Let It Flow, Bro

“I’m just saying, just let it flow, man.”

-Ray Dalio


I think I have milked both the quotes from Ray Dalio’s New Yorker interview and this week’s short squeeze in Global Equities bone dry. While there has been plenty of emotion embedded in this week’s 100 point S&P futures rally, it’s just time to “let it flow”, Bro.


“Bro” is a very sophisticated nickname that Wall Street trader types use when addressing each-other. Examples would be: “Bro, that was a monsta print, bro…” or “Bro, the two-hundo is still broken – this rally doesn’t make sense, bro.”


Both in the Bro Brotherhood and beyond, this week’s +9% rally in the S&P futures (from Monday’s pre-open low to yesterday’s intraday high) has left a mark. Not surprisingly, you’re seeing the commensurate hedge fund blowups that are associated with price volatility. The Goldman Beta Fund shutdown is a Top 3 story on Bloomberg this morning. Yesterday it was the Euro Bro at UBS.


Bull markets generally don’t blow up the Bros. Volatility does. And as a profession we have a lot of work to do in order to evolve the risk management process so that our clients are actually getting the protection we market to them.


Bridgewater’s Ray Dalio doesn’t blow up. To the contrary, his $100 Billion Dollar hedge fund capitalizes on other people blowing up. In the same New Yorker interview (“Ray Dalio’s Richest and Strangest Hedge Fund”, by John Cassidy, July 25, 2011) Dalio explains how emotion has no place on his team – or he, at a minimum, needs a way to govern it:


“What we’re trying to have is a place where there are no ego barriers, no emotional reactions to mistakes… if we could eliminate all of those reactions, we’d learn so much faster.”


Re-think. Re-work. Re-learn.


That’s what getting good at this Globally Interconnected Game of Risk is all about - not pointing fingers, fighting change, and/or Mr. Macro Market’s leading indicators.


Back to the Global Macro Grind


Not surprisingly, after prices have moved higher across the Global Equities universe, my price, volume, and volatility factors look a heck of a lot better than they did last Friday.


Let’s look at those core 3 factors in the SP500 for example:

  1. PRICE – what was immediate-term TRADE resistance at 1178 is now support
  2. VOLATILITY (VIX) – what was immediate-term TRADE support at 35.47 is now resistance
  3. VOLUME – remains less than dead in the water on the up moves with Wednesday’s volume signal being +9% above average

Now to be crystal clear on reading these factors, they are on 1 duration (the immediate-term TRADE), not all 3 (TRADE, TREND, and TAIL). From a long-term TAIL perspective, resistance for the SP500 remains up at 1265. In other words, all of the “long-term” investors out there should still be concerned about the long-term.


The hallmark of my risk management process is to be:


A)     Multi-Factor

B)      Multi-Duration


What that means (and I think Dalio would agree with this) is that you can heighten the probability of 1. not missing something big or 2. being overly exposed to one big thing, if you are analyzing multiple-factors (Countries, Currencies, Commodities, etc.) across multiple-durations.


So, if we broaden the immediate-term TRADE signals to Europe this morning, here’s what I see (and it’s not good):

  1. Germany’s DAX failing to overcome immediate-term TRADE resistance of 5631
  2. Italy’s MIB Index failing to overcome immediate-term TRADE resistance of 15,014
  3. Spain’s IBEX failing to overcome immediate-term TRADE resistance of 8437

Bear markets get immediate-term TRADE oversold. Then they bounce. We get that. That’s why we’ve made 2 calls in Q3 of 2011 (August 8thand Monday, September 12th) titled “Short Covering Opportunity.” And yes, these “calls” have time stamps.


Old Wall Street’s Sell-Side or the pop-media that provides it a marketing platform doesn’t really do the time stamp thing. We don’t champion time stamps to rub it in their face. We are explicitly challenging them to be transparent so that we can figure out if they can be additive to the collective risk management process that this industry needs.


Letting $2 Billion Dollar losses in the UBS bonus pool “flow” or blowing clients out of “risk managed” hedge fund products at every capitulation bottom we’ve had in the 2008-2011 period isn’t cool anymore, Bro.


My immediate-term support and resistance ranges for Gold (which just broke its immediate-term TRADE line of $1817 and has no TREND support to $1630), Oil, and the SP500 are now $1, $86.54-90.26, and 1178-1212, respectively.


