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Lower-Highs: SP500 Levels, Refreshed

POSITION: Long Consumer Discretionary (XLY)


If you need proof that US Employment and US Consumption enjoy a Strong Dollar, ask an American.


If you need proof that the US stock market is making lower-highs, just pull up a chart. The SP500 is making lower-highs on 2 of 3 risk management durations (TAIL and TRADE).


The question from this time and price is whether we break-out back above TRADE resistance (1231) or break-down below TREND (1207) support?


Across all 3 risk management durations (TRADE, TREND, and TAIL) here are the lines that matter most: 

  1. TAIL resistance = 1269
  2. TRADE resistance = 1231
  3. TREND support = 1207 

On any rally toward 1231 that fails, I’ll be considering re-shorting the SPY because being long Consumption here can only take this market to another lower-high as long as the Financials and Basic Materials/Energy stocks continue lower.




Keith R. McCullough
Chief Executive Officer


Lower-Highs: SP500 Levels, Refreshed - SPX

European Banking Monitor

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor"


If you'd like to receive the work of the Financials team or request a trial please email .


Of the charts below, in particular we want to highlight the ECB’s SMP bond purchasing program that bought 3.361 Billion EUR last week in European sovereign issuance!  This is notable due to the paltry spend two weeks prior of 635MM EUR, and is supportive of both the strong demand seen in European issuance last week, and the notable decline in peripheral yields late last week.  As a reminder, Draghi continues to warn that the SMP is a temporary facility with limited firepower. While the SMP along with the extension of the LTROs should be additive to capital market gains, we don’t see the programs carrying sustained gains over the intermediate term for European capital markets.


Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk.  The Euribor-OIS spread tightened by 2 bps to 94 bps versus last week’s print of 96 bps.


European Banking Monitor - 1. Euribor



ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  The ECB pays lower rates than the market, so an increase in this metric demonstrates increased perceived counterparty risk and liquidity hoarding.  Last week the facility hit its periodic low, but this level was higher than the previous cycle, indicating growing risk. 


European Banking Monitor - 2. Liq



European Financials CDS Monitor – Bank swaps were wider in Europe last week for 28 of the 40 reference entities. The average widening was 2.7% and the median widening was 0.3%.


European Banking Monitor - 3. Banks



Security Market Program – The ECB's secondary sovereign bond purchasing program bought 3.361 Billion EUR in the week ended 12/16 (versus 635 Million EUR in the previous week) to take the total program to 211.0 Billion EUR.


European Banking Monitor - 4. smp


Matthew Hedrick

Senior Analyst


Raising our December GGR forecast to HK$22.5-23.5 billion



Macau posted another strong week with average daily table revenues of HK$782 million versus HK$719 million last week and HK$717 million for November.  For the second straight week, we are raising our full month projection, this time to HK$22.5-23.5 billion – up 23-28% over last year.  It appears our near-term pessimism was unfounded. 


MPEL and LVS remain the big winners in December thus far, both with market shares well in excess of trend.  MPEL was the clear standout this past week, upping its monthly share 130bps from the first 12 days of the month.  We are 12% above the Street for MPEL Q4 EBITDA but it now appears that even our estimate may be conservative.  LVS appears on track to beat the Street by 4-5% in Macau.



Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.






Comments from CEO Keith McCullough


In a consensus world that was begging for the next Big Government Intervention (and didn’t get it), dead cats can still bounce:

  1. DEAD CATS – in real-time risk management speak, crashing is defined by draw-downs of 20% or more vs a recent high; while the dead cats didn’t bounce in Asia overnight (China -21% YTD, India -25.2% YTD etc), we’re seeing the higher impact Correlation Crash bounce (European Equities and Commodities), sort of…
  2. EUROPE – contextualizing a dead cat’s bounce matters; don’t forget last week alone the CAC, MIB, and FTSE were all down between -5.9-6.3%, so a +30-90bps bounce is what it is – another round of lower highs. Fitch downgrading France actually still matters to insolvent French banks who are going to have the negative P&L impact of ratings uplifts going away (higher funding costs).
  3. COMMODITIES – amidst all of the final countdown to year-end markup fun (or are they markdowns?), Dr Copper is down another -0.7% this morning – that’s pretty sad considering Copper dropped -6.2% last wk; Brent Oil is now in a Bearish Formation w/ immediate-term downside to $101.98/barrel; Gold’s refreshed range = $1.


In between now and the end, Deflating The Inflation through King Dollar will be good for US Consumption. The only problem between now and whenever the Correlation Crash ends is real-time prices.






THE HBM: CMG, BWLD, BJRI - subsector fbr





CMG: Chipotle Mexican Grill’s co-CEO, Monty Moran, is making headlines as a champion of immigration reform.  The Wall Street Journal is highlighting Mr. Moran’s interactions with political leaders in Washington D.C. aimed at overhauling immigration policies in the U.S.





BWLD: Buffalo Wild Wings is featured in an article in the Wall Street Journal today, pitching it as a long idea and an alternative to Chipotle Mexican Grill which is, according to the article, too expensive.  The author does caution readers on the risk of rising wing prices but highlights higher EPS growth in (full year) 2009 despite elevated wing prices.  This article is lacking, in our view, in that it does not highlight the risks to analysts’ expectations which, we believe, are overly optimistic.  We remain bearish on BWLD for 4Q and – in particular – 1Q12.


BJRI: BJ’s Restaurants are testing a new limited-menu variant called BJ’s Grill which is about 4,500 square feet, around half the size of a regular BJ’s.  One of the most noticeable aspects of BJ’s Grill is the open kitchen, separated from the 150-seat dining room by clear glass, allowing guests full visibility.  Servers at the restaurant are piloting the use of wireless hand-held tablets to take orders.


THE HBM: CMG, BWLD, BJRI - stocks 1219



Howard Penney

Managing Director


Rory Green




The Macau Metro Monitor, December 19, 2011




In a written statement to the Hong Kong Stock Exchange on Sunday, Sands China said it had received confirmation from the Securities and Futures Commission that the investigation has been concluded and that no further action will be taken against the Company at this time.  Sands China said in March that the commission had asked the company to produce documents for an investigation into alleged breaches of the Securities and Futures Ordinance.  LVS remains under investigation by U.S. federal and state regulators.


Correlation Crash

This note was originally published at 8am on December 14, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“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 $1637-1718, $107.12-109.56, 5667-5842, 3026-3133, and 1214-1232, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Correlation Crash - Chart of the Day


Correlation Crash - Virtual Portfolio

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