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


As we look at today’s set up for the S&P 500, the range is 33 points or -1.83% downside to 1141 and 1.01% upside to 1174.




On our intermediate-term TREND duration, 8 of 9 Sectors remain broken/bearish. TREND trumps TRADE.  The only sector of 9 that’s bullish TRADE and TREND = Utilities (XLU). We’re long Utilities and Healthcare (XLV) which is 1 of 3 Sectors that is bullish on our immediate-term TRADE duration (Consumer Staples, XLP, is the 3rd).




THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: -219 (+1907)  
  • VOLUME: NYSE 1087.88 (-10.98%)
  • VIX:  38.52 +12.14% YTD PERFORMANCE: +117.01%
  • SPX PUT/CALL RATIO: 2.20 from 1.80 +22.48%



FIXED INCOME: 10yr UST yields held the 1.86% support line yesterday; bouncing big this morning

  • TED SPREAD: 33.78
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 1.94 from 1.93    
  • YIELD CURVE: 1.73 from 1.76

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30 a.m.: NFIB Aug. small business optimism
  • 8:30 a.m.: Aug. import price index, est. M/m (-0.8%), prior (0.3%)
  • 10 a.m.: IBD/TIPP Sept. economic optimism, est. 38.0, prior 35.8
  • 11:30 a.m.: U.S. to sell $27b 4-week bills 
  • 1 p.m.: U.S. to sell $13b 30-year bonds reopening
  • 2 p.m.: Aug. budget statement, est. (-$132.0b)
  • 4:30 p.m.: API inventories


  • World oil demand forecast cut by IEA on concerns about health of global economy
  • Merkel rejects Greek default, defends euro-area integrity
  • President Obama gives jobs speech in Columbus, Ohio, 2:15 p.m.



OIL – alongside Copper and 10yr UST yields arresting their declines this morning, WTIC oil holding an important TRADE line of support ($86.03) is an important growth stabilizer in Global Macro this morning. This tells me we aren’t going to the dark ages of depression, yet.  Global Macro remains as interconnected across asset classes as ever


THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Thailand May Cede No. 1 Rice Ranking to Raise Rural Incomes
  • Gold May Fall a Third Day on Sales to Cover Losses in Equities
  • Oil Gains a Second Day on Signs U.S. Crude Stockpiles May Drop
  • Australia Seen Shipping Record Wheat Cargoes on Bumper Harvest
  • China Builds Lead in Afghan Commodities, Adds Oil to Copper
  • Steel Dynamics Cuts Forecast as Flat-Rolled Margins Get Squeezed
  • Copper Climbs First Day in Three on Easing European Debt Concern
  • Corn Falls as U.S. Cuts Demand Outlook, Crop Conditions Improve
  • Wheat to Stay Near Parity With Corn as Soy Climbs, Goldman Says
  • Oil Trades Near Four-Day Low as IEA Reduces Demand Estimates



THE HEDGEYE DAILY OUTLOOK - daily currency view




  • GERMANY – with the DAX having moved into full crash/capitulation mode in the last 3 days of trading, it shouldn’t surprise anyone to see German stocks move 2% in 20 minutes to go green on the day. With political career risk dominating the craws of every Eurocrat, expect plenty more rumors than the “China buys Italy” thing we saw yesterday. Most of the rumors are lies, but deal with them.


THE HEDGEYE DAILY OUTLOOK - euro performance




  • ASIA: mixed on light volume as volatility in Asian Equities is calming (bullish); Australia/Japan/Malaysia = up; China/Thai/Singapore down

THE HEDGEYE DAILY OUTLOOK - asia performance








Howard Penney

Managing Director

Great Misunderstandings

“To be great is to be misunderstood.”

-Ralph Waldo Emerson


Great short sellers in this game have one thing in common – they know when to cover.


I was taught how to sell short by doing. That’s not to say I’m the greatest short seller since the Count of Monte Cristo either. That’s simply to say that since 1999 I have had a lot of reps.


Like in any other profession, the more you do of something the more you have an opportunity to make mistakes. It’s your mistakes that make you evolve as a Risk Manager – that’s if you choose to let them teach you.


There have been plenty of opportunities for people in this game to evolve since 2008. Evidently, some have chosen not to. According to S&P data, only 167 of over 19,000 “recommendations” by Old Wall Street’s analysts this year have been “sell.” Professionally embarrassing.


We don’t want to embarrass the competition inasmuch as we want to challenge them. We wake up early every morning with fire in our bellies and a passion to be the change we want to see in this business.


Obviously on Washington’s Wall Street there hasn’t been a lot of that going on for the last 9 months – that’s why we do what we do. We want America to start winning again. Every losing streak ends with a win. It’s time to embrace winners.


