Big Default

This note was originally published at 8am on September 21, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Greece should default, and default big.”

-Mario Blejer


The day after European stock markets put in their 2011 bottom (September 12th), Bloomberg’s Eliana Raszewski and Camila Russo wrote a  Big Headline article titled “Greece Should Default Big To Address Worsening Debt Crisis.”


Notwithstanding this newsy headline being a classic contrarian indicator in its own right (German stocks are up +10% in a straight line since September 12th), Bloomberg was citing a reputable source on the matter. Mario Blejer took over Argentina’s central bank during its epic $95B default in 2002.


Back then, that was considered a Big Default.


Today, what’s another $100, $200, or $800 BILLION dollars? That’s chump change compared to what Madame Lagarde has in mind with what she has dubbed, en englais s’il vous plait, an “infinite amount of resources.” Read: she’s thinking a bazooka 2-3x the size of Hank The Market Tank Paulson’s in 2008. The ECB and IMF central planning for a Euro-TARP is called the EFSF. And it’s Big!


Back to the Global Macro Grind


Whether it’s that September 13thBloomberg headline (the SP500 is up +3.4% since) or yesterday’s “How To Prevent A Depression” article from the venerable Perma-Bull himself, Mr. Nouriel Roubini, we have a lot of Big Government Intervention here on our plate to process. So let’s get cracking.


It takes an aggressive short seller to know one, and I can assure you that plenty of the bears thought yesterday’s selloff in the SP500 into the close was going to be bearish for both Asian markets overnight and the US stock market Futures this morning.


Not happening.



  1. ASIA – Last I checked, it’s a big part of this globally-interconnected earth and ostensibly still has a say in domestic matters that are not related to Europigs or Timmy The Squirrel Hunter Geithner’s latest Keynesian ideas. Both South Korean and Hong Kong unemployment dropped to generationally lows levels last night with August unemployment readings of 3.1% and 3.3%, respectively. On the news, the KOSPI Index (South Korea’s leading indicator for a real-time Global Macro Model like mine) shot back above the 1813 line. What was resistance in Korean stocks is now immediate-term TRADE support.
  2. EUROPE – Qu’est ce qui ce passe avec les higher-lows? (that’s French for why won’t Italy go down on the “news”). What goes down in a raging bear market eventually bounces and could bounce really big if Lagarde pulls out La Bazooka when she speaks in Washington (Fall meetings for the World Bank and IMF) in the next 24-48 hours.
  3. USA – While it’s hard to believe I have not mentioned La Bernank in this note yet (it really is his big Presser day), I think the poor Keynesian is out of bullets. Like his debt-monetizing predecessor of the 1970s, Arthur Burns, he has been neutered by Le Stagflation (0.36%-0.98% Q1/Q2 GDP Growth and 3.8% headline consumer price Inflation) and most likely won’t be able to Twist his way out of it before his career as central-economic-planner-in-chief comes to an end. Pardon le pun. 

Bernanke being in a box (he can’t cut or raise rates anymore) is, on the margin, bullish for Americans. No, not the 10% of us who actually traffic on the long side of the stock market casino. I mean the other 90% of us who really couldn’t give a damn about stocks and would much prefer lower prices for gas, food, college, etc. You know, the non-government manufactured stuff.


Bernanke not being able to do much to debauch America’s Dollar anymore will continue to Deflate The Inflation and put pressure on Gold prices. That’s why I cut our exposure to Commodities in the Hedgeye Asset Allocation Model to ZERO percent again yesterday. While commodity price deflation is very bad for Energy and Basic Material stocks, this is very good for Americans.


As for what a Big Default in Greece today or tomorrow will bring, don’t sweat it. That’s not going to happen. It’s already happened in both their stock and bond markets. We don’t need another big “Blue Chip Economist” who has been wrong on his 2011 GDP forecast by 60-70% to remind us commoners of that.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1767-1820, $85.69-86.93, and 1188-1229, respectively. Don’t let headlines freak you out at the high or low ends of these ranges. Proactively manage your risk around them.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Big Default - Chart of the Day


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Reformation Time

“There is an embarrassing lack of talent and imagination in the last generation of the technocrats.”

-Victor Davis Hanson


On August 9th, 2011, Hanson published a thought provoking article in the National Review titled “A Tottering Technocracy” that I highly recommend. If you want to stop the losing in this country, first you need to get the ball out of the losers’ hands. Winners win.


“An education-age Reformation is brewing every bit as earth-shattering as its 16th century religious counterpart… So the elites furor grows at those who seek and obtain power, exposure, and influence without the proper background, credentials, or attitude.”

