TODAY’S S&P 500 SET-UP - May 3, 2011


While it’s proactively predictable to see Geithner politic his way around our “reported” fiscal position, even for him this is impressive.  The Republicans were allegedly waiting until mid-May to put the Democrats feet to the fire on the debt ceiling debate. The US Currency Crash is starting to price this in.  As we look at today’s set up for the S&P 500, the range is 33 points or -1.27% downside to 1344 and 1.16% upside to 1377.




The Financials remain the only sector broken on both TRADE and TREND.    


THE HEDGEYE DAILY OUTLOOK - daily sector view








  • ADVANCE/DECLINE LINE: -511 (-1428)  
  • VOLUME: NYSE 935.18 (-4.11%)
  • VIX:  15.99 +8.41% YTD PERFORMANCE: -9.92%
  • SPX PUT/CALL RATIO: 1.38 from 1.75 (-21.37%)



  • TED SPREAD: 23.75 -0.507 (-2.090%)
  • 3-MONTH T-BILL YIELD: 0.05% +0.01%
  • 10-Year: 3.31 from 3.32
  • YIELD CURVE: 2.70 from 2.71 



  • 8:30 a.m.: Fed’s Hoenig speaks to bankers in Washington
  • 10 a.m.: Factory orders, est. 2.0%, prior (-0.1%)
  • 11:30 a.m.: U.S. to sell $24b 52-wk bills, $28b 4-wk bills
  • 4 p.m.: Treasury’s Geithner at U.S.-China Business Council
  • 4:30 p.m.: API inventories


  • Renren, China’s biggest social-networking website by page views, aims to raise as much as $743.4m in U.S. IPO
  • Greek Finance Minister Says Debt Restructure ‘Huge Mistake’ - Finance Minister George Papaconstantinou said a restructuring of Greece’s debt, causing losses for bondholders, would lock the country out of markets for a decade or more.
  • Canada’s dollar rose, stocks and bonds may rally after Conservative Prime Minister Stephen Harper won a majority government for first time.
  • Goldman Sachs Lloyd Blankfein likely to remain CEO for at least two years - NY Post
  • US steel companies using price escalator clauses in longer-term contracts - WSJ



THE HEDGEYE DAILY OUTLOOK - daily commodity view



  • Gold, Silver Advance as Signs of Inflation Spur Increased Investor Demand
  • Oil Drops on Economic Growth Concern as Bin Laden Death Boosts Volatility
  • Copper in London Declines for Fourth Day on China, U.S. Manufacturing Data
  • Soybeans Drop For a Second Day as Favorable Weather May Aid U.S. Planting
  • Sugar Falls to Seven-Month Low on Thai Production; Cocoa Prices Decline
  • S. Korea to Boost Tarriff-Free Pork Imports After Foot-and-Mouth Outbreak
  • Dodd-Frank Rules on Swaps and Ratings Targeted by U.S. House Republicans
  • Rail Access to Australia’s Fremantle Port Is Cut After Accident, ABC Says
  • Palm Oil Advances as Gain in Malaysian Exports May Curb Inventory Build-up




THE HEDGEYE DAILY OUTLOOK - daily currency view




  • European equity markets opened mixed before drifting lower in choppy trading.
  • UK Apr Manufacturing PMI 54.6 vs consensus 56.9; now at a 7 month low
  • EuroZone Mar PPI +6.7% y/y vs consensus +6.6% and prior +6.6%; EuroZone Mar PPI +0.7% m/m vs consensus +0.6% and prior +0.8%







  • Australia keeps main cash rate unchanged at 4.75%
  • India’s  central bank raised benchmark interest rates by a more-than-estimated 0.5 percentage point after forecasting inflation will stay at an “elevated level” until at least September - Bloomberg.
  • China Home Prices Rise; Wen ‘Determined’ to Lower Them - Bloomberg
  • Japan was closed for Constitution Day and will remain closed until 6-May.











