TODAY’S S&P 500 SET-UP - October 12, 2010

As we look at today’s set up for the S&P 500, the range is 20 points or -1.06% downside to 1153 and 0.66% upside to 1173. Equity futures are trading below fair value in reaction to fairly steep falls seen across Asian and European markets overnight as a firmer dollar sparks some profit taking in risky assets.

The main event for today is this afternoon's important FOMC minutes which will be scrutinized for any fresh insight into the Fed's preconditions for implementing additional QE; after the close Intel (INTC) will report Q3 earnings.

  • ActivIdentity agrees to be bought by Sweden’s Assa Abloy for $3.25-shr; 43% premium to yesterday’s close
  • Deere (DE) maker said Sept. retail utility tractor sales fell single digits vs industry sales down 11%
  • GlaxoSmithKline’s (GSK) Hycamtin drug can be toxic to bone marrow when added to most common initial chemotherapy for advanced ovarian cancer, study says
  • Global Payments (GPN) reported 1Q adj. EPS 67c vs est. 69c, sales $440.1m vs est. $438.4m
  • Halozyme Therapeutics (HALO) will decrease research related to new compounds and cut jobs by 25%; expects to incur one- time charge in 4Q, mostly offset by reduced payroll expenses
  • Myriad Genetics (MYGN) said new Prolaris product accurately predicts prostate cancer survival


  • One day: Dow +0.03%, S&P +0.01%, Nasdaq +0.02%, Russell (0.04%)
  • Month-to-date: Dow +2.06%, S&P +2.11%, Nasdaq +1.42%, Russell +2.56%
  • Quarter-to-date: Dow +2.06%, S&P +2.11%, Nasdaq +1.42%, Russell +2.56%
  • Year-to-date: Dow: +5.58%, S&P +4.5%, Nasdaq +5.87%, Russell +10.89%


  • ADVANCE/DECLINE LINE: -318 (-1149)
  • VOLUME: NYSE - 827.90 (-12.25%)  
  • SECTOR PERFORMANCE: Energy +0.27%, Technology +0.17%, Consumer Staples +0.11%, Healthcare +0.06%, Utilities +0.03%, Consumer Discretionary +0.03%, Financials (0.14%), Materials (0.18%) and Industrials (0.26%)
  •  MARKET LEADING/LAGGING STOCKS YESTERDAY: Wynn +8.45%, NY Times +7.11% and Supervalue +7.75%/Citrix -6.65%, Salesforce -5.63% and Akami -3.81%.
  • VIX: 18.96, -8.45% - YTD PERFORMANCE: (-12.54%)
  • SPX PUT/CALL RATIO: 1.49 from 1.69, -11.74%


  • TED SPREAD: 18.16, 0.710 (4.070%)
  • 3-MONTH T-BILL YIELD: 0.12%
  • YIELD CURVE: 2.06 from 2.06


  • CRB: 296.37 +1.26%
  • Oil: 82.21 -0.54%
  • COPPER: 378.95 +0.40%
  • GOLD: 1,353.45 +0.71%


  • EURO: 1.3888 -0.37%
  • DOLLAR: 77.442 +0.15%




  • European markets: FTSE 100: (1.11%); DAX (0.96%); CAC 40 (1.56%)
  • Major indices are weaker in early trade in response to falls seen across Asia with weak commodity prices weighing on mining names, with financials also acting as a drag in response to China temporarily raising its reserve requirement ratio by 0.5% to a historical high of 17.5% for 6 major banks.
  • South Korea's Posco's (PKX) disappointing outlook statement weighs on European steel makers
  • Germany Fin Min spokesman says against extension of Greek repayment plan for EU/IMF bailout loan
  • Germany Sep Final CPI +1.3% y/y vs Prelim +1.3%
  • UK Sep CPI 3.1% y/y vs cons 3.1%, RPI +4.6% y/y vs cons +4.4% 


  • Nikkei (2.09%); Hang Seng (0.37%); Shanghai Composite +1.23%
  • Markets closed broadly lower ahead of the much anticipated release of the FOMC's September meeting minutes later today.
  • The continuing weakness of the dollar vs the yen has the Nikkei trading lower as any remaining luster from the BOJ's surprise rate cut last week appears to have vanished as investors are now focused on additional Fed easing.
  • Shanghai reversed earlier losses to close at its highest level in five months, after gains in commodity stocks and autos, offset drops in banks following a surprise temporary rise in reserve requirements 
Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends














