TODAY’S S&P 500 SET-UP – January 24, 2012

As we look at today’s set up for the S&P 500, the range is 22 points or -1.14% downside to 1301 and 0.53% upside to 1323. 











  • VOLUME: NYSE 722.90 (-22.04%)
  • VIX:  18.67 2.13% YTD PERFORMANCE: -20.21%
  • SPX PUT/CALL RATIO: 2.35 from 2.54 (-7.48)


  • TED SPREAD: 52.45
  • 3-MONTH T-BILL YIELD: 0.03%
  • 10-Year: 2.04 from 2.05
  • YIELD CURVE: 1.81 from 1.82

MACRO DATA POINTS (Bloomberg Estimates):

  • 9am: FOMC begins 2-day meeting on interest rates
  • 10:00am: Richmond Fed, Jan., est. 6 (prior 3)
  • 11:30am: U.S. to sell 4-week bills
  • 7:45am/8:55am: ICSC/Redbook weekly retail sales
  • 1:00pm: U.S. to sell $35b 2-yr notes


  • State of the Union speech
  • Romney attacked Newt Gingrich as an “influence peddler in Washington” and a failed leader whose party ousted him as U.S. House speaker in Florida debate
  • Mitt Romney paid effective tax rate of 13.9% on income of $21.6m in 2010, according to a tax return his campaign showed reporters last night and will release today
  • House, Senate in session:
    • 1:30pm: Republicans on House Oversight panel to question Consumer Financial Protection Bureau Director Richard Cordray
    • 10am: House Judiciary Committee marks up H.R. 1433, the “Private Property Rights Protection Act of 2011”
    • 10am: Congressional Services Caucus holds discussion on Census employment data, broken down by congressional district
    • 2:30pm: House-Senate Conference Committee meets on H.R.3630, the “Temporary Payroll Tax Cut Continuation Act of 2011”


  • President Obama to give 3rd State of the Union Speech, focusing on economic concerns
  • Oil traded near $100/barrel in New York on concern that Iran may respond to European crude-export embargo by disrupting shipping in Persian Gulf
  • FOMC begins two-day meeting
  • Apple reports earnings
  • William Ackman says he will shield his choice to run Canadian Pacific Railway against possible loss of benefits after the retired executive’s former employer suspended pension and other payments
  • Blackstone Group said to secure more than $6b of pledged capital for a new real estate fund that will buy mainly distressed-property assets
  • The Earth will be bombarded today by strongest solar radiation storm in six years, with limited potential to affect satellites and power grids
  • Oscar nominations to be announced ~8.30am


      • Ashland (ASH) 6am, $1.00
      • EI du Pont de Nemours & Co (DD) 6am, $0.33
      • Baker Hughes (BHI) 6am, $1.32
      • Air Products & Chemicals (APD) 6am, $1.36
      • Key (KEY) 6:20am, $0.21
      • Travelers Cos (TRV) 6:30am, $1.52
      • Quest Diagnostics (DGX) 6:45am, $1.06
      • EMC (EMC) 7am, $0.46
      • Coach (COH) 7am, $1.15
      • MGIC (MTG) 7am, $(0.89)
      • Regions Financial (RF) 7am, $0.06
      • Waters (WAT) 7am, $1.50
      • Harley-Davidson (HOG) 7am, $0.22
      • Kimberly-Clark (KMB) 7:30am, $1.30
      • Verizon Communications (VZ) 7:30am, $0.52
      • Johnson & Johnson (JNJ) 7:45am, $1.09
      • Brinker International (EAT) 7:45am, $0.45
      • McDonald’s (MCD) 7:58am, $1.30
      • Rayonier (RYN) 8am, $0.49
      • Peabody Energy (BTU) 8am, $1.30
      • Cooper Industries PLC (CBE) 8am, $0.95
      • AK Steel Holding (AKS) 8:30am, $(0.39)
      • Commerce Bancshares (CBSH) 9am, $0.70
      • RF Micro Devices (RFMD) 4pm, $0.03
      • Stryker (SYK) 4pm, $1.02
      • Total System Services (TSS) 4pm, $0.31
      • Norfolk Southern (NSC) 4:01pm, $1.40
      • Canadian National Railway Co (CNR CN) 4:01pm, $1.25
      • CA (CA) 4:02pm, $0.54
      • Fusion-io (FIO) 4:05pm, $0.04
      • Yahoo! (YHOO) 4:05pm, $0.24
      • Altera (ALTR) 4:15pm, $0.42
      • Advanced Micro Devices (AMD) 4:15pm, $0.16
      • International Game Technology (IGT) 4:15pm, $0.22
      • Apple (AAPL) 4:30pm, $10.12



GOLD – both Gold and Silver backing off at their intermediate-term TREND lines of $1688 and $32.69 resistance this morning. We’re short Silver as of Friday’s rip and looking to get back on the short side of Gold (and Gold related stocks). The critical signal in our model is a breakout in 10yr UST yield > 2.03% (TREND line). Gold has to compete w/ absolute levels of “risk-free” yield.

