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

As we look at today's setup for the S&P 500, the range is 30 points or 0.98% downside to 1785 and 0.69% upside to 1815.                                                    










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.51 from 2.50
  • VIX  closed at 13.91 1 day percent change of 3.11%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Dec. 6 (prior -12.8%)
  • 10:30am: DOE Energy Inventories
  • 11am: Fed to purchase $1.25b-$1.75b in 2036-2043 sector
  • 1pm: U.S. to sell $21b 10Y notes in reopening
  • 2pm: Monthly Budget Statement, Nov., est. -$140b


    • 8:30am: NTSB holds investigative hearing on crash landing of Asiana Airlines flight 214 at San Francisco Intl Airport
    • 9:15am: Senate Finance Cmte reconvenes confirmation hearing on John Koskinen to take over as chief of IRS
    • 10am: House Energy and Commerce Cmte panel hears from HHS Secretary Kathleen Sebelius on Affordable Care Act
    • 10am: Senate Environment Cmte hears from EPA, Energy, Dupont on renewable fuels standard and ethanol
    • 10am: Michael Gibson, director of Fed bank supervision, speaks at panel discussion on insurance industry in Washington
    • 1pm: House Ways and Means panel holds hearing on identity theft, with acting IRS Commissioner Daniel Werfel
    • 3pm: House Armed Services Cmte panel hears from Congressional Research Service on People’s Liberation Army


  • U.S. budget negotiators reach deal easing spending cuts
  • EU finance chiefs set creditor-writedown rule parameters
  • FCC set to approve in-flight calls as Congress resists
  • NSA using Google cookies to pick hacking targets: Wash. Post
  • Costco net misses ests. as warehouse chain boosts discounts
  • MasterCard to buy back $3.5b in shrs, boosts qtrly div 83%
  • Foxconn may start funding startups for wearable technologies
  • Chinese drugmakers may see increased FDA scrutiny
  • IEA raises 2014 global oil demand forecast on U.S. recovery


    • Hudson’s Bay (HBC CN) 7am, $0.10
    • Joy Global (JOY) 6am, $1.12 - Preview
    • Laurentian Bank of Canada (LB CN) 8:40am, $1.31
    • Men’s Wearhouse (MW) 5:30pm, $0.86
    • Nordson (NDSN) 4:30pm, $0.94
    • Oxford Industries (OXM) 4pm, $0.11
    • Vera Bradley (VRA) 4:03pm, $0.33


  • IEA Boosts 2014 Global Oil Demand Forecast on U.S. Recovery
  • Gold Retreats From Three-Week High as Investors Weigh Rally, Fed
  • Colombian Rebels Seen Blocking Farmland Overhaul: Commodities
  • Coffee Spread Falls From Record on Vietnam Sales; Cocoa Retreats
  • Nickel Leads Metals as Investors Add to Bets on Higher Prices
  • WTI Trades Near Six-Week High; IEA Boosts 2014 Demand Estimate
  • Wheat Rebounds From 18-Month Low as Demand to Gain After Drop
  • Thailand to Reinstate Natural Rubber Exports Fee From January
  • Chinalco Copper Output Cuts Set To Help Trim Global Surplus
  • U.S. Sees Least Volatile Oil Prices in 17 Years: Energy Markets
  • Solar Boom Boosts South Africa Salaries With 25% Jobless: Energy
  • Wall Street Exhales as Volcker Rule Seen Sparing Market-Making
  • Sugar Rout Deepening on Weaker Real, Thai Baht: Chart of the Day
  • Robusta Coffee Seen Dropping as Vietnam Sales Set to Accelerate


























The Hedgeye Macro Team














Confidence? No Thanks

This note was originally published at 8am on November 27, 2013 for Hedgeye subscribers.

“Well, there’s not a day that goes by when I don’t get up and say thank you to somebody.”

-Rod Stewart


Roderick gets it. The youngest of five kids, he wasn’t born into poverty or affluence. The 68 year old rocker from Highgate (North London) was born on my wife’s due date (pending baby #3 for us in January). And God knows, I have nothing but thanks for my family’s health and happiness as we move closer to game time.


