Believe The Evidence

“A wise man proportions his beliefs to the evidence.”

-David Hume


If there’s one thing that Hume, Hayek, and Hedgeye may have had in common, it’s that free-market pricing bears evidence of the truth. That’s my 2012 Global Macro Strategy - Believe The Evidence.


For Global Macro investors managing risk across asset classes in 2011, evidently US Treasuries outperformed mostly everything else. With Global Growth Slowing and the 10-year UST Yield dropping -43% on the year (from 3.31% to 1.88%), America’s long-bond zoomed higher as the MSCI All-World Stock Index and the 19 component CRB Commodities Index dropped -7.2% and -8.1% respectively.


In the USA, primarily due to a +9.9% rally in the US Dollar Index (from testing a 30 year low post QE2), the last 8 months of 2011 were very different from the first 4 months of 2011. While US Dollar strength may have been what Keynesians fear-mongered as a “deflationary force” on certain stock and commodity market prices, it provided the tail-wind needed for the largest part of the US Economy – Consumption.


Believe The Evidence: C + I + G (EX – IM) = GDP. And 71% of the US GDP number comes from the C, Consumption.


From a Q1 of 2011 low of 0.36% US GDP growth (and an unemployment high of 9.2%), US GDP growth recovered to 2.0% by Q3 of 2011 (and unemployment fell to 8.6%). *Note to Bernanke: stay out of the way, it’s working.


Therefore, the most contrarian bullish call we can make on US GDP Growth in 2012 is that the US Dollar continues to strengthen. Not to be confused with what the US stock market or commodity markets do, employment and economic growth is what really matters. Any sniff of a QE3 implementation will drive inflation higher and stymie whatever real (adjusted for inflation) growth Americans can look forward to.


Back to the Global Macro Grind


With 13 consecutive booked gains in the Hedgeye Portfolio into the final day of the 2011, I’m feeling as good as I can feel about our risk management process. The goal in December was neither being bearish or bullish – it was simply to keep moving as prices did and to be right.


Rather than give you a reckless wire-to-wire “2012 Outlook” call this morning, I’ll give you our positioning (Hedgeye Asset Allocation Model):

  1. Cash = 61% (down from 70% before last week’s Global Equity and Commodity selloff)
  2. Fixed Income = 18% (Long-term Treasuries and a Treasury Flattener – TLT and FLAT)
  3. Int’l Currency = 12% (US Dollar – UUP)
  4. US Equities = 6% (Consumer Discretionary – XLY)
  5. Int’l Equities = 3% (China – CAF)
  6. Commodities = 0%

FYI: I haven’t worked alongside or know one top performing Portfolio Manager from the 2008-2011 period that deals with his or her Portfolio Strategy on a trivial duration of exactly 12 months starting January 1st.


Leading Portfolio Managers of the Wall Street 2.0 era have learned to be:

  1. Multi-duration
  2. Multi-factor

As the evidence changes, they do.


Absorbing all that’s new in my trusty notebook this morning, here’s how I think about the evidence in market pricing related to our aforementioned positioning:


1.   TLT and FLAT: Whether I look at the Bloomberg Consensus US GDP estimates or the 10-year trading at 1.94% this morning, it’s all signaling the same thing to me again this morning. Consensus has finally appropriately priced in the 2011 Growth Slowdown and now we can deal with Growth’s Pricing Signals day-to-day. A breakout > 2.03% on 10-year yields would have me sell TLT and FLAT.


2.   UUP: Strong Dollar = Strong Consumption = Stronger Employment. Rinse and Repeat. Whoever (Obama or his Republican challenger) figures this basic economic relationship out in 2012 is going to have a good shot at becoming the next President of the United States. US Dollar Index is in a Bullish Formation with its first line of immediate-term support = $79.37.


3.   XLY: There should be no confusion as to why I had a 0% asset allocation to US Equities in either July of 2008 or July of 2011. I fundamentally Believe The Evidence that debauching the dollar kills US Consumption (and confidence). Strengthen and stabilize the currency of a country and the volatility of its economic cycle (and how markets price it) will break down; equities then break-out.


4.   CAF: Pardon? Yep. TimeStamp us as being long Chinese Equities as of 3:19PM on December 29th, 2011. Call us the scions of “valuation” intellect buying a legitimately “cheap” Global Equity market or just call us names, we’ll either not sell this position for a few years or we’ll sell it tomorrow and smile either way. Strong Dollar = Deflating The Inflation (bullish for Chinese Consumption).


