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For the week ending March 4, 2011.


Keith McCullough – Strategy

CALLOUT OF THE WEEK: The bull/bear battle between what’s more impactful on US Consumption – unemployment or oil – is on. Since one is a leading (oil) and the other is a lagging (unemployment) indicator, I say oil. That’s not to say that I won’t get more constructive on US Equities at lower prices, especially if high-frequency and concurrent indicators (jobless claims, consumer confidence, mortgage applications) improve in unison. I highly doubt they will if oil prices stay pinned up here. 

CONTRARIAN CALLOUT:  I still don’t think consensus realizes what a US Dollar crisis will do to the American Consumer’s buying power and corporate margins. The correlation risk to just about every asset class that trades in (or relative to) US Dollars is reaching levels that I would call surreal. The Bernank is perpetuating price volatility. If he doesn’t start changing as the facts have (like virtually every other central banker in the world has), he’ll become a modern day Arthur Burns. 

Daryl Jones – Geopolitics; Commodities

CALLOUT OF THE WEEK: Regardless of the grade of oil you looking at, the commodity is melting up.  The key drivers are a weakening U.S. dollar, continued uncertainty in the Middle East, and, as well, decent demand for gasoline in the United States.  We think the U.S. dollar weakness will continue to be a key driver; look for an acceleration in the increase of the price of crude oil if the ECB starts raising rates. 

CONTRARIAN CALLOUT:  While focus has shifted to the unrest in the Middle East, unrest across the United States relating to State level budget cuts is accelerating.  This unrest could create an incremental headwind to GDP that currently isn’t in consensus numbers.  This will come from both layoffs and a decline in State and local level budget spending year-over-year.

Matt Hedrick – Europe

CALLOUT OF THE WEEK: ECB President Trichet said on Thursday that an “increase of interest rates in the next meeting is possible… but not certain.” Trichet’s tone sets him apart from Bernanke, who chooses to turn a blind eye to inflation. European markets and the EUR vs. most major currencies rose vs. the USD this week alongside a more hawkish tone. We contend that the ECB and BoE should hike rates within the next 1-3 months to address pressing inflation risk. 

CONTRARIAN CALLOUT: The March 24-25 EU Summit promises to devise a “comprehensive” package to end the region’s crisis and stabilize the Euro, however we contend that the “sailing” may not be so smooth as leaders will struggle to tie an all encompassing policy bow around the region -- increasing country competitiveness and stronger fiscal standing can be easy in theory, harder in practice. The interconnectedness of the EUR means that the instability of just one country, and Portugal looks most imminent, can severely weigh on the common currency. Gains in the EUR this week could very well pull back in the coming weeks. We’ll be monitoring political rhetoric and policy moves acutely.

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

CALLOUT OF THE WEEK: Both Brazil and India unveiled new fiscal policy measures this week and both failed to adequately address the key issue facing both economies – rising inflation. India’s lack of fiscal resolve (particularly relative to Brazil) contributed to the SENSEX closing up +4.5% on the week (vs. +1.9% for the Bovespa) as the market cheers on more loose policy. As we called out back in early November, Brazil’s proactive monetary policy (relative to India) will keep it outperforming in this two-legged stagflationary race: Bovespa down (-1.7%) YTD vs. SENSEX down (-9.8%) YTD.

CONTRARIAN CALLOUT: It’s clear now that consensus understands that the melt-up in commodity prices since Jackson Hole (Aug. 27) has contributed to accelerating headline inflation readings on a global basis. What consensus may fail to miss going forward is the likelihood that inflation starts to show up in “Core” CPI readings globally. The confluence of companies passing through cost pressures to end-consumers and a global acceleration in wage growth and government subsidies (particularly in key emerging economies) perpetuates this possibility.



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 Q&A (if you need a live dial-in, please emails 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: Why are you so negative on fund flows; wouldn’t it have been prudent in December to recognize that the flows would trump fundamentals for the intermediate-term TREND, rather than shorting the market? Could one argue that it’s the job of the risk manager to contextualize both fundamentals AND flows, as both have the ability to influence price?

A: We aren’t negative on fund flows per se; where we see risk is that talk of the “flows” is highly speculative in nature. You can’t quantify the dollar amounts ahead of time or even on a concurrent basis. Also, market history tells us that it’s a contrarian signal when the “flows” become consensus’ main catalyst.


Q: What would get you to put the SPY short back on; it rallied up to just under your TRADE line of support on Friday. Is there a specific level that would get you to test the waters again on the short side?

A: Waiting and watching. I’m learning from my mistakes of trading the SPY 1-3 days too early over the last decade.


