Locking Horns

“No one in our age was cleverer than Keynes nor made less attempt to conceal it.”

-Roy Harrod


That quote typifies the best thing I can say about John Maynard Keynes – he was a world class storyteller. This characterization provides context at the start of Chapter 7 in Wapshott’s “Keynes Hayek” for what was undoubtedly the closest time in history that Hayek ever came to taking Keynes down (1931).


That’s why Wapshott titles his chapter “Return Fire – Keynes and Hayek Lock Horns, 1931.” This was a unique time in Western Academic History where the “governing ethos at Cambridge was to profit from argument” (page 95).  This was also a very different time than what I’m observing from my office on an Ivy League Campus in New Haven, CT today.


Today, there is no legitimate debate between Hayekian and Keynesian thought at either the Whitehouse or in the hallowed halls of the source code that gets paid by it (the Economics Departments of Harvard, Princeton, Yale, etc.). That’s not new. And that’s just plain sad. America is better than that. In order to Re-think, Re-work, and Re-build, our said leaders have to change this.


Back to the Global Macro Grind


Dominating the debate is what we all wake up thirsting for here at Hedgeye Risk Management. No, that doesn’t mean that we always do – but it provides an excellent compass for us every morning.


Expecting to win is a culture. So is being held accountable for our mistakes.


We’ve been Locking Horns with Keynesiasn, Sell Side Strategists, and Media Pundits for the better part of the last 4 years on the functional matter that is called the purchasing power of a US Dollar.


Yesterday, the US Dollar Index rose another +1.1% to make a new intermediate-term closing high of $80.95 = up +11% since the likes of Bernanke and Geithner have been relegated to basically getting out of the way.


Central planners, meet your new King.


Now a lot of people (and I mean a lot - almost all of Western Keynesian Academia and mostly every “professional economist” in Washington) will quibble with me on the causality of it all.


But to be clear, I don’t want whispering and quibbling – I want to pick a fight.


So today, since I am in a bit of a fired-up mood here in the Haven, I am formally challenging anyone and everyone with a Senatorial title in Central Planning to Lock Horns with me on why a Strong Dollar is not great for Americans?


Strong Dollar = Stronger Employment, Confidence, and Consumption. Period.


You saw that in the US Consumer Discretionary stocks again yesterday with the XLY outperforming the SP500 by another 50 basis points. You saw that in the weekly jobless claims numbers remaining below our critical level of 385,000 resistance. You saw that in the Bloomberg weekly Consumer Comfort Index improving from -47.5 to -44.8 week-over-week.


Keynesians, do you see the impact of your being able to do nothing fiscally and monetarily now?


Surely, they’ll have some political form of a back-slapping session after whatever this morning’s US Employment Report brings. Heck, they were back slapping when they were providing “stimulus” that didn’t work!


What could go wrong from here?


A lot; particularly with both Congress and the Fed coming back from vacation.


The biggest risk from here is that Bernanke and/or Geithner come back into our lives with the broken promise that their next central plan (like the housing forgiveness thing for Bank of America yesterday) is going to provide us with the elixir of a mediocre life.


Recognizing this American Zeitgeist for what it is will either provide President Obama with his greatest opportunity for re-election or it will prove to be his Waterloo.


This isn’t a Republican vs Democrat thing – this is an evolution thing. Both parties have had a bi-partisan agreement on 1 thing for the last decade – Keynesian Economics in their policy making. When The People want that to change, what do you do Sirs?


Let the Locking of The Horns begin.


My immediate-term support and resistance ranges for the Gold, Oil (Brent), EUR/USD, Shanghai Comp, German DAX, and the SP500 are now $1, $111.61-113.96, $1.28-1.30, 2150-2211, 5, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Locking Horns - Chart of the Day


Locking Horns - Virtual Portfolio


The Macau Metro Monitor, January 6, 2012




A representative of a major Chinese bank said the CNY210 BN was higher than expected due to a sharp increase in deposits in the last week of December.  For 2011, new loans by all financial institutions are estimated to total CNY 7.4 TN.