The Macau Metro Monitor, October 12th 2010



According to China Securities Journal, China will start levying a property tax on a trial basis in some selected cities “within months.”  Shanghai has already started to prepare for the tax.   Nie Meisheng, president of the China Real Estate Chamber of Commerce, believes that the performance of the real estate market will determine whether a tax is introduced this year. He thinks housing prices will remain high as most developers have plenty of cash.  On Sept 29, China's State Council said that it will introduce the trial property tax in some cities and then expand the tax nationwide.



Guo Shuqing, chairman of China Construction Bank, says a property tax is necessary to reduce the dependence on government revenues from the industrial sector and stabilize the real estate market.  Guo believes the tax rate being discussed is still too low to have any meaningful impact on housing prices. 



Sources say one of S'pore's 40 richest people recently lost a total of S$100 million and another tycoon from the timber-rich East Malaysian state of Sabah lost $50million at RWS and MBS.  This follows businessman Henry Quek, who has settled his whining over losing S$26 million over 3 days at RWS. 

Inflation Wars: Snorting QE

"I didn't even like coke that much, it was just a case of getting on whatever train I needed to take to get high.”

-Carrie Fisher


On many levels, the Big Government American Life of the late 1970s became a scary place. As consensus gets paid to snort QE and blow its mind on whatever M&A machination they can dream up because “money is cheap”, please remember that we’ve seen government sponsored trailers to this movie before.


In 1977, as Jimmy Carter was being sworn in as President of The United States and the Fed’s Chairman, Arthur Burns, was finishing his experiment of monetizing US Treasury debt, “Star Wars Episode IV: A New Hope” came to the big screen. In the meantime, Princess Leia (Carrie Fisher) was snorting lines of cocaine on the set of “The Empire Strikes Back.”  


If you didn’t know that’s what was going on behind the scenes, now you know. Yesterday, in the spirit of Columbus Day, the now 53-year old Fisher admitted that she didn’t even really like doing coke, but she was quite happy to get high anyway.


Hope, of course, is not an investment process and neither is chasing this market higher in the face of what you really know is going on. Inflation is running up again. Both companies and consumers alike are starting to get squeezed.


Before you have a “New Keynesian” who got submarined by stagflation circa 1981 send me a reply explaining how everything is “deflationary”…  but earnings for the companies my buddies and I are long are “going to be great”…  but “we need QE3 anyway”… let’s look at some real-time prices:

  1. CRB Commodities Index hit a new YTD high yesterday for 2010 (up +13% since August!).
  2. Copper prices are up +28% since August and are now testing their all-time peak prices of 2008.
  3. Chinese stocks have rallied +20% since their July lows.

China, Copper, and Commodities? Yes, Dear Congress person, these are what we call demand drivers of long term secular inflation that are augmenting your Burning of the Buck as you provide the stimulus for Jobless American Stagflation.


Now please don’t take my word for this concept of long-term secular inflation. Have all of your analysts read pages 180-201 in Reinhart & Rogoff’s ‘This Time Is Different.’ Chapter 12, “Inflation and Modern Currency Crashes”, is very timely reading when you consider the history of global inflation going back to the year 1500.


Yes, going back that far in time is a long time. But so is life and, as Rose Bertin aptly put it, “there is nothing new except what is forgotten.” The chart on page 181 of the median inflation rate, using a 5-year moving average, tells you all you need to know. Ever since the world convinced itself that the US should be trusted to debauch the world’s reserve currency, prices have gone up.


In today’s world inflation is, like politics, a local phenomenon that’s backed by the credibility of the government who oversees its currency. So let’s strap the accountability pants on and snort down some local inflation readings from this morning:

  1. UK Consumer Price Inflation (CPI) was reported at +3.1% year-over-year (+110bps above what even the government calls acceptable).
  2. Brazil is raising its inflation forecast for 2011 to +4.98% - that’s pretty precise because they change the estimate as prices change.
  3. Korea’s Posco (the 3rd largest steelmaker in the world) cuts earnings guidance by 7% due to “commodity costs” rising.

