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Mega Dogma

“The century of megacities has already begun.”

-Lawrence C. Smith (“The World In 2050”)


I’m writing the Early Look from Los Angeles, California this morning. According to Lawrence Smith’s research in an excellent book I just finished reading, “The World In 2050”, Los Angeles-Long Beach-Santa Ana is the world’s 11th largest Mega City (a city with more than 10M people). Next to New York-Newark, which I’ll be on a plane to later this afternoon, that makes LA the only US city in the global top 19.


Most of you probably knew that.


What I didn’t know (from Lawrence’s data compilation in his chapter titled “A Tale of Teeming Cities”):

  1. The world had 2 megacities in 1950
  2. The world has 19 megacities now
  3. The world will have at least 27 megacities by 2025

“Of the eight new megacities anticipated over the next fifteen years, six are in Asia, two in Africa, and just one in Europe. Zero new megacities are anticipated for the Americas. Instead this massive urbanization is happening in some of our most populous countries: Bangladesh, China, India, Indonesia, Nigeria, and Pakistan.” (Smith, page 34)


Now there are obviously plenty long-term investment implications associated with a world that continues to move East. And I assume most of you probably know that too – but what we don’t know is what this balance of population-power is going to do to our Western Dogma of ZERO percent interest rates - and the associated pillaging of our savings (Asians and Muckers like to save).


Being on the road, I get into a lot of fascinating debates with some of the world’s sharpest investing minds. This has been the most intellectually fulfilling aspects of building Hedgeye. Meeting with people who run the buy-side is infinitely more interesting than having a sell-sider beg me for a bonus, bailout, or an II vote.


One of the current debates I have been getting into with buy-siders centers on how long America can sustain Japanese and Western European monetary policies?


Good question - with answers that continue to be tattooed with partisan politics (yes, being a Keynesian is partisan):

  1. US Monetary Policy – we have two views; what Le Bernank should have done (raised rates 6 months ago) and what he will do (nothing – he hasn’t raised rates since 2006 and he won’t start now). Our Q2 Macro Theme remains that the Fed will remain “Indefinitely Dovish” (no QG3 and no rate hikes), which is why we are long a UST Flattener (FLAT) and the long-bond (TLT).
  2. Western European Monetary Policy – we have one view; Les Eurocrats will remain socialist in their leanings even though they are pretending to be chicken hawks post their most recent rate hike (ECB raised rates before the Fed for the 1st time ever). Le Trichet will be gone by year-end and replaced by a left-leaning Italian (Mario Draghi). We think he could cut rates within his first 3-6 months.
  3. Eastern European and Asian Monetary Policy – they have one view; fight inflation with the weaponry allocated to the Fiat Fools. Russia shocked me early this week with another interest rate hike and obviously the Chinese and Australians have raised interest rates 6 times respectively since this short-cycle global “recovery” began.

More objective policy makers who use the blunt fiat instrument of interest rate decisions both ways (like yesteryear’s Bundesbank or today’s Reserve Bank of Australia), have learned over the years that there is one unique advantage to having the stones to raise interest rates – THEN YOU CAN CUT THEM!


Le Bernank et Les Japanonais… not so much. They have chosen to put their countries in de penalty box for many, many, time – deh will ultimately sit dere now… and feel shame…


Or maybe they won’t feel shame. Your run of the mill central planning groupthinker from the Keynesian Kingdom tends to think they’ve saved us from all of the problems that they’ve created with ZIRPS (ZERO interest rate policies). Have you ever seen an academic “economist” win his or her Nobel prize and have a change of heart?


Not so much…


“We are now on a trajectory to add nearly 40% more population by the year 2050, raising our number to around 9.2 billion. Who will we be in 2050? In that year, for every one hundred of our future children and grandchildren born, fifty-seven will open their eyes in Asia and twenty-two in Africa, and mostly in cities.” (Smith, page 35)


A few important words in Smith’s depiction of the Global Macro Markets in which interconnected factors will continue to collide: “our number”, “our future”, and “open their eyes”…


Do we really think that conflicted, compromised, and constrained monetary policies that serve 5-10% of Western populations’ compensation desires (never mind 1% of our world’s) are going to hold their dogmatic line?


That’s a mega question that I’d love to see Le Bernank host a Global Presser Conference on and answer in Chinese and Rusky, with a straight face. Particularly after this morning’s Jobless Stagflation report, which will continue to remind the world that the Greenspan-Bernanke era of cutting savers account returns to ZERO percent has equated to a decade of ZERO net jobs created in America.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $98.11-102.29, and 1, respectively.


