Are You Bullish Enough On King Dollar?

Conclusion: Our analysis of derivative positioning and its impact on the FX spot market as a leading indicator strongly suggests that it likely won’t pay to fade consensus as it relates to being bullish on the U.S. Dollar over the intermediate-term TREND. Further, the math supports our fundamental stance of being bearish on things that are inversely correlated to the Greenback over the same duration.


Position: Long the U.S. Dollar (UUP); Short the Euro (FXE).


Themes at Play: King Dollar; Deflating the Inflation; Correlation Crash; Eurocrat Bazooka.


Much to-do is being made about how crowded the Euro-short position is and we agree that this is an acute immediate-term risk to manage. As it relates to the amount of open interest in the futures and options market, those speculators large enough to meet the minimum reporting requirements of the CFTC are net short the Euro by a total -69.8k contracts as of the latest reporting period (Oct 11). Just off of the late-September highs in short interest of -79.6k and 1.8x standard deviations below the 5yr average of +17.1 net long, it’s pretty clear that this is a fairly one-sided trade.


Are You Bullish Enough On King Dollar? - 1


Does it pay to fade the market here? The short answer is “no”. As indicated by both our fundamental outlook and the marked-to-market positioning within our Virtual Portfolio, we expect consensus to remain right on this currency play over the intermediate term TREND.


Speaking of trends, one of the reasons we rely heavily on the foreign exchange as a real-time leading indicator of both market prices and economic fundamentals is because of its sheer size ($4 trillion in daily turnover = the world’s largest mkt.) and its reflexive nature. To the former point, we are of the belief that an investor’s greatest source of conviction lies with where he plays his chips. To the latter point, the highly-levered nature of many FX market transactions (in some cases 250:1) causes the basic risk management of gains and losses to perpetuate any given pattern of trading. Moreover, currency pairs trade on their relative economic fundamentals – data that tends to be more glacial and self-sustaining in nature.


Turning to King Dollar specifically, we continue to believe strength in America’s currency will be supported over the intermediate term by a combination of three factors: 

  • Subsequent to the left-leaning Mario Draghi assuming control of the ECB next month, we expect to see a rate-cutting and/or money-printing cycle out of the Eurozone over the intermediate term as Eurozone economic growth continues to slow and exacerbate the region’s sovereign fiscal metrics (Euro = 57.6% of the DXY basket).
  • As reported inflation peaks in 3Q/4Q and trends down (albeit slowly in some cases), a cycle of monetary easing and fiscal policy relaxation is likely to sweep across emerging market economies. For early examples of this phenomenon, refer to the recent Brazilian, Indonesian, and Turkish rate cuts; Singapore’s FX adjustment; and Filipino and Malaysian stimulus measures.
  • While Obama/Bernanke/Geithner will certainly be tempted to incrementally ease both monetary and fiscal policy in the U.S., we think both mounting political pressure from the right (i.e.: voting down incremental stimulus and publicly speaking against the Fed) and sticky reported inflation (particularly “core” inflation) will keep this Keynesian trio in a box – at least for the time being. Obviously the risk of Bernanke forcefully imposing more of his academic dogma unto the markets and the U.S. economy is likely to remain a key source of both consternation and volatility in the FX markets going forward. 

We’ve been harping on each of these themes in various reports and presentations over the past couple of quarters, so we’ll leave it there for the sake of brevity. Email us if you’d like us to follow up with more details regarding any of these points.


Is a Big Appreciation in the U.S. Dollar Index Forthcoming?

Performing a similar futures + options analysis on the U.S. Dollar Index as we did with the Euro above yields a surprisingly more interesting conclusion.  Interestingly enough, open interest from large speculators reached +47k contracts net long as of the latest reporting period (Oct 11) – the highest on record, which dates back to 1995.


Are You Bullish Enough On King Dollar? - 2


Surely, we must fade this consensus positing?


A resounding “no” would be our answer here. Analyzing the open interest with the U.S. Dollar Index’s spot price provides a shocking conclusion: the derivative positioning tends to lead the action in the spot market by 2-6 months – particularly when pushed to an extreme in either direction.


Are You Bullish Enough On King Dollar? - 3


Are You Bullish Enough On King Dollar? - 4


Given that the most recent reporting shows the net long positioning at the highest on record, we would expect to see a pronounced move to the upside in the U.S. Dollar Index’s spot price over the intermediate term. The current futures + options positing registers as a +3.9x standard deviation move “off the lows”. A commensurate move in both size and historical median duration in the U.S. dollar index from April’s cycle-low of $72.93 would put the DXY at $89.30 by mid-February.


