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TODAY’S S&P 500 SET-UP - April 4, 2011


Interestingly, but not surprisingly, Inflation Accelerating in Europe has both expectations for an ECB rate on Thursday and the Euro pushing higher. This is not good for debtors (another way to be long The Inflation), and most obviously expressed in Greek stocks. They are down a full -2.1% this morning but, more impressively, down -12.9% since a lot of the “reflation” mean reversion trades peaked on FEB 18th.  As we look at today’s set up for the S&P 500, the range is 25 points or -1.38% downside to 1314 and 0.49% upside to 1339.




Day 1 of PERFECT; we have 9 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND. 


THE HEDGEYE DAILY OUTLOOK - daily sector view









  • ADVANCE/DECLINE LINE: 1163 (+648)  
  • VOLUME: NYSE 902.12 (+16.15%)
  • VIX:  17.40 -1.92% YTD PERFORMANCE: -2.15%
  • SPX PUT/CALL RATIO: 2.22 from 2.10 (+5.58%)



  • TED SPREAD: 25.03
  • 3-MONTH T-BILL YIELD: 0.07% -0.03%
  • 10-Year: 3.46 from 3.47
  • YIELD CURVE: 2.66 from 2.67



  • 9:05 a.m.: Fed’s Lockhart speaks in West Palm Beach, Fla.
  • 9:30 a.m.: Fed’s Evans speaks at Money Smart Week
  • 11 a.m.: Export inspections (corn, soybeans, wheat)
  • 11:30 a.m.: U.S. to sell $32b 3-mo. bills, $30b 6-mo. bills
  • 3:15 p.m.: Fed’s Evans speaks on CNBC
  • 4 p.m.: Crop progress plantings
  • 7:15 p.m.: Bernanke speaks on clearinghouses and stability in Georgia 


  • Larry Page takes over as Google CEO today
  • Vivendi agrees to buy Vodafone’s 44% stake in French mobile- phone operator SFR for EU7.95b ($11.3b)
  • Belgium’s Solvay agrees to buy Rhodia for EU3.4b ($4.8b) in cash, boosting shares of other European chemicals stocks on speculation of more M&A
  • President Barack Obama will file Federal Election Commission paperwork for his re-election bid as early as today, according to a person familiar with the planning
  • Muammar Qaddafi’s acting foreign minister met with Greece’s prime minister in what Greek govt. described as an attempt to find a political solution to hostilities in Libya. Fighting continued in the besieged rebel- held city of Misrata on Sunday, AP reported



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Copper Seen Rising 18% to Record as Shortages Overcome Weaker China Demand
  • Cocoa Seen Dropping 12% Once Fight for Ivory Coast Presidential Power Ends
  • Corn Rallies to Highest Since 2008 as Stockpiles Drop, Goldman Sees Record
  • Oil Rises to 30-Month High in New York on Fuel Demand Outlook, U.S. Jobs
  • Lead Reaches Three-Year High on Speculation Demand Will Gain; Copper Rises
  • Gold Advances on Conflict in Libya, Concern About European Sovereign Debts
  • Tainted Pork Becomes Latest Inflation Driver for China: Chart of the Day
  • Anglo American Will Struggle to Meet Collahuasi Copper Goal After Floods
  • China's Minmetals May Need to Raise Its $6.5 Billion Equinox Offer by 29%
  • Mitsubishi Materials to Increase Lead Output by 16% on Post-Quake Demand
  • Palm Oil Advances, Tracking Gain in Soybeans, Corn on Lower Inventories
  • Fight for Ivory Coast's Abidjan Enters Fifth Day, Food Supplies Run Short
  • Japan Quake Recovery, Atomic Concerns Drive Demand for Copper, Iron, Beef



THE HEDGEYE DAILY OUTLOOK - daily currency view




European stocks are little changed near three-week highs as losses by financial companies offset takeover bids from Vivendi and Solvay. 




