The Secret

This note was originally published at 8am on December 09, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The secret is to work less as individuals and more as a team. As a Coach, I play not my eleven best, but my best eleven.”

-Knute Rockne


Born in Voss, Norway, Knute Rockne was an American immigrant who coached college football in this country when the US Government didn’t have a perma-central plan for losers on the fields of finance to win.


Between 1918-1930, Rockne’s Notre Dame football teams amassed an amazing win/loss record of 105-12. He was not a qualitative analyst of the game. He was a chemist who learned how to change the game.


Re-think, Re-work, and Re-build – whether it was Rockne’s introduction of the forward pass, or Hedgeye’s vision of real-time risk management – this is the America that most of us love and believe in.


It was a great year…


I can say that tonight at the 4thannual Hedgeye Holiday Party. I can say that because we hired, net, more Americans than Bank of America, Citigroup, and Morgan Stanley, combined. I can say that because my team did so profitably (paid up +24% year-over-year). I can say that because we are building something, as a team, that no one can centrally plan away from us.


The Secret to our success is very simple. Whether you like our hockey learnings in life or not, my defense partner, Daryl Jones, summarized it best at our Company Meeting this week in New Haven:  


“It’s the name on the front of the jersey that matters more than the name on the back.”


That’s what USA Olympic Hockey Coach, Herb Brooks, famously said. It’s different than what Knute Rockne or Vince Lombardi said about winning – but it’s really all the same thing. It’s The Secret of American success.


Back to the Global Macro Grind


Yesterday’s intraday spanking of the S&P Futures came right on time with our catalyst – a failed European Summit. Failure, of course, being measured versus the market’s consensus expectations. With the SP500 dropping 34 handles from its Tuesday and Wednesday intraday highs, a -2.6% draw-down left a mark on Santa’s sleigh.


But where is old Saint Nick? We’ve done battle in the corners with any bull that wanted a piece of us in November. We’ve banged the boards for the home team on the “sell-high” side for the first 10 days of December. With the US and Global Equity markets down for both November and December, we’re calling this a win.


That’s just measuring success, of course, on our most immediate-term duration – at Hedgeye we call it the TRADE. And while many “long-term investors” don’t TRADE (or manage risk – same thing) like we do, we get that and also have a risk management framework that incorporates longer-term investor durations:

  1. Immediate-term TRADEs = 3 weeks or less
  2. Intermediate-term TRENDs = 3 months or more
  3. Long-term TAILs = 3 years or less 

Like Rockne’s vision of the forward pass, our vision of risk management has more to do with Embracing Uncertainty across durations than it does locking ourselves into a certainty of style. Our style isn’t to be bullish. It’s definitely not to be bearish either. It’s simply to be right – and being Duration Agnostic helps accomplish that.


In US Equities, across durations, what’s the score?

  1. TRADE = The SP500 is down -1% for December, 2011
  2. TREND = The SP500 is down -9.5% from its YTD high (April 2011)
  3. TAIL = The SP500 is down -21.2% (still in crash mode) from its October 2007 high

Since we’re one of the only teams that writes what we think to you in real-time that nailed both Global Growth Slowing calls of 2008 and 2011, we can celebrate our process tonight for what it’s accomplished – helping become a part of your risk management process.


That’s The Secret. We can collaborate and partner with our clients in a way that Marcus Goldman could. We can learn much more from your teams, collectively, than you can learn from ours – and we like that. It’s ok to learn. It’s ok to say I don’t know. It’s ok to say hey, we’re winning out there, together, and we’re proud of it.


I personally want to thank my teammates and all of you. As a Canadian immigrant to America, it’s both a pleasure and a privilege to wear this Made in the USA jersey every day.


My immediate-term support and resistance ranges for Gold (bearish TRADE and TREND), Brent Oil (bearish TAIL and TRADE), Gemany’s DAX and the SP500 are now  $1699-1743, $107.11-110.31, 5776-5986, and 1231-1251, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Secret - Chart of the Day


The Secret - Virtual Portfolio


The Macau Metro Monitor, December 14, 2011




Visitor arrivals in package tours soared by 60.9% YoY to 637,345 in October 2011.  Visitors from Mainland China (460,660); Taiwan (43,594); Hong Kong (31,189) and the Republic of Korea (24,166) surged by 67.7%, 97.7%, 46.5% and 104.9% respectively.


At the end of October 2011, number of available guest rooms of hotels and guest-houses totaled 22,330, up by 2,481 rooms (+12.5%) YoY, with that of 5-star hotels accounting for 63.7% of the total.  The average length of stay of guests increased by 0.06 night to 1.6 nights.