5.   COMMODITIES: Zero means zero. With the Gold price up for 11 consecutive years and Oil prices up for the last 3 in a row, I have zero problem calling a 0% asset allocation to this asset class as contrarian right here and now.


While Cyprus, Greece, and Egypt seeing their stock markets evaporate on the order of -72%, -52%, and -49%, respectively in 2011 has our eyes open to “value” opportunities outside of Chinese Equities, this morning there’s reason to believe that cheap can get cheaper. Poor Cyprus is down -4% to start 2012, and I’m going to Believe The Evidence rather than believing I’m smarter than Mr. Macro Market.


My immediate-term support and resistance ranges for Gold (covered our short position last week), Oil (Brent), and the SP500 are now $1, $107.86-110.26, and 1, respectively.


Best of luck out there this year,



Keith R. McCullough
Chief Executive Officer


Believe The Evidence - Chart of the Day


Believe The Evidence - Virtual Portfolio


TODAY’S S&P 500 SET-UP – January 3, 2012


SQUEEZE – in both Asian and European Equity squeezage (yesterday + today) there actually was some economic data supporting it; China (which I bought on last day of 2011) printed a 50.3 on its PMI for DEC and Germany’s unemployment rate dropped in DEC to 6.8% vs 6.9% last month, with both economies proving you don’t need Keynesian fear-mongering to generate a solid employment base - KM


As we look at today’s set up for the S&P 500, the range is 21 points or -0.68% downside to 1249 and 0.99% upside to 1270.  






THE HEDGEYE DAILY OUTLOOK - daily sector veiw


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE:  -154 (-1893) 
  • VOLUME: NYSE 588.05 (10%)
  • VIX:  22.40 +3.31% YTD PERFORMANCE: N/M
  • SPX PUT/CALL RATIO: 1.49 from 2.80 (-46.77%)



  • TED SPREAD: 57.80
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 2.03 from 1.97   
  • YIELD CURVE: 1.89 from 1.91


GLOBAL MACRO DATA POINTS (Bloomberg Estimates):

  • 10:00am, Construction Spending, Nov., est. 0.5% (prior 0.8%)
  • 10:00am, ISM Manufacturing, Dec., est. 53.2 (prior 52.7)
  • 11:30am: U.S. selling $29b 3-month bills, $27b 6-month bills
  • 2:00pm, FOMC Minutes
  • UK Dec Manufacturing PMI 49.6 vs consensus 47.4 and prior revised to 47.7 from 47.6
  • Germany Dec Unemployment Rate sa +6.8% vs consensus +6.9% prior +6.9%
  • Germany Dec Unemployment Change sa (22K) vs consensus (10k) prior (20k)
  • China December PMI 50.3 vs 49.0 seq. 


  • Mitt Romney vying with Rick Santorum, Ron Paul for top spot in Iowa caucuses; other rivals may see campaigns end
  • French President Nicolas Sarkozy to meet with German Chancellor Angela Merkel in Berlin Jan. 9
  • EU says no decision has been made yet on financial assistance to Hungary -- wires




COMMODITIES – as important to watch as European equities as they test their TAIL lines of resistance in early 2012 will be Copper and Oil testing their TAIL lines of resistance of $111.61 (brent) and $3.99/lb, respectively. 

  • Global Growth Slows to 3.9% as O’Neill Sees Aging Labor in BRICs
  • BP Seeks Recovery of All Gulf Spill Costs From Halliburton
  • Hedge Funds Raise Bullish Bets by Most in 16 Months: Commodities
  • Biggest Hedge Fund in Ships Sees Frozen Gas Beating Oil: Freight
  • Crude Advances Amid Manufacturing Expansion, Tension Over Iran
  • Gas Bears Trim Short Bets as Prices Dip Below $3: Energy Markets
  • Gold Advances as Iranian Nuclear Concern Increases Haven Demand
  • Chile’s Codelco Exercises Buy Option on Anglo Copper Unit
  • Copper Paces Advance in Metals as China’s Output Boosts Outlook
  • Iron Ore Prices May Average 11% Lower in 2012, IG Markets Says
  • Australian Manufacturing Shows First Expansion in Six Months
  • Caterpillar, Rio Lock Out Canada Workers as Contract Talks Fail
  • Mewah Invests in Indonesia Refinery to Diversify, CFO Says
  • Polyus Leads Gain as Oil Rises for Third Year: Russia Overnight
  • Sugar Mills in India Seek Time to Export as Surplus Cools Demand
  • Copper Rises as Manufacturing Gauges May Signal Stronger Demand
  • Lee Says ‘New Era’ Possible After N. Korea Calls Him Traitor
  • S. Korean Agency to Boost Metals Buying 47% to $461 Million
  • CDS Dealers to Judge If Sino-Forest in ‘Credit Event,’ ISDA Says

