Barroso's Bazooka

This note was originally published at 8am on October 06, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I don’t have to be careful, I’ve got a gun.”

-Matt Groening


It’s only a matter of time before the likes of Jon Stewart and Matt Groening (creator of The Simpsons) start mocking this European Gong Show for what it has become – a gong show.


Groening made his debut in Wet Magazine in 1978 with a cartoon called “Life in Hell.” That might be a better way to describe how a money manager feels about dealing with La Bernank et Le Trichet’s concepts of Keynesian “price stability.” Today’s game of Globally Interconnected Risk is being driven by rumors of Barroso’s Bazooka.


Does Jose Manuel Barroso (President of the European Commission) have a bazooka? What’s the timing on its deployment? Who supports it? Oh the drama…


What we do know is that the IMF, ECB, EU, and Timmy Geithner are working on it, feverishly. These are the said leaders of our lives who are going to centrally plan our way to long-term prosperity. What would we do without them?


On the topic of the bazooka, this is what Geithner had to say yesterday:


Europe needs a more powerful financial backstop.”


This, of course, comes on the heels of Christine Madeleine Odette Lagarde saying she (or the 187 countries she now represents on behalf of France and The DSK at the IMF) has ze “infinite resources” to print ze ammo for Le Bazooka.


Or is it La Bazooka?


Maman, pardon mon francais, but this is what a Yale education has reduced me to. I’m now just a man with a keyboard and a tweet machine fighting the Socialists of the world who are putting another bailout gun to capitalism’s head.


Back to the Global Macro Grind


With the SP500 up +4.1% from its Monday closing low of 1099, the pain being felt in the hedge fund community is much greater than that.


You see, if you shorted the immediate-term TRADE oversold bottom (Tuesday morning) of 1078, and you’re staring down the crosshairs of the S&P Futures indicated up another 10 handles this morning, you are feeling the bazooka of the Pain Trade yourself.


Obviously whoever shorted the low instead of seeing it for what it was – a Short Covering Opportunity – does not Occupy Hedgeye as part of their risk management process. Shorting low and covering high isn’t cool.


So what do we do now?


The thing about this Barroso Bazooka is that it’s real. Weeks ago we did a 52-slide presentation outlining what the size of the bazooka could be and we’ll go over this again for clients on our Q4 Macro Themes Call next Friday (email sales@hedgeye if you want in), but here’s our headline math (slide 42): 

  1. 1.25-1.75 TRILLION Euros to Recapitalize European Banks
  2. 0.75-1.25 TRILLION Euros to Fund Future Deficits
  3. = 2-3 TRILLION Euro-TARP Bazooka 

Now, to be clear, as our Director of Research, Big Alberta, often reminds me – size matters. But there are still some other things about this bazooka to consider: 

  1. Timing – there is no timing. That’s a problem.
  2. Coordination – to deploy a bazooka that big, herding politicians of the world will be like herding cats.
  3. Markets – remain real-time. Tick tock. 

So… on with our risk management day.


Instead of sending our Senior European analyst, Matt Hedrick, back to France to pose as one of two-eggs-side-by-each on Lagarde’s breakfast meeting plate, the best we can do is let Mr. Macro Market tell us what to do.


The German DAX is breaking out above our immediate-term TRADE line of resistance (5439) again this morning. So the 1stthing we do is don’t short European Equities. Wait and watch.


The 2ndthing we do is watch the Euro/USD currency pair. If the Euro can close above $1.34, then the short squeeze in almost everything inversely-correlated to the US Dollar can continue (EUR/USD drives USD Index). If the Dutch come out intraday and vote down the size of Barosso’s Bazooka (and the Euro fails again at $1.34), there is no support all the way back down to its 2011 lows of $1.29-1.30.


In the end, like you are seeing with US money-center banks post the 2008 Geithner/Paulson TARP1 Bazooka, there will be an end … and piling more short-term debt-upon-debt on insolvent banks and their incompetent political advisors will end badly. Very badly.


But, back to the immediate-term, if you’re not the one with the gun – things can end badly for the pig-headed short seller too.


My immediate-term support and resistance ranged for Gold, Oil, the German DAX, and the SP500 are now $1601-1673, $75.86-84.59, 5439-5767, and 1099-1172, respectively. On Tuesday morning, I cut our Cash position from 73% down to 67%, taking our asset allocation to US Equities up to 6% (versus 0% at this time last week).


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Barroso's Bazooka - Chart of the Day


Barroso's Bazooka - Virtual Portfolio

Groupthink's Behavior

“Psychologist Irving Janis coined the term groupthink to describe ‘expert’ behavior.”

-Dan Gardner (“Future Babble”, page 109)


When our head of Healthcare Research, Tom Tobin, and I were working at what used to be called Dawson-Samberg (long-time hedge fund that split up) over a decade ago, we were learning what Wall Street “consensus” was by doing. Today, we continue to develop processes to quantify it. This, like any good process, takes flexibility, testing, and time.


