The Macau Metro Monitor, December 1, 2011




Macau November gross gaming revenue totaled MOP23.058 BN (HK22.385BN, US2.88BN), up 32.9% YoY.



Average home prices in 100 Chinese cities slipped 0.3% MoM in November, the third month of a modest pullback in the face of government measures to curb an exuberant housing market.  Average home prices eased 0.2% in October and 0.03% in September on a monthly basis.

Dynamic Risk Management

This note was originally published at 8am on November 28, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Schumpeter’s ambition was to replace static with dynamic economic theory.”

-Sylvia Nasar


Chapter V of Nasar’s “Grand Pursuit”, Creative Destruction: Schumpeter and Economic Evolution, was my favorite. While I am not sure if it’s politically correct to say that I like to creatively destruct things, I’m not sure I care. I’m not exactly a politically correct kind of a guy.


While Joseph Schumpeter ended up becoming a compromised man of government later in life, his early days of collegiate thinking were some of the most formative in all of modern economic theory.


Shakespeare wrote that youth is ‘ambition’s ladder.’ Being left to the devices of his own commoner’s experiences (“born in a small factory town” in the Czech Republic, page 171), Schumpeter defined “creative destruction” using common sense.


Back to the Global Macro Grind


First, in order to contextualize this morning’s sharp squeeze higher across Global Equities, we need to take a step back and remind ourselves of what pricing of risk that we are bouncing from:

  1. US Dollar Index was up another +2.1% to close the week at a fresh Q4 high of $79.69 (up +9.2% from the April low)
  2. EUR/USD was down -2.2% to our immediate-term TRADE oversold line of $1.32
  3. US Stocks (SP500) were down another -4.7% week-over-week to close at a higher-YTD-low of 1158
  4. Italian, German, and French stocks were down -8.3%, -5.3%, and -4.7%, respectively (all crashing and in Bearish Formations)
  5. Asian stocks were down across the board again (Taiwan -6.2%, Australia -4.5%, Hong Kong -4.3%)
  6. CRB Commodities Index (19 commodities) was down another -2.2%
  7. Gold was down another -2.1% (in-line with the weekly US Dollar move up)
  8. Volatility (US Equities) was up another +11% to 34.47 (taking the cumulative rip in Bernanke’s “price stability” since April to +130%!)
  9. Long-term US Treasuries rose again as 10-year yields dropped to 1.96%
  10. Yield Spread (10s minus 2s) compressed by another 4 basis points week-over-week to 169bps wide

Dead cats bounce.


That would be a polite way of putting it actually. Last week was the worst week for US stocks during a Thanksgiving week since 1932 (not a good historical reference point, fyi).


In a world dominated by Keynesian policy makers perpetuating immediate to intermediate-term price moves in their respective fiat currencies, what we have left is called Correlation Risk.


The Correlation Crash (one of our 3 Global Macro Themes for Q4 alongside King Dollar and Eurocrat Bazooka) is born out of what the world’s fiat reserve currency (US Dollar) does relative to everything else.


If you get the US Dollar right, you’ll likely get mostly everything else right.


To be clear, correlations, like political careers, are not perpetual. So don’t expect this to stay with you for the rest of your born life. Just expect to have to deal with its implications in your portfolio again today.


Today’s immediate-term TRADE inverse-correlations to the US Dollar Index are as follows:

  1. US Stocks (SP500) = -0.94%
  2. European Stocks (EuroStoxx) = -0.94%
  3. Commodities (CRB Index) = -0.87%
  4. Bond Yields (UST 10yr) = -0.81%

Now if you are still using a static Marshallian or Keynesian economic model to manage risk, you’re probably not too happy with your 2011. What you should have done in the last 4 years is use this tremendous learning opportunity to evolve your risk management process into a dynamic one – a process that embraces the uncertainty associated with a Globally Interconnected Market’s last price.