I also wanted to take some time to thank you, our clients, for making all that we’ve set out to achieve here @Hedgeye possible. We’re going on 6 years since the founding of our firm. You’ve helped us create 50 jobs in America. For that I’m forever grateful.


With achievement comes great responsibility. Now that we have our new @HedgeyeTV studio and office space built out in Stamford, CT we’re looking forward to being the change we all want to see in both our community and profession.


Back to the Global Macro Grind


Change starts with being transparent and accountable. All great American (and Canadian) Patriots have held their government to account. While hope is not a reputational management strategy, I sincerely hope you see some of my anti-government rants in that light.


Yesterday’s declining US Consumer Confidence reading is case and point. While the US government and its un-elected @FederalReserve refuses to acknowledge this, there’s an implicit link between:


A) The Purchasing Power of The American People

B) US Consumer Confidence


In real-time economic strategy speak, we call these coincident indicators. As you can see in Christian Drake’s Chart of the Day (US Dollar vs. US Consumer Confidence going back to January, 2013), the following conclusion is also explicit:


1. The US Dollar locked in her YTD highs in the May-July period

2. US Consumer Confidence peaked in mid-July of 2013


Not only did confidence peak; now, alongside the US Dollar (down 3 weeks in a row), it’s starting to plummet. While the chart we are showing is the University of Michigan’s reading, every single US Consumer & Business Confidence survey we track looks the same:


1. US Conference Board Consumer Confidence reading for NOV = 70.4 vs 81.0 in JUL

2. University of Michigan Consumer Confidence reading for NOV = 72.0 vs 85.1 in JUL

3. NFIB Small Business Optimism reading for OCT = 91.6 vs 94.1 in JUL


In other words, as the US government signs off on this no-taper-zero%-rates-on-savings-US-Dollar-devaluation lie, the American people aren’t buying it.


Why? Because everyone who is literate in real-world economics realizes that the current @FederalReserve Policy To Inflate is only good for high income earners in America who are long of the @PIMCO Total Return fund and/or stocks, art, bubbles, etc…


Within another US Consumer Confidence data series, look at the Bloomberg Consumer Comfort readings by Income bracket:


1. INCOME $40,000-50,000 confidence reading for NOV = -45.6 vs -23.1 JUL

2. INCOME > $100,000 confidence reading for NOV = +16.9 vs 17.0 JUL


Notwithstanding the obvious (that low-income earners all have NEGATIVE confidence readings to begin with), this is a national embarrassment; especially for a US President who campaigns explicitly with class warfare words. Obama, what about the “folks?”


I didn’t grow up in a community where we assigned people to different “classes.” I’m the son of a firefighter and teacher who put two feet on the floor every morning just like everyone else. And when someone less fortunate than me needed help, it was my leadership responsibility to do so.


So I’d like to thank you again this morning for the opportunity to lead from the front. There has never been a country that has devalued its way to long-term economic prosperity. Perpetually devaluing the purchasing power of the poor (US Dollar) is wrong. And it’s our patriotic responsibility to end this never-ending-money-printing-policy before it’s too late.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.69-2.81%

SPX 1795-1809

VIX 11.91-13.61
USD 80.35-80.91

Brent 108.69-112.14

Gold 1226-1285


Best of luck out there today and Happy Thanksgiving to you and your loved ones,



Keith R. McCullough
Chief Executive Officer


Confidence? No Thanks - cdrake


Confidence? No Thanks - Virtual Portfolio

RH: Our Take On The Market's Bearishness

Takeaway: We still think RH is on its way to $175. The quarters will ebb and flow. But despite the bearish sentiment we like it into the 3Q print.

We've never seen the Street more bearish on RH -- especially headed into a print.  We find that interesting, if not perplexing, given that there should be such a positive change in fundamentals with the upcoming quarter. We still think RH is on its way to $175. The quarters will ebb and flow. But despite the bearish sentiment we like it into the 3Q print.


Consider the following

Last quarter -- when RH was flirting with $80...

