TODAY’S S&P 500 SET-UP – January 10, 2012

As we look at today’s set up for the S&P 500, the range is 22 points or -0.91% downside to 1269 and 0.80% upside to 1291. 













US EQUITIES – the Pain Trade is still up and that’s why we have our highest asset allocation to US Equities in a year (18%); that probably doesn’t make us bullish enough, but it’s better than the alternative – which is staying locked in w/ our 2011 Growth Slowing view. We’ll go through our US scenario for GDP growth accelerating to 2.2-2.8% (consensus = 2.1%) on tomorrow’s Macro Theme Call.

  • ADVANCE/DECLINE LINE: 812 (+1012) 
  • VOLUME: NYSE 721.88 (1.56%)
  • VIX:  21.07 2.13% YTD PERFORMANCE: -9.96%
  • SPX PUT/CALL RATIO: 2.03 FROM 1.40 (45%)



  • TED SPREAD: 57.54
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 1.98 from 1.97
  • YIELD CURVE: 1.73 from 1.709


MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Business, Dec., est. 93.8 (prior 92.0)
  • 7:45am/8:55am: ICSC/Redbook weekly retail comp sales
  • 10:00am: IBD/TIPP Economic Optimism, Jan., est. 45.3 (prior 42.8)
  • 10:00am: JOLTs Job Openings, Nov.
  • 10:00am: Wholesale Inventories, Nov., est. 0.5% (prior 1.6%)
  • 10:30am: Fed’s Williams to speak on economy in Vancouver, Washington
  • 11:10am: Fed’s Pianalto speaks on labor markets in Ohio
  • 11:30am: U.S. to sell $30b 4-wk, $25b 52-wk bills
  • 1:00pm: U.S. to sell $32b 3-yr notes
  • 1:00pm: Fed’s George speaks on economic outlook in Kansas City



  • U.S. Treasury Secretary Geithner will urge China, Japan to cut Iranian oil imports, seek to narrow differences with China on trade, currency during visits 
  • Bank of New York Mellon close to settling some claims in U.S. lawsuit accusing the bank of overcharging customers for FX trading 
  • Fiat, Chrysler may seek to combine with another automaker to increase efficiencies, CEO Sergio Marchionne said yday
  • Merck says it will make whatever deals are necessary in race for future hepatitis C combination therapies 
  • Intel CEO Paul Otellini holds keynote speech at CES, 7:30pm
  • Bob Evans may lure bids from leveraged buyout firms as cheapest restaurant, Miller Tabak & Co. says
  • New Hampshire holds primaries 
  • JP Morgan Health Care, CES conferences continue
  • No IPOs expected to price: Bloomberg data



  •  Biggest Rubber Glut Since 2004 Cuts Michelin Costs: Commodities
  • Oil Rises First Day in Four on Iran Dispute, Euro Debt Meeting
  • Gold Advances in London on Physical Demand, Low Rates Appeal
  • Copper Rises Most in a Week on Record Metal Imports Into China
  • wheat Falls as Stockpiles May Increase; Corn, Soybeans Slide
  • Cocoa Reaches Six-Week High on Demand Outlook; White Sugar Gains
  • la Nina Seen Near Peak as Dryness Parches Argentine Corn
  • Gasoline Supply Reaches 10-Month High in Survey: Energy Markets
  • Youngstown Opens Mills Again as States Jockey for Fracking Jobs
  • Uranium Ban at U.S. Grand Canyon Pits Tourism Against Mining
  • Indonesian Bourse Delays Start of Tin Contract Until Next Month
  • MF Global Customer Sapere Seeks Commodity Customer Priority
  • Shipping Crash Survivor Turning Profit as Fleet Expands: Freight
  • COMMODITIES DAYBOOK: Oil Rises Before Meeting on Europe Crisis
  • Nigeria Strike Halts Cocoa Grading, Transportation From Farms
  • China’s 2011 Soybean Imports Fall First Time in Seven Years
  • Alcoa Has First Quarterly Loss Since 2009 After Prices Drop











GERMANY – both German Equities and Bunds act very well in the face of Deutsche Bank melting down. Call the Germans whatever you want to call them, but don’t call them the bailout bankers that some Americans became during our banking crisis – these guys are letting prices clear, to a degree, which is impressive. DAX up +2.1% this morn, well above 6045 TRADE line support.





CHINA – the Shanghai Composite followed up yesterday’s +2.9% gain w/ another boomer of a +2.7% move to the upside overnight, taking Chinese stocks to +3.9% for 2012 YTD. We’re long both China and Hong Kong (CAF and EWH) as we think Growth’s Bottom (a deceleration of the slowdown) may very well be happening in Q112. Bottom’s are processes, not points.









The Hedgeye Macro Team


Natural Remedy

This note was originally published at 8am on January 05, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The market has its own logic and contains its own natural remedy.”

-Nicholas Wapshott


That was an excellent paraphrasing of Hayekian thought by Nicholas Wapshott in his recently published “Keynes Hayek.” But who is Hayek and what does Hayekian thought mean?