TODAY’S S&P 500 SET-UP – January 6, 2012


Sold my Growth Slowing position in Fixed Income yesterday (US Treasury Flattener – FLAT = +28% gain). I’d held that position for a year and felt all warm and fuzzy about the buy-and-hold on conviction thing. Onto the next - KM


As we look at today’s set up for the S&P 500, the range is 19 points or -1.10% downside to 1267 and 0.39% upside to 1286. 




For the 3rdconsecutive day, the SP500 holds my long-term TAIL line of 1267 support. Not only did it test that level on the lows of the morning, but its bounce was finally confirmed by some volume. I don’t mean real volume. I just mean +19% more volume that my immediate-term average.


Volatility continues to breakdown as the US Dollar continues to breakout. Strong/Stable Currency = Stronger Employment, Confidence, and Consumption. I’ll stay on this until it stops.


All 9 Sectors remain bullish from an immediate-term TRADE perspective and I remain long of 2 of them (Consumer Discretionary, which has been a Top 2 Sector in both of the last 2 days, and Utilities, which I bought back on down move – Citi downgraded Utilities today and XLU closed up).


If tomorrow’s employment report is a bomb, a lot might change in a hurry. If it’s not, we’ll likely move to Day 4 of a bullish confirmation. - KM









  • ADVANCE/DECLINE LINE:  -75 (-1734) 
  • VOLUME: NYSE 759.44 (-11%)
  • VIX:  21.48 -3.33% YTD PERFORMANCE: -8.21%
  • SPX PUT/CALL RATIO: 1.69 from 1.99 (-15%)




TREASURIES – let the masses focus on whatever it is they flip to day to day; today, I’ll be focused on 1 line in the sand and that’s the intermediate-term TREND line of 2.03% resistance on the 10yr UST; a sustained close > than 2.03%, combined w/ repeated closes > 1267 for the SP500 will have me doing more of what I have been doing for a month (buying stocks, selling bonds).

  • TED SPREAD: 57.23
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 2.02 from 2.00   
  • YIELD CURVE: 1.75 from 1.75


GLOBAL MACRO DATA POINTS (Bloomberg Estimates):

  • Eurozone Nov Retail Sales (2.5%) y/y vs consensus (0.8%) and prior revised to (0.7%) from (0.4%)
  • Payrolls may have climbed by 155k workers in Dec. after rising 120k the previous month, economists est.
  • Fed officials are nearing agreement on adopting inflation goal as Bernanke extends his push for improving transparency
  • Eurozone Dec consumer confidence (21.9) vs consensus (21.2) prior (20.4)
  • Eurozone Nov unemployment rate +10.3% vs consensus +10.3% and prior +10.3%


  • 8:30am: Nonfarm Payrolls, Dec., est. 155k (prior 120k)
  • 8:30am: Unemployment Rate, Dec., 8.7% from 8.6%
  • 9am: Fed’s Dudley speaks in N.J.
  • 10:20am: Fed’s Rosengren speaks on economy on Connecticut
  • 12:40pm: Fed’s Duke speaks on economy in Richmond
  • 1pm: Baker Hughes rig count
  • 1pm: Fed’s Raskin speaks on community banking in Baltimore