  1. RH missed the comp -- coming in at 'only' 26% versus expectations of something well into the 30s.
  2. RH continued its string on new business announcements -- but instead of announcing businesses that are actually commercially viable, it came out and announced that it would  start RH Music and RH Hotels (whereby it would outfit a small number of niche hotels with RH garb). The company made a mistake in announcing these -- even though it only cost them about $5mm annually out of the $35mm they saved by not producing the Fall sourcebook -- it was really more of a marketing initiative than a new business initiative.  All they succeeded in doing is scaring the lights out of Wall Street about their strategic direction.
  3. Gross Margins were off by 253bps, the biggest decline RH experienced since 2009 -- when it was in the tank.
  4.  They announced the elimination of the Fall sourcebook -- which caused a not-so-minor freak out by investors who were concerned that the company's Direct (non-store) business -- which is about 47% of total -- would start to evaporate.
  5. Shortly after the print, the three 'founding shareholders' who took it private and subsequently public all sold out simultaneously (the structure of the deal required that they all move in tandem).
  6. Then as a kicker there was one extremely bearish sell-side initiation with a Sell rating due to structural reasons -- arguments that we think are weak at best (we'll debate them anytime). Then earlier this week, another firm was out talking about how weaker ComScore data suggested that sales were falling.


Package that all together, and it's easy to see why sentiment is so poor.


But here why we're more optimistic…

  1. We think comp will accelerate meaningfully this quarter -- from 26% to something well north of 30%. The company did not articulate as well as it should have that comps were weak because it simply did not have enough inventory. Part of that was that product was on the water for 2-4 weeks longer than expected, and as such they could not recognize revenue. That revenue will show up in 3Q. Is the supply chain issue fixed? No. That will take the better part of a year. But we're convinced that the problem has not gotten worse, and in fact has started to improve.
  2. Gross Margins should improve dramatically this quarter -- from -253bps last quarter to better than -100bp this quarter. We would not be surprised to see it closer to flat.
  3. As it relates to, we're simply not as concerned as everyone else seems to be.  We think that the following chart flies in the face of those who think that the elimination of the sourcebook hurt revenue. Specifically, it shows the traffic trend at RH over the past six months. To be clear, you want to have a declining traffic rank (Facebook is #1,  Nike is 972, and Saucony is 77,500). The point here is that's traffic rank improved consistently from 15,000 down to 10,000 over the time period that people are worried that RH's web business dried up. 


RH: Our Take On The Market's Bearishness - 1



RH: Our Take On The Market's Bearishness - sourcebook



RH: Our Take On The Market's Bearishness - whatpeople do with catalogues



Sentiment for RH is just about as low as it's ever been  -- despite the fact that fundamenals are getting better on the margin, and we’re inching closer to the period (in 12 months) when square footage should start to accelerate.


RH: Our Take On The Market's Bearishness - 11

RH: Our Take On The Market's Bearishness - rhsqftge

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$USD Debauchery: Repercussions

Takeaway: Dollar debauchery has consequences.

$USD Debauchery: Repercussions - doll1

Shhh. Don’t tell the Fed, but that Down Dollar (The one that’s down five weeks in a row), well it's kick-starting that ‘ole 2011-2012 style inverse correlation to Commodity Inflation again.



$USD Debauchery: Repercussions - C mon man

Right now, Brent Oil vs. US Dollar has an inverse correlation of -0.66  on a 6-week duration. Both Brent and WTIC are up about 1% this morning after Brent held our Hedgeye TAIL risk support of $109.07/barrel. We covered our Oil short yesterday.


Great news for America as we head into the thick of winter with heating bills and all. Right?


If you would like to join the Hedgeye Revolution click here


Takeaway: The key to a safe “landing of the [growth] plane” is an expedited, well-implemented deregulation of FDI and portfolio flows.

This note was originally published December 04, 2013 at 14:44 in Macro.

