Boxed In

“If you ever dream of beating me you’d better wake up and apologize.”

- Muhammad Ali


In the United Kingdom, Boxing Day, historically, was the day after Christmas on which the wealthy gave their servants gifts in a box to show them appreciation for their service. It is a holiday that it still recognized in much of the Commonwealth, though the concept of the holiday has changed rather dramatically over time. Yesterday, I celebrated Boxing Day in my hometown of Bassano, Alberta with family and friends and a traditional town pond hockey game in the mid-afternoon.


In Canada, Boxing Day has morphed from a charitable day to a day which is generally known to have the best shopping deals of the year. With the commercialization of Boxing Day, the goodwill aspect of it has been all but lost. On some level, though, the massive sales that occur on Boxing Day do provide some respite to the middle and lower class consumer who continue to get Boxed In by the North American economy.


In the United States, one of the key issues facing the middle and lower class consumer clearly remains the employment situation. The most recent monthly employment report from the Bureau of Labor Statistics in the United States, reported in early December and including November data, showed that the national unemployment rate in the United States had declined from 9.8% in November 2010 to 8.6% in November 2011. This was good news, right? Well, as usual, the devil is in the details.


From November 2010 to November 2011, the totally number of employed in the United States increased from 138.9 million to 140.6 million for a total increase of 1.68 million, or 1.2%. Conversely, the total number of civilian and non-institutional population not in the workforce increased from 84.8 million to 86.6 million for a total increase of 1.79 million, or 2.1%. So on a net-net basis, the number of people out of the workforce has increased more than the people in the workforce over the last twelve months, despite the illusion of a decreasing unemployment rate.


As it relates to prospects for hiring, the outlook is muddled. According to the Business Roundtable survey released last week, about 1/3 of CEOs expect to add employees in 2012, about 40% expect to keep their employees flat, and almost 25% expect to trim headcount. This survey is basically unchanged from its results three months before. A recent survey from Manpower echoed similar uncertainty in the job market, with the following key conclusion:


“Seven percent of employers report they are unsure of their hiring intentions going into the new year. The rise from three to seven percent is the most significant quarterly increase since 1977 and represents the highest percentage of uncertain employers surveyed since 2005.”


Despite the more ominous long-term employment picture, recent weekly unemployment claims have shown some improvement in the U.S. In fact, last week’s headline initial claims fell 2,000 to 364,000. In terms of context, our financials team wrote the following regarding the recent claims data point:


“It strikes us that claims have exhibited similar tendencies for the past few years. Starting around week 36 of the year, rolling claims begin improving and continue that improvement through year-end. While we don't have a great explanation for why that is, considering the data is seasonally adjusted, it does seem to be a recurring trend. Also important is the fact that in the first 1-2 months of the new year, claims seem to go the wrong way, or least have done so in the past few years.


We'd also highlight the sizeable divergence that has emerged between claims and the S&P. Historically these divergences have not lasted. Right now the divergence is suggesting that either claims back up to ~445k or the S&P 500 puts on a move to ~1375. Last time a comparable divergence emerged it was in the fall. The mean reversion instrument at that time was the market, as claims showed resilience, and, ultimately, improvement.”


Given the employer surveys highlighted above, it seems likely that typical trend of employment worsening in the first couple of months of the year will again come to the fruition this year.


In the Chart of the Day, we’ve highlighted the growth of the population not in the workforce in the United States going back three years. This chart illustrates that as unemployment has grown over that period, so too has the population that has left the workforce.


The background of the chart is a picture from the “Thrilla in Manilla,” which was the third and final fight between Muhammad Ali and Joe Frazier. At the start of the seventh round, Ali purportedly whispered in Frazier's ear, "Joe, they told me you was all washed up."  Frazier growled back, "They told you wrong, pretty boy." Unfortunately for Frazier he eventually lost in the 14th round by TKO when his trainer threw in the towel.


