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TODAY’S S&P 500 SET-UP - November 23, 2011


As we look at today’s set up for the S&P 500, the range is 21 points or -0.93% downside to 1177 and 0.84% upside to 1198. 




With the SP500 down for 5 consecutive days and down -5.2% for November (down -7.9% from OCT28 intraday peak of 1290), it should be no surprise to see the deterioration in our S&P Sector Studies. All 9 Sectors are Bearish TRADE; 3 of 9 Bearish TREND; 8 of 9 Bearish TAIL.


With this week’s TREND breakdown (1203), the SP500 itself is back into what we call a Bearish Formation (all 3 risk management durations are bearish). The only sector that’s bullish TREND and TAIL is Utilities (XLU), which is up +7.8% YTD.


Financials (-24.3% YTD), Basic Materials (-15.6% YTD), and Industrials (-8.4% YTD) tell you all you need to know about the double edged sword of Growth Slowing and Correlation Risk. We’ve been calling for both.


We remain bullish on the US Dollar and ultimately think that will provide a tailwind for US domestic Consumption stocks in both Consumer and Healthcare sectors. These stocks/sectors finding higher-lows will take time. Bottoms are processes, not points.



THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance



  • ADVANCE/DECLINE LINE: -708 (+1449) 
  • VOLUME: NYSE 878.19 (-5.80%)
  • VIX:  +31.97 -2.86% YTD PERFORMANCE: +80.11%
  • SPX PUT/CALL RATIO: 1.66 from 1.81 (-8.70%)




TREASURIES: Growth Slowing? 10yr bonds ripping a move to 1.90%; 30yr 2.87% and Yield Spread collapsing to +164bps wide

  • TED SPREAD: 49.01
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 1.94 from 1.97   
  • YIELD CURVE: 1.71 from 1.67


MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, (prior -10.0%)
  • 8:30am: Durable Goods, est. -1.2% (prior -0.8%)
  • 8:30am: Personal income, est. 0.3% (prior 0.1%)
  • 8:30am: Personal spending, est. 0.3% (prior 0.6%)
  • 8:30am: Initial jobless claims, est. 390k, prior 388k
  • 9:45am: Bloomberg Consumer Comfort (prior -50.0)
  • 9:55am: UMich Confidence final, est. 64.5 (prior 64.2)
  • 10:30am: DoE inventories
  • 11am: Kansas City Fed, est. 9, prior 8
  • Noon: EIA natural gas storage
  • 1pm: Baker Hughes rig count



  • Delta, US Airways expected to find out which of their rivals won auctioned landing slots at LaGuardia, Ronald Reagan; watch Southwest, JetBlue
  • Orders for durable goods other than transportation stabilized in Oct. after rising most in 6 months, separate figures may show
  • China passed U.S. to become world’s largest smartphone market by volume in 3Q: Strategy Analytics
  • U.S. markets closed Thursday for Thanksgiving holiday



  • Coffee Supply Crunch Spurs Rally After Folgers Cut: Commodities
  • Australia Faces Wheat Export Challenge as Rain Hurts Crop
  • Gold Advances as Global Debt Risk Drives ETP Holdings to Record
  • Golden Agri Forecasts Higher Palm-Oil Output on Expansion
  • Turkey Farmers Lose Out on Thanksgiving Rally as Corn Costs Rise
  • Palm Oil Declines for Third Day on Concern World Growth Slowing
  • South Korea Buys 3,000 Tons of Malaysian Aluminum in Tender
  • Soybeans Decline to 13-Month Low as Supply Prospects Improve
  • Copper Declines on Sign China’s Manufacturing May Contract
  • Oil Drops on Rising U.S. Fuel Supplies, Slowing Economic Growth
  • Sugar Mills Expect India to Allow More Exports Next Month
  • Sugar in China May Extend Decline on MACD: Technical Analysis
  • Diesel Becomes ‘Global Issue’ as Premium Soars: Energy Markets
  • Australia Lower House Passes Mining Tax as Greens Back Bill
  • ‘Absolute Fear’ Saps Commodity Open Interest: Chart of the Day
  • Copper Rises Most in a Week on Signs China’s Demand to Climb
  • Vale Says Galilee Miners Need to Build Joint Rail to Save Costs
  • Copper in London Falls by 0.3% to $7,305, Reversing Gains
  • Cocoa Arrivals From Brazil’s Bahia Advance 11%, Hartmann Says
  • Oil Gains First Day in Four on Iran Sanctions and Egypt Protests
  • Wheat Drops as U.S. Exports Slow on Ample Global Supplies