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  • Conflicting signals from Chinese officials have made it difficult to handicap China’s TREND & TAIL GIP outlook(s) in recent months. We offer our latest thoughts in the note below.
  • We are decidedly back to analyzing China with a sanguine lens and are increasingly of the view that it probably warrants playing China alone (i.e. not via consensus ancillary “China plays”) on the long side with respect to the intermediate-term TREND.
  • With respect to the long-term TAIL, we still would like to see concrete implementation of capital account and FX reforms, as well as more safeguards put in place to limit the risk of a broadly destructive transition to a fully liberalized financial system (email us if you’d like to receive a walk-though of the specifics and a recent collection of confirming evidence).
  • It could be over a year before we have meaningful clarity on the latter, so our best solution for clients at the current juncture is to overweight “new China” (i.e. consumption and deregulation) while underweighting (or shorting) “old China” (i.e. the concomitant bubbles in credit and fixed assets investment), as highlighted in the chart below.

At the bare minimum, 2013 has been a weird year to be involved in China – either directly through Chinese equity exposure or indirectly through consensus ancillary plays like EM assets, commodities, and the currencies of commodity-producing nations.


While we consider it a huge victory for our team to have kept our clients out of or on the short side of those ancillary plays all year (and prior), that is certainly not to say we’ve nailed China or anything to that nature.


In the following table, we highlight the absolute bloodbath that has occurred across the commodity complex since we first introduced our structurally negative view on commodities back in APR ’11 as part of our Deflating the Inflation quarterly macro theme. We’ve obviously followed that up with numerous notes and presentations over the past couple of years, so please email us if you’re not yet familiar with our long-held bearish bias on the commodity complex and we’ll be happy to forward you the relevant materials.




Going back to not nailing China, we’ve been keen to change our stance on China multiple times in the YTD (% changes reflect the performance of the Shanghai Composite Index over the respective duration):



The predominant reason we’ve changed our tune on China so many times this year has been due to policy inflections that have materially altered (or complicated) our rolling-thee-to-six-month forward expectations for the Chinese economy. Amid this ~3M long period of admittedly-unattractive neutrality, we’ve analyzed China in both a positive and negative light, highlighting both the key opportunities and risks to China’s long-term GIP outlook along the way:


Sanguine tone:


Pessimistic tone:


We are decidedly back to analyzing China with a sanguine lens and are increasingly of the view that it probably warrants playing China alone (i.e. not via consensus ancillary “China plays”) on the long side with respect to the intermediate-term TREND.


With respect to the long-term TAIL, we still would like to see concrete implementation of capital account and FX reforms, as well as more safeguards put in place to limit the risk of a broadly destructive transition to a fully liberalized financial system (email us if you’d like to receive a walk-though of the specifics and a recent collection of confirming evidence).


It could be over a year before we have meaningful clarity on the latter, so our best solution for clients at the current juncture is to overweight “new China” (i.e. consumption and deregulation) while underweighting (or shorting) “old China” (i.e. the concomitant bubbles in credit and fixed assets investment), as highlighted in the chart below:




Going back to the intermediate-term TREND outlook, we think China has the opportunity to surprise consensus growth expectations to the upside into and potentially through 2014, after what is likely to be a brief dip into Quad #3 here in 4Q13:








Moreover, we think China has the potential to continue distancing itself from the carnage that has become the emerging markets space. It will seek to accomplish this by enticing international capital flows (both FDI and portfolio) away from beleaguered EM economies, at the margins, through a combination of strengthening the CNY and promoting its use internationally, as well as through incremental deregulation and investor-friendly incentives.




Below is a compendium of data points we’ve come across in the past couple of weeks that support this view:


