CHART OF THE DAY: Short Covering in Consensus Short Ideas



CHART OF THE DAY: Short Covering in Consensus Short Ideas -  chart

Instinctive Effort

“It is no other than the instinctive effort of every people towards liberty.”



It’s both sad and exciting to watch Portuguese politicians fall on their swords of Keynesian storytelling this morning. And oh the irony of Portugal’s PM bearing the name of the great Greek philosopher. Socrates’ decision certainly adds to the philosophical field of ethics. For the first time, he’s actually doing what he said he’d do – resigning.


There is, of course, no ethics in assuming that you can plunder your people with deficits and debts without the rest of the world eventually noticing. That’s why Portuguese bonds continue to crash this morning (2-year Pig Paper yields hitting new highs of 6.83%). That’s how the broken handshakes are going to be priced in this brave new transparent world of Fiat Fool Finance – with a trashing of promissory notes that were based on lies.


Instinctively, whether you are watching American Idol or a piggy politician, you know when someone doesn’t pass the smell test. While fibbing is part of any political process, flat out lying is punished with much more asymmetric outcomes. There is an Instinctive Effort of every person in this world to find the truth.


The truth about sovereign debt is that more of it is not good. At least not when your country has crossed what we have called The Rubicon of deficit and debt ratios (as a percentage of GDP). As a reminder, those 2 critical risk management levels are as follows:

  1. Deficit/GDP greater than 9%
  2. Debt/GDP greater than 90%

If you are reading this note in America this morning, this should remind you that we will not be immune to crossing the proverbial Rubicon of Fiat Fool Finance.


Timing unknown. Fundamentals known.


As the Japanese press toward 210% Debt/GDP, if you didn’t know the Japanese Bureaucrats have already handcuffed their citizenry’s long-term liberty with these liabilities, now you know…


Socrates (the 399 BC one) was penning his thoughts about ethics 3 centuries before Julius Caesar finally crossed The Rubicon. For Caesar, that meant passing the point of no return. That was the beginning of the end for the professional politicians of the Roman Empire. On that historical score, today is a very good day for Portugal’s version of Socrates. The People refuse to be plundered.


As Bastiat predicted in 1850, in plundering The People, “in this you will not succeed… so long as the legal plunder is the basis of legislation within” (“The Law”, page 15). And behold that Instinctive Effort of The People of Portugal this morning – they refuse to let Big Government Interventionists plug them with austerity measures any longer. They’d rather see the aristocracy, who gets paid by the bond market, fail.


Back to the grind…


Not surprisingly, the immediate-term reaction in both US and European stock market futures to this “news” is that if the market isn’t going down immediately on this, well we better suit up in our BTD Gear and chase these suckers higher…


To a degree, this illustrates the continued short-term performance pressures building within the temples of the hedge fund community. For 2011 YTD, how else would you explain a stock market like Greece’s being the world’s best performer?


Drum-roll… it’s called short covering in consensus short ideas…


Been there, done that – and I’m actually still trying to do it every day. How does a “fundamental” long/short Risk Manager make money shorting Fiat Fool countries who think “This Time Is Different” (Reinhart & Rogoff, 2009) when anyone who hasn’t been living under a rock for the last 18 months knows how this movie will ultimately end? Evidently, you wait, patiently, on price.


As a refresher, there is this thing in risk management called mean-reversion. Those who subscribe to it know that what crashes, eventually bounces – and what bubbles, eventually pops…


For the year ended 2010, the 3 worst performing stock markets in the world were:

  1. Greece = DOWN -35.6%
  2. Spain = DOWN -17.4%%
  3. China = DOWN -14.3%

In 2011, for the YTD, the tables have turned:

  1. Greece = UP +13.9%
  2. Spain = UP +8.0%
  3. China = UP +4.9%

So, I guess it’s a good thing we’re long China after being bearish on Chinese stocks for the last year…


Ultimately, whatever crack-pot “strategist” tells you this all means Greece, Spain, and Portugal are all systems go now probably missed proactively making the call 2 years ago that these stock and bond markets would selectively self-destruct on multiple durations.


Net net net, our long-term call on this gigantic Keynesian experiment going very bad remains as follows:


1.   Crossing The Rubicon of deficits and debt ratios will ultimately result in governments and their promissory notes self destructing

2.   Debauching the value of fiat moneys will result in both Price Volatility and The Inflation

3.   Fiat Fools and their policies to inflate will ultimately go away


They won’t go away forever. That’s Wall Street. You always bring in a new cattle class to bank and broker commissions. But Roman history and 1970s Style Stagflation fans alike remember Caesar as well as they remember Nixon – with an Instinctively Effortless smell.