Back to Short Covering


I’ve written 2 intraday notes in Q3 of 2011 titled “Short Covering Opportunity” (one on August 8th and one yesterday). Yesterday’s call to cover shorts generated as much questioning and feedback as any time I think I have ever made a call to cover shorts since the thralls of early 2009. This is an important sentiment indicator.


Sentiment is one of the hardest things in this game to quantify. I was on multiple client calls yesterday where, ultimately, what very astute investors wanted to know was what I was “hearing” from other clients. My answer to that question is that there is no answer that is of quantifiable relevance. What any of us are “feeling” or “hearing” about markets subjects our performance to Great Misunderstandings.


As I wrote in yesterday’s Early Look, stock market fund “outflows” and “sentiment” will be the final stage for the 2011 Equities bears to navigate. What I meant by that is those who have been too bullish in 2011 will have redemptions (outflows) and forced to sell at immediate-term bottoms. All the while, quantifiable sentiment indicators will show signals of immediate-term TRADE capitulation.


Here are 3 of those:

  1. II Sentiment Survey Spread (Bulls Minus Bears) = dropped to almost a dead heat in the last week (39% Bulls, 38% Bears) and could easily move to the bearish side (more institutional investors admitting they are bearish at the bottom than bullish – it’s called career risk management into year-end) this week and next.
  2. Volatility (VIX) = immediate-term TRADE overbought yesterday at 43 and is now making a lower-high versus the August 8th Short Covering Opportunity high of VIX 48. Unless you think 2008 starts happening this week (it could!), lower-highs are what they are (bearish on the margin for volatility) and I shorted fear yesterday via a short position in the  VXX.
  3. US Stocks vs US Treasury Bonds = flagged one of their widest performance chasing divergences of the year yesterday (stocks down, bonds up) and, critically, both the UST 10-year yield hit my immediate-term downside target of 1.87% intraday at the same time that the US stock market (SP500) tested lower-lows (then stocks recovered to close at a significantly higher-low).

“Significant” is as significant does. If you are using the wrong models and/or sources to help you navigate this beast of Keynesian Economics gone bad, we’d agree that most bulge bracket sell-side desks aren’t going to be helpful at this stage of the game (unless they are making calls to fade their economist/strategist calls as they “cut estimates” at the bottom).


Remember, bottoms are processes, not points. So you need a rigorous and repeatable Global Macro risk management model that has worked in both 2008 and 2011 to know when to cover. Making the turns “off the lows” matters.


Lastly, after you take advantage of Short Covering Opportunities, you need to quickly, but patiently, get yourself back into position on defense. There are no rules against re-shorting things that you covered lower. Neither are there any Keynesian laws (yet) that prevent you from thinking quickly as you patiently pick your spots.


In Steven Pressfield’s “Gates Of FireAn Epic Novel of The Battle of Thermopylae” (I read it on the beach last week to get me fired up for Q4’s Global Macro battle), Pressfield explains the “role of an officer” in Spartan war as follows:


“He was just a man doing his job. A job whose primary attribute was self-restraint and self-composure, not for his own sake, but for those whom he led by his example.” (“Gates Of Fire, page 112)


To be great in this globally interconnected game takes passion, patience, and time. The greatest of misunderstandings is how quickly we need to evolve the risk management process before it becomes our Waterloo.


My immediate-term support and resistance ranges for Gold, Oil, Germany’s DAX, and the SP500 are now $1, $86.03-90.51, 4, and 1141-1174, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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The Macau Metro Monitor, September 13, 2011




In an official statement, DSSOPT (Land, Public Works and Transport Bureau) said Wynn's request for a land concession was currently being reviewed and the Administration has yet to make a final decision. DSSOPT added that the procedures concerning this request have yet to be fully completed.


Within 15 days of the land grant being published in the govt gazette, Wynn Macau will also pay US$50MM to a Macau company, Tien Chiao Entertainment and Investment, in exchange for it relinquishing rights to the Cotai site, under an agreement disclosed in Wynn Macau's 2009 listing prospectus.





Weekly Latin America Risk Monitor


At Hedgeye, we firmly believe risk is always “on”. Latin American financial markets would certainly attest to this contrarian mantra.



Last week was a rough week for Latin American equity investors, with the region’s indices closing down -2.5% wk/wk on average and falling -3% wk/wk on a median basis. Argentina led the way to the downside, plunging -4.1% wk/wk, while Colombia’s -0.3% wk/wk decline outperformed amid a sea of red.


Falling expectations for further monetary tightening and outright speculation for monetary loosening continues to weigh on Latin American FX markets, with our least favorite – the Mexican peso – leading the way to downside (-2.2% wk/wk vs. the USD). Interest rates across Latin America’s sovereign debt markets continued their recent trend of declines – particularly on the short end of the curve, where monetary policy tends to have a more forceful impact. Interestingly, rates on the long-end of Mexico’s sovereign debt curve backed up fairly meaningfully wk/wk. The -3.8% wk/wk decline in Mexico’s IPC Index and the central bank’s own bearish commentary do not suggest that this widening of Mexico’s yield curve should be interpreted as heightened growth expectations, however.


