that were up on the day were the 2 slowest growth sectors – Utilities (XLU) and Consumer Staples (XLP).


What else has been working this week?

  1. Gold
  2. Bonds
  3. Volatility

Isn’t that just great? Think about that for another few seconds – AT THE ALL-TIME HIGH IN THE US STOCK MARKET, GOLD, BONDS, and VOLATILITY WENT UP! And CNBC’s big government access ratings hit new lows.


This has never happened before…  that’s why it “enervates, extinguishes, and stupefies people.”


Why has it never happened before? That’s easy. We have never been at these all-time highs before – and the Bush/Obama Bernanke legacy now has plenty of “this time is different” economic policy that history will have plenty of time to review.


Is this time really different? Is it still 2008? Or do the people in Washington who are plundering your currency for political gain look like they are living through Bernanke’s said 1936 depression?


Or is it 2013 – the year when de Tocqueville finally nails it on US monetary policy being that soft tyranny that we are all so numb to that we just allow it to exist?


2013 FACT: as US economic growth accelerated (Dollar Up, Rates Up), the bond, currency, and stock markets all had this right. That’s why Gold got tapered. On September 18th, 2013, Ben S. Bernanke restrained market forces from acting as they were.


I don’t think torching the currency, starving savers or a risk free-rate of return, and trying to arrest economic gravity ends well for Americans. That’s why I went to 58% cash yesterday and I still feel like I am going to puke.


Our immediate-term Global Macro Risk Ranges are now as follows:


UST 10yr Yield 2.47-2.60%


VIX 12.01-14.62

USD 78.99-79.98

Euro 1.36-1.38

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Soft Tyranny? - Chart of the Day


Soft Tyranny? - Virtual Portfolio

real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

CAT: Management Playbook Missing?

We Were Mostly Right, But Too Optimistic On Restructuring



We’ve been “short” CAT for about the past year and a half, but this is the first quarter where we were not bearish enough.  We had expected management to present the strong corrective measures hinted at on the 2Q 2013 call.  Instead of a restructuring program, CAT management sounded a bit helpless – revenue was just dropping too fast.  As the totality of the miss and lack of credible response sink in, we expect continued pressure on CAT shares.  CAT’s 2014 outlook implies an earnings decline from an already weaker than expected 2013.  CAT sell-siders are going to need to cut 2014 to ~$5.50 from ~$7, give or take, which will be hard for even the 13 analysts with Buys to spin as positive.  CAT is not in a good way with the Street.


Troubled Industrial companies usually have a “go to” playbook.  They trash a quarter or two with one-time impairment charges and accruals, boosting future earnings with a current profit hit that gets written off as one-time.  Analysts may complain that those future higher earnings are just the result of previous charges, but the market usually gives a partial pass.  Then that troubled company does some sort of “portfolio reshaping”, with a few small divestitures and a few large acquisitions with generous acquisition accounting.  As the charges/accruals run out, they just rinse and repeat.  We’ve all seen variations on this before, with some companies achieving greater success than others.  It gets the management teams through the down-cycles with a bit less pain and bad press.


We had assumed CAT would adopt a version of this playbook in 3Q, finally recognizing that the market for resources-related capital equipment is going to grind lower, not turn higher.  Even if CAT management truly believes that mining capital spending will come back, a series of charges would make it look like they were doing something – even if it was only protecting headline EPS.  They could then do a few acquisitions (looking at you MTW – mining shovels and cranes scream synergies, right?).  Acquisitions could stem the nasty revenue decline, allow CAT to stop repurchasing overvalued shares and, most importantly, give management something less gloomy to talk about. 


On the earnings call, CAT oddly disavowed much of this strategy.  We are “short” and even we had expected more positive news on this front. 


“And in terms of physical capacity, it doesn't make any sense to close down an assembly line or get rid of machining equipment that you've put in place. So I think just from taking out physical capacity standpoint, there's just not a lot of scope to do that... But we're going to need the physical capacity.” – CAT 3Q 2013 Earnings Call


As we read that, our response is “actually, no, you are not going to need that capacity.”  While we could be wrong, that expectation lies at the core of our CAT thesis and rests on pretty solid data and reasoning.  Nonetheless, CAT should be telling us that it is rationalizing capacity and will take a bunch of charges – that is the playbook.  It will be harder to do that convincingly with the comments above.



Why Can’t CAT Follow The Playbook?


Perhaps management is unwilling to accept an implied mea culpa on billions in bad investments in mining equipment.  Action to reduce capacity or focus acquisitions elsewhere might be perceived as an admission of bad choices. 


The lack of M&A is less of a surprise; the current management team’s track record on acquisitions is poor.  The Board would probably be very skeptical of any proposed transaction.  Given the publicity around the Siwei fraud and the BUCY purchase price allocation, transaction execution would probably not be much fun, either.