I’m going to make a concerted effort to educate our audience throughout the US Presidential Election on the answers to those very simple questions. Keynesian Dogma is pervasive in our Western education. It has also brought Japanese, European, and US governments to their knees in the last 10 years…


Good news: the young people in American who are allowed to Re-think, Re-work, and Re-build this country get that. That’s why you’re seeing a groundswell of a “young” vote for Ron Paul. It may not be as big as Obama’s was – but it’s based on the same American principle of progress – change.


To be crystal clear, this doesn’t mean I am some brainwashed disciple of Hayekian economics. It simply means that I have been educated in its alternative and have concluded (like Milton Friedman and Margaret Thatcher did) that it doesn’t work.


After the Keynesian experiments of the late 1920s and early 1970s ultimately failed in America, Hayekian thought became a very popular alternatives in both 1931 and 1974.


Ultimately, this is why Hayek won (shared) the Nobel Prize in Economics in 1974 and why Milton Friedman went on to become so popular in the 1970s and 1980s (Friedman won the Nobel in 1976).


Timing Matters.


Hayek: “When I was a young man, only the very old men believed in the free market system. When I was in my middle ages, I myself and nobody else believe in it. And now I have the pleasure of having lived long enough to see that the young people believe in it again.” (Keynes Hayek, pg 258)


This time, will not be different.


Back to the Global Macro Grind


What I have enjoyed most about this stabilization of both volatility (VIX) and US stock market performance in the last few weeks is that it has been driven by the Top Natural Remedy for a country and her economy – the strength and stabilization of her currency.


With the US Dollar Index up +0.6% on the day yesterday (up +9.5% since Bernanke signaled the end of Quantitative Easing), the SP500 held flat and Consumer Discretionary stocks (we’re long XLY) closed up +0.8% on the day.


Strong Dollar = Strong Consumption. Period.


As a reminder, my solution to this mess is to get both the fiscal and monetary central planners out of the way. Big Government Spending (fiscal) will come down via The People’s vote and Easy Money Policy (monetary) that starves conservative US Savers of their hard earned fixed income will come under fire for what it’s been – a short-term policy to inflate.


Strong Dollar = Deflates The Inflation. Period.


That’s a functional reality in the Post-Keynesian economy, primarily because it’s globally interconnected. Most liquid commodity markets trade/settle on some underpinning of a US Dollar. It’s still the world’s reserve currency.


More Good News: the Correlation Risk born out of Congress and Bernanke devaluing the US Dollar to all-time lows twice (2008 and 2011) is NOT perpetual. In other words, get big fiscal and monetary “stimulus” plans out of the way and the correlations in the big stuff that matters start to burn off.


What does that mean in English? Let’s use numbers…


After having 80-90% inverse correlations to the US Dollar throughout the May-November period of 2011 (Dollar UP = Everything DOWN), here are the latest immediate-term TRADE correlations as of last night:

  1. Gold = -0.93
  2. Copper = -0.69
  3. CRB Commodities Index = -0.69
  4. EuroStoxx Index = -0.57
  5. US Equity Volatility = -0.57
  6. SP500 = -0.02

In other words, the Natural Remedy that convinces the world that we are no longer implicitly trying to devalue our currency lends credibility to the US Dollar and a lower valuations for competing currencies like the Euro and Gold.


Additionally, as the US Dollar stabilizes and strengthens:

  1. Commodity Inflation continues to deflate
  2. US Stock Market Volatility starts to fall!
  3. US Stocks that aren’t levered to easy money and/or debt go u

Keynesian Quacks can quibble with me about this all they want – but they’re most likely to do it behind closed doors. Like Keynes vs. Hayek in 1931 or Arthur Burns (Fed Chief) vs. Friedman in 1976, these people are very afraid of the debate – as they should be.


As the facts change, America does. Lead, follow, or get out of our way.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, VIX, and the SP500 are now $1590-1639, $111.61-113.37, $1.28-1.30, 20.35-24.11, and 1267-1283, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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Multiplying Halves

“Perpetual optimism is a force multiplier.”

-Colin Powell


Politicians have been trying to spin multiplication theories for generations. From time to time, within their own groupthink tanks, these theories have become particularly influential – especially with the large percentage of the political-class that doesn’t do math.


In 1936, when he wrote the General Theory, John Maynard Keynes focused on what he infamously coined “The Multiplier Effect.” The theory was that every dollar spent by government would have a multiplier effect (greater than 1) rippling throughout the economy. Unfortunately, when Keynesian governments tried that in the late 1920s it didn’t work – and it hasn’t worked since.


Despite being proved wrong throughout the 1 period, Keynes, ever the master Storyteller, found a way to re-frame his vision of the elixir of a government-stimulated life. Keynes preached “that it is a complete mistake to believe that there is a dilemma between schemes for increasing employment and schemes for balancing the budget.” (Keynes Hayek, page 135)


What does 1 scheme multiplied by 2 more failed schemes equal? But these guys have to do something!