My immediate-term support and resistance lines for WTI Crude Oil are $101.78 and $106.98, respectively. My immediate-term support and resistance lines for the SP500 are 1280 and 1309, respectively. Manage your risk around these ranges.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Instinctive Effort - Chart of the Day


Instinctive Effort - Virtual Portfolio


TODAY’S S&P 500 SET-UP - March 24, 2011

Now that we’ve traversed the daily double-dose of Middle East/Japan open-the-envelope-risk, it could very well be back to the “fundamental” grind.  Germany, which is a country we’ve fundamentally liked for the last two years, reported a sequential slowdown in its MAR Manufacturing PMI this morning at 60.9 vs 62.7 in FEB.  The evidence continues to support the theme of Global Growth Slowing; the USA looks to continue to put risk on the back burner.   As we look at today’s set up for the S&P 500, the range is 29 points or -1.35% downside to 1280 and 0.88% upside to 1309.




As of the close yesterday we have 2 of 9 sectors positive on TRADE and 8 of 9 sectors positive on TREND. 

  • One day: Dow +0.56%, S&P +0.29%, Nasdaq +0.54%, Russell 2000 +0.32%
  • Month-to-date: Month-to-date: Dow (1.15%), S&P (2.24%), Nasdaq (3.02%), Russell (1.48%)
  • Quarter/Year-to-date: Dow +4.39%, S&P +3.17%, Nasdaq +1.71%, Russell +3.52%
  • Sector Performance: - Materials +1.45%, Consumer Disc +0.87%, Tech +0.55%, Industrials +0.34%, Consumer Spls +0.17%, Energy +0.26%, Utilities (0.05%), Healthcare (0.06%), Financials (0.27%)


  • ADVANCE/DECLINE LINE: 303 (+761)  
  • VOLUME: NYSE 878.55 (+6.64%)
  • VIX:  19.17 -5.15% YTD PERFORMANCE: +8.00%
  • SPX PUT/CALL RATIO: 1.40 from 1.98 (-29.39%)


Currently, treasuries yields were the highest in more than a week.

  • TED SPREAD: 22.69 +0.304 (1.360%)
  • 3-MONTH T-BILL YIELD: 0.09% -0.01%
  • 10-Year: 3.36 from 3.34
  • YIELD CURVE: 2.66 from 2.67


  • 8:30 a.m.: Durable Goods orders, est. 1.2%, prior 2.7%
  • 8:30 a.m.: Net export sales (cotton, corn, soybeans, soymeal)
  • 8:30 a.m.: Initial jobless claims, est. 383k, prior 385k
  • 9:45 a.m.: Bloomberg Consumer Comfort, est. (-48.5), prior (-48.5)
  • 10 a.m.: Freddie Mac 30-year mortgage
  • 10:30 a.m.: EIA natural gas, est. (-8)
  • 1 p.m.: U.S. to sell $11b 10-yr TIPS reopening
  • 7:30 a.m.: Fed’s Duke speaks to economist in Virginia


  • Bullish sentiment among individual investors bounced back to 37.8% this week in American Assoc. of Individual Investors survey, reversing last week’s results where bears outnumbered bulls for the first time in 6 months.
  • Portuguese PM resigns
  • Moody’s cuts ratings on Spanish banks after sovereign downgrade
  • U.S. aims to shift Libya command to NATO
  • Top U.S. Republicans question purpose of Libya military intervention


  • CRB: 357.03 +0.15% YTD: +7.28%  
  • Oil: 105.75 +0.74%; YTD: +14.06% (trading +0.59% in the AM)
  • COPPER: 442.85 +2.68%; YTD: +0.18% (trading +0.35% in the AM)  
  • GOLD: 1,437.80 +0.80%; YTD: +1.65% (trading +0.27% in the AM)  


