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Playing Blind

This note was originally published at 8am on January 18, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“We can be blind to the obvious, and we are also blind to our blindness.”

-Daniel Kahneman


That’s one of what I expect to be many solid risk management quotes from the book I am currently reviewing, “Thinking, Fast and Slow” by behavioral psychologist/economist Daniel Kahneman (page 24).


Are we blind to the obvious? Are we blind to our own blindness? I think we should probably ask ourselves that question both as individuals and as leaders in our society each and every day.


Last night, Daryl Jones, David Bergerson, and I hosted a dinner with 10 Portfolio Managers in mid-town Manhattan. This wasn’t an “idea dinner” like the ones the Old Wall still tries to host where people push their books. This was a legitimate Global Macro debate.


Fully loaded with the political discussion (which even if you’re not political actually has to be had – which is sad, I know), after 3 hours I concluded that we are all Playing Blind to what could ultimately happen out there each and every day.


Iran, Europe, Qe3? Romney, China, Gold? Growth, Earnings, Levels?


It’s all out there. It’s all interconnected. And the only way to even begin to attempt to absorb it all is to have a repeatable risk management process that’s Multi-Factor and Multi-Duration. Embrace Uncertainty.


Back to the Global Macro Grind


What I didn’t expect this morning was waking up to another central planning rumor.


These central planners, like most Keynesians, fundamentally believe that they can temporarily arrest gravity. When their plans don’t work, they just make it a bigger plan.


How about a trillion?


That’s the IMF “rumor” this morning. Never mind contextualizing what a trillion dollars actually is or that any IMF sponsored trillion dollar package is implicitly backstopped by the United States of America’s tax payers – just think about it some more – think fast and slow - and watch the S&P futures whip around on this while you attempt to remain sane.


What are markets doing on that?


(hint, they are going up)


What do you do with that?

  1. You stay out of the way on the short EUR/USD position until it re-tests $1.31 (immediate-term TRADE resistance)
  2. You stay out of the way on the short German DAX position until it re-tests 6502 (long-term TAIL resistance)
  3. Your stay away from economists at the World Bank (another Washington based beauty) and their estimates

That 3rdpoint is more of a transition sentence to what is a Top 3 Most Read on Bloomberg today (next to Jerry Yang and Carnival Cruise lines): “World Bank Cuts Global Growth Estimates.” Gee, thanks for coming out guys.


Talk about the blind leading the blind – after looking for +3-4% US Growth (depending on when you asked them for a US GDP Growth estimate last year), the World Bank is cutting their US Growth estimate from 2.9% to 2.2% this morning.


At the same time, we’re taking our US Growth estimates up…


Rather than Playing Blind from a Growth and Inflation modeling perspective, we actually have our own models that actually work. They don’t work all of the time. But they worked in calling both turns - in both Growth and Inflation - in both 2008 and 2011.


The same models that had us turn bullish (versus consensus expectations) on Growth in early 2009, have us getting bullish, on the margin, on Growth in 2012.



  1. US Dollar Strength = Deflates The Inflation
  2. Deflating The Inflation = higher real (adjusted for inflation) Growth

I’m often blind to my own blindness. But I’m not blind to what our models are telling me. Rather than debate the obvious implied by a broken consensus source code, I’ll just call building a Washington Consensus out for what it is – it’s what group-thinkers do.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, and the SP500 are now $1630-1660, $110.10-$112.17, $1.26-1.29, $80.24-81.77, and 1287-1300, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Playing Blind - 1. EL EUR


Playing Blind - 1. VP Heute


The Macau Metro Monitor, January 23, 2012




The Bayfront MRT station that opened on Jan 14 has made it more convenient for shoppers and casino patrons to visit Marina Bay Sands.  While retail stores and dining outlets at MBS have registered an increase of 5-30% in business since the MRT opened, more also seem to be visiting the casino.



TODAY’S S&P 500 SET-UP – January 23, 2012

As we look at today’s set up for the S&P 500, the range is 23 points or -1.40% downside to 1297 and 0.35% upside to 1320. 













TREASURIES – the most important line left in our interconnected Global Macro model = the intermediate-term TREND line of 2.02% for 10yr US Treasury yields. The market closed right at that level on Friday and is holding it again this morning as Treasuries have their worst January start since 2003 (not Bullish on Growth period you wanted to be short in EM or US Equities).