-Victor Davis Hanson (National Review, August 2011)


Losers don’t want to hear this today, tomorrow, or the next day. Especially from me. But, for them, I guess that’s too bad isn’t it? I’m the one hiring and we’re going to do everything we can to be the change we all want to see in this country. We can do this.


Back to the Global Macro Grind


With global markets hanging on every whisper coming out of Eurocrats from Greece to Germany this morning, our economic freedoms remain in the balance.


What the Europeans ultimately decide to do when they pull out their multi-trillion Euro-TARP bazooka is out of our hands at this point. That said, we can make sure that the likes of Tim Geithner and his compromised and conflicted cronies don’t’ fool us the 2ndtime.


Remember, whatever bazooka took the US Financials up for the short-term remains a national banking embarrassment in this country for the long-term. Letting losers lose is an important principle of “free” markets because, in the end, they’ll lose anyway.


I can’t imagine anyone likes playing the game this way, but we have to play the game that’s in front of us. Here’s your Global Macro calendar of critical catalysts for this week: 

  1. Tuesday, Greece’s PM meets with Angela Merkel in Germany
  2. Tuesday, US Federal Reserve President Fisher discusses why he disagreed with Bernanke on implementing the Twist
  3. Wednesday, Bernanke gives a speech on “Emerging Markets” and how his policy to inflate had nothing to do with nothing
  4. Thursday, US GDP for Q211 is released (still subject to 32-81% downside revisions)
  5. Thursday, Germany’s Bundestag votes on the Euro-TARP bazooka
  6. Friday, Congress votes on another Keynesian Spending Bill (and could shut down again if they don’t pass it)
  7. Friday, is month and quarter end for all of the asset managers in our business (watch out for the customary markups) 

Why my Macro calendar of catalysts isn’t more data and fundamentally driven is a failure of our financial system’s current architecture in and of itself. If I’ve said this 1000x in the last 3 years, I have said it 10,000x - Big Government Intervention in our markets will continue to have 2 general outputs:


A)     Shortened Economic Cycles

B)      Amplified Market Volatility


And… so the “furor grows” for calling policy people out on this… the truth hurts.


The truth also reveals new horizons of opportunity. The best news we had last week was that a Strong Dollar can re-build a Strong America. The US Dollar Index was up another +2.5% week-over-week, taking its cumulative appreciation to +7.5% since the end of April.


Strong Dollar Deflates The Inflation. Period.


Week-over-week, here’s how that looked in the Commodity prices: 

  1. CRB Commodities Index down -8.5%
  2. Oil down -9.2%
  3. Copper down -16.5% 

Yes, the price of Gold and US Equities were down -9.6% and -6.6% respectively. But, that’s good for all of the astute buyers out there who knew Growth Slowing was going to be their 2011 investment theme. The winners are in cash and there’s nothing more a proactively prepared American likes than buying things on sale.


The only people who don’t want a Strong Dollar are the people who don’t get paid by a strong dollar. Follow the money and you’ll usually figure these types of things out. You’ll probably pick up some transparent and accountable friends along the way too.


To one of Washington/Wall Street’s finest central planners, it may sound upside down for me to say that seeing energy stocks and prices at the pump decline in unison is good for America. But that’s exactly what I want them to hear.


They can’t buy my vote of confidence anymore with their fleeting schemes to inflate. It’s Reformation Time in America, indeed.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $79.19-85.91, and 1121-1144, respectively.


Bes of luck out there today,



Keith R. McCullough
Chief Executive Officer


Reformation Time - Chart of the Day


Reformation Time - Virtual Portfolio


The Macau Metro Monitor, September 26, 2011




Stanley Ho has liquidated his remaining 0.09% stake in SJM Holdings to his 4th wife, Angela Leong On Kei, for HK$76.4MM.


CHINA'S SEPT CPI FORECAST TO BE 6.0-6.2% VS 6.2% IN AUG China Securities Journal

A government researcher tells the China Securities Journal that the slight drop should mainly be attributed to the stringent monetary policy that China government has adopted.




TODAY’S S&P 500 SET-UP - September 26, 2011


There is no Euro-TARP bazooka this morning, but there is plenty of policy noise making – that’s what central planners doLagarde wants it; Geithner wants it; so it’s coming –time/size remains the question.


Two TRILLION is being floated as the number this morning and that’s in line with what we’ve been saying since our conference call on Euro-TARPing last week.  Important calendar catalysts are Merkel meeting with Greece’s PM tomorrow in Germany, and the Bundestag voting bailout size Thursday.


