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This note was originally published at 8am on October 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.

“High absolute return is much more recognizable and titillating than superior risk-adjusted performance.”

-Howard Marks (The Most Important Thing, page 57)


I wasn’t short the SP500 until 326PM EST (1290) yesterday. I’d sold all of my long-term Treasuries (TLT) on Wednesday. I wasn’t short anything Commodities and/or European Equities…


So, yesterday could have been worse.


Where I got killed was in my long US Dollar position. The US Dollar Index was down huge (-1.7%), making a fresh low for the month as US stocks completed their biggest 18 day short squeeze ever.


Ever is a long time.


Like my “Short Covering Opportunity” call on October 4th, my “Buy The US Dollar” call on October 21st has a Time Stamp. While there were plenty of risks building a US Financial Services and Media firm in the 2008-2011 period, for me at least, one of them wasn’t showing you every position I take, when I take it.


Time Stamps are cool on Wall St 2.0 because they save you from having to take my word for it.


Back to the Global Macro Grind


Get the US Dollar right and you’ll get mostly everything else right – if that’s not obvious to someone who is confusing their “high absolute returns” yesterday (everyone nailed it, right?) with what we call beta, I don’t know what is…


Using our immediate-term TRADE duration to measure Correlation Risk, here’s a real-time update on the USD’s inverse correlations:

  1. SP500 = -0.97
  2. CRB Commodities Index = -0.88
  3. 10-year US Treasury Yields = -0.81

No matter where you go this morning, there it is. If you have been bearish on the US Dollar (and bullish on the Euro) for the last 3 weeks, you have absolutely crushed it.


If you’ve been levered-long beta since April’s YTD high in the SP500 of 1363, you’re still getting crushed. Over that time span, the US Dollar Index is up +2.7% and the SP500 is down -5.8%.


But today, all of what you’ve done for 2011 doesn’t matter to the market at all. Mr Macro Market doesn’t care about who is doing the crushing or who is getting crushed. She tends to inflict the most amount of pain on the most amount of players at the same time.


So, what do I do “right here, right now?”


I was asked that yesterday at a lunch meeting in Boston. My answer: “I finish our meeting then go to my next meeting. And if I see my immediate-term TRADE overbought level in the SP500, I’ll short it, for a trade.”


Then client then asked me, “at what price?”


I said, “I don’t know. I need to fire up my machine and remodel my volatility parameters for the draw down in the VIX and melt-up in the SP500’s price. I let my process tell me what to do, not my emotions.”


So, at 326PM, I hit the button, “shorting the SP500 (SPY) as it is immediate-term TRADE overbought.” Time Stamped.


What do I do with that position today?


Same answer. The risk management process will tell me what to do. All of my decisions are risk-adjusted to the market’s last price. In other words, Prices Rule my process. Period.


The SP500’s setup is now as follows:

  1. Immediate-term TRADE overbought = 1290
  2. Intermediate-term TREND support = 1257
  3. Long-term TAIL support = 1266

In other words, on any pullback towards 1257-1266, I’ll cover that short position and get longer of US Equity exposure. If 1266 doesn’t hold, I get shorter.


Currently, in the Hedgeye Asset Allocation Model, I have a 9% position in US Equities – that’s all in Consumer Discretionary (XLY). Obviously if I stay wrong on the US Dollar, US Consumption will be adversely affected by inflation. Strong Dollar = Strong America. So with Goldman telling you to chase beta this morning, remember what that implies longer-term – Debauched Dollar = Mad America.


If my long-term bullish case for the US Dollar doesn’t convince you of that – let The People. In the face of the biggest 4-week rally ever, Bloomberg’s weekly Consumer Confidence survey dropped to minus -51.1 versus -48.4 last week. Titillating.


My immediate-term support and resistance ranges for Gold (bullish TRADE and TREND again), Oil (bullish TRADE; bearish TAIL), German DAX (bullish TRADE and TREND; bearish TAIL), and the SP500 are now $1703-1756, $89.36-93.87, 6127-6428, and 1233-1290, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Titillating - Chart of the Day


Titillating - Virtual Portfolio

Unequal Outcomes

“Equality of outcome is a form of inequality.”

-Paul Ryan


As I sit here in my hotel room in San Francisco this morning, the elephantine intellects of the Fiat Fool system continue to attempt to centrally plan us towards “equality.” Meanwhile, markets are producing very Unequal Outcomes.


Instead of stability, we have volatility. If the +41.9% rip in the Volatility Index (VIX) in the last 3 days isn’t a reminder of that, I don’t know what is…


My longest of long-term theses about Big Government Intervention and money printing remains. From Japan, to the USA, to Europe, and back again, Fiat Fool policies to inflate A) shorten economic cycles and B) amplify market volatility.


