TODAY’S S&P 500 SET-UP – December 22, 2011


Storytelling may very well make the US stock market world go round, but the globally interconnected facts embedded in last price remain.  As we look at today’s set up for the S&P 500, the range is 31 points or -1.26% downside to 1228 and 1.23% upside to 1259. 








THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE:  695 (-1620) 
  • VOLUME: NYSE 824.30 (-12.96%)
  • VIX:  21.43 -7.71% YTD PERFORMANCE: +20.73%
  • SPX PUT/CALL RATIO: 2.53 from 1.25 (+102.78%)




TREASURIES – not getting the memo from Ed Hyman on GDP being 4%? in Q4 either; we all know that the Keynesian sell-side GDP models failed Old Wall St in both 2008 and 2011, so I don’t get why someone would use them right here when the long-end of the Treasury market has front-run every Growth Slowdown from Dupont to Oracle this year. 10yr trading 1.96%, only up 11bps on the wk and well below all lines of resistance.

  • TED SPREAD: 57.12
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 1.98 from 1.94   
  • YIELD CURVE: 1.70 from 1.68


GLOBAL MACRO DATA POINTS (Bloomberg Estimates):

  • Japan Gov forecasts FY11-12 real GDP (0.1%), FY12-13 real GDP +2.2%.
  • UK final Q3 GDP +0.5% y/y vs consensus +0.5% and prior +0.5%
  • UK final Q3 GDP +0.6% q/q vs consensus +0.5% and prior revised to +0.00% from +0.5%
  • 8:30am: Chicago Fed, Nov., est. -0.17 (prior -0.13)
  • 8:30am: GDP QoQ (Annualized)    3Q, est. 2.0% (prior 2.0%)
  • 8:30am: Initial Jobless Claims, Dec. 17, est. 380k (prior 366k)
  • 9:45am: Bloomberg Consumer Comfort, Dec. 18, (prior -49.9)
  • 9:55am: UMich Confidence, Dec. F, est. 68.0, (prior 67.7)
  • 10am: Leading Indicators, Nov., 0.3% (prior 0.9%)
  • 10am: House Price Index, Oct. est. 0.2% (prior 0.9%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural gas storage 



  • Yahoo! said to consider cutting its 40% stake in Alibaba to ~15%
  • Greece creditors said to resist IMF pressure to accept bigger losses on Greek govt bond holdings
  • U.K. GDP climbed 0.6% in 3Q, more than estimated
  • 10:25am: NRC meets to discuss Toshiba design, permits for what would be first nuclear reactors built in U.S. in 30 years




  • Herpes Virus Makes Oysters Rare Treat in French Holiday Season
  • ‘Medieval’ Economy Is Kim Jong Il’s Legacy as Minerals Untapped
  • Hong Kong Solstice Banquets Threatened by Bird Cull, Sales Ban
  • Hamburg Loses to Trieste as Southern Ports Exploit Rail: Freight
  • Nothing Predicted Happened as Men Conspired With Nature in 2011
  • Oil to Set Record in 2012 as U.S. Dodges Slump: Energy Markets
  • More Bankers Predict Policy Easing as Economy Cools, PBOC Says
  • Gold May Decline in London as ETF Holdings Drop to 1-Month Low
  • Oil Rises for Fourth Day as U.S. Supplies Drop Most in a Decade
  • Komatsu Sees Record Year for Mining Equipment Sales on China
  • Corn Crop Heading for Record to Feed 1 Billion Cows: Commodities
  • U.S. Stocks Rise for 2nd Day as Oil Climbs, Treasuries Retreat
  • Gloucester Coal Suspends Share Trading Pending Merger Proposal
  • Copper Gains for Third Day on Stockpiles, U.S. Data Speculation
  • Uralkali Cuts Output Target for Next Year to Buoy Prices
  • Ex-Dow Scientist Who Stole Secrets Gets 7 Years, 3 Months Prison
  • India Should Allow Banks, Funds Trade in Commodities, Panel Says
  • Palm Oil Climbs to Two-Week High as Rains Threaten Production


THE HEDGEYE DAILY OUTLOOK - daily commodity view





THE HEDGEYE DAILY OUTLOOK - daily currency view





ITALY – you’d think the Italian stock and bond markets could at least recover my 1st lines of support (immediate-term TRADE lines) and hold them for more than 48 hours – after 24hrs, and 489B euros of life support, nope – MIB’s first TRADE line of resistance = 15,391; watching that like a hawk alongside Euro 1.31 as I have no European short exposure and need to put it back on once resistance is confirmed.