Howard Penney

Managing Director

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Crystal Clear

This note was originally published at 8am on April 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’s not clear that we can get substantial improvements in payrolls without some additional inflation risk.”

-Ben Bernanke, April 27, 2011


We’re all for transparency in what it is that we do. The problem with Ben Bernanke’s definition of transparency is that it’s not clear that he knows what he is doing. His forecasts are routinely late and/or wrong, and his decision making process depends heavily on those forecasts.


Our Q2 Macro Theme that The Bernank will remain “Indefinitely Dovish” is a forecast. So is our call that the probability of a US Currency Crash continues to heighten. Ben Bernanke did nothing but confirm those forecasts yesterday:

  1. He raised his inflation forecasts
  2. He cut his US GDP growth forecasts
  3. He Burned The Buck

While many critical factors are “not clear” to the Central Planner-in-Chief of globally interconnected markets, the prices that are marked-to-market real-time remain Crystal Clear.


Of the Big 3 that I made a call on in yesterday’s Early Look, I had 1 out of 3 wrong:

  1. Long Gold – hitting an all-time high intraday yesterday and again this morning (all-time is a long time), the price of Gold is now in line with the SP500’s YTD return of +7.8% YTD.
  2. Long Oil – rallying immediately as the US Dollar crashed to fresh YTD lows yesterday, the price of West Texas Crude Oil is now up +23.7% for 2011 YTD, outperforming both the SP500 and Gold by a factor of 3:1.
  3. Short SP500 – rallying on low-volume to a fresh YTD high of 1355, the SP500 is up 50 points (+3.8%) in a almost a straight line in the last 7 trading days into a government presser. I think The Bernank calls this “price stability.” We call it the market Gaming Policy.

While my biggest position remains long International Currencies (we have a 30% Global Macro allocation in the Hedgeye Asset Allocation Model to FX), what a lot of people want to talk to me about isn’t the raging bull market in currencies other than our own – it’s usually “what gets you to cover and buy the SP500.”


I get why that is. I think it’s fair. I am accountable to all of the current 26 positions in the Hedgeye Portfolio, particularly those that I have wrong. As Seth Klarman appropriately said earlier this year, “focusing on what you can lose versus what you can earn sets you apart.”


So, other than our “free” market’s ability to function without the heavy hand of a Central Planner holding pressers, where am I losing? Here are the updated returns in the Hedgeye Portfolio of the Big 3 aforementioned positions:

  1. Gold = +8.37%
  2. Oil = +5.37%
  3. SP500 = -2.46%

Just like that old nursery rhyme on Romper Room – one of these things is not like the others; one of these things just doesn’t belong… being short the SP500 right here and now is obviously wrong. The score doesn’t lie; people do.


Back to the Dollar…


While The Bernank’s comments addressing a Crashing US Currency were “not clear” yesterday, the world currency market’s vote was Crystal Clear:

  1. On The Day – the US Dollar lost another -0.5% (that used to be a lot for a day in the world’s reserve currency) to make a fresh YTD low.
  2. On The Week – the US Dollar is down another -1.3% (down for the 14th week out of the last 18 and down -9.8% since January).
  3. On The 28 Months – since Obama and Groupthink Geithner took their seats, the USD is down -17% (300bps away from crashing).

Now please don’t call me a Republican for putting Obama’s name beside the score. I was at least as bearish on Bush and his US Dollar Devaluation policy to inflate as I am on this administration’s grasp of Global Macro markets and how they are interconnected.




Yes, correlated – which, suspiciously, was a word that The Bernank didn’t use once in his prepared FOMC statement or presser yesterday.


