Blame Yourself

“It was a matter in which we have heard some other persons blamed for what I did myself.”

-Abraham Lincoln, 1862


That’s one of the many outstanding leadership quotes in the book I highlighted yesterday, “Team of Rivals – The Political Genius of Abraham Lincoln.” If he wants to get re-elected, President Obama should think long and hard about Lincoln’s example of transparency, accountability, and trust. Rather than giving lip-service to being like the great American leaders who came before him, Lincoln was his own man - and he lived these principles out loud.


Whether you like following politics or not, you need to get the direction of their leanings right if you want to get your Global Macro positioning right. Currency markets move on policy – policy is set by politicians. And while that’s a pathetic and sad statement about our said “free market” system altogether, you can’t get bogged down by it – you need to play the game that’s in front of you.


Currently, the most important game in Global Macro Risk Management is the cross-asset-class correlation-risk associated with what the US Dollar does. If you get policy right, you’re likely to get the US Dollar right. If you get the US Dollar right, you’ll get fewer things wrong.


This is where my only political advice to the President of the United States (or whoever realizes that they could win his office) comes into play – get the US Dollar right (strengthen it) and you’ll Deflate The Inflation. If you Deflate The Inflation, The People will believe in you.


Strong US Dollar Policy isn’t a partisan thing. It’s an American thing. Reagan had it. Clinton had it. Nixon and Carter devalued it. Nixon and Carter also had a Dollar Debauchery man at the Fed named Arthur Burns.


Reagan had Volcker. President Obama has The Bernank.


Obama will be the first to tell you he took on a lot of Bush’s baggage. He’ll be the last to tell you he made a mistake in taking on Bush’s Bernanke. So, Mr. President, let’s strap on the accountability pants, Blame Yourself, and take a walk down that path – because your General-in-Chief on all things US economic policy definitely won’t be doing it for you anytime soon. Some of his Generals in the Fed’s ranks will.


In one of the great 2011 accountability headlines coming out of the US Federal Reserve last night, Kansas City Fed President, Thomas Hoenig, explained the following by effectively blaming himself:

  1. “Once again, there are signs that the world is building new economic imbalances and inflationary impulses…”
  2. “The longer policy remains as it is, the greater likelihood these pressures will build and ultimately undermine world growth…”
  3. “…remember, I’m not advocating tight monetary policy… I’m advocating a non-crisis policy. Zero is a crisis policy that by itself should be temporary.”

Now this isn’t Hoenig’s first rodeo. He joined the Federal Reserve Bank of Kansas City in 1973. He is the longest serving member at the Fed and his 8 consecutive “dissents” (English for publically disagreeing with The Bernank) recently tied Henry Wallich’s 1980 record for most disagreements with Fed policy (Wallich has been validated as being very right). Hoenig is a known inflation hawk – most likely because he faced it in the 1970s and joined Wallich and Volcker in fighting it.


Does the President of the United States really want to test the waters on $120/oil and 1970s style Jobless Stagflation? Does he want to roll the bones on The Quantitative Guessing experiments in Japan gone bad? Does he want to run against someone in 2012 who will crush him like a bug with the simple conclusion that Growth Slows As Inflation Accelerates?


I don’t think so. Remember, he’s a professional politician – after all…


As opposed to someone holed up in a room of academia’s Keynesian Kingdom, I’m in the soup. I’m managing risk in this cross-asset-class correlation-risk game each and every day. I have been writing these morning strategy notes since I started this firm without bailout moneys 3 years ago – and I’ve made 19 calls on the US Dollar since (long and short side) – and I’ve been right 19 times. If you want a USD opinion – at least ours has some credibility.


Call me politically irrelevant. Call me Canadian. Call me names from the heavens, Mr. Big Government Intervention man. But don’t call me a McClellan (1862) in this currency war, because it’s The US Monetary Policy that’s managed by you, the unaccountable generals, at the front of The Inflation lines who are perpetuating the problem.


Back to the Global Macro Grind


Now that the IMF is cutting their US GDP Growth estimate for 2011 this morning (to 2.8%), I’ll assume that our call for Growth Slowing As Inflation Accelerates is being absorbed into the craws of consensus. The leading indicator that is the price of Dr. Copper remains bearish and broken with intermediate term TREND resistance (which was longstanding support) at $4.38/lb.


Consensus doesn’t mean that Growth Slowing signals don’t continue to flash amber lights – it simply means the 6.5% intra-quarter SP500 correction had more to do with a longer-term global reality (piling sovereign debt-upon-debt-upon debt structurally amplifies inflation and impairs growth) than a tsunami of complacency.