  • Eurozone Apr Sentix Index 14.1 vs consensus 16 and prior 17.1
  • UK Mar Construction PMI 56.4 vs consensus 54.9 and prior 56.5
  • Eurozone Feb PPI +6.6% y/y vs consensus +6.7%








The Asian markets turned in a stronger relative performance lead by China up 1.34%












Howard Penney

Managing Director

CHART OF THE DAY: No Shutdown of The Inflation in Sight



CHART OF THE DAY: No Shutdown of The Inflation in Sight -  chart

Leaders At The Front

This note was originally published March 30, 2011 at 07:59 in  

“Disaster was caused by errors committed by the leaders at the front.”

-George McClellan, 1861


I’m in the middle of reading an outstanding US history book that one of our star analysts, Allison Kaptur, recommended: “Team of Rivals – The Political Genius of Abraham Lincoln”, by Doris Kearns Goodwin.


The aforementioned quote comes from Chapter 14 which is titled “I Do Not Intend To Be Sacrificed.” As I was reading it last night, I couldn’t help but think about the parallels between America’s political leadership, then and now…


McClellan was a Major General in the American Civil War who served a very short term as Lincoln’s General-In-Chief of the Union Army (from November 1861-1862), before ultimately falling on his own sword of accountability.


Whether on the ice of athletic competition or in the arena of professional asset management, I’ve seen plenty of McClellans in my day. Their biggest problem is one of perception. However talented and resume’d up they may be, they don’t quite get what it means to lead people – by example.


Consider the following contrast between McClellan’s public representation of himself: “You have no idea how the men brighten up, when I go among them.” (“Team of Rivals”, page 378)…


And how he behaved when he thought no one was looking: “The whole thing took place 40 miles from here without my orders or knowledge… it was entirely unauthorized by me and I am in no manner responsible for it.” (“Team of Rivals”, page 383)…


It’s both sad and pathetic to think that the said leaders of this world, both then and now, think that they can fool history into believing not only the facts, but their intentions in representing their version of the “truth.”


McClellan’s finger pointing and excuse making came on the heels of a big mistake he made that led to a Union loss at Ball’s Bluff. This wasn’t a one-off event. To the contrary, if you follow a man’s behavior long enough – the leadership methods he employs, the decisions he makes, and the reactions he has to wins/losses – you’ll figure him out. That’s the point, in principle, that I want to make this morning about risk management.


Back to the Global Macro Grind


I’m certainly not suggesting I don’t make mistakes. But I’ll be one of the last guys who goes to war with you who will be accused of being gutless. And no, that doesn’t mean I’m the prettiest player in this game – neither the most polite. It just means my friends call me Mucker.


We’ve created a culture here at Hedgeye that resembles that of the 4-wall dressing room we fostered at the Yale Whale in 1995. We are accountable to our performance in real-time. Everyone faces each other. There is nowhere to hide.


No matter where you go this morning, there it is – the score. As we push into both month and quarter end, however “light the volume” has been for the last week in Global Equity market trading – the price performance has been up into the right. Thankfully, I’ve drawn down my cash position in the Hedgeye Asset Allocation Model by 18% (to 43% from 61%) in the last 6 weeks.


While I made the right “Short Covering Opportunity” call on March 16th, I’ve made the wrong call in not holding the line on a very net long position (16 LONGS and 4 SHORTS in the Hedgeye Portfolio) until the very end of the month. That would have made our navigation of the last 2 weeks of Q1 2011 perfect – and perfect we are not.


We do have a risk management process however. That’s what guides us in asking questions as to where we could be right or wrong next. The #1 question on my mind right now is can we see a DEFLATION of The Inflation?


On that score, there are two scenarios I see playing out – they are both US Dollar based:

  1. US Dollar UP  - through an end to the unaccountable outcomes of QG1 and QG2 (The Bernank Perpetuating The Inflation), I think this would relieve a huge consumption tax on the American people. With 72% of US GDP being tied to Consumption, we have to get this right.
  2. US Dollar DOWN - through a continued Debauchery of the Dollar, Americans will face either a currency or bond market crisis (or both). This will be a massive headwind for all US capital markets (currency, stocks, and bonds) as it was in the 1970s.