Back to the Global Macro Grind


Get the US Dollar right, and you’ll get mostly everything else right. As bad as I looked being long the US Dollar last week is as good as my team looks this week. The US Dollar has put on an impressive +3% move, recovering its TREND line of support (75.37 on the US Dollar Index), and mostly every asset class price that’s inversely correlated to that has fallen, hard.


Since I shorted the SP500 on Thursday at 1290 (Time Stamp), US stocks have had a straight down correction of -5.6%, taking the SP500’s correction from its 2011 YTD high (April) back to a double digit loss (-10.6%). Longer-term, like Japanese stocks, the SP500 has crashed from its all time peak (down -22.2% from October 2007). Bull market?


With all but 3 country stock market indices in the entire world negative for the YTD, this is obviously not a bull market in equities. It’s a bull market in long-term US Treasuries. It’s a bull market in volatility. But these asset classes are pricing in very Unequal Economic Outcomes.


Update on the Eurocrat Bazooka:


This morning Old Wall Street’s finest brokerages tried to fire the first mini-missile of EFSF bond issuance from Ireland, and had to abort mission! Given that this was the 1st €3B of €600 or so BILLION of these fiat issues coming down the pike, I’d say that’s really not good.


Inclusive of attempts to ban short selling, ban CDS trading, and ban gravity, European markets have already been telling you how this sad story of Keynesian spending and leverage ends…

  1. Germany’s DAX snapped its TREND line of 6112 yesterday and is crashing again (down -22% from its 2011 peak)
  2. France’s CAC never recovered its TREND line of 3403, and continues to crash (down -26% from its 2011 peak)
  3. Greece’s Athex Index never recovered a risk management line of consequence in the last 12 weeks (down -56% from its 2011 peak)

Never mind the €2-3 TRILLION Bazooka, these professional politicians can’t sell the world on €3B in bonds!


The European Sovereign Bond market gets this obviously. In fact, they didn’t suspend disbelief like stock market people did last week either. Italian and French sovereign debt yields continue to make a series of higher-highs, reminding you that piling-debt-upon-debt-upon-debt structurally impairs economic growth.


Setting aside the differences between Europe, Japan, and the US, that’s the story of the Fiat Fools that isn’t getting its “fair share” of air-time, yet (Obama’s team is working on rectifying this inequality). The part about causality. The part that would require these central planners to accept responsibility for the bigger problem than maybe even the banks themselves – Growth Slowing.


If Growth Slowing takes Europe’s economy into the negative 1-3% GDP zone as inflation spikes into the +3-6% range, what do you get?


European Stagflation.


Stagflation earns the lowest multiple for stocks (read: in the 1970s, the SP500 traded at 7x earnings 3 different times in the same decade). Why is that so? Simple: the combo of Growth Slowing and Margins Compressing is the kiss of the “value” investor’s death.


That’s the bad news. And it’s a European problem that perversely could result in a Strong US Dollar which, in turn, would Deflate The Inflation in America (think commodity prices). In the long-term, while these are very Unequal Global Macro Outcomes relative to how the central planners of the 2011 Fiat were thinking, this should only perpetuate global economic volatility in the short-term.


As for the “price stability”, stay tuned for the Bernank’s latest on that at his 1230PM EST press conference.


My immediate-term support and resistance ranges for Gold (bullish TRADE and TREND), Oil (bullish TRADE; bearish TAIL), German DAX (bearish TRADE, TREND, and TAIL) and the SP500 (bullish TREND; bearish TAIL) are now $1, $91.16-93.87, 5, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Unequal Outcomes - Chart of the Day


Unequal Outcomes - Virtual Portfolio

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.


November GGR will fall MoM and growth will slow sequentially.  That in and of itself should not be alarming.



November may be a telling month for Macau as it can be considered very normal.  There are no holidays to boost revenues.  However, November may also bring some volatility and confusion and potentially disappointing investor sentiment.  The month should display a substantial decline from October’s record results and YoY growth rate.  However, the sequential slowdown shouldn’t ring alarm bells unless it is more severe than our projections.  We use two methodologies to derive expected November Gross Gaming Revenue (GGR) YoY growth of 25-30%.


1) November GGR would rise 30% YoY to just under HK$22 billion based on September and October GGR, seasonally adjusted.  We analyze seasonality based on revenue from the previous 2 months, adjusted by seasonal factors, for mass revenue, hold-adjusted VIP revenue, and slot revenue.