Are You Bullish Enough On King Dollar? - 5


Are You Bullish Enough On King Dollar? - 6


The principles of chaos theory driving our research at the most basic level would never allow us to subscribe to the Old Wall Street model of throwing out a price target and a target date for any market (let alone the #1 factor in our Global Macro model); we do, however, think the above scenario analysis is one of many risks to at least respect as probable. Moreover, a sustained and measured breakout in the U.S. Dollar Index may prove particularly bearish for asset classes inversely correlated to the DXY (immediate-term TRADE duration regressions): 

  • Brent Crude Oil: r² = 0.90;
  • Corn: r² = 0.82;
  • CRB Index: r² = 0.87; and
  • S&P 500: r² = 0.92. 

Conversely, it may prove particularly bullish for things positively correlated to the DXY, like: 

  • CBOE SPX Volatility Index (VIX): r² = 0.75; and
  • U.S. Junk Bond Yields: r² = 0.93 (bankruptcy cycle?). 

As with all of our research, the purpose is not to fear monger or be alarmist. Rather, we hope we are equipping you with the differentiated analysis that allows you to both manage risk and preserve your client’s hard-earned capital throughout volatile times like these. As always, we’re here if you have any follow up questions.


Have a great weekend with your respective families,


Darius Dale







German business sentiment index dropped for a fourth consecutive month to 106.4 in October from a revised 107.4 in September.  French business confidence fell to 97 in October from 99 in September. 





THE HBM: MCD, CMG - subsector fbr




MCD: McDonald’s reported strong 3Q earnings this morning.   EPS came in at $1.45 versus expectations of $1.43 on the back of strong global comps with strength in France, Russia, Germany and the U.K. being particularly encouraging.  U.S. comps came in at 4.4% versus 3.8% expectations.  Europe came in at 4.9% versus 3.3% consensus and APMEA also beat, printing a 3.4% comp versus the Street at 2.7%.  The company said that October comparable sales are expected to be up 4% to 5%. 









CMG: Chipotle Mexican Grill reported $1.90 versus $1.85 on the back of 11.3% comparable restaurant sales growth.  Margins were slightly negative in the third quarter, year-over-year, as chicken, beef, cheese, and sour cream costs were higher than expected.  The company sees mid-single digit inflation in 2012.


THE HBM: MCD, CMG - stocks 1021



Howard Penney

Managing Director


Rory Green


Romney Risk

This note was originally published at 8am on October 18, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Risk means more things can happen than will happen.”

-Elroy Dimson (quote from “The Most Important Thing”)


I received a tremendous amount of feedback on my Yale Economics Department note from yesterday. Your diverse and critical thoughts have provided my team a tremendous opportunity to see plenty of perspectives. For that, we thank you.


Yale didn’t write me back, yet.


Maybe tonight in Las Vegas the dogma that is academia’s Keynesian Economics will hear some louder drums. I am probably the least connected person in American and European politics (and I’d like to keep it that way), but there is heightening probability that Mitt Romney talks more explicitly about firing Ben Bernanke at tonight’s Republican debate. That would be very bullish for the US Dollar.


Strong Dollar = Strong America. Period.


That’s my long-term call and I’m sticking to it. Like you saw yesterday, when the US Dollar strengthens, we Deflate The Inflation. That’s good for the American Consumer. This happened in September, and the Michigan Consumer Confidence reading rose.


With the US Dollar down for the 1stweek in the last 5 last week, inflation expectations at the pump rose, and that same American Consumer Confidence reading fell (57.5 OCT vs 59.4 SEP).


This may sound like a perverse relationship (stocks and commodities down make the country more confident), but the US stock market isn’t the electorate anymore. You can only plunder your people so many times.


I’m not a Republican, but this is what the Republicans are going to say about this for the next year:


Bernanke has overinflated the amount of currency that he’s created… QE2 did not work… it did not get Americans back to work.” –Mitt Romney


Whether the Keynesians want to admit this or not, monetary and fiscal policy drive the value of a country’s currency. If I’m too “young” to be “trusted” on that, ask the biggest hedge fund manager in the world who has made money for his clients during both the 2008 and 2011 Growth Slowing draw-downs. That was not Steve Cohen – it was Ray Dalio.


If you don’t want to ask any of us who have had this right what is going wrong, fine. But don’t expect The People to trust you. They aren’t as willfully blind to the academic dogma that has driven both Bush and Obama to devalue the currency in exchange for short-term asset price inflations. They may not be able to communicate it concisely yet – but I would not bet against them.


Back to the Global Macro Grind


China doesn’t trust Japanese, American, or European monetary policy. They seem keen on proving that they have better ideas to lead the next generation of global capitalists. Can communists be capitalists? If “capitalists” leading America can behave like socialists, why not? It’s all name calling anyway.


At the same time that our markets are begging the Europeans for bazookas to socialize bank losses, I hear a lot of whining in this country. It’s not the kind of whining that the Chinese in particular are used to seeing from us. It’s time to stop. Reset. And Reload. It’s time to start winning again.