Within the context of a long time, “groupthink” is a relatively new phenomena. Irving Janis’ original groupthink research at Yale University didn’t occur until the early 1970s. Since then, it’s been very helpful in analyzing both the military and economic policy mistakes of central planners.


Groupthink can also be applied to analyzing the behavior of short sellers – as in hedge funds – and how and when they make decisions. To be, or not to be hedged – remains the question. With the most obvious of groupthink occurring at the most painful ends of what we call the immediate-term TRADE range.


While it’s hard to believe that Old Wall Street missed making the 2011 Growth Slowing call (after having had the opportunity to review their 2008 forecasting mistakes), it’s even harder to believe that the SP500 can put on a 116 point (+10.7%) move in less than a week and still have so many hedge fund guys trafficking in the same high-short interest hedges.


Believe both.


I remember listening to a friend explain to me that John Paulson was “reducing his exposure to 62% net long” (with leverage) sometime back in early Q3 of 2011 and thinking to myself, that’s not a hedge fund – hedge funds hedge.


But that was just silly young me saying what any prudent Risk Manager should have said about Paulson’s positioning, given my bearish intermediate-term Global Macro view.


After I said it publically on CNBC again in July, I had people do the proactively predictable and tell me I was being whatever they call someone when they are confident in their view. After all, John Paulson is smart. But, then again, so is my team. Market opinions aren’t personal. Neither are the tail risks associated with redemptions and liquidations. It’s all part of the game.


Back to the Global Macro Grind


With the Short Covering Opportunity and the Eurocrat Bazooka Squeezes out of the way, now we can get back to managing risk around newly developed ranges. In the last week, a very important signal has developed on my immediate-term TRADE duration that supports that claim – the SP500 and Volatility have recovered their respective TRADE lines of support and resistance.


What does that mean? First, let’s look at the levels.

  1. SP500 TRADE line support = 1167 and TREND line resistance = 1228
  2. Volatility (VIX) TRADE line resistance = 36.91 and TREND line support = 29.02

Did I just confuse the matter by throwing in another duration (the intermediate-term TREND)? Yes, I did. And that’s the risk management point that we continue to beat the drums on within our process – you have to be able to be Duration Agnostic.


What that means is that bullish is as bullish does for US Equities provided that the TRADE line of 1167 holds. But only to a point (the TREND line of 1228). And with a deep respect for that point, we also have to wake up every morning Embracing Uncertainty – because the minute that 1167 breaks again, we’ll need to be focused on putting our crash helmets back on.


This Globally Interconnected Game of Risk can get even more confusing if you don’t blow out your model to absorbing the uncertainty associated with correlation risks across global markets. Whether they be countries, currencies, or commodities, they’re all there – and they affect Groupthink’s Behavior, big time.


We call that being Multi-Factor in our risk management approach.


So, with a multi-factor (countries, currencies, commodities, etc.), multi-duration (TRADE, TREND, and TAIL) Global Macro model in hand, what do I see going on out there this morning?


Here’s my Top 6:

  1. SP500 bullish TRADE; bearish TREND
  2. VIX bearish TRADE; bullish TREND
  3. Hang Seng in a Bearish Formation (bearish across all 3 durations, TRADE/TREND/TAIL)
  4. Copper and Oil in Bearish Formations
  5. Euro/USD cross in a Bearish Formation with TRADE and TAIL lines of resistance at $1.36 and $1.39, respectively
  6. German DAX bullish TRADE; bearish TREND

I have a lot more than 6 factors in my model – but these are the ones ringing with the most Correlation Risk right here and now. These are my front-runners for managing Global Macro risk.


I have a tremendous amount of confidence in both my risk management model and the 41 people on my team that support its inputs. This confidence is a culture – we are not too proud to change the model’s parameters or throw away the wrong assumptions when they are not working. As prices, volatilities, and volumes change, we do.


Embracing Uncertainty is the furthest thing from what Old Wall Street wants right now. The only certainty I have about that is that Groupthink’s Behavior is going to continue to have performance problems as these markets churn.


My immediate-term support and resistance ranges for Gold, Oil, the German DAX, and the SP500 are now $1, $80.90-86.41, 5, and 1167-1198, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Groupthink's Behavior - Chart of the Day


Groupthink's Behavior - Virtual Portfolio

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Occupy Hedgeye

Conclusion:  So far, Occupy Wall Street is a smallish group of rabble rousers, but they have gained serious traction in a short period of time and are worth monitoring as a potential political and financial sector factor.  A key catalyst to watch will be October 15th, which is the day of global demonstrations for Occupy Wall Street.


“If you put every single left-wing cause into a blender, this is the sludge you’d get.”

          - Fox News, October 1st, 2011


“Don't blame Wall Street, don't blame the big banks, if you don't have a job and you're not rich, blame yourself!"

          - Herman Cain, October 2nd, 2011


“I came down here to educate myself.... There's a huge void between the rich and the poor in this country.”

          - Susan Sarandon, September 30th, 2011


“We're tired of the greedy sons of bitches taking our money. Does this movement have legs? Shit, Look around you!"

