• run with the bulls

    get your first month

    of hedgeye free


European Risk Monitor: More of the Same Indecision

Positions: Short Italy (EWI)

Some things change, others stay the same. As the European sovereign debt and banking contagion crisis chugs along, the underlying current remains that despite Germany’s pledge to back the EFSF, the fund is undercapitalized to deal with the bailout/default needs of Italy or Spain, and Trichet and the ECB remain unwilling to let the Bank take on more risk via larger sovereign bond purchases.


As the powder keg of indecision on go-forward policy from Eurocrats heightens, so too does volatility across European capital markets. We’re positioning to get short a number of European economies at the right price. Currently we’re short Italy in the Hedgeye Virtual Portfolio via the etf EWI, but numerous indices are broken across immediate and intermediate TRADE and TREND durations, an explicit bearish set-up in our models. [For more on our thesis on Italy see our note titled “Shorting Italy (EWI)” on 9/30].  


From a risk perspective, we continue to take our cues from government bond yields and cds spreads. As we’ve noted in previous work, the 6% yield on 10 year government bonds has been a historically significant level for the PIIGS, meaning that a violation of the line to the upside resulted in an expeditious upward run (see chart below).  Italy, like Spain, has maintained a level below 6% since the ECB restarted the SMP on August 8th, and currently trades at 5.50%, whereas Spain is trading at 5.08%.  However, should yields rise above the 6% level, we’d expect the ECB and European policy makers to act quickly to attach another band-aid to the Union’s fiscal imbalances.


European Risk Monitor: More of the Same Indecision - A. 10


European Sovereign CDS – European sovereign swaps were mostly tighter week over week, with only the German sovereign CDS spread widening. Irish sovereign CDS spreads tightened week over week by 15%. (Please note: Greek CDS is not shown in the chart because the data was not available.  To gauge Greek credit risk, please refer to Greek bond yields below.) 


European Risk Monitor: More of the Same Indecision - A. 1


European Risk Monitor: More of the Same Indecision - A. b


We don’t have the crystal ball on the timing of the next bailout band-aid, however below we provide a calendar of catalyst around which an announcement could be made:


4th October:                            ECOFIN Council.                

6th October:                            ECB Interest rate decision. Jean Claude Trichet’s last Meeting as President.

13th October:                          Eurogroup to decide on release of 6th tranche of Greece bailout funding.

13th October:                          Italian Bond Auction.

14th October:                          G20 Finance Ministers.

Mid-October:                           Possible Italian proposals on labor market and other structural reforms.

17th October:                          Possible Slovakian vote on EFSF.                              

17th/18th October:                   EU Summit.

27th October:                          Irish Presidential Election.

28th October:                          Italian Bond Auction.

Late-October:                          Expected publication of European Commission report on Eurobonds.

1st November:                         Mario Draghi replaces Jean Claude Trichet as ECB President.

4th November:                         G20 Heads of State.

8th November:                         ECOFIN.

20th November:                       Spanish Elections.


Finally, below we present the European Financials CDS Monitor from our Financials team. Bank swaps mostly tightened in Europe last week.  Swaps tightened for 34 of the 40 reference entities, widened for 5, and was unchanged for 1. The average tightening was 6.7%, or 37 basis points, and the median tightening was 3.0%.


European Risk Monitor: More of the Same Indecision - A. Banks


Matthew Hedrick

Senior Analyst


The most important meal of the day.








Dairy price have come down dramatically over the past couple of months but it is worth noting that beef prices continue to follow a bullish trajectory.  Cheese prices have been volatile this year and we believe that another increase is possible before the quarter is out.


THE HBM: SBUX, DPZ, RT, PFCB, CAKE - cheese 103


THE HBM: SBUX, DPZ, RT, PFCB, CAKE - live cattle 103





Corn continues to slide and food processors, in turn, continue to outperform peer subsectors in the food, beverage, and restaurant space.




THE HBM: SBUX, DPZ, RT, PFCB, CAKE - subsector fbr





SBUX is kicking off its “Create Jobs for USA” campaign, accepting donations online and in some of its cafes to spur job creation among community businesses in the United States.


DPZ outperformed the space on Friday. 




RT, CAKE, and PFCB underperformed the casual dining category on accelerating volume during Friday’s trading session.


THE HBM: SBUX, DPZ, RT, PFCB, CAKE - stocks 103



Howard Penney

Managing Director


Rory Green



TODAY’S S&P 500 SET-UP - October 3, 2011

Deflating The Inflation via a Strong Dollar remains our Global Macro call.  Get the US Dollar right, you get a lot of other things right.  As we look at today’s set up for the S&P 500, the range is 44 points or -1.63% downside to 1113 and 2.26% upside to 1157.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: -1836 (-3131) 
  • VOLUME: NYSE 1323.20 (+18.04%)
  • VIX:  42.96 +10.61% YTD PERFORMANCE: +142.03%
  • SPX PUT/CALL RATIO: 1.49 from 2.20 (-31.98%)



  • TED SPREAD: 36.42
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 1.92 from 1.99     
  • YIELD CURVE: 1.67 from 1.72