Despite a lot of people in the hedge fund community fear-mongering about China falling off a cliff like Europe has, here’s how China’s Q3 GDP report looked last night:

  • Real GDP growth slowed in 3Q: 9.1% y/y vs. 9.5% prior;
  • YTD Real GDP growth slowed in 3Q: 9.4% y/y vs. 9.6% prior;
  • Industrial Production growth accelerated in September: 13.8% y/y vs. 13.5% prior;
  • Retail Sales growth accelerated in September: 17.7% y/y vs. 17% prior; consistent with our call for a shift on the margin towards consumption-led growth; and
  • YTD Fixed Assets Investment growth slowed in September: 24.9% y/y vs. 25% prior.

Not great. But not bad.


On the margin, these are still sequential decelerations so we are waiting on the sidelines to buy Chinese stocks again. Everything that really matters in Global Macro happens on the margin.


If you look at the data coming out of the rest of Asia in the last 24 hours, it’s actually quite bad:

  1. Singapore Exports for SEP down -4.5% y/y vs +3.9% AUG
  2. Australian Vehicle Sales for SEP down -1.3% y/y vs +4.6% AUG
  3. Japanese Department Store Sales for SEP -2.4% y/y vs -1.7% AUG

So, with Global Growth Slowing and the US Dollar strengthening (two of our key Macro Themes), there is a generational amount of Correlation Risk that remains in Global Macro markets.


While our American-made definition of Real-time Risk Management most certainly considers many more things that can happen than will happen, we are not trying to be alarmist. Neither are we holing up on campus with dogmas. We are standing here on the front lines of the fight trying to get to the right answers for this country before the wrong assumptions driving policy make that too late.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1636-1686, $84.11-89.12, and 1187-1229, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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“There is no cause for worry.  The high tide of prosperity will continue”.

-Andrew Mellon, June 1928.


Clearly, Mr. Mellon’s statement proved to be inaccurate and untimely. 


Fortunately for him, Irving Fisher stole the limelight with his immortal quote made days before the 1929 crash, “stock prices have reached what looks like a permanently high plateau”.  As John Kenneth Galbraith writes, in reference to Mellon’s statement, in his seminal work titled The Great Crash, “Mr. Mellon did not know.  Neither did any of the other public figures who then, as since, made similar statements…it is not to be supposed that the men who make them are privileged to look further into the future than the rest”. 


Later in The Great Crash, as Galbraith moves to discuss the weeks and days more closely preceding the ultimate stock market collapse of October 1929, he writes, “When markets fell many Wall Street citizens immediately sensed the real danger, which was that income and employment – prosperity in general – would be adversely affected.  This had to be prevented.  Preventative incantation required that as many important people as possible repeat as firmly as they could that it wouldn’t happen.  This they did.”  Here we are, in 2011, and important people are once again turning to preventative incantation.  This time, dare I say it, is different.


As the “roaring twenties” came back down to Earth, the informational resources that were available to Main Street were rather limited.  The New York Times, the Wall Street Journal, Barron’s and other legacy newspapers were the primary source of financial news for the vast majority of shareholders in this country.  Indeed, during the most volatile days of the period leading up the 1929 crash, the tickers in the New York Stock Exchange could not keep up with the real-time prices.


Today, ordinary people are increasingly on par with so-called important people.  Twitter, YouTube, and the acute desire for transparency are ensuring that this trend continues.  Yesterday’s most important geopolitical event highlights this point perfectly.  Muammar Gaddafi was dragged out of a sewer and killed by rebel forces in Libya after, in an ironic twist of events, pleading for mercy. 


One of his captors decided to make a digital recording of the event and, forty-five minutes or so after the dictator was executed, anyone in the world with access to YouTube could see evidence of the event on their mobile phone or laptop computer.  Not only could we watch an historic event unfold in just as timely a fashion as the Secretary of State, we could also see a clip on YouTube of Secretary Clinton being passed a phone with a message informing her of Gaddafi being captured.  Newsreaders in years past may have wondered, “I wonder what it was like?”


“The Veil of Ignorance” is a concept discussed by political philosopher John Rawls in his book A Theory of Justice to frame an unbiased determination of the morality of a certain issue.  Behind the Rawlsian “veil of ignorance”, parties to a debate on a social issue know nothing about their abilities, position in society or preferences.  A less sophisticated interpretation of the phrase could be that a veil exists between Main Street and the elites of Wall Street and Washington.  Movements like Occupy Wall Street and the Tea Party epitomize dissatisfaction with the status quo.  Social media is enabling democracy, however indefinite the aims of some groups may seem.