  • Record U.S. Beef Sales Seen as Japan Reviews Curbs: Commodities
  • Oil Fluctuates as Iran Responds to European Crude Import Embargo
  • Gold Declines as Rally to Six-Week High Spurs Investor Sales
  • Copper Declines as Prices Near Four-Month High Prompt Selling
  • Sugar Climbs a 13th Session as Mexico Output Falls; Cocoa Falls
  • Soybeans Decline as Biggest Gain in Two Weeks Prompts Selling
  • India Cuts Cotton Production Estimate as Disease Hurts Crop
  • Natural Gas Rises a Third Day on Chesapeake Plans to Cut Output
  • Oil-Embargo Rally Muted by Saudi Pledge, Libya: Energy Markets
  • JBS Sale Shows Rising Demand for High-Yield Debt: Brazil Credit
  • Sieminski to Leave Deutsche Bank to Head U.S. Energy Agency
  • Cabot Production Growth Seen Cut as Gas Hits 10-Year-Low: Energy
  • Detroit Aluminum Use Means New Muscle for Cars: Chart of the Day
  • COMMODITIES DAYBOOK: Record U.S. Beef Sales Seen on Japan Review
  • LME Copper Stockpiles at Two-Year Low Signal Falling Supplies
  • West Europe Aluminum Output May Fall 500,000 Tons, Goldman Says










GREECE – the Athex Index is down -2.6% to 724 after going parabolic to the upside for the YTD. What’s next? News-flow is setting this up for central planners to come say they saved the day again – we’re all saved if this thing just goes away – funny how the dudes in Davos said Greece was a “one-off” just about now at this time LY. Greece’s TREND line = 709 on the Athex, watching that.




JAPAN – been a while since Japan was #1 in our morning macro grind, but this country’s failed Keynesian Experiment doesn’t cease to exist – the Yen getting spanked this morning after the Japanese announced they’ll miss both their topline (growth) and bottom line (budget) goals, again. Don’t forget Japan has to roll over 31.2% of its sovereign debt in 2012. That’s a lot of yens (231T).










The Hedgeye Macro Team

Perpetually Reverting

This note was originally published at 8am on January 19, 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 only thing that’s gone up for the last 12 years is my weight.”

-Keith McCullough


Two nights ago Keith and I hosted a dinner for a number of our subscribers at the beautiful Patroon restaurant in midtown Manhattan.   Keith’s quote above was in reference to asset classes generally.  Now, truth be told, Keith and I snuck away to play noon hour hockey earlier this week and he’s actually staying in pretty good shape.  Nonetheless, his analogy was an apt one.  Asset class returns are not perpetual, nor are global macro investment views.


On the latter point, the big surprise we heard at the dinner and feedback from our Q1 Themes call last week is the shock that we are getting more constructive on equities and the U.S. economy.  Yes, we are less bearish.  Not raging bulls, per se, but on the margin less bearish.  As a result we’ve upped the equity allocation in our asset allocation model to its highest level since mid-September ’11.  So, what’s driving our more constructive outlook?


First, we believe the rally in the U.S. dollar will continue to gain momentum.  The strength in the dollar is likely to be driven by a fiscal outlook in the United States that is improving, on the margin, due to automatic budget cuts via sequestration and the winding down of the Iraq war.  In addition, both political parties have signaled, at least rhetorically, the importance of getting government spending under control, an issue that will be front and center in the 2012 election, and will likely lead to further budget cuts, or the perception of such.


The other key tailwind for the U.S. dollar is monetary policy.  Since the financial crisis in 2008, the United States has led the world in accommodative monetary policy.  This is changing and will continue to change.  We believe the Fed is in a box related to its ability to implement additional quantitative easing due to an improving employment and economic growth situation.  Conversely, central banks globally have plenty of room to ease, which naturally narrows the differential between U.S. interest rates and global rates.  The most recent example of this is from China, where this morning reports suggest Chinese officials are weighing plans to relax capital requirements for the major Chinese banks.  Add to this Brazil, which cut interest rates by 50 basis points overnight and the Philippines, which cut rates for the first time since 2009. 