Best of luck out there today and enjoy your weekend with your families,



Keith R. McCullough
Chief Executive Officer


Let It Flow, Bro - Chart of the Day


Let It Flow, Bro - Virtual Portfolio


The Macau Metro Monitor, September 16, 2011




MGM China chairwoman Pansy Ho said she firmly believes it is possible for MGM China to receive land approval on Cotai in 2011.  Regarding Wynn Cotai's recent approval, Ho said, "There is no point competing even in terms of who gets the land first and who is going to ultimately build it out first.  For us, as long as we are given the fair opportunity, meaning there is no deliberate delay in any sense, then we are very satisfied.”




The restaurant industry has been lobbying for a loosening of restrictions on food stamp recipients’ food purchasing options.  YUM is regularly called out in media reports on the issue so we decided to call the company to get a better understanding of the issues.




We recently reached out to senior vice president and chief public affairs officer at Yum! Brands, Jonathan Blum, to discuss the topic of food stamps.  He provided us with some insight on the company’s efforts to help bring about a modification to the Farm Bill that would allow a portion of food stamp recipients to use their Electronic Benefit Transfer (EBT) cards at restaurants. 


Contrary to the overly-simplified headlines of late, the action YUM and others are pushing for would not result in restaurants accepting food stamps across the board.   Rather, under the modification to the Farm Bill that the restaurant coalition is promoting, only participants classified as homeless, elderly, or disabled (HED) would be allowed to use food stamps to buy “hot, prepared food”.  The origins of what is officially named the Supplemental Nutrition Assistance Program prohibited, among other things, the purchase of hot, prepared meals.  Federal regulatory changes in 1978 provided states with the option to allow elderly and disabled food stamp households to use food stamps at restaurants.  In 1996, the program was expanded to include homeless food stamp households. 


Thus far only Michigan, Arizona, and California (in certain urban centers only) have opted to allow HED program participants to purchase food at approved restaurants (restaurants in these states still have to apply to the state for authorization).  The coalition within the restaurant industry that is agitating for change, including YUM, is arguing that the rule disallowing the purchase of hot, prepared foods is antiquated given that restaurants are now visited far more frequently by the general public than in the mid 20th century when the program was kicked off.  Furthermore, for elderly and disabled participants in particular, allowing access to prepared, affordable, possibly delivered food makes sense, according to YUM (and we would agree).




Mr. Blum’s hope is that a modification to the Farm Bill can be brought about in the next thirty days.  It seemed to us from his tone and general commentary that achieving that goal may be difficult for several reasons. 


Firstly, mobilizing the federal government to focus on an issue so small relative to other concerns is a challenge.  Secondly, the modification’s effect of moving the power of authorization from states to the Federal government (restaurants would apply to the Federal government, not the states) could be adding a political component to the debate.  It certainly makes sense that it would, given the heightening skepticism of centralized power in this country. 


The alternative, if left with the status quo, is for restaurant companies to appeal to individual states to take advantage of the exemption for HED participants, as Michigan, California, and Arizona have done.  Mr. Blum told us that that was likely not worth the effort, despite the 45.2 million people currently registered as participants in the program and the $74 billion of expenditure, annually, that that represents.  To be clear, a modification of the current law would not represent $74 billion of revenue for the restaurant industry but would likely distribute that money differently than it is currently being spent.  In certain, mainly urban, areas of the three states currently allowing HED SNAP participants to spend their allowance at restaurants, YUM is seeing sales improve in the MSD range.  While Florida and Rhode Island are running pilots, there is no sign of any other states following suit, according to Mr. Blum. 




While not privy to any significant insights into the legislative process surrounding this particular issue, we believe that the coalition lobbying for this modification to the Farm Bill are up against difficult headwinds.  The first, as we wrote above, being that the Federal government is proving difficult to mobilize for the lobbyists.  Secondly, given that the modification would involve a ceding of control by states to the federal government of which restaurants would be allowed to accept EBT cards as payment for food, we believe that the current political mood in Washington – one of smaller government and less federal power – may impede the coalition's progress. 


We will continue to monitor this issue closely given that it would represent a possible sales boost for YUM’s ailing U.S. business if things were to change.  As the chart below shows, the number of people depending on this program has been growing steadily for some time, despite the slowdown in June from May (the first month-over-month decline since 2008).  There may come a point where states begin to expand options for the growing ranks of participants in the program, even if the federal government does not move to modify the Farm Bill, as YUM hopes.





Howard Penney

Managing Director


Rory Green



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Long of Indonesia

Conclusion: We’ve taken advantage of the opportunity presented via lower prices to invest in a great long-term idea.