THE HEDGEYE DAILY OUTLOOK - daily commodity view





EUR/USD – get the US Dollar’s daily direction right and you’ll get most things beta right; that’s not a perpetual correlation, but it certainly still matters this morning. Euro’s new TRADE range = 1.28-1.31, so we’re dead cat bouncing this thing right back up to the top end of the range and Gold (which has a stunning -0.91% inverse cor to USD right now) pops for a +1.5% gain (covered our GLD short at $1538/oz)


THE HEDGEYE DAILY OUTLOOK - daily currency view





THE HEDGEYE DAILY OUTLOOK - euro performance





THE HEDGEYE DAILY OUTLOOK - asia performance




  • Global Growth Slows to 3.9% as O’Neill Sees Aging Labor in BRICs
  • Biggest Hedge Fund in Ships Sees Frozen Gas Beating Oil: Freight
  • Crude Advances Amid Manufacturing Expansion, Tension Over Iran
  • Aldar Soars on $4.6 Billion Abu Dhabi Bailout: Islamic Finance
  • Iran Warns U.S. Against Sending Aircraft Carrier Back to Gulf
  • Gold Advances as Iranian Nuclear Concern Increases Haven Demand
  • Egypt Holds Final Round of Vote as Mubarak Faces Prosecutors
  • Dana Gas Bond Yield Jumps Most in Two Weeks Ahead of Meeting
  • Blackwater Is Back as U.S. Spending to Hit $8 Billion in Iraq
  • Gold Climbs to One-Week High as Iran Makes Nuclear Rod
  • Crude Advances Amid Manufacturing Expansion, Tension Over Iran
  • Banque Saudi Fransi Seeks to Raise Capital 25% Via Bonus Shares
  • U.A.E. Interbank Rate Reaches 5-Month High as Loans Top Deposits
  • Dubai Plan to Halve 2012 Deficit Urges Bond Upturn: Arab Credit
  • Dana Board to Discuss Egypt, U.A.E. Project Financing on Jan. 4
  • Iran Military Warns US Aircraft Carrier to Stay Away From Persian Gulf
  • Iran military warns US aircraft carrier away from Gulf
  • Greece Looking For Alternatives to Iranian Oil, Kathimerini Says




The Hedgeye Macro Team

Howard Penney

Managing Director


And January should accelerate from December’s growth rate.



Final December GGR grew 25% YoY, close to the midpoint of our most recent projected range of HK$22.5-23.5 billion.  However, at HK$22.9 billion, GGR was higher than our initial projected range of HK$21.5-22.5 billion.  We don’t yet have the market shares and property details but investors should be satisfied with the solid finish to the year.


Looking ahead, January figures to be a very strong month.  Most of the Chinese New Year celebration will occur in January of 2012 versus February of 2011.  Moreover, January of 2012 contains an extra weekend day relative to last year.  We estimate YoY growth of 32-40% (+7% MoM) for the first month of the year.

The Week Ahead

The Economic Data calendar for the week of the 2nd of January through the 6th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - call 1

The Week Ahead - call 2

The Week Ahead - call 3

Hypnotic Markets

This note was originally published at 8am on December 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.

“The only time I have problems is when I sleep.”

- Tupac Shakur


In Greek mythology, Hypnos is known as the god of sleep.  His palace was a dark cave where the sun never shone.  The palace itself had no gates or doors, so that he would never be awakened by sounds from doors opening and closing.  Unlike Hypnos, global macro markets, especially in these interconnected times, never sleep.


The most noteworthy news overnight, not surprisingly, comes fromEurope.  The first Italian bond auction of the week was held this morning and it was, on the margin, successful. Italysold 9 billion euro of 6-month bills at 3.25%, which was dramatic improvement over the last auction on November 25ththat sold at a yield of 6.5%.


