This note was originally published at 8am on January 23, 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 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 $1646-1676, $109.12-111.92, $1.26-1.30, $80.01-80.86, and 1297-1320, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Crisis-Mongering - Chart of the Day


Crisis-Mongering - Virtual Portfolio

Changing Direction

“There is nothing wrong with change, if it is in the right direction.”

-Winston Churchill


When they were both green yesterday, I sold my entire US Dollar (UUP) and US Equity positions (XLY and XLU) in both the Hedgeye Portfolio and the Hedgeye Asset Allocation Model. That takes me to 91% Cash.


What changed?

  1. Growth Expectations
  2. Inflation Expectations
  3. Fiscal and Monetary Policy

Very rarely do all 3 core fundamental research factors (Growth, Inflation, and Policy) change in a 24 hour period. Very rarely has the United States of America had both its President and Federal Reserve Chief delivering US Dollar Debauchery messages on back to back days.


Rather than listen to some Keynesian Quack tell you how yesterday’s Fed message isn’t inflationary or have another Washington “forecaster” tell you that inflation doesn’t slow growth, listen to what the market is telling you this morning:

  1. Growth Expectations are falling (10-year US Treasury Yield snaps my 2.03% TREND support; Yield Spread compresses 6bps day/day)
  2. Inflation Expectations are rising (Gold, Copper, TIPs, etc. all went vertical post The Bernank’s 1230PM 1/25/12 USD Debauchery)
  3. The Growth Slowing TRADE (US Treasury Flattener, FLAT) is ripping – that’s what pancaking free market pricing of bond yields does

Now Masters of The Obvious will be quick to point out, as they tend to during any short-term hyper-inflationary move for stocks and commodities (German stocks looked awesome during the hyper-inflation of the 1920s) that this is good. No doubt it’s good for those who are long of the inflation policy – but really bad for the other 99% who get the inflation bill at the pump or in their food.


I’m not going to re-hash everything about my Globally Interconnected Economic Risk Management Model that got us to make the Growth Slowing call at this time of 2011. The model hasn’t changed. Big Government Interventions in markets have. *Reminder: they A) Shorten Economic Cycles and B) Amplify Market Volatilities.


Oh, and by the way – it’s not just a non-bank bailout Independent Research firm in New Haven, CT that gets it at this point:

  1. Jaime Dimon is explicitly calling out Bernanke for lowering long-term yields and compressing the Yield Curve
  2. Mitt Romney told Larry Kudlow last night that he’ll fire Bernanke and bring in his “own guy”
  3. The American Institute of Economic Research ( has already quantified what 0% means to the 99%

Just to recap the headline calculations out of the AIER that were released after Qe2 failed (July of 2011) in a paper titled “The Steep Cost of Cheap Money”:

  1. Zero Percent rate of return on American Savings accounts is huge income tax (it’s called interest income, confiscated)
  2. GDP lost (due to the interest income you could have spent) = upwards of $587B in US Consumption
  3. US Jobs lost (due to lost Consumption) = 2.4-4.6 million and “shaved between 1.75-3.32% to gross-domestic-product growth”

Oh, and by the way Part II – unlike the Fed who is completely politicized and dogmatized at this point, the American Institute of Economic Research is independent (neither politically or academically partisan).


Whenever the names of politicians are included in economic analysis, partisan people get emotional paralysis. Bush’s fiscal and monetary policies were as bad as Obama’s inasmuch as Jimmy Carter’s were as bad Nixon’s.


Nixon had no problems lying to the American People, but he actually told the truth on this score when he admitted “we are all Keynesians now.” Neither Bush nor Obama have been brave enough (or advised by someone analytically competent enough) about globally interconnected markets to say the same about the 1 thing they had in common – Bernanke.


To recap how the Global Macro market actually work:

  1. GROWTH: US and Emerging Market Growth is highly dependent on 71% of the US GDP number (Consumption Growth)
  2. INFLATION: Policies to Inflate (devalue the world’s Reserve Currency) slow real (inflation adjusted) growth
  3. SLOPES: since Qe2, the sequential rate of change in Growth has been highly affected by the rate of change in inflation (prices)

Bernanke and his boys will tell you inflation is “low” when it’s up and down. How else could a man tell you with a straight face that during all-time highs in the price of Oil, Food, and Gold that there is no inflation?