On the short side of US Equities, I’m not brave enough to fight a bullish breakout in the US Dollar again. Been there, tried that in December of 2010. And I don’t think those who have been as bearish as we have on US stocks since Valentine’s Day should be testing bravery-to-the-death on that front (if we see it again) either.


As is always the case when fighting the proverbial Fed War, our risk management process defers to the highest probabilities embedded in the math. That is, in the correlation risks we see developing between our most heavily weighted Global Macro Factor (US Dollar Index) and everything else.


As of the last 6 weeks, it’s critical to note that the long standing 2-year inverse correlation between the USD and the SP500 has changed (DOWN Dollar = The Reflation trade). Whether you look at it on a 3 week or a 6 week duration, this is the latest math:

  1. 3-week TRADE: USD versus SP500 = +0.29
  2. 6-week TREND: USD versus SP500 = +0.67

Don’t fight the truth. Embrace it. This means that our ultimate strategy for the President of the United States holds true where it matters most. On the battlefield of American currency.


Dear Mr. President, if you strengthen the US Dollar, you will DEFLATE The Inflation – and stocks will go up. Alternatively, if your General-in-Chief of the US Federal Reserve continues to point fingers at everyone in this global market system other than at himself, your currency will burn and your citizenry will lose confidence in whatever confidence they have left in our Leaders At The Front.


My immediate-term TRADE lines of support and resistance for WTI Crude Oil are $104.09 and $108.03, respectively. My immediate-term TRADE lines of support and resistance for the SP500 are 1306 and 1328, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Leaders At The Front - Chart of the Day


Leaders At The Front - Virtual Portfolio

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The Week Ahead

The Economic Data calendar for the week of the 4th of April through the 8th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - call11

The Week Ahead - call22

Eye On Asia: Country Capsules

Conclusion: We’re seeing some notable divergences within the flurry of economic data coming out of Asia over the past few days, all of which are analyzed in the callouts below. In addition, we update our intermediate-term outlooks for each major Asian economy, as well as how to play our views across asset classes.



Perhaps the most bullish data point we’ve seen out of China recently was today’s positive inflection in Manufacturing PMI, which accelerated sequentially in March to 53.4 vs. 52.2 in Feb. The report also showed that Input Prices ticked down in March, and, while still elevated, this is positive on the margin and rewarding of Chinese efforts to rein in inflation over the intermediate term.


Analyzing consensus’ recent moves, we see that an interest rate hike is expected in 2Q and more signs of the sell-side getting positive on China. We remain long Chinese equities as inflationary headwinds have become consensus and no longer carry the same level risk they did when we first called this out back in January 2010. Further, we think the Chinese economy has entered a bottoming process and is poised to reaccelerate over the intermediate term.


Eye On Asia: Country Capsules - 1



The release of the March Manufacturing PMI data confirmed that the recent natural disaster had a pronounced effect on the Japanese economy, ticking down to 46.4 vs. 52.9. With only 5% of the average number of replies (indicating a natural survivor bias), the extent of the quake/tsunami’s impact might have been understated and we expect further near term weakness in Japanese economic data. History and our quantitative models continue to support our view that it’s much too soon to get long the Japanese recovery trade.


Keep an eye on the BOJ; they will be growing pressure to monetize government debt in the coming weeks and are already hinting at an unprecedentedly large lending facility to prevent a wave of bankruptcies from sweeping the nation. Both history and empirical studies suggest this will ultimately end up in perpetuating structural inflation – an outcome that will be equally negative for the Japanese economy as it will be for the Japanese government and its bond holders. This remains a major TAIL risk for the global economy.