THE HEDGEYE DAILY OUTLOOK - daily commodity view




THE HEDGEYE DAILY OUTLOOK - daily currency view





EUROPE: remains no bid - lower-highs on low volume rallies and threats for lower-lows

THE HEDGEYE DAILY OUTLOOK - euro performance





ASIA: do up your chinstraps b/c Asian Equities are crashing, again - HK (were short) down another -2.1% (down -26.8% from YTD high)


THE HEDGEYE DAILY OUTLOOK - asia performance




  • Arab World’s Former ‘Club of Tyrants’ Turns Against Syria
  • Gingrich Immigration Plan Derided as ‘Amnesty’ in Debate
  • Egypt Army Pledges Transition as Protesters Gather in Cairo
  • Australian Banks Ready First Sukuk on Tax Vote: Islamic Finance
  • Egypt Dollar Bonds Tumble as Tantawi Promises a ‘Step Backward’
  • Qatar Said to Hire 6 Banks for Meetings With Bond Investors
  • Saudi May Struggle to Boost Small Business Lending: Arab Credit
  • Oil Gains First Day in Four on Iran Sanctions and Egypt Protests
  • Iraq’s Lafarge-Run Cement Plant Plans to Triple Production
  • Dubai’s Al Wasl May Close as Stocks Retreat to 2004 Low
  • Iraq Has Told Exxon It’s in Breach of Laws, Shahristani Says
  • Oil Abundance in Canada Provokes Anxiety Over Fossil Fuel Lust
  • U.S. Targets Iran Oil, Bank in Bid to Halt Nuclear Program
  • Saipem, Petrofac ‘Well Positioned’ if Saudi E&P Cut: JPMorgan
  • ADIB Prices $500 Million Sukuk at 245 Basis Points Above Midswap
  • Abu Dhabi’s Masdar Cuts Jobs, Keeps Renewable Energy Goals
  • Abu Dhabi Index Heads for Lowest Since 2009 on Global Growth




The Hedgeye Macro Team

Howard Penney

Managing Director


Most of the commodities that we monitor for the purpose of following trends important to the restaurant and food industries took a dive over the last week.






The supply and demand setup for beef remains bullish.  Prices decreased over the last week but, given the likelihood that the U.S. herd size will be far smaller in 2012 than at the outset of 2011, elevated prices are likely to continue.  Today, JACK management said that the company expects beef prices to be up 9 or 10% in 2012.


Data released by the USDA yesterday showed that cold storage supplies of beef were down 3% month-over-month in October and down slightly year-over-year.  Corn is declining but winter feed stocks are depleted enough already that farmers are reducing herd sizes into year-end which will tighten supplies for 2012. There is also a seasonal uptick in the slaughter of cows in the last weeks of the year that is worth taking into account.


Concerns over Europe’s economic prospects and economic growth estimates for the U.S. being cut are weighing on beef prices but emerging market demand remains strong.  Tyson Foods reported disappointing 4Q earnings yesterday and, during the earnings call, President and CEO Donald Smith said that demand was flat overall during the quarter.  On a global basis, however, TSN sees demand for proteins growing but anticipates a shift in food service from beef to chicken, given the continuing high price inflation beef is bringing to restaurant companies’ P&Ls.



Chicken – BWLD


Chicken wing prices were one of the few items to increase in price over the last week.  Tyson said yesterday that the company expects food service companies to focus more on chicken in 2012 which is a bullish sign for wing prices.  Our view for some time has been that 1Q will prove to be very difficult for Buffalo Wild Wings as high wing prices pressure margins and the company does not have the option of preserving margins while driving sales through promotion, as it did in 3Q.





