TODAY’S S&P 500 SET-UP - September 15, 2011


As we look at today’s set up for the S&P 500, the range is 38 points or -1.40% downside to 1172 and 1.79% upside to 1210.




A 3 day rally finally gives us a bullish immediate-term TRADE signal for both the SP500 and 7 of 9 S&P Sectors. It’s been a long drought, but all droughts end with a fresh squeeze of water. The SP500’s TRADE line of support is now 1172.  We have been getting longer because of a heightening probability of establishing higher-YTD-lows for the SP500 and that’s still what the model is signaling (if 1172 were to break, I still have significant support at 1141 vs the YTD closing low of 1119).


The 2 of 9 Sectors that remain bearish on our immediate-term TRADE duration are Financials (XLF) and Industrials (XLI) which are down -21% and -10.1% for the YTD, respectively. We are short Industrials (XLI) and long Utilities (XLU) which remains the top performing sector in the SP500 at +7.0% YTD.




THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance





  • ADVANCE/DECLINE LINE: +1430 (-139)  
  • VOLUME: NYSE 1085.46 (+1.37%)
  • VIX:  34.60 -6.26% YTD PERFORMANCE: +94.93%
  • SPX PUT/CALL RATIO: 1.49 from 1.71 -12.57%



  • TED SPREAD: 34.91
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.03 from 2.00     
  • YIELD CURVE: 1.84 from 1.79

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30 a.m.: Consumer price index, est. 0.2%, prior 0.5%
  • 8:30 a.m.: Empire manufacturing, est. (-4.00), prior (-7.72)
  • 8:30 a.m.: Jobless claims, est. 411k, prior 414k
  • 8:45 a.m.: Fed’s Bernanke gives brief remarks at risk conference (text, no questions)
  • 9:15 a.m.: Industrial production, est. 0.0%, prior 0.9%
  • 9:15 a.m.: Capacity utilization, est. 77.5%, prior 77.5%
  • 9:45 a.m.: Bloomberg consumer comfort, est. (-49.0), prior (-49.3)
  • 10 a.m.: Philadelphia Fed, est. (-15.0), prior (-30.7)
  • 10 a.m.: Freddie Mac mortgage rates
  • 1:45 p.m.: Fed’s Tarullo speaks at systemic risk conference


  • UBS said it may post 3Q loss after $2b loss from unauthorized trading
  • Groupon now said to be aiming for IPO as early as next month: NYT
  • Texas Gov. Rick Perry is preferred presidential choice of 26% of Republicans, Republican-leaning independents: Bloomberg poll
  • European stocks climbed for 3rd day as assurance from Germany and France that Greece will remain a member of the euro outweighed a $2b trading loss at UBS.



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Gold-Backed Dollar Signals $10,000 Metal Price: Chart of the Day
  • Goldman Sticks With Oil, Copper Forecasts as Risks Climb
  • Oil Rises a Second Day in London on European Support for Greece
  • Ralcorp Costing Investors $1 Billion Opposing ConAgra: Real M&A
  • China to Install First Gold Vending Machine, ND Daily Says
  • Copper Gains From One-Month Low on Easing Debt Concern, Strikes
  • Freeport Weighs Grasberg Strike Impact on Output, Shipments
  • SocGen Goes ‘Underweight’ on Commodities ‘in Danger Zone’
  • Australia Wheat Exports Seen Trailing Government Forecast
  • Rio Tinto to Invest Further $833 Million in Pilbara Expansion
  • China’s Refined Copper Use May Reach 8.5 Million Tons in 2015
  • Palm Oil Retreats as Global Cooking-Oil Supplies Set to Climb
  • Libya to Resume Oil Exports Within Four Days, Official Says
  • Record Texas Drought Burns Cotton Farmers as White Gold Withers



THE HEDGEYE DAILY OUTLOOK - daily currency view




  • European stocks climbed for 3rd day as assurance from Germany and France that Greece will remain a member of the euro outweighed a $2b trading loss at UBS.
  • EUROPE: Germany has sufficiently ripped the shorts a new one ... But the DAX trade line of resistance remains above last price at 5569 

THE HEDGEYE DAILY OUTLOOK - euro performance




  • ASIA: much better morning for Asian equities than yesterday with both Japan and Korea coming off their lows

THE HEDGEYE DAILY OUTLOOK - asia performance









Howard Penney

Managing Director


Fiat Fool Monday

This note was originally published at 8am on September 12, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Any fool can know. The point is to understand.”

-Albert Einstein


After spending some much needed time with my beautiful wife on a non-Greek island in the middle of nowhere last week, I’m feeling good this morning. I’m re-charged and ready to go after some Fiat Fools in France.


Actually, I’m not ready for that. That would be boring. Playing yesterday’s game all over again usually is. Being short European or US Equities is yesterday’s news. Today we are tasked with playing the game that’s in front of us.