Q: Much of the weakness in the US dollar has been generated by weak US monetary and fiscal policy. As we saw yesterday with Trichet’s commentary, could further US dollar weakness actually be driven now by hawkishness in the currencies in the US dollar basket? i.e. Could central bank hawkishness relative to Bernanke push the dollar down in addition to the downward pressure being applied by the Fed and D.C. politics? 

A: Outstanding multi-factor question; the answer is “yes” (currencies are priced in baskets relative to each other). As the rest of the world respects the cost of capital and their citizenry (by not infusing them with inflation), their currencies will go higher. This will have a structural negative effect for the US dollar. Don’t get carried away, however. The US Dollar Index will be immediate-term TRADE oversold in the low-$76 range and we expect to see a snap-back rally to another lower-high prior to it resuming its bearish TREND.



  • Cash: 49% vs. 58% 1wk ago vs. 58% 1mo ago
  • US Equities: 6% vs. 6% 1wk ago vs. 6% 1mo ago
  • Int’l Equities: 6% vs. 6% 1wk ago vs. 3% 1mo ago
  • Commodities: 9% vs. 6% 1wk ago vs. 6% 1mo ago
  • Int’l FX: 27% vs. 24% 1wk ago vs. 18% 1mo ago
  • Fixed Income: 3% vs. 0% 1wk ago vs. 9% 1mo ag 


3/1: Early Look: The Flows


-Our view of The Fundamentals is often 3-6 months ahead of Wall Street/Washington consensus  is what it is – since October, our Global Macro view of the fundamentals remains Global Growth Slowing as Global Inflation Accelerates.

-What happens on the margin in Global Macro matters most. And on the margin, The Flows into the stock markets of Developed Economies have been huge. The most important risk management part of that last sentence is “have been.”

-There is no but in The Flows. They are what they are until they stop. All the while, I’m most certainly not going to freeze with a strategy to short-and-hold…Not in a market where professional politicians are sponsoring a Burning Buck, The Inflation, and Price Volatility.




3/1: Could the Kingdom Fall?


-Though once unthinkable, the fall of the Saudi kingdom now seems at least in the realm of reality.  That is, popular unrest in Saudi Arabia and the Middle East could lead to a shift away from the autocratic rule in Saudi Arabia.  Keep March 11th on your calendars as Saudi youths have organized a day of protests against the monarchy called the Day of Rage.

-The Saudi stock market has been flashing some amber lights…there has been a severe correction in the Saudi stock market of more than 10% and an expansion by more than 20% in CDS spreads.

-The International Labor Organization (ILO) has put the unemployment rate for those between the ages of 20 – 25 at close to 30%.  This is particularly important given the population is young with median age of 23.4 years old. 


3/3: Trichet Boosts Rate Hike Expectations, Markets Cheer


-ECB President Jean-Claude Trichet said that an “increase of interest rates in the next meeting is possible… but not certain.” Despite all attempts by Trichet to be close-lipped on future actions by the governing council, the sentence was largely interpreted by the market as proof that the ECB will hike in the near-term.

-Our position remains that both the ECB and BOE will act to address their respective inflation pressures well before Ben Bernanke does, as The Bernank chooses to ignore the looming pressures of domestic and global inflation.

-Confirming the rising tide of inflation: CPI rose 2.4% in February year-over-year versus 2.4% in January; and PPI increased 6.1% in January Y/Y versus 5.3% in December. The PPI report showed that energy prices jumped 13% from a year earlier.


3/4: Crude Oil In The US: Is the Price $103/bbl or $115/bbl?

-Refined products (gasoline and diesel) in the U.S. are tracking Brent crude oil, and not WTI.  If you are using WTI as your marker for oil’s impact on consumers in your macro model, you should reconsider.

-Interestingly, the prices of refined products in the U.S. are no longer tracking WTI.  When WTI began lagging other oils, gasoline and diesel did not hang back with it. 

-Since November 15, the correlations between a barrel of WTI crude oil and refined products since November 15th, 2010 are: Gasoline +0.83; Diesel +0.69. Over the same duration, the correlations between a barrel of Brent crude oil and refined products are: Gasoline +0.98; Diesel +0.98.


3/4: State & Local Government Finances Not Just a Problem for Muni Bonds

-Recent developments in the FY12 State & municipal government budget season reveal to us several trends that are incrementally bearish for US GDP growth and the US Dollar over the intermediate-term.

-One could make a compelling argument that the public employee protests currently impacting the Midwest region will spread throughout the country like wildfire, especially considering the relative health of Wisconsin, which just recently issued arrest warrants for its fugitive legislators.

-46 States have to balance their budgets by July 1 or risk delays in payments to vendors and creditors alike. If the US Dollar and the protests in Wisconsin et al are indicating anything, it is that this catalyst is closer on the horizon than a resolution of the budgetary debates.


Have a great weekend,

The Hedgeye Macro Team