Nifty Adventures

This note was originally published at 8am on October 05, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Adventure is just bad planning.
-Roald Amundsen 


Yesterday, in the Early Look Keith wrote the following:


“Again, I’m not calling for a new bull market. Neither am I saying that Growth Slowing has ended. I am simply suggesting that you see this for what it is in most things US Equities (and some things Asian and European Equities) this morning – a Short Covering Opportunity.”

Call us lucky or good, but with the SP500 moving 44 handles upwards in the last 45 minutes yesterday, yesterday was a short covering opportunity indeed.


A key point underscoring that call yesterday was that global macro fundamentals, on the margin, were not getting worse.  Alongside that, of course, was that consensus was hyper bearish.  I was reminded of that this morning when I saw an advertisement on Google that was trying to sell a list of banks that are “doomed to fail”.


Certainly, we have a bearish view on the global banking system.  That said, when companies start running advertisements to sell lists of banks that are “doomed to fail”, the surest takeaway is that a lot of the bad news surrounding bank failures is priced in over the short term.  In the Chart of the Day, we’ve flagged this advertisement.


The other positive catalyst for global equities today is Moody’s downgrade of Italian government debt by 3 notches.  To the credit of Moody’s, the ratings agency has at least gone from being completely irrelevant and wrong to being a classic contrarian signaler.  The market decides when debt is downgraded, not Moody’s, and the market downgraded Italy many months ago.


Our view of Europe is that it would require a crisis to lead to an appropriate action that would at least lead to a reprieve in the European debt crisis contagion in the short term.  Yesterday, the crisis came in the form of Dexia, the largest bank in Belgium.  Dexia is also a significant global banking player and is roughly twice the size of Washington Mutual for comparative purposes. 


The negative rumors out on Dexia yesterday were rampant.  There was speculation that an emergency board meeting had been called to discuss Dexia’s accounting for Greek debt.  Rumors suggested that a breakup of the bank was imminent.  To raise capital, the bank was supposedly preparing to sell its profitable Turkish and Asset Management businesses.  Etc. Etc.


In the case of Dexia, we should be clear, where there is smoke there is fire.  In a chart that we have flagged numerous times over the last couple quarters comparing tangible equity to tangible assets of European banks, Dexia is by far the worst capitalized of the major European lenders at 1.5%. (Incidentally, Deutsche Bank is the fourth worst capitalized bank in Europe at 2.8% tangible equity to tangible assets.)


As with any global economic crisis, though, comes a great Keynesian opportunity.  Last night the Belgian Prime Minister put his Keynesian cards on the table and said the following on national radio:


“One of the possibilities to consolidate Dexia Bank Belgium is, at a certain point, to ensure that it is taken up by the government.”


To this hockey head, that sounds like an explicit back stop for Dexia and, at least, a short term reprieve for the weakest major bank in Europe.


The other marginal positive from Europe, which was a key catalyst for U.S. equities yesterday, was an article from the Financial Times that Eurozone officials are examining ways of recapitalizing banks.  Like an addict, the first step in solving your problem is actually admitting you have one.  After months of denial, European officials leaking that they will recapitalize bad banks is an admission of their problem and a short term positive.


In addition, German President Angela Merkel made the following statement yesterday:


“No one can say for certainty what would happen if Greece defaults.  Before I make a nifty step into an adventure, I have to ask whether we can really handle this and can we oversee what we are doing? Solidarity is always cheaper than if we were to go it alone and wind up with the problem Switzerland has . . . that the currency level is so high that you can’t export any products anymore.  Today, going it alone is not path to a better future.”


Not surprisingly, Merkel sums up German situations quite adroitly.  On one hand, Germany has and will continue to bear the bulk of the financial responsibility of Europe’s Sovereign  Debt Dichotomy.  On the other hand, German has been a major economic beneficiary of a common currency in the Eurozone.


Undoubtedly Merkel has not forgotten 1992 to 1995, the last time that other European economies found their combination of demand growth and real exchange rates against the German economy unsustainable. The results were massive and abrupt depreciations against the Deutsche Mark. In turn, the appreciation of the Deutsche Mark against Germany’s key trading partners led to a collapse in German exports and competitiveness.  Despite internal politicking, the Germans ultimately understand that the Euro benefits them.


And so the nifty adventure in Europe continues.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Nifty Adventures - Chart of the Day


Nifty Adventures - Virtual Portfolio

Paulson faces big test as clients mull future

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.

