Winners vs Whiners

This note was originally published at 8am on November 17, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“What is even worse is a terrifying uniformity of opinions and reasoning.”

-Siegmund Warburg


Coming out of WWII, that’s how Warburg explained the difference between his thought process and that of the American bankers he competed with (they didn’t like that). According to Niall Ferguson, “…at times Warburg could lapse into an almost blimpish anti-Americanism…” (High Financier, page 167)


I’m definitely not anti-American. In fact, at this point I think I can make the argument that I love this country as much as my own. That said, I am anti-groupthink and anti-Old Wall Street. As Warburg said, at American banks “even those who are outstandingly intelligent change their views according to the movement of the Stock Exchange.”


On that score, just fyi, the US stock market is not the US economy. A lot of people on Old Wall Street disagree with me on that – and if you can’t tell already, I really want to have this debate in the arena of American public opinion!


Strong Dollar = Strong America. Period.


That doesn’t mean that the US Dollar has to go up and the stock market down for me to be right on this. On the contrary, I think this country will only get it really right when both its currency and stock markets are going up together. That’s when the 99% get paid.


Keynesians already have their hands up in the air before the Yale-Harvard Game this weekend reading this – ‘but, but, what about exports – how do we compete with the Chinese if our currency is strong?’


Stop whining and start winning.

  1. The US Economy isn’t an export economy anymore – get over it
  2. US Consumption = 71% of US GDP - this is a service and consumption economy
  3. Strong Dollar = higher purchasing power for Americans where it matters

American winners like Ford, Microsoft, and Apple didn’t become the leaders of innovation and job creation on some cochamamy central plan for a weak currency. They did it by dealing with the globally interconnected game that they were in, and finding a way to win.


Back to the Global Macro Grind


First, let me start with what’s been winning for us here in November – our Global Macro call for King Dollar. Here’s how the Hedgeye Asset Allocation Model is positioned for this morning’s open:

  1. CASH = 52%
  2. FIXED INCOME = 24% (Long-term Treasuries, Treasury Flattener, and Corporate Bonds – TLT, FLAT, and LQD)
  3. INT’L CURRENCY = 12% (US Dollar – UUP)
  4. US EQUITIES = 6% (Utilities and Healthcare – XLU and XLV)
  5. COMMODITIES = 6% (Gold – GLD)
  6. INT’L EQUITIES = 0%

I started the week at 0% asset allocation to US Equities as I came into the week short the SP500 (SPY).


Yesterday, I did what the process told me to do: started buying Healthcare (XLV), and sold some Fixed Income exposure (which was oversized to start the week at 30%, with my max being 33% to one asset class).


By Global Macro position, here’s what I am thinking as of last price:

  1. TLT – Growth Slowing, globally, is going to continue to have an impact on US Growth Slowing. Immediate-term target for UST 10-year yields is 1.98% so that means it’s time to take my time selling some bonds and buying some stocks (see Chart of The Day).
  2. FLAT – Growth Slowing. Period. We’ve had this position on since February of 2011, so the buy-and-hold crowd can give me a golf clap for having the conviction to stay with our highest conviction idea relative to consensus in January 2011.
  3. LQD – Are Corporate balance sheets “flush with cash” – no doubt, but some of them are flush with debt too – so we want to be careful with this position as the US bankruptcy cycle accelerates (see chart of American Airlines – AMR).
  4. UUP – Domestically, we think the US Presidential cycle puts Bernanke in a box. Internationally, we think the Europeans are going to cut rates alongside most central bankers in Asia and Latin America. Strong Dollar = Strong America.
  5. XLU – next to owning the top performing major currency in November (USD), we want to continue to have exposure to American cash dividend yields. This is the highest dividend yielding S&P Sector ETF and remains in a Bullish Formation in our model.
  6. XLV – buying it right is what matters most here (yesterday was a good re-entry point), but our Healthcare Team is bullish on the intermediate-term TREND outlook for consumption oriented domestic Healthcare stocks (think dental and Strong Dollar).
  7. GLD – again, you want to buy it right and manage your risk around what looks to be a relatively predictable range ($167.21-$175.98). As long as real-interest rates on American savings accounts remain negative, Gold works for absolute return.

