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For the week ending February 25, 2011.

This week we’re rolling out for the first time our version of a summary product designed to help keep you up to speed with our latest research and our current thoughts on both topical and non-consensus issues.

Given that this is our first take, we’d love to hear your thoughts on if this is something you find valuable and how we can improve it to better suit your needs. If there’s anything you’d like us to add/omit, let us know. Please reply with any feedback at your earliest convenience.

The format is as follows: 1) Commentary from team members; 2) Highlights from this week’s Q&A on the Morning Macro Call; 3) Asset Allocation update; and 4) Quick summaries of select Macro research notes and updates to select Quarterly Macro Themes.


Keith McCullough – Strategy

CALLOUT OF THE WEEK: On the margin, the biggest risk factor in my macro model that fortified itself this week is that growth is slowing sequentially in the United States. For the last 3 months, the high-frequency data on Global Growth Slowing (Asia in particular) has been more pronounced than US Growth Slowing. Inflation is both a policy and a consumption tax in America and the consumer stocks are starting to reflect this reality.

OUT OF CONSENSUS WATCH:  With all eyes focused on the impact of Global Inflation Accelerating, we now have a consensus that understands the immediate-term impact of rising oil prices. What I don’t think is a consensus focus anymore is the heightening probability of the second wave of the US Housing crisis. Mortgage applications remain abysmally low and New Home Sales data for January remained very weak.

Daryl Jones – Geopolitics; Commodities

CALLOUT OF THE WEEK: Soft commodities are beginning to trade on supply and demand fundamentals in the short term.  Two examples are corn, which is up +4.65% in the last month, and oats, which is down (-6.9%) in the last month.  Despite common top down drivers like USD weakness and global consumption patterns, shorter term supply fundamentals are dominating and leading to price divergence.

OUT OF CONSENSUS WATCH:  With much national media attention focused on State level budget battles, March 4th looms large in Washington.  This is the date that Congress decides whether to extend the current budget, until a new budget can be agreed on.  Current political rhetoric suggests a deal is not close, so a shutdown of the Federal government is realistically imminent.

Matt Hedrick – Europe

CALLOUT OF THE WEEK: With the PIIGS still some of the top equity market performers YTD, we caution on the mean reversion trade. Credit yields continue to signal the risk premium to own sizable sovereign debt leverage. The EUR made recent gains vs. major currencies alongside a more hawkish tone from policy makers over the last weeks; we continue to like countries and currencies with active independent central banks (SEK, CHF, and GBP) as the USD continues to get debauched by Bernanke and Co. 

OUT OF CONSENSUS WATCH: Italy could be one southern European country in particular to see a mass exodus of refugees to its shores given the uprisings in Northern Africa. Officials in Brussels believe as many as 750K could attempt to cross the Mediterranean, but Libyan estimates put the figure as high as 2 Million (of a population of ~6.4 Million Libyans).  Italy already faced an influx of over 5K Tunisian refugees following the country’s regime change.  Clearly, policing an influx of these proportions would be a huge tax on the Italian state. 

Darius Dale – Asia; Latin America; State & Local Governments

CALLOUT OF THE WEEK: After today’s dead-cat bounce, most of Asia’s equity markets remain broken on a TRADE and TREND perspective. We caution against buying the dips and growth storytelling at these prices. If we wanted long exposure to Asia, we would prefer to do so through the currency market (IDR, SGD, and HKD).

OUT OF CONSENSUS WATCH:  The last thing cash-strapped State & local governments need at this stage of the budget cycle is deceleration in US growth (lower tax receipts) due to higher inflation. Dollar debasement perpetuates both sides of the economic cycle…



Every morning at 8:30AM EST, we host a live conference call with clients whereby Keith’s 15 mins of prepared global macro commentary is followed by 5 mins of live Q&A (if you need a dial-in code, please email us a ; the call is also podcasted on our website each morning by 9:00AM). Below is a sample of some of the better questions we received this week (answers paraphrased).


Q: Your 1340 resistance level for the S&P 500 looks like it was dead on. How much downside should we expect from here based on how overextended the market was/is in your model?

A: We need to test 1307 in the next 48 hours, which would be a 3% correction. From an intermediate term TREND basis, support is way down at 1251, which, from its peak, would be a 7-7.5% drawdown.



Q: What’s the house view on Middle East and oil at these levels?

A: Both conflict in the Middle East and current crude oil prices are sustainable. From an immediate-term TRADE perspective, however, oil is overbought. We’d be buyers of WTI around TRADE support at $89.50.



Q: Walk us through in detail how Feb 2011 rhymes with Feb 2008 – particularly from a sentiment and expectations perspective. Walk us through all the bearish macro fundamentals that would keep you from buying US equities should the market appear it wants to test its TREND line of support.

A: “Flows”, ample liquidly, and “you can’t be in cash b/c of inflation” were all offered as reasons to buy equities [at the top]; consumer confidence was peaking [it wound up being a contrarian indicator in ‘08]; and inflation choking off a great run in private consumption growth all rhyme when comparing early ’08 to early ’11. Accelerating inflation (Trashing Treasuries), slowing consumption growth (Consumption Cannonball), and deflating housing prices (Housing Headwinds) are all reasons we are negative on equities for the intermediate-term TREND. We will not buy and hold dips b/c we believe valuation is NOT a catalyst in a market where the Global Macro backdrop suggests growth is slowing and inflation is accelerating.