Today’s uncertainty leads me toward one question – can this EUR/USD bounce extend itself this week so that the following immediate-term TRADE and TREND lines of resistance are overcome:

  1. SP500 1203 (TREND)
  2. Germany’s DAX 5893 (TREND)
  3. France’s CAC 3089 (TRADE)
  4. Italy’s MIB 15135 (TRADE)
  5. Hang Seng 19443 (TREND)
  6. Shanghai Composite 2449 (TRADE)
  7. Japan’s Nikkei 8601 (TRADE)
  8. Brent Oil $110.61 (TREND)
  9. Gold $1726 (TRADE)
  10. Copper $3.45 (TRADE)
  11. UST 10-year yield 2.12% (TRADE)
  12. EUR/USD $1.37 (TRADE)

I know. Those are a lot of lines and a lot of durations. But that’s the point about Dynamic Risk Management – its construction needs to be multi-factor and multi-duration. And its principles need to adhere to one of the greatest mathematical discoveries since relativity (Chaos Theory).


“… just as Darwin had swept aside traditional with evolutionary biology” (Grand Pursuit, page 177), I’m very comfortable climbing Schumpeter’s ladder of creative destruction on Old Wall Street this morning. Change is good.


My immediate-term support and resistance ranges for Gold, Brent Oil, France’s CAC40, and the SP500 are now $1656-1726, 104.65-109.39, 2755-3071, and 1143-1195, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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Melting Savings

“He saw his parents’ savings melt away.”

-Nicholas Wapshott


Yesterday was not a good day for me. You couldn’t have had a good day if you were having a good month.


Yesterday was not a good day for American, German, or British people who have savings accounts either. That’s what centrally planned policies to inflate do – they punish the conservative saver. They pay the debtor.


Bernanke gets that and so do The German People who are paying the German Government to lend Germany money this morning (short-term yields on German Bunds have gone negative). I guess the upside to the Bernanke model is that 3-month US Treasuries are yielding 0.00%. That way no one wins or loses. Fair share “free-market” capitalism baby.


The aforementioned quote comes from a book I cracked open this past weekend by Nichalas Wapshott titled “Keynes vs Hayek.” Plenty of people have written on this topic since the debate between the two schools of thought emerged in the 1920s. Wapshott’s is the most recent. So far, it’s a healthy reminder of how history rhymes.


I fundamentally believe it’s very difficult for a human being not to superimpose his or her personal experiences in life into the passions of their opinions. Call it context or perspective – it’s all one and the same thing to me. If you’ve studied enough economic history, you provide yourself an opportunity to walk down life’s path in other people’s shoes.


Keynes was born into a British family of the academic elite who found himself scaling the wall of the Ivory Tower by the time he was in his teens, whereas Hayek was more of a commoner solider “in the Austrian army on the Italian front who returned to find his home city of Vienna devastated and its people’s confidence broken.” (Wapshott)


“The Austrians mostly read English and were conversant if not persuaded by the English tradition; the English on the whole could not read German and largely ignored the works of Austrian and German theorists.” (Wapshott)


Hayek wasn’t an elite student. He actually didn’t start studying the “political economy” (reading Marshalian and Keynesian economics) until he went to war. Eventually, his views came to be shaped by his personal experience (inflation melted his parents savings away). His critique of an inconclusive social science experiment (Keynesian Economics) remains as relevant today was it was in the 1920s.


It’s a good thing Einstein figured out how to communicate in English.


Back to the Global Macro Grind


My introduction this morning isn’t meant to proclaim my mystery of Hayekian faith. I’m not a Republican or a Democrat. I’m not a Keynesian, and I’m not a Hayekian. My name is Keith McCullough and I do my own work.


I do not believe that policies to A) Inflate B) Pile-debt-upon-debt, or C) Bailout losers, is the long-term path to American economic prosperity.


To the contrary, I think debauching the US Dollar does exactly what it did yesterday - it stimulates inflation in asset prices and, as a result, slows Consumption Growth.


US GDP = 71% Consumption Growth.


Last time Brent Oil prices spiked like this, US GDP Growth slowed to 0.36% (Q1 of this year). And while that seems like a long time ago versus yesterday’s no-volume stock market reflation, that is not something I am going to let the Keynesians forget.


It’s the Policy To Inflate, Stupid.


As the US Dollar strengthened throughout Q2 and Q3, we saw some Deflation of The Inflation and, presto! US GDP growth recovered sequentially:

  1. Q111 US GDP Growth = 0.36%
  2. Q211 US GDP Growth = +1.34%
  3. Q311 US GDP Growth = +2.01%

The interconnectedness doesn’t lie; central planners do.