  • China Forestry Auditor KPMG Resigns Citing Valuation Concern
  • Gold Traders More Bullish After Bear Market Averted: Commodities
  • Thieves Defy Death to Tap Metal Price Boom as U.K. Cracks Down
  • Resilient Pubs May Appeal to Investors More Optimistic on U.K.
  • Nestle Gains With Heinz as China Fears Local Food Safety: Retail
  • Alcoa to Cut Smelting Capacity by 12% After Aluminum Decline
  • Oil Little Changed as Europe’s Economy Limits This Week’s Gain
  • Stocks Reverse Declines as Banks Rally; Treasuries, Euro Retreat
  • Palm Oil Output in Malaysia Seen at Nine-Month Low on Floods
  • Gold Set for Best Week Since December as Haven Demand Increases
  • BHP’s Ekati Mine May Fetch Less Than $500 Million, Investec Says
  • ENRC to Buy First Quantum’s Congo Assets for $1.25 Billion
  • Oil Heading for Weekly Gain on U.S. Economy, Iranian Tensions
  • Gold to Outperform Dow Index on ‘Fear Trade,’ SICA Wealth Says
  • Rich to Invest More in Commodities, Reduce Cash, Survey Says
  • Copper Trims Weekly Loss as U.S. Data May Lift Demand Prospects
  • Platinum-Gold Ratio Drops to 0.8677, Lowest Since at Least 1987
  • Soybeans, Corn Advance as USDA Seen Paring Stockpiles Estimates
  • Raw Sugar Declines Most Since Mid-September; Coffee, Cocoa Drop









GERMANY – both bunds and stocks starting to act like the fiscal champ Germany has become; no matter what the fanfare and/or finger pointing is here in the US re the Europeans, Germany’s employment and fiscal position is better than USA’s and now the DAX is holding TRADE and TREND lines of support. Haven’t bought it yet, but I will.






JAPAN – down -1.2% last night puts Japanese Equities into the cellar of the major/liquid markets for the 1st week of the year. Away from being grounded by Keynesian policy, Japan has more issues than Time Magazine – so watch this market (because consensus isn’t). Japan needs to rollover 31.2% of its sov debt in 2012 – that’s 3 TRILLION Yens (a lot of yens = $566B USD)






  • Sheikh Holding IPad Gazes at Breitling Before Winning Melbourne
  • Obama Returns to Bush Plan for Cutting U.S. Troops in Europe
  • Dana Gas Sukuk Sink on Debt Payment Concerns: Islamic Finance
  • Fewer, Better Nuclear Weapons Can Make the U.S. Stronger: View
  • Mubarak, El-Adli Should Be Executed, Egypt Prosecution Says
  • Japan to Express Concerns to U.S. Over Possible Iranian Oil Ban
  • Oil May Fall Amid Iranian Threat and Rising Dollar, Survey Shows
  • Oil Heading for Weekly Gain on U.S. Economy, Iranian Tensions
  • MTN Drops on Nigeria’s Doubling Fuel Costs, Iran Concern
  • Saudi Arabia Moved 6 Million Barrels of Oil a Day Through Hormuz
  • U.K. Opposes Pre-Emptive Strike on Iran, Will Act If Hormuz Shut
  • Gold Has Longest Rally in 10 Weeks on Iran ‘Fear,’ U.K. Warning
  • European Refiners Seek to Replace Iran Crude as EU Nears Ban
  • Formosa Buys Extra Crude, Naphtha in Case of Iran Supply Cut
  • Iran’s Revolutionary Guards Plan Naval Exercises, General Says
  • Dubai, Fujairah Ports Busy as Usual Amid Hormuz Passage Threat
  • As Currency Crisis And Feud With West Deepen, Iranians Brace for War
  • Italy’s Monti Questions Scope, Timing of EU Ban on Iranian Oil



The Hedgeye Macro Team

Howard Penney

Managing Director

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.

BBBY: Shorting

Keith added BBBY to the virtual portfolio on the short side into the close.


The money making call on BBBY was to go long because it looked expensive – for 2 years. But, now the top line is rolling and the Q4 sales/gross margin setup is unfavorable as the company continues to shift into lower margin merchandise. In addition, the quality of earnings is starting to deteriorate with SG&A cuts and a lower tax rate driving the recent beat.


BBBY: Shorting - BBBY

NKE: Portfolio Update

Nike remains one of our top longs in 2012. Keith sold NKE from the virtual portfolio this afternoon trading the range with the stock immediate-term overbought.


For our longer term thoughts following the latest quarter's results, please see our 12/21 note "NKE: Too Good".


