Locking Horns

This note was originally published at 8am on January 06, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“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 $1591-1642, $111.61-113.96, $1.28-1.30, 2150-2211, 5976-6281, and 1267-1286, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Locking Horns - Chart of the Day


Locking Horns - Virtual Portfolio

Resenting Success

"America should be lifted up by our desire to succeed, not dragged down by the resentment of our success."

-Mitt Romney


In what I thought was the most progressive Strong Dollar, Strong America speech I’ve heard in the last 3 years last night, Mitt Romney hammered that Red, White, and Blue point home like maybe only Obama could. Strong.


Romney was alluding to crushing the “Most Popular” (most read) story on Bloomberg yesterday titled “Gingrich Attack Film Shows Romney As Ruthless Rich.” I don’t know one person (whose financial industry expertise I respect) who considered that Bain commercial anything short of a Michael Moore production. Apparently the State that says “Live Free, Or Die” agrees.


To be clear, I’m not a Republican or a Democrat. I simply want to get this country’s economics right. Clinton should have provided as much inspiration to President Obama to balance a budget as Reagan may have inspired Romney’s great hair. When it comes to the economic policy in America, Keynesian Academic Dogma failed both Bush and Obama. It’s time for change.


Can Obama be the change that Ron Paul is with the Youth/Change Vote in this country? Yes He Can. Will he? I have no idea. He’s certainly not going to get any non-groupthink ideas on economics from Tim Geithner. As of this Romney win in New Hampshire last night, this ½ Clinton ½ Reagan race to the US Presidency is officially on.


Back to the Global Macro Grind


Game on. I love this. I really do. I’m going to light up our 11AM EST conference call line like a Christmas tree this morning as Big Alberta and I officially roll out our Q1 Global Macro Themes for 2012.


Our clients already know what our Q1 Themes are, but if you’re new to this Canadian-American tire pumping game, here they are:


1.       Strong Dollar = Strong Consumption

2.       Deflating The Inflation, Part Deux

3.       Growth Slowing’s Bottom


Yesterday’s breakout in US Equities confirmed a lot of what we have been signaling for the last 3-4 weeks. We’ll go through this in depth (45 slides) on our call this morning, but the data doesn’t lie – perma-bulls forced to perma-change their bullish theses do. A Sustainably Strong and Stable US Dollar provides a coincident benefit to Employment, Confidence and Consumption.


That’s the fundamental research view – our quantitative risk management view supports this fundamental shift:

  1. SP500 closing above its October 29th, 2011 closing high of 1285 yesterday (1292 close) puts 1363 in play
  2. US Equity Volatility (VIX) is already down -11.6% for 2012 YTD (bearish TRADE and TREND)
  3. US Equity Volume studies are starting to change (up +31% day/day on yesterday’s up move, down on down moves)

Backcheck, Forecheck, Paycheck – that’s a PRICE, VOLATILITY, and VOLUME win in my model – and my model has not changed.


People who didn’t see our team make the shift from bearish to bullish on US Equities in early 2009 are still insecurely scrambling to put me on their Top 10 People Not To Listen To List of 2012 (some journalist from the Old Wall yesterday at Marketwatch). Why? They want to (or should I say need to) put me in the perma-bear box in which they need to think.


Thinking inside of a box is no way to live. Being perma bullish or bearish doesn’t work. What works is having a repeatable process that allows you to make money in both up and down markets.


What would make me go back to bearish on US Equities?

  1. President Obama not engaging in the ½ Clinton ½ Reagan strategy and imposing more of what didn’t work in 2011
  2. Ben Bernanke implementing a QE3, stoking inflation
  3. Geithner convincing his cronies of some socialized “mega refi” idea for US Housing (blowing up the MBS market)

Our desire to succeed in this country is based on having prior successes. If you’ve won a few games in your life, but have not yet won a Championship, you’re not thinking about the standard of success I am. America has an opportunity to be great again.


My economic strategy message should resonate as much with Democrats as it does Republicans. Both the US Currency and Equity markets are getting fired up about change in this country. That’s what real winners in real-life do. They don’t Resent Success.


My immediate-term support and resistance lines for Gold, Oil (Brent), EUR/USD, US Dollar Index, Shanghai Composite, and the SP500 are now $1, $111.91-116.01, $1.26-1.29, $80.55-81.53, 2, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Resenting Success - Chart of the Day


Resenting Success - Virtual Portfolio

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%

Weekly Latin America Risk Monitor: Argentina’s Making Noise

Conclusion: Our dominant TREND-duration themes remain largely intact throughout the region from a high-frequency data perspective. In the context of this “quiet” week, we’ve interpreted recent market signals as an opportunity to look under the hood of Argentine policymaking – specifically with regards to a potential currency devaluation.



