TODAY’S S&P 500 SET-UP - October 18, 2010

As we look at today’s set up for the S&P 500, the range is 14 points or -0.78% downside to 1167 and 0.41% upside to 1181. Equity futures are trading below fair value as investors continue to digest Friday's speech by Fed Chairman Bernanke which appeared to have disappointed investors who were looking for specifics on any further QE. Overnight moves in Asia and Europe have been muted with the dollar bouncing off lows and sending commodity prices lower. Looking ahead to today, earnings from Citi before the open and Apple after the close will be in focus, while the September Industrial Production numbers are the main MACRO data points.

  • Allergan (AGN) said the U.S. FDA approved Botox for the preventive treatment of chronic migraines in adults
  • Daimler (DDAIF) shares may touch $75 or higher as more Chinese buy Mercedes cars and demand gains for its medium- and heavy-duty trucks, Barron’s reported, citing analysts and investors.
  • Lulu Athletica (LULU US) may fall as much as 30% as sales growth slows, Barron’s reported, citing analysts
  • Pioneer Natural Resources (PXD) expects to record $127.6m in 3Q derivative gains
  • Supertex (SUPX) said 2Q sales will be no more than $22.5m, lower than the average analyst estimate of $25.1m
  • WD-40 (WDFC) posted 4Q EPS 41c vs est. 38c
  • Wilmington Trust (WL) may be a takeover target, Barron’s reported, citing analysts


  • One day: Dow (0.29%), S&P +0.20%, Nasdaq +1.37%, Russell (0.22%)
  • Month/Quarter-to-date: Dow +2.55%, S&P +3.07%, Nasdaq +4.23%, Russell +4%
  • Year-to-date: Dow +6.09%, S&P +5.48%, Nasdaq +8.8%, Russell +12.44%
  • Sector Performance: Technology +1.69%, Consumer Discretionary +0.73%, Healthcare +0.42%, Utilities +0.30%, Materials +0.29%, Energy +0.27%, Consumer Staples +0.25%, Industrials (0.62%), and Financials (1.71%).


  • ADVANCE/DECLINE LINE: -629 (-9.97%)
  • VOLUME: NYSE - 1416.33 (-27.52%)
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Google +11.19%, Western Digital +8.14% and Amazon +5.86%/Gannett -8.80%, First Horizon -7.90% and Capital One -7.62%.
  • VIX:  19.03 -4.28% - YTD PERFORMANCE: (-12.22%)
  • SPX PUT/CALL RATIO: 2.85 from 1.49 +91.58%


  • TED SPREAD: 15.32 -0.101 (-0.658%)
  • 3-MONTH T-BILL YIELD: 0.14%  
  • YIELD CURVE: 2.22 from 2.14


  • CRB: 296.06 +1.29%%
  • Oil: 81.25 -1.74% - BULLISH
  • COPPER: 383.35 +0.62% - OVERBOUGHT
  • GOLD: 1,370.97 -0.28% - BULLISH


  • EURO: 1.3977 -0.55% - BULLISH
  • DOLLAR: 77.041 +0.51%  - BEARISH



European markets:

  • FTSE 100: (0.11%); DAX (0.03%); CAC 40 (0.13%)
  • Major indices are weaker in tandem with the softer tone set by Asian markets with mining, auto, retail and construction sectors underperforming.
  • Strikes across France shuts oil terminals
  • Philips reported Q3 EBIT of €517M vs €453M expected, with a €154M gain on the sale of the remaining stake in NXP boosting net income to €524M. Shares fell 5% on a cautious revenue outlook statement
  • Rio Tinto (RIO.LN) BHP Biliton (BLT.LN) abandon production jv

Asian markets:

  • Nikkei (0.02%); Hang Seng (1.21%); Shanghai Composite (0.54%)
  • Markets fell across the region in muted reaction to Fed Chairman Bernanke's comments on Friday which fuelled speculation of the likelihood of further QE measures being implemented.
  • Japan ended flat, supported by short covering and defensive plays. 
Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends













Blind Belief

"Blind belief in authority is the greatest enemy of truth."
— Albert Einstein


If you need a solid dose of anti-academic dogma, read “Einstein: His Life and Universe” by Walter Isaacson. Never again will you accept the Blind Beliefs of modern day academics who purport to know exactly what is going on in your life and the global economy.