Another decline in grain prices is bullish for the restaurant industry.  Feed costs for protein producers such as SAFM and TSN remain high at current prices but the trajectory is unmistakably downward.  Investors are, in general, losing interest in commodities as open interest for commodities, tracked by the S&P GSCI Index, has declined 14% since February as debt and deficit concerns weigh on the EU and US.  US exports of wheat fell for a second straight day today as speculation mounts that demand will decline for supplies from the US as competing exporters such as Russia boost production. 
































Chicken – Whole Breast


WEEKLY COMMODITY CHARTBOOK - chicken whole breast 1122



Chicken Wings















Howard Penney

Managing Director


Rory Green


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Available Cash

“Desire is proof of the availability.”

-Robert Collier


As I grind through the end of Sylvia Nasar’s “Grand Pursuit” this weekend, I’m looking forward to the most talked about book in the high-halls of intellectual hockey-head thought – Dan Kahneman’s recently published “Thinking, Fast and Slow.”


I love everything about that title. Being an amateur writer whose first English paper at Yale was deemed “un-grade-able”, I think the punctuation (using a comma) of the title provides a lesson for everyone in this business. Thinking is important – sometimes you need to do it fast. Sometimes you need to do it slow. Risk waits for no one.


Thinking back to his prior works in the 1970s (a period Bernanke should familiarize himself with), Kahneman (and Tversky) did a psychological experiment called the “Availability Heuristic” which essentially “operates on the notion that if you can think of it, it must be important.” (Wikipedia)


Can you think of anything going on in Europe right now?


Of course you can. That’s all the financial media talks and writes about every day. South Park’s Trey Parker must have Blame Europe in the works, right?




How many Old Wall Street meetings and/or interviews have you observed in recent months where the person speaking ends what they are saying with the word “right?”




That’s the business we are in. Whether people want to admit it or not, groupthink in our economic outlooks, politics, and choice of words is pervasive. Too Big To Think?


Back to the Global Macro Grind


The reason why Global Equities have been going down since Q1 of 2011 has a lot more to do with Global Growth Slowing than it does anything else. If you got US and Global Growth right at the beginning of 2011, you’re having a good year.


This morning’s Global Macro data continues to hammer home the deep simplicity of this fundamental research point:

  1. China’s flash HSBC Producer Manufacturing Index (PMI) dropped again, sequentially, to 48 in NOV vs 51 OCT
  2. Hong Kong’s Consumer Price Inflation (CPI) remained elevated at +5.8% y/y in OCT (inline with SEPT)
  3. Germany’s manufacturing PMI dropped again, sequentially, to 47.9 in NOV vs 49.1 OCT

Oh, that last point is about Europe. Right.


Well the inconvenient truth is that Globally Interconnected Macro markets aren’t all about Europe. Asian Growth Slowing and USD Correlation Risk would be 2 of the Top 3 (next to Europe) that any objective global analyst has to be proactively prepared for.


Get the US Dollar right, and you’ll get The Correlation Risk right.


On our immediate-term TRADE duration, here’s how inversely correlated the US Dollar Index remains to the big stuff moving markets:

  1. SP500 = -0.83
  2. EuroStoxx600 = -0.89
  3. CRB Commodities Index = -0.79
  4. 10-year US Treasury Yield = -0.72

Anyone who trades stocks or commodities gets points 1 through 3, but point 4 is a stealth reminder that the US Bond Market had US Growth Slowing right throughout the entire US Equity and Global Commodity head-fake rallies of October 2011.


With the US Dollar strengthening again intraday yesterday, that’s partly why I sold my Gold position and took my allocation to Cash in the Hedgeye Asset Allocation Model back up to 67% from 58% day-over-day.


Gold is one of the most over-owned, over-valued, “asset classes” left in Global Macro markets.




With Gold’s immediate-term TRADE correlation to the US Dollar becoming more intense (-0.49 last) and the hedge fund community under liquidation pressure again here in November (the industry doesn’t do well when stocks and commodities stop going up), booking a small -3.6% loss in Gold makes me more comfortable than taking a predictably larger one.


In the meantime, Available Cash remains King. That’s a 2011 Availability Heuristic you’ll be talking about over Thanksgiving dinner.