All the while, back here in the Empire of the Fiats, after the US Dollar has lost -13% of its value over the course of the last 19 weeks, Ben Bernanke is going to fear-monger you into trusting that everything you put in your car or grocery basket is deflating. Keep snorting on that QE idea dude. Arthur Burns did.


Ahead of Heli-Ben’s deflation speech at the Boston Fed on Friday, think about what’s really going on behind the scenes here folks. The US government is broke and can’t afford to tell Americans on Social Security that professional politicians would rather pay themselves than the political piper.


As my partner, Howard Penney wrote yesterday, health insurance premiums are rising, poverty is up (43 million on food stamps), and the nation's unemployment rate is nearly 10% and now the government is expected to announce this week that more than 58 million Social Security recipients will go through another year without an increase in their monthly social security benefits.


As a point of reference, Social Security and Supplemental Security Income benefits are adjusted annually to reflect the increase in inflation; the average CPI-W for the third calendar quarter of the prior year is compared to the average CPI-W for the third calendar quarter of the current year and the resulting percentage increase represents the percentage that will be used to adjust Social Security benefits beginning for December of the current year.


The projection will be made official on Friday, when the Bureau of Labor Statistics releases inflation estimates for September. Those on Social Security haven’t had a raise since January 2009, and now it looks like they won’t be getting one until at least January 2012.


Now you know why Bernanke’s speech in Boston is titled “Revisiting Monetary Policy In A LOW INFLATION Environment”…

Keep taking whatever train you boys at the Fed need to get on to help CNBC cheer that stock market higher. We know what’s going on behind the scenes.


My immediate term support and resistance lines for the SP500 are now 1153 and 1173, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Inflation Wars: Snorting QE - fisher

Early Look

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It was WYNN’s turn to make the big move yesterday. Some of the move was for legitimate reasons, some not so much.



WYNN climbed over 8% yesterday even after a big October move.  Here is what we think were the drivers:

  • October revenues were off the charts in the first 10 days and Wynn’s market share improved from September
    • The numbers were indeed terrific and implied a HK$20 billion (+65%) month even after normalizing post Golden Week revenues
    • WYNN’s table market share for the first 10 days was 14.2% which is higher than September’s 12.0% share
    • However, 14.2% is still right around pre-Encore averages so it shouldn’t be something to get excited about
    • As long as Macau keeps growing like it has market share probably won't matter
  • Reports of US$125m in EBITDA over Golden Week
    • We heard this rumor yesterday and we think it is insane
    • We know Wynn generated HK$1.2 billion in the first 10 days of October which implies around US$35m in EBITDA so not even close under any aggressive scenario
  • September market share loss was due mostly to hold percentage
    • Rolling Chip share actually declined 1% from August so they did lose VIP volume share
    • Mass revenue share went up sequentially so that was a positive
  • Vegas carryover from Friday
    • Las Vegas Strip revenues were released on Friday - up over 20% in August
    • Baccarat revenues drove the growth
    • If WYNN captured its fair share of the Baccarat business – its Q3 moved from an in-line quarter to a nice beat
    • However, we are hearing that MGM held well which would imply a low hold at Wynn since Baccarat hold percentage was below normal
  • Special dividend – this remains a possibility and has been used to explain recent moves in the stock
  • Short covering
    • 23% of the float was short
    • This likely played a role

So that’s what we are hearing/thinking on WYNN.  It seems that the stock could back off over the near term as the short covering abates and investors realize that $125 million in EBITDA for 10 days is near impossible.  Moreover, anecdotally, we are hearing that business levels and traffic slowed demonstrably this past weekend, even below normal levels.  The Street is clearly expecting HK$20b+ in October gaming revenues.  The quarter is definitely looking better than it did a week ago but it looks like the stock will have a choppy ride for the rest of the month.

Defend Yourself

This note was originally published at 8am this morning, October 11, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Defense is superior to opulence.”

-Adam Smith


Thankfully, I didn’t waste much of my time this weekend listening to professional politicians at the IMF meetings in Washington make their proactively predictable protectionist comments about global currencies. As the aforementioned Scottish moral philosopher aptly put it, “all money is a matter of belief.”


