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Snares and Delusions

“If we mean to prosper long term, I am sure we need to act to make debt less attractive to everybody: it really is a snare and a delusion.”

-Jeremy Grantham


I sold my Gold again yesterday, taking the Hedgeye Asset Allocation to Commodities back to 0%. I took my long US Dollar position up to 12%. I have a 70% asset allocation to Cash and couldn’t care less about missing the last few days of another Month-End Markup.


Long-term investors: if you’re betting against the Fiat Fool system of conflicted, compromised, and constrained monetary and fiscal policy, ultimately you are betting on King Dollar’s return. That’s the only way out. We need to let losers lose. We need to deflate.


Deflation is only bad if you are one of the people whose business is to earn a fee on perma-inflating asset prices. For we commoners who have our own capital at risk and are running our own companies for cash flow, deflation is good. We like to buy low, sell high, and earn a spread.


My sense is that the people who didn’t sell high (either in October 2007 or April 2011 – the SP500 is down -25% and -14% from those Policy To Inflate tops, respectively) are the ones whining the most right now, just like they were then.


“Then” was Q3 of 2008. That’s when Old Wall Street’s finest were begging for the “bazooka.” Remember that? “We need some shock-and-awe rate cuts” from the Fed … we “need” Paulson to deliver us the biggest one-sided bailout in the history of the world…


Today, with certain French and Belgian banks not looking any different to us than Lehman did then (marking their Pig Paper at par; Dick Fuld called this “level-3 asset pricing”), what are the Keynesians begging for? Another Bazooka.


This is no ordinary Keynesian Bazooka. This one needs to be 2-3x the size of the biggest man-made financially engineered Delusion, ever.


Back to Grantham…


The aforementioned quote came from Mr. Grantham’s August 2011 Quarterly Letter titled “Danger: Children At Play”, where he opened his always thought-leading missive with the following fear:


“My worst fear about the potential loss of confidence in our leaders, institutions, and capitalism itself are being realized. We have been digging this hole for a long time. We really must be serious in our attempts to resuscitate the fortunes of the average worker.”


Effectively, what he’s calling for is the end of the plundering of American wages and savings accounts; the end of policies to inflate the debt of bad debtors; and the end of abusing our currency for the sake of a conflicted few.


Back to this morning’s Global Macro Grind


Strong Dollar = Strong America. Period. It did under Reagan inasmuch as it did under Clinton. Both of these Presidents not only saw much lower levels of commodity inflation imposed on their citizenry, they saw the highest levels of employment in modern American history.

  1. Q: Who needs Commodity inflation? A: The people who are long of commodities.
  2. Q: What happens when you strengthen the US Dollar? A: You Deflate The Inflation.

With the US Dollar being one of the best Global Macro investments you could have made in the last 3 months, let’s look at what the correlation math says about everything that trades globally in US Dollars (these are inverse correlations – USD up = everything down):

  1. WTI Crude Oil = -0.87
  2. Heating Oil = -0.94
  3. Silver = -0.81
  4. Copper = -0.88
  5. Coffee = -0.87
  6. Oats = -0.87

Now if you take a Washington/Old Wall Street car service to work and don’t need to pay for gas, or if you’re not planning on heating your home this winter… or drinking coffee, or eating oatmeal… or anything like that at all… You should be supporting policies to inflate via US Dollar debauchery.


Otherwise, don’t call yourself a patriot trying to solve this country’s long-term problems via a currency devaluation. Patriots attack the tyranny of self-dealing government policy; they don’t perpetuate it.


Destroying our currency through failed policies didn’t work for us in the 1970s and it’s not working now. It didn’t work for Charles de Gaulle in France in the 1960s, and it won’t work for Sarkozy’s Eurocrats this time around either.


Intraday rallies on rate cuts and bazookas are the Snares and Delusions that I have personally had enough of. This is not leadership. Neither is it going to put America back on the long-term path to prosperity.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $78.21-84.49, and 1118-1182, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Snares and Delusions - Chart of the Day


Snares and Delusions - Virtual Portfolio




TODAY’S S&P 500 SET-UP - September 28, 2011




Yesterday was a really close confirmation of another immediate-term TRADE breakout (within a bearish TREND and TAIL) of the SP500.  As we look at today’s set up for the S&P 500, the range is 64 points or -4.88% downside to 1118 and 0.56% upside to 1182.




TRADE, TREND, and TAIL lines for the SP500 remain broken as long as 1182 SPX does. Only 1 Sector of 9 is bullish TRADE and TREND - (Utilities XLU). Of the 8 of 9 Sectors that remain bearish TREND, Financials (XLF) still look the worst followed by Basic Materials (XLB) and Consumer Staples (XLP).


The Consumer Staples risk continues to evolve as the US Dollar’s strength does; FX risk is a trivial headwind for EPS.  If 1182 (SPX) is overcome and the Greeks and Italians jump over the moon, everything should be fine into month-end.