Insecurity's Ego

“I love playing ego and insecurity combined.”

-Jim Carrey


There is a good article in this week’s The Economist titled “Return to Maastricht” where Charlamagne interviews locals in the Dutch town that gave birth to the Euro in 1991. Frans Timmermans has a concise quote on page 68 that summarizes the Eurozone today:


“Europe seems to be an agent of insecurity. The benefits are invisible; the downside is very visible indeed.”


The French know this. The Belgians know this. The Germans and the Dutch know it too – but the question remains as to whether or not they need to swallow Bear Stearns like exposures whole to the extent that the French and Belgians do.


On that score, this morning’s #1 Most Read Story on Bloomberg tells you all you need to know about what matters to interconnected Global Macro markets today:


“Merkel, Sarkozy Pledge Bank Recapitalization”


And while there are very different definitions of the size and scope of this “recapitalization” (coined first at Hedgeye as the Eurocrat Bazooka), this morning’s Global Macro market action tells you all you need to know about dominos.


Dexia, as we wrote last week, is the domino.


Dexia is a Belgian/French bank that is being bailed out this morning by, drum-roll, Belgium and France. Sure, the fine lads in Luxembourg appear to be throwing in some Europig Paper too – but, ultimately, this is a Belgian and French thing. A really big thing for those 2 countries in particular (relative to Germany and the Netherlands), because Belgium and France have marked their Pig Paper at par!


Qu’est ce qui se passe avec le marking of le Pig Paper at par?


Put simply, this is what Bear, Lehman, Morgan, etc. did in 2007-2008. They called it “level 3 asset pricing.” And Bailout Bankers around the world can call it whatever they want in Europe this morning, but there is one thing it is not – marked-to-market!


The most important move in all of Global Macro for the past 3 weeks has been that the US Dollar Index has been up for 3 consecutive weeks. In the end, I think this is the most bullish development there has been for the US economy. Strong Dollar = Strong America.


With the US Dollar Index up +7.8%  since La Bernank tested Burning The Buck to a 30-year low in April of 2011, this has been good for the 71% of America that matters – Consumption (C) as a % of US GDP – and bad for dysfunctional debtors who are begging for bailouts.


This isn’t a consensus view. But I’m not really a consensus kind of a guy. And neither should you be. If the last 3 years has taught you anything about common sense, one is that Keynesianism is not for the commoner. If you are a debt laden aristocrat, sorry – can’t help.


Of course the US Dollar strengthening has nothing to do with Ben Bernanke or Tim Geithner changing their Keynesian policies (yes, It’s The Policy, Stupid). It has everything to do with the Europeans trying to do exactly what our Too Big To Perform financial system had Americans do in 2008 – bailout bad banks with tax payer backed fiat currency.


Perversely, with the “news” of the Dexia Domino in motion this morning, the Euro is rallying to another lower short-term and lower long-term high. This has more to do with the mechanics of the EUR/USD pair being the most widely held short position on planet hedge fund right now, so don’t let it stress you out.


Across all 3 of our risk management durations (TRADE, TREND, and TAIL), the Euro (versus the USD) remains bearish/broken:

  1. TRADE resistance = $1.36
  2. TREND resistance = $1.42
  3. TAIL resistance = $1.39

When all 3 of our risk management durations are bearish/broken, we call this a Bearish Formation. Those are not good.


And neither is Austria or Greece seeing their stock markets get hammered for -4.5% moves to the downside this morning. I guess that’s what you get when your Eurocrat Bazooka isn’t big enough, yet. Size matters. Insolvent European banks are seeing their marked-to-market stock prices fail. Insecurity’s Ego is going to have to have another European emergency bailout meeting about that…


My immediate-term support and resistance ranges for Gold, Oil, the German DAX, and the SP500 are now $1, $80.66-84.66, 5, and 1145-1169, respectively. My Cash position in the Hedgeye Asset Allocation Model dropped to 64% from 73% week-over-week.