NKE: Portfolio Update - NKE

Retail: The Cost of Sales


December sales didn’t quite materialize as many had hoped. While the ratio of beats-to-misses was net positive at 2:1 (16 companies beat to 8 misses) the resounding takeaway this morning is the cost at which these sales came. With the majority of retailers looking to clear inventories in the midst of an unseasonably warm holiday selling season (least snowfall in over 50 years) coupled with consumers coming in later to purchase, promotional activity accelerated into month end crippling margins across the industry.


The result is ‘guide-down’ activity outpacing ‘guide-ups’ by a count of 8-to-6 this morning. More important is the magnitude of Q4 revisions i.e. JCP (-38% consensus/prior guidance), PLCE (-26%), AEO (-19%), and KSS (-14%). Consistent with last month’s sales performance and our Key Q4 Themes, margins continue to come in weaker than expected particularly at the mid-tier where there is clearly blood in the water. Just a week after SHLD lowered its guidance, both JCP and KSS lowered their own while GPS missed comp expectations yet again.


Volatility continues to increase in retail and is expanding the bifurcation between upward and downward revisions as is clearly evident through the first two months of the quarter. We expect Q4 results to reflect this reality and for volatility and this bifurcation to remain clear and present through the 1H at a minimum in an increasingly more competitive pricing environment.


A few additional callouts in December:

  • The High/Low-end performance spread remains divergent. Within department stores, JWN +8.7%, M +6.2%, SKS +5.8% were solid while JCP +0.3%, KSS -0.1% came in slightly above and below expectations respectively, but both materially lowered Q4 guidance. BONT -0.7% continues to be the department store laggard.
  • Food/Grocery continues to outperform driving results at discounters. Both COST and TGT reported the food/grocery up LDD outpacing all other categories. While COST came in better than expected, TGT came in light as home and hardlines weighed on sales. Notably, TGT was one of only a handful of retailers highlighting its inventory position noting they were in ‘very good condition’ at month end.
  • TGT’s results mark its second consecutive sequential comp decline since Aug11 and its lowest 2yr comp of +1.3% since Jan11. This was perhaps the only negative earnings revision due to weaker sales instead of margins imploding in December. The key here was TGT’s favorable inventory position headed into the holiday that allowed it to be less promotional. Weakness on the margin at TGT a net positive for WMT.
  • GPS posted the biggest miss of the month coming in -4.0% vs. -1.9%E. Perversely, this could be viewed as incrementally positive reflecting lower promotional activity = stronger margins; however, we would strongly caution against such optimism given the visible stress in GPS’ competitive set.
  • JCP & KSS reported the most significant negative Q4 earnings revisions of the monthly contributors. Of the companies to report seasonal results, PLCE and AEO took the honors. Consistent with the rest of retail, both highlighted sales coming in as or better than expectations with ‘margins down due to increased promotional activity.’ That was clearly the tag-line du jour this month.
  • The clear positive standout of December was M. Not only did comps come in better than expected (+6.2% vs. +4.7%E), they also raised guidance (i.e. not at the expense of margins). Online continues to drive sales coming in up +36%. More importantly is the company’s more aggressive stance towards capital allocation. Macy’s announced it would double its dividend as well as significantly increase its share repurchase authorization by $1Bn from the $850mm, which was just reinstated in Aug11. Good for PVH, RL and others over-indexed to M.
  • At the category level, hardlines were negative while softlines/apparel was positive at both COST and TGT. Despite SHLD noting weakness in appliances sales were up at COST and home was up at both KSS and TGT.

Longs: LIZ, WMT, NKE, RL



Casey Flavin


Retail: The Cost of Sales - total SSS


Retail: The Cost of Sales - 1 yr comps


Retail: The Cost of Sales - 2 yr comps


Retail: The Cost of Sales - 3 yr comp


Retail: The Cost of Sales - Equal Weighted SSS


Retail: The Cost of Sales - TGT Sales Grid



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