The primary benefit of a strong dollar is that it boosts the purchasing power of the U.S. consumer by deflating those commodities that are priced in U.S. dollars and by making global goods cheaper on a relative basis.   This is important when considering the outlook for GDP since 71% of U.S. GDP is driven by consumption.  Conversely, Eurozone government spending is almost 50% of GDP, which makes the outlook for European growth relatively bleak in comparison given the dramatic austerity being implemented in 2012.  (Incidentally, a weak European economy and euro are also positive for the U.S. dollar.)


Last year at this time, consensus U.S. GDP estimates for 2011 were at 3.2% and came down steadily all year.  It is likely that full year 2011 U.S. GDP comes in at, or under, 2%, which implies an almost 38% miss by the consensus Wall Street prognosticators.   Call it process or luck, but we started last year with a much more pessimistic view of economic growth.  Thus, for most of last year we were underweight equities and overweight fixed income, with a focus on FLAT and TLT.


This year the scenario is basically reversed.  U.S. GDP consensus growth estimates are now just above 2% for 2012.  Our models suggest a reasonable high end range of GDP growth in the U.S. could be 2.8%.  This is almost 40% above the consensus number and an economic scenario in which growth is accelerating versus last year.  Not surprisingly then, we have exited our fixed-income positions and have a much higher allocation to equities, both U.S. and global.


Currently, one of our key global equity positions is long Chinese equities via the closed end fund CAF.  As of this morning, the position has already returned more than 15% for us in the Virtual Portfolio.  Are we surprised? Well, perhaps by the rapid price appreciation, but it was a game of expectations in China.  The Chinese bears have been perpetuating an end of the world scenario for China and the Chinese benchmark equity index was down more than -20% last year.  Thus, when economic growth from China came in better than bad a couple of days ago at +8.9%, Chinese equities reacted favorably.  This is not dissimilar to the economic setup we see in the United States.


In the Chart of the Day today we’ve highlighted gold versus the U.S. dollar going back twelve years.  The key take away from the chart is that bull markets in gold have been perpetuated by bear markets in the U.S. dollar.  After gold has gone straight up for the last decade plus, it might not seem to be a contrarian call to suggest there is bubble in gold and it is potentially primed for a potential major correction, but there is major complacency related to gold.  Unfortunately for the gold bugs, nothing goes up forever, not even gold.  But if you don’t believe us, ask India, the world’s largest consumer of gold, who is set to import 54% less gold in Q4 2011 on a year-over-year basis.


If there is one truism of investing, it is that prices revert to the mean.  As Jeremy Grantham once said:


“I got wiped out personally in 1968, which was the last really crazy, silly stock market before the Internet era….After 1968, I became a great reader of history books. I was shocked and horrified to discover that I had just learned a lesson that was freely available all the way back to the South Sea Bubble.”


No asset class goes up, or down, in perpetuity.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, Shanghai Composite, and the SP500 are now $1636-1675, $109.02-111.91, $1.26-1.29, $80.31-81.61, 2220-2354, and 1290-1310, respectively.


Keep your head up and your stick on the ice,


Daryl G. Jones

Director of Research


Perpetually Reverting - Chart of the Day


Perpetually Reverting - 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%

Natural Laziness

“Laziness is built deep into our nature.”

-Daniel Kahneman


Chapters 2 and 3 in Dan Kahneman’s “Thinking, Fast and Slow” are linked by laziness. I loved it – the author really forces you to ask yourself if you really know what you don’t know.


“Highly intelligent individuals need less effort to solve the same problems, as indicated by both pupil size and brain activity. A general “law of least effort” applies to cognitive as well as physical exertion. The law asserts that if there are several ways of achieving the same goal, people will eventually gravitate to the least demanding course of action.” (page 35)


Most people in our profession are, from an academic achievement perspective, considered “highly intelligent.” Odds are that if you are a Buy-Sider paying a Sell-Side desk a commission, the Sell-Sider might even call you “really smart.”


Really? How really smart is smart? Collectively, the Old Wall’s Consensus on Global Macro risk management issues hasn’t been smart for the last 3-5 years. It’s been lazy.


Let’s take, for instance, this newly wedded concept the Street has to “Risk On” versus “Risk Off.” The entire premise of that idea is just lazy. While it may provide a framework for people to talk about risk with the least demanding course of thought or action, it doesn’t change the fact that risk is always on.


Back to the Global Macro Grind


Risk also works both ways. The #1 risk we have been beating on so far in 2012 is not Greece. It’s Global Growth. And the “risk” on Growth Expectations is to the upside.


Unless you’ve been living under a rock for the last 3 years, you’re aware the Greeks have more issues than Time Magazine. Last year alone, the Greek stock market crashed by another -51.9%. This morning, Greece is down -2.5% (and the manic media can’t find anything else to talk about but Romney’s taxes), but that doesn’t mean that the rest of the globally interconnected world ceases to exist.


