Powerful Turbulence

This note was originally published at 8am on November 22, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“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 $1684-1722, $95.35-98.42, 5567-5769, 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

Scarce Vision

“Capitalism isn’t scarce; vision is.”

-Sam Walton


Get GDP Growth and the US Dollar right and you’ll get mostly everything else right. Happy Thanksgiving.


The US Dollar is up another +0.5% this morning to $79.52 on the US Dollar Index, taking its week-to-date gain to +1.7%, and its cumulative gain since Bernanke signaled the end of Quantitative Guessing II to +8.9% (since April).


Given the generationally high inverse-correlations between the US Dollar Index and everything else, we continue to see what we’ve coined as a Correlation Crash across asset classes as a direct result of this bullish Buck Breakout.


This morning’s Global Macro Grind amplifies the deep simplicity of this risk management point:

  1. S&P Futures are down another 9 handles to 1150 = down -15.6% since the US Dollar stopped going down in April
  2. EUR/USD testing its early October lows of $1.32
  3. European Equities selling off, across the board, to down -22-42% since February-April (pick your country)
  4. Asian Stocks continuing their crash (down > 20% from their YTD highs) with HK and India down -27.5% and -23.5%
  5. Commodities breaking down toward their October lows as the CRB Index’s correlation to the USD = -0.82
  6. Gold is down another -1.1% to $1679 = down -11.6% from its all-time high in August

Correlation does not always imply causality. We get that.


But A) sometimes it does and B) it can be very reflexive in the immediate to intermediate-term.


Keynesian economists/strategists try to avoid Soros’ concept of “Reflexivity” in markets and economies as much as Global Macro investors are avoiding the Hungarian-American’s birthplace this morning (Hungary’s stock market trading down -4.6% after Moody’s cut Hungary’s credit rating to junk).


Academic types have a hard time using markets as leading indicators because they have no experience managing real-time market risk. That’s a problem - a really big problem with US economic policy.


Policy = Causality.


That’s why you’ve never heard Ben Bernanke or Tim Geithner use these 2 words - Correlation Risk – to attempt to explain anything about nothing that’s happening in either Global Macro markets or the economies that underpin them.


Accepting responsibility for causality, after all, would be an admission of failed policy. At least Greenspan admitted this in 2008. Maybe Bernanke will by the time he is retired from the Fed too…


The Germans kind of get this. That’s primarily because they have to. The German People will not give the fiscally conservative leadership of the Bundesbank a hall pass on forgetting the history of hyper-inflation. At least not yet.


German stocks are down another -0.54% this morning, taking the DAX down to 5398 (down -28.2% since the US and German stock markets put in their 2011 YTD highs). If the SP500 was down that much from its April 2011 closing high (1363), it would be trading at 979 this morning. The German People aren’t as hyper about their stock market as our manic media culture is.


If I’ve said this 100 times in the last 4 years, I’ve written and/or said it 1000 times – the immediate to intermediate-term moves in a country’s stock market does not exclusively reflect a country’s long-term health. Currency stability, inflations/deflations, and employment levels are, collectively, much better long-term barometers for purchasing power and prosperity.


I could write a book about that – and maybe I will – but that’s not going to happen in the remaining 10 minutes I have to finish this note this morning. So hopefully it continues to provide a basis for long-term economic debate.


The Scarce Vision that policy makers in this country have displayed over the course of the last decade is not what we should be thankful for this Thanksgiving. What we should all be thankful for is a generational opportunity in America to change that.


My immediate-term support and resistance ranges for Gold (bearish TRADE and TREND), Brent Oil (bearish TRADE and TREND), German DAX (Bearish Formation) and the SP500 (Bearish Formation) are now $1, $105.13-109.98, 5, and 1154-1196, respectively. With the US Dollar immediate-term TRADE overbought today, plenty of market prices will be oversold.


Happy Thanksgiving to you and your loved ones,



Keith R. McCullough
Chief Executive Officer


Scarce Vision - Chart of the Day


Scarce Vision - Virtual Portfolio

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Future Generations

This note was originally published at 8am on November 21, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“We are scattering the substance that belongs to future generations.”

-Irving Fisher


“In 1908, after the assassination of President McKinley, Fisher was appointed by his successor, Theodore Roosevelt, the youngest President of the United States, to the National Conservation Commission.” (Sylvia Nasar, “Grand Pursuit”, page 164).


Commissions and committees have been around forever. In times of crisis, successful leadership by government committee has rarely worked. Ultimately, a super-sizing of that committee concept isn’t going to work this time around either.


By 1909, Congress refused further funding of the National Conservation Commission. Today, they’d probably try to double or triple down on the idea as long as there were some bridges, roads, and teaching jobs to spinoff from it as “economic growth.”


The problem, of course, is that no matter what the American Keynesians try to do, the world’s economic growth continues to slow. As cyclical Growth Slowing in Asia and European Stagflation becomes more clear, Global Equity markets are becoming more red.


On the heels of last week’s nasty -16.2% year-over-year export slowdown in Singapore, the Monetary Authority of Singapore said: “The world economy and financial system are at their most fragile state since the 2008-2009 global financial crisis.”


Much to Timmy Geithner’s centrally planned chagrin, Singapore is China’s trusted economic advisor. When they say something like this – they mean it – and a man-made US committee isn’t going to be able to slow its implications.


Back to the Global Macro Grind


This morning’s Top 3 Headlines on my screens are: 1. Super-committee Fails, 2. Spain Elects Center-Right Government and 3. Packers Move to 10-0. So at least there’s one team out there who is still focused on winning instead of whining.