In addition to an ominously timed story titled “The Return of the LBO”, Barron’s ran an interview with Vincent Reinhart this weekend titled “The Case for Quantitative Easing.” If you haven’t read it yet, you should. It will cost you 5 debauched bucks to get a consensus opinion that’s worth about that much.


Vincent Reinhart shouldn’t be confused with his wife, Carmen Reinhart, who co-authored one of the most important empirical works in modern economic times (“This Time Is Different” with Ken Rogoff). Carmen is a self-taught Cuban-American who came to America with her family and 3 suitcases in 1966, whereas Vincent spent almost his entire career as a yes-man at the Federal Reserve.


If you don’t want to waste 5 Burning Bucks (the US Dollar closed down again on a week-over-week basis last week for the 17th out of the last 20 weeks), here’s a recap of some fairly shocking one-liners in the Reinhart interview (*reminder – Reinhart was a Greenspan “consigliore”):


1.  Barron’s: “You must feel some vindication that the very policy you have been pushing for several years is now being embraced”

Reinhart: “It’s too early to take credit until they actually do something meaningful.”


2.  Barron’s: “Quantitative easing has very little history in economics.”

Reinhart: “There was one other important case study, the 1930s, when short term rates were about zero from 1932 onward.”


3.  Barron’s: “Is that a good or a bad thing?”

Reinhart: “That depends on your outlook. Certainly you can’t expect the Chairman of the Fed to go around making speeches saying ‘hooray, we are depreciating the currency. Yet dollar weakness is a good thing as long as it is limited, controlled and gradual.”


Maybe a better acronym for QE is government sponsored BS.


While we do applaud the Barron’s interviewer for giving Hedgeye some knucks calling QE “financial kryptonite” (in our Q4 Macro Themes presentation from 3 weeks ago we coined QE “Krugman’s Kryptonite”), we’re hardly going to support another professional politician with no market practitioner background for pandering to the academic dogma of a Fed Chairman who is still lost in his historical studies of the Great Depression.


I think the groupthink embedded in these quotes is pretty obvious, so I won’t dissect it in detail, but I will summarize the risk in what both Reinhart and Ben Bernanke aren’t telling you.


1.  With 43 MILLION Americans in line for the Food Stamp program and a 9.6% unemployment rate there should be no credit given to the charlatans of the broken promises associated with ZERO percent rates and Big US Government Market Intervention.


2.  Quantitative Easing has plenty of history – it’s just not the history that fits the storytelling of those who perpetuated Jobless Stagflation in both the mid-1930s (Germany and USA) and Japan since 1997.


3.  Debauching a country’s currency and attempting to fear-monger its citizenry into believing that the rate-of-return on their hard earned savings accounts should be ZERO as the government implodes itself with debt is something the Fed Chairman should be protecting Americans from rather than perpetuating via its politicized policy making.


As Washington fat cats take pictures petting their pooches in front of some inflated art like Vincent Reinhart did for his interview, remember this … and remember it well… Americans aren’t paid off to have Blind Belief in short-term dollar depreciation oriented stock market rallies. They know who is getting paid by the Piggy Banker Spread in 2010 – and it’s not them.


Americans want someone in government to tell them the truth. The enemy of truth is the posturing of truth itself.


My immediate term support and resistance lines for the SP500 are now 1167 and 1181, respectively. As the bulls were Snorting QE on Wednesday, I finally re-shorted the SP500 (SPY) near its intra-week high. I titled an EL note last Monday “Defend Yourself” and I am currently living that strategy out loud.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Blind Belief - blind

PSS: GILTy As Charged

Interesting timing that Saucony shows up as a headline in a sneaker trunk sale on GILT just days in advance of the PSS analyst day. The question to answer for mgmt will need to be strategy at core PSS. But tough to hide momentum at Saucony and Sperry -- which are more meaningful to cash flow than people think. 


PSS: GILTy As Charged - 12


PSS: GILTy As Charged - 22

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Malthusian Tails

This note was originally published at 8am this morning, October 15, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The power of population is indefinitely greater that the power in the earth to produce substance for man.”

-Thomas Malthus


Any regular reader of our work, especially when Keith is penning the Early Look, is familiar with our work on investment durations.  Our investment process enables us to develop investment ideas on 3 durations: TRADE (3 weeks or less), TREND (3 months or more), and TAIL (3 years or less).  We call this our Trade-Trend-Tail Process.