My immediate-term support and resistance ranges for Gold (bearish TREND resistance = $1724/oz), Brent Oil (Bearish Formation), France (Bearish Formation), Hong Kong (Bearish Formation), and the SP500 (Bearish Formation) are now $1, $105.67-109.59, 2, 176, and 1177-1198, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Available Cash - Chart of the Day


Available Cash - Virtual Portfolio

Asia Isn’t Buying Into Santa Claus

Conclusion: In this three-part note, we update our outlook for Chinese economic growth and monetary policy, hit on recent economic growth trends and outlooks across Asia and the associated implications for U.S./E.U. growth, as well as offer some sobering analysis on Asia’s role in funding the Eurocrat Bazooka.


With the bulk of U.S. investor attention oscillating between a sequentially worse domestic equity earnings season and Europe’s Sovereign Debt Dichotomy, we thought it be a helpful to quickly focus your attention on a few data points out of Asia over the last 72hrs that we think are instrumental to constructing a more clear intermediate-term outlook for both the U.S. and global economy:


While Chinese Growth Is a Real Problem, Broad Easing of Monetary Policy Is Unlikely to Occur Soon Enough

On the heels of Chinese Vice Premier Wang Qishan’s urging that the nation adopt more “forward looking and flexible” monetary policy (i.e. ease), the People’s Bank of China cut reserve requirement ratios in the province of Zhejiang, where Wenzhou is located (home to the sensationalist media reports of a dramatic credit crunch). While the single-province, -50bps reduction is hardly something to get excited about, it does support our view that China is unlikely to broadly ease monetary policy for 1-2 quarters, instead electing to “fine-tune” economic policy, per the PBOC. Chinese equities, as measured by the Shanghai Composite Index, are in support of our view (broken on our TRADE and TREND-duration quantitative factoring):


Asia Isn’t Buying Into Santa Claus - 1


Also consistent with our contrarian view that rate cuts aren’t always bullish when initially implemented because of the effect fear-mongering has on private sector confidence, Vice Premier Qishan’s call for monetary easing was accompanied by the following statement:


“The global economic recession triggered by the international financial crisis will be long-term.”


We remain convinced that this type of negative sentiment coming from high-ranking officials is not conducive for small business owners investing in additional capacity or consumers opening up their purses for big(er)-ticket items. Moreover, they aren’t conducive for international confidence in the world’s third-largest economy; it’s not a coincidence that the first decline in yuan holdings at Chinese banks (a gauge of “hot money” in/out flows) since December ’07 occurred in October.  As such, we’re now seeing 12mo non-deliverable forwards for the Chinese yuan trade at a slight discount to spot prices – the first break into negative territory since September ’08.


Asia Isn’t Buying Into Santa Claus - 2


Asia’s Woeful Export Growth and Downward Growth Revisions

Japan joined Hong Kong, Singapore, and Thailand as another large, export-dependent Asian economy to post flat-to-down YoY export growth in the latest reporting period. This is consistent with the general trend of softening industrial production statistics and weaker manufacturing PMI surveys throughout the region. This has obvious negative implications for the intermediate-term inventory build and consumption trends in the U.S. and E.U., given that Asia generally rests atop the developed-world’s supply chains. We say this time and time again, but it’s worth repeating:


“If the velocity of Asia’s production and shipment of goods and services is slowing or in decline, then the velocity of U.S./E.U. orders and consumption is sure to follow. Suppliers can’t sell what isn’t on the shelves and consumers can’t consume what hasn’t been produced.”


Asia Isn’t Buying Into Santa Claus - 3


Elsewhere in Asia, Singapore updated its 2012 GDP estimate to a baseline forecast of +1-3% and revised down its 2011 forecast for export growth to +2-3% from +6-7% prior. Per the Trade Ministry, neither forecast is inclusive of "downside risks to growth", such as a Eurozone recession. This follows up the Monetary Authority of Singapore’s stern warning issued on Friday:


"The world economy and financial system are at their most fragile state since the 2008-09 global financial crisis."


Just a thought, but if Singapore – a place home to the world’s 1st, 5th, and 6thstrongest banks and consistent a ~2% unemployment rate – is growing at only +1-3%, where does that put French and Italian growth in 2012?...


Additionally, Singapore joins Japan, Hong Kong, India, Indonesia, Thailand, and Australia as key Asian economies to either reduce official GDP estimates or talk them down publically in recent weeks.