And no, I don’t feel shame in calling out these policies to inflate as stupid. Forrest Gump could tell you that stupid is as stupid does too. And there are a lot of “smart” people in the Ivory Towers of Keynesian economic forecasting that don’t look so smart anymore.


The economy is a globally interconnected ecosystem that could not care less about the short-term “political economy” of a few European bankers yesterday who begged Bernanke for a bailout.


The Global Economy of supply and demand ticks on this morning (in real-time):

  1. China reported their lowest level of manufacturing (PMI) strength since 2009 (47.7 for NOV PMI vs 50.4 OCT)
  2. Britain reported their lowest level of manufacturing (PMI) since June of 2009
  3. South Korea reported a 3-month high in inflation (CPI) of 4.2% NOV vs +3.6% OCT

Growth Slowing and Inflation Rising. Do the Keynesians get it? They will when they see Q4 US GDP Growth Slow, sequentially, again like it did in Q1 as Consumption Growth slows.


In the meantime, while there seems to be a language barrier between Mr. Macro Market’s real-time messaging and the Fed’s central mandate for “full employment and price stability”, the common man’s savings are being melted away as the precious few pander to their banking losses being saved.


My immediate-term support and resistance levels for Gold (back above $1736 TRADE support), Brent Oil (Bullish Formation), France’s CAC40 (Bearish Formation), and the SP500 (bullish TRADE; bearish TAIL) are now $1, $109.42-111.37, 3074-3208, and 1, respectively.


Best of luck out there in December,



Keith R. McCullough
Chief Executive Officer


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TODAY’S S&P 500 SET-UP - December 1, 2011


There is plenty relevant MACRO data today: – UK PMI hits 47.6 (lowest since 09), South Korean inflation rises sequentially to +4.2% November vs +3.6% October, Brazil cuts rates for the 3rdtime in a row, etc…  Bottom line is that all of this remains much more a policy to inflate than it does equate to bare knuckled economic growth – there’s a difference – inflation slows consumption growth at $110/barrel.  As we look at today’s set up for the S&P 500, the range is 45 points or -3.53% downside to 1203 and 0.08% upside to 1248. 






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE:  2306 (2416) 
  • VOLUME: NYSE 1667.75 (+81.53%)
  • VIX:  27.80 -9.27% YTD PERFORMANCE: +56.62%
  • SPX PUT/CALL RATIO: 2.33 from 2.07 (+12.78%)




  • TED SPREAD: 52.89
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.08 from 2.00   
  • YIELD CURVE: 1.83 from 1.73


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Jobless claims, est. 390k, prior 393k
  • 9am: Fed’s Lockhart to give welcome at real-estate conference
  • 9:05 am: Fed’s Bullard to speak at Bloomberg event in NY
  • 9:45am: Bloomberg consumer comfort, est. -49.0, prior -50.1
  • 10am: Construction spending, est. 0.3%, prior 0.2%
  • 10am: ISM Manufacturing, est. 51.8, prior 50.8
  • 10am: Freddie Mac mortgage
  • 10:30am.: EIA natural gas



  • Nov. retail comp. sales may gain 3.1% as heavy promotions, early store openings helped holiday results: Retail Metrics
  • Thousands of workers in southern China went on strike in past week, disrupting work at companies including one that supplies equipment to IBM
  • House scheduled to vote on eliminating public financing for election campaigns
  • Senate may consider as early as today payroll tax provision for employers included in Democratic legislation
  • Senate Agriculture Committee hears from CFTC Chairman Gary Gensler, SEC Chairwoman Mary Schapiro on oversight of Wall Street Reform Act, 10am
  • House Financial Services Committee hears from Housing Secretary on health of FHA single-family insurance fund, 10am
  • House Energy and Commerce Committee marks up broadband spectrum legislation, 10am
  • House Financial Services subcommittee hears from CEOs of Fannie Mae, Freddie Mac, head of Federal Housing Finance Agency, at oversight hearing, 2pm