The latest weekly inflation report was essentially a wash on a wk/wk basis; prices still remain up double digits on a YoY basis, defying government efforts to cool the economy with the recent rate hikes. Credit growth continues unabated and, as we pointed out in a previous note, the subsidy and tax increases in the upcoming budget will be accretive to current inflationary pressures.


While the RBI continues to ratchet up its typically wildly inaccurate inflation projections, consensus has started calling on the bank to do more to slow the rate of price increases. Inflation is likely to remain a significant headwind for the Indian economy over the intermediate-term TREND, and the RBI’s poor response imposes significant risk of it needing to implement ultra-aggressive tightening measures in the latter half of this year.



The bulk of Korean economic data continues to go the wrong way, with the notable exception of today’s positive trade report. March Export growth accelerated and the 1Q Trade Balance widened on a YoY basis, which is accretive to Korea’s GDP growth. What’s dilutive to growth is accelerating inflation, which quickened to +4.7% YoY in March.


As we called out in November, Korea’s negative real interest rates continue to fuel inflationary pressure, which is only mitigated by recent strength in the won. That said, we think Korea’s relative passiveness in addressing the country’s growing inflation concerns increase the risk of the Korean central bank having to slam on the breaks later in the year. That’s a big negative, particularly given that PMIs (both Manufacturing and Non-Manufacturing) and Industrial Production were all going the wrong direction in the Feb-March period.


Despite all of this, the Kopsi Index has ripped to the upside and is now bullish from a TRADE & TREND perspective. We think the fund flows have rotated on the margin to Korea from Japan, as investors anticipate Korea picking up what used to be Japanese production and export orders. There’s a great deal or risk speculating on Korean equities at current prices, particularly given the trajectory of its domestic growth, as well as global growth (both are sloping down).


Eye On Asia: Country Capsules - 2



The story here is undoubtedly the Aussie dollar, which continues to rip alongside rising commodity prices and rising expectations for the Chinese economy (Australia’s largest export market). It doesn’t hurt that Australia will eventually be called upon to ship larger amounts of materials to its second-largest export market (Japan). Australia’s terms of trade haven’t been higher since the 1950’s, according to the Austrian government, and those very terms look to continue onward and upward over the intermediate term.


That said, we do see a few major risks to chasing the Aussie dollar beyond its current all-time highs: 1) Dr. Copper isn’t confirming a reacceleration in Chinese or global growth; 2) Australia’s near-term trade data stands to roll over alongside its manufacturing data (PMI rolled over in March); and 3) Glenn Stevens and the RBA stand ready to actually cut rates if the global economy falters over the next 3-6 months – which we anticipate. Needless to say, there is a definite air-pocket under the Aussie dollar and any reversal of price momentum carries significant downside risk in our model.


Eye On Asia: Country Capsules - 3


As an aside, the global FX market might be sniffing out a potentially lucrative opportunity for Aussie-based purchases of US Treasuries on a rolling-hedged basis. We urge caution here, as it remains to be seen whether the US Treasury market can withstand the end of QE2 and the upcoming debt ceiling debate. Stay tuned.



We’re getting more constructive on both the Indonesian economy and equity market here, aided by decelerating inflation (March CPI slowed to +6.7% YoY), which is boosting Consumer Confidence (107.1 in March vs. 106.4 in February). A widening Trade Balance further augments the case for Indonesian GDP growth coming in above consensus expectations. We continue to be bullish on the Indonesian rupiah and the currency’s recent strength limits the central bank’s need to continue hiking rates, though we do think they will continue to be hawkish over the near-to-intermediate term.


Hong Kong

Hong Kong economic data continues to go the wrong way in February: CPI accelerated to a 30-month high, Trade Balance contracted, Money Supply (M2) growth slowed, Retail Sales growth decelerated, and the Government’s Budget Balance deteriorated. Despite this, the Hang Seng Index looks like it wants to go along for the ride and join China on a bullish breakout. Aided by the yuan appreciation story and its own inflationary headwinds, we remain bullish on the Hong Kong dollar.



