World Movers

This note was originally published at 8am on June 08, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Whatever we are, it’s we who move the world, and it’s we who’ll pull it through.”

-Hank Rearden (Atlas Shrugged)


If that isn’t the quote of a self-made man, I don’t know what is. In Atlas Shrugged, Rearden Metal personified capitalism. Sometimes it’s harsh. Sometimes you win. Sometimes you lose. But you are always going to be held accountable to your own decision making.


Le Bernank showed that he stands for none of that last night in Atlanta. Since he’s never run a company, hired/fired employees, or assumed the responsibility of putting his own capital at risk – this should not surprise you. He is a Keynesian Central Planner.


Whether you are an Ayn Rand, Ben Bernanke, or Jaime Dimon fan is of no particular concern to me when I wake up to write this note to you every morning. I am concerned with making money so that I can confidently and gainfully employ a team of professionals that helps you manage risk.


If there are more than a few lines in Ayn Rand’s 1168 pages of Atlas Shrugged that resonate with me, that doesn’t mean I am an Ayn Rand lover inasmuch as I don’t have to love anything in this good life more than my wife and family. I like to read things that I disagree with. I like things that make me think.


I am a Risk Manager – and, unlike Le Bernank, that means I am tasked with considering multiple ideas across multiple risk management scenarios. Accepting anyone’s dogma in full, including the Holy Bible’s, lacks the intellectual honesty to question. I am tasked with not losing you money. That includes accepting when I am wrong. The goal is to be right.


What’s been right about cutting interest rates to ZERO percent and scaring the living daylights out of Americans in order to market the fear-mongering message? Has socializing losses made the capitalists in this country less or more confident in hiring? What’s the difference between jacking up short-term liquidity and eroding long-term demand?


These are critical questions that the Chairman of America’s Unaccountable Central Planning Board does not have an answer to. Last night he called GROWTH “frustratingly slow” and INFLATION “transitory.” In response, JP Morgan’s respected CEO, Jaime Dimon, asked Le Bernank, “do you have fear like I do?”


The context of Dimon’s question was also critical. He prefaced the question about fear by asking Bernanke if he thinks in “10 years someone will be writing a book about” how all of this Big Government Intervention was what perpetuated the slowdown itself. Atlas Shrugged is a 54 year-old fictional book. Jaime, get the paperback.


Back to the Global Macro Grind


Yesterday, when the US stock market was up intraday, I cut my US Equity exposure in the Hedgeye Asset Allocation Model in half, selling down our long (and wrong) position in US Healthcare (XLV) from 6% to 3%.


If the US stock market closes down again today, it will be down for 6 consecutive days and 6 consecutive weeks. If that’s Le Bernank’s definition of success, using a massive amount of financial and societal leverage, I’d hate to see what losing looks like.


Why do I continue to sell strength in equity and commodity market exposures?

  1.  The Market – real-time prices don’t lie; Keynesians do.
  2. The Data – I have yet to see sequential improvement in any of the high frequency data that we track
  3. The Fed – and Indefinitely Dovish Fed that can’t hike (or cut) has been a life preserver for Gold and UST Bonds

Away from the US, here’s The Market’s message:

  1. China (the world’s 2nd largest economy) remains bearish TRADE and TREND with the Shanghai Composite down -2.1% YTD
  2. Japan (the world’s 3rd largest economy) remains bearish TRADE and TREND with the Nikkei down -7.6% YTD
  3. Germany (the world’s 4th largest economy) just moved to bearish TRADE and TREND this morning with the DAX down a full -1%

In terms of The Data:

  1. South Korean GDP Growth slowed sequentially to +4.2% in Q1 (better than US, Japanese, or W. European Growth, but slowing)
  2. Brazilian Inflation (CPI) rose sequentially to +6.6% year-over-year in May vs +6.5% in April
  3. Philippines Inflation (CPI) rose sequentially to +4.5% year-over-year in May – a new YTD high

But The Fed (and I couldn’t make this up if I tried):

  1. Expects US employment to improve in the coming months
  2. Expects US Growth to re-accelerate
  3. Expects US Inflation to remain “transitory”

PROBLEM: The Market and The Data completely disagree with The Fed (as they have for the last 3-6 months).