  • EQUITIES Median: +1% wk/wk; High: Argentina +10.3% wk/wk; Low: Mexico -0.5% wk/wk; Callout: Argentina +15% YTD;
  • FX Median: +0.5% wk/wk vs. USD; High: Colombian peso +2.6% wk/wk; Low: Argentine peso -0.1% wk/wk; Callout: Mexican peso -10.5% YoY;
  • S/T SOVEREIGN DEBT (2yr) High: Brazil +8bps wk/wk; Low: Colombia flat wk/wk; Callout: Brazil -30bps in three months;
  • L/T SOVEREIGN DEBT (9-10yr) High: Brazil +25bps wk/wk; Low: Mexico/Colombia -7bps wk/wk; Callout: Mexico -56bps in six months;
  • SOVEREIGN YIELD CURVE High: Brazil +17bps wk/wk; Low: Mexico -9bps wk/wk; Callout: Mexico -23bps in one month;
  • 5YR CDS Median: -0.3% wk/wk; High: Peru +3.4%/+6bps wk/wk; Low: Argentina -3.6%/-34bps wk/wk; Callout: Peru +15.5%/+24bps in one month;
  • 1YR O/S RATE SWAPS Median: +0.8% wk/wk; High: Chile +5%/+22bps wk/wk; Low: Brazil -0.2%/-2bps wk/wk; Callout: Colombia +3%/+15bps in six months;
  • O/N INTERBANK RATES Median: -0.4% wk/wk; High: Chile +0.4%/+2bps wk/wk; Low: Mexico -0.7%/-3bps wk/wk; Callout: Argentina -13.7%/-160bps in two months;
  • CORRELATION RISK The MSCI Latin America Equity Index has gone from -67% correlated to the U.S. Dollar Index on a six-month basis to +24% correlated on a three-week basis.

Full performance tables can be found at the conclusion of this note.



With the potential for a peso devaluation in 2012, Argentine monetary policy remains a key risk factor in the region.


Financial repression has been supportive of peso deposit growth and lower ARS deposit rates:


Weekly Latin America Risk Monitor: Argentina’s Making Noise - 1


The issue (capital flight ahead of a pending devaluation) which necessitated the latest round(s) of Big Government Intervention, while less dire on the margin, remains:


Weekly Latin America Risk Monitor: Argentina’s Making Noise - 2


This is due to the likelihood that the peso may be devalued by over 20% in order to meet a 2012 dollar debt service payment using “free-and-available” FX reserves:


Weekly Latin America Risk Monitor: Argentina’s Making Noise - 3



Growth Slowing’s Bottom:

  • Brazil: Manufacturing PMI accelerated in DEC to 49.1 vs. 48.7 prior.

Growth Slowing:

  • Brazil: Export growth slowed in DEC to +5.8% YoY vs. +23.1% prior. Trade Balance growth slowed in DEC to -$1.5B YoY vs. +$291M prior. Industrial Production growth slowed in NOV to -2.5% YoY vs. -2.2% prior.
  • Mexico: Global Economic Indicator (proxy for GDP) slowed in OCT to +3.7% YoY vs. +4.6% prior.
  • Mexico: Both Manufacturing and Services PMI readings slowed in DEC to 52 (from 53.5) and 54.1 (from 54.4), respectively.

Deflating the Inflation II:

  • Brazil: CPI slowed in DEC to +6.5% YoY vs. +6.6% prior, allowing the central bank to avoid breaching the upside of its FY11 inflation target (+4.5% +/- 200bps). At +6.5% for the whole of 2011, Brazil just closed out its fastest year of price increases since 2004. Our models do point to further downside in 1H12, however, as does the market. Brazil’s 2013 breakeven rate has fallen -70bps to 5.75% since peaking on SEP 21.
  • Colombia: CPI and PPI slowed in DEC to +3.7% YoY (from +4%) and +5.2% YoY (from +6.8%), respectively.

King Dollar:

  • Mexico: The peso, which is down nearly -15% vs. the USD over the last six months, is contributing to an increase in Mexican CPI alongside a domestic drought (via lower food supplies). CPI accelerated in DEC to +3.8% YoY vs. +3.5% prior, the fastest rate in 12 months.
  • Argentina: As a result of financial repression via capital controls and new FX regulations designed to stem record capital flight ($18B through 3Q11), Argentina’s peso-denominated time deposits are growing at a record pace (+4.7% MoM) as domestic savers are robbed of alternatives to store their wealth. Additionally, the central bank is building FX reserves at a record pace (+$2.5B MoM in DEC). The build-up/reversal of declines has been supportive of sovereign dollar debt (2017 yields down -313bps since OCT 4 to 9.54%; Argentine dollar debt up +3.3% YTD after being the worst EM sovereign performer in 2011) as the country plans to tap its FX reserves to make a +$5.7B debt service payment next year. Per Argentine rule (always subject to whimsical change), the government can only tap “free-and-available reserves” in excess of the monetary base and current calculations leave the government with a -$5.4B deficit. To get to a +$5.7B surplus, the peso needs to be devalued by -24% assuming a constant monetary base. USD/ARS forward markets are pricing in a -16.7% devaluation in the coming year, up from a trough of -25.9% in early NOV.


  • Chile: Economic Activity Index (proxy for GDP) accelerated in NOV to +4% YoY vs. +3.4% prior. CPI also accelerated in DEC to +4.4% YoY vs. +3.9% prior.