I know it terrifies Old Wall Street to think that we can be as bearish as we’ve been on Growth Slowing, but still find a way to make money on it on the long side. Ray Dalio has done it in both 2008 and 2011 and so have we. Winners win.


Being perma bullish or bearish isn’t a risk management process; neither is hope for the next Big Government Intervention. I think we are having a generational moment in this country where the winners can take this country’s leadership reigns back from the whiners.


That’s the long-term America I think we can all believe in.


My immediate-term support and resistance ranges for Gold, Oil, France, Germany, and the SP500 are now $1748-1808, $97.69-102.11, 3003-3089, 5802-5926, and 1224-1252, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Winners vs Whiners - Chart of the Day


Winners vs Whiners - Virtual Portfolio

Powerful Turbulence

“In a time of turbulence and change, it is more true than ever that knowledge is power.”

-John F. Kennedy


Contextualizing market moves within the scope of Global Macro fundamentals is as critical right now as it’s ever been. That’s why we built a firm around our multi-factor, multi-duration, Global Macro risk management process.


Every morning we wake up at the same time and do the same thing. We Embrace Uncertainty. Functionally, what that means is that price, volatility, and volume factors strike our models on a real-time basis – and we accept them for what they are.


Much like the rain and tide pounding the contour of an ocean line, what you end up seeing is what you get – patterns. Time and patterns create a series of probabilities, scenarios, and ranges. This is how we apply Chaos Theory to markets.


Back to the Global Macro Grind


This morning’s embrace of uncertainty issued me a not-so-friendly risk management kiss. I’m in a hotel room on the road – and that’s not cool coming from a laptop. But I guess that’s too bad for me – the market doesn’t care about how I am positioned.


I am long the US Dollar and short the Euro.


The Germans decided to support the Euro this morning by telling the rest of the world’s Bailout Beggars to go pound sand. This isn’t the kind of sand in Benoit Mandelbrot’s fractal model (falling one grain at time). This is the big beachhead of fluffy expectations stuff.


“We don’t have any new bazooka to pull out of the bag… we see no alternative to the policy we are following… we need to tell markets very clearly – and this must be done soon – that there is no other way forward than the one we’re pursuing.” –Michael Meister


Meister, one of Merkel’s senior guys, went on to add that if Italian and the French central planners don’t like that, they can go pound some more sand, and “sit tight through the turbulence.”


The Euro finally bounced on that (I know – how dare the Germans defend the common currency and purchasing power of their people!), rallying straight back up to an immediate-term TRADE zone of resistance ($1.35-1.36).


In turn, the US Dollar sold off, holding immediate-term TRADE support of $77.07 (US Dollar Index).


Thankfully, it will take more than one morning, week, or month of Powerful Turbulence to take me out of this globally interconnected game of risk. Pursuing its outcomes is what I love to do. And I love being long our King Dollar theme on red.


Dollar Down = reflation of some of yesterday’s deflation. Dollar up = Deflates The Inflation.


Since 71% of US GDP = Consumption, that’s what we need to see more of to bring growth back in the country – not another super-committee of central planners. Newt has that part of it right.


Strong Dollar = Strong America. Period.


While that may create some Powerful Turbulence in the stock market in the short-run, in the long-run most of our children and grandchildren won’t be dead.


The short-run performance of the stock market doesn’t reflect the long-term health of the country – full employment and price stability do.


US stocks are down -12.5%, -7.6%, and -5.6% from their April, October, and November highs, respectively. Volatility (VIX) is up +120% since April’s SP500 price of 1363. Unemployment in America hasn’t moved off of 9%.  


Having learned the 1920s lessons of structural unemployment and price volatility the hard way, maybe there’s a part of this that the Germans have right for the long-run too.