How the world’s Central Planner-in-Chief can use the word “hope” multiple times and not address the most obvious risk that a US Currency Crash imposes on global markets is beyond me. The Audacity of Hope is clearly not a risk management process, so here’s the correlation math:

  1. USD to Oil = -0.92
  2. USD to Gold = -0.92
  3. USD to CRB Index = -0.87

*Note to Timmy and The Bernank: these are what we call the inverse correlations of the US Dollar to Oil, Gold, and the 19 Commodity Component CRB Index on what we call our intermediate-term TREND duration (3 months). These are at all-time highs.


The alternative risk management strategy to dismissing either causality and/or correlation risk (the global median inflation rate has been making higher-highs for the last 40 years, effectively since Nixon abandoned the Gold Standard in favor of the Fiat Fool Policy Standard), is to simply believe. Yes, we can all go there – I took my family to see Shamu’s “Believe” in Orlando last week – it was magical.


According to Big Broker yesterday (The Banker of America Merrill Lyncher North American Economics Strategist – Ethan Harris) what the Almighty Cental Planner of US Dollar Destruction was doing with this presser thing yesterday was, “teaching the American public about how monetary policy works…” (Bloomberg article by Craig Torres and Josh Zumbrun)


Thanks for the transparency. Thanks for the teachings. I may as well gloss over all of world history’s lessons on Currency Crashes now and go back to buying-the-damn-dips in US stocks alongside a stuffed dolphin at Seaworld.


My immediate-term support and resistance lines for Gold are now 1499 and 1534 (Gold is immediate-term overbought). My immediate-term support and resistance lines for Oil are now $110.59 and $114.68 (buy more). My immediate-term support and resistance lines for the SP500 are now 1328 and 1360 (I’ll stay short, for now).


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Crystal Clear - Chart of the Day


Crystal Clear - Virtual Portfolio


“I feel dirty making money on the long side in this market”

-A Hedgeye Client that has been successfully making money on the long side


This quote comes from a client of hedgeye, who just happens to work for one of the largest “long only” money managers on the planet.  Why does he feel dirty?  He’s probably shares many of the same views that David Einhorn has had as he’s been covering his shorts.  The music is playing and the kids are Dirty Dancing.  The Chuck Prince of 2007 would approve. The grownups, however, do not.


David Einhorn had this to say, in the Greenlight capital Q1 Shareholder Letter: “The broad market, which shrugged off the continued escalation of commodity prices, unrest in the Middle East, a catastrophe in Japan, tightening monetary policy outside the United States and a deceleration of domestic economic growth...this quarter we were repeatedly confuzzled when we read company news announcements that we expected to cause falling stock prices, only to see them rise instead – and sometimes sharply at that.  Nonetheless, we believe that this environment is cyclical, and that it will continue this way... until it doesn’t.”   


Einhorn likens the market today to Charlie Sheen, believing that “all publicity is good publicity”.  Einhorn’s past record and thorough thought process that comes through in his writing are both impressive.  He is no Bud Fox; he understands the danger of investor psychology and groupthink.  Nevertheless, he is not confident that his firm can call the turn so he has been covering. 


Both Einhorn and the Hedgeye Client quoted at the beginning of this Early Look are thoughtful market operators that have generated alpha in different market cycles across sectors and geographies.  Clearly by the sentiments they are expressing, they are alerting us to a real problem that exists in money management at this point in equity markets.  Capital has been pumped into the system through two rounds of quantitative easing and PM’s that want to get paid will chase yield with that capital.  The stock market rally has been self-sustaining in that regard; a rising stock market does improve consumer confidence among higher income brackets.  However, the reception of all news as good news is disturbing to say the least.  As the multitude of interconnected global macro factors continue to change in real-time, the government is handcuffed with sky-high debt, zero percent interest rates, and slowing economic growth.


The pension fund community, too, has been dragged into this game of pass-the-grenade.  “Assumed” rates of return are to be hit lest the funds face a significant shortfall on their obligations.  Given the fear of inflation that has rightly taken hold, pension funds cannot look to bonds for the required 7-8% returns with interest rates at 0%.  Rather, pension fund managers are chasing yield right at the top of the cycle.  In fact, I would argue – although Keith may not agree (so this is not the official Hedgeye view) – that the cycle has already topped. 


