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New Start

This note was originally published at 8am on June 13, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“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 $1525-1538, $98.60-100.45, and 1255-1298, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


New Start - Chart of the Day


New Start - Virtual Portfolio

Boston Harbor Smiles

“I'm just ready to move forward.”

-Tim Thomas


After watching a generational win for the Boston Bruins last night in Game 7 of the playoffs, I am sitting here in my hotel room watching a gorgeous sunrise in the Boston Harbor. It must be Lord Stanley’s way of smiling.


Was I smiling yesterday? Am I smiling this morning? Big time. We love winning here at Hedgeye. And we support anyone who has a transparent, accountable, and winning attitude. Our vision for American Optimism is as old as America itself.


Yesterday’s price action in markets did nothing but solidify our conviction in our Global Macro Themes:

  1. Growth Slowing (bearish on Wall Street/Washington US GDP Growth estimates) 
  2. Deflating The Inflation (bearish on housing, stocks, and commodities)
  3. Indefinitely Dovish (bullish on long-term Treasuries, UST Flattener, and Gold – TLT, FLAT, and GLD)

We’re not celebrating the other team’s losses - someone always has to lose (Goldman is bullish on commodities; JP Morgan is bullish on Equities, etc). We are championing a winning Risk Management Process that’s saving our clients from losing money in 2011.


Winning starts with not losing. It’s pretty difficult to lose if you don’t get scored on. Swedish offensive skills of the Sedin Sisters last night aside, defense won The Stanley Cup. Bruins goalie Tim Thomas was as focused as any professional athlete I have seen in a long time.


Focus, discipline, confidence – you either have it, or you don’t.


I certainly don’t have it all of the time. But the challenge isn’t to overcome my emotional capacity. The goal is to build a team and process that can pick me up when I am down. And Lord Stanley knows I’ve had my fair share of downs in life.


“I’m just ready to move forward.”


Yesterday’s wins are over with. Today we have to deal with today. It’s time to play the game that’s in front of us.


From a risk management process perspective, before we move forward, we always look back. We need to absorb what’s been priced into market expectations so that we can handicap what the probabilities are for prices to change.


From an immediate-term TRADE perspective, oversold lines in Global Equities are now as follows:

  1. SP500 = 1261
  2. Nadaq = 2613
  3. Russell2000 = 771
  4. Japan’s Nikkei = 9367
  5. China’s Shanghai Composite = 2661
  6. India’s Sensex = 18,066
  7. UK’s FTSE = 5662
  8. Germany’s DAX = 7011
  9. Spain’s IBEX = 9811
  10. Brazil’s Bovespa = 61,109

From an immediate-term TRADE perspective, oversold lines in Commodities are:

  1. WTIC Oil = $94.70
  2. Copper = $4.07
  3. Gold = $1520

From an immediate-term TRADE perspective, oversold line in US Treasury Yields are:

  1. 2-year UST Yield = 0.36%
  2. 10-year UST Yield = 2.91%
  3. 30-year UST Yield = 4.15%

The corollary to oversold bond yields, of course, is overbought bond prices – so, while it’s popular for US stock market centric pundits to trash anyone who isn’t Perma-Bullish on “stocks for the long run”, we’re quite happy that they wake up every morning thinking that way. There’s always risk to be managed somewhere. Being bullish on bonds yesterday was a big win.


There are winners and whiners in this profession. We subscribe to the principles of the former. Being Perma-Anything generally doesn’t work. In the last few years I have written a few Early Look notes about Bears and Bruins:

  1. Bullish Bruins” = April 17, 2009  (when we went bullish on US Equities – bought SBUX April 21, 2009)
  2. Ragingly Bullish Bears” = May 5, 2011 (when we pressed the short case for Growth Slowing)

What’s interesting about the timing of the “Ragingly Bullish Bear” note is how quickly sentiment has changed. In that May 5, 2011 missive I highlighted the following sentiment setup in the II Bullish-to-Bearish survey:

  1. Bulls up 100 basis points week-over-week to 55%
  2. Bears down 200 basis week-over-week to 16.5%
  3. The Spread (Bulls minus Bears) widened by 150 basis points week-over-week to +38.2% for the Bulls

Again, relative to itself, there are a few critical risk management callouts in this long-dated survey to consider:

  1. Bulls are not ragingly bullish
  2. Bears are not allowed to be bearish
  3. The Spread between Bulls and Bears is only 200-300 basis points from its all-time wides (all-time is a long time)

“All-time “wides” is risk management locker-room speak at Hedgeye for something you don’t want to mess with – kind of like being a man dressed in orange last night drinking a smoothie with your i-pod on in the bowl of the Boston Garden – it’s just a bad position to be long of.”


Back to today…


The only worse position to be “long of” was probably a Blue/Green Canucks jersey at a bar in Boston last night. This morning, the good news for Perma-Bulls (US stocks) is that this morning the II Bullish-to-Bearish Spread has narrowed to +11% for the Bulls (37% of people now admit to being Bullish and 26% being Bearish).


That’s a huge narrowing of an exceptionally wide spread. But my and the Boston Harbor’s Smiles are still beaming.