Neither Adam Smith’s ideas about free market capitalism, nor his citations from “The Wealth of Nations” get much air time in the manic media these days. US stock market cheerleaders are much more focused on “New Keynesian” economic theories of Big Government Intervention that  are allegedly going to help policy makers save themselves from adhering to the laws of gravity.


Rather than engage in a philosophical or ethical debate about ideas coming out of the Scottish Enlightenment this morning, I’m going to give you some advice in modern day plain English – Defend Yourself. That’s right and that’s it – defend yourself because, unless you have a legitimate Global Risk Manager managing your money, no one else will.


Notwithstanding the obvious protectionist commentary coming out of the world’s top 3 economies this morning (USA, China, and Japan), here are a few other representative central banker quotes that came out of the IMF meetings:

  1. Brazil: “Brazil won’t pay the price for several countries’ imbalances. Our position is: Brazil will protect its economy regardless.”
  2. Philippines: “In the face of possible further weakness in the US Dollar, the central bank continues to assess investment diversification options.”

At the end of the day, the world is still too long of the US Dollar and the broken promises that back it. This isn’t new (we’ve been short the US Dollar since June 7th). It’s simply becoming consensus. And, unlike stock market consensus, global political consensus is much more difficult to reverse.


The “consensus” 2-2.5 month direction of the US stock market has been often reversed in 2010. Students of the Real-Time Market Enlightenment get this. As a result, they will likely continue to profit from the Mathematical Enlightenment called mean-reversion.


Since we made our call for May Showers on April 16th, I haven’t seen such obvious signals to suggest you defend yourself from a US stock market exposure perspective. Never mind what the dude at Citi thinks about our levels, Newton and Einstein would most likely love this call as our Hedgeyes are intensely focused on measuring both time and space.


Time (duration) and price (space) aren’t very useful for economic theoreticians who have never traded a market in their life. Today’s selling opportunity is really amplified by the Academic Dogma that is driving US political consensus that QE2 is going to end well. As your local professional politician Burns the Buck, global politicians are becoming increasingly protectionist about what it means for their constituencies.


Admittedly, we were a little early with the April Flowers/May Showers macro call by about a week (the SP500 topped for 2010 YTD at 1217 on April 23rd). But early is as early does – seeing something coming before it actually occurs and having the patience to wait for your entry point (or in this case, selling point) is easily the most challenging aspect of my risk management day.


In the spirit of keeping the accountability pants on, as a reminder here are the market factors I’ve been looking for since the morning of September 29th when I wrote a note titled “A Heavier Crash”:

  1. We need to see the SP500 get squeezed one more time in the next few weeks to a price north of 1164.
  2. We need to see volatility (VIX) get oversold towards 20.
  3. We need to continue to see the world’s said “reserve currency” lose its credibility.

And no matter where we go this morning, here we are. Check, check, and check on the levels. Fellow Risk Managers, ‘tis time to defend yourself.


I started buying protection by investing in volatility (VXX) on Friday. I get that it’s not a perfect instrument when considered alongside the volatility index (VIX), so we model the risk/reward and probability in the VXX from the bottom-up on its own historical price, volume, and volatility merits.


I have not yet shorted the SP500 (SPY) as my risk management model was flashing amber lights on Friday to wait and watch for the 1169 line in terms of the US stock market being immediate term overbought.


Yes, Dear Theoretical Dogmatists, Hedgeye reserves the unalienable right to change our game-plan as the game changes. Defending ourselves against your Ivory Tower economics is our advice as we drift ominously higher toward 3 more Fridays in October.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Defend Yourself - EL heute

Retail: Looking Through The Cotton Trade

The fact that cotton prices are at record highs is not new, but then why is the market looking right through it as it relates to retail? The chart below shows the spread between the MVR (Morgan Stanley Retail Index) and the S&P500 matched against a cotton price index. Without fail, over the six notable periods from 2000-2008, retail zigged when connot prices zagged. But since early 2009, there was only zigging to be found across the board. That was easily explainable by post-recession earnings revisions that took retail up through 1Q10. But that is O-V-E-R.


We'll dive into this, as well as other salient issues on Friday at 10am est when we release our next Retail Blackbook called Consumption Cannonball: The Retail Aftermath. Please contact for details.


Retail: Looking Through The Cotton Trade - 11