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SP500 Levels Into The Close...

Since Thursday afternoon, I have made 19 consecutive sales (long sales and short sales) in the 'Hedgeye Portfolio'... with the SP500 at the top of my trading range, I am incrementally bearish. At the bottom of that range, I am incrementally bullish. This isn't my religion. This is my investment process with volatility (VIX) running in the high 60's. This is a market that needs to be traded.

See chart below for my updated levels post the 3PM refresh of my model's pricing:

BUY "Trade" = 839
SELL "Trade" = 901

The "Shark Line" is the great white dotted one on this chart up at 927. Beware of it.

Japan's Bottom Is Not In...

See the chart below. While it is not new news that a country that gives its people zero interest rates on their life savings ends up wallowing in their own economic misery, it was apparently new to the media this morning that Japan could drive itself into another recession...

Do not mistake the 2008 Japanese recession for the one we witnessed in 1998 (where the Nikkei looked past the news and ripped higher ahead of accelerating economic growth). This Japanese bailout policy is going result in protracted economic stagnation.

We remain short Japan via the EWJ etf. This is a position we have held since opening the firm in May.

UA: Eye On Insider Buying

Amidst all the market noise, most people probably missed the insider buying at UnderArmour last week. Was it massive in size? Nah… But notable in that it was only the second insider buy all year. Harvey Sanders, member of the Board since 2004 and Chair of the Compensation Committee, boosted his stake in UA by 19% at $21.68 (i.e. where it is now). Equally as important is that Mr. Sanders has been a reasonably astute buyer and seller over time. – having lost money on 1 out of his 5 trades. In addition, his largest trade to date was 1,900 shares. This transaction was for 10,000.

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Charting EU Credit Divergences, By Country...

Sometimes simple charts like this can reveal critical truths. While the EU has created a common currency, not all credit quality in the European bond market is considered equal. This is one more reason to like German Equities. We are remain long Germany, via the EWG etf.

China: Best Looking Country Chart In The League

The fundamental picture in China continues to improve (growth expectations have been reigned in, and inflation continues to abate). In the face of a $586B stimulus spending plan and the cutting of taxes on exports, this is not a macro train many can afford to miss.

China's SSEC closed up another +2.2% overnight at 2030. The Composite Index has had a better than +15% move in the last week of trading. The chart below shows the impact of breaking out through our "shark line", which rests comfortably underwater now at 1866.

We remain long China via the FXI exchange traded fund. We were the bears for the better part of the last year, so we are well aware of their pitching our stale thesis.

Eye On The New Reality: American Cost Of Capital...

Below are two of the most important macro charts in my notebook – cost of long term capital on both a 30 and 1 year basis. Why are these “most important”? Because what occurs next on the margin here will have a meaningful impact across asset classes, how they trade, and how they are valued.

The 30 year chart puts a lot of what has occurred in the cheap money leverage cycle in context. The numbers don’t lie here, people do. This long term chart made geniuses of many in America. As cost of capital declined, some levered up on it and spent their brains out – some even called it a repeatable investment process. Pardon?

THE QUESTION from here is what do you do if the Queen Mary turns up into the right on 10 year yields?

You know that access to capital is never going to be what it was. You know that anyone in need of long term capital (MGM Mirage, Barclays, etc…) is paying double digit rates. You know that the US Federal Reserve eventually has to raise rates (they can’t cut from zero).

Do you know what this means for your portfolio? This is going to be “The New Reality”…

I have the critical breakout/breakdown line (or “shark” line) for US 10 Year Treasury Yields at 3.83% (see chart).

Manage risk at the tail. Jimmy Carter’s economic legacy remembers cost of capital well…

Keith R. McCullough
Chief Investment officer
Research Edge LLC

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