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Lover's Hour

“Each moment of a happy lover’s hour is worth an age of dull and common life.”

-Aphra Behn


I love my family, my firm, and my macro model. There is no hiding love – especially after the lover’s hours we’ve had on the short side of the US stock market for the past few days and weeks. Winners love to win.


No, dear Bullish Sirs – this isn’t about slapping you in the face this morning. This is all about a man named Mucker showing you the love. The love of something that brutish men of markets could never understand – the love of a woman.


If Aphra Behn were to join the ranks of we who are wedded to our writings, I think she’d have sufficiently stirred the pot of conventional market wisdoms too. In the 17th century she became one of the first professional female writers in England. Per Wikipedia, “She has since become a favorite among sexually liberated women.”


Having been ball-and-chained to plenty a Wall Street trading desk in my day, the liberation associated by this great country’s freedom of speech has made me a very happy man. The love I have of seeing the conflicted and compromised walls of the Fiat Republic fall has no end.


Being Nemo in the fishbowl has its perks. I get fed a lot of emails. Most of the notes that people take the time to send me are very thoughtful and additive to my risk management process. Once in a while, I get sent something very special.


While the bullish brutes were running up the buy-and-hope score in July, an interesting player in this game made my day. He sent me a note that accused me of being married. He wrote, and I quote, that “you sound like a wife defending her husband."


Now, both on and off the ice, I have been called a lot of things in my day, but never a wife. If I could be someone’s wife, I would definitely be Laura’s.


Altogether, being wed to a view in this business can be as dangerous as being single minded. Being wed to a flexible, multi-factor, and multi-duration investment process is something I may forever wear as a badge of honor that some men in this business will love to hate. I’m cool with that though – I don’t foresee seeking the love of another man.


Let’s end this diatribe with what players in this game really feel. They hate being wrong. They love being right. For me, I have been happily wed to the bearish view since I put it on the tape on April 16th. Let’s get back to the positive messaging I am working hard on this week – winning and the love:

  1. Unemployment – yesterday’s jobless claims number was an absolute bomb. As my teammate Allison Kaptur summarized yesterday, initial jobless claims rose 12k last week to 500k, the highest level since November 2009. Consensus had called for a small decline.  Rolling claims rose 8k to 482.5k, also the highest level since last November.  We have been looking for the range of 375-400k as the maximum level for unemployment to fall meaningfully, but with claims moving the wrong direction, the spectre of rising unemployment looms.
  2. US Economic Growth – JP Morgan joined Goldman Sachs yesterday as the latest sell-side firm to cut their GDP estimates for the back half of 2011 closer to ours. As a reminder to all of those who are wedded to the bullish case that “earnings are good and US growth is good”, there is a very high likelihood that US GDP growth comes in at or below the Hedgeye estimate (established via my love letter dated July 1, 2010) of +1.7% for Q3.
  3. US Housing Double Dip – we fully realize that our current 2011 US GDP estimate of +1.7% doesn’t equate to what newsy pundits call a “double dip.” To be clear, we are calling for a significant sequential slowdown in US GDP growth over the course of the next 3-6 months and an acturial “double dip” in US Housing prices over the course of the next 6-12 months (our Q3 Macro Theme call for Housing Headwinds lays out the case for US Home Prices in the Case-Shiller series to drop -15-20% from the cycle-highs that are being established here in Q3).

Now what would my lover’s hour of watching the US futures trade lower again this morning be without giving my bullish friends both a line and a catalyst?

  1. The Line – the next line of immediate term TRADE support for the SP500 is 1058. Below that, the gravitational forces of chaos theory don’t signal any significant support for the SP500 until 1041. That line would register as a 3 standard-deviation move in our immediate term model and a very good spot to be covering shorts, buying some longs, and loving happy hour thereafter.
  2. The Catalyst – the next catalyst is starring us right in the eye on August 24th when the next bomb is dropped on the bulls barns via Twitter, Facebook, and email in the form of the US Existing Home Sales report.

As Oscar Wilde said, “the world has grown suspicious of anything that looks like a happily married life.” But the investment world as the Fiat Republic knows it is ending.


‘Tis Lover’s Hour in New Haven, CT. Stay transparent, my friends.



Keith R. McCullough
Chief Executive Officer


Lover's Hour - bb1


TODAY’S S&P 500 SET-UP - August 20, 2010

As we look at today’s set up for the S&P 500, the range is 35 points or 1.6% (1,058) downside and 1.6% (1,093) upside.  Equity futures are trading below fair value as Asian and European markets fall amid a resumption of risk aversion; news flow has been light and volumes are thin.  There are no economic indices scheduled for release today, and earnings are light, with only HRL and JMS reporting.  Last night, DELL reported earnings which beat at EPS while reiterating June guidance.