That’s why Ben Bernanke having a smirk on his face when a Market/Data centric Risk Manager like Jaime Dimon was asking him THE question (what if your Keynesian Dogma is wrong?), made every red-white-and-blue capitalist in this country want to puke.


This is the beggar/bailout central planning that we ordered up folks. “Whatever we are”, it’s only we who can stop doing what we are doing to this country – so that we can start to pull it through.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $98.40-100.79, $1535-1555, and 1275-1313, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


World Movers - Chart of the Day


World Movers - Virtual Portfolio


TODAY’S S&P 500 SET-UP - June 13, 2011


Roll out the bearish on growth consensus – it’s career risk management time for the bulls and time to get the perma-bears back in the media (Roubini top story on Bloomberg this morn calling it the “Perfect Storm” – and Barrons Mid-Year Roundtable is actually funny when you read what their consensus was (side by side) 6 months ago).

Consensus, however, can remain a constant until its fully priced in:

  1. ASIAN EQUITIES: no bid this morning, with Japan down another -0.7% to -7.6% YTD on a nasty machinery order print (-3.3%)
  2. EUROPEAN EQUITIES: no bid as Greek stocks and bonds continue to crash (Athex Index down -27% since mid-Feb)
  3. COMMODITIES: no bid for Copper in particular (down -0.8% this morn) as base metals (nickel smoked) and silver (I guess that “industrial demand” component are seeing Growth Slowing getting priced in.


As we look at today’s set up for the S&P 500, the range is 43 points or -1.26% downside to 1255 and 2.13% upside to 1298.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: -1920 (-2755)  
  • VOLUME: NYSE 1019.30 (+12.07%)
  • VIX:  18.86 +6.13% YTD PERFORMANCE: +6.25%
  • SPX PUT/CALL RATIO: 1.77 from 1.43 (+24.46%)



  • TED SPREAD: 21.29
  • 3-MONTH T-BILL YIELD: 0.05%
  • 10-Year: 2,99 from 3.01
  • YIELD CURVE: 2.58 from 2.58 



  • 9 a.m.: ECB’s Trichet speaks at London School of Economics
  • 9:30 a.m.: Fed’s Lacker speaks on manufacturing in Virginia
  • 11 a.m.: Export inspections, corn, wheat, soybeans
  • 11:30 a.m.: U.S. to sell $27b 3-mos. bills, $24b 6-mo. bills
  • 4 p.m.: Crop conditions
  • 7 p.m.: Fed’s Fisher speaks in Dallas 


  • Citi defends hacking disclosure delay - WSJ
  • US banks to cut Treasury use - FT
  • Best Buy may postpone its European expansion plans - FT



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Nickel Plunging Into Bear Market as Expanding Glut Outstrips Record Demand
  • Aluminum Bookings From LME’s Asian Warehouses Jump as U.S. Fees Hit Record
  • Oil Declines for a Second Day on Concern Over Economic Growth, Share Slump
  • Palm Oil Has Longest Losing Run in Two Years on Malaysian Supply Outlook
  • China’s Copper Imports ‘Low’ Last Month as Stockpiles Drop, Goldman Says
  • Wheat Rises as Rains May be Too Late to Prevent U.S., France Yield Losses
  • Rubber Drops to Two-Week Low as Chinese Demand May Ease on Slowing Economy
  • Funds Boost Bullish Agriculture Bets for Third Week as Crops May Decline
  • George Soros Urges G20 to Demand Mining Transparency, Le Figaro Reports
  • Tanzania Plans to Discuss Proposed Super Tax With Miners, Minister Says
  • Roubini Says a ‘Perfect Storm’ May Converge on the Global Economy in 2013




THE HEDGEYE DAILY OUTLOOK - daily currency view




  • EUROPE: no bid; Greece continues to crash (down -27% since FEB hope highs); FTSE/DAX/CAC all breaking Hedgeye intermediate term TREND lines