Jobless claims have given back all of the progress that was made from January 2010 onward.  GDP slowed sequentially and sell-side expectations for GDP growth are coming back down to earth.   What’s more, Fed-sponsored inflation and price instability is the ultimate kryptonite for the economy as we head into 2H11. 


Osama bin Laden’s death is a great victory for the U.S. Military and the American people, but it is important to keep that in context from a market perspective.  Many market pendants are trying to spin this as a positive for the consumer and thus the overall market.  While it may have been yesterday, for a time, consider the day-to-day realities facing Americans.  Sky high gas prices, food costs, clothing costs, healthcare costs and declining purchasing power are a constant reminder to consumers of the fragility of the economy. 


Even if Bin Laden’s death is to have a long-lasting impact on markets, it may be a negative one if any retaliation or escalation of extremist terrorist activity causes an increase in the global risk premium and the cost of oil.  In fact, a poll conducted yesterday indicated that, of just under 10,000 respondents, 72% of people responded “No” when asked if they felt safer now that U.S. forces have killed Bin Laden.


The Dirty Dancers out there are counting their blessings that the market, perched on a precipice, is still on two feet thanks to the maintenance of the status quo.  Quantitative Easing sponsors bubbles and I believe that while earnings have been strong of late, many markets are taking on more and more of the characteristics of a bubble.  Dr. Rich Peterson uses three main parameters to describe a bubble.  First, it’s a great story.  Secondly, it has unlimited upside and finally, it is confirmed by higher prices.  An asset class that is exhibiting these characteristics is difficult to resist.  Pension fund managers and hedge fund managers alike are following market momentum as their performance targets require them to.


All the while, great stories are being told as to why the market should keep going up.  Inflation is “transitory”.  Japan’s catastrophe is not a big deal.  Oil prices are still not high enough to impact the consumer, according to some.  At the end of the day, all of these stories are supportive of higher equity prices.


How will it end?  This debate begins on the topic of debt and deficits.  Hedgeye believes that a country’s currency is a prescient indicator of its underlying economic health and we view the USD crashing as a bearish indicator, just as it was in 2008.  Warren Buffett’s recent quote on the impossibility of a U.S. debt crisis of any kind “as long as we keep issuing our notes in our own currency” is based on several obvious assumptions that neither Mr. Buffett nor anyone in the investment or bureaucratic community can be certain of.  The unexpected is unexpected for a reason.  That the political make-up of Washington D.C. will allow the federal government to continue on this road or to involve itself with the States’ debt issues remains to be seen.  


Part of the timeline of the USD Currency Crash call we’ve been making has been this literal moving target on the debt ceiling limit.  It was only three weeks ago that Secretary Geithner was doing some Dirty Dancing of his own, drawing a firm line in the sand that May 16th was the debt ceiling debate’s date with destiny.  Now, after 1Q11 GDP growth sequentially slowed and the dollar maintained its downward trajectory, Geithner has decided to join the festivities by pushing out the deadline to July 8th as of a few weeks back and now to August 2nd as of yesterday. “Extend and pretend” is a phrase that comes to mind.


In my view, the bottom line is this; there are some terrific story-tellers out there.  Whether it’s today on Osama bin Laden’s death being bullish for confidence but not for oil, that the global currency market will tolerate this crashing of the global reserve currency, or Secretary Geithner procrastinating in the hope that the market will give the dollar a bid, story-tellers abound.     


Lastly, this weekend I went shopping with my daughter for her prom dress.  After trying on at least thirty different dresses, the first twenty-nine were not good enough, she found the right one.  She has assured me that there will be no Dirty Dancing at the prom.


Function in Disaster; finish in style,


Howard Penney


DIRTY DANCING - Chart of the Day


DIRTY DANCING - Virtual Portfolio

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