  • Mugabe’s Seized Farms Boost Profits at British American Tobacco
  • Goldman Says Commodities May Rally in 2012 as Brent Surges
  • Dollar Proves Best Bet as Investors Shun Stocks for Safety
  • China’s Manufacturing Contracts for First Time Since 2009
  • Natural Gas Battered in U.K. by Milder Winter: Energy Markets
  • RBA Straddles Record House Slump, Mining Boom: Chart of the Day
  • Oil Rises to Near Two-Week High Amid Supply Risks, Euro Optimism
  • Cotton Crop Reaching Record Makes Goldman Bearish: Commodities
  • Gold May Climb on Central Bank Efforts to Tame European Crisis
  • Copper Declines on Weakest Chinese Manufacturing Since 2009
  • Stocks, Euro, Commodities Surge as Central Banks Boost Liquidity
  • Tin May Rebound 11% as China Supports Demand: Chart of the Day
  • Vale Matching Slim’s Rating Signals Debt Cost Cut: Brazil Credit
  • Codelco Starts Legal Action to Annul Mitsubishi’s Anglo Deal
  • Australian Court Freezes A$858 Million of Magnitogorsk’s Assets
  • Indonesia Spending $200 Billion Boosts Krakatau: Freight
  • Gold Average Signaling Third Monthly Rally: Technical Analysis
  • Copper Falls in London After China’s Manufacturing: LME Preview
  • Palm Oil Demand May Gain 3% in 2012, Indonesian Group Says


THE HEDGEYE DAILY OUTLOOK - daily commodity view





THE HEDGEYE DAILY OUTLOOK - daily currency view





ITALY – stocks look much different on the MIB index readings than they do on the DAX – so if you need to get paired off do it that way, but Italy failing at its first line of TRADE resistance (15,460) is a big problem.   So is the Euro failing at 1.34 – both remain in Bearish Formations and the NOV PMI data across Europe supports the markets intermediate-term view as well

THE HEDGEYE DAILY OUTLOOK - euro performance





CHINA – when China started cutting in SEP 2008, they were serious about a serious slowdown in Chinese demand – this morning’s HSBC PMI print for NOV of 47.7 was awful (worst since 09) and Chinese stocks rallied less than they fell prior to the cut.






  • Iran Clings to Oil Lifeline as U.S. Pushes Tighter Sanctions
  • Qatar’s $5 Billion Bond Sale Caps Issuance Surge: Arab Credit
  • U.K. Expels Iranian Diplomats as Tehran Faces Isolation
  • Yemen’s Saleh Still Acting Presidential in Risk to Gulf Plan
  • Citigroup Deal Haunts Pandit as Saudis Claim $383 Million
  • Indonesia Tax Breaks May Spur 40% Bank Growth: Islamic Finance
  • VTB Capital Said to Hire 4 Bankers From Credit Suisse Dubai
  • Iran Oil Sanctions Set to Shrink Circle of Foreign Buyers
  • Qatar Shares Climb Most in Three Weeks After Central Banks Act
  • Iran Would Hit U.S. Bases in Germany in Case of War, Bild Says
  • Glencore, Spain’s Cepsa in Talks Over Oil Accord, Expansion Says
  • Shuaa of Dubai Cuts 29 Jobs as It Restructures Amid Losses
  • Saudis Seek Compensation From $100 Billion Climate Funding
  • Almarai Seeks to Raise $400 Million From Sukuk Sale in 2012
  • Dubai Islamic Lender Tamweel Hires Banks for Possible Bond
  • Statement by UANI on French Shipping Company CMA CGM Ending Exports
  • EU to Widen Sanctions on Iran, Including Possible Oil Embargo 





The Hedgeye Macro Team

Howard Penney

Managing Director


Could Santa’s Sack Be Filled With Coal?

Conclusion: Don’t get too excited by the centrally-planned easing of financial conditions this morning. History suggests, if anything, they are likely to be a precursor to deteriorating economic data and financial market conditions.


It is not a secret that our intermediate term outlook for the global economy is somewhat dour based on an outlook of tepid economic growth and sticky inflation. The question now, of course, is whether today’s coordinated policy actions should change that. For our thesis to change, today’s action would have to change the outlook for either inflation or growth.


For starters, with consensus focused squarely on the central planning of central bankers in hopes that it will ignite the year-end Santa Claus rally, we thought it might be value-add to offer some contextual analysis around what just happened.


Per the Federal Reserve’s monetary policy press release from today:


“The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity… These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from December 5, 2011. The authorization of these swap arrangements has been extended to February 1, 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.”


