Chirp, or Be Chirped

“The fact that we are today to debate raising America’s debt limit is a sign of leadership failure.”

-Senator Barack Obama, March 2006


Our CEO Keith McCullough has been out most of this week recovering from a surgery to reattach his Achilles tendon.  I’ve known Keith for upwards of fifteen years, including three years as college hockey players, so I can rightly say that I’ve seen the man in a few precarious situations, but never did I think he would injure himself on the squash courts.  So when it comes to risk management for the aging college athlete, leave the squash to those that grew up playing it at prep schools is my advice on a go-forward basis.


With Keith out, I’ve had to live a week in his shoes.  I’m not prone to giving the proverbial tire pump, but, candidly, it’s not easy to write a morning strategy note and prep for a morning call every morning starting at 5 a.m.  As it relates to President Obama and the quote above, I think he is now realizing what it’s like to live in another man’s shoes, as well.   (Life as President is much different than as a member of Congress it seems.)


Members of Congress in Washington basically have free rein to chirp.  While Presidents can chirp as well, they also have to make decisions.  Obama’s quote (chirp) above was prescient back in 2006, but in the coming weeks he will have to push to get the debt ceiling raised because, as President, he needs to keep the country running.  The advisors hired to chirp on his behalf have been out in full force making sure he has the political cover to get this done.


Specifically, White House economic advisors Austan Goolsbee recently had this to say about the debt ceiling:


"This is not a game. You know, the debt ceiling is not something to toy with. … If we hit the debt ceiling, that's essentially defaulting on our obligations, which is totally unprecedented in American history. The impact on the economy would be catastrophic. I mean, that would be a worse financial economic crisis than anything we saw in 2008."


Now, if that’s not chirpy, I don’t know what is.


Freshman Senator Rand Paul was not to be outdone though, and chirped back his own proposal:


“I can't imagine voting to raise the debt ceiling unless we're going to change our ways in Washington. I am proposing that we link to raising the debt ceiling — that we link a balanced budget rule, an ironclad rule that they can't evade.


We have to change the rules and we have to say to Washington, Balance the budget. You have to do it by law.  And then I'll vote to raise the debt ceiling.  But only if we have an ironclad balanced budget rule that we attach to the debt ceiling.”


Ironically, the best assessment of the debt and debt situation was probably Senator Obama back in 2006.  The fact is that we are in this fiscal situation today because of failed leadership.  This is failed leadership that has transcended administrations and political parties. It is because the United States has created long term obligations in the way of social security and healthcare that we can’t fulfill, and administrations have overspent on discretionary items when times were good.  (In fact, our friend Karl Rove even acknowledged to us that the one regret he had was that the Bush administration didn’t do a better job on discretionary spending.)


In the coming weeks, the debate over the debt ceiling will increase in velocity and volume.  The fiscal conservatives, particularly those who were swept in with the Tea Party in the most recent midterm, will be on the soap box and will be chirping like never before.  Unfortunately, even Goolsbee’s language and delivery is somewhat inflammatory, and as a nation, we really have no choice, but to increase the limit on the debt ceiling.


In the coming months, there are three key catalysts that will take the debate over the debt and deficit to a heightened level, these are:


1)      Late January - Congressional Budget Office deficit projections will have to be raised dramatically for the next few years.  We’ve highlighted their projections in the Chart of the Day, and, simply put, the numbers are too low for what we’ve already seen in Q1 of fiscal 2011.


2)      Mid February - President Obama’s draft budget proposal will be submitted in early February.  This proposal will be more heavily scrutinized than any budget in recent memory and since so few of the line items can be played with in the short term, they’ll surely not satisfy the fiscal conservatives.


3)      Early March - Finally, the vote on the debt ceiling will occur sometime before March 4th.  This is when the debate will reach its highest pitch even though the outcome is already known, which is the ceiling must go higher.


We believe the outcome of all of this could be, American Sacrifice. This is the idea that this debate actually drives our politicians to implement meaningful initiatives that will begin to reverse the fiscal predicament we are facing.  If we do start to see fiscal improvement, or at least positive discussions in that direction, it will be bullish for the U.S. dollar.


That said, as it relates to Washington, one never knows and productive legislation will actually require these politicians to set aside their “chirp, or be chirped” politicking, and help move the country forward.