Since 2006, this guy hasn’t tightened monetary policy once. Whether his Qe2 Policy To Inflate slowed US GDP Growth to 0.36% in Q1 of 2011 or if it’s +733% higher at 3% GDP Growth today, he will not change as the data does. This is an embarrassment to the American flag. In order for Bernanke to have every last lemming who remains willfully blind enough to the math to believe him, he needs to fear-monger.


Fear-Mongering just when Strong Dollar = Stronger Employment = Stronger Confidence… just when things were getting better by simply having him out of the way – he’s back.


He’s telling American savers to go lever themselves up with stocks after a +96.2% run off the March 2009 lows. He’s telling Obama to give a “Mega Refi” to every one of your neighbors who levered themselves up and crushed the value of your home. He’s telling you to take 0% rate or return on your hard earned savings until 2014 and like it.


I’m telling you I’m Changing Direction. This country’s said political and academic leadership should too.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, and the SP500 are now $1676 (big TREND breakout level)-1721, $110.11-111.98, $1.29-1.31, and 1.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Changing Direction - Chart of the Day


Changing Direction - Virtual Portfolio


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TODAY’S S&P 500 SET-UP – January 26, 2012


As we look at today’s set up for the S&P 500, the range is 23 points or -1.36% downside to 1308 and 0.37% upside to 1331. 













US DOLLAR – with the back-to-back US Dollar Debauchery statements from Obama and Bernanke, the US Dollar has broken its immediate-term TRADE line of support; now the question is will it hold its $78.03 intermediate-term TREND line of support (EUR/USD TREND resist = 1.34)? Last night when KM was on Kudlow, Romney said he’d fire Bernanke – KM would too. Enter the debate.


INFLATION – Bernanke fans can say whatever they want; bottom line is that market prices don’t lie; Keynesians do – Bernanke telling savers 0% is their rate-of-return until he gets fired has created an absolute 24hr melt up in both Inflation Expectations (TIPS) + Commodity Inflation –Copper and Gold just went vertical to $3.90/lb and $1720/oz en route to test bubble highs?


91% CASH – We obviously had very little patience for Qe2’s policy to inflate and got very bearish on this Feb-Apr of 2011 because INFLATION SLOWS GROWTH. If oil, copper, and cattle prices keep ripping like this, there is a very high probability that all of Global Growth slows, sequentially, in late JAN early FEB. Not good.

  • ADVANCE/DECLINE LINE: 1561 (1325) 
  • VOLUME: NYSE 830.46 (11.82%)
  • VIX:  18.31 -3.17% YTD PERFORMANCE: -21.75%
  • SPX PUT/CALL RATIO: 1.87 from 1.78 (5.06%)


  • TED SPREAD: 52.10
  • 3-MONTH T-BILL YIELD: 0.04%
  • 10-Year: 1.95 from 1.99
  • YIELD CURVE: 1.74 from 1.77

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Chicago Fed, Dec., est. -0.10 (prior -0.37)
  • 8:30am: Durable Goods, Dec., est. 2.0% (prior 3.7% (revised))
  • 8:30am: Jobless Claims, week of Jan. 21, est. 370k from 352k
  • 9:45am: Bloomberg Consumer Comfort, week of Jan. 22
  • 10am: Freddie Mac 30-yr mortgage
  • 10am: Leading Indicators, Dec., est. 0.7% from 0.5%
  • 10am: New Home Sales (M/m), Dec., est. 1.6% from 1.6%
  • 10am: New Home Sales, Dec., est. 321k from 315k
  • 10:30am: EIA Natural Gas
  • 11am: Kansas City Fed, Jan., est. 2 (prior -4)
  • 1pm: U.S. to sell $29b 7-yr notes


      • Treasury Secretary Tim Geithner attending World Economic Forum in Davos, Switzerland
      • Quinnipiac University releases poll of Florida voters
      • Republican presidential candidates face off in Jacksonville, Fla., in debate hosted by CNN, 8pm
      • Obama to speak in Las Vegas, Denver, Detroit as part of on 3-day swing
      • House not in session, Senate in session
      • 9:30am: Senate meets to consider motion to proceed to H.J.Res.98, on increasing the debt limit


  • President Obama said to plan offering proposal to overhaul U.S. corporate tax system in Feb.