CPI on both a Headline and Core basis ticked up in March to +3.1% YoY and +1.6% YoY, respectively, and we think the subsidies currently being handed out by the government in advance of this year’s elections (“buying” votes) will only add to the current inflationary pressure over the intermediate term. We remain bullish on Thai interest rates/bearish on Thai local currency bonds.


Thai equities are now bullish from an intermediate-term TREND perspective – a sign that growth expectations are reaccelerating and a leading indicator that the upcoming elections are likely to go off without any major hitches. Given the scope of last year’s political protests, we find such expectations to be hopeful at best. Last, but certainly not least, there is a lot of mean reversion risk in owning Thai equities right here and now – particularly given the amount geopolitical risk that could flare up any given moment. In addition, inflation looks poised to break out to the upside over the intermediate-term.



We’ve remained bullish on the Singapore dollar since last July on the strength of robust growth and accelerating inflation. Now, both factors are starting to go the wrong way for the currency. Industrial Production growth slowed in Feb to +4.8% YoY vs. +11% YoY in Jan. Non-Oil Export growth slowed measurably in Feb to +7.8% YoY vs. +20.7% YoY in Jan. CPI decelerated for the first time since October in Feb to +5% YoY vs. +5.5% in Jan.


While it appears the strong currency (+10.8% over the past 12 months) is starting to weigh on exports, we can’t help but point out its positive impact on the Singapore consumer: Retail Sales growth (ex-Auto) accelerated in Feb to +15.6% YoY in Jan and we look for that trend to continue with unemployment hovering near a two-year low. Further, PMI data continues to look healthy, accelerating in all but one subcomponent in Feb. Despite this economic health, we remain cautious on Singaporean equities, as their export and manufacturing growth looks to suffer from Japanese supply constrains, as well as a slowdown in US and European consumer demand.


Darius Dale


Short Selling Opportunity: SP500 Levels, Refreshed



I’ve decided to come out of retirement. Short selling is too much fun.


The risk management setup here is getting as interesting as it was on Valentine’s day. We’ve effectively seen a -6.5% correction all but recovered on low-volume, slowed fund-flows, and an almost complete collapse in volatility.


Top-down, our view remains that market expectations that hang in the balance of what a few humbled men in the Keynesian Kingdom do next are going to perpetuate Price Volatility. We can’t get upset about that – we just need to deal with it – and one of the most obvious ways to capitalize on that is to manage risk around the inverse correlation between the SP500 and the VIX. 

  1. SP500: Pre-open this morning my immediate-term upside TRADE target in the SP500 was 1334. Now it’s 1341. Interestingly, but not ironically, that’s right back to the range I outlined as 3 standard deviations overbought using my intermediate-term TREND duration back in February (1). 
  2. Volatility (VIX): we’ve seen a -43% draw-down in the VIX in 12 trading days. A) that’s the biggest move down over that duration ever and B) ever is a very long time. I don’t expect this up USD, down VIX, UP stocks thing to continue for the next 3 weeks. 

The VIX has a ton of immediate-term TRADE support between 16.36 and it’s long term TAIL level of support at 15.29. So the highest probability risk management decision I can make from here is to sit tight and Wait & Watch for that volatility zone to be realized on the downside as 1 is tested on the upside. We’re inching closer to these key zones today.


Inasmuch as it was a great call to cover most of our short positions at SP/VIX 29.40, it’s been a bad call coming back to the short side too early. I think I’ve thought about the setup better than I’ve executed on it – and, again, that doesn’t make my being short the SPY here right – but it does provide a healthy reminder that the discipline of patience is what will really drive performance in Q2 of 2011. The next few months will not be for the faint of heart.


Cover low, short high – and stay transparent, my friends.



Keith R. McCullough
Chief Executive Officer


Short Selling Opportunity: SP500 Levels, Refreshed - 1