Yours in risk management,

Daryl G. Jones


Chirp, or Be Chirped - Chirp


The Macau Metro Monitor, January 14, 2011



Macau Tourist Price Index (TPI) for 4Q 2010 rose by 11.63% YoY to 177.03.  Specifically, Miscellaneous Goods (+21.01%), Accommodation (+18.97%), Transport & Communications (+5.17%), Restaurant Services (+4.94%) and Food, Alcoholic Drinks & Tobacco (+4.74%) all recorded notable increases.


For the 1st time in 7 months, visitor arrivals in package tours fell.  Nov 2010 tours declined by 9.3% YoY to 450,597--visitors from Mainland China, Hong Kong, Taiwan, and Malaysia fell by 12.3%, 3.2%, 29.6% and 4.0% respectively, while those from Japan, Republic of Korea, and India rose by 1.2%, 139.5% and 59.9% respectively.


Total number of available guest rooms of the hotel sector increased by 4.2% YoY to 20,059 rooms.  Number of hotel guests increased 4.3% YoY.



The Singapore retail index fell 2.4% YoY in November as car sales tumbled 30%.  However, ex car sales, the retail index grew by 5.4%--the 13th straight month of gains--spurred by higher wages, big bonuses and record tourist arrivals.



The 50bps increase, effective January 20, will raise the reserve requirement ratio for China's biggest banks to a record high of 19.5%.  The move was spurred by surging FX reserves and new loans.


According to sources, China’s regulators limited new loans to less than 800BN yuan this month after loans exceeded 500BN in the first seven days of the new year.  That compares with the 480.7BN yuan of new loans extended in December.

EARLY LOOK: Long Walks

This note was originally published January 11, 2011 at 08:14am.  It's available to Hedgeye subscribers in real-time.




“It is odd to reflect that the prime advocate of a classless society had this early succeeded in making two classes of workers and in marking the difference so clearly with substantial rewards to one class.”

-Slavomir Rawicz



For those of you haven’t read Salovmir Rawicz’s book, The Long Walk, it is well worth your time.  The book tells the story of the author and six fellow prisoners who escape a Soviet labor camp in Yakutsk in 1941. The escapees travel over 4,000 miles through the Gobi Desert, Tibet, and the Himalayas to finally reach British India, and their freedom, in the winter of 1942. 


Last week I surveyed our team for their top book recommendations for 2011 and this book was recommended to me by our newly hired Managing Director of New Business Development, Bob Brooke.  After a brief description of the book, Bob ended his note with the apt, “Hard work is easy.”  In the context of an escape from a Soviet labor camp in Siberia, Bob’s point is a fair one.  Our daily grind through the global markets is certainly easy in comparison to the struggles many on this planet face every day.


On that note, I would like to officially welcome Bob to the Hedgeye team.  After obtaining a degree in economics from Yale, Bob went on to an illustrious professional hockey career, which began playing with the U.S. Olympic Hockey Team in Sarajevo and then tours of duty with the New York Rangers, Minnesota North Stars, and New Jersey Devils.   Bob then went on to get his MBA from Harvard and has spent the last few decades working and building businesses at CSFB, RBC Capital Markets, and Sanford Bernstein.  At Hedgeye, he will be leading many of our new business initiatives and he can be reached at  


The reason I highlighted Rawicz’s quote above, versus the many noteworthy quotes in the book, is because it emphsaizes the power of free markets.  The Soviet authorities needed cross country skis and in order to find the prisoners who had ski making skills, they had to offer increased pay, which in the case of a Soviet labor camp was nothing more than a doubling of rations.  Incentives are at the very foundation of free market systems.  While the Soviets could easily have used coercive incentives, they opted to use higher remuneration for what they perceived as a more critical skill set (that of ski making). 


Interestingly, incentives on an individual basis are often quite successful, but where they often fail is at the nation state level.  As we survey the global macro landscape, the key issue currently is sovereign debt in Europe.  While European debt concerns took a respite at the end of last year, they are again front and center, and rightfully so.  In the Chart of the Day below, we’ve highlighted some key debt maturities in Europe in 2011. Broadly, there are massive refinancing needs in Europe this year, highlighted by Italy and Spain.  It will be interesting to see if certain nations within Europe can be incentivized to get their fiscal houses in order in the coming year.


The Long Walk of Sovereign Debt is, of course, not limited to Europe.  In fact, CMA recently released its Q4 Sovereign Debt Credit Risk Report and highlighted its view of the top 5 riskiest countries, which were:

  1. Greece - $330BN in 2009 GDP
  2. Venezuela - $337BN in 2009 GDP
  3. Ireland - $227BN in 2009 GDP
  4. Portugal - $227BN in 2009 GDP
  5. Argentina - $310BN in 2009 GDP

The collective GDP of these highest at risk countries is $1.4 trillion, which in aggregate would make them the 10th largest country by economic output in the world (just ahead of Canada).  So, while on an individual basis these countries may have little impact, in aggregate they matter big time.