My immediate-term support and resistance ranges for Gold, Oil, German DAX, and the SP500 are now $1, $95.35-98.42, 5, and 1186-1203, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Powerful Turbulence - Chart of the Day


Powerful Turbulence - Virtual Portfolio

Early Look

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TODAY’S S&P 500 SET-UP - November 22, 2011


OVERSOLD is as oversold does. Yesterday’s SP500 immediate-term TRADE oversold line = 1187 and this morning’s math gets me 1186, so that’s the zone.  Problem with that so far is that a 10-14 point bounce can’t get us back above 1203 (TREND line resistance).  As we look at today’s set up for the S&P 500, the range is 22 points or -0.59% downside to 1186 and 1.26% upside to 1208. 











  • ADVANCE/DECLINE LINE: -2157 (-2568) 
  • VOLUME: NYSE 932.24 (-2.45%)
  • VIX:  +32.91 +2.54% YTD PERFORMANCE: +85.41%
  • SPX PUT/CALL RATIO: 1.81 from 1.05 (+72.62%)




  • TED SPREAD: 48.99
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 1.97 from 2.01   
  • YIELD CURVE: 1.70 from 1.72


MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45/8:55am: ICSC/Redbook weekly comp retail sales
  • 8:30am: GDP, Q/q, (Annualized), est. 2.5% (prior 2.5%)
  • 8:30am: Personal Consumption, est. 2.4% (prior 2.4%)
  • 10:00am: Richmond Fed, est. -2 (prior -6)
  • 11:30am: U.S. to sell 4-wk bills
  • 1:00pm: Fed’s Kocherlakota speaks in Winnipeg
  • 1:00pm: U.S. to sell $35b 5-yr notes
  • 2:00pm: FOMC minutes of Nov. 1-2 meeting released



  • Germany sees no alternative to current policy to fight euro- zone financial crisis, Merkel ally says
  • S&P, Moody’s won’t lower ratings on the U.S. after supercommittee talks fail
  • Quinnipiac University holds news conference on results of national poll on 2012 GOP presidential contenders
  • Obama makes speech on American Jobs Act in at high school in Manchester, N.H.





GOLD – We are long and wrong Gold here and do not like it having broke its intermediate-term TREND line of $1722/oz. Gold selling off like this has a lot more to do with liquidations in the hedge fund business than anything else. Performance is not good out there.

  • Supercommittee Failure Threatens Recovery as Rating Affirmed
  • World Bank Says Asia Has Room for Stimulus to Limit Europe Hit
  • Oil-Tanker Rally Threatened as Ships Seen Accelerating: Freight
  • DuPont Faces Squeeze as Titanium Ore Costs Advance: Commodities
  • Gold Rebounds From Four-Week Low as Debt Concerns Spur Demand
  • Iron Ore May Resume Fall as Demand Declines, Ord’s Arden Says
  • Copper Advances as China Imports Rise, Global Inventories Drop
  • Stocks Slump as Treasuries Rise on U.S. Budget; Euro Trims Loss
  • Hong Kong Bourse to Introduce Commodities Trading, CEO Says
  • India’s Gold Imports May Drop 15% as Rupee Plunges to Record
  • Lupatech Default Bets Send Bonds to Record Low: Brazil Credit
  • BHP Leads Mining Bond Sales in Surge to Record: Australia Credit
  • Oil Trades Near One-Week Low on Speculation U.S. Stockpiles Rose
  • Ex-Goldman Commodities Chief Plans Hedge Fund, SparkSpread Says
  • Oil Gains First Day in Four as U.S. Expands Sanctions on Iran
  • UBS Names Ed Carroll, Hector Freitas to Head Commodities
  • Vale Proposes Tito Martins as CFO in Management Reshuffle
  • Palm Oil May Gain After Breaking Resistance: Technical Analysis
  • Rio Says Some Mines Are Affected by Orica Plant Shutdown














ASIA – better than bad is the best way to describe how Asian stocks traded after the European and US selloff.  Again, immediate-term TRADE ranges are what they are – they always get overbought/oversold. India finally arrested its recent decline, +0.75%.





