• run with the bulls

    get your first month

    of hedgeye free



“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

 -John Maynard Keynes


A Google search for quotes related to “inflation” produces quotes from Keynes in the first 10 spots.  While his radical idea that government should spend money it doesn’t have may have saved us from the brink of a financial collapse, he might not have agreed with QG (Quantitative Guessing) and the impact it is having on global inflation. 


The week in between two holidays is challenging on many fronts - personally and professionally.  Typically, there is little incremental macro data in the U.S. because politicians take time off for the holidays rather than trying to force issues when there is no audience.  In addition, most “big money” institutions are not going to make any big bets when there is no liquidity.   


We headed into the holiday lull with a bullish sentiment, an overbought market and MACRO factors that continue to keep us on the bearish side of a tightly-wound, high-risk environment.  Yesterday, on a stealth day for MACRO news, the VIX shot up 7.29%, putting a two-day move at 13.89% (but still down 18.5% YTD). 


The world is interconnected and this year’s “tweener week” is filled with interesting global macro data points, especially after China used the holiday weekend to hike interest rates in an attempt to ward off mounting inflation.


The news/rumors this week do not stop with China!  After the first of the year, Taiwan and South Korea will also be raising rates to battle domestic inflation.  How ironic that the region of the world (Asia) that is the hot bed for “deflation” for the balance of the planet is fighting a battle against domestic inflation.  If slowing growth in the emerging markets is not on your list of 10 surprises for 1Q11, it should be.  


Don’t take my word for it; the Chinese equity market is now down 9 of the last 10 days, declining 1.74% last night (down over 3% at one point).  The Chinese don’t mince words about where they think things are headed.  Overnight China’s Premier Wen Jiabao said measures to curb the country’s property market “weren’t well implemented” and reiterated his goal for home prices to return to a “reasonable level” during his term that ends in 2012. 


This is the killer statement by Wen Jiabao: “We introduced about 15 measures this year but it appears that they were not well-implemented….I believe that after some time, the home market will return to a reasonable level with our efforts.” 


If China did not get it right in 2010 (even though the Shanghai Composite is down 16.6% YTD) and they implement measures to curb property prices more effectively in 2011 and demand begins to slow as a result of a heightening cycle, we could see Industrials (XLI) and Metals (XLB) quickly come under pressure.  With the Chinese market as a leading indicator of growth and the market trading down 3.1% over the past month, those sectors and commodities with the biggest leverage to Chinese demand are likely headed lower, despite recent moves higher.


Over the past month: 


(1)    The S&P 500 is up 5.1%

(2)    The XLB is up 9.6%

(3)    The XLE is up 7.5%

(4)    The XLI is up 6.7%

(5)    The CRB is up 9.3%

(6)    Copper is up 13.8%   


In light of Wen Jiabao’s statement, it is interesting to note that the best performing sectors year-to-date are also those with the most leverage to Chinese demand.  The four best performing sectors are:


(1)    Consumer Discretionary (XLY up 26.03% YTD)

(2)    Industrials (XLI up 25.51% YTD)

(3)    Energy (XLE up 17.82% YTD)

(4)    Materials (XLB up 15.79% YTD)


While most Asian central bankers seem to see that there is an inflation problem, in the USA we still cannot see it, despite a number of “real life” examples of real inflation hitting the U.S. consumer hard.  Yes, we are going to hammer home a key theme in 2011: Jobless Stagflation (inflation accelerating, growth decelerating) is here to stay.


Of course, the components of any inflation index are up for debate.  For instance, the government and most people that disagree with our view on inflation prefer to exclude staple, non-discretionary aspects of consumer spending such as food and energy from the calculation.  One item I hope we can all agree to include is healthcare costs. 