Beyond these hot spots, the key economies to watch in coming months will be Italy, the seventh largest economy in the world with a GDP of $2.1 trillion, and Spain, the ninth largest economy in the world with a GDP of $1.5 trillion.  The CDS market for both these nations is flashing Default Danger as Spanish 5-year CDS is trading at 359 basis points and Italian 5-year CDS is trading at 256 basis points.  This is up 237% year-over-year for Spain and 180% year-over-year for Italy . . .


As it relates to the calendar, The Long Walk of Sovereign Debt begins this week with the following auctions:


1.       Today: The Netherlands is pitching about 3.5 billion euros of debt. 


2.       Tomorrow: Portugal plans to borrow as much as 1.25 billion euros, repayable in October 2014 and June 2020. Germany seeking 7 billion euros. 


3.       Thursday: Spain will auction as much as 3 billion euros of five-year bonds. Italy will market securities maturing in 2026 and 2015.


As always, the market will ultimately be the arbiter in the coming days, weeks, and months as to whether Europe can survive The Long Walk of Sovereign Debt.


Yours in risk management,


Daryl G. Jones


EARLY LOOK: Long Walks - EL Chart Debt 

Daily Trading Ranges

20 Proprietary Risk Ranges

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TODAY’S S&P 500 SET-UP - January 14, 2011

Equity futures are trading below fair value, tracking European/Asian markets, despite last night's bullish outlook from INTC. China has again raised its bank reserve requirement by 50bps.



  • 8:30 a.m.: CPI, Dec., est. 0.4% M/m, ex. food and energy est. 0.1% 
  • 8:30 a.m.: Advance retail sales, Dec., est. 0.8%, ex. autos and gas est. 0.3% 
  • 9:15 a.m.: Industrial production, Dec. est. 0.5%, capacity utilization est. 75.6% 
  • 9:55 a.m.: Uni. of Mich. Confidence, Jan., P, est. 75.5 
  • 10 a.m.: Business inventories, Nov., est. 0.7% 
  • 12:45 p.m.: Fed’s Jeffrey Lacker speaks on economy in Richmond 
  • 1:15 p.m.: Fed’s Eric Rosengren speaks at mortgage expo. in Connecticut


  • The SEC has started a broad investigation involving several financial firms to determine whether they made improper payments to secure investments from sovereign wealth funds
  • The biggest U.S. banks, facing tighter scrutiny and higher capital requirements, are pressing regulators to force hedge funds, money managers, insurers to share the pain. The newly created Financial Stability Oversight Council plans to discuss guidelines to determine which non-bank financial companies are systemically important at a meeting in Washington next week
  • Google may face an antitrust lawsuit by U.S. Justice Department over its $700m acquisition of ITA Software. Department officials haven’t made a final decision about whether to sue to block the purchase by Google
  • AIG’s recapitalization deal is set to close today, giving Treasury ~92% ownership of AIG
  • Coinstar (CSTR) cut 2011 rev., EPS cont ops forecasts
  • Dendreon (DNDN) to offer $250m shrs 
  • Intel (INTC) sees 1Q rev. above est.
  • Sealy (ZZ) 4Q rev. missed est.
  • Sunstone Hotel Investors (SHO) plans to Buy $1b of hotel properties this year


  • One day: Dow (0.20%), S&P (0.17%), Nasdaq (0.07%), Russell 2000 (0.09%)
  • Last Week: Dow +0.84%, S&P +1.10%, Nasdaq 1.90%, Russell +0.53%
  • Month-to-date: Dow +1.33%, S&P +2.08%, Nasdaq +3.11%, Russell +2.17%
  • Sector Performance - (Only two sectors positive) - Materials (0.86%), Healthcare (0.53%), Financials (0.35%), Energy (0.28%), Consumer Disc (0.16%), Tech (0.08%), Utilities (0.09%), Industrials +0.10%, Consumer Spls +0.20%          


  • ADVANCE/DECLINE LINE: -271 (-1545)  
  • VOLUME: NYSE 924.63 (4.04%)
  • VIX:  16.39 +0.92% YTD PERFORMANCE: -7.66%
  • SPX PUT/CALL RATIO: 1.39 from 1.29 (+7.97%)


Treasuries were stronger today with support from the Fed's $8.4B buying operation. The uptick in claims and pullback in stocks also seemed to help, though the bond auction seemed to be a disappointing.