  • ADVANCE/DECLINE LINE: 1938 (+537) 
  • VOLUME: NYSE 1190.10 (+2.83%)
  • VIX:  37.71 -3.36% YTD PERFORMANCE: +112.45%
  • SPX PUT/CALL RATIO: 1.82 from 1.86 (-2.02%)


  • TED SPREAD: 35.51
  • 3-MONTH T-BILL YIELD: 0.01% -0.01%
  • 10-Year: 2.00 from 1.91     
  • YIELD CURVE: 1.75 from 1.66 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7 a.m.: MBA Mortgage, est. -0.2%
  • 8:30 a.m.: Durable goods, est. -0.2%
  • 10:30 a.m.: DoE inventories
  • 1 p.m.: U.S. to sell $35b 5-yr notes
  • 5 p.m.: Fed’s Bernanke speaks in Cleveland. Prepared text, Q&A


  • Amazon.com hosts press event, said to announce new tablet device. Watch for details on who may sell it, parts suppliers, pricing
  • President Obama’s $447b jobs plans would help avoid return to recession: Bloomberg economist survey
  • Boston Fed President Rosengren called for more govt efforts to help homeowners refinance mortgages
  • President Obama participates in an “Open for Questions” roundtable at White House, 11:25 a.m.; delivers annual back- to-school speech at Benjamin Banneker High School in Washington, 1:30 pm
  • N.J. Gov. Chris Christie said he plans to sit out the 2012 presidential race
  • U.S. nuclear regulators meet for a second day to consider Southern’s request to build two reactors at its Vogtle plant near Augusta, Georgia



COPPER – Dr Copper can teach us a lot, if we are willing to re-learn; you’d think that a 1-day short squeeze in everything commodities would see more than a day of follow through – not so much; Copper down another 2% this morning and crashing.


GOLD: we sold it yesterday, keeping Friday's trade a trade; immediate-term downside to $1603 $GLD





  • LME Takeover Bids Mean Most at Stake for Goldman Sachs, UBS
  • Coffee Falls in Rout as Starbucks Cup Costs $1.50: Commodities
  • Chaoda Faces Second Hong Kong Market Misconduct Hearing Today
  • Gold May Gain in London on Physical Purchases, Europe Concern
  • Oil Falls, Heading for Quarterly Decline on Europe Debt Crisis
  • Russian Oil to Fall as Tax Spurs Urals Exports: Energy Markets
  • BP May Quadruple Indonesian Gas Plant as Part of Asian Drive
  • Commodities Drop, Deepening Quarterly Decline, on European Risk
  • Wrong Reasons Hurt Corn, Says UN, as Morgan Stanley Bullish
  • Russia Expands Ports to Regain Wheat Export Advantage: Freight
  • Commodities Rise Most in Four Months as European Concerns Ebb
  • Spot Gold, Gold Futures Resume Decline on Europe Crisis Efforts
  • Oil Surges Most in Four Months on European Debt-Crisis Efforts
  • Dairy Has Greater Resilience in Slowdown, New Fonterra CEO Says
  • Ship Owner Losses Persist on Glut as Mine Profits Boom: Freight
  • Gold Climbs Most in Seven Weeks as Commodities, Equities Rally
  • Aluminum Product Shipments by Japan Drop for Third Month
  • Billionaire Ross Says Ship Deals to Accelerate After Slump
  • Typhoon Nesat Kills 20 in Philippines, to Hurt Rice Harvest



FX: Euro/USD has a wall of resistance between here (1.36) and its broken TAIL line of 1.39






Thanks for the timing on this  - “BOE's Financial Policy Committee says Britain's banks face "materially" increased risks from the euro zone debt crisis; recommended that banks should take any opportunity they had to strengthen their levels of capital and liquidity”


EUROPE: sketchy situation developing with DAX recovering my TRADE line of support and CAC and MIB failing at it.


GREECE: lots of rumors; no market support for them - Greek stock market hitting fresh YTD lows here this morning (down -55% since FEB)


FINLAND: important market to watch today in Global Macro as they vote on Euro-TARP bazooka; early read through not good - Finland down -1.5%


FRANCE: no GDP growth in Q2 (reported at 0.0% q/q). No way for these politicians got their forecasts right if they are this wrong on growth.






ASIA: Hang Seng (which we're short) down -26% since the April highs; Korea crashing obviously as well (down -23% since May)


ASIA: very bearish follow through from European and American hope rally yesterday with China, KOSPI, and HK all down in response.








Howard Penney

Managing Director

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.


I want someone to accuse me of looking through the sluggish numbers just to find a silver lining!


The consensus thesis on the consumer is consistent with a fundamentally-weak economy: no job growth, declining real income, Bernanke-inspired price volatility, declining stock prices, falling house prices, sticky gasoline prices, and zero confidence.