  • PERFORMANCE ONE DAY: Dow (1.39%), S&P (1.69%), Nasdaq (1.66%), Russell 2000 (2.72%)
  • PERFORMANCE MONTH-TO-DATE: Dow (1.86%), S&P (2.36%), Nasdaq (3.36%), Russell (6.13%)
  • PERFORMANCE QUARTER-TO-DATE: Dow +5.09%, S&P +4.36%, Nasdaq +3.30%, Russell +0.24%
  • PERFORMANCE YEAR-TO-DATE: Dow (1.50%), S&P (2.61%), Nasdaq (2.65%), Russell (2.31%)
  • ADVANCE/DECLINE LINE: -1910 (-2448) Breadth was very negative last two days
  • VOLUME: NYSE - 1073.61 (+16.3%) - Light but nice move DoD - bearish
  • SECTOR PERFORMANCE: Every sector down - only three left positive on TREND XLB, XLP and XLU
  • MARKET LEADING/LAGGING STOCKS: McAfee +57.0%, Symantec +6.2% and Sears -9.13% and Gamestop -8.19%


  • VIX  26.44, +7.52, up 8.59% last two days and 22% YTD.
  • SPX PUT/CALL RATIO  1.31 down from 1.92


  • TED SPREAD 18.42, -0.984, (-5.071%)
  •  3-MONTH T-BILL YIELD .16% unchanged
  • YIELD CURVE  2.09 from 2.13 XLF is the only sector down on a 1yr basis


  • CRB: 268.22 -0.62% Down 4 of the last 5 days
  • Oil: 74.43 -1.31% Breaking down - down 8 of the last 10 days - support at 72.11
  • COPPER:333.05 -0.92% - first down day in 3
  • GOLD: 1,233 +0.11% - up 6 straight days - Bullish formation


  • EURO: 1.2823 +0.40% first down day in 3
  • DOLLAR: 82.447 +0.27% first up day in 3




  • ASIA - Major indices tracked Wall Street lower as weak data fuelled fears about a double dip recession and spurred investors to seek safe havens. Tokyo's Nikkei slid nearly 2% as the yen threatened to hit a 15 year high against the dollar. China declined 1.7%
  • EUROPE - Major indices are trading near session lows with weakness across the cyclical names.  Euro trading at its lowest level vs the dollar since mid-July - Greece down 2.9%
  • EASTERN EUROPE - Trading lower - Slovakia and Serbia are the only two markets that are up
  • MIDDLE EAST/AFRICA - Trading mixed to lower
  • LATIN AMERICA -  Trading lower
Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends
















Risk Manager subscribers can access the post in it's entirety, and in real-time;  This entire note was originally published at 9:03am ET.



Initial jobless claims rose 12k last week to 500k, the highest level since November 2009.  Consensus had called for a small decline.  Rolling claims rose 8k to 482.5k, also the highest level since last November.  We have been looking for the range of 375-400k as the maximum level for unemployment to fall meaningfully, but with claims moving the wrong direction, the spectre of rising unemployment looms. 








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MGM is severely under spending on maintenance capex. The good news is they can probably keep it up [down] through 2011.



We’ve always thought that maintenance capex in the casino industry needed to be 5-7% of revenues.  It’s not the perfect measure but it’s good enough.  Companies have either spent this much or under reported true maintenance.  To its credit, MGM has historically spent in the 5-9% which means they are a) honest in their reporting and b) properly maintaining their properties.  Certainly, given the company’s exposure to the competitive LV Strip and its market positioning at the upper end of the spectrum, they do need to spend more.


The following chart shows MGM’s historical maintenance spend as a % of revenues and as a % of PP&E.  Clearly, capex is way below normal levels on both metrics.




MGM plans on spending $200 million on maintenance capex this year and next year, representing about 3% of revenues.  They can probably get away with it since they had fresh product heading into the downturn.  MGM spent 9% of revenues on maintenance capex in both 2007 and 2008.  However, they will have to play catch up in 2012 and therein lies the problem.  Normalized capex will eat into its free cash flow.  In 2011, we project MGM will generate $225 million in free cash flow but only $75 million if we normalize maintenance.  That translates into a paltry 2% free cash flow yield on the current stock price.  Note that for this analysis we are using a modified free cash flow measure that includes hypothetical JV distributions and income tax benefits.  True free cash flow will undoubtedly be negative next year. 

Bear Market Macro: SP500 Levels, Refreshed...

Since April, there have been bulls who have appeared and disappeared. All the while this Thunder Bay Bear has remained bearish.


I’m not bearish on every country and every asset class. If you look at Hedgeye’s Virtual Portfolio, you’ll see that we actually have as many longs as we do shorts right now (we’re long Indonesia, the British Pound, etc). We’re simply bearish on both America’s currency and stock market.


As risk managers who are accountable to the score every day, we force feed ourselves the most immediate term data points (both economic and price oriented). Sometimes the data doesn’t support our bearish stance, most of the time it does. Otherwise we wouldn’t remain bearish.


This morning’s jobless claims report of 500,000 was an absolute bomb (highest since November of 2009). Next week’s Existing Home Sales report (August 24th) will be a bomb too. Bombs are bearish.


From a quantitative factoring perspective, as of 11AM EST my model is flashing me lower-highs of immediate term resistance (1093) and lower-lows of immediate term support (1059). That’s bearish too.


I’m not always bearish, but when I am – I use Hedgeye.



Keith R. McCullough
Chief Executive Officer


Bear Market Macro: SP500 Levels, Refreshed...  - 1

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