          - Leader of Service Employees International Union, October 5th, 2011


No, Hedgeye isn’t currently occupied.  In fact, we’ve included a photo of our headquarters in New Haven as pictorial proof that we don’t even have any protestors outside the beautiful Taft Mansion.  All joking aside, we did want to spend some time both quantifying and characterizing the growing Wall Street protest.


Occupy Hedgeye - 1a


It’s not yet apparent that these protests will have a major impact on the banking system, which is where their reforms are most focused, or the economy generally, but the movement is increasingly showing that it has potential.  Further, as the quotes we’ve highlighted above suggest, the true catalyst coming out of this movement could be an acceleration of class warfare rhetoric heading into the 2012 election season.


The Occupy Wall Street protest is headquartered in Zuccotti Park, more commonly known as “Liberty Park Plaza”.  This is a plaza located just north of Wall Street in downtown Manhattan and is highlighted in the map below.  Many believe that the Occupy Wall Street movement has its inspirations in the Arab Spring and, in particular, the protests in Tahir Square in Cairo.  The specific catalyst for the protest appears to have originated with a Canadian based anti-consumer magazine, Adbusters, which floated the idea of occupying Wall Street to its email list in late July of 2011.


 Occupy Hedgeye - d2


The Occupy Wall Street protest began on September 17thin New York.  In a relatively short period of time, the protest has gained national and global media coverage.  As well, the footprint of the protest had broadened dramatically.  In just three weeks, the protest has done the following:


  • Acquired 59,130 followers on Twitter (@OccupyWallSt);
  • Acquired 17,435 attendees on Facebook;
  • Held key demonstrations in the following cities : Manhattan, Los Angeles, Boston, Chicago, Philadelphia, Miami, Portland (Maine and Oregon), Seattle, Denver, Calgary, Toronto, and Montreal;
  • Received celebrity support from Susan Sarandon, Cornel West, Russell Simmons, Margaret Atwood, Alec Baldwin, George Soros, and Joseph Stiglitz;
  • Demonstrated in 70 cities globally;
  • Received union support from  14 of the largest labor unions in the United States; and
  • Received political support from Congressman Ron Paul, Senator Bernie Sanders, and former Senator Russ Feingold.


The central demand of the organization appears to be for President Obama to “ordain a Presidential Commission tasked with ending the influence money has over our representatives in Washington."  Beyond that the pervasive theme appears to be in protesting the richest 1% of Americans and their purported greed.  In fact, when interviewed, leaders of Occupy Wall Street commonly refer to themselves as “the other 99%,” which suggests that they represent a broad segment of the U.S. demographic.  As far as we can determine, the group, to date, is largely made up of the left of the left wing, youth, and those underemployed.  As a case in point, Marxist Slavoj Zizek spoke to the group this morning.


To be clear, it is not apparent that there is any organization behind the movement that will make it overly effective, or that there is truly a coherent view, other than that “money” and “Wall Street” are bad.  To wit, this weekend an Occupy Wall Street group met in Atlanta and invited Congressman John Lewis to speak to them.  He has been a member of congress since 1987 and is widely considered a leader in the American civil rights movement.  As the video below shows, which is admittedly anecdotal, this segment of Occupy Wall Street could not even decide whether they should led Congressman Lewis peak to them.


Despite the lack of organization, Occupy Wall Street is garnering mindshare.  In the chart below, which we borrowed from Google Trends, we would highlight the growth in traction that the movement has received in a very short period of time.   Not surprisingly, as can be seen by the location of the largest amount of searches, the group is gaining the majority of its traction in more liberal areas.  Most notably on this front would be Austin, which is home to the 7thmost searches for “Occupy Wall Street”, but is only the 35thlargest metropolitan region in the United States.


 Occupy Hedgeye - d3


Analogies are already being made to the Tea Party.  As of yet, those analogies are somewhat inaccurate.  The Tea Party proved itself, even if a minority group, to be organized both politically and monetarily, which allowed the group to effect change in the 2010 election.  To be truly effective, Occupy Wall Street will need money (they purportedly have $40,000 in the bank), the one key thing they appear to be protesting. 


That being said, as the chart below shows, Occupy Wall Street does appear to be getting comparable traction in the media as the Tea Party did after roughly the same period of time.  In terms of actual organization, the two groups are both loosely affiliated regional groups with no central leadership.  The key differences so far though seem to be funding (the billionaire Koch brothers are a key backer of the Tea Party) and a more coherent set of concerns and issues.


The cohesiveness that the Tea Party was able to build in short order led to a number of key electoral victories in 2010, including:


-          Marco Rubio defeating Charlie Crist for Senate in Florida;

-          Scott Brown won Ted Kennedy’s seat in Massachusetts;

-          Rand Paul won a Kentucky Senate seat; and

-          Numerous primary and congressional seat victories.


 Occupy Hedgeye - d4


It’s too early to tell whether Occupy Wall Street will have real impact beyond disrupting the tourist flow in New York.  The media, though, is certainly giving the platform a voice.  Should fundraising and organization follow, Occupy Wall Street may be an interest group with a loud and disruptive voice in the 2012 elections.


Daryl G. Jones

Director of Research

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