2) Using the average daily revenue of the last two weeks of October and taking into account the number of weekend and weekdays, we project November GGR to grow 25% to just over HK$21 billion.


With October growing 40% to HK$26 billion, we believe a 15-20% sequential decline may concern some people.  However, we would consider it “as expected” and not indicative of a credit/liquidity/macro fueled slowdown.  October was an outstanding month with a rocket ship golden week that contributed to full month GGR growing 26% over September.  Hopefully, investor expectations are appropriately in check.



TODAY’S S&P 500 SET-UP - November 2, 2011


72 handles and -5.6% lower in the SP500 from where we shorted them at 326PM EST on Thursday – now what?  As we look at today’s set up for the S&P 500, the range is 35 points or -0.43% downside to 1213 and 2.44% upside to 1248. 






THE HEDGEYE DAILY OUTLOOK - daily sector performance


THE HEDGEYE DAILY OUTLOOK - global performance





Bullish sentiment increases to 43.2% from 40.0% in the latest US Investor's Intelligence poll; Bearish sentiment down to 36.8% from 37.9%

  • ADVANCE/DECLINE LINE: -2153 (-245) 
  • VOLUME: NYSE 1329.21 (+16.29%)
  • VIX:  32.92 +16.05% YTD PERFORMANCE: +95.89%
  • SPX PUT/CALL RATIO: 2.29 from 3.02 (-23.99%)




TREASURIES: just ran the "but growth is good" camp right over as 10yr yields snap my TRADE line of 2.11% support

  • TED SPREAD: 43.68
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.01 from 2.17    
  • YIELD CURVE: 1.78 from 1.92


MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage, prior 4.9%
  • 7:30pm: Challenger Job Cuts
  • 8:15am: ADP Employment, est. 100k, prior 91k
  • 10:30am: DoE inventories
  • 12:30pm: FOMC Rate Decision
  • 2:15pm: Bernanke speaks at Fed press conference


  • European leaders convene emergency talks today to tell Greece there is no alternative to budget cuts imposed in bailout plan
  • Greek PM Papandreou said referendum on Europe’s rescue package will confirm the nation’s membership of the euro
  • Bill Ackman said he isn’t pushing for sale of Canadian Pacific Railway



Gold continues to hold TREND line support - new range = 1; back to bullish bias in our model


THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • MF Global Funds Are All Accounted For, Lawyer Tells Judge
  • Top Gold Forecasters See Rally to Record by March: Commodities
  • Paulson Clients to Pull Less Than 8% in Year-End Redemptions
  • MF Global Didn’t Segregate Client Collateral, CME Group Says
  • Greenlight’s Einhorn Bets Mining Companies Will Beat Gold
  • Oil Gains on European Debt Talks as U.S. Fuel Stockpiles Decline
  • U.K. Oil Service Stocks Cheap Vs Brent Price: Chart of the Day
  • Copper Gains for First Day in Three as LME Stockpiles Decrease
  • Gold Gains for Second Day as Debt Crisis Increases Haven Demand
  • Oil Falls a Fourth Day on Concern Greek Vote Raises Default Risk
  • Saudi Top-Oil Premiums Set to Drop With Naphtha: Energy Markets
  • China Copper Demand Growth to Slow Further, Antaike Says
  • Bell Financial Seeks to Transfer Positions With MF Global
  • Sumitomo Forecasts Copper Price Drop, Seeks Iron and Coal Assets
  • Soybeans Climb on Speculation 17% Slump May Attract Importers
  • Kinross Misses Gold Rally With October Plunge: Canada Credit
  • Copper Climbs in London Before U.S. ADP Jobs Report: LME Preview
  • Freeport Says Milling at Indonesia Mine Suspended Since Oct. 22
  • Oil Falls a Fourth Day on Concern Greek Vote Raises Default Risk




EURO – get the EUR/USD pair right and you’ll get mostly everything else right – that’s glaringly obvious right now in our correlation risk model. I covered the short EUR position at TRADE line support of 1.36 yest and will look to re-short 1.39-1.40 TAIL resistance after the ECB doesn’t cut as much as hoped tomorrow. Bernanke debauchery day for the USD side of the trade will be in full effect for today too.


THE HEDGEYE DAILY OUTLOOK - daily currency view





Inclusive of a generational squeeze, remember Germany's DAX and France's CAC are down -22% and -26%, respectively from their YTD highs


EUROPE: major breakdowns in the DAX and CAC not recovered this morn; after this last lift in the Euro; European stocks to resume crash


FRANCE – not only did the CAC40 fail at my TREND line of 3401 resistance in the last week, but now it has moved right back into a Bearish Formation (bearish TRADE, TREND, and TAIL) – given that French banks and their super sovereign rating all need to be downgraded further, this makes sense; don’t forget the CAC is still crashing (down -26% from its YTD high inclusive of the squeeze)


THE HEDGEYE DAILY OUTLOOK - euro performance




ASIA: stealth move continues in China with stocks up +1.4% on the A-shares and up 7 of the last 8 days; Japan not good.