Construction finally began on the HK$83BN Hong Kong-Zhuhai-Macau bridge on Wednesday, after a year’s delay caused by a legal challenge to its environmental assessment report.  “Although the local construction works for the bridge was delayed for a year because of a judicial review earlier, we will tighten the schedule by altering construction methods and deploying extra manpower and machines, so the bridge can open in 2016 as planned,” CEO Donald Tsang Yam-kuen said.

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Correlation Crash

“There thus appears to be an inverse correlation between recovery and psychotherapy.”

-Hans Eysenck


With The Correlation Risk whipping around faster than a Keynesian can drum up the next big central plan, I’ve decided to source my morning quote from a psychologist. If I have to deal with managing risk today like I did yesterday, I think I might need one.


The late Eysenck was a “German-British psychologist … best remembered for his work on intelligence and personality… at the time of his death, Eysenck was the living psychologist most frequently cited in science journals” (Wikipedia).


The Big Government Intervention experiments of Japanese, American, and now European social scientists may not be cited in the scientific journals of our children as successes. I’m thinking maybe more like pre-Einstein “scientists” are remembered from Berlin.


After Ben Bernanke’s FOMC proclamations of faith yesterday, I was reminded of what the President of the United States should be holding him accountable to (his job):

  1. Achieve full employment
  2. Establish price stability

In the Transparency, Accountability, and Trust school of questioning perceived academic wisdoms, I give the Chairman of the Federal Reserve and the policies he has perpetuated globally to inflate very low grades.


Sure, somewhere in between what he thought was going to be an employment recovery and psychotherapy, I can be convinced that the man got lucky with some inverse correlations (driving commodities and stocks up with the Dollar Down). But for now, it’s the Correlation Risk (i.e. the other side of the trade), that’s ungluing just about everything that he believed would stick.


Back to the Global Macro Grind


As the SP500 bumped up against (and failed at) my immediate-term TRADE line of resistance (1249) yesterday, I sold my long position in the SPY (957AM EST, #TimeStamped).


While that’s a 180 versus what I was outlining yesterday, there’s also a 180 degree difference between the SP500 at 1229 and 1249. There’s an even bigger difference on a TRADE line breakdown through 1232. Risk works both ways.


Contextualizing why you make immediate-term TRADE decisions requires an intermediate to long-term risk management process. That’s why we call our model Duration Agnostic.


If you take a step back and consider our most fundamental intermediate-term TREND view in Global Macro right now, it’s a lot easier to see why we’d have a 0% asset allocation to something like Commodities.


Hedgeye Global Macro Themes for Q411 (introduced in mid October):

  1. King Dollar – an explicitly bullish view of the US Dollar across durations
  2. Correlation Crash – an explicitly bearish view of Global Equities, Commodities and Foreign Currencies
  3. Eurocrat Bazooka – a view that the Europeans would ultimately fail in keeping rumors in line with reality 

So far, so good.


Our competition (shh, even in a fair share world, it really still is a competition) has had plenty of opportunity to follow the leader on these Global Macro Themes. But, sadly, they have chosen the path most travelled by Old Wall Street sell-side firms and stayed the course with what didn’t work for them in 2008 and certainly is not working now. Same broken models.


Not to name names, but whether it was Goldman saying buy Commodities in October (then buy the Euro in November!), or Tom Lee at JP Morgan just saying buy buy buy, it’s all one and the same old thing. I’m not the only one who should be considering psychotherapy.


Back to The Correlation Risk


Yesterday I heard a few pundits talk about how interesting it was that the “correlations are starting to come undone.” Not sure what that means (they were saying it when US stocks were up on the day actually), but here’s the latest math:


Immediate-term inverse correlations between the US Dollar Index and the big Macro that matters:

  1. CRB Commodities Index = -0.87
  2. SP500 = -0.59
  3. EuroStoxx = -0.73
  4. Gold = -0.82
  5. Silver = -0.89
  6. Corn = -0.84

Now maybe if you are US stock centric and not paying attention to Global Macro Correlations other than the SP500, this data could be spun as half-true (SP500 was a -0.8). But C’mon Man – interconnectedness is what’s been driving the Alpha bus for all of 2011. Period.


Since we authored this very basic thought, we do agree that the best path to long-term prosperity in America is through a Strong Dollar. Correlation Risk is not perpetual. With time, Strong Dollar = Strong US Consumption. Strong Consumption (71% of US GDP) will ultimately save this country from the Keynesians themselves - like it did in 2009.