Japanese and Chilean Industrial Production Growth reports for February (pre quake) came out yesterday and both slowed again sequentially. Eurozone inflation (CPI) for March accelerated again, sequentially. And while the US Dollar trading up for 2 of the last 3 weeks has helped Deflate The Inflation this week (bullish for Equities), it looks like that reverts back to the mean of Burning Buck and up oil again this morning. I’m staying long oil and long gold.


My immediate-term TRADE lines of support and resistance for oil are now $102.13 and $107.95, respectively. My immediate-term TRADE lines of support and resistance for the SP500 are now 1305 and 1333, respectively.


Looking forward to seeing everyone at Hedgeye Soho’s launch party in NYC this evening – no government bailout moneys required for us to buy you drinks.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Blame Yourself - Chart of the Day


Blame Yourself - Virtual Portfolio

A Thousand Illusions

This note was originally published at 8am on March 28, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“It is the nature of inflation to give birth to a thousand illusions.”

-Henry Hazlitt


Last week, despite the US Dollar posting a rare gain, The Inflation didn’t come down. It’s sticky – and  that’s unfortunate because Deflating The Inflation is what America needs to get her confidence back. Not another low-volume stock market rally to lower-highs.


Here’s how the week-over-week Macro scorecard looked for Americans:

  1. US Dollar Index = UP +0.65% to $76.21
  2. CRB Commodities Index = UP +2.3% to 359
  3. WTI Crude Oil = UP +4.3% to $105.40
  4. Gold = UP +0.81% to $1427
  5. Copper = UP +1.8% to $4.41
  6. SP500 = UP +2.6% to 1313
  7. Volatility (VIX) = DOWN -26.7% to 17.91
  8. 2-year US Treasury Yield = UP +15bps to +0.73%
  9. 10-year US Treasury Yield = UP +17bps to +3.44%
  10. 30-year US Treasury Yield = UP +8bps to 4.50%

Not to put a wet Kleenex on your morning, but the reality is that well over half of America wakes up to not really caring so much about the US stock market. We, as a profession, have ourselves to blame for that. Many Americans think this game is rigged.


“So inflation turns out to be merely one more example of our central lesson. It may indeed bring benefits for a short time to favored groups, but only at the expense of others. And in the long run brings ruinous consequences to the whole community.” (Henry Hazlitt, “Economics In One Lesson”, page 170, 1946).


Sure, stocks going down again last week (like they had in 3 of the 4 weeks prior) would have been bad. But the US Dollar going down for the 10th out of the last 13 weeks would have been worse. Despite the massive week-over-week drawdown in market volatility (VIX) and a relative easing of headline news coming out of both Japan and the Middle East, the price at the pump hit a new weekly closing high for 2011 and this part of the economic cycle.


What part of the economic cycle is this anyway? The Big Government Interventionists would have you believe that this is the “growth” phase of the American dream. Last week’s revisions had US GDP growth running at +3.1% for the 4th quarter of 2010. But that’s using a joke of a deflator of 0.4% for inflation (you need to subtract inflation from nominal growth to get the reported number)  – so what part of this joke are Americans missing?


Americans get the joke.


Whether you want to look at the weekly or monthly readings on American Consumer Confidence, they tell you the same story:

  1. Bloomberg Weekly Consumer Comfort Index = -48.9 last week versus -48.5 for the week prior (yes, those are minuses)
  2. University of Michigan Consumer Confidence = 67.5 for March versus 77.5 in February (one of the largest monthly drops on record)

At least stocks were rising alongside The Inflation in February. For the month of March, US stocks look like they’ll close flat to down. So my question is, As Growth Slows And Inflation Accelerates, what’s next?


Answering that question from a Macro Catalyst Calendar perspective, here what’s on tap in the immediate-term (this week):

  1. Monday – US Personal Income and Consumption (FEB)
  2. Tuesday – Conference Board Consumer Confidence (MAR) and Case-Shiller Home Prices (JAN)
  3. Wednesday – MBA Mortgage Applications (weekly) and II Bullish/Bearish Sentiment (weekly)
  4. Thursday – Month and Quarter End (MAR) and Producer Manufacturing Index (FEB)
  5. Friday – ISM Survey (FEB) and the Monthly US Employment Report (MAR)

Consumption will continue to be borrowed; Housing will continue to deteriorate; and High-Frequency Data (PMI, ISM, Confidence, etc.) will continue to remind us that markets are looking forward, not behind.