Asian and European stocks continue to crash and the so called “Santa Claus Rally” in US Equities has never looked so rouge. Last week we were offered plenty of warning signs – here were some of the more important Macro callouts:

  1. US Dollar Index - had another solid week, closing up +1.45%, taking its cumulative gain since May to +6.8%
  2. US Stocks – SP500, Nasdaq, and Russell2000 down -3.3%, -4.0%, and -3.4% on the week, respectively
  3. US Equity Volatility (VIX) – up another +6.7% (up +113% since May)
  4. Commodities (CRB Index) – down another -2.5% (down -14.5% since May)
  5. Oil – WTIC down -1.6% vs Brent down -5.6% (breaking its TAIL line of $110/barrel support)
  6. Gold – down -3.5% on the week closing barely above TREND line support of $1722/oz
  7. Copper – down -1.7% and remains in a Bearish Formation (bearish TRADE, TREND, and TAIL)
  8. US Treasuries – long-term bonds continued to rally, with 30-year yields falling another -4.5% on the week to 2.99%
  9. US Yield Spread – continued to compress (another 10bps week-over-week) as growth continued to slow
  10. TED Spread (3month LIBOR minus 3month Treasuries) – up another 3bps on the week to +49 basis points wide

Those were some of the more obvious leading indicators that a US centric stock market investor may have incorporated into his/her risk management view.


Some of the less obvious week-over-week Global Macro moves were as follows:

  1. Argentina’s stock market down -8.1% (major funding issues continue)
  2. France’s CAC40 Index was down another -4.8% (we’re short EWQ)
  3. Austria’s stock market lost another -7.0% (moving YTD down to -38.1%!)
  4. India led decliners in Asian Equities, moving back into crash mode at > -20% from YTD peak (down -4.8% wk)
  5. Hang Seng down another -3.4% and continues to crash from YTD peak (we’re short EWH)
  6. Natural Gas down -7.7% on the week making YTD lows
  7. Palladium down -9% week-over-week
  8. Cocoa down -7.3% week-over-week

Obvious or not to consensus, all of these risk factors are measurable and incorporated into our globally interconnected macro view. It’s a lot of work. And it can be as boring as the day is long – but someone has to be your Risk Manager. Risk never sleeps.


Bottom line from here: Get the US Dollar right, and you’ll get mostly everything else right.


That’s been our call since May, and we’re sticking to it.


Yale economist, Irving Fisher, certainly made his fair share of mistakes – but one of them wasn’t ignoring how mathematical realities could drive inflations and deflations of prices.


He called it the “Money Illusion” – and what he ultimately missed was how much debt could perpetuate price volatility. Hopefully, Future Generations of economists figure out that debt’s impact on economies and market prices are not illusions. They are real-time.


My immediate-term support and resistance ranges for Gold, Brent Oil, CAC40, and the SP500 are now $1707-1738, $106.11-110.29, 2911-3135, and 1199-1240, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Future Generations - Chart of the Day


Future Generations - Virtual Portfolio

Covering France (EWQ) and EUR-USD (FXE): Trade Update

Keith covered France via the eft EWQ and EUR-USD via FXE in the Hedgeye Virtual Portfolio today with the CAC40 approaching our oversold level of 2,801 and EUR-USD approaching our oversold level of $1.32. We opportunistically covered EWQ, however remain bearish on the country over the long term TAIL duration (see chart below). The CAC40 is down -28% since its end of June high. We took the other side of Goldman Sachs currency analyst Thomas Stolper’s bullish call on the EUR-USD on November 11th and shorted FXE in our portfolio. We’ll cover here with Goldman capitulating on the call today and the cross approaching our $1.32 line, but remain bearish on the Euro's intermediate-term TREND.


Covering France (EWQ) and EUR-USD (FXE): Trade Update - 1. CAC


Covering France (EWQ) and EUR-USD (FXE): Trade Update - 2. EUR


France remains an important EU country in the crosshairs—constrained by fiscal pressures (debt and deficit) and a web of cross-country sovereign banking exposure, the two combined put pressure on the country’s AAA credit rating. Today, Fitch Ratings warned that France’s AAA credit rating would be at risk if crisis intensifies.


On 10/18 we penned a note titled “France is Going to Get Downgraded”, and made the important point that there exists an enormous outsized risk to the entire European bailout project for sovereigns and banks should France lose its credit rating: essentially the entire EFSF would be jeopardized, as France is the second largest contributor of collateral to the facility, at 22%, behind Germany at 29%.


Covering France (EWQ) and EUR-USD (FXE): Trade Update - 1. EFSF


From the fiscal side, France’s public debt as a % of GDP is likely to hit 88.4% this year, near the important 90% (and above) level that Reinhart and Rogoff outline in their seminal book This Time is Different as prohibitive to growth.  Through austerity, the government hopes to bring down the budget deficit, forecast to hit 5.7% of GDP this year, to 3% in 2013, or in compliance with the EU’s Growth and Stability Pact. Nevertheless, there’s been great push-back to Sarkozy’s austerity programs (including the most recent €8 Billion in additional budget cuts), which has also eroded his polling results for elections next April.


On the banking side, France is the largest holder of Italian public debt ($106.8B) and private debt ($309.6B) of any country according to June BIS report, which compounds risk given Italy’s own debt imbalances and investor uncertainty around leadership in the wake of Berlusconi.


Early this month Sarkozy’s government revised GDP to 1.0% in 2012 versus a previous estimate of 1.75%. Politically, Sarkozy remains faced with high unemployment, at 9.2% (vs 7% in Germany), or 22.8% among the French youth, and unlike Germany does not have the ability to cushion slowing growth through exports. 


Matthew Hedrick

Senior Analyst

Early Look

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