THE HEDGEYE DAILY OUTLOOK - euro performance





ASIA – still not getting the memo that the LTRO gets the world free and clear of the #1 factor that’s pummeling Global Equity valuations in 2011 – Growth Slowing. Yesterday’s export print in Japan (down -4.5%) knocked the Nikkei down another -0.8% overnight (down -18% YTD) and Chinese stocks have been down every day this week. Emerging Markets MSCI Index down -23% YTD – EM outflows $41.2B YTD are = 2nd worst ever.



THE HEDGEYE DAILY OUTLOOK - asia performance




  • Baghdad Bombings Kill 57 as Political Tensions Escalate
  • Oil to Set Record in 2012 as U.S. Dodges Slump: Energy Markets
  • Putin Must Beat Own Economic Record as ‘Golden Decade’ Ends
  • EU Banks’ Retreat Creates Gap for Gulf Borrowers: Arab Credit
  • Malaysia, Emirates Consider Sukuk for Aircraft: Islamic Finance
  • Dana Gas Slumps to Lowest on Record on Egypt Delay Report
  • Egypt May Delay $148 Million Payment to Dana Gas, Al Bayan Says
  • U.S. Joins EU Push to Embargo Iran Oil Over Nuclear Effort
  • Rosneft Overtakes Exxon Mobil in Crude Output, Vedomosti Reports
  • BankMuscat Plans Stock Sale at 20% Discount; Shares Advance
  • MIDEAST DAYBOOK: Egypt Bond Rating Cut at Moody’s; Barwa Sale
  • Dubai’s Nakheel Says It Made 10% Profit Payment on Sukuk
  • Qatar’s Barwa Sells Financial District for $3 Billion
  • Aldar Won’t Delist Shares From Abu Dhabi, Deputy CEO Says
  • Iran to Hold Navy Exercises East of Strait of Hormuz, Fars Says
  • U.A.E. Shares Retreat on Aldar Delisting Concern, Margin Calls
  • Iraq Halts Oil Exports Via Turkey on ‘Operational Requirements’
  • Goldman Sachs Sukuk Row May Dent Industry Lure: Islamic Finance





The Hedgeye Macro Team

Howard Penney

Managing Director

What's True?

This note was originally published at 8am on December 19, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Do you like learning? Do you like finding out what’s true?”

-Ray Dalio


Unless you’re long Venezuela or Pakistan (the only 2 markets in the world up double digits YTD), this was not a good year to be long stocks. Most of you know that by now. The final few weeks of 2011 might change the storytelling. Then again, they may not.


What’s True?


During what I thought was the best Global Macro Risk Management interview of the year, that’s what Bridgewater’s Ray Dalio leaned across the table and asked of Charlie Rose.


Can we, as a profession, look into the mirror and answer that question? Or are we failing to learn? Are we accepting mediocrity?


Re-think, Re-work, Re-build.


Rather than give you some completely random wire-to-wire December 31st“Outlook for 2012”, my risk management goals for the coming months, quarters, and years are:

  1. Don’t lose money
  2. Embrace Uncertainty
  3. Be Right

In order to achieve these goals, I have a lot of learning to do. We have an opportunity to learn something from markets every day.


Back to the Global Macro Grind


What’s True about Global Equity markets in November and December of 2011 is that they are down. This morning, after seeing Asia make fresh new lows (China and India down -21.0% and -25.2% YTD, respectively), we’re seeing another dead cat bounce from oversold levels in European Equities. Don’t forget that France, Italy, and the UK were down -5.9%-6.3% last week.