This sounds vaguely familiar to their September 18, 2008 press release:


“Today, the Bank of Canada, the Bank of England, the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank are announcing coordinated measures designed to address the continued elevated pressures in U.S. dollar short-term funding markets. These measures, together with other actions taken in the last few days by individual central banks, are designed to improve the liquidity conditions in global financial markets. The central banks continue to work together closely and will take appropriate steps to address the ongoing pressures… The Federal Open Market Committee has authorized a $180 billion expansion of its temporary reciprocal currency arrangements (swap lines). This increased capacity will be available to provide dollar funding for both term and overnight liquidity operations by the other central banks… All of these reciprocal currency arrangements have been authorized through January 30, 2009.”


Appropriately based on this policy action, and as highlighted in the chart below, the Fed Dollar liquidity swap line rate has adjusted from 1.1% to 0.6% in short order, which will allow cheaper access to U.S. dollars for the cash-strapped European banks. Ironically, the noteworthy takeaway here is that assuming a constant U.S. dollar OIS rate and flat discount rate of .75%, when the Fed’s new measures kick in on December 5th it will be roughly 15 basis points cheaper for European banks to borrow U.S. dollars from the ECB than for U.S. banks to get them from the Fed. 


Could Santa’s Sack Be Filled With Coal? - 6


Equity Market Context

Accepting the fact that this is 2011 and NOT 2008 (an assertion we’ve maintained throughout the year), looking at a chart of the “market reaction” to the 2008 action, we saw the S&P 500 rip +98.7 points (or +8.5%) higher in a span of just two days.


Could Santa’s Sack Be Filled With Coal? - 1


The “market”, of course, went on to fall -578.55 points (or -46.1%) from the centrally-planned lower-high to economic reality nearly six months later.


Could Santa’s Sack Be Filled With Coal? - 2


As it relates to today’s market action, the SP500 ended the day up +51 points. Interestingly, the commodity markets are showing little of the return to risk on as WTI oil is only up 0.70% and the CRB index, more broadly, is only  up +1.09%. So, interestingly while there is clear shift into equities, we are not seeing the same follow through into commodities, which would imply that the outlook for economic growth has not been altered meaningfully as a function of this concerted policy action.


Credit, Funding, and FX Market Context

In terms of the credit markets, the reaction also seems to be somewhat tepid. The yield on the Italian 5-year bond, a good proxy for the European sovereign debt issues, closed at 7.5%, which was down only marginally on the day by -13bps and still at, or near, its all-time highs. As well, both LIBOR and Euribor have not moved meaningfully. In fact, the LIBOR 3-month spread is at 43bps and the Euribor 3-month spread is at 99bps, both of which remain at highs for the year. Finally, the Euro, which touched 1.355 intraday today, is now near its lows of the day as highlighted in the chart below.


Could Santa’s Sack Be Filled With Coal? - 4


A stealth takeaway in amid all the hysteria could be that the EUR/USD exchange rate is potentially allowed to trend lower at an accelerating rate. There has been speculation by many market participants that the rate has been artificially supported by the repatriation of European banks’ forced US dollar-denominated asset sales amid a drying up of USD-liquidity. Presuming that they can soon borrow US dollars at a very attractive rate from the ECB starting on December 5th, we would expect to see less repatriation on the margin from European banks. Ironically, the centrally-planned assault on investor hedges might actually be the catalyst for systemic correlation risk if the EUR/USD no longer has the support of cross-border repatriation.


From our vantage point, while this recent round of action does, on the margin, ward off imminent liquidity concerns for ailing European banks, it does nothing to address the solvency issues created by the marked-to-market value of their sovereign debt exposure – arguably the primary risk facing the global financial system today. Nor does it materially impact the looming specter of slowing global growth.


Moreover, presumably our central planners aren’t taking such drastic measures because they think “earnings are fine”. Perhaps their access to and analysis of exclusive interbanking data suggests to them that such aggressive measures are needed (yes, we think reducing the cost for insolvent European bankers to obtain access to our currency is an “aggressive” measure). They and the Chinese saw the need to attempt to ward off further deterioration in financial/capital market conditions in early September of 2008 and that was actually appropriate foresight.


Daryl G. Jones

Director of Research


Darius Dale


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