Why not ‘kitchen sink’ 3Q and then do a deal?  Maybe CAT is waiting for 4Q 2013 to combine it with goodwill impairment testing.  Maybe they are just responding really, really slowly – even though they responded very quickly in 2009.  Maybe Kynikos’ “accounting issues”, the Siwei fraud and the huge dealer inventory problem have attracted the attention of regulators and management is distracted or wants to stop digging.  Maybe senior management is about to turn over and the Board wants to leave the restructuring to the next team.  The last one seems a good guess. 


If the market hates uncertainty, CAT’s lack of a reasonable playbook is likely to foster continued share price weakness. We may be reading this all completely wrong, but the lack of a clear response to CAT’s challenges struck us as a key aspect of CAT’s release.  What, exactly, are the longs looking forward to?  Are they just going to wait for resource-related capital spending to turn up (think 2025)?  As the charts below show, mining capital spending is already cyclically inflated and likely on its way lower.  Please do not email that now earnings expectations are low enough – we get that every quarter.  2013 is low enough now, excluding a possible 4Q goodwill impairment charge, but 2013 is almost over. Expectations for the out years are still too high in our view.


We have held three “black book” calls and written numerous notes outlining our bear case for CAT.  Our thesis has played out well so far, but all the while we had assumed that CAT would go to the playbook.  While it may be interesting to see what CAT does instead, we do not see alternatives that are likely to benefit the share price anytime soon.


CAT: Management Playbook Missing? - fdr1



CAT: Management Playbook Missing? - fdr2


In preparation for WYNN's F3Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • We are currently working on renovating the original Wynn Macau tower that's resulting in between 6% to 8% on the room base being out on any given day. Recently made some upgrades to the slot area, looking at making some possible changes to our original west casino space but nothing imminent on the casino front.


  • It's about $409 million spend through the second quarter. We'll spend about $300 million more in the second half of this year, probably another $1 billion spent on that in 2014 and it will be hopefully opening still in the first half of 2016.
  • Still trending on track for an early opening in January of 2016.
  • With our guaranteed maximum price contract, there's a additional payment that I guess paid to the contractor, if they hit that January date. It's a pretty sizeable number, not one that we're allowed to put out but it's a big enough number where they're pretty strongly incentivized to hit their early date too.


  • I've always been sort of neutral about using the word recovery. I think that Las Vegas is doing better than it did last year, but the extra capacity that came on during the recession was poorly timed.
  • In Vegas we continue to outperform. Vegas is a very competitive market. And despite that, we continue to outrun all of our peers.
  • We think the drivers [are] the non-casino end of the business.


  • It's going up.


  • So what we have done is gone onto a policy of happier in year-end. We just did that recently. In fact we just paid.. our last dividend, we're the happier for Macau. So expect that to continue. That was HK$0.50.


  • The mass market's high limit side is hypercompetitive, remains hypercompetitive, and we've just been focusing on taking care of our customers, delivering high-quality service and trying not to get into the heavy discounting promotional battle that's in the marketplace.


  • There's mild disruption. We're not doing heavy renovation. We're refurbishing our guest rooms. We're doing all 600 keys in our Wynn Tower, and we're just over 7 years old. They've been incredibly well received. We've taken the palette from Wynn Las Vegas Tower suites and rooms and so far the reaction has been excellent. We've done five floors so far. We'll be finished by late November.


  • Everyone is aware of the liquidity issue in China. We're very cautious of how we handle our credit and collections, so we really haven't felt any effect on our business or economy here yet.


  • We actually see a pick up across – besides north and also through the Guangdong province area. So, both sides are picking up.





Takeaway: Takeaway: Join us for a conference call with Guy Constant, CFO, of Brinker International.

Friday, October 25th at 11:00am EDT  

For details please email 


We will be hosting a call with the CFO of Brinker International, Guy Constant, to discuss 2Q14 results, the outlook for the balance of the year, and the emerging role of technology in the casual dining industry.



  • Bringing technology to the casual dining industry.
  • A more detailed look at 2Q14 results.
  • Why traffic trends in the casual dining industry look bleak.




Guy Constant is Executive Vice President, Chief Financial Officer and President of Global Business Development for Brinker International.  In this role, he is responsible for overseeing Planning and Analysis, Mergers and Acquisitions, Investor Relations, Treasury, Tax and Accounting, Domestic Franchise Business Development, and Corporate, Chili’s and International Finance in addition to overall Development.  Guy added his global responsibilities in January 2013 and is responsible for overseeing global operations.




Please email or call to learn more about the event. Attendance is limited. Please note if you are not a current client of our Restaurants research there will be a fee associated with this call.




Howard Penney

Managing Director

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.