  • TED SPREAD: 16.32
  • 3-MONTH T-BILL YIELD: 0.15%     
  • YIELD CURVE: 2.75 from 2.79


  • CRB: 333.00 -0.56%  
  • Oil: 91.40 +0.50% - trading -1.41% in the AM
  • Crude Oil Falls a Second Day as U.S. Economy Signals Slowing Fuel Demand
  • COPPER: 437.70 -0.78% - trading -0.46% in the AM
  • Copper Falls on Speculation Higher Stockpiles Signal Weaker Chinese Demand
  • GOLD: 1,384.47 +0.06% - trading -1.12% in the AM
  • Gold Demand in India Is `Good' as Incomes Increase, Biggest Exporter Says


  • Commodity Options Traders Make Record Bearish Bets After Oil, Metals Rally
  • Corn Heads for Biggest Weekly Gain Since October on Concern About Supply
  • Cooking-Oil Crunch Looms as Growing China Wealth Boosts Diet: Chart of Day
  • Palladium May Rally to $1,000 on Car Sales, Russian Supply, Ikemizu Says
  • Cocoa Prices Rebound in London Trading, Following Advance in New York
  • Rice Stockpiles in Vietnam Decline by 41% After Record Exports, Group Says
  • Palm Oil Has Biggest Weekly Slide in Four Following Rally to 34-Month High
  • Tin Output From Indonesia's Timah, Largest Shipper, May Be Level in 2011
  • Cooking-Oil Imports by India Drop for a Second Month as Local Supply Gains
  • Copper Stockpiles Climb to Seven-Month High in Shanghai, Aluminum Decline
  • Sugar May Gain Next Week on Speculation Demand Will Increase, Survey Shows


  • EURO: 1.3355 +2.08% - trading -0.07% in the AM
  • DOLLAR: 79.191 -1.05% - trading +0.19% in the AM


  • European Markets: FTSE 100: (1.20%); DAX: (0.60%); CAC 40: (0.35%)
  • European markets trade lower after a mixed open as news that China has raised banks reserve ratio 50bps sent indices to session lows.
  • Initially, gains amongst technology shares following Intel's (INTC) results overnight were mitigated by weakness in banks, basic resources and household products sectors.
  • ARM Holdings rose as much as +10% before paring gains.
  • Germany Dec Final CPI +1.7% y/y vs prelim +1.7%
  • UK Dec core PPI +2.9% y/y vs consensus +3.0%
  • Eurozone Dec final CPI +2.2% y/y vs consensus +2.2% and prior +1.9%
  • European Automobile Manufacturers' Association (ACEA) Dec new passenger car Registrations for the EU+EFTA (2.7%) y/y


  • Asian Markets: Nikkei (0.86%); Hang Seng +0.18%; Shanghai Composite (1.29%)
  • Asian markets were mixed today, with more markets falling than rising on disappointing USA initial unemployment claims.
  • South Korea +0.89% - Oil refiners fell on concerns that the government will pressure them to lower gas prices to fight inflation
  • Banks rose, offsetting weakness in resource shares and leaving Hong Kong slightly up on the day. Tsingtao Brewery fell again, extending losses another 3% on fears that higher food prices will hurt its bottom line.
  • Australia finished flat, with banks rising to support the market, but miners falling on lower commodity prices.
  • Japan went down when weak January options settlement and a stronger yen resulted in profit-taking. Reaction to Prime Minister Naoto Kan’s new cabinet was limited.
  • China sank on talk of interest rate increases over the weekend. Banks were broadly weaker, and coal miners plunged.
  • China told banks to set aside more deposits as reserves for the fourth time in two months, stepping up efforts to rein in liquidity after foreign-exchange holdings rose by a record and lending exceeded targets.
  • Japan December domestic CPGI +1.2% y/y. December consumer sentiment diffusion index (51.7), (9.6 points) from prior.

EARLY LOOK: Buck Breakout

This note was originally published January 10, 2011 at 07:57.  It's available to Hedgeye subscribers in real-time.



“The best way to destroy the capitalist system is to debauch the currency.” 

-John Maynard Keynes



This year I am going to try my best to kick off each week with a Global Macro recap of the week prior. I’ll also try to address what decisions I made in the Hedgeye Asset Allocation Model to reflect ongoing and ever-changing Global Macro risks.