While I’ll be the first to acknowledge that a 7-day record drawdown in US stock market volatility was bullish for stocks last week, I was also the first US stock market bear to write “Short Covering Opportunity” at the SP500’s YTD low. I don’t Short-And-Hold.


Today, with the VIX -41.6% lower and the SP500 +4.5% higher, I’m a seller again. After moving the Hedgeye Portfolio to 16 LONGS and 4 SHORTS on Wednesday, March 16th, I closed last week with 15 LONGS and 13 SHORTS.


I also sold all of our exposure to US Equities in the Hedgeye Asset Allocation Model last week (sold Energy and Healthcare – XLE and XLV). Zero percent is now something The Bernank and I share in common. There’s always common ground to find somewhere.


On last week’s overall inflation of stock and commodity prices, I took our Cash position back up to 52%.


Here’s the Hedgeye Asset Allocation Model:

  1. Cash = 52%
  2. International Currencies = 27% (Chinese Yuan, Canadian Dollar, British Pound – CYB, FXC, and FXB)
  3. Commodities = 9% (Gold and Corn – GLD and CORN)
  4. Fixed Income = 9% (US Treasury Flattener and Long Term Bonds – FLAT and TLT)
  5. International Equities = 3% (China – CAF)
  6. US Equities = 0%

If you want to modernize a “Thousand Illusions” about The Inflation, check out MIT’s “Billion Prices Project” and hit the USA tab. It should provide you with some hope that reality will eventually be measured in real-time. In the meantime, as Hazlitt predicted, “The political pressure groups that have benefited from the inflation will insist upon its continuance.”


My immediate term support and resistance levels for the SP500 are now 1307 and 1323, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


A Thousand Illusions - Chart of the Day


A Thousand Illusions - Virtual Portfolio


TODAY’S S&P 500 SET-UP - March 31, 2011

Now that the IMF is cutting their US GDP growth estimate for 2011 (to 2.8%), our call for Growth Slowing As Inflation Accelerates is being absorbed into the craws of consensus.  Dr. Copper remains bearish and broken with intermediate term TREND resistance (was longstanding support) = 4.38/lb.   As we look at today’s set up for the S&P 500, the range is 28 points or -1.75% downside to 1305 and 0.36% upside to 1333.



As of the close yesterday we have 8 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.  The XLF is the only sector to be broken on TRADE. 










  • ADVANCE/DECLINE LINE: 1338 (+248)  
  • VOLUME: NYSE 899.14 (+11.78%)
  • VIX:  17.71 -2.48% YTD PERFORMANCE: -0.23%
  • SPX PUT/CALL RATIO: 1.49 from 1.73 (-13.94%)


  • TED SPREAD: 21.32
  • 3-MONTH T-BILL YIELD: 0.10%
  • 10-Year: 3.47 from 3.50
  • YIELD CURVE: 2.67 from 2.69


  • 8:30 a.m.: Jobless claims, est. 380k, prior 382k
  • 8:30 a.m.: USDA planting data
  • 8:30 a.m.: Net export sales (cotton, corn, soybeans, soy meal, soy oil, wheat)
  • 9:45 a.m.: Chicago Purchasing Manager, est. 69.7, prior 71.2
  • 9:45 a.m.: Bloomberg consumer comfort, prior (-48.9)
  • 10 a.m.: Freddie Mac 30-yr mortgage
  • 10 a.m.: Annual revisions, wholesale inventories
  • 10 a.m.: NAPM Milwaukee, prior 63.0
  • 10 a.m.: Factory orders, est. 0.5%, prior 3.1%
  • 10:30 a.m.: Fed’s Lacker to speak at 2011 credit symposium in Charlotte
  • 10:30 a.m.: EIA Natural gas storage change, est. (-1), prior (-6)
  • 12:30 p.m.: Fed’s Tarullo to speak at 2011 credit symposium in Charlotte
  • 2:05 p.m.: Fed’s Pianalto to speak on economic outlook, oil prices


  • Bullish sentiment among individual investors rose to 41.8% this week, reaching a 4-wk. high in American Assoc. of Individual Investors survey.
  • Standard & Poor's announced that following its recent downgrade of Greece's sovereign credit, its lowering our long-term counterparty credit ratings of four Greek banks
  • David Sokol, considered a candidate to replace Warren Buffett as head of Berkshire, resigned as it was disclosed he purchased stock in a company he later helped negotiate a takeover
  • WTO to rule on claims that Boeing received government subsidies
  • Irish Central Bank stress test results being released
  • Outside advisers to FDA will vote on safety of food dyes
  • Troops loyal to Muammar Qaddafi force Libyan rebels to retreat as the U.S., U.K. say they will consider arming opposition forces; Libya’s foreign minister resigned and flew to London
  • Google being investigated for tax evasion in China
  • Baseball’s Opening Day  