Unfortunately, this is not yet 2009. Bottoms are processes, not points. And this Correlation Crash still needs to run its course.


My immediate-term support and resistance ranges for Gold, Brent Oil, German DAX, French CAC, and the SP500 are now $1, $107.12-109.56, 5, 3026-3133, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Correlation Crash - Chart of the Day


Correlation Crash - Virtual Portfolio

Retail Sentiment = Opportunity

We’re seeing some very notable sentiment changes. Great setup for WMT on the margin. Also looking good – LIZ, GES, COLM, URBN. Negative callouts include M, DECK, TJX. Keep an eye on NKE and JCP. They can go either way.


Here are some interesting callouts in our Hedgeye Retail Sentiment Scoreboard. As a reminder, our Scoreboard combines buy-side and sell-side sentiment measures. It standardizes those measures to an index of 0-100, where 100 is the best possible sentiment ranking and 0 is the worst. We won’t belittle the art of stock picking by implying that simply going counter to what a chart says will make money. But this analysis is heavily quantified, back-tested, and most of all…accurate. We use it as a part of our process to flag the outliers. (Think of it like the manager of a baseball team sending a batter to the plate and starting off with a 2-0 count).


Here are some important notables:


WMT: The fact that WMT went down to 74 from 92 over the past year is stunning – though it appears that this negative trend has stabilized. WMT remains one of our top picks.


NKE: While Nike’s Sentiment has come down meaningfully to 84 from 94 in July, it still has the highest sentiment score on our radar.


URBN: The contrarian bull case has been building for URBN for over a year now. Sentiment has steadily eroded from a high score of 70 down to 30. Now that all the bears are out of hibernation, we think that the incremental shifts will be on the positive side.


LIZ: LIZ was one of our favorites when its score was a 5. A few asset sales later as well as a more clearly defined brand strategy moving forward have gotten more people involved; the score is pushing double digits – but still among the lowest in all of retail (ie people are still not bullish enough).


CRI/GIL/HBI: Scores for the perceived commodity-heavy names improved throughout September and October. More recently however, GIL and HBI have declined sharply while CRI accelerated 8 points last week. Sell-side upgrades and expectations of a minimally promotional holiday shopping season have had no impact on our thesis. We’re still bearish on all three.


LULU: This week’s score jolted up 13 points to 41. The quarter definitely raised flags, but the stock saw immediate upgrades and short covering, which took sentiment higher.


GES: The long term merchandising and geographic opportunities for GES remain positive but short term headwinds in Europe and rising concerns around North America have driven the sentiment score down 10+ points over the past month. As it heads lower, we like it more.


COLM: Over the past 6 weeks, Columbia’s score has deteriorated by 20 points to 36. Someone is making a big negative bet here – likely on its tremendous International exposure (45% of EBIT).


DECK: The perennially bearish sentiment on DECK is now sitting at its most bullish position in years. Are people finally giving in to the idea that UGG is not a fad?


M: Macy’s is hitting peak sentiment. Yes, the name is cheap if you believe numbers. But we don’t believe numbers.


UA: Retraced 10 points over the past two months. Still bearish overall with a score of 40, but not bearish enough.


Retail Sentiment = Opportunity - discount stores


Retail Sentiment = Opportunity - apparel retail


Retail Sentiment = Opportunity - low tier apparel


Retail Sentiment = Opportunity - upper tier apparel


Retail Sentiment = Opportunity - department stores


Retail Sentiment = Opportunity - footwear


Retail Sentiment = Opportunity - sporting goods


Retail Sentiment = Opportunity - other sentiment


Weekly Latin American Risk Monitor: Looser Policy Forthcoming

Conclusion: Both leading market price indicators and lagging economic fundamentals lend us further conviction in our expectation of a monetary easing cycle across Latin America over the intermediate term.



  • Equities: Latin American equity markets are trading down -2.1% wk/wk as of now. Argentina, a country we remain fundamentally bearish of, led decliners (-5.4% wk/wk).
  • FX: Latin American currencies closed down -0.6% w/wk vs. the USD, led to the downside by Brazil’s real and Mexico’s peso (down -3.8% and -2.9%, respectively).
  • Fixed Income: Latin American sovereign debt yields generally increased wk/wk, highlighted by the backup across Mexico’s maturity curve: 2yr up +8bps; 10yr up +15bps; and 30yr up +20bps. Yield curves mostly compressed across the region as slowing growth remains an issue.
  • Credit: 5yr sovereign CDS broadly widened wk/wk, trading up +1.5% wk/wk on a median percentage basis. Venezuela held out, tightening -32bps or -3.4%.
  • Rates (1yr O/S Swaps): Bullish wk/wk action across Latin American interest rate swaps markets; Mexico widened +24bps wk/wk and Brazil continues to trade a full -112bps below the central bank’s policy rate.
  • Rates (O/N): Interbank rates signaled a broader easing of liquidity across Latin America, with Brazil seeing a -5bps wk/wk decline. Conversely, Mexico saw a +5bps wk/wk tightening.