Are China and Japan Setting Consensus Up for an Asymmetric Downmove?

With global equity prices still elevated relative to their early October lows, we think it’s fair to say that there is a decent-sized faction of buyside consensus that is betting on an orderly resolution to the Eurozone’s Sovereign Debt Dichotomy. That, of course, requires a leveraging of the existing Eurocrat Bazooka, per the latest official commentary out of Germany. Unfortunately for this viewpoint, we continue to come across glaring data points that are supportive of our belief that the EFSF will struggle to attract capital – especially on the order of our estimate of $2-3 trillion needed for the upcoming fiscal year:


In China, Gao Xiqing, president of China Investment Corp (the country’s sovereign wealth fund) had this to say regarding the potential of them reallocating assets to aid in the Euozone bailout:


“When we talk about international investments, we must consider whether they serve our interests… We can’t say that we’re a generous nation and we can help you at whatever economic costs to us.”


Additionally, Jin Liqun, chairman of the board at China Investment Corp, had this to say as well:


“China cannot be expected to buy the highly risky bonds of euro-zone members without a clear picture of debt workout programs.” 


Clearly, the powers that be over at CIC share our view that China is no lemming. They won’t be foolishly convinced to step in and bail out Europe at these prices! Refer to our 9/14 research note titled, “China to the Rescue?” for more details on what conditions China needs to see before stepping in to bid for European assets with size. Moreover, we are perhaps even farther from meeting those conditions than we were just over two months ago.


Turning to Japan, in recent weeks we’ve had conversations internally and also with various members of the buyside centering on the possibility that Japan can “save the day” with major purchases of EFSF issuance and/or PIIGS+French sovereign debt via central bank money printing. Japan appears to have a vested interest in weakening the yen from near-record levels, having carried out three largely-unsuccessful interventions in the YTD with record size. Such a bold move could prove a great deal more successful than their previous interventions (the yen is trading +5.4% YTD vs. the USD vs. a median decline of -2.0% for all other Asian currencies), in addition to perhaps giving them a boost to their public image and international influence.


Unfortunately, today Finance Minister Jan Azumi rejected the possibility of the Bank of Japan establishing a ¥50 trillion yen (~$650 billion) fund to purchase foreign debt (a plan proposed to him last month by BOJ Deputy Governor Kazumasa Iwata) by saying:


“We think that would be similar to intervention… Such an idea isn’t in-line with our thinking.”


This is a major blow to this creative line of Keynesian thinking, as the BOJ takes orders for currency intervention from Japan’s Finance Ministry – whose sole purpose for intervention has been to stem “speculative trading and excessive movements”. An outright currency devaluation isn’t on their agenda and certain members of the BOJ remain publically concerned of the ill-effects of Keynesian money-printing:


“We should minimize the chance of distorting markets [when the BOJ buys assets] and I’m very cautious about that.’’

-Sayuri Shirai, Monetary Policy Board Member, November 2011


“If a central bank starts to underwrite government bonds, there may be no problems at first, but it would lead to a limitless expansion of currency issuance, spur sharp inflation and yield a big blow to people’s lives and the economy, as has happened in the past.”

 -“Masaaki Shirakawa, BOJ Governor, May 2011


To his point, in the last round of outright JGB monetization which occurred during the Great Depression era, Japan’s CPI and PPI eventually peaked at YoY growth rates north of +40% and Real GDP growth slowed sequentially for nearly 15 years. While buying EFSF or PIIGS+French paper isn’t the same thing as buying domestic securities, it is created from the same source – an expansion of Japan’s monetary base. Should such expansion eventually seep into Japan’s domestic money supply in the coming years, Shirakawa’s worst fears are at risk of being realized.


Asia Isn’t Buying Into Santa Claus - 4


All told, we think Japan is doing the prudent thing by standing pat here. Moreover, our analysis would suggest it’s also prudent to remain cautious about the EFSF – at least in the short-to-intermediate term.


Darius Dale


AN: Shorting


"McGough and Flavin do not like the go forward outlook for this stock. Shorting the Goldman upgrade on green.

TRADE and TREND converging above last price in the 36.56-36.98 range; immediate-term downside to $32.11." - KM


AN: Shorting - AN trade trend



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