As we look at today’s set up for the S&P 500, the range is 23 points or -1.36% downside to 1121 and 0.67% upside to 1144.











  • ADVANCE/DECLINE LINE: 800 (+3195) 
  • VOLUME: NYSE 1229.80 (-28.34%)
  • VIX:  41.25 -0.24% YTD PERFORMANCE: +132.39%
  • SPX PUT/CALL RATIO: 1.31 from 2.75 (-52.49%)



  • TED SPREAD: 36.53
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 1.84 from 1.72     
  • YIELD CURVE: 1.52 from 1.67


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30 a.m.: Chicago Fed Nat Activity Index, Aug., est. (- 0.4), prior (-0.06)
  • 9:15 a.m.: Fed’s Raskin speaks on monetary policy in Washington
  • 9:30 a.m.: Fed’s Bullard speaks in New York
  • 9:30 a.m.: ECB’s Bini Smaghi speaks in New York
  • 10 a.m.: New home sales, Aug., est. 294k (down -1.3%)
  • 10:30 a.m.: Dallas Fed Manufacturing, Sept., est. (-8), prior (-11.4)
  • 11:30 a.m.: U.S. to sell $29b 3-mo. bills, $27b 6-mo. bills
  • Noon: ECB’s Weidmann speaks in Washington
  • 3 p.m.: Fed’s Kocherlakota speaks on debt panel in Chicago


  • Finance ministers, central bankers urged European officials to intensify efforts to contain debt crisis as IMF, World Bank held annual meetings in Washington
  • Berkshire Hathaway said to increase stake in Tesco to 3.64% from 3.21%
  • Netflix, DreamWorks Animation complete streaming deal, NYT
  • Apple may have cut 4Q iPad orders by 25%, JPMorgan says, citing indications from supply-chain vendors
  • Pimco forecast advanced economies will stall over the next yr as Europe slides into a recession
  • Axis-Shield disappointed Alere hasn’t taken notice of its investors’ rebuttal of Alere’s 460p-shr offer, which “fundamentally undervalues” Axis-Shield’s prospects
  • Clorox (CLX) Carl Icahn withdrew director slate after concluding holders wouldn’t approve move



Deflating The Inflation remains a big theme of ours (because we are bullish on the US Dollar); in the end, this is great for Americans (bad for the stocks that, if you dropped them on your head (or foot or something) would hurt); Copper down another -1.6% this morning at 3.22/lb and has crashed alongside the price of oil by 28-29% since April.





  • Commodities Drop to 10-Month Low as Silver Slumps on Debt Risk
  • Gold Slides More Than Comex Margins as Investors Cover Losses
  • Raw-Materials Rout Drives Bullish Futures Down 20%: Commodities
  • LME Facing Takeover as Record Commodity Volumes Draw Bidders
  • Mongolia Seeks Bigger Stake in Rio, Ivanhoe Copper Mine
  • Oil Falls to Seven-Week Low on Bets Europe Crisis to Cut Demand
  • Investors Favor Cash Over Commodities in Dim Poll Outlook
  • Industrial Metals Tumble as Europe Debt Crisis May Curb Growth
  • Australian Precious-Metals Exchange Plans to Start Next Month
  • Spot Gold Advances for First Day in Four as Futures Rebound
  • Palm Oil Headed for First Drop in Three Years to Cut Costs
  • Monsoon Rainfall Exceeding Forecast to Boost India Crops
  • Indonesia’s Biggest Tin Producing Region May Suspend Exports
  • Armajaro Trading Moving Focus From Futures to Actual Commodities
  • Copper in Shanghai Tumbles by Daily Trading Limit
  • Oil Trades Near 6-Week Low on Bets European Crisis to Cut Demand
  • Copper Falls Below $7,000 a Ton to Lowest Since July 2010
  • Copper Has Most ‘Fundamental’ Risk to Decline, Macquarie Says
  • Palm Oil Drops on Expectations of Higher Supplies, Weak Demand







EUROPE: trying to rally in front of the Bazooka but volume not convincing yet and DAX remains under my key TRADE line of 5439 resistance.






ASIA – crashing Asian equity prices continued overnight, which is a very bearish leading indicator that A) is not new but B) is worsening at an accelerating rate; Thailand dropped -5% last night, followed by Philippines down -4.2% and Indonesia down another -3.2% (these 3 markets are in the Top 10 in the world; so part of this is mean reversion; part liquidation in EM).








Howard Penney

Managing Director

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