Fortunately, President Bill Clinton figured this out and wanted nothing to do with being labeled a Keynesian. President Clinton, like President Reagan, oversaw one of the 2 largest decades of employment growth in US history (by decade, the 1980s and 1990s saw between 18-22 million jobs added (net), respectively – Obama/Bush decade = net zero).


And Clinton did it with a balanced budget mandate…


Fact Check: Clinton’s Balanced Budget Act of 1997 led to the following Federal Budget results:

  1. 1998 = +$69B surplus
  2. 1999 = +$124B surplus
  3. 2000 = +$230B surplus

“… the first surplus in three consecutive years since 1, when Harry Truman was President. The debt had been reduced by $360B in three years with $223B paid in 2000, the largest one-year debt reduction in American history.” (Keynes Hayek, page 274-275)


I’m not a Republican or a Democrat. I’m just a man who wants to get this right. And, setting aside all of the other angles on this Presidential Election, I think that if Obama or Romney get the economic policy messaging right, they’ll win the election.


So far, President Obama has a lot of Reagan in his economic policy legacy (ballooning national debt balance and Keynesian spending). Romney’s got plenty of baggage too, but maybe he has a bigger opportunity to be the change Americans want to see in our economics.


Last night on The Kudlow Report, Larry asked me what I’d suggest Romney be (economically). My answer: ½ Clinton ½ Reagan.


Back to the Global Macro Grind


I’m coming into this morning’s US market open hot. I don’t mean Alabama Crimson Tide hot – I mean locked and loaded with the most Global Equity exposure I’ve had in well over a year:

  1. Long US Consumer Discretionary(XLY)
  2. Long US Consumer Staples (XLP)
  3. Long US Utilities (XLU)
  4. Long Chinese Equities (CAF)
  5. Long Hong Kong Equities (EWH)

But how hot is hot? Well, get out the calculators and tell me what your money is up or down if you sold all of your Asian and US Equity exposure between February and April of last year, and you tell me.


We all invest from the vantage point of what’s in our own accounts. This cochamamy storytelling of the Old Wall that there is an optimal “asset allocation” is as broken as Keynes personal accounts were when they crashed in 1929.


Money compounds. Anyone who does math with their own money gets that. Money also gets evaporated during big draw-downs (i.e. if you’re still long SP from October 2007, you’re still down -18.2% from there and need to be up over +22% to get back to breakeven). That’s math too – it’s called geometric.


For my money, moving to a 24% total Global Equity asset allocation in an environment like this actually makes me really nervous. Maybe that’s why it’s working for 2012 YTD (Chinese Equities are already up +3.9% for the year). Maybe it’s not. All I know is that what I don’t know is what makes me nervous about being long anything tied to government decision making.


Maybe Powell was right about the force-multiplier of optimism. Maybe I’ve been right on the trust-divider of fear-mongering. All I know is that, combined with a Strong Dollar, the best of ½ Clinton ½ Reagan is a winner for me.


My immediate-term support and resistance levels for Gold, Oil (Brent), EUR/USD, US Dollar Index, Shanghai Composite, and the SP500 are now $1, $111.89-115.61, $1.26-1.29, $80.41-81.61, 2178-2295, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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Reprieve: Buying EWH Trade Update

Conclusion: Hong Kong looks ripe for a bullish trade.


Position: Long Hong Kong equities (EWH).


Down -17% from when turned outwardly bearish on the Hang Seng, we are well aware of the bear case for Hong Kong. That puts us a unique position to have an educated view on the catalysts that could get this thing turned around – specifically on the growth/inflation front.


The immediate-term catalyst calendar looks favorable (views based on our models and global macro outlook): 

  • JAN 10: DEC Chinese exports should continue to slow and lower expectations for the following week’s growth data;
  • JAN 11: DEC Chinese CPI and PPI should show continued disinflation and create incremental room for China to ease monetary policy;
  •  JAN 16: DEC Chinese industrial production, retail sales, fixed assets investment data and 4Q11 real GDP should all slow at a slower rate and may even surprise depressed consensus estimates to the upside;
  • JAN 19: Hong Kong unemployment rate should continue to back up, though only marginally;
  • JAN 20: Hong Kong CPI should continue to slow on the strength of King Dollar’s increase in purchasing power, which the Hong Kong dollar is pegged to; and
  • JAN 26: Hong Kong exports should continue to slow at a slower rate and on a lag to a pickup in manufacturing. 

From an intermediate-term perspective, buying the EWH with the Hang Seng less than -0.3% shy of our TREND line of resistance does indeed suggest we believe in the index’s ability to break out above the TREND line on the strength of the aforementioned macro calendar. As Chinese and U.S. economic growth bottoms in 1Q12 (China = 52.7% of Hong Kong’s export demand; the U.S. = 11%), we look for Hong Kong manufacturing and shipping orders to accelerate ahead of reaccelerating end demand in the coming months. To that tune, manufacturing slowed at a slower rate in DEC, with the PMI reading ticking up to 49.7 vs. 48.7.


Growth slowing at a slower rate is a leading indicator for a reacceleration in growth.


Darius Dale

Senior Analyst


Reprieve: Buying EWH Trade Update - 1