My immediate-term support and resistance ranges for the Gold, Oil, and the SP500 are now $1, $94.70-99.58, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Boston Harbor Smiles - Chart of the Day


Boston Harbor Smiles - Virtual Portfolio

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


TODAY’S S&P 500 SET-UP - June 16, 2011


Our top Global Macro Themes remain:

1.       Growth Slowing

2.       Deflating The Inflation (housing, equities, commodities)

3.       Indefinitely Dovish (bullish on UST Bonds)


While Oil, Copper, SP500 are immediate-term TRADE oversold this morning, it's important to recognize that yesterday only heightened the probability that these will all remain bearish intermediate-term TRENDs. Consensus isn't quite there yet.  As we look at today’s set up for the S&P 500, the range is 20 points or -0.35% downside to 1261 and 1.23% upside to 1281.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: -2098 (-4093)  
  • VOLUME: NYSE 1068.78 (+16.76%)
  • VIX:  21.32 +16.76% YTD PERFORMANCE: +20.11%
  • SPX PUT/CALL RATIO: 2.86 from 1.50 (+89.90%)



  • TED SPREAD: 19.92
  • 3-MONTH T-BILL YIELD: 0.05%
  • 10-Year: 2.98 from 3.11
  • YIELD CURVE: 2.60 from 2.66 



  • 8:30 a.m.: Current account balance, est. ($-130.0b), prior ($113.3b)
  • 8:30 a.m.: Net export sales
  • 8:30 a.m.: Initial jobless claims, est. 420k, prior 427k
  • 8:30 a.m.: Housing starts, est. 545k (up 4.2%), prior 523k
  • 8:30 a.m.: Building permits, est. 557k (down 1.1%)
  • 9:45 a.m.: Bloomberg Consumer Comfort, prior (-45.9)
  • 10 a.m.: Philadelphia Fed, est. 7.0, prior 3.9
  • 10 a.m.: Freddie Mac 30-yr mortgage
  • 10 a.m.: Fed’s Tarullo testifies on regulatory reform
  • 10:30 a.m.: EIA natural gas storage, est. 69
  • 8 p.m.: ECB’s Trichet speaks in NY


  • Paulson Suffers Sizable Losses, One Fund Is Down 19.65% - WIRES
  • Greek PM Papandreou to reshuffle cabinet today and seek a confidence vote, battling to control a shrinking majority and pass austerity measures demanded by international lenders
  • Capital One bidding for HSBC’s U.S. credit card unit: WSJ
  • Borders Group may have deal with lenders and creditors to avoid closing as many as 51 stores; canceled auction set for today
  • U.S. banks must be willing to raise capital to guard against a potential financial crisis, FDIC Chairman Sheila Bair will tell lawmakers at House Financial Services meeting today



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Copper Falls Most in a Week on Concern Greece’s Debt Crisis May Cut Demand
  • Oil Trades Near Four-Month Low on Concern Europe Debt Crisis Is Worsening
  • Lower U.S. Cattle Sales Squeezing Beef Supply Means More Costs for Packers
  • Gold Falls as Stronger Dollar Erodes Demand for an Alternative Investment
  • Wheat Drops for a Fourth Day as European Rainfall Eases Production Concern
  • Cocoa Falls Most in Two Weeks in London on African Supplies; Sugar Drops
  • Food-Safety Fears Grow in Japan as Radiation Testing Engenders Skepticism
  • Lead Output in China to Extend Drop as Battery Makers Shut After Poisoning
  • Tractor Sales in India Surge to Record as Commodity Boom Drives Production
  • Record Brent Crude Premium to Shrink on North Sea Oil Flow: Energy Markets
  • Gold May Extend Drop on Seasonality, Commerzbank Says: Technical Analysis
  • No More Major Weather Threats Seen for Commodities in ‘11, Forecaster Says
  • Lenzing $875 Million Share Sale Priced at Bottom of Range; Stock Plummets



THE HEDGEYE DAILY OUTLOOK - daily currency view




  • EUROPE: gong show; all of my TRADE and TREND durations have gone bearish (including Germany); Greece down -28.5% since Feb.  We are short Spain.
  • UK May Retail Sales +0.2% y/y vs consensus +1.5% and prior revised +2.4% from +2.3%

THE HEDGEYE DAILY OUTLOOK - euro performance




  • ASIA: just a mess; China down -1.5% to fresh YTD lows; Japan down another -1.7% (were short) to -8% YTD; Korea -1.9%, Indonesia -1.4% 

THE HEDGEYE DAILY OUTLOOK - asia performance









Howard Penney

Managing Director

SP500 Levels Refreshed: Know When to Hold Them, Know When to Fold Them

The Thunder Bay Bear, our CEO Keith McCullough, is in Boston visiting some of Hedgeye’s top subscribers and discussing our macro themes, but primarily focusing on the outlook for equities in a continued Jobless Stagflation scenario.  Simply put, slower economic growth inhibits revenue growth and input price inflation squeezes margins, and the outcome is decelerating earnings growth.  Slowing earnings growth leads to lower multiples for equities.  It’s that simple.


Obviously along with the potential for a European sovereign debt pandemic today, this is what the stock and bonds markets have already been pricing in for the last six weeks.  As of intraday today, the SP500 is up ~+0.50% for the year and has corrected ~-7.2% from its peak on April 29th. Interestingly, though, the SP500 is still up more than 19% over the last 12-months.  The bond markets tell us a similar story as 10-year yields, as a proxy, are just more than 20% off their February 2011 highs of 3.6%. 


While the growth crowd is finding some solace in the Pandora IPO today, personally, watching Pandora trade today reminds me of the old Kenny Rogers song, “The Gambler”.  As the song goes:


“You got to know when to hold 'em, know when to fold 'em,

Know when to walk away, know when to run.”


The Thunder Bay Bear just called in between meetings and his message was clear, this is a short covering opportunity and nothing more.  The equity markets remain broken in our models with the key level of support, as outlined in the chart below, down at 1,223.  If we violate that level, make sure you “know where to run.”  In the meantime, I’ll make sure Keith tones down his growling for the rest of the afternoon.


As always, if you want to chat with Keith, myself, or the team, email us at and we can hop on the phone.  Risk is always on.


Daryl G. Jones
Director of Research


SP500 Levels Refreshed: Know When to Hold Them, Know When to Fold Them - DJ MACRO

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 80.46%
  • SHORT SIGNALS 78.35%