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“Perhaps love is the process of my leading you gently back to yourself.”

-Antoine de Saint-Exupery

I do what I do every day because I love what I do. I love the morning’s silence. I love the research grind. And I love keeping score.

My vision for this firm isn’t to impose what I love upon you. My mission is to democratize the research process so that a real-time risk management conversation can be had. If we help you re-think any aspect of your risk management process, we’ve all won.

If a piece of research data or a point in principle leads you back to yourself, you’ve won. We can’t decide your risk tolerance. We can’t decide your investment duration either. What we can do is accept that markets are grounded in uncertainty and they do not discriminate in favor of anyone.

For me, Loving The Process means living it out loud. That’s why I’m trying my best to give you 100% transparency and accountability in every move we make each and every day. Sometimes this can be confusing – there’s a lot going on in Global Macro, so I get that. But complexity is no excuse for not delivering on the simplicity that is how I am positioned every day. So, going forward, we’re going to include the Hedgeye Portfolio at the bottom of every Early Look.

The Hedgeye Portfolio is not our Hedgeye Asset Allocation Model. These are two separate products that share many interconnected investment thoughts. The Hedgeye Portfolio is our best book of long and short ideas. They aren’t paired off. They aren’t weighted. They all have their own individual top down and bottom up thesis. They are intended to drive alpha on their own individual merits.

This is not to say that they are all driving alpha every minute of each and every day. This is not to say that we get everything right either. This is simply to say that I am going to be accountable to anything that comes out of these arthritic hockey knuckles, real-time. In the end, I think other firms will be forced by the marketplace to do the same. Opacity is dying on the vine of every industry – and there is no way to bail it out.

Enough about the process and its principles, let’s get at it and address how I am positioned (or thinking about being positioned) in the Hedgeye Portfolio after going through this morning’s grind:

1.  Asia – We continue to see Asian Growth Slowing as Global Inflation Accelerates.

The Chinese and Indian governments are going to perpetuate this investment theme as they do not get paid to be willfully blind to the effects of inflation on their common people over the long term. China is raising interest rates this morning by another +25 basis points, taking its benchmark rate 300 basis points over Fed Funds, in order to address what Bernanke refuses to.

In the short-run, this is the pain that Asian central bankers are willing to impose on their stock markets. Over the long-run, seeing inflation destroy their sovereign bond markets, corporate margins, and their citizenry’s buying power is a really bad idea.

India’s stock market closed down another -1.6% overnight, taking the BSE Sensex Index down -13.4% for 2011 YTD. Bangladesh crashed yesterday, losing -10.3% of its stock market value in one day. Next to China and India at #1 and #2, Bangladesh has the world’s 8th largest population by the way. We remain short Thailand, which continues to see civil unrest on the border with Cambodia. These populations are hungry.

 

 

2.  Europe – We’re not leaning bullish or bearish on Europe right now, but British Stagflation is starting to rear its ugly head.

We’ve been bullish on Germany for the last 18 months but recently sold out of that long position (EWG) as we see any price north of 7,300 on the German DAX as immediate-term TRADE overbought. Like it did in 2010, the DAX continues to outperform the SP500 and we think that Germany’s fiscal policy is amongst the most stable in all of the Western world.

We like countries with strong currencies that stand behind sober fiscal and monetary policy and Sweden fits that bill. When we say strong currencies, we don’t mean countries that say they want one – we mean countries that have one. Sweden doesn’t have Ben Bernanke. Sweden has the oldest central bank in the world and the Swedish Kroner is  hitting a 10-year high this morning against the Euro. We’re long Sweden (EWD).

Despite the mean reversion rally in everything Pig Paper for 2011 YTD, we’re not preparing to buy Spanish or Greek stocks and bonds. We’re short Italy (EWI) and, as you can see in the Hedgeye Portfolio, that position is -3.82% against us. The next time someone tells you that inflating a stock market to a lower-long-term-high is bullish for a country’s long-term economic health, remind them Greece is the world’s best performer YTD.

3.  USA and Latin America – We threw in the short-term towel covering our SP500 short position at 1276 on January 28th. Thank God for that.

That doesn’t mean I’m not bearish on US Equities on my long-term TAIL duration. That certainly doesn’t mean I won’t be re-shorting the SP500 again on its way up to my intermediate-term target of 1340. I’m actually as long as I have been US Equities since November and I’m downright scared about it. In the Hedgeye Portfolio, we continue to short the US Consumer stocks, trading around the positions profitably.

Whenever someone asks me about whether I am bearish or bullish on the US, I immediately have to answer them with a question – currency, stocks, or bonds? It’s a simple question, but it’s still a huge investment point when you think about generating uncorrelated returns. We remain bearish on US bonds and the US Dollar. These are major problems for the other HALF of Americans that don’t own The Ber-nank’s stock market inflation.

Latin America looks a lot like Asia – willing to accept that a debauchery of the world’s reserve currency is affecting global inflation and their citizenry. Two of the most important economies in Latin America, Brazil and Chile, are seeing their stock markets down -5.7% and -6.4% for 2011 respectively. We aren’t long of anything south of a Starbucks (SBUX) on the Mexican border.

Keep doing what you do out there, and I’ll keep doing what I do, re-thinking and re-learning how to manage Global Macro risk so that I can keep Loving The Process of being humbled by Mr. Macro Market.

My immediate term support and resistance levels for the SP500 are now 1300 and 1325, respectively.

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

EARLY LOOK: Loving The Process - VP