Happy Canadian Thanksgiving and best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Insecurity's Ego - EURBEAR


Insecurity's Ego - VPDEUX




TODAY’S S&P 500 SET-UP - October 10, 2011


And so it begins… the Dexia Domino falls into a bailout package:  BAILOUT – interestingly, but not surprisingly, Sarkozy is trying his best to nip gravity in the bud and stop Dexia becoming the European domino – this morning’s Dexia bailout is only 61% backstopped by Belgium – France is taking a big piece. Both the DAX and CAC are holding their immediate-term TRADE lines of support (5429 and 3004, respectively) on the news.  As we look at today’s set up for the S&P 500, the range is 24 points or -0.91% downside to 1145 and 1.17% upside to 1169






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: -1218 (-3413) 
  • VOLUME: NYSE 1137.24 (+1.77%)
  • VIX:  36.20 -0.19% YTD PERFORMANCE: +103.94%
  • SPX PUT/CALL RATIO: 2.16 from 1.70 (-27.60%)


  • TED SPREAD: 38.60
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.10 from 2.01     
  • YIELD CURVE: 1.80 from 1.72

MACRO DATA POINTS (Bloomberg Estimates):

  • No material events today


  • House, Senate not in session
  • Government offices closed for Columbus Day holiday
  • Superior Energy to buy Production Services for 29% premium in cash and stock.
  • American Eagle, pilots’ union hit impasse in efforts to agree on a new contract before Eagle is spun off from AMR Corp., the union said.
  • Microchip Technology (MCHP) may be poised to rise to $40, Barron’s said
  • Borrowed shares climbed to 11.6% of stock last month from 9.5% in July, biggest increase since at least 2006: Data Explorers


COMMODITY/GROWTH EXPECTATION                                                                    


COMMODITIES: rallying to lower highs across board this morning; I covered our short Gold position last week; looking to see if $1676 resistance holds.


THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Hedge Funds Miss Biggest Rally as Short Bets Rise: Commodities
  • Short Sales Rise Most Since ’06 as Stocks Lose $11 Trillion
  • Thailand Bolsters Flood Defenses as Deluge Threatens Bangkok
  • Hedge Funds Cut Bullish Oil Bets for Third Week: Energy Markets
  • BHP Wins Australia’s Approval for Olympic Dam Expansion
  • Gold Climbs as Investors Mull Europe Crisis Amid Merkel Pledge
  • Oil Gains a Fourth Day After European Pledge to Contain Debt
  • Paulson’s Main Fund Said to Lose 47% in 2011 Through September
  • Copper May Drop in London on Concern About Outlook for China
  • Chemical M&A Grinds to Slowest Pace Since 2009 on Growth Concern
  • U.K. Wants EU Farm Payments Cut as Agriculture Policy Reviewed
  • Hong Kong Bourses Decline to Comment on LME Bid-Interest Report
  • Palm Oil Inventories Increase as Production Gains, Exports Ebb
  • Police Say Two Workers Shot Near Grasberg Mine in Indonesia
  • Australia’s Eastern Crops Improve, La Nina May Boost Yields
  • COMMODITIES DAYBOOK: Saudi Oil Minister Sees No Excess Supply
  • Indonesia’s Refined Tin Shipments Extend Drop as Prices Fall
  • Lundin Mining to Consider Possible Merger in Review in 2012
  • Pemex CEO Says Lack of Repsol Collaboration Is ‘Ridiculous’




EURO – cutting off perceived tail risk is bullish for the Euro’s insolvency pricing until it isn’t. TRADE line resistance = 1.36 and the TAIL (that’s broken) of resistance is up at 1.39 – so we’d be shorting Euros and buying US Dollars all day long on the news.


THE HEDGEYE DAILY OUTLOOK - daily currency view





EUROPE: bazooka in play but markets not up as much as socialists would have thought; DAX and CAC look fine; Austria

getting hammered -4.4%


AUSTRIA – domino is as domino does; Erste bank is getting powered and the Austrian stock market is down -4.4% this morning; Greece is down another -4.5% (fresh new lows) and Romania is -2.5% - all of this tells me the interconnectedness of risk is what we think it is and not unlike Bear Stearns, this Dexia moment is not the end (no bailouts in Greece today).


THE HEDGEYE DAILY OUTLOOK - euro performance





ASIA: subdued session with China down -0.61%; HK flat, and KOSPI +0.38% as Asia looks for direction from Europe's bank bailout Part I.


THE HEDGEYE DAILY OUTLOOK - asia performance









Howard Penney

Managing Director

The Week Ahead

The Economic Data calendar for the week of the 10th of October through the 14th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - 1. leck

The Week Ahead - 2. dieses

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 80.43%
  • SHORT SIGNALS 78.35%