The biggest move that mattered last week was the Buck’s Breakout above my immediate-term TRADE line of $79.92 on the US Dollar Index. After taking a breather into December end, the US Dollar Index is now bullish again on both our immediate-term TRADE and intermediate-term TREND durations.


With the US Dollar Index closing up +2.6% on the week (up for the 8th week out of the last 10), here’s the big stuff that went down: 

  1. Euro = down -3.1% to close the week at $1.29 (we covered our short position in FXE into week’s end)
  2. CRB Commodities Index = down -2.7%, after hitting a new cycle-high of 333 on the 1st trading day of 2011
  3. Oil = down -3.7%, breaking its immediate-term TRADE line of support of $89.46 midweek (we sold our OIL this wk)
  4. Gold = down -3.7%,  breaking its December closing low (we remain short GLD)
  5. Copper = down -3.6%, after hitting an all-time closing-high of $4.48/lb on the 1st trading day of 2011 
  6. Volatility = down -3.3% to $17.14 on the VIX, after seeing volatility rise in an up US equity market in the 2 weeks prior

I’m no Keynesian, but I (like Keynes did when he was 36 years old) trade currencies and believe them to be a very important barometer of a country’s overall health. In those days, as Liaquat Ahamed wrote in one of my favorite financial history books (Lords of Finance, page 11), “in 1914 the single most important, indeed overriding, objective of these institutions was to preserve the value of the currency.”


As a direct result of last week’s US currency strength, I think last week was a win, win, win for most Americans who care, not only about how much money they make, but how the rest of society does in the meantime.


Let’s look at these 3 wins associated with a strong American currency:

  1. Stocks went up (SP500 was up +1.1% on the week)
  2. Inflation went down (that’s what should happen if a country’s currency is pervasively strong)
  3. Rates of return on our hard earned savings accounts went up (10yr and 30yr US Treasury rates climbed again week-over-week)

No, I’m not saying we are out of the woods yet. I’m just saying that last week was a better week for America by my global macro scorecard than the week prior was – and by the looks of the aforementioned Keynesian quote, the Fiat Fools should agree.


Nor am I saying this was good for the rest of the world (some of their currencies went down, and so did their stock markets):

  1. India’s BSE Sensex Index = down -4.0%
  2. Spain’s IBEX Index = down -3.0%
  3. Luxembourg’s LUX Index = down -2.6%
  4. Portugal’s PSI Index = down -2.4%
  5. Taiwan’s TAIEX Index = down -2.1%
  6. Indonesia’s Jakarta Index = down -1.9%

After all, inflation, like politics, is priced in local currency. This, of course, isn’t a consensus way to look at the world; particularly from a money printing government official’s perspective – but I think that will change.


Whether it was the price of oil hitting an all-time high choking off US consumption in 2008 or the price of the United Nation’s Food Index hitting an all-time high (this week) staring Indian and Indonesian stock markets right in the face (the #2 and #4 largest country size populations in the world), it’s all the same to me. The Fiat Fools around this world are just taking turns.


Back to the Hedgeye Asset Allocation Model, I ended the week with the same allocation to US Cash that I started the week with (61%). Although I did drop down to a 49% position in cash intra-week and changed the complexion of my invested position into Friday’s close (I call this managing risk around my gross invested exposure). My updated positioning is now as follows:

  1. US Cash = 61%
  2. International Currencies = 21% (all in the Chinese Yuan, CYB)
  3. International Equities = 9% (all in German Equities, EWG)
  4. Commodities = 3% (all in Corn, CORN)
  5. US Equities = 3% (all in Volatility, VXX)
  6. Fixed Income = 3% (all in Treasury Inflation Protection, TIP)

Now I fully understand that this isn’t the way that most strategists do it  - that’s why I do it this way.


As price, volatility, and volume studies change, I change both my asset allocation positions and invested exposures. For example, I started the week long oil (stocks and the commodity) and US Healthcare stocks (XLV), but Oil broke its immediate-term TRADE line of support and US Healthcare (XLV) became immediate-term TRADE overbought on Thursday. There are no rules stating that I can’t buy either of those positions back (lower) in the coming weeks.


Nor are there rules stating that I can’t get less bearish on US Equities if the US Dollar were to continue to strengthen. US stocks actually closed down for back-to-back sessions for the 1st time on Thursday/Friday since November 29th and 30th. I don’t have to buy them when they are on sale. I don’t have to get bullish on the way down either. I’m just saying that with a 61% cash position, I have plenty of options.


My immediate term support and resistance levels in the SP500 are now 1251 and 1276, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer



EARLY LOOK: Buck Breakout - matt

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