Social media is to democracy what the Bloomberg terminal was to finance.  Like the investors of the late 1920’s that had to wait until the ticker on the floor caught up with market prices, voters at the time were also deprived of the information flow that we are benefitted with.  Preventative incantations, in the US, Europe and elsewhere, are fact checked and debated by main streeters everywhere.  It has been said that deliberation is the essence of democracy and, if that is true, technology is the engine behind democracy today.


 I can’t claim to have visited Zuccotti Park to decipher exactly what it is that the Occupy Wall Street movement wants, but I would imagine that a higher jobs rate might assuage some of the dissatisfaction they are feeling.  Inequality is certainly a large theme of the protest, but a lack of jobs while corporate profits and cash balances remain so high seems to be central to what is causing discontent along all parts of the political spectrum. 


Chief Executive Officers, like politicians should be to voters, are accountable to their shareholders.  Growing profits and increasing shareholder returns are primary goals of any CEO.  Does it make sense, then, to leave so much cash on the sidelines earning little-to-nothing?  The easy answer is no, but most executives don’t want to risk the hard earned capital either.  So what is a CEO to do - wait and watch?  Here are some comments from CEO’s on the current economic environment:


Steve Wynn, CEO Wynn Resorts: “I cannot predict what healthcare costs are going to be, what regulatory load they are going to heap on us, what new taxes or other burdens this insatiable governmental appetite for money from the citizens will take us to.”


Paul Coghlan, CFO Linear Technology Corp: “Customers continue to be very cautious and are concerned over general global macro economic conditions. They acknowledge in-demand opportunities, but are in a wait-and-see mode. They're running tight inventories and order to the low end of our lead times.”


Stephen G. Newberry, CEO Lam Research Corp:  “Since our June quarter call, macro-economic uncertainty has continued, including concerns over European debt issues and ongoing struggles in the U.S. with high unemployment and a growing budget deficit.”


All in all, it is clear that neither the stimulus nor preventative incantations from American or European politicians are reassuring those that matter – the job creators.  Voters, too, can now see the impact – or lack thereof – of politicians’ lip service.


At Hedgeye we are trying to build a business that catches the wave of transparency that is changing how events unfold and are perceived. In 1929, political elites shifted blame and responsibility to each other with little fear of meaningful exposure, at least not in the immediate term. 


Today, their successors are not afforded that buffer.  In 1929, Joseph Stagg Lawrence’s book Wall Street and Washington, attempted to expose government policy and the impact it had on the prosperity of the nation.  Today, the same aim, if it is to gain traction, has to be synthesized within the construct of social media.  That is where Hedgeye is going. 


While hope is not an investment process, we hope that this time it is different.


Function in disaster; finish in style,


Howard Penney






The Macau Metro Monitor, October 21, 2011




According to Jornal Tribuna de Macau, as of Oct 19, Macau GGR reached MOP17BN (HK16.6BN, US2.13BN).  October is on track to reach a new monthly record.  In terms of market share, SJM 26%, Galaxy 22%, LVS 'close to 15%', MPEL 14.5%, WYNN 13%, and MGM 9.5%.



An internal memo from LVS General Counsel, Gayle Hyman, shows that LVS is seeking to secure a list of government officials who have gambled its Macau casinos.  Macau law prohibits local government officials from gambling.  LVS disclosed in March that the SEC and the U.S. Justice Department were investigating whether the company violated the Foreign Corrupt Practices Act (FCPA).


Hyman's memo instructs employees at Sands to retain documents regarding "transmission of anything of value" to current and former Macau government officials and their family members.  The memo also names several Sands employees and contractors about whom documents must be preserved.  Among those people is a prominent Macau lawyer--Leonel Alves, a Macau legislator, a member of the Macau government's top advisory body and a member of China's top political advisory body, the Chinese People's Political Consultative Conference--who is a focus of a dispute between Sands China and its former CEO Steve Jacobs.  An outside counsel for LVS called the memo "extremely standard operating procedure" and said it is no indication of whether the documents that were requested actually exist. 


In another memo, LVS has hired Ira Raphaelson, a special counsel in the Justice Department during the administration of President George H.W. Bush, to the new position of global general counsel.  Hyman will take the new position of senior vice president of corporate affairs and report to Mr. Raphaelson, according to the memo, which was sent by Chairman Sheldon Adelson.


LVS has hired law firm O'Melveny & Myers LLP to conduct an independent investigation of the company in connection with the government probe.  In July, a 30-member team from the firm went to Macau to collect documents.  The O'Melveny team looked at the activities of at least two Sands China staff with connections to the Macau government that aren't named in Ms. Hyman's memo.  One of those people cited by O'Melveny is the company's vice president of community relations Melina Leong.  Ms. Leong is the sister of Lionel Leong, a member of Macau's executive council, who is considered a potential future CEO of Macau. 


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