We are not certain when the U.S. consumer will officially throw in the towel, but there is certainly a scenario in which a strengthening U.S. dollar will help to buoy consumer spending by increasing purchasing power and deflating key input costs. On the other hand, we are much more certain that if Italian yields continue to trend above 7%, as they are this morning, global investors will be increasingly likely to throw in the towel on the Euro.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, and the SP500 are now $1, $106.02-109.11, $1.28-1.30, and 1, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research



Boxed In - DJ EL chart


Boxed In - HVP

Multiplier Effect

This note was originally published at 8am on December 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.

“… 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 1928-1929 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 $1568-1623, $106.03-109.16, 5803-5901, 3059-3118, 2152-2341, and 1228-1259, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Multiplier Effect - EL Heut


Multiplier Effect - VP 12 22

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.


The Macau Metro Monitor, December 27, 2011




MGM Macau is suing longtime VIP junket agent and North Korean tour operator Wong Sing-Wa for failing to repay HK$5.6MM (+18% interest) of a three-year-old, HK$10MM debt.  According to a Hong Kong High Court writ filed on December 16, MGM China alleges Wong drew down a HK$10MM credit line and lost it all on the gambling tables on September 8, 2008.  


Wong is "a VIP room operator, a suspected triad member and an individual with ties to North Korea", the attorney-general of the US state of New Jersey wrote in a 2009 regulatory report, citing a 2003 background memo authored by MGM Resorts' then head of corporate security.  Wong has also reportedly been involved in the operations of the Pyongyang casino 100% owned by Sociedade de Turismo e Diversoes de Macau (STDM).  According to the 2009 New Jersey report, in January 2007, Wong accompanied Pansy Ho on a trip to Kazakhstan to explore gaming and non-gaming development possibilities on behalf of STDM and Shun Tak.



The new anti‐smoking rules will be effective beginning January 1, 2012.  According to the law, premises operators must put up authorized no‐smoking signage inside their properties, otherwise they will face a fine of MOP 10,000 to MOP 100,000. Meanwhile, they are obliged to stop smoking in non‐smoking areas and are advised to remove all ashtrays and lighters in non‐smoking premises.




TODAY’S S&P 500 SET-UP – December 27, 2011


As we look at today’s set up for the S&P 500, the range is 39 points or -2.71% downside to 1231 and 0.37% upside to 1270. 











  • ADVANCE/DECLINE LINE:  1151 (-389) 
  • VOLUME: NYSE 477.81 (-38.31%)
  • VIX:  20.73 -2.03% YTD PERFORMANCE: +16.79%
  • SPX PUT/CALL RATIO: 1.84 from 3.06 (39.95%)


  • TED SPREAD: 58.03
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 2.03 from 1.97   
  • YIELD CURVE: 1.75 from 1.69


GLOBAL MACRO DATA POINTS (Bloomberg Estimates):

  • U.S. holiday sales will rise 3.8% vs 5.2% advance last year: National Retail Federation
  • U.S. SEC sided with the bankrupt Lehman brokerage in $3b dispute with Barclays over assets
  • German govt is revising forecast for 1% economic growth in 2012 and will present a lower figure in mid-January, Focus magazine reports
  • Republican presidential candidates step up campaigns as Iowa caucuses near (Jan. 3)
  • Online gambling could be poised to flourish – WSJ
  • Strong Christmas weekend performance insufficient to rescue 2011 box-office performance for movies – WSJ
  • Apple iTV sets to be launched in Q2 or Q3 - DigiTimes


  • 9:00am: S&P/Case-Shiller Y/y, Oct., est. -3.22% (prior - 3.59%)
  • 10:00am: Consumer Confidence, Dec., est. 58. (prior 56)
  • 10:00am: Richmond Fed Index, Dec., est. 5 (prior 0)
  • 10:30am, Dallas Fed Manf., Dec., est. 4.5 (prior 3.2)
  • 11am: Export inspections, Dec. 22: corn, soybeans, wheat
  • 11:30am, U.S. to sell $29b 3-mo. bills, $27b 6-mo. bills