  • Oil Abundance in Canada Provokes Anxiety Over Fossil Fuel Lust
  • U.S. Targets Iran Oil, Bank in Bid to Halt Nuclear Program
  • Egypt Cabinet Offers to Resign as Mass Protests Planned
  • OPEC May Cut Production at December Meeting, Luaibi Says
  • Malaysia Leveraged Buyout Sukuk to Fund PLUS: Islamic Finance
  • Oil Gains First Day in Four as U.S. Expands Sanctions on Iran
  • Mizuho, Mitsubishi UFJ to Finance $1.6 Billion Oman Project
  • Saudi Shiites Protest in Eastern City of Qatif After Man Killed
  • Dubai Shares Fall to Seven-Year Low on U.S., Europe Growth Risk
  • ADCB May Offer Benchmark Bond in First-Half of 2012, CFO Says
  • Abu Dhabi Taqa Offers to Buy Back Bonds, Will Meet Investors
  • Doha Bank Plans to Sell Bond in First Quarter, Deputy CFO Says
  • Dubai’s Stocks Fall to Lowest Level in More than Seven Years
  • Dubai’s Al Wasl Brokerage May Shut as Stocks Slump to 2004 Low
  • Saudi Aramco Turns to Gas, Petrochemicals as Oil Demand Wanes
  • Abu Dhabi Islamic Bank Said to Sell $500 Million Five-Year Bond
  • Iraq Oil Minister Expects Output Cut at Next OPEC Meeting
  • N.Y. Man Faces Terror Charges After FBI Said to Decline Case
  • Genel, Biggest Kurdistan Oil Producer, Falls in London Debutukuk



The Hedgeye Macro Team

Howard Penney

Managing Director





Weekly Latin America Risk Monitor: Growth Remains Constrained

Conclusion: Both financial markets and economic data continue to paint a negative intermediate-term outlook for the Latin American region.



Latin American equity markets had another off week last week, closing down -2.4% on a median basis. Argentina, a market we remain the most bearish on, led decliners (-8.1% wk/wk) and is now down -28.3% for the YTD. Latin American equity markets are down -17.9% YTD on a median basis as economic stagflation erodes earnings and equity multiples to varying degrees throughout the region.


Latin American currencies also struggled against King Dollar last week, closing down -1% wk/wk on median basis. Brazil’s real and Chile’s peso led decliners, falling over -2% each.


Across Latin American sovereign debt and interest rate markets, we saw Brazil continue to get the benefit of the doubt on the rate cutting front: 2yr yields declined -11bps wk/wk; 9yr yields declined -12bps wk/wk; and 1yr O/S interest rate swaps tightened another -5bps to 9.95% – a full -155bps below the central bank’s target Selic rate! Other sovereign issuers, including Mexico and Colombia saw their local currency yields back up broadly across the curve last week.


5yr CDS traded wider across the entire region last week, finishing +10.6% wider on a median percentage basis. Mexico led gainers here, closing up +13.7% or +21bps wider wk/wk. Mexico, whose equity market continues to benefit from hopeful expectations out of the U.S., may be suggesting things aren’t as rosy north of the border as they are expected to appear – at least according to the credit market’s perspective. Mexican 5yr CDS has widened +55.6% in the YTD, which is right in line with the +56% median YTD move in the region.