THE HEDGEYE DAILY OUTLOOK - daily commodity view



  • Commodities Heading for Third Quarterly Advance on Recovery, Surging Crude
  • Wheat Demand Sustained by Japan as Grain Sought for East Coast After Quake
  • Crude Above $100 Approaches Economic Danger Zone on Libya: Energy Markets
  • Soybeans Gain on Speculation Lower U.S. Sowing, Brazil Rain May Cut Supply
  • Cocoa Falls to 11-Week Low on Speculation Ivory Coast Exports to Increase
  • Gold Heads for Longest Quarterly Winning Streak Since 1979 on Haven Demand
  • Food-Price Surge to Swamp Consumers With Inflation, According to Superfund
  • Copper May Advance Before Report on Manufacturing in China, Biggest User
  • Hedge Funds Cutting Bullish Bets May Show Commodity Drop: Chart of the Day
  • Aluminum Smelters in China Ramp Up Production as Country Ends Power Curbs
  • U.S. Detects Trace Amounts of Radiation in Milk, Poses No Threat to Health
  • World’s Biggest Shipping Lines Are Still Taking Cargoes to Tokyo Bay Ports



THE HEDGEYE DAILY OUTLOOK - daily currency view




European markets trade mixed to lower with the periphery again in focus and particularly Ireland and Portugal; Austria, Greece and Italy are leading the way down.    



  • UK Mar Nationwide house prices +0.5% vs con (0.1%)
  • Germany Feb retail sales +1.1% y/y vs con +1.8%
  • France Feb PPI +0.8% m/m vs con +0.7%
  • Germany Mar unemployment rate +7.1% vs con +7.2% (lowest since 1992)
  • Eurozone Mar preliminary CPI +2.6% y/y vs consensus +2.3% and prior +2.4% (fastest since October 2008)







The Asian markets turned in a stronger relative performance with the exception of China.  In Japan February housing starts +10.1% y/y vs consensus +7.2%. February construction orders +19.5% y/y.













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Macau Q4 EBITDA share update



Our calculations show Macau 2010 gaming EBITDA was close to US$4BN, almost doubling that of 2009.  For some perspective, Las Vegas Strip EBITDA in FY 2010 (ended in June) was US$1.6BN.  Macau’s Q4 EBITDA was 20% higher than Q3.  As the charts below show, EBITDA market share had major shifts in Q4 2010. 






The standout loser was LVS, giving up more than 5% in EBITDA share, mostly to WYNN and MGM.  This is somewhat surprising since this is Sheldon Adelson’s favorite Macau metric.  LVS’s Q4 EBITDA share loss was primarily attributed to relatively poor top-line performance, with lower table rev share (particularly VIP) and lower VIP Rolling Chip share.  


If the Macau gaming market continues its stellar run in 2011, these EBITDA market dynamics may not mean much.  But for now, it’s interesting to see who’s getting a bigger or smaller chunk of the burgeoning cash pie in Macau.

What’s Next for Brazil?

Conclusion: We don’t anticipate the Brazilian government’s latest attempt to curb the real’s appreciation to be successful, and thus, we remain in wait-and-watch mode on Brazilian equities and Brazilian fixed-income securities. If, however, the real starts to weaken materially, we want to be short both Brazilian equities and bonds.


Position: For clarity, let’s revisit our recent calls on Brazilian assets: 

  • May 2010: Bearish on Brazilian Equities
  • June 2010: Bullish on the Brazilian Real
  • July/August 2010: Bullish on Brazilian Equities
  • November 2010: Bearish on Brazilian Bonds and Bearish on Brazilian Equities
  • March 2011: Less Bearish on Brazilian Equities (wait-&-watch mode) 

Late yesterday, the Brazilian government decided to implement further measures in the latest installment in a series of attempts to stem the real’s appreciation. Up nearly 55% since it bottomed in December ’08 and +1.6% YTD, the real’s persistent strength continues to be a thorn in the side of Brazilian exporters and policy-makers alike.