Last week’s macro moves were largely explained by our Top 3 Global Macro Themes for Q411:

  1. King Dollar – up another +2.1% week-over-week
  2. Correlation Crash – USD up = most things highly correlated (inversely) to the USD down
  3. Eurocrat Bazooka – no dice

What’s True about the Correlation Crash as it pertains to Commodities is that they went straight down last week:

  1. CRB Commodities Index = -3.6%
  2. Oil prices (Brent) = -4.9%
  3. Gold = -6.9%
  4. Copper = -6.2%
  5. Palladium = -8.9%

What’s True about Palladium is that if you dropped it on your head, it would hurt.


But, aside from consensus being paid to call precious metals “currencies” over the course of the last 4 years, What’s True about the causality embedded in that consensus assumption?


In order to attempt to answer to that question, we need to taking a step back, and Embrace The Uncertainty associated with the Ben Bernanke policy to inflate:


“Let us experiment with boldness… even though some of the schemes may turn out to be failures, which is very likely.”

-John Maynard Keynes in the 1920s (Keynes Hayek, page 33)


What’s True about the Keynes model away from what he called it himself? Well, the man did blow up his entire net worth by being long The Inflation Trade (Commodities) in 1928…


P&L doesn’t lie; Keynesian politicians talking about “price stability” do.


Ray Dalio’s thoughts on this generational debate that’s occurring on Old Wall Streets, in our offices, and on the Twitter-sphere is quite simple: “there is not a quality conversation about what is true.”


So either President Obama or the next President of the United States figures this out or there is going to continue to be a social tension amongst The People. Americans may not know the specific how or why, but they do know they are being lied to.


My first solution to this mess is simply to stop what we are doing (stop lying). Dalio’s is to have a conversation about What’s True. Somewhere in between those ideas is a beautiful American bridge that can Re-build what we broke – America’s trust.


Otherwise, as Dalio solemnly reminded Rose in October of 2011, “… the cost of being wrong is a terrible thing.”


My immediate-term support and resistance ranges for Gold, Oil (Brent), and the SP500 are now $1568-1608, $101.98-107.18, and 1207-1226, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


What's True? - Chart of the Day


What's True? - Virtual Portfolio


The Macau Metro Monitor, December 22, 2011




Singpoare Changi Airport passenger traffic increased 7.4% YoY to 3,890,535 in November.  This is the slowest YoY growth since March 2011.  Traffic was helped by strong visitation from Middle East and Northeast China.



Singapore hotels are enjoying an increase of between 5-30% in occupancy this holiday season.  Those in Marina Bay and Sentosa said occupancy rates have increased by as much as 30%.  A few are running on full capacity from Christmas Day to the middle of January, due to an increase in the number of tourists, as well as locals who prefer to take "staycations".





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Multiplier Effect

“… every job created by the government would add a further job to supply that new worker with goods.”

-Nicholas Wapshott (Keynes Hayek, pg 58)


John Maynard Keynes had more personal and P&L issues over the course of his career than Time Magazine. His biggest losses (both in terms of academic credibility and in his personal account) came in the late 1920s when “corporate profits were good” and debauching the British Pound came to an end.


Sound familiar? It’s a good thing they don’t let Bernanke trade his p.a.


The aforementioned quote comes from a passage in Keynes Hayek where Nicholas Wapshott does a nice job reminding us of the context of Keynes’ big marketing idea for Lloyd George going into the 1929 British Election. The idea, much like the central planning ideas of Big Government Liberals today, was to “stimulate” economic growth via government spending.


The Liberals lost that 1929 election (the Conservative Party’s Ramsay MacDonald formed a minority government), and like most politicized people who can’t get paid putting their own capital at risk, John Maynard Keynes, “ever the pragmatist...” (Wapshott), pulled a Bernank and shifted his central planning ideas to the other party line.


“This marked the end of Keynes’ long dalliance with the Liberals.” He “… now directed his energies toward persuading the new government to accept his prescriptions.” (Keynes Hayek, pg 58)


*Note: Since 1929, while tested and tried by Charles de Gaulle (France in the 1950s), and Jimmy Carter (USA late 1970s), the Keynesian concept of the Multiplier Effect has not worked.