  • Hedge-Fund Managers Miss Biggest Rally in 10 Weeks: Commodities
  • Mildewed Feed Caused Tainted Mengniu Milk, Regulator Says
  • Oil Trades Near Highest in Two Weeks on U.S. Recovery Forecasts
  • Gold Declines to One-Week Low as Europe Woes Damp Growth Outlook
  • Mechel Faces Record Yields After Net Debt Surges: Russia Credit
  • Copper Drops First Day in Five in New York on China Slowdown
  • India’s Gold Imports Seen Dropping 50% in December on Rupee
  • Corn May Extend Rally From Two-Month Low: Technical Analysis
  • India May Curb Potash, Phosphate Fertilizer Prices, Jena Says
  • Most Stocks Gain as Dollar Holds Losses on U.S. Economic Outlook
  • Russian Gold Output Rises 4.5% to 193.8 Tons in January-November
  • China 2012 Rare-Earth Export Quota Almost Same as This Year
  • Aluminum Shipments by Japan Drop as Overseas Demand Weakens
  • Rubber Falls to One-Week Low on Concern Chinese Demand May Drop
  • Palm Oil Drops From One-Month High as Investors Lock in Gains
  • Noble Group - Unlocking value in Gloucester Coal (Buy, S$1.195 - TP S$
  • Paulson’s Gold Fund Said to Fall 10.5% in 2011 as Metal Rises
  • China Gold Trading Limited to Shanghai Exchanges, PBOC Says
  • Gold Climbs in London as Dollar Decline Boosts Investor Demand

















  • Iran Regime Profiting From Currency Decline, U.S. Treasury Says
  • Oil Traders Flee as Crude Price Swings From $100: Energy Markets
  • Iraq War Lives on as Second-Costliest U.S. Conflict Fuels Debt
  • Dubai’s Sukuk Trails 2010 Gains on Debt, Europe: Islamic Finance
  • Qatar Plan to List Debt May Boost Local Bond Sales: Arab Credit
  • Saudi Arabia Forecasts $3.2 Billion Surplus in 2012 Budget
  • Saudis Need $74 Oil Price to Balance 2012 Budget, Jadwa Says
  • Abu Dhabi’s Aldar Board to Discuss Selling Assets, Projects
  • Renaissance Plans to Raise $130 Million Via Private Placement
  • Aldar’s May 2014 Bond Yield Drops to Almost Five-Month Low
  • Libyan Output Exceeds 1 Million Barrels a Day: Persian Gulf Oil
  • U.S. Considering Yemen’s Saleh Request to Visit for Medical Aid
  • Aldar Declines as Board Plans to Meet to Discuss Asset Sale
  • Saudi Oil Break-Even Price Rise to $71.5 Next Year, NCB Says
  • Savola to Sell Stake in Land Plots for $168 Million
  • Syria Producing 260,000 Barrels a Day as Oil Sanctions Bite
  • Savola Surges Most Since March After Land Sale, Egypt Stake Buys
  • Qatar Fertiliser to Supply Mitsubishi Ammonia, Al Raya Says
  • Iran Government Saves $15 Billion on Subsidy Cuts, State TV Says



The Hedgeye Macro Team

Howard Penney

Managing Director





Tequila Sunrise

This note was originally published at 8am on December 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.

"Alcohol is the anesthesia by which we endure the operation of life."

-George Bernard Shaw


Keith is New York today for meetings and to co-host Squawk on the Street at 10am eastern, so I’ve been handed the keyboard on the Early Look.  I actually have the pleasure of writing this missive from my vacation in Mexico (Cancun to be exact), so unlike many of you stock market operators who have had to endure the manic volatility over the last couple of days, I´ve been enjoying the sun, beach, and, dare I say, a few nips of that old magic agave elixir . . . tequila!


To be sure, this has been a year in which the consumption of alcohol has gone up in proximity to many of the world´s financial districts. Although I certainly would not condone overconsumption, to Shaw´s point above, a few drinks does, at times, provide an appropriate release and if there was ever a year in which a suspension of reality was needed, it may be 2011.