According to the Commonwealth Fund (a non-profit fund), U.S. health-insurance costs are rising more quickly than the ability of U.S. families to pay for it.  They cited that private-insurance premiums for families rose three times faster than median household income over six years and deductibles rose almost five times faster.  In 15 states, health-insurance premiums are the equivalent of at least 20% of median household income for people under 65.


While the market has rallied on the back of the Government pumping another $800 billion into the economy to prop up the ailing consumer, the average American remains liquidity-impaired and the U.S. housing market is headed lower, not higher.  With these factors still in place, the now positive bias toward stronger-than-expected GDP growth in 2011 can certainly be questioned.


Inflation is a policy that, as Keynes said, confiscates part of the citizens’ wealth. The government’s most recent move, to implement payroll tax cuts while extending unemployment benefits, may go some way to stimulate the economy in the short term but runs a considerable risk of exacerbating the deficit.  In this interconnected global economy, as the world’s fastest-growing economies take strong measures to curb inflation, the net effect could be icy for world growth.  In the U.S. certainly, from a global and domestic perspective, the evidence is clear that inflation is here to stay on a global basis and Jobless Stagflation is going to impact the economy in 2011.


Function in disaster; finish in style.


Howard Penney






TODAY’S S&P 500 SET-UP - December 28, 2010

As we look at today’s set up for the S&P 500, the range is 16 points or -0.76% downside to 1248 and 0.51% upside to 1264.  Equity futures are trading above fair value after Asia finished mixed and Europe trades flat. Volume low in volume internationally.


Today all eyes are on the Case-Shiller Home Price Index and December consumer confidence numbers.  Home prices are estimated to drop in 0.2% Y/y in October - the housing data will remain a weak.


Other data and events today:

  • Consumer confidence - December estimate is 56.4, prior 54.1
  • Richmond Fed Manufacturing - December estimate is 11 prior 9
  • U.S. to sell $25b 4-wk bills, $35b 5-yr notes  
  • ABC consumer confidence, prior -41


  • ICSC releases weekly sales information; may revise December sales forecast following weekend results curtailed by snow.
  • MasterCard Advisors’ SpendingPulse says total holiday season retail sales (including internet sales) from Nov. 5 through Dec. 24 rose 5.5%, best performance in five years.
  • Travelers and New York commuters face further disruptions as winds hinder efforts to clear roads, runways. Passengers stranded after airlines canceled 6,000 flights face lengthy waits to rebook their trips
  • AstraZeneca stops studies of experimental painkillers on concern they raise risk of joint damage; follows JNJ putting development program for fulranumab on hold last week.


  • One day: Dow (0.16%), S&P +0.06%, Nasdaq +0.06%, Russell +0.43%
  • Last Week: Dow +0.72%, S&P +0.28%, Nasdaq +0.21%, Russell +0.34%
  • Month-to-date: Dow +4.99%, S&P +6.52%, Nasdaq +6.77%, Russell +8.99%
  • Quarter-to-date: Dow +7.11%, S&P +10.19%, Nasdaq +12.61%, Russell +17.19%
  • Year-to-date: Dow +10.81%, S&P +12.77%, Nasdaq +17.54%, Russell +26.7%
  • Sector Performance mixed (5 sectors up, 4 down) - Financials +0.88%, Tech +0.20%, Industrials +0.17%, Materials +0.16%, Utilities +0.06%, Healthcare (0.19%), Consumer Discretionary (0.29%), Energy (0.36%), and Consumer Staples (0.48%)


  • ADVANCE/DECLINE LINE: +320 (+439)  
  • VOLUME: NYSE 467.57 (-24.03%)  - worst snow storm in six decades
  • VIX:  17.67 +7.29% YTD PERFORMANCE: -18.50% (up 13.89% last two days)
  • SPX PUT/CALL RATIO: 2.06 from 1.96 (+5.25%)


Treasuries were mixed, nearly unchanged at the short-end, with 7bps narrowing of the 2/30 spread; 10-yr yield fell 6bps to 3.33%.