  • Brazil: The government’s aggressive capital controls proved successful (relative to their stated objectives) in 2011. Foreign investment flows increased +168% YoY to $65.3B – with roughly 92% of that being the preferred FDI.
  • Mexico: The sell-side is bullish on the peso, forecasting at ~5% gain through June on the heels of a -25% reduction in the number of economists predicting a Banxico rate cut per their latest survey.
  • Argentina: Mark Mobius, Head of $45B Templeton Emerging Markets Group, is bullish on Argentine equities. “Although the political environment is not very good, the companies are very cheap so we’re looking closely… We continue to add selectively as more money comes into the fund.” The threat of a big bid like this in such an illiquid market has forced intense short covering in the Merval Index (up +15% YTD).
  • Argentina: Tax revenue grew +31.8% YoY to ARS540B in 2011; when coupled with public-sector salary increases > +20% earlier in the year, it’s easy to believe private economist estimates of inflation running north of +20-25% YoY vs. official statistics of +9-10%.

Darius Dale

Senior Analyst


Weekly Latin America Risk Monitor: Argentina’s Making Noise - 4


Weekly Latin America Risk Monitor: Argentina’s Making Noise - 5


Weekly Latin America Risk Monitor: Argentina’s Making Noise - 6


Weekly Latin America Risk Monitor: Argentina’s Making Noise - 7


Weekly Latin America Risk Monitor: Argentina’s Making Noise - 8


Weekly Latin America Risk Monitor: Argentina’s Making Noise - 9


Weekly Latin America Risk Monitor: Argentina’s Making Noise - 10


We expect an in-line but low quality quarter with a substantial quarterly share loss.



We estimate that IGT will report an in-line quarter and maintain the high end of their guidance when they kick-off the gaming earnings season on January 24th.   While an in-line quarter is neither here nor there, investors may be a little spooked by IGT’s large sequential share drop and a flat to slightly down year-over-year replacement number for the market, as we wrote about in “REPLACEMENT REVERSAL" (12/2/11).  We believe that IGT’s NA ship share will be between 27-30% in the December quarter, down from 40% in the September quarter and that market replacement orders were down about 5% YoY.  However, management should be pretty bullish about the remainder of 2012.





We estimate that IGT will report FQ1 EPS of $0.22 and $488MM of revenue.


Product sales of $208MM at a 54% gross margin:

  • NA product revenues of $118MM at a 57% gross margin
    • North American box sales of $59MM
      • 4.1k North America new shipments
        • 3,450 replacement units and 675 new and expansion units          
        • New units include shipments to Twin Arrows Casino in AZ and Miami Jai Lai
    • ASPs down 3% YoY but up 1% QoQ
  • Flat YoY NA non-box sales
  • International product revenues of $90MM at a 50% gross margin
    • $67MM of box sales
      • 4k new shipments at an ASP of $16.6k
  • $24MM of non-box sales
    • Entraction sales will be in non-box sales

Gaming operations revenue of $280MM at a 58% margin

  • Average install base of 54.6k units at an average win per unit of $55.70
  • Increase in install base due to Aqueduct units and to a lesser extent CAGE placements
  • Game ops D&A of $42MM

Other stuff:

  • SG&A: $88MM
  • D&A: $18MM
  • R&D: $49MM
  • Net Interest expense: $17MM
  • Tax rate: 37%


We expect IGT to be quite bullish about the March quarter given shipment to 3 large casinos (Cleveland & Toledo and Revel) and their seasonal improvement in market share.  IGT will surely address the implications of the DoJ’s reversal of opinion on the application of the Wire Act on online gaming.  The Entraction platform will help IGT garner some market share when poker comes online – although we’re a little more pessimistic on the timing than the Street.  The DoJ opinion also opens up the possibility of WAP jackpots across state lines – which means bigger jackpots and should lead to a lift in win per unit for IGT’s gaming operation business.  We’re currently at $1.04 for FY12 and $0.28 for FQ2.

Bullish TAIL: SP500 Levels, Refreshed

POSITION: Long Consumer Discretionary (XLY), Long Utilities (XLU)


I said that if the SP500 continues to hold my long-term TAIL line of support (1267) that I’d title my notes Bullish TAIL.


That doesn’t mean that I won’t make sales and/or call out immediate-term TRADE overbought as it appears in my model. It just means I’m sticking with the risk management process that had me make the bullish turn on US Equities in 2009.


Across all 3 risk management durations, here are the lines that matter to me most right here and now: 

  1. Immediate-term TRADE overbought = 1299
  2. Immediate-term TRADE support = 1273
  3. Long-term TAIL support = 1267 

As we pushed higher towards 1299 this morning, I sold my Consumer Staples (XLP) long because that’s the Sector ETF of the 3 I was long coming into today that I like the least. There are no rules against buying it back on red.


Keep moving out there,



Keith R. McCullough
Chief Executive Officer


Bullish TAIL: SP500 Levels, Refreshed - SPX

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.