Brazil’s growth/inflation outlook augers well for continued monetary easing:


Weekly Latin American Risk Monitor: Looser Policy Forthcoming - 1


That view is being priced into various fixed income and interest rate markets throughout Brazil:


Weekly Latin American Risk Monitor: Looser Policy Forthcoming - 2


The Currency Crash in the Mexican peso suggests Agustin Carstens and Co. might be next to join Brazil in lowering interest rates:


Weekly Latin American Risk Monitor: Looser Policy Forthcoming - 3



Growth Slowing:

  • Brazil’s real GDP growth slowed in 3Q to +2.1% YoY vs. +3.1% prior; flat sequentially (QoQ) vs. +0.7% prior. Brazilian retail sales growth slowed in Oct; inflation-adjusted sales grew +4.3% YoY vs. +5.2% prior; unit volume growth came in at +1.6% YoY vs. +4.7% prior.
  • Mexican consumer confidence ticked down in Nov to 89.5 vs. 90.6 prior. Industrial production growth slowed in Oct to +3.3% YoY vs. +3.6%.
  • Chilean economic activity growth slowed in Oct to +3.4% YoY vs. +5.7% prior. Export growth slowed in Nov to +0.3% YoY vs. +18.2% prior.

Deflating the Inflation:

  • Brazilian CPI slowed in Nov to +6.6% YoY vs. +7% prior; the continued slowing remains in-line with our models and the central bank’s expectations, which point to CPI falling to the mid-point of the target range (+4.5%) by year-end 2012 – a forecast that is inclusive of the recent rate cuts. Antonio Fraga, a former Brazilian central bank head now on the buyside, expects Brazilian interest rates to fall to a record low under President Rousseff, whose administration has been applying well-documented pressure to the central bank to continue lowering interest rates.

Sticky Stagflation:

  • Chilean CPI accelerated slightly to +3.8% YoY vs. +3.7% prior.
  • Venezuelan CPI accelerated in Nov to +27.6% YoY vs. +26.9% prior.

King Dollar:

  • Per Brazil’s Deputy Finance Minister Nelson Barbosa, the country plans to rely further upon monetary easing (both trailing and future) and less upon fiscal easing to stimulate the economy in 2012. Moreover, he confirmed that the country would not rely upon a widespread expansion of state-directed lending as seen in the 2008-09 downturn. As highlighted in our Black Book on Brazil, this is positive for the long-term health of the Brazilian economy, as backdoor capital injections into these banks will be limited to R$25B vs. R$100B-plus in previous years. Net-net, we expect further rate cuts and a potential for fiscal metrics to “miss” expectations to weigh on the BRL going forward. To the former point, the 1y O/S swaps market is trading 112bps below the current Selic target rate and Brazil’s interbank futures market is pricing in three additional -50bps cuts by next August. To the latter point, the central bank is forecasting +3.5% GDP in 2012 – a full 150bps below the government’s +5% target, which suggests to us that revenues may come in light next year and widen the deficit relative to the official target.
  • After a -15.6% peak-to-trough decline in the Mexican peso through the end of Nov (a call we had clients well in front of), we saw Mexican CPI accelerate to +3.5% YoY in Nov vs. +3.2% prior. The +1.1% MoM gain was the largest sequential acceleration since Jan ’10. The weakened currency poses intermediate-term upside risks to Mexican inflation, so much so that the central bank has taken to auctioning $400M of its FX reserves daily to lend a bid to the ailing peso.
  • Colombia CPI came in unchanged in Nov at +4% YoY while PPI slowed to +6.8% YoY vs. +7.9% prior. Our models point to this being right around the intermediate-term peak in Colombian CPI – a view supported by the aforementioned easing of Colombia’s supply-side inflationary pressure. As such, we do not expect further interest rate hikes out of Colombia over the intermediate term as growth slows and inflation peaks.


  • Mexico’s IMEF manufacturing and services PMI readings both ticked up in Nov to 53.3 (vs. 51.4 prior) and 54.1 (vs. 53 prior), respectively.

Darius Dale

Senior Analyst


Weekly Latin American Risk Monitor: Looser Policy Forthcoming - 4


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