THE HEDGEYE DAILY OUTLOOK - euro performance




  • A China banks issue CNY551.6B of new loans in May vs cons CNY650B - MarketWatch; M2 at end of May +15.1% y/y vs cons +15.5%.
  • ASIA: no bid; China makes new YTD lows and Japan down another -0.7% (were short) as rest of Asia breaks down (Taiwan -1.4%, Indonesia -1.0%)


THE HEDGEYE DAILY OUTLOOK - asia performance







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New Start

“If we are to build a better world, we must have the courage to make a new start.”

-F.A. Hayek


Last week I received a tremendous amount of positive feedback on my note titled “American Optimism.” So I’d like to start this week off by thanking you for inspiring me. I am very bullish on the prospects of building a better world – I am very bullish on change.


Interestingly, but not surprisingly, Hayek wrote the aforementioned quote in the concluding chapter of “The Road To Serfdom” (page 237) in 1944. His summary thought stood in the face of British-style Keynesianism that had dominated the economic theory of his time.


What was Keynes’ response to Hayek’s conclusions?


Bruce Caldwell (who edited the most recent edition of “The Road To Serfdom”) captures the moment best in his Introduction:


“John Maynard Keynes read the book on the way to the Bretton Woods conference, and delighted Hayek when he wrote him that it was “a grand book” and that “morally and philosophically I find myself in agreement with the whole of it; and not only in agreement with it, but in a deeply moved agreement.” (Letter, John Maynard Keyens to Hayek, June 28, 1944)


Alrighty then – we have a consensus!


Last week, the most bullish week-over-week moves in all of Global Macro came right where I think the prospects for change are going to be measured – in the real-time price of the US Dollar Index.


I’m not so concerned about US stocks being down for 6 consecutive weeks when it’s crystal clear that Growth Slows As Inflation Accelerates. What I need to see change (to get bullish on stocks) is a Deflating of The Inflation (Hedgeye Q2 Macro Theme).


With the US Dollar Index UP a full +2% last week to $75.60, here’s what happened to things priced in US Dollars:

  1. US Stocks = DOWN -2.3%
  2. WTI Crude Oil = DOWN -0.9%
  3. Copper = DOWN -1.4%

Le Mucker’s SERIES 66 TEST QUESTION: Which of those 3 things matters most to the US Economy?

  1. La Bernank says stocks
  2. Le Consumer says gas prices
  3. Le Industrialist says cost pressures

I’ll go with #2 and #3.


If you want a New Start in this country you have to see a Deflating of The Inflation. Otherwise you’ll continue to see a slowdown in 70% of US GDP (Consumption) and margin compression at the companies who are supposed to employ these consumers.


The Stagflation is not hard to understand (Growth Slowing below the rate of Inflation). It just isn’t palatable for the Keynesian Kingdom to accept responsibility for it. That would be called holding themselves accountable.


Until I start seeing data that implies that both of these things are occurring at the same time:

  1. Growth is slowing at a decelerating rate
  2. Inflation is accelerating at a decelerating rate

Why would I stop protecting my family’s hard-earned wealth?


Being in Cash in 2011 has obviously beaten 48 of the country stock markets in the Hedgeye Global Macro Stock Market Index for the YTD (there are 66 country indices in our Index). And, depending on where you bought them (or what index you are in – both the Nasdaq and Russell 2000 are DOWN for 2011 YTD), the +1% YTD return in the SP500 has been slim pickings!


Here’s how the Hedgeye Asset Allocation Model was positioned going into and out of Friday’s US equity market swoon:

  1. Cash = 52% (UP +3% week-over-week after selling ½ our US Equity Allocation on mid-week strength)
  2. International Currencies = 21% (Chinese Yuan and US Dollar – CYB and UUP)
  3. Fixed Income = 18% (Long-term UST Bonds and US Treasury Flattener – TLT and FLAT)
  4. Commodities = 3% (Gold – GLD)
  5. US Equities = 3% (US Healthcare – XLV)
  6. International Equities = 3% (Germany – EWG)

And no, being in 52% Cash wasn’t enough!