Whether yesterday was 2008 in the US or 2011 in Europe is really for history to decide. Crashing market prices are what they are and I highly doubt blowing up other people’s money a second time around is going to be tolerated by at least that one core constituency – those other people. Equity market fund “outflows” and “sentiment” will be the final stage for the 2011 Equities bears to navigate.


Back to the Global Macro Grind


Even for a central planner of modern day money printing, arresting gravity is difficult. With that risk management thought in mind, here are the Top 3 things I am looking at this morning:

  1. GERMANY – the German DAX continues to tell us all we need to know about not being long anything Europe (stocks, bonds, or currency). With the healthiest fiscal situation and balance sheet of a bad Western European bunch, if Germany can’t stop going down, I don’t see why France or Italy can; DAX, CAC, and MIB Index crashes are now -33%, -30%, -39% since the end of April.
  2. EURO/USD – from The Correlation Risk perspective, this remains the most important relationship in all of Global Macro. We like to say, “get the EUR/USD pair right and you’ll get a lot of other things right.” Both the TAIL ($1.39) and TREND ($1.43) for the Euro have broken expeditiously here in September.
  3. SEPTEMBER – after going net short for the 1st time since June 23rd  at the end of August (more SHORTS than LONGS in the Hedgeye Portfolio), we showed the “Month-End Markup” factor (last 6 days of the month vs first 6 in the new month for US Equities). The average 6 day drawdown since April = -4.5%. For September to-date the SP500 is down -5.3%.

Of course, any fool can know most of these things after they have occurred. Yesterday’s score is the score. Since the 2007 and 2011 highs, the SP500 is down -26.3% and -15.3%, respectively. The point now is to understand what to do next.


On today’s down move, this is what I’m going to do:

  1. COVER shorts that have gone down
  2. BUY Asian Equities where the rate cycle is about to become accommodative (no more rate hikes)
  3. BUY US Equities (Utilities and Healthcare first) as we SELL more of our US Fixed Income exposure

Now before I get accused of being all horned up like a bull here, we’re in a very good position to take our time. After all, rotating your assets from one asset class to another should be a proactive process, not an emotional point.


Last week, on US Bond market strength and US Equity market weakness, I sold Fixed Income Exposure (TLT) and started buying some US stock market exposure (XLU and XLV). As a reminder, I moved to ZERO percent US and European Equity exposure before this morning’s episode of the Fiat Fool Monday gong show began.


Here’s the Hedgeye Asset Allocation Model as of Friday’s market close:

  1. CASH = 55% (down from 64% last week and down from 70% at my peak Cash position for 2011)
  2. FIXED INCOME = 18% (US Treasury Flattener, Long-term US Treasuries, and Treasury Bond ETF – FLAT, TLT, and BWX)
  3. INTERNATIONAL EQUITIES = 12% (Philippines, China, and S&P International Dividend ETF- EPHE, CAF, and DWX)
  4. US EQUITIES = 9% (Utilities and Healthcare – XLU and XLV)
  5. COMMODITIES = 6% (Silver and Corn – SLV and CORN)

Cutting an exposure to ZERO percent can be considered “aggressive” by someone who doesn’t understand what we do. Most recently, I’ve opted to cut my International Currency exposure to ZERO percent. The #1 reason for that has been my being bullish on the US Dollar for the first time in a long time.


With Global Growth Slowing being priced in and Americans leaning more conservatively in the polls than they have in years on both fiscal and monetary policy (Fiat Fools are politicians and, yes, they follow the polls), the US Dollar has put on one heck of a move “off the lows.” Last week alone, the US Dollar Index was +3.3%. That’s very good for Americans.


Yes, Americans. As in the other 90% of Americans who don’t really own stocks anymore. Either by liquidation, capitulation, or californication (housing bust), that’s your New Reality of a financial system that people don’t trust. The top 10% of America’s wealthy own 98.5% of the US stock market (source: G. William Domhoff, UC Santa Cruz). And 10% of America isn’t America.


If I’ve said this 100x in the last 3 years, I’ve said it 1000x – the best path to American prosperity is through a strong US Dollar. This isn’t a political point. Both Reagan and Clinton got this as right in America as Bush II and Obama have had it wrong. Strong Dollar reduces inflation at the pump and creates more spending power in this brave, new, globally-interconnected world.


The Monday morning Fiat Fool quarterbacks of the Keynesian Kingdom don’t get that, yet. But markets have always had a not so funny way of helping them eventually understand.


My immediate-term TRADE ranges of support for Gold, Oil, and the SP500 are now $1844-1903, $85.81-88.09, and 1126-1177, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fiat Fool Monday - Chart of the Day


Fiat Fool Monday - Virtual Portfolio

Shorting JCP

Once again, Keith is short JCP in the virtual portfolio, managing near-term risk around our highest conviction TREND and TAIL short idea that is immediate-term TRADE overbought.