The Treasury auctioned $29B in 3-mo bills at 0.18%, up from the prior week, as well as $35B in 2-yr notes at 0.74%.

  • TED SPREAD: 14.76 -2.943 (-16.621%)
  • 3-MONTH T-BILL YIELD: 0.17% +0.02%  
  • YIELD CURVE: 2.65 from 2.74


  • CRB: 329.11 -0.08% (up 1.81% last week)
  • Oil: 91.00 -0.56%  Trading flat in the am - near a two year high
  • COPPER: 428.00 +0.50% Trading up slightly in the AM
  • GOLD: 1,379.60 -0.30% Trading up 1% in the AM


  • EURO: 1.3131 +0.07% - Trading up 0.75% in the AM
  • DOLLAR: 80.366 -0.13% Trading down 0.57% in the AM - a two week low vs the EURO


  • European Markets: FTSE 100: closed; DAX: +0.1%; CAC 40: +0.3%
  • In thin trade again, Europe is trading slightly higher today, with auto stocks dragging on markets as they did yesterday on continued worries about the effects of China's rate hike and Beijing's new limits on cars.
  • The UK remains closed until tomorrow.
  • Basel Committee on Banking Supervision tells banks to be more transparent about pay, bonuses
  • France Q3 GDP revised to +0.3% q/q vs preliminary +0.4%


  • Asian markets were mixed this morning.
  • South Korea went up 0.55% on construction and tech stocks. Hyundai Elevator soared by its 15% daily limit for a second straight day in response to Schindler Deutschland’s raising its stake in the company.
  • Japan fell 0.61% on a stronger yen and weakness in China, though it was supported by strong industrial output data.
  • Securities firms led China down 1.74% on fears that tightening measures are not over.
  • Property stocks and banks fell in Hong Kong, which was closed yesterday, in reaction to the 25-Dec interest-rate rise in China. Carmakers extended their December 24th decline due to Beijing’s announcement that it would limit new-car registrations in the city.
  • Australia and New Zealand were closed for Christmas.
  • Japan November core CPI (0.5%) y/y vs cons (0.6%) - Jobless rate 5.1%, matching consensus and prior - Industrial output +1.0% m/m, matching expectations - Retail sales +1.3% y/y - Household spending (0.4%) y/y - Household incomes +0.5% y/y - Tokyo December core CPI (0.4%), matching expectations.
  • Beijing raises minimum wage rate by 21%




THE HEDGEYE DAILY OUTLOOK - dec 28 s p setup




The Macau Metro Monitor, December 28th, 2010


DSEC reported total visitor arrivals rose by 6.5% YoY to 2,013,188.  Visitors from Mainland China increased by 7.9% YoY to 1,096,865 (54.5% of total), with 437,375 traveling to Macau under the Individual Visit Scheme, up by 13.5% from November 2009.


Visitors from Hong Kong (561,395), Japan (35,897) and Republic of Korea (26,832) grew by 10.8%, 4.6% and 77.2% respectively, while those from Taiwan, China (96,432), Malaysia (34,855), and Singapore (24,987) decreased by 16.5%, 8.2% and 8.3% respectively.




MGM MACAU AT FULL SPEED macaubusiness.com

MGM Macau president Grant Bowie said MGM Macau is currently using all of its 427 gaming tables.  Bowie said previously, MGM was only using 380 tables but a pickup in business in late 2009-2010 allowed it to improve its table utilization rate.

The Calm and The Storm

This note was originally published at 8am on December 27, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“They sicken of the calm, who know the storm.”

-Dorothy Parker


While it’s tempting for a man with an Arctic Cat Pantera snowmobile parked outside his front door to poke fun at Americans wearing dress shoes in NYC this morning, I’ll just roll with a quote from a self proclaimed “wisecracker” poet from New Jersey. Dottie Parker was a beauty.