  • ADVANCE/DECLINE LINE: 489 (-433) 
  • VOLUME: NYSE 927.24 (+15.04%)
  • VIX:  18.28 -8.00% YTD PERFORMANCE: -21.88%
  • SPX PUT/CALL RATIO: 2.54 from 1.11 (128.83%)



SPREADS – whether it’s the critical ones to counterparty risk (Euribor/OIS or TED) or the Yield Spread in Treasuries, the message is the same = bullish on the margin. And it’s what happens on the margin that matters to us most. Euribor/OIS down to 82bps wide this morn = 2.5 mth low. Yield Spread (10s minus 2s) +179bps wide; 3 month high (bullish for the Financials).

  • TED SPREAD: 52.04
  • 3-MONTH T-BILL YIELD: 0.04%
  • 10-Year: 2.05 from 2.02
  • YIELD CURVE: 1.81 from 1.78


MACRO DATA POINTS (Bloomberg Estimates):

  • 11:30am: U.S. to sell $29b 3-month, $27b 6-month bills


  • Newt Gingrich captured Republican primary in S.C. over the weekend
  • Republican presidential candidates debate in Tampa, Fla.; Florida primary Jan. 31
  • 9:30am: Energy Information Administration to release projections of U.S. energy supply, demand, prices through 2035
  • Senate returns to Washington following winter recess
  • NOTE: Obama State of the Union address Tuesday



  • EU finance ministers meet in Brussels to discuss new budget rules, financial firewall to protect indebted states, Greek debt swap
  • Thorsten Heins, to replace Jim Balsillie, Mike Lazaridis as RIM CEO; Barbara Stymiest to take over as Chairman
  • Apache agreed to buy closely held Cordillera Energy for $2.85b in cash and stock
  • EU foreign ministers  may approve embargo on import of Iranian oil with phase-in period to July 1
  • BAE plans to bid on contract to run Lake City Army Ammunition Plant in Independence, Missouri which Alliant has held since 2000
  • “Underworld: Awakening” was top N.A. Film this weekend, taking in $25.4m
  • No IPOs expected to price today: Bloomberg data


      • Bank of Hawaii (BOH) 7am, $0.82
      • Halliburton Co (HAL) 7:04am, $0.99
      • VMware (VMW) 4pm, $0.60
      • Woodward (WWD) 4pm, $0.45
      • CSX (CSX) 4:01pm, $0.44
      • FNB (FNB) 4:01pm, $0.19
      • Polycom (PLCM) 4:04pm, $0.29
      • Albemarle (ALB) 4:05pm, $1.10
      • Kansas City Southern (KSU) 4:05pm, $0.79
      • Zions Bancorp (ZION) 4:10pm, $0.33
      • Western Digital (WDC) 4:15pm, $0.71
      • Cathay General (CATY) 4:30pm, $0.29
      • Texas Instruments (TXN) 4:30pm, $0.23
      • STMicroelectronics (STM) 4:42pm, $(0.03)
      • Crane (CR) 5pm, $0.90
      • Packaging of America (PKG) 5pm, $0.37
      • Equity Lifestyle Properties (ELS) 8pm, $0.87




GOLD – wandering on up into no man’s land here (our intermediate-term TREND resistance = $1684). We have no short position, but we likely will again soon. All of the aforementioned will be very bearish for Gold (Growth + Rising 10yr rates). We need to get the Heli-Ben’s FOMC mtg out of the way Wednesday though…

  • Speculators Raise Metals Wagers by Most Since July: Commodities
  • Gold Climbs to Six-Week High on Europe Concern; Silver Advances
  • Wheat, Corn Gain for Third Day as U.S. Export Sales Strengthen
  • Copper Rises Before Finance Ministers Meet to Craft Crisis Plan
  • Rubber May Drop ‘Sharply’ Through March, Goldman Sachs Says
  • Iran Said to Seek Yen Oil Payments From India Amid Sanctions
  • Sugar Climbs for a 12th Session in London Trading; Coffee Drops
  • ICE Wheat-Market Bid Slowed by Canada Growers’ Fight With Harper
  • ThyssenKrupp Advances on Stainless Merger Talks: Frankfurt Mover
  • Rubber Retreats From 3-Month High on Oil’s Drop, Debt Concerns
  • Fuel Glut Cuts Reliance’s Profit as Asia Adds Capacity: Energy
  • Apache to Acquire Cordillera Energy Partners for $2.85 Billion
  • Hedge Funds Oil Bets Drop on Iran Sanction Delay: Energy Markets
  • COMMODITIES DAYBOOK: EU Diplomats Agree on Iran Oil Embargo
  • Oil Climbs as European Union Agrees on Sanctions Against Iran
  • WSI Says UK Weather to Be Colder Than Average Next Month
  • U.S. Gasoline Rises to $3.39 a Gallon, Lundberg Survey Shows





















The Hedgeye Macro Team




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Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.