Here’s how we think about the Natural Laziness of getting lulled into yesterday’s news: Market Prices Rule.


What I mean by that is that if you look at what the construct of real-time market price, volume, and volatility signals are telling you within a time horizon that’s Duration Agnostic, you can up the probability of not getting caught off-sides by consensus.


Across all 3 risk management durations in our model (TRADE/TREND/TAIL), here’s how Greece’s General Share Index looks:

  1. Immediate-term TRADE support = 669 (bullish breakout)
  2. Intermediate-term TREND support = 708 (bullish and holding that new support)
  3. Long-term TAIL resistance = 1109 (bearish)

Ok. Makes sense right? But maybe it only does because I just gave you a short-cut to think about risk within the context of the short, intermediate, and long terms. Is that good enough? Do you have an alternative process that’s better? How can we evolve it?


These are all questions that I encourage my team to push me on each and every day. Question the premise of the assumptions, particularly when our investment positioning is wrong. The market always knows something.


For now, only people who are short Greek stocks in 2012 can assure you of what the wrong position has been. Inclusive of today’s -2.5% selloff, Greece is still up +6.5% for 2012 YTD, beating the SP500 by 1.8% (1316). Who would have thunk?


In other globally interconnected news, Japan popped right back onto our risk management radar this morning with the following:

  1. Japan will not meet its top-line (GDP Growth) goals, again
  2. Japan will not meet its bottom-line (deficit) goals, again
  3. Japan is becoming increasingly annoyed with their failed Keynesian Experiment

How’s that money printing + fiscal “stimulus” model treating the old boy network in Tokyo?


Now if Japan didn’t have to roll over 31% of its debt in 2012, we might brush off what’s happening in one of the world’s Top 3 economies like Newt is trying to side-step his Freddie Mac compensation. But, we’re not dumb enough on the math to try that yet. We’re talking about rolling over 231 TRILLION Yens in debt ($3T USDs). Even by Fiat Fool standards, that’s a lot of Yens!


Relative to the US Dollar, the Japanese Yen, naturally, is down this morning on that “news.” As to why the Old Wall’s Consensus didn’t list a Japanese Sovereign Debt Crisis as part of their 2012 “biggest surprises”, we’ll just have to chalk that up to Natural Laziness too.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, Nikkei225, and the SP500 are now $1, $109.31-111.26, $, $79.63-80.44, 8, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Natural Laziness - 1. Athex


Natural Laziness - 1. VP Heut

2012 Tail Risk: Shorting EWJ Trade Update

Conclusion: The Japanese sovereign debt markets are beginning to look stressed, as noted by CDS that have widened (particularly versus the rest of Asia), as the re-financing needs of the Japanese government accelerate in 2012.  As such, we believe the massive issuance on the horizon for Japan sovereign debt will continue to limit economic growth, over the TAIL, which is negative for Japanese equities.


Position: Short Japanese equities (EWJ)


Earlier today, Keith shorted Japanese equities in our Virtual Portfolio. Adding this risk exposure is a continuation of our long-term bearish research thesis on Japan (Japan’s Jugular), which we published a presentation on in 4Q10.


In addition to that work, we’ve published detailed analysis of the puts and takes of Japan’s banking system and its exposure to JGB risk – which is on the table in a major way in 2012, as the economy has to roll over 30.9% of its QUADRILLION-plus yen sovereign debt balance via redemptions and new issuance this year. To the later point, new issuance is expected to cover 49% of all expenditures – a record high.


Thoughtful analysis of the aforementioned puts and takes has kept out of the way of the short side of the JGB/JPY markets, unlike other notable Japan bears. That said, our propriety analysis suggests that the Japanese banking system may be on the hook for over $80B in capital raises should Japan be downgraded to an A+ equivalent by two of the ratings agencies (using Basel II standards). Currently, both Fitch and Standard & Poor’s ascribe a negative outlook to the country’s LT sovereign debt. This potential headwind may erode what is the main structural demand tailwind for the JGB market (surplus liquidity in the banking system).


Ironically, our models have Japanese real GDP growth accelerating through 2Q12E, as the country comps up against one of the worst natural disasters in modern history. We think being long Japan for that trade is the kind of investment that can sucker in those that fail to do enough of the background work.  As such, we are taking the other side of this obvious (and consensus) tailwind and are electing to trade Japanese sovereign debt tail risk with a bearish bias for now.


As always, we are happy to follow up with further analysis. Email us if you’d like to start a dialogue on the subject.


Darius Dale

Senior Analyst


2012 Tail Risk: Shorting EWJ Trade Update - 1


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