Growth Slowing:

  • Despite consumer credit growth running well beyond central bank targets in the YTD (up ~29%) Brazil’s central bank unwound the bulk of consumer credit curbs it imposed last December in what appears to be desperate effort to spur growth and “ward off recession” according to public rhetoric. Specifically, the measures reduced capital requirements for auto loans w/ maturities of less than 5yrs and maintained a 15% monthly minimum payment requirement on consumer loans that was scheduled to increase to 20% by EOY. The moves have marginally slowed down the rate at which traders expect the central bank to ease monetary policy, though further cuts are still being priced into various markets.
  • Brazil’s economic activity index, a proxy for GDP, slowed in Sept to +1.2% YoY vs. +2.9% prior.
  • Brazilian formal payrolls growth slowed in Oct to 126.1k vs. 209.1k.
  • Chilean real GDP growth slowed in 3Q11 to +4.8% YoY vs. +6.6% prior.
  • Peruvian real GDP growth slowed in Sept to +5.8% YoY vs. +7.5%.

King Dollar:

  • Chile’s central bank kept its benchmark interest rate on hold at 5.25% for the fifth straight month last week. The move comes as CPI accelerated to a 2-plus year high of +3.7%, which is pushing toward the outer limits of the central bank’s target band (3% +/- 100bps). The fact that they didn't raise rates signals to us that their "balance of risks analysis" is skewed towards eventually needing to take steps to preserve growth (i.e.: cut rates).
  • The yields on Argentina’s benchmark dollar-denominated bonds due in 2033 jumped +143bps to 13.67% amid growing speculation that the government’s efforts to support the peso will ultimately fail. Central bank reserves have fallen -12.2% to $46.2 billion amid dollar sales and a $5.7 billion allocation to service international debt. The government has taken extensive measures of late to combat capital outflows, which have forced benchmark deposit rates to 3yr highs and the highest level relative to interbank rates since 2003 (badlar = 20.6%; baibor = 12%). We’ve been quite bearish on Argentine equities, largely as a result of the long list of knock-on effects of a pending currency devaluation; email us for our aggregated work on this topic – not the least of which are higher borrowing costs leading to a deteriorating credit outlook. Fighting King Dollar’s bullish bid is not a battle we foresee the Argentines winning.


  • Mexican same-store sales growth accelerated in Oct to +5.8% YoY vs. +5.4% prior.

Darius Dale



Weekly Latin America Risk Monitor: Growth Remains Constrained - 1


Weekly Latin America Risk Monitor: Growth Remains Constrained - 2


Weekly Latin America Risk Monitor: Growth Remains Constrained - 3


Weekly Latin America Risk Monitor: Growth Remains Constrained - 4


Weekly Latin America Risk Monitor: Growth Remains Constrained - 5


Weekly Latin America Risk Monitor: Growth Remains Constrained - 6

Covering the Aussie Dollar – We’ll Be Back

Today, Keith used the red tape across global macro markets to book some gains on the short side in our Virtual Portfolio. Within that construct, we’ve covered the Aussie Dollar (etf: FXA) as it is finally immediate-term TRADE oversold on our quantitative factoring. Australia’s currency remains our top Asian FX short idea over the intermediate-term TREND due to the following factors: 

  1. The Reserve Bank of Australia, led by Glenn Stevens, looks to accelerate the pace of rate cuts over the intermediate term as both growth and inflation continue to slow alongside dramatic property market headwinds;
  2. Australia’s terms of trade – which are heavily associated with raw materials prices – will continue to decline from multi-generational highs as both demand for and market prices of Australia’s exports fall (Asia accounts for roughly 70% of Aussie exports, which are roughly 60% comprised of commodities like coal, iron ore, and liquefied natural gas)… the CRB Raw Industrial Materials Index is down -17.3% from its YTD peak;
  3. Mean reversion and Winner’s Risk (i.e. liquidation) remain headwinds on the behavioral side (AUD is the best performer globally vs. the USD since the March ’09 low in global beta – up +55.8%). 

Covering the Aussie Dollar – We’ll Be Back - 1


Covering the Aussie Dollar – We’ll Be Back - 2


Covering the Aussie Dollar – We’ll Be Back - 3


For those who haven’t seen the in-depth work behind our intermediate-term bearish thesis on the Aussie dollar, please refer to the following research notes for more details: 

Darius Dale



Covering the Aussie Dollar – We’ll Be Back - 4

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