“We must remember that economists are not necessarily the creatures of great thought but of circumstance.”

-John Kenneth Galbraith


As the Overlords of Keynesian Economics descend from their chalets in Davos, Switzerland this week, we must all give thanks and praise. Without doing the exact opposite of their consensus in the last 4 years, who knows what precipice we commoners would have fallen from…


Not surprisingly, Crisis-Mongering has become fashionable on Amazon. Looking at the Top 20 new hard-cover books on policy, economics, and markets, a lot of them are about debt and deficits. After all, what better time to buy Gold than after it’s gone up for 11 straight years? Right? Right.


This weekend I started reading “That Used To Be Us” by the New York Times’ Thomas Friedman and his buddy professor from John’s Hopkins University, Michael Mandelbaum. Sorry guys, but this is about as consensus as consensus gets.


The book’s preface, like most Big Government Interventionist ideas that start using the rear-view mirror, assumes the position of elephantine intellects who have found the elixir of American optimism. In reality, they are just one small part of the larger problem.


“We now live and work in the nation’s capital, where we have seen first-hand the government’s failure to come to terms with the major challenges the country faces.” –Thomas L. Friedman and Michael Mandelbaum, Bethesda, Maryland, June 2011


Really? Thanks guys. I’ve seen it first-hand without living in the nation’s capital! Telling me about your personal inconveniences commuting from Bethesda, Maryland to the epicenter of Keynesian Experimentations Failed is a much larger problem of pretense than the one you individually have to stare at each and every morning in the mirror.


We need less people with opinions born out of Washington groupthink; less Crisis-Mongering; and less commuting to get paid by DC. That’s the change I can believe in. Please, for the sake of all of us, just get out of the way.


Back to the Global Macro Grind


Getting out of the market’s way has proven to be a great strategy for both the US and German government. While the Germans have been more explicit about their distaste for bank bailouts, American central planners haven’t been able to do much for the last 3 months. Evidently, doing nothing works.


Doing nothing probably won’t get American booksellers paid, but it’s getting the commoners paid:


  1. Chinese, German, and American stock markets are at 3 month highs
  2. Counter-party global banking risks (Euribor/OIS Spread, TED Spread, Yield Spread, etc.) are all at their best levels in 3 months
  3. US Growth, Employment, and Confidence readings are hitting 3-month highs


So what can they do to screw this all up this week?


  1. State of the Union or Republican Debate #26 (Monday-Tuesday)?
  2. The US Federal Reserve’s Open Market Committee meeting/decision (Wednesday)?
  3. Davos, Switzerland Meeting of the Crisis-Mongering minds (all week)?


What screwed this up around this time last year?


  1. Policies to Inflate brought us $120/oil by Q211
  2. Growth Slowing became reality as inflation accelerated and debt levels compounded
  3. Employment and Confidence followed to the downside


Got Reflexivity?


After seeing Global Growth slow in both 2008 and 2011, we really, really, do not want to go there again. Markets love the idea of getting Government out of the way. This is the first January since 2003 that the US Treasury market has sold off like this.


Nine years ago (2003) is a critical reference point because that came after 3 consecutive down years for US stocks (2000, 2001, and 2002), a terrorist attack on US soil, and fear-mongering from Congress like we had never seen.


Why are US Treasuries selling off as US Equity Volatility crashes (VIX down -22% YTD) and US Stocks refuse to stop going up? Because Growth Expectations are starting to recover from Crisis-Mongering lows.


Giants vs Patriots – it’s time for us all to cheer for the progressive message in this country that’s always been Red, White, and Blue.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, and the SP500 are now $1, $109.12-111.92, $1.26-1.30, $80.01-80.86, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Crisis-Mongering - Chart of the Day


Crisis-Mongering - Virtual Portfolio

Shorting WFT: More than Just the Weather(ford)

This note was originally published January 20, 2012 at 12:45 in Energy


We look to Schlumberger (SLB) as a bellwether for the oil services industry.  From the Company’s 4Q11 results, and more importantly the management team’s commentary and outlook, we have more confidence in our bearish thesis on North American land-focused energy services companies.  Further, we feel that the service companies with the most leverage to the rebound in deepwater drilling, as well as the nascent international shale drilling market, will be the outperformers in 2012.