  • Worst Texas Drought in 44 Years Damaging Wheat Crop, Reducing Cattle Herds
  • Commodities to Resume Rally to 2008 High After Temblor: Technical Analysis
  • Crude Oil Rises a Fourth Day After Allied Forces Intensify Libya Attacks
  • Gold Trades Near Record on Europe Debt Risk; Silver Reaches 31-Year Peak
  • Wheat Falls as Higher Prices May Encourage Farmers to Increase Planting
  • Coffee Slides to One-Week Low as Drought May Ease in Vietnam; Cocoa Falls
  • Copper May Rise for a Third Day as Orders to Draw Metal From Stocks Surge
  • India May Keep Rice, Wheat Export Curbs Even on Normal Monsoon, Adani Says
  • Curbs on Food Imports From Japan Widen Amid Nuclear Contamination Concern
  • Copper-Treatment Fees Jump in China as Quake Hurts Japan's Smelter Output
  • France Shipped 3 Million Tons of Wheat to Algeria, According to Exporter
  • Rice Stockpiling Program in Vietnam Is 45% Complete, Industry Group Says
  • Natural Gas's Three-Year Drop Ending on Japan's LNG Demand: Energy Markets
  • Rubber Futures Gain on Tight Supply From Key Producers, Crude Oil Advance


  • EURO: 1.4124 -0.66% (trading -0.03%% in the AM)
  • DOLLAR: 75.794 +0.48% (trading -0.01% in the AM) 


Generally, European markets are trading higher despite concerns over Portugal and a Moody’s downgrade of Spanish banks. 


EuroZone Mar flash Manufacturing PMI 57.7 vs consensus 58.4 and prior 59.0

Germany Mar preliminary Manufacturing PMI 60.9 vs consensus 62 and prior 62.7

UK Feb Retail sales +1.3% y/y vs consensus +2.3% and prior revised to +5.1% from +5.3%

  • United Kingdom: +0.88%
  • Germany: +1.10%
  • France: +0.60%
  • Spain: +0.13%
  • Greece +1.54%
  • Italy: +0.49%


Most Asian market traded higher, with the exception of Vietnam and China down -1.35% and -0.06%, respectively. 

  • Japan: -0.15%
  • Hang Seng: +0.39%
  • Australia +1.01%
  • China: -0.06%
  • India: +0.79%
  • Taiwan: +0.37%
  • South Korea +1.22%

Howard Penney

Managing Director



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Your Problem

This note was originally published at 8am on March 21, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The dollar is our currency, but it’s your problem.”

-John Connally


That’s an interesting way to look at the world’s reserve currency; particularly if you’re the United States Treasury Secretary. That’s where John Connally Jr. found himself for a very short period of time (1971-1972). Hedgeye economic history does not remember him or Richard Nixon’s political strategy to devalue the dollar well.


In the end, I don’t think history will remember US Treasury Secretaries Hank Paulson or Tim Geithner well either. At least not when considering them alongside this critical score. All pleasantries associated with how they say they saved us from the crisis they helped create aside, the price in the US Dollar Index chart doesn’t lie; professional politicians absolving themselves from it as an accountability metric do.


Storytellers like Paulson and Geithner would have you believe that the US Dollar’s shining moments come to Bear (pardon the pun) when the world is flying for “safety.” And while it is true that if you burn the credibility of your country’s currency to a low enough level that it will eventually bounce (2008), amidst fear enveloping world markets last week the US Dollar went no bid…


Last week, the US Dollar Index was down another -1.38% week-over-week, closing at a fresh 2011 YTD low of $75.72.


For those of you keeping score:

  1. The USD is down for 9 of the last 12 weeks as the USA printed its highest monthly deficit on record in February ($223B)
  2. The USD has lost -7% of its value since the 1st week of January when it became clear that mid-term election promises would be broken
  3. The USD is down -11% since Geithner took office as the 75th United States Secretary of the Treasury

So, if the idea is to try what the French (1950s), British (1960s) or Japanese (1990s) have already tried – devalue your way to prosperity – it looks like Timmy is right on plan.


You don’t need to watch Charles Ferguson’s documentary Inside Job (2010) to understand the basic concept here. We’ve berated this point for 3 years and now you have socially transcending technologies (YouTube) making what drives The Keynesian Kingdom easy to see.


As of this morning’s latest viewership readings, here’s another way to look at the score:

  1. “Quantitative Easing Explained” (The Bernank) = 4,371, 553 views (
  2. “Every Breath You Take” (Columbia Business School) = 1,725,495 views (

So, The People get it. They trust the US Government on financial matters as little as they ever have (that’s saying a lot). They know that US Dollar Debauchery = The Inflation.


But does Wall Street get it? We think it’s starting to. We can see it in the math.