  • Reuters noted that the PBoC said China will begin rolling out financial liberalization reforms in the Shanghai free-trade zone within three months. PBoC Shanghai chief Zhang Xin said the reforms would be launched within three months, evaluated after six months and formal policies would be fully implemented by the end of a year. He added the policies will serve as models for other regions as they move to create their own FTZs. (StreetAccount)
  • Xinhuanet noted that Zhang Xiaoqiang, deputy head of the National Development and Reform Commission, said China will simplify its foreign investment approval process in order to introduce a registration-based system for foreign investment projects. Zhang said that the government will further enhance the role of foreign investment in its market-oriented economic development. (StreetAccount)
  • Reuters reported that the yuan overtook the euro in October to become the second-most used currency in trade finance. SWIFT said the market share of yuan usage in trade finance grew to 8.66% in Oct, up from 1.89% in January 2012. The yuan now ranks second behind the US dollar, which has a share of 81.1%. (StreetAccount)
  • Dim Sum bond issuance has accelerated to the fastest pace since June 2012 as China’s pledge to move toward yuan convertibility boosts demand for the currency. Sales reached 27 billion yuan ($4.4 billion) in November, almost five times as much as October’s 5.8 billion yuan, according to data compiled by Bloomberg. Yuan savings in Hong Kong rose the most since April 2011 to a record 782 billion yuan in October. (Bloomberg)
  • The WSJ noted that foreign real estate developers eager to capitalize on rising consumption in China are increasingly raising funds to invest in warehouses and shopping malls. Data from PERE showed developers and their subsidiaries have raised $3.5B for China projects so far this year, eclipsing the $2.2B raised in all of 2012 and just shy of the $4B raised by private-equity and other fund managers. (StreetAccount)
  • Xinhuanet noted that Zhou Xiaochuan said China should increase the qualification and quota of QDII and QFII investors to help them with their activities. He added that administrative approval procedures for QDII and QFII qualification and quotas shall be eliminated "when conditions are ripe". (StreetAccount)

All told, we still think China has a lot of credit bubble-related skeletons in its closet that will increasingly become a headwind to Chinese economic growth over the long-term TAIL. For the time being, however, we think Chinese officials are putting the right policies in place to offset those headwinds, at the margins.


Please feel free to email us with any follow-up questions.




Darius Dale

Associate: Macro Team


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From Chicago to France: E-Cig Regulatory Winds Are Blowing

As we inch ever closer into year-end, there remains an industry wide expectation that the FDA is set to announce regulatory restrictions on electronic cigarettes. The exact timing? It’s anyone’s guess.


We believe the industry is bracing for regulation that could include:  


1) A ban of online commerce

2) Age verification standards at retail

3) Flavor limitations (beyond tobacco and menthol)

4) Health/safety certifications

5) Labeling and marketing requirements


(For a more comprehensive overview of the industry and regulation please see our recent report: “E-Cigs at the Thanksgiving Table”)


As the inevitable FDA announcement draws near, we want to highlight some notable, recent regulatory winds blowing against e-cigs in Chicago and New York City, as well as in France. While we continue to maintain a very bullish outlook overall on e-cigs, especially with Big Tobacco’s participation in the category, these regulatory initiatives, if legally enacted, would represent headwinds to the category.


Chicago and NYC

  • In late November, Chicago’s City Council held preliminary meetings to consider regulating e-cigs as traditional tobacco, and include them under the Indoor Clean Air Act. This could include such measures as increasing the age of purchase to 21 from 18, moving them to the back counter at retail, as well as banning use in parks, restaurants and bars.
  • Last week, the NYC City Council held similar meetings to those held in Chicago. That said, NYC has already voted to raise the age to buy traditional tobacco and e-cigs to 21 from 18, and raise the minimum price per pack of traditional cigs to $10.50 (set to take effect in APR/MAY 2014).
  • Both Chicago and New York are expected to put their respective measures to final votes this month. If passed, they would go into effect sometime in January of next year.
  • Currently, New Jersey, North Dakota, Utah and Arkansas and have “lumped in” e-cig products in with tobacco under their indoor smoking bans. Meanwhile, Minnesota has changed its definition of tobacco products to include e-cigs and subjected them to tobacco-like taxes.


  • A French court in Toulouse ruled yesterday that tobacconists should have exclusive rights to sell e-cigs; France's 27,000 tobacconists already have a monopoly on selling traditional cigs in the country.
  • If legislation were to follow the court’s reasoning, it would force e-cig stores to close.
  • Right now, there are an estimated 300 shops selling e-cigarettes in France.
  • E-cig sales in France are expected to more than double to around 100MM EUR this year.
  • France's Health Minister Marisol Touraine is on record saying she wants to ban e-cigs from public spaces and ban advertising on them.

Stateside, depending on the eventual FDA ruling on e-cigs (on the Federal level), we could very well see a number of states being called to action to define and/or redefine e-cigs and tax rules around them. 


Bottom line: Despite increasing regulatory headwinds in the U.S and abroad, we remain very bullish on e-cigs.



Matthew Hedrick


Early Look

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