Weatherford International (WFT) is heavily exposed to the North American land services market.  According to the 4Q10 segment breakdown, 48% of WFT’s revenue and  66% of its operating income comes from its North America business, which makes a soft North American services market a major headwind.  Further, WFT is not a major player in deepwater or an early mover in international shale exploration, which will be the pockets of strength in 2012.  Given, we like WFT on the short side.  If you are looking to pair it off, go with long SLB.  We shorted WFT this morning in our Virtual Portfolio at $16.68.


Other reasons we like WFT on the short side are as follows:

  • Slower top line growth in 2012 as company compares against increasingly difficult 2011 numbers (chart 1);
  • Margins peaking and contracting (chart 2);
  • North American land drilling activity slowing (chart 3);
  • North American land pricing slowing (chart 4);
  • The stock is 26% off its December 2011 low and is bumping up against our TRADE line resistance of $16.76.  The long-term TAIL line is broken, $18.13 (chart 5).

Shorting WFT: More than Just the Weather(ford) - w1


Shorting WFT: More than Just the Weather(ford) - w2


Shorting WFT: More than Just the Weather(ford) - w3


Shorting WFT: More than Just the Weather(ford) - w4


Shorting WFT: More than Just the Weather(ford) - w5


SLB confirmed our fundamental view on the services industry in North America – that gives us incremental confidence in our short WFT thesis.  BHI and HAL report earnings early next week – we see no reason for those companies to say much different.


Here are some callouts from the SLB call along with quotes from the management team:


Land activity in North America is flat and likely falling due to crashing natural gas prices.  Pricing – pressure pumping, drilling, and completions – is slowing.  As a result, sell side estimates are too high for 1Q12 in their assumption of 26% y-o-y revenue growth and too high for the full-year barring a recovery in the natural gas market:


“The current consensus is probably somewhat on the optimistic side or on the high side [for 1Q12]. Just a comment on how we see the quarter from this point. I think the underlying activity continues to be strong and it's driven by steady growth in the international markets and also strong activity in North America shale liquids. Like you say, we are going to see the normal seasonal slowdown in the North Sea and Russia. And I think also the sequential drop in product sales and multi-client sales. I think also there is some added uncertainty going into Q1 now in terms of the impact of the accelerating drop in North America shale gas activity. So generally I would say that the current consensus is somewhat on the optimistic.”


“In North America, land revenue grew in line with rig count while margins increased moderately driven in part by internal efficiencies and active cost management. Pricing in our wireline and drilling product lines continue to show an upward trend although slowing somewhat compared to previous quarters. In pressure pumping downward pricing pressure in the gas basins continued in the fourth quarter. Pricing in liquids-rich basins remained more or less flat excluding the impact of continued conversion to 24-hour operations.” 


“In North America, we expect land rig count to remain flat with Q4 2011, combined provided the ongoing drop in gas activity will be countered by increasing activity in the liquids and liquids rich basins.”


“Well, if you look at pressure pumping pricing, as I said, we continue to see downward pressure on pricing in gas [basins] in Q4. The liquids basins we saw pricing basically being flat, some contracts being up in some context been down.”


The deepwater recovery – particularly in the GoM and off both coasts of Africa – is fully underway and will be a tailwind for the deepwater servicers in 2012:


“ This quarter I think was the first quarter where our Gulf of Mexico margins were accretive to North America.”


“We're quite optimistic in terms of the outlook for the Gulf of Mexico.  Firstly in terms of our market share position and in terms of how well we can leverage our high-end technology and operational performance in this type of market. So we see steady growth in deepwater drilling rig counts during 2012, roughly about a rig a month so we would be at pre-Macondo levels for drilling rigs in the Deepwater by the latter part of 2012.”


We are in the early stages of E&P in international shale plays.  That activity will continue to trend higher over 2012 and 2013; SLB and HAL are the early movers:


“We won a lot of contracts in the international market requiring fracturing capacity. So in the event that we have the opportunity or basically decide to shift capacity internationally, I think that will be welcomed by our international operations.”


“I think that international capacity is obviously one driver that's going to support pricing going forward because we don't see significant overcapacity in the international market.”


“We won a number of these contracts in all parts of the world and I would say that the increase in activity for us in international unconventionals over this year and going into next year is probably somewhat higher than where I thought it would be going back two or three quarters. So we expect to see strong growth in all the international shale plays for us in 2012.  The work is still going to be around evaluation and pilot projects in general but I mean it's still going to represent very good growth for us and I think the two markets that are going to take of the fastest, I would say would be Argentina and China.”


Kevin Kaiser