Being the Critic

“The critic has to educate the public; the artist has to educate the critic.”

-Oscar Wilde


Life is short.  So short, in fact, that we should all try to find time to do things that we enjoy and derive some amount of satisfaction from doing them.  I’ll be honest, I think most Hedgeyes enjoy what they do every day.  As for other financial firms, I’m not so sure.


According to reports this morning, UBS lost roughly $2 billion from “unauthorized trading by a trader in its Investment Bank”.  Not to name names, but if you work at a certain investment bank this morning, that kind of sucks.


So, here’s the bottom line, Hedgeye is hiring. What are we looking for? Well, quite simply, people that have a passion for doing great research.  No, we aren’t going to offer anyone a super duper 3 by 10 guaranteed bonus, but if you do love what do and think your research is differentiated, well, then email me : .  Keith calls me Big Alberta and I’m more commonly known as the Director of Research at Hedgeye.


Back to the global macro grind. . .


Far be it for the lads at Hedgeye to be contrarian, but, are you sitting down, the SP500 is currently giving us a bullish immediate-term TRADE signal.  Not only that, but 7 of 9 S&P sectors are giving us the same quantitative signal.  Aye carumba ! Are the Hedgeye lads getting all bulled up? Well, at least for a trade. . .


Currently, the only two sectors that remain bearish on our TRADE duration are Financials (XLF) and Industrials (XLI).  In the Virtual Portfolio, we are long Utilities (XLU) and short Industrials (XLI).  Not only has this worked in the year-to-date with Industrials down -10.1% and Financials and Utilities up 7.0%, but we think it will continue to work.


It has been an interesting few weeks for us at Hedgeye.   In dramatic fashion, we have seen many of the largest sell side economists capitulate to our view on the economy and growth.  For those of our subscribers that read us somewhat regularly, they know being bearish is not new to Hedgeye.  In fact, by way of a time stamp, attached is an article that I wrote for Fortune on December 31st, 2010:


If you don’t have time to read it, I will highlight one quote, which is as follows:


“Currently, according to a Bloomberg survey of the strategists from 11 of the largest brokerage firms in the United States, the mean consensus target for the S&P 500 by year end 2011 is roughly 10% above current levels. Further, every single strategist is expecting a positive performance out of the index in 2011.”


As my 9-year old niece might say, OMG ! Indeed, it is somewhat scary to think that the reputed smartest economists on the street got the target for the most relevant stock market in the world so wrong. 


Yesterday CNBC hosted its Seeking Alpha Conference, which on some level was entertaining to watch.  Actually, it was entertaining on many levels. The most interesting excerpt was from Leon Cooperman who, and I’m paraphrasing, indicated that he recently had lunch with his top friends in money management and they are all under allocated to U.S. equities.  Now, obviously, Mr. Cooperman isn’t always right, but he has been around the block and his statement yesterday was insightful.  Incidentally, and not that we planned this, our current weighting to global equities is currently 24%, which is our highest allocation since early July . . . aye carumba, indeed !


In the longer term, we are not so bullish. In fact, in the Chart of the Day today, we highlight the long term interest rates of Japan.  Or as our Asian Analyst and former Yale lineman Darius Dale likes to characterize it : ZIRP.   For those of you that don’t know what ZIRP means, it stands for Zero Interest Rate Policy.  In the chart, Darius has outlined the dangers of ZIRP.


While conventional wisdom would have you believe that ZIRP means that equities are cheap on a relative basis, the history of Japan actually suggests otherwise. ZIRP was instituted in Japan in 1999 and the Nikkei has returned -37.4% since the start of that year. So while risk assets, like equities, look cheap vis-à-vis interest rates, it all depends on the assumed economic growth rate implied by interest rates.


On a totally non-linear note, I would like to end with a quote from a book that Keith is currently reading called “Gates of Fire”.  As Keith emailed the team late last night:


“There’s an excerpt in Gates of Fire where the Spartan officer, Dienekes, was told (on the eve of battle) that the Persian archers were so many in number that when they fired their volleys, the mass of arrows would block out the sun.

Dienekes looked at the messenger and said …


“Good. Then we will have our battle in the shade.””


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Being the Critic - Chart of the Day


Being the Critic - Virtual Portfolio


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


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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


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


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.