Consider the following 6-week correlations:

  1. USD vs WTI Crude Oil = -0.88
  2. USD vs CRB Commodities Index = -0.75
  3. USD vs SP500 = +0.58

In summary, what these correlations have been telling you for the last 6 weeks is that Burning The Buck is driving The Inflation UP and the US stock market DOWN. This is interesting, but not surprising … particularly if you believe that the causality behind this correlation is primarily Big Government Intervention (deficit spending and dollar devaluation).


Since the US Dollar and stocks are developing a POSITIVE correlation now (like they did in Q2/Q3 of 2008), and the US Dollar and Commodity prices continue to have very high NEGATIVE correlations (like they did in Q2/Q3 of 2008), what should we be proactively managing risk towards?


Well, I think the scenario analysis is pretty straightforward:


1.       US Dollar DOWN from here

= immediate-term TRADE upside in the price of oil to $107/barrel; intermediate-term TREND upside to $109/barrel (+7%)

= immediate-term TRADE upside in Commodities (CRB Index) to 365; intermediate-term TREND upside to 373 (+6%)

= immediate-term TRADE downside in SP500 to 1251; intermediate-term TREND downside to 1231 (-4%)


2.       US Dollar UP from here

= immediate-term TRADE downside in WTI Crude Oil to $96/barrel; intermediate term TREND downside to $91/barrel (-11%)

= immediate term TRADE downside in Commodities (CRB Index) to 348; intermediate term TREND downside to 333 (-5%)

= immediate term TRADE upside in SP500 to 1312; intermediate-term TREND upside to 1352 (+6%)


I also think that The Keynesian Kingdom of stock market cheerleaders should see this as a short-term solution. The best way to DEFLATE The Inflation and have guys like me get bullish on another US stock market rally is to have a Strong US Dollar policy.


As for the US deficit and debt problems that stand in the way of having the international investment community trust American politicians and the US currency again – well, Mr. President, I guess it’s your problem.


My immediate-term support and resistance lines for the SP500 are now 1276 and 1292, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Your Problem - Chart of the Day


Your Problem - Virtual Portfolio


The Macau Metro Monitor, March 24, 2011




Sands China is talking with InterContinental Hotels to manage two hotel towers at parcel 5 on Cotai.  Earlier, Sands had terminated a management contract with Shangri-La Asia to operate those hotels.  No details on why the agreement was terminated but it was resolved amicably.  “The termination of the Shangri-La management agreement will not have any impact on the company’s operations, ”Sands China ensured, adding that the company remains committed to its timeline of opening the first phase of parcels 5 and 6 by the end of 2011.

The Sands China’s management agreement with Starwood Hotels to operate the hotels on parcel 6 under its Sheraton and St. Regis brands remains in place, the company added.



A regional uptick and market share gains should drive near-term earnings. Street too low on 2011 free cash flow too.



We’ve seen it before with the stocks of regional gaming operators.  Free cash flow yields climb into the teens and above 20%.  That high of a yield is unsustainable either because the free cash flow estimate is too high or the stock is too low.  We believe ASCA will beat Q1 EPS and free cash flow estimates so you can guess which side of the equation we think is wrong.


Following a string of horrible weather for casinos, the 2nd half of February bounced back and we believe March trends are pretty strong.  ASCA also appears to be gaining market share, mostly at the expense of Harrah’s.  Harrah’s regional properties are looking tired, especially the slot product, from a lack of capex.  Harrah’s has clearly opted to direct its skimpy capex budget to Las Vegas.


We think ASCA’s estimates need to go higher.  Adjusted Q1 EPS should be well into the 30s versus consensus of $0.28.  More importantly, we think the street is too low on Q1 and 2011 free cash flow.  ASCA will pay little in cash taxes in 2011 due to bonus depreciation and other tax breaks.  Our free cash flow estimate is $140 million or $4.25 per share on the post Nielsen Trust buyout of 33 million shares.  That is a stunning 25% free cash yield.


We think that level of free cash flow should be sustainable.  Any cash taxes in 2012 should be offset by EBITDA growth and less interest expense.  ASCA will close a major refinancing that should reduce interest expense considerably.


While the cash flow is at least sustainable, this 25% yield is not, in our opinion.  Catalysts are near term:  1) JP Morgan conference next week that should improve overall investor sentiment surrounding the regional gaming operators, 2) closing of the accretive refinancing in the next 1-2 weeks, 3) release of better March regional numbers in April, 4) Q1 earnings and free cash upside.


ASCA looks very good from a quantitative/technical trading perspective per the Hedgeye Macro team as can be seen in the chart below.



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