There is, of course, another duration, which I will simply call the longer term.  This is the time frame beyond 3 years.  While it is difficult to make an investment decision today, for an event that will happen beyond 3 years, that doesn’t mean we shouldn’t be contemplating the longer term.  One key force that will shape the longer-term with some predictability is demographics.


One of the most well known and earliest recorded demographers was the Reverend Thomas Robert Malthus.  His primary work on this front was his treatise, “An Essay on the Principle of Population”, which he published in 1798 at the age of 32.  Malthus started with the basic premise that society could not be improved with time, so as population increased, so too would the constraints on that society.  Eventually, a large enough population would not be self sustaining and, as Malthus wrote:


“The superior power of population cannot be checked without producing misery or vice."


In contrast to Malthus, if we have learned anything over the last few centuries it is that the welfare of societies can and will improve with population growth in conflict with Malthus’ primary tenet, but Malthus did leave us with a few salient points: 1) demographics are powerful and 2) changing populations will constrain societies.  Below we’ve outlined 3 key Malthusian Tails that we are focused on.


1.  Marriage Rates in the United States - We wrote an intraday note on this point to our Hedgeye Macro subscribers earlier this week (if you aren’t currently receiving our full product, please email us at to set up a trial); in the last decade we have seen a dramatic shift in marriage status among young adults.  In fact, in 2000 almost 55% of the 25 – 34 cohort was married, while 35% was never married.  Amazingly less than 9 years later, by 2009, only 45% of that cohort was married, while 46% of the cohort was unmarried. 


Naturally, as people marry later, birth rates will decline, which will lead to lower population growth in the future and the ability, or lack thereof, to fund future entitlement programs.  Additionally, and near and dear to our Housing Headwinds call, is that homeownership rates are impacted by this demographic shift.  According to the most recent data from the Census Bureau, homeownership rates are 84.2% for married couples and 50.3% and 59.6% for male and female singles, respectively. 


2.  The Aging Japanese Population – One of our Q4 themes was entitled, Japanese Jugular, which describes our long term negative view of Japan.  Once again, a key driver here is demographics, in particular the aging of society.  In 1985, roughly 10% of Japanese society was over 65 years old.  Currently, almost 23% of Japan’s population is over 65 years old.  The great Keynesian experiment in Japan will likely eventually fail because of this aging of society, and its future demands on the government as it relates to retirement and healthcare entitlements. 


Currently, the ratio of retirees to working-age Japanese is equal to 35.5%.  In just ten years time, that ratio will be equal to 48%.  We’ve likely already seen the negative inflection point in this trend within the last year, as Japan’s pension fund announced it will be increasing its asset sales by a factor of 5x to support pension payment requirements.


3.  The Aging Baby Boomers in the U.S. – Our Healthcare Team, led by Tom Tobin, presented a Black Book on this topic last week, which was titled:  “HEDGEYE HEALTHCARE: AGING OF AMERICA: DEMOGRAPHICS OF DEMAND AND PROFITS IN HEALTHCARE.” (If you are an institutional investor and would like to sample or trial some of their superb work on the Healthcare sector, please email


In effect, the glacial movement of U.S. demographic trends holds specific consequences both for healthcare and the larger economy broadly. For Healthcare investors, the Baby Boomer investing dogma mistakenly centralizes per capita spending as the core driver of the thesis.


While absolute per capita consumption is higher for those in their 70s & 80s, the growth rate of healthcare consumption is slower and there are far fewer people to support it.  The period of greatest acceleration of per capita consumption comes as people age into their 50s - a demographic now in the heart of a secular decline which won’t see bottom until 2018.


Boomer Employment (45-64 yr olds) reached its crescendo in the 1993-2002 period with peak earnings and peak disposable income occurring alongside historic lows in unemployment.  Now, with this segment of the working population in deceleration mode, the U.S. workforce nearing a peak in average age, and the echo boomer generation (30-39 yr. olds) years away from peak consumption growth, the healthcare and broader economy face significant long-term headwinds.


At risk of starting off your weekend on too somber of a tone, I will leave you with one last aging quote from Groucho Marx that is counter to our thoughts on demographics:


“Age is not a particularly interesting subject.  Anyone can get old.  All you have to do is live long enough.”


Yours is risk management,


Daryl G. Jones


Malthusian Tails - DJEL

The Week Ahead

The Economic Data calendar for the week of the 18th of October through the 22nd is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - c1

The Week Ahead - c2

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