Back to the Global Macro Grind


There was one big thing that changed yesterday that had me thinking about the 1 narrative of “but corporate profits are good and stocks are cheap” consensus – Oracle trading down -14% on the open.


Oracle isn’t exactly a small company ($130B in market cap – only about 20% of the size of yesterday’s LTRO leverage slapped onto insolvent European bank balance sheets). It’s also a company whose revenues are highly correlated to the corporate profit cycle.


Yes, a blind intellectual squirrel can tell you what corporate profits are, after they’ve occurred. But how many of the gargantuan intellects in our profession can tell you when the Global Growth and Profit Cycle is about to slow?


Not a trick question.


The answer, last I checked, on who nailed both the 2008 and 2011 Global Growth Slowdowns, is, not many.


How do we translate this thought about investing at the Top Of A Corporate Profit and Margin Cycle to our daily risk management positioning?


Well, the market has already started to do that for you. Look at the S&P Sector Returns for the YTD:

  1. Utilities (XLU) = +13.4% YTD (lead the market higher yesterday, closing +1.6%)
  2. Technology (XLK) = -0.7% (lead the market lower yesterday, closing down -1.7%)
  3. Financials (XLF), Basic Materials (XLB), and Industrials (XLI) = -19.8%, -13.4%, and -4.1% YTD, respectively.

In fact, the market has been telling you what we’ve been telling you on Global Growth Slowing since February – so this is not new. Neither is Utilities (dividends) moving into a raging bull market if we are on the cusp of what ISI’s Ed Hyman called for earlier this week (a Q4 surge in US GDP to 4%?).


Fortunately, the bond market has figured this out. Hyman actually taught me that, so I don’t get why he’s not following his own leading indicator process. Long-term US Treasuries (which we’ll be buying more of today and tomorrow, and really until the math tells us not to) remain in a bull market of their own.


Across all 3 of our risk management durations, both 10 and 30-year UST Bonds are in what we call a Bullish Formation (yields are in a Bearish Formation) with TRADE, TREND, and TAIL lines of resistance for the 10yr at 2.05%, 2.09%, and 2.82%, respectively.


Now before my Ivy League classmates who are endowed with the high powers of determining “valuation” better than I start yelling at me this morning that “stocks are cheap relative to bonds,” I’ll just take a moment to whisper, softly, in their 2011 ears… the market doesn’t care about what you think is “cheap”… it’s getting cheaper…


The corollary, of course, to where US Government Bonds can go in a Growth Slowing environment that is perpetuated by the piling of debt-upon-debt is Japanese Government Bonds (or JGBs).


Looking at last night’s reported non-resident holdings of JGBs as a proxy for TLT demand (long-term US Treasury ETF), they hit a new all-time record of 76 TRILLION Yen. That’s a lot of yens. And 15 years after Paul Krugman told them to “PRINT LOTS OF MONEY and stimulate”, Japan is still waiting for the Multiplier Effect to reach “escape velocity”…


My immediate-term support and resistance ranges for Gold (shorted it yesterday), Oil (Brent), German DAX, French CAC, Shanghai Composite (down every day this week), and the SP500 are now $1, $106.03-109.16, 5, 3059-3118, 2152-2341, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Multiplier Effect - EL Heut


Multiplier Effect - VP 12 22


Keith bought CCL in the Hedgeye Virtual Portfolio at $32.82.  According to his model, there is TRADE and TREND support at $32.51 and $32.19 respectively.



Carnival came out yesterday with a guarded outlook on 2012 which led to a barrage of analysts lowering estimates and price targets on the stock.  However, we believe Carnival was over-conservative in its 2012 yield forecast as outperformance from the Caribbean and Mexico should support yields in the near-term.  Our most recent Cruisers Price Matrix showed that for Q1 2012, improvements in Caribbean pricing is sustainable and robust pricing in Mexico could drive better than expected results, even in the face of difficult YoY comps.  Continued weak pricing from Southern Europe is well-known but comps ease starting mid-February and any meaningful improvement either in occupancy or pricing during Wave Season would be a positive surprise.  Carnival would also be well-positioned with lower fuel prices ahead, as forecasted by our Hedgeye Macro team.  



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