On a week-over-week basis, I lost money in 4 of 6 of these asset allocation positions:

  1. US Dollar (UUP) = +1.5%
  2. Long-term Treasuries (TLT) = +0.8%
  3. Chinese Yuan (CYB) = -0.4%
  4. Gold (GLD) = -0.7%
  5. Healthcare (XLV) = -1.1%
  6. Germany (EWG) = -2.7%

It’s a good thing I have shorts – and there’s plenty to be optimistic about on that front. There’s always risk to be managed somewhere.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $98.60-100.45, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


New Start - Chart of the Day


New Start - Virtual Portfolio

The Week Ahead

The Economic Data calendar for the week of the 13th of June through the 17th 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 - ca1

The Week Ahead - ca2

Gravity Weighs on Korea

Conclusion: We see more selling pressure in the Kospi’s intermediate-term future, as the balance of earnings risk is skewed to the downside alongside the gravitational pull of mean reversion. Furthermore, the Bank of Korea will likely be more hawkish than is currently anticipated by consensus.


Today, the market didn’t like the Bank of Korea’s vigilance regarding its “war on inflation” (as proclaimed by president Lee Myung Bak in January). The latest +25bps move is the third rate hike YTD and brings the country’s real benchmark interest rate to -0.85%. While the recent slope of real rates is a noteworthy positive, we can’t help but callout the fact that Korean real rates (adjusted for inflation) have been in negative territory since November ’09. And while negative real rates have indeed been stimulative to Korean economic growth over the past couple of years, we can’t help but callout their negative impact on the future slope of growth in Korea – also negative.


Gravity Weighs on Korea - 1


Both Korea’s equity and bond market agree with our stance; the Kospi Index is now broken on an immediate-term TRADE and intermediate-term TREND perspective and Korea’s sovereign bond 10Y-2Y spread has narrowed -49bps YTD:


Gravity Weighs on Korea - 2


Gravity Weighs on Korea - 3


It seems that Global Macro is akin to real life in the sense that one cannot get something for nothing. What we mean by this is that Korea’s loose monetary policy has been bullish for domestic inflation readings and we expect Korea’s CPI to continue to accelerate on a YoY basis over the next 3-6 months – particularly its core inflation index. This will force the Bank of Korea to continue to tighten monetary policy – a direct blow to economic growth in the ~70% consumption-based economy (~55% Household; ~15% Government). Moreover, higher interest rates will weigh on private consumption going forward as servicing costs for an all-time high household debt burden of 801.4 trillion won ($740 billion; equivalent to 155.4% of disposable income) creep up.


Our view that the Bank of Korea will continue to remain hawkish over the intermediate term is divergent with current consensus expectations of only one more rate hike in 2011 to 3.5% (Bloomberg). We like being contrarian here, as the Bank of Korea has recently signaled that they’re on our side of the fence insomuch that they will look past slowing growth to continue on its path of interest rate normalization:


“The committee will conduct monetary policy with a greater emphasis on ensuring that the basis for price stability is firmly anchored while the economy continues its sound growth… Despite the temporary sluggishness of domestic demand, the economy has maintained its underlying upward trend.”

-Bank of Korea Governor Kim Choong Soo; June 10, 2011


Soo also said on May 18th that the Bank of Korea will continue to boost borrowing costs at its own pace and that the nation needs to be wary of an inflation spiral.


“Inflation spiral” and “sluggishness of domestic demand” isn’t exactly what investors in Korean equities want to be hearing out of the Korean central bank chief following a 26-month doubling of the Kospi Index. While the former is much less probable at the current juncture, that doesn’t change the fact that the latter is a real and present danger to Korean corporate earnings. As such, we see more selling pressure in the Kospi’s intermediate-term future. While Korea has been a darling over the last year (up +23.9% YoY), the balance of earnings risk is skewed to the downside alongside the gravitational pull of mean reversion.


Darius Dale


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.70%