Whether you are observing global financial markets from the Big Lake they call Gitche Gumee this morning or from a window on Madison Avenue, you’ll find that plenty has changed in the last 72 hours:

  1. China raised interest rates.
  2. American shoppers have been grounded on the East Coast.
  3. Canada beat Russia 6-3 at the World Junior Hockey Championships in Buffalo.

Now, some things, like Canadian demand for gold on ice, are expected. Other things, like China funding deficit-financed American hopes for a continued stock market rally, aren’t…


In fact, China’s Premier, Wen Jiabao, made an important statement to China’s citizenry on Christmas Day that “inflation expectations are far more dire than inflation itself.” FDR-esque.


When it comes to the global inflation on your screens this morning, China’s leadership using the word “dire” wasn’t misrepresented. If you don’t want to use the all-time high price for something like copper (up another +2.4% last week to $4.24/lb) as a leading indicator for inflation, just use the price moves in the CRB Commodities basket (19 different commodities) and look at what they’ve done across the following 3 durations:

  1. Weekly = +2.8% week-over-week (last week)
  2. Monthly = +6.5% for the month-to-date (December)
  3. Quarterly = +15.5% for the quarter-to-date (Q410)

The word “expectations” wasn’t misused either. As Shakespeare said, “expectations are the root of all heartache” and I have no reason to believe that the last price of a commodity that represents a large part of a human being’s buying power isn’t the same.


Whether it’s the price to warm your home in Connecticut (oil $91.34/barrel this morning is trading at a 26-month high) or the price to feed your family in Asia this morning, the Chinese aren’t sitting on their hands while the US Federal Reserve opts to Quantitatively Guess (QG) about how this all ends.


While He Who Sees No Inflation (Bernanke) does his best to extend and pretend the Fiat Fool experiment, the calm (US stock market investor complacency) that’s come before every emerging market storm (inflation) is finally rearing its ugly head.


Before you get a bull to try to tell me that this storm is actually great for US “growth” let’s look at what effect the force majeure of China tightening interest rates has had on the Shanghai Composite Index:

  1. Down -1.9% overnight to 2,781
  2. Down for 7 out of the last 8 trading sessions
  3. Down -15.1% for 2010 to-date

Again, if you’re one of the bulls that’s in the US “growth” is back camp and you’re willing to tell me that Chinese growth slowing as inflation accelerates plays no part in your global risk management model, I don’t know what to say in response other than good luck in the New Year with that…


In US equity market action, the low-volume and low-volatility calm may very well be a reality for revisionist stock market historians, but the break-downs in US Treasury and emerging debt markets look eerily similar all of a sudden. They look like they are both staring into the same storm of global inflation.


In the eye of the NYC storm this morning, UST yields continue to breakout to the upside with 2-year and 10-year yields hitting 0.67% and 3.44%, respectively. If the bulls want to tell me higher-highs in yields are “growth” signals this morning, I’ll just call that out for what it is – a smoke signal that The Calm and The Storm of Wall Street story-telling remains.


My immediate term TRADE lines of support and resistance for the SP500 are now 1246 and 1262, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Calm and The Storm - BlizELL

Europe: Risk does not Cease to Exist

Position: Long Germany (EWG); Short Italy (EWI), Euro (FXE)


European equity indices largely closed in the red today, with negative divergence from the PIIGS; in particular Greece’s Athex fell -2.8% and Spain’s IBEX 35 declined -2.1%.


Below we refresh the charts of 10YR govt. bond yields and 5YR sovereign CDS, which show the continued heightening of risk from Europe’s periphery. Of note is Greece’s 10YR yield, which now stands at a mere 15 bps away from its previous year-to-date high of 12.449% on 5/7, a few days after Greece received a €110 Billion bailout and a few days before the EU and IMF established a €750 Billion aid package for the region to tap into.


Matthew Hedrick



Europe: Risk does not Cease to Exist - h1


Europe: Risk does not Cease to Exist - H2

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.