  • Cash: 58% vs. 58% 1wk ago vs. 64% 1mo ago
  • US Equities: 6% vs. 6% 1wk ago vs. 6% 1mo ago
  • Int’l Equities: 6% vs. 6% 1wk ago vs. 0% 1mo ago
  • Commodities: 6% vs. 6% 1wk ago vs. 6% 1mo ago
  • Int’l FX: 24% vs. 24% 1wk ago vs. 18% 1mo ago
  • Fixed Income: 0% vs. 0% 1wk ago vs. 6% 1mo ago 



To access the full reports, please copy/paste the associated links into the URL of your browser.


Housing Headwinds Part II:

2/22: Joshua Steiner: Home Price Declines Gaining Steam: All Markets Weakening Except For DC: https://www.hedgeye.com/feed_items/11959 

  • Case-Shiller 20-city home prices this morning fell -1.0% MoM and -2.4% YoY on a non-seasonally adjusted basis. We expect home prices will continue to fall at an accelerating year-over-year rate through July 2011, and will continue to fall in absolute terms thereafter.
  • Eleven of the 20 markets are now at new lows on an NSA basis, up from nine last month.  19 of the 20 markets fell MoM (Washington D.C. was the exception with a 0.3% MoM gain) and 18 of the 20 markets were lower YoY.
  • The Corelogic Home Price Index fell -1.8% MoM and -5.5% YoY.  This was an acceleration on both metrics.  At the current pace of MoM change (even without continued acceleration), the Corelogic HPI will hit a new low next month. 

Consumption Cannonball:

2/22: Brian McGgough: Retail: 3 Stages of Grief: https://www.hedgeye.com/feed_items/11970 

  • One thing we find consistently surprising are managements’ comments about how “if all else fails, the consumer will absorb the cost of inflation.” In retail, that is almost never the case.
  • Based on what the retailers, brands, and manufacturers are saying, the consumer will need to grow the size of their wallet by 3-5% on like-for-like product this year, and fork it all over to maintain peaky profit margins on so/so businesses.
  • What do Wal-Mart, VFC Corp and to a degree Macy’s all have in common? They’re forecasting healthy consumer spending in 2011 without meaningful margin erosion. How in the world can they do this with 87% of the year left to go and we’re two months away from the point where the highest raw material headwind the modern retail industry will hit margins? 

2/23: The Gadhafi--Berlusconi Trade: https://www.hedgeye.com/feed_items/11999 

  • We view Italy’s outsized energy exposure (via ENI) to Libya as a critical force weighting to the downside of its equity market, or the etf EWI with its heft ENI weighting
  • We’ve long been critical of the Italy’s excessive debt leverage and have been short Italy via the etf EWI at times over the last 6 months in the Hedgeye Virtual Portfolio. Now, we see even more short-term downside pressure for Italy’s FTSE MIB given the country’s exposure to the precarious state of Libya.
  • The FTSE MIB is trading between a rock and a hard place. It is trading above its TREND line of support at 21,193, but recently broke through what was its TRADE line of support, and is now resistance, at 22,709.

Japan’s Jugular: 

2/23: Japan’s Jugular Update: Just Getting Started on the Short Side of Japanese Equities: https://www.hedgeye.com/feed_items/12001

  • Though we covered our oversold short position in Japanese equities today in the Hedgeye Virtual Portfolio, we remain outwardly bearish on Japan’s intermediate-term TREND and long-term TAIL.
  • This morning we covered our short position in the EWJ for a gain. We’ll look to re-short Japanese equities on a bounce back up to its immediate-term TRADE line of resistance at 10,909.
  • Watching how US equities trade will be critical here, as both markets have been the beneficiaries of the “flows” into relative “safe havens”. If 1,307 in the S&P 500 doesn’t hold or if it can’t close above 1,330 in the immediate term, the probability of a meaningful bounce in Japanese equities dwindles. 

2/24: Early Look: Mr. Money Man: https://www.hedgeye.com/feed_items/12008

For the week-to-date, here’s your US Dollar/Commodity Inflation score: 

  • US Dollar Index DOWN -0.33% for the week-to-date (down for 7 out of the last 9 weeks)…CRB Commodities Index UP +1.7% to 347 (making a series of fresh weekly closing highs all the while).
  • LONGS - Dollar denominated food and energy inflation, currencies of countries with hawkish central banks, financials in socialized countries that have made banks too big to fail.
  • SHORTS - Sovereign Bonds of countries with deficit and currency devaluation central planners, currencies of countries with dovish central banks, emerging markets.

2/24: Pavlov’s Bell: SP500 Levels, Refreshed: https://www.hedgeye.com/feed_items/12026

  • Right now, the SP500 is trying to make up its mind between a  -2.6% correction (1308) and a -6.9% drawdown (1251). If the SP500 closes below 1308, we’ll say a -6.9% intermediate-term peak-to-drawdown is a probable risk.
  • If the SP500 can close above 1308, a lower-high of immediate-term TRADE resistance at 1330 is still our line.
  • Pavlov may very well have taught everyone to buy every dip – but that doesn’t mean everyone is still going to be a winner. 

2/25: Could The Turmoil in the Middle East Be Bearish for Oil?: https://www.hedgeye.com/feed_items/12049 

  • We are long OIL in the Virtual Portfolio as price continues to confirm this position, but longer term, as history shows us, political liberalization could actually support growing production.
  • A lot would have to happen for Western Oil companies to up investment in less stable regions like Iran and Libya, but both Iraq and Russia do provide some credence to the idea that production, over the longer term, could grow if the ultimately outcome is the spread of democracy and rule of law.
  • While the price of oil is still more than $40 from its all time high, it is very close to highest February close of $101.78 in February 2008.  This abnormal and non-seasonal price movement emphasizes the powerful price move we are seeing. 

Enjoy the rest of your weekend,

The Hedgeye Macro Team