As Greek mythology tends to work, Hypnos’ brother was Morpheus, the King of Dreams.  So, while you may still be asleep, especially given the holiday shortened week, the paragraph above is not a dream.  The Italians actually did have a better than expected bond auction this morning.  If there was any disappointment, it was likely in the tranche of 2013 zero coupon Italian debt that was auctioned this morning.  The Italians were able to sell only 1.7 billion euro of the maximum allotted 2.5 billion euro.


Certainly though, we need to jot down this auction as a positive data point in our notebooks, as it is a sequential improvement.  The true test of whether there is an improved appetite for Italian sovereign debt will occur tomorrow.  In tomorrow’s auction, the Italians will attempt to sell up to 8.5 billion euro of 3, 6, and 10-year debt.  In theory, if the Long-Term Refinancing Operation, or LTRO, of the ECB is even moderately successful, then tomorrow’s auction should see some improvement over the prior comparable auction.


Yesterday in an intraday note to our subscribers, we wrote a note titled, “The LTRO is No Bazooka” (email if you’d like a copy) and highlighted the following key points:


“In the chart below, we’ve highlighted the ECB liquidity facility going back one year and in the inserted chart going back roughly one month. The key takeaway is that the ECB liquidity facility, which is used by European banks to effectively park money, hit a new all-time high at 411 billion euros this morning and has been increasingly rapidly since the inception of the LTRO just over a week ago. In fact, the day before the LTRO was put into effect, the ECB facility was at 265 billion euro and as of this morning has increased by 146 billion euro, or more than 70% of the incremental liquidity from the LTRO.

So, not only is the LTRO not being used as a bazooka by the European banks, but these banks are parking the borrowed LTRO money with the ECB rather than using it to buy sovereign debt, and thus are experiencing a negative yield on the trade.”


Given the results of the Italian bond auction this morning, there is some evidence the LTRO is being used as the fabled bazooka.  Ironically, though, the amount of money parked at the ECB’s liquidity facility increased dramatically overnight to a record of 452 billion euro.  This is an increase of 41 billion euro from the prior day. We would caution reading too much into the “successful” Italian bond auction as clearly the risk aversion trade remains in full effect.


In other European news, the prominent Spanish newspaper, Expansion, is indicating that Rajoy may force Spanish banks to cut the valuation of the real estate assets on their books by up to 20%.  The fact that Spanish banks still need to write down real estate assets on their balance sheets should not be terrible surprising to anyone.


Spanish home ownership rates are above 80% on the back of cheap long-term mortgages, often up to 40 and 50 years. As well, the government encouraged home ownership by making 15% of mortgage payments a tax deduction.  The Spanish real estate bubble makes Phoenix and Florida housing look like a value investment.


Unfortunately, the Spanish real estate market isn’t likely to improve anytime soon. Specifically, in October, Spanish real estate loans decreased for an18th straight month and were down 43.6% year-over-year.  Our long term analysis has shown that demand for mortgages is one of the best predictors for future real estate prices.  Therefore a 20% cut in the valuation of real estate assets for Spanish banks seems more than reasonable.


On the domestic front, Bloomberg this morning is predicting that 2012 could be the biggest year for IPOs since 1999.  Given the current filings, internet IPOs may raise more than $11.0 billion in the coming year.  In the face of heightened volatility and a 2011 that was lackluster in terms of equity offerings, raising only $156 billion in 2011 versus $252 billion, the onslaught of internet offerings seems a bit excessive.  Undoubtedly, even Dionysus, the Greek god of partying and excesses, would agree with that.


Keep your head up and your stick on the ice,


Daryl G. Jones

Director of Research


Hypnotic Markets - DJ chart EL wednesday


Hypnotic Markets - hvp12 28

WMT: Portfolio Update

WMT continues to be one of our favorites on the long side as the Hedgeye Macro team maintains a bullish outlook on the US dollar and consumer discretionary into 2012.


Though it is near-term TRADE overbought, we continue to like WMT over the TREND and TAIL durations for the following reasons…


1) US business is inflecting after years of investing to turn the cruise ship. This is partially apparent in WMT outperforming peers this holiday -- in part due to layaway plan, but also due to better alignment outside of consumables.         


2) Great play on stronger dollar heading into 2012. 

3) Street estimates are low next year by 3-4%. Not huge, but meaningful for WMT. 

4) Though not really 'new' is share repo is a part of many investors' thesis, the fact is that the Walton Family is slowly but surely taking the company private. 

5) Sentiment (per our backtested indicator) has never been worse.  


WMT: Portfolio Update - WMT TTT


WMT: Portfolio Update - WMT Sentiment

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.