Latin American sovereign CDS broadly widened wk/wk, with Colombia and Peru leading the way on a percentage basis (up +12.9% and +11.4%, respectively). The recent broad-based trend of higher-highs and higher-lows remains intact.


Weekly Latin America Risk Monitor - 1


Weekly Latin America Risk Monitor - 2


Weekly Latin America Risk Monitor - 3


Weekly Latin America Risk Monitor - 4


Weekly Latin America Risk Monitor - 5


Weekly Latin America Risk Monitor - 6



Brazil: Brazilian economic data remains flat-out terrible and has been for much of the last 3-4 quarters, yet Brazilian financial markets continue to signal there is more bad data to come (equities, currency, bond yields – all down wk/wk). The most recent spate of Sticky Stagflation on a reported basis came in the form of slowing real GDP growth (+3.1% YoY in 2Q vs. +4.2% prior) and accelerating CPI (+7.2% YoY in Aug – a six year high – vs. +6.9% prior). Even Brazil’s oft-bandied about domestic demand is slowing, with the Aug services PMI reading ticking down to 52.2 (vs. 53.7 prior).


Obviously with the recent rate cut, combating slowing growth remains atop Brazilian policymakers’ collective agenda. In fact, Finance Minister Guido Mantega said that Brazil has a “great deal of room to maneuver” in both monetary and fiscal policy (though he did confirm that officials would prefer not to use the fiscal stimulus – a much-needed sign of fiscal conservatism). Absent a material unwinding of the European banking system, we continue to believe that much of Brazil’s stimulus efforts will come in the form of interest rate cuts, due to mounting political pressure to lower the country’s real interest rate/debt service burden, as well as the simple fact that the Rousseff administration has shown that it has its hands full with containing nominal expenditure growth in the upcoming federal budget.


An interesting callout that we wanted to flag was the rate of DPGE debt being issued by mid-sized Brazilian banks (R$8.5B YTD vs. R$6.3B in all of ’10). The bonds, which are backed by the country’s depoisit insurance fund, have essentially become a source of last-resort funding for Brazilian lenders after the Banco Panamericano scandal all but evaporated the loan portfolio market. Obviously, we’re a long way away from a crisis, but the risk that mid-sized banks in Brazil face heightened liquidity risk in 2012 is an important one to flag, as government incentives for larger banks to buy bonds or loan books from smaller banks get phased out.


Mexico: Mexican economic data continues to support our bearish intermediate-term view of the Mexican peso and Mexican equities: consumer confidence ticked down in Aug to 93.4 (vs. 95.5 prior); manufacturing PMI ticked down in Aug to 51.5 (vs. 50.1 prior); services PMI ticked down in Aug to 52 (vs. 52.5 prior); and CPI slowed in Aug to +3.6% YoY (vs. +3.6% prior) – which is negative for expectations for tighter monetary policy (MXN-bearish). In fact, of the 47 currencies we track, the Mexican peso’s -9.2% decline vs. the USD over the last two months is only bested by the Polish zloty’s -9.5% decline.


Chile: Sticky Stagflation continues to dominate both headlines and headline economic data in Chile. From a headline perspective, the central bank lowered the top end of its 2011 real GDP growth forecast -75bps to +6.25% YoY. Currently growing at an +8.2% pace YTD, their outlook clearly implies a meaningful drop-off in Chilean economic activity in 2H – which is in line with what our models were signaling much earlier in the year and continue to signal. On the inflation front, CPI accelerated in August, supportive of the central bank’s recent statement that it was “too early to cut interest rates”. Elevated rates of reported inflation are likely to continue to keep many central banks in a box and prevent them from easing monetary policy in a proactive manner and Chile is no exception in this regard.


Colombia: Political pressure on Colombia’s central bank to cut interest rates continues to grow and a marginally dovish inflation reading for Aug only amplified those claims (CPI slowed to +3.3% YoY vs. +3.4% prior). President Juan Manuel Santos blatantly asked the central bank to refrain from raising interest rates early last week and subsequently tweeted, “There is no reason to raise rates.” Moreover, he publically stated that he “remains concerned about the strength of the [Colombian] peso” (COP). While Colombia’s 2yr sovereign debt yields have fallen -66bps over the last three months, they remain a regional outlier from a YTD perspective (up +57bps) and this tug-of-war should eventually culminate with the central bank giving in to the President’s demands (our models have Colombian GDP growth slowing in 2H11).


Darius Dale


Early Look

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