Australia September building approvals (13.6%) m/m vs cons (4.5%).



THE HEDGEYE DAILY OUTLOOK - asia performance







The Hedgeye Macro Team

Howard Penney

Managing Director



Weekly Asia Risk Monitor: Dominant Trends Still Intact

Conclusion: The short term, beta-chasing melt-up we saw across global macro markets last month wasn’t enough to change our conviction on the dominant macro trends within this region.



Positions in Asia: Short the Aussie dollar (FXA); Short a basket of emerging-Asia currencies (AYT).



Not surprisingly, Asian equity markets are down across the board week-to-date, declining -1.8% on a median basis. The interconnected global melt-up we saw in October largely failed to register higher intermediate-term highs, as Asian equity markets remain down -2.5% and -11.3% on a 2mo and 3mo basis, respectively. The same sequence of price action can be applied to Asian currencies as well, falling -1.2% on a median basis in the week-to-date vs. the USD, and down -3.6% and -4.3% on a 2mo and 3mo basis, respectively.


Across the region’s sovereign debt markets, the Reserve Bank of Australia’s interest rate cut and nasty growth data out of Hong Kong are driving the largest deltas. Australian 2yr and 10yr yields have fallen -13bps and -14bps, respectively, in the week-to-date. Hong Kong’s 10yr yields have declined by -14bps as well in the week-to-date, collapsing the territory’s 10s/2s spread by the same amount. 5yr CDS have widened +16.8% on a median basis in the week-to-date and the dramatic tightening we saw in October (-23.3% on median basis) failed to make lower intermediate-term lows vs. the past two (+16.9%), three (+45.2%), and six (+49.7%) months.


Across Asian interest rate swaps markets, we continue to see our themes of Deflating the Inflation and Global Growth Slowing take market interest rate expectations lower. Notably, Chinese 1yr on-shore swaps have declined a full -85bps in the prior 2mo and are down another -16bps in the week-to-date as expectations for PBOC monetary easing grow seemingly larger by the day. Another callout here is that in spite of the broad-based optimism we saw across global equity markets in October, we didn’t see a pick-up in expectations for tighter monetary policy across Asia (1yr swaps advanced only +1bps on a median basis over the last month). What this tells us is that through the noise of the manic media-influenced equity market(s), the aforementioned Global Macro trends remain intact.



Rather than delineate these data points by country, given the varying size and importance of these economies, we thought we’d try something different by grouping them by theme. Ideally, this should make it easier to absorb and contextualize anything of significance. Lastly, the callouts below are from the prior seven days:


Growth Slowing:

  • China’s manufacturing PMI came in at a rather weak 50.4 in October (vs. 51.2 prior) – the lowest reading since February ’09! What’s worse, the forward-looking subcomponents (new orders, new export orders, and order backlog) all declined sequentially to near-50 or sub-50 levels.
  • Japanese export growth slowed in September to +2.4% YoY vs. +2.8% prior. Additionally, Japanese small business confidence edged down in October to 46.4 vs. 47.2 prior.
  • Hong Kong money supply growth (M3) went negative for the first time in years in September, falling -0.4% YoY. This happened in 2Q08 and was largely flat-to-down on a YoY basis until 1Q09. This is yet another stealth data point to consider when pondering where global growth might be headed over the next 3-6 months.
  • Taiwanese real GDP growth slowed in 3Q: +3.4% YoY vs. +5% prior – a two-year low. Manufacturing PMI ticked down in October to 43.7 vs. 44.5 prior.
  • South Korea’s manufacturing and non-manufacturing business surveys both ticked down in November to 82 (vs. 86 prior) and 84 (vs. 86 prior), respectively.
  • New Zealand’s NBNZ business confidence and outlook surveys both dropped in October to 13.2 (vs. 30.3 prior) and 26.1 (vs. 35.4 prior), respectively.