Yesterday, the SP500 closed up almost 3% at 1,241.   Interestingly, that is about 5 S&P points below the price at which November closed, 1,246.  So, despite the massive squeeze the SP500 is still down roughly 40 basis points on the month.  So far, at least, Santa Claus has not delivered.


Although the stock market will likely not end the end the year with a meaningful decline, at least not in the U.S., underperformance has been rampant at many mutual funds and hedge funds. To those that have generated positive performance and alpha this year, Hedgeye salutes you as it has not been easy.


Roughly a year ago, Fortune asked us for our perspective on 2011, so I wrote an article on December 31stwhich outlined our key thoughts with the following summary:


“When contemplating the outlook for the upcoming year, the best place to start is consensus expectations. Currently, according to a Bloomberg survey of the strategists from 11 of the largest brokerage firms in the United States, the mean consensus target for the S&P 500 by year end 2011 is roughly 10% above current levels. Further, every single strategist is expecting a positive performance out of the index in 2011.


Suffice it to say, Hedgeye is decidedly non-consensus heading into 2011.


As it stands, we see a trinity of negative fundamental macro clouds on the horizon that have yet to be properly discounted by the market, and which are poised to cast a potentially long shadow over domestic equities heading into next year. The three key risks we see to these lofty consensus expectations heading into 2011 are: global growth slowing, inflation accelerating, and interconnected risk heightening.”


 (The article in its entirety can be found here: )


Interestingly, interconnected risk has become the most noteworthy of the three risks we flagged at the end of last year.  The most relevant evidence of this is probably a recent statistic emphasized by Jim Grant.  According to his analysis, in the entire history of the SP500, going back to 1957, there has never been a day when all 500 stocks rose or fell.  There have, though, been 11 days when over 490 stocks moved in the same direction and 6 of those have occurred since July 2011.  Still think government intervention has no impact on your portfolios?


At times, our outlook for 2011 looked really wrong.  In fact, by April 29th2011 the SP500 was up 8.4% for the year and on track for a 25%+ gain on an annualized basis, which, of course, would have made our outlook not just wrong, but dead wrong.  As for those of you who have followed us closely for the past few years, we are anything if not convicted in our research.  In 2011, it paid to have conviction on that macro process.


Related to the game in front of us, the short term question is what to do with yesterday's massive squeeze.  The key drivers of the squeeze were both a better than expected new housing data point in the U.S. and the newest panacea from Europe (or is it the newest acronym?), the ECB’s LTRO facility.  On the first point, housing starts were up 9.3% sequentially to 685K on an annualized basis, but this was driven by a 25% growth in multifamily starts (single family starts have been flat since the expiration of the second tax credit in April 2010 and remain well off prior cycle peaks of 2.27MM on an annualized basis).  As it relates to Europe, Italian 10-year yields are up at 6.85% this morning, which suggests we may be shortly awaiting the next European panacea to keep the equity rally going.  (Incidentally, Greek 10-year yields are north of 35%.)


Unlike Taiwan equities which posted a 4.56% gain overnight, that market’s biggest gain in 2.5 years, on the back of the government saying it will let its National Stabilization Fund buy equities to support domestic markets, China closed down 1.2% and is now down 22% on the year.  The Chinese, it seems, are less excited by the continued path of structurally impaired growth as insinuated by the 498 billion Euros to be lent from the ECB to the European banking system.


As for our moves yesterday, Keith bought back long term Treasuries (TLT) and shorted oil (BNO) as the SP500 remains Bearish from a TAIL perspective with a range of 1,207 and 1,270.  As for me, I’m headed back to the beach to enjoy a few more margaritas before my vacation ends, but rest assured I will be risk managing my consumption.  For as Seneca once said:


“Drunkness is nothing but voluntary madness.”




Happy holidays to you and your loved ones,


Daryl G. Jones

Director of Research


Tequila Sunrise  - Chart of the Day


Tequila Sunrise  - Virtual Portfolio


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