Perhaps more so than previous efforts, the latest measures are more directly targeted towards cooling speculation than actually stemming inflows of capital. This is positive on the margin, especially considering Brazil’s long-term capital needs to build out its woeful infrastructure in the coming years.


Whether or not the newly imposed +6% tax on international corporate debt sales and loans with an average minimum maturity of up to 360 days actually weakens the currency over the intermediate term remains to be seen, as the real’s gains YTD have been driven by longer-term fundamentals and USD weakness, rather than the performance of Brazilian financial markets.


In fact, central bank data suggest net foreign currency inflows in 2011 are actually much more linked to long-term investment and not just speculation. Indeed, the yield-chasing flows to Brazil’s equity and bond market have slowed measurably, as foreign investment in Brazilian stocks and bonds fell (-91.4%) YoY in Jan to $206M, while foreign direct investment grew +393% YoY to $3B. Altogether, net foreign currency inflows for 2011 YTD ($24.4B) already exceed the full year 2010 total.


The 6% tax is in addition to the already-established 5.38% tax on loans up to 90 days and the newly announced +400bps hike in the foreign consumer credit card transactions tax to 6.38%. Today’s measures are a continuation of recent attempts to curb real appreciation, which include:  tripling a tax on foreign purchases of Brazilian fixed-income securities to 6% in October, buying $18.8B US dollars in the spot market in the first three months of 2011 alone (45% of full-year 2010 total), buying US dollar in the futures market for the first time in 21 months, and raising reserve requirements on short dollar-positions held by local banks in January.


All told, we don’t expect these latest measures to materially weaken the real over the intermediate term. If, however, the Brazilian government is successful in weakening the real, we want to be outright short Brazilian local currency bonds, a position supported by (hypothetical) currency weakness and incremental inflationary pressure driven by rising import costs.


It’s important to keep in mind that the real’s ~10% appreciation over the last 12 months has acted as a governor on Brazilian CPI. Should that reverse, we could continue to see the central bank struggle to rein in accelerating inflation. Not ironically, the central bank raised it 2011 CPI outlook to +60bps to 5.6% alongside the release of yesterday’s FX intervention measures.


Further, with the central bank raising its inflation forecast and credit growth accelerating far beyond the Tombini’s +15 YoY target, we could foresee a scenario whereby the central bank continues to raise interest rates beyond the upcoming monetary policy meeting on April 19-20. That would be counter to current consensus expectations of a pause after that meeting and would be incrementally bearish for Brazilian equities over the intermediate term.


What’s Next for Brazil? - 1


If the status quo remains from an inflation expectations perspective and a foreign exchange rate perspective, we’d still continue to urge caution on Brazilian equities, as they are broken from an intermediate-term TREND perspective. We’d need to see a sustained breakout above the TREND line on the Bovespa before we’re comfortable getting long Brazilian equities, as that would signal to us Brazilian Stagflation is fully priced into the market.


What’s Next for Brazil? - 2


On the flip side, a breakout in global financial market volatility stemming from the buy-side reacting to a reported deceleration in US and global growth that we’ve been calling for will surely put a damp on non-energy related risk assets over the medium term.


For more on the intermediate term outlook on Brazil, please refer to the more comprehensive report we published last week titled “Brazilian Tug-of-War”. Please email us if you need a copy.


Darius Dale


Flailing Bull: SP500 Levels, Refreshed



I should have paid more attention to how many people disagreed with my “Short Covering Opportunity” call on March 16th. Evidently a lot of people who weren’t hedged slapped on short exposure at the YTD lows. Evidently “should have” still only works in a liberally organized game of Canadian horseshoes (with beverages).


From an intermediate-term TREND and long-term TAIL perspective, nothing has changed. The SP500 continues to make a series of lower-highs on low volume. From an immediate-term TRADE perspective, the immediate-term range has tightened up to 1. On the margin, that’s less bearish than what we outlined last Wednesday. Higher prices do that.


Back to the intermediate-to-long-term, if the SP500 were to breakout above 1343 … and volume started accelerating on the upside… and the VIX breaks down through long-term support (15.44)… then one of those 2 duration statements will render itself void – the intermediate-term TREND will turn bullish. Long-term, like Japan, we think the outlook for a country attempting to manipulate asset prices through Fiat Fool monetary policy will fall on its own sword of expectations…


Being Duration Agnostic has helped us Wait & Watch for 1. That’s where I’ll put my second bullet in this Flailing Bull.



Keith R. McCullough
Chief Executive Officer


Flailing Bull: SP500 Levels, Refreshed - 3

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