MACRO DATA POINTS (Bloomberg Estimates):

  • 7 a.m.: Fed’s Fisher speaks on CNBC
  • 10 a.m.: Construction spending, est. (-0.2%), prior (-1.3%)
  • 10 a.m.: ISM Manufacturing, est. 50.3, prior 50.6
  • 11 a.m.: Fed to purchase $2.75b-$3.5b in notes/bonds
  • 11 a.m.: Export inspections: corn, soybeans, wheat
  • 11:30 a.m.: U.S. to sell $29b 3-mo. bills, $27b 6-mo. bills
  • 1 p.m.: Fed’s Fisher speaks on Bloomberg Radio
  • 6 p.m.: Fed’s Lacker speaks in Madison, Wis.


  • European finance ministers meet in Luxembourg to consider how to shield banks from the debt crisis, boost region’s rescue fund
  • Yahoo will hold 9 a.m. press conference; Alibaba Chairman Jack Ma said on Sept. 30 very interested in Yahoo, talks snagged over political issues
  • Apple iPhone announcement tomorrow; watch for increasing speculation about iPhone 5 capability
  • N.J. Gov. Chris Christie on brink of decision whether to seek Republican nomination for president
  • Supreme Court’s term opens
  • Congress returns from recess
  • Anadarko (APC) won’t have to face personal-injury claims related to 2010 Gulf of Mexico spill, federal judge ruled
  • Arch Coal (ACI) cut forecast for 2011 adjusted EPS


COMMODITY/GROWTH EXPECTATION                                                                    


COMMODITIES – everyone and their brother knows Dr Copper is crashing now, and this is perpetuating weakness (down another -3.1% to start the wk making fresh lows at $3.05/lb). Every commodity in the Hedgeye model is now bearish TRADE and TREND, including Gold (TREND resistance $1680)


THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • China Manufacturing Stability May Ease ‘Hard Landing’ Risks
  • Raw-Material Bets Cut 26% in Biggest Rout Since ’08: Commodities
  • Hedge Funds Cut Oil Bets Most in Seven Weeks: Energy Markets
  • Shell Declares Force Majeure After Fire, Cancels Oil Supply
  • Gold Rises for Third Day as Greek Debt May Spur Increased Demand
  • Obama Said Poised to Submit Three Trade Accords to U.S. Congress
  • Platinum-Gold Ratio Tumbles to Lowest Level Since at Least 1987
  • Commodities Drop to 10-Month Low as European Industry Shrinking
  • Copper Falls to 14-Month Low on Prospects for Demand to Weaken
  • Crude Extends Declines in New York After Closing at One-Year Low
  • European Goldfields Rises in London on $600 Million Qatari Loan
  • Corn Extends Declines After Biggest Monthly Drop in Five Decades
  • Oil Falls After Closing at One-Year Low as Europe Ministers Meet
  • Petrobras Bonds Trailing Pemex on Higher Costs: Brazil Credit
  • Palm Oil Tumbles to One-Year Low as Soybeans Drop on Stockpiles
  • Copper Falls to 14-Month Low Before Manufacturing: LME Preview
  • U.S. Mint American Eagle Silver Coin Sales Most Since January
  • Freeport, Striking Peru Copper Miners to Resume Wage Talks Today
  • U.A.E. Says World Oil Use Stable, No Risk of Plunging Demand



THE HEDGEYE DAILY OUTLOOK - daily currency view





GREECE – so they fibbed again… what does that matter in a globally interconnected game of risk where the entire construct of the EUR/USD pair continues to trade off of politics? Greece leads the headlines and Germany’s DAX broke my critical TRADE line of 5439 support again. Not good.


THE HEDGEYE DAILY OUTLOOK - euro performance





ASIA – complete meltdown where markets were opened last night w/ Hong Kong leading the crashers on the downside (down -4.4% overnight; down 31% since April 8th); Thailand and Indonesia collapsed for -4.7% and -5.9% moves, respectively. Asian Growth Slowing.


THE HEDGEYE DAILY OUTLOOK - asia performance









Howard Penney

Managing Director

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.


The Macau Metro Monitor, October 3, 2011




According to data compiled by Macau Daily Times, Macau Sept GGR was likely MOP 21.5-21.7 BN, which would imply 40-42% YoY growth.  The data is up to Sept 29, when typhoon Nesat affected the territory.



Michael Leven, president of LVS, said LVS has not observed any negative signals in its business in Macau.  "When you're on the ground and see what is happening, it's very, very hard to be pessimistic," Leven said.  "We are continuing to go forward with our investment in Asia and we are continuing to look for additional opportunities in Asia. We haven't seen any problems there and we continue to be very very very bullish on the Chinese situation," Leven added.



Flash estimate of the private residential property index for the third quarter 2011 shows that the rate of increase in private residential property prices continues to moderate for the eighth consecutive quarter since the fourth quarter 2009.  The index shows a 1.3% QoQ growth. 

Snares and Delusions

This note was originally published at 8am on September 28, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“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 $1603-1667, $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

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.