Deflating the Inflation:

  • Japanese CPI slowed in September to flat YoY vs. +0.2% prior.
  • Chinese input prices PMI sub-index ticked down in October to 46.2 vs. 56.6 prior – the first sub-50 (contraction) reading since March ’09!
  • South Korean CPI slowed in October to +3.9% YoY vs. +4.3% prior.
  • Indonesian CPI slowed in October to +4.4% YoY vs. +4.6% prior.
  • Australian CPI, core CPI, and PPI all slowed in 3Q to +3.5% YoY (vs. +3.6% prior), +2.3% YoY (vs. +2.6% prior), and +2.7% YoY (vs. +3.4% prior), respectively. An unofficial TD Securities gauge of inflation showed continued cooling of late: +2.6% YoY in October vs. +2.8% prior.
  • New Zealand’s CPI slowed in 3Q to +4.6% YoY vs. +5.3% prior.

Sticky Stagflation:

  • Chinese Premier Wen Jiabao reiterated that China will continue to maintain firm controls within the property market and that the country will ease policy at a “suitable time and [to an] appropriate degree”. We’ve been in print saying that we likely won’t see China loosen meaningfully without at least one quarter of sequentially contracting CPI alongside slowing YoY headline inflation trending down towards the State Council’s +4% target. The latest reported inflation data would suggest we’re at least 3-4 months away.
  • China’s banking regulatory body, the CBRC, granted approval to some banks to issue debt in order to fund incremental loan issuance to Chinese SMEs. Elevated inflation continues to keep the Chinese government from coming to the rescue of its ailing small businesses in a meaningful way.
  • Thai CPI accelerated in October to +4.2% YoY vs. +4% prior. The acceleration makes the Bank of Thailand’s monetary policy strategy that much harder, given that they just lowered their 2011 GDP forecast by -36.6% to +2.6%. Rapidly slowing economic growth is supportive of easing, but current CPI readings and an increase to their 2012 inflation forecast requires additional prudence per Assistant Governor Paiboon Kittisrikangwan.

King Dollar:

  • Japan intervened for the third time in the year-to-date to weaken the yen in the spot currency market. Finance Minister Jan Azumi pledged to continue taking “bold action against speculative moves in the market” as the “one-sided speculative moves that don’t reflect the economic fundamentals of [Japan’s] economy.” His lack of understanding on the relative nature of exchange rate determination continues to make Japanese bureaucrats flat-out wrong here, as our analysis shows the yen is being driven solely by “fundamentals”.
  • The Reserve Bank of India raised interest rates for the 13thtime since the start of 2010 (+350bps in the current tightening cycle) and signaled that if the “inflation trajectory conforms to [their] projections” over the next few months (our models suggest this is the most likely scenario), the RBI is likely done tightening monetary policy. India’s benchmark repo rate now stands at 8.5%.
  • Consistent with our outlook since 2Q, the Reserve Bank of Australia finally broke and lowered interest rates by -25bps (now at 4.5% on the overnight cash rate). In explaining the decision, RBA Governor Glenn Stevens cited all the things we’ve been hitting on for months: slowing Asian demand, a weakened domestic labor market, Europe’s Sovereign Debt Dichotomy, and retrenchment in the domestic consumer and corporate sectors. Interbank cash rate futures are currently pricing in a 74% chance the RBA lowers by another -25bps in December.

Eurocrat Bazooka:

  • Chinese Vice Finance Minister Zhu Guangyao confirmed our belief that China would not be a source of “dumb capital” for the EFSF, publically demanding more details about the “technicalities” of the fund. Additionally, China Investment Corporation (sovereign wealth fund) Chairman Jin Liqun said that “Europe is not really short of money” and publically challenged the European populace to “work harder”, “longer”, and “be more innovate”.


  • Japanese manufacturing PMI ticked up in October to 50.6 vs. 49.3 prior.
  • Indian manufacturing PMI ticked up in October to 52 vs. 50.4 prior.
  • South Korean manufacturing PMI ticked up in October to 48 vs. 47.5 prior.
  • Australian manufacturing PMI ticked up in October to 47.4 vs. 42.3 prior.


  • The epic flooding in Thailand (92 billion cubic meters of water) have forced closures of 10,000+ factories and caused structural damage to plants and farmlands currently estimated at $4.6 billion. The closures are noticeably impacting the supply chains of Japanese corporations like Toyota and Sony, helping drag Japanese industrial production down in September to -4% on both a YoY and MoM basis.


Darius Dale



Weekly Asia Risk Monitor: Dominant Trends Still Intact - 1


Weekly Asia Risk Monitor: Dominant Trends Still Intact - 2


Weekly Asia Risk Monitor: Dominant Trends Still Intact - 3


Weekly Asia Risk Monitor: Dominant Trends Still Intact - 4


Weekly Asia Risk Monitor: Dominant Trends Still Intact - 5


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Weekly Asia Risk Monitor: Dominant Trends Still Intact - 7

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