Best of luck out there today and enjoy the weekend,



Keith R. McCullough
Chief Executive Officer


Mega Dogma - Chart of the Day


Mega Dogma - Virtual Portfolio


Notable news items and price action from the restaurant space as well as our fundamental view on select names.

  • CBRL was downgraded by BofA.
  • SBUX brand Seattle’s Best Coffee LLC and Borders have ended their licensing agreement after a judge ruled to allow the move.  Seattle’s Best Coffee had asked a U.S. bankruptcy court this week to reject a plan by Borders to end its licensing agreement with the coffee operator. 
  • Nespresso has raised coffee pod prices in the U.S. and Europe.
  • Next time you’re in China, head to KFC for the new dish being advertised as a “Taste of Ireland”: fried chicken smothered in Bailey’s liqueur.
  • PZZA gained on accelerating volume yesterday.
  • AFCE, DRI, CBRL, DIN, and RRGB declined on accelerating volume.



Howard Penney

Managing Director

Early Look

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Government Interference

This note was originally published at 8am on May 31, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Is it just or reasonable, that most voices against the main end of government should enslave the less number that would be free?”

-John Milton


John Milton was an influential 17th century poet who “wrote at a time of religious flux and political upheaval in England” (Wikipedia). His most famous writing was “Paradise Lost.” His most enduring life lesson was to challenge the Perceived Wisdoms of the State.


F.A. Hayek cites Milton’s aforementioned quote in “The Road To Serfdom” (page 210) in order to introduce Chapter 14, “Material Conditions And Ideal Ends.” Hayek goes on to remind us that: “Though it is natural that, as the world around us becomes more complex, our resistance grows against the forces which, without our understanding them, constantly interfere with individual hopes and plans…” (page 211).


In the face of Global Macro Markets waking up to further Government Interference in the free-market pricing of Greek risks this morning, considering Milton and Hayek’s thoughts on the matter seems just and reasonable to me.


BREAKING (#1 Headline on Bloomberg this morning): ”Greek Aid Package To Be Decided By June”


Ok. So what does that mean? Does it mean that the first 110 BILLION Euros ($158B US Dollars) allocated to the Greeks was a success? Does it mean that socialist bailout policies have gone global? Why don’t they throw another 30-60 BILLION at this sick puppy and see?


Obviously, this gargantuan global experiment in Fiat Fool policy has crossed its proverbial Rubicon – or I wouldn’t be in a position to ask such ridiculous questions. I do not think doing more of what isn’t working is a good idea. I do not think Greece’s structural economic implosion will end by June either.


So don’t get upset about it – capitalize on it.


Here are the 3 things that matter most in digesting this morning’s Global Macro Grind:

  1.  Greece’s ATG Stock Market Index: up +3.8% on “news”, but is still DOWN -25% since FEB and broken on both TRADE and TREND durations
  2. Euro: making its last charge to overcome its newly minted TRADE line of resistance at $1.44 (versus USD)
  3. USD: throwing a little fear into the US Currency Crash scenario again, but should hold Hedgeye’s critical $74.41 line of TRADE support

In other words, while it’s nice and tidy to tell ourselves stories that our long positions are all off to the races again, we’ll stop, take a breath, and remind ourselves that all this Government Interference in Europe means is that we’re going to have heightened market volatility in June.


Market volatility? Big time. As a reminder, our base long-term TAIL case is that that’s what Big Government Intervention does:

  1. It shortens economic cycles
  2. It amplifies market volatility

In order to capitalize on that thought, all you really have to do (for now) is stay ahead of the next big moves in the US Dollar Index. This morning, with the Euro up at $1.44, the USD Index is down at $74.59, if this US Dollar Index level holds, I’ll make LONG US Dollar (UUP) at least a 9% position in the Hedgeye Asset Allocation Model.


As you know, being long the US Dollar isn’t exactly what my Canadian craw should be considering – given my “long-term” view. And that’s exactly why I think the position makes so much more sense from this price. If the Europeans are actually serious about “ruling out restructurings”, what is going to be bearish for Euros in the intermediate-term is going to be bullish for Dollars.