Overall, the MACRO data out today on consumer trends is consistent with the factors listed above.  Yet, there are silver linings!  Well, maybe…


Today, the high frequency – ICSC chain store sales index – confirms the decelerating thesis, as the index fell 0.2% last week.  This is consistent with the painfully slow downward trend (the index is now down 6 of the last 8 weeks.)  On a year-over-year basis, growth dipped to 2.7%, the slowest pace in three weeks, though consistent with the trends of 1H11.  Is there a silver lining here?


Also bouncing along the bottom is the Richmond Fed survey, which contracted for the third consecutive month in September. The pace of decline moderated from August, as the composite index rose 4 points to -6.  Looking at the details, new and unfilled orders remained on downward trends but employment growth accelerated and input cost pressures eased.  The increase in employment month-over-month is the first silver lining in the overall sluggish environment


Lastly, after plunging 14 points in August, the Conference Board Confidence Index was virtually unchanged in September (rising only 0.2).  Last month saw a slight 0.7-point upward revision to the August print.  The improvement was led by better employment expectations, which is the second silver lining.


If the economy were to accelerate confidence should recover, but given the excessive debt burden domestically and in Europe, it’s unlikely that growth is going to accelerate.  Our 3Q GDP estimate is 1.1 to 1.4% year-over-year; the risk to the downside is that the low confidence results stay on a continued downward trajectory in sales trends, and causes further economic weakness. 


The third silver lining is not one from today’s data, but one that economists often cite as a reason to buy equities here: that corporate America is flush with cash.  That cash waiting in the wings coupled with pent-up demand could lead to a quick improvement in the jobs picture and an acceleration of growth.


Hope springs eternal, but is not an investment process!




Howard Penney

Managing Director

Commodities and Correlations

Conclusion: Given the historical inverse correlations, a strengthening U.S. dollar is likely to continue deflating key commodity prices, which is positive, on the margin, for the U.S. economy. 


One the more bullish factors in our global macro models as of late is the strength in the U.S. dollar.  In the short term, this is viewed as a flight to safety as global asset allocators get increasingly concerned about the outlook of the euro and the global economy and naturally reallocate funds into U.S. dollar-denominated assets.  In both the short term and long term, a strong U.S. dollar has one key positive benefit, which is a Deflation of the Inflation.


As we’ve consistently highlighted over the course of the past three years, the key driver of many global asset prices has been and will continue be the direction of the U.S. dollar versus other major currencies.  In the chart below, we’ve charted the U.S. Dollar Index versus WTI oil and copper going back three years.  In fact, according to our analysis the correlation between the U.S. dollar index and both copper and oil going back three years is -0.77 and -0.68, respectively.


Commodities and Correlations - 1


The immediate term impact of Deflating the Inflation is at the gas pump in the United States.  As of last week’s retail pricing across the United States, gasoline was priced at $3.51 per gallon and diesel was priced at $3.79 per gallon.  On year-over-year basis, as of last week, the price in gasoline is up +29.9% and the price of diesel is up +28.3%.  On a year-over-year basis, this is obviously not great news, but gas prices are also now at their lowest level since March 2011 and prices have been declining for the last four weeks, so, on the margin, we are seeing some alleviation of the energy consumption tax.


Commodities and Correlations - 2


In the short term, gasoline demand has been proven to be inelastic, so when prices change demand does not change meaningfully.  Therefore, it is likely that these gas savings potentially get funneled back into other areas of consumer spending. 


As a frame of reference for the potential impact to the economy of changing energy prices, according to the Energy Information Administration in 2009 the United States consumed roughly 19.2 MM barrels of oil per day (2/3rds in transportation alone).  This equates to just over 7 billion barrels of oil per year.  Thus, a $10 deflation of the price of oil on an annualized basis leads to $70 billion that can be reallocated within the economy.  In aggregate terms this decrease in the price of oil has a potential positive impact of ~+0.6% on GDP growth.


As an interesting aside, the only two major commodities that have shown a positive correlation to the U.S. dollar over the last three years are natural gas and lumber with +0.49 and +0.62, respectively.  On natural gas, this is somewhat understandable as natural gas, due to transportation costs, is a localized market that is priced based on local supply and demand dynamics.  The lumber point is more interesting and seems to at least tangentially suggest what we’ve often theorized, which is that a strong dollar will lead to a willingness by foreign investors to purchase excess U.S. real estate assets (and thus buoy the price of housing materials).


As it relates to correlations, another key risk point we wanted to highlight is globally increasing correlations between markets and asset classes.  This is occurring in fixed income markets versus equities (at a 40-year high in Europe according to reports), in components of the emerging markets versus the emerging markets index, and between subsectors in the U.S. market.  To the last point, we’ve highlighted in the chart below this strengthening correlation in the U.S. of the SP500 versus its key sectors.  This outcome of increased correlation is, obviously, increased directional risk, but also increased performance risk, as Alpha becomes increasingly difficult to come by.


Commodities and Correlations - 3


Daryl G. Jones

Director of Research

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.