Drowning In Sweat

This note was originally published October 29, 2010 at 08:03am ET


“Nobody ever drowned in his own sweat.” 

-Ann Landers




I’ve seen a lot of sweaty hockey players in my day. The stench of a few hockey bags in the back of a mini-van has definitely made a few hockey Moms nauseous, but I think Ann Landers has the greater risk management point right.



Drowning In Sweat - sweat



The Hedgeye Question of The Day: Can markets drown in the sweat of their own expectations? If you are really levered up long here. And I mean right here, right now… you better be sweating. Here’s why:




  1. Month-End markups (and Year-End for some), ends today.
  2. Mid-Term Election catalyst is gone as of next week.
  3. QG’s (Quantitative Guessing) expectations could get hammered next week.


  1. SP500 is up +13% since Bernanke signed off on creating fanciful QE expectations in Jackson Hole (August 27th).
  2. CRB Commodities Index (proxy for inflation expectations) is up +15% since the same begging for Bernanke bailouts began.
  3. After losing over -7% of its value since Jackson Hole, the Burning Buck is bottoming on an immediate term basis (up for the 2nd wk in a row).

As global macro risk managers, measuring TIME (duration of catalysts) and SPACE (price) is obviously critical. At the same time we need to comply with the rules of Wall Street Storytelling and come up with something that the theoretical people out there can surmise as plausible.


How about this 3-factor model?

  1. Global Growth Is Slowing
  2. Global Inflation Is Accelerating
  3. Globally Interconnected Risk is Compounding

‘Whoa, whoa, big bone head hockey fellah – that doesn’t fit the narrative fallacy of our outstanding September/October performance run. Reign that sweaty hockey talk in before we cut your trading commissions. Oh right, you don’t have trading commissions – we’ll plug Nomura then.’


I didn’t sweat consensus coming off of the April highs and I’m certainly not going to now. There are plenty of clean cut contrarian signals in the marketplace today that reconcile another mean reversion move in correlations to the downside (VIX, CDS Spreads, Sentiment, Inside Selling, Volume Studies, etc…). But let’s not focus on those market-practitioner-points for now. Let’s get back to where the theoreticians need some convincing.




Global Growth

  1. USA: Assuming that the Street isn’t asking for a TRILLION in QE2 because US growth is accelerating, I think consensus gets that US growth is slowing. This isn’t a new concept; it’s a reminder. You’ll get the revisionist “economist” commentary on Q3 GDP this morning, but obviously today is Q4 and @Hedgeye we’re looking for another sequential slowdown to 1.3% GDP growth based on what we call our “Consumption Cannonball” estimates for the C in C+I+G for year end.
  2. JAPAN: Assuming that Citigroup’s Chief Economist isn’t joking this morning (he’s asking for “100 TRILLION” in Japanese style QE to rescue the Japanese from the broken promises of Krugman Kryptonite – yes, that’s ONE HUNDRED TRILLION YEN – a lot of Yen), we’ll assume that the Japanese stock market teetering on another crash is representative of reality. After seeing Retail Sales (September) fall off a cliff last night, Japanese equities lost another -1.8% taking the YTD loss for the Nikkei down to -12.8% (only Greece and Slovakia are worse YTD).
  3. CHINA: Assuming that the Chinese weren’t joking when they raised interest rates last week, they seem fine with the tradeoff of fighting Guido’s War (QE inspired inflation) in lieu of seeing a continued slowdown in both Chinese and Asian economic growth. From Taiwan’s Industrial Production slowing to 12.2% (SEP) vs 23.4% (AUG) to Japanese Exports continuing to slow sequentially (SEP vs AUG), this week’s Asian economic data reflects reality. Chinese stocks closed down last night for the 6th out of the last 7 days.



Global Inflation

  1. US INFLATION: Monday’s $10 BILLION in 5-year TIPs (Treasury Inflation Protection) yielded the 1st negative yield (-0.55%) ever. Yes, every Wall Street Storyteller knows that EVER is a very long time. The inflation expectations born out of QE are so high that your favorite 401k manager saw it fit to PAY THE GOVERNMENT to take your money, LOL.
  2.  GLOBAL INFLATION: Whether it was Singapore reporting that inflation accelerated to +3.7% (SEP) v. +3.3% (AUG) or India’s Finance Minister suggesting earlier this week that Indian inflation is running “double the ideal level”, I don’t see an inflation chart in the world that hasn’t moved up into the right from the Bernanke Jackson Hole lows of August. This is the birth-child of the Fiat Fools folks. Watch what prices do, not what conflicted and compromised Japanese style governments are telling you they are doing.
  3. INTEREST RATES: On the heels of continued rates hikes in Asia (China hiked last week) and Europe (Sweden hiked this week), a lot of perma-bond market bulls are all of a sudden having their worst week in a very long time. Why? Interest rates are going higher all of a sudden (yes, this does happen periodically from decade to decade). In the face of global inflation concerns, both 10-year and 30-year yields on US Treasuries are breaking out above what we call our immediate term TRADE lines of resistance of 2.55% and 3.81%, respectively.



Global Interconnectedness

  1. CORRELATION RISK: The inverse correlation between the US Dollar Index and virtually everything else (other than things with positive correlations to the US Dollar like Natural Gas) is as high right now as I have seen in my models going back to September of 2008. We’re talking correlations and r-squares ranging between 0.85 and 0.97 – mathematical monsters.
  2. CROSS ASSET CLASS RISK: Overlay the chart of Chinese equities and Copper and you’ll get the point. China correcting hard in the last week and now Copper breaks what was a significant immediate term TRADE line of support in our macro model at $3.73/pound. Proxy for Asian growth slowing sequentially into Q1?
  3. INTEREST RATE RISK: Ask Captain Stock Picker what happens to their super duper picks that are all of a sudden going up every day for the last 2 months what happens if both JGB (Japanese Government Bond) and UST (US Treasury) yields start backing up together. You know, if default risk starts getting priced into either US or Japanese sovereign yields in say the next stage of their lifetime?


Drowning In Sweat - Bernanke 2


Sweating yet? Don’t worry – it won’t kill you. Heli-Ben has bags full of “cash on the sidelines” – load up the mini-vans and plug your nose.


My immediate term TRADE lines of support and resistance for the SP500 are now 1169 and 1192, respectively.


Have a great weekend and best of luck out there today,



Keith R. McCullough
Chief Executive Officer

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