There is no change to our thesis on the name.

For more info on our thesis, see our Black Book, “JCP: What Ackmanists Are Missing.”


Shorting JCP - JCP Levels 9 14 11

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The most recent supply and demand data points on corn do not augur well for consumer budgets going forward.


Inflation in the grocery aisle has been outstripping price increases at restaurants.  This trend has been holding for some time and the most recent CPI data, for July, highlighted that.  See the chart, below, that we are republishing from our 8/19/11 post, “CPI: GROCERY BILLS STILL OUT-INFLATING RESTAURANT CHECKS”.   It will be interesting to learn whether or not the August data shows a continuation of this trend.  August Consumer Price Index data is due to be released by the Bureau of Labor Statistics later this morning. 





A report published by the USDA (link here) yesterday saw the official U.S. corn yield forecast for 2011/12 drop 4.9 bushels per acre this month to 148.1 bushels.  The drop in U.S. production is expected to lead the U.S. to produce less than 50% of world corn trade for the first time in 30 years.  Increased foreign coarse grain production will partly offset the U.S. drop but, overall, the price prospects for corn are higher following this report.   The net 2011/12 market year ending stocks of corn are expected to dwindle to 672 million bushels versus 920 million at the end of 2010/11 and 1,708 million at the end of 2009/10. 


This is supportive of continued high protein prices for consumers.  Government forecasts now call for 3.5% to 4.5% grocery food inflation for 2011 which would be among the four largest annual increases over the past two decades. 



Howard Penney

Managing Director


Rory Green


China to the Rescue?

Conclusion: Recent rhetoric suggests China continues to stand ready and willing to step up its aid to ailing European nations. Only this time, it expects a great deal more in return.


Rhetoric around the next great bailout out of China has been swirling about the wires over the past 24-48 hours. We think it’s important to highlight China’s official stance by filtering through what’s been said thus far. Perhaps the largest takeaway is that Beijing wants favors in return and any further large-scale assistance is likely to come alongside some nice perks for the Chinese economy.


Regarding the need to extend additional help:

“What is most important now is to prevent the further spread of the sovereign debt crisis in Europe.” – Premier Wen Jiabao


“Chinese policymakers are thinking in a global context and about the need to prevent a domino effect in the European debt crisis.” – Zhang Yansheng, a researcher affiliated with China’s National Development and Reform Commission


Regarding what incremental actions China plans to pursue, if any:

“China is willing to buy [additional] bonds from nations involved in the sovereign debt crisis.” – NDRC Vice Chairman Zhang Xiaoqiang


“China can best contribute to the global economic recovery by ensuring steady growth at home.” – Premier Wen Jiabao


What China wants to see in return for such aid:

“Developed countries must take responsible fiscal and monetary policies.” – Premier Wen Jiabao


“If the U.S. introduces a third round of quantitative easing, this will further increase the global inflation pressure.” – NDRC Vice Chairman Zhang Xiaoqiang


“The nation wants countries including the U.S. [and E.U.] to become more open to investment by Chinese companies, which will create local jobs.” – NDRC Vice Chairman Zhang Xiaoqiang


“China is also actively allocating foreign reserves via commercial banks to support domestic companies going abroad. China will also use foreign reserves to secure important commodities or find resource assets overseas.” – NDRC Vice Chairman Zhang Xiaoqiang


“[The U.S. and E.U.] should recognize China’s full market economy status before the 2016 deadline set by the World Trade Organization. To show one’s sincerity on this issue a few years ahead of that time is the way a friend treats another friend.” – Premier Wen Jiabao


Lastly, what China has done thus far:

“We have on many occasions expressed our readiness to extend a helping hand, and our readiness to increase our investment in Europe.” – Premier Wen Jiabao: 

  • In October ’10, Premier Wen Jiabao pledged to purchase Greek sovereign debt and Beijing also authorized $267.8 million in Chinese bank loans to three Greek shippers;
  • In a November ’10 visit to Portugal, President Hu Jintao stated that China was available to support the country;
  • In April ‘11, China pledged to support Spanish sovereign debt after Spanish Prime Minister Jose Luis Zapatero visited Beijing; and
  • In June ‘11, Premier Wen Jiabao pledged step up China’s support of European sovereign debt by funding a “limited volume” of new issues, immediately putting $1 billion on the tape for Hungarian bonds. 

Net-net, recent rhetoric out of China suggests Chinese officials believe firmly that they are negotiating from a position of strength, and, thus, are expecting to dictate policy perhaps a bit more than they have in the past – i.e. “no QE3”. Like the shrewd investor the country has proven itself to be over the years, China appears to favorably view European (and some U.S.) corporate assets with an eye for “blood in the streets”. To the extent foreign policymakers are ready to allow China greater access to more sensitive assets, will go a long way in determining how much more participation we are to expect from China on the bailout front.


Darius Dale


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