Late yesterday afternoon, we initiated a long position in Indonesian equities in the Hedgeye Virtual Portfolio. We’ve been bullish on Indonesian equities since 3Q10 and we continue to expect the steady performance out of the Indonesian economy that we have come to know over the last few quarters. And with the world’s fourth-largest population and strong demographic tailwind (Indonesia’s labor force is set to expand +20% over the next 20 years), Indonesia’s bullish long-term TAIL story remains intact. As such, we’ve taken advantage of the opportunity presented via lower prices to invest in a great long-term idea.


Much like the Philippines, which we are also long of on the equity front in the V.P., Indonesia draws our admiration for being a relatively defensive play amid an uncertain at best Global Macro backdrop.


Indonesian economic growth is stable: real GDP growth came in flat in 2Q at +6.5% YoY and our models point to a flat-to-slightly-down outlook for 2H (vs. “down-to-down-a lot” in many other major economies).  Though an absolute acceleration in GDP remains the most supportive catalyst in our models, we also like countries where economic growth is accelerating on a relative basis to vs. the rest of the world. Indonesia certainly fits the latter of those setups quite well:


Long of Indonesia - 1


Though up marginally in August, consumer price inflation has slowed to +4.8% YoY, coming in from the January peak of +7% YoY:


Long of Indonesia - 2


Core inflation, which has accelerated to a 26-month high of + 5.2% YoY in Aug, remains a key concern. Coupled with a our model’s outlook for Indonesian headline inflation (marginally higher over the next two months), we think Bank Indonesia will be forced to maintain rates on hold and perhaps introduce a hawkish lean in their statement – depending on the absolute level of inflation. Still, even adopting our model’s most inflationary estimates would leave CPI well within the central bank’s target of 5% +/- 100bps – meaning that we’re unlikely to see any tightening over the intermediate term.


For reference, Bank Indonesia’s Reference rate (currently at 6.75%) has been on hold since February; moreover, their recent commentary suggests they are perhaps more concerned about the [global] risks to Indonesian economic growth than a measured and sustained pickup in inflation:


“Bank Indonesia has room to cut its benchmark rate if inflation behaves.” – Hartadi Sarwono, Bank Indonesia Deputy Governor


“Policymakers are ready to adjust the rate and mix monetary policy toward loosening if price gains slow and the economy expands less than expected due to a global slowdown.” – Perry Warjiyo, Bank Indonesia Director of Economic Research


In addition to having an ace in the hole on the monetary policy front, Indonesia’s fiscal positioning also remains supportive should it become necessary. With a small and improving deficit/GDP ratio of -2.1% and a incredibly healthy debt/GDP ratio of 26.9%, Indonesia isn’t in a box as it relates to being able stimulate its economy should it become necessary as a function of the global growth outlook deteriorating further. Though we’re certainly not ever going to be labeled proponents of Keynesian “countercyclical” policy, even us football and hockey players can recognize the profound effects “stimulus” has on stock markets.


Long of Indonesia - 3


Long of Indonesia - 4


One key risk we see to holding Indonesian [and other emerging market] equities, is on the currency front. Should Bank Indonesia make due on their promise to “loosen” monetary policy, we could see the rupiah come under continued pressure vs. the USD (down -2.5% over the last five trading days alone). To that effect, the central bank intervened yesterday in the country’s FX and bond markets to stop the bleeding, so to speak. The meaningful backup in Indonesia’s sovereign debt yields (2yr up +47bps wk/wk; 10yr up +59bps wk/wk; and 30yr +27bps wk/wk) isn’t a result of renewed inflation/tightening speculation (1yr on-shore interest rate swaps down -90bps wk/wk). Rather, we view it as foreign investors exiting the market en masse, as both Indonesia’s equity and bond markets are subject to a great deal of Winner’s Risk as a result of their outperformance over the last year.


A hockey stick in the country’s external debt burden also remains a risk to the currency – particularly if Indonesian corporations are forced to buy USD/EUR/JPY by selling the IDR to meet debt service requirements. External debt growth, both on a public and private level, has accelerated to roughly +22% YoY and each segment is growing at the highest rate on record, which dates back to 2004:


Long of Indonesia - 5


As it currently stands we don’t see a re-do of the ’97 Asian Financial Crisis, but if the Indonesian equity market blows through its long-term TAIL of support (less than 1% below), we’d argue that the risk of a larger-scale external debt crisis is definitely in play. Still, our positioning indicates that we have confidence that this critical quantitative line will hold and, as such, we have chosen to go long the IDX in our Virtual Portfolio.


Darius Dale



Long of Indonesia - 6 

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%