Taking a step back, looking at last week’s US Market Macro Moves, the US Dollar has already set itself up to recover:

  1. US Dollar Index = DOWN -1% last week to $74.89 (down for the 2nd consecutive week)
  2. US Equities (SP500) = DOWN -0.2% last week (down for the 4th consecutive week)
  3. US Treasury Yields (30-year) = DOWN -1.4% last week to 4.24% (testing fresh YTD lows)

The summary risk management point embedded in currency, equity, and bond markets here in the United States of America is that Growth Is Slowing. This isn’t a new Hedgeye view. But it is becoming a consensus one.


Lower prices in US Equities had me cover our short position in the SP500 last Monday (time stamped @Hedgeye at $131.95 SPY on 5/23/11) and take up my US Equity exposure from ZERO percent last Monday to 3% this morning (I know – call me a horned up bull!).


The complexion of the Hedgeye Asset Allocation Model to kick off this week is now:

  1. Cash = 49% (down from a 61% last week – my peak Cash position for Q2)
  2. International Currencies = 24% (Chinese Yuan and US Dollar – CYB and UUP)
  3. Fixed Income = 18% (Long-Term Treasuries and US Treasury Flattener – TLT and FLAT)
  4. International Equities = 3% (Germany – EWG)
  5. US Equities = 3% (US Healthcare - XLV)
  6. Commodities = 3% (Gold – GLD)

Is it “just or reasonable” to have not lost money in the month of May? Is Government Interference the best path to long-term economic prosperity? These are simple questions for a complex macro market – and it’s our job, as your Risk Manager, to answer them in real-time.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1512-1543, $99.65-101.89, and 1323-1340, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Government Interference - Chart of the Day


Government Interference - Virtual Portfolio


The Macau Metro Monitor, June 3, 2011




The Director of the Maritime Administration, Susana Wong Soi Man, said the Macau govt will not renew the concession contract with Sociedade de Turismo e Diversões de Macau (STDM) regarding the control of the Outer Harbour Ferry Terminal after the contract expires on December 20.  Meanwhile, she also said that the fare increase applications submitted by four ferry operators--Far East Hydrofoil Company Limited, Hong Kong Macao Hydrofoil Company Limited, New World First Ferry Services Limited and Shun Tak-China Travel Ship Management Limited will be authorized but some may not be at the rates requested.



Starting June 15, Singapore's Casino Regulatory Authority (CRA) will have a new chief executive, Mr. Lau Peet Meng, who is the senior director of the Policy & Operations Division in the Ministry of Home Affairs and Assistant Commissioner of Police.

The current CEO of the CRA, Mr. T Raja Kumar, will return to the Singapore Police Force where he will be appointed Deputy Commissioner of Police (Policy).

SP500 Levels Refreshed: Dazed and Confused

Yesterday with Keith on the road, I wrote our intraday market note and highlighted that the stock market was broken on the intermediate duration based on our quantitative models.  As always, closing prices dominate and the SP500 closed below yesterday’s trend line of support, which was at 1,324.  Thus, until further notice, the SP500 is broken based on our quantitative models.


Today’s action is indicative of a dazed market that is having a difficult time finding real buyers, despite how “cheap” it is.  Interestingly, the market is flat despite a substantial sell off in the USD.  Currently, the EUR is up 1.17% versus the USD, while the U.S. dollar index is down over 0.60%.  The fact that U.S. equity markets are flat to down, despite this sizeable selloff in the USD market today, is a noteworthy observation, even if just for one day.


Over the past couple of years if there has been one tried and true correlation, it has been dollar down and most everything, particularly equities and commodities, up, with the 1-year r-squared between the SP500 and U.S. dollar index at 0.71.  We’ll have to wait and watch to determine whether this correlation is changing, but it is certainly confusing price action for those market operators that had been playing this correlation.


Undoubtedly part of the confusion in the markets today is born from Moody’s “update” on U.S. debt and deficit negotiation in which they stated:


“If the debt limit is raised and default avoided, the Aaa rating will be maintained.”


So, to paraphrase Moody’s, if the U.S. is allowed to issue more debt, that is deemed a positive and the Aaa credit rating will be maintained.  It’s shocking that the rating agencies have lost their credibility . . .


Below we’ve refreshed our current levels for the SP500. TRADE support is at 1,302 and TAIL support remains down at 1,214.  If the TRADE line holds, then maybe, just maybe, Morgan Stanley will get that Groupon IPO they just filed out the door, though we have our doubts if this market remains broken, as it is.


Daryl G. Jones

Managing Director


SP500 Levels Refreshed: Dazed and Confused - 1

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