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This note was originally published at 8am on November 07, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Choose a job you love, and you will never have to work a day in your life.”

-Confucius

On this day in 2007, my first son Jack was born. Less than a week prior to that, on November 2nd, 2007, I was fired. Having recently achieved my highest ranking “title” in the vaunted hedge fund universe, this was a rather abrupt end to what was only a 10 month old affair at Carlyle’s new hedge fund.

All that ends abruptly creates opportunities for new beginnings. I’d never been cut from a team or fired by a firm before (unless I fire myself, hopefully that doesn’t happen again!). However, I firmly believe that men and women have to be able to “fail” in order to ultimately succeed. It’s the only way to learn how to rethink and rework what it is that we are here to do. Evolve.

Thank you to Laura, my family, and firm for giving me such a tremendous opportunity to help create Hedgeye. I am Loving Life.

Back to the Global Macro Grind

With all of the October 2011 fanfare associated with the only good month stocks and commodities have had since April, last week was a reminder of what intermediate to long-term equity investors should recognize as bearish. Welcome to November.

If you’ve taken the lessons of the October 2007 US stock market top and embraced it as an opportunity to change your process to one that’s more diversified and Global Macro in scope, last week was a very good one for you. Both the US Dollar and US Treasuries outperformed, big time.

On the week, with the US Dollar Index realizing an impressive +2.5% week-over-week return, here’s how everything that’s inversely correlated to the USD moved:

  1. US Stocks (SP500) = down -2.5%
  2. Asian Stocks (MSCI Index) = down -3.6%
  3. Latin American Stocks (MSCI Index) = down -3.3%
  4. Euro/USD = down -2.1%
  5. Canadian Dollar (CAD/USD) = down -2.0%
  6. CRB Commodities Index = down -0.9%
  7. WTIC Oil = up +0.9%
  8. Gold = up +0.5%
  9. Copper = down -3.8%
  10. 10-yr US Treasury Yields = down -12.5%

Interestingly, with both Oil and Gold maintaining 0.7-0.9 inverse correlations to the US Dollar, they diverged versus just about everything else in our Global Macro Correlation model. The intermediate-term TREND between Oil and the US Dollar since May remains intact, however, with the USD Index up +5.4% and Oil down -8.7%, since.

Positively correlated with the US Dollar Index (this is the good news, if you’ve been long them since May) are:

  1. Long-term Treasury Bonds (TLT)
  2. US Treasury Flattener (FLAT)
  3. Corporate Bonds (LQD)

Oh, and Volatility (VIX)…

Volatility was up +23% last week alone and is up +101% since The Bernank offered us his first global press conference on what he calls “full employment and price stability” (end of April 2011).

Not.

With the so called “catalyst” of the G20 meetings gone, and another terrible 2011 US employment report behind us, “the gales of November came early.”

That line, as many locals from Thunder Bay, Ontario would recognize, comes from one of our local risk management ballads called The Wreck of the Edmund Fitzgerald:

 

“The legend lives on from the Chipewa on down

Of the big lake they called ‘Gitche Gumee’

The lake it is said, never gives up her dead

When the skies of November turn gloomy”

And since today is just another day for Risk Managers who have proactively prepared for the Growth Slowing storm of 2011, I’ll just end this morning’s missive here. Given the number of rants you’ve all put up with in the last 4 years of my writing these notes, I owe you all some brevity.

My immediate-term support and resistance ranges for Gold (bullish TRADE, TREND, and TAIL), Oil (bearish TAIL, bullish TRADE), German DAX (bearish TRADE, TREND, and TAIL), and the SP500 (bullish TREND; bearish TAIL) are now $1732-1778, $92.97-93.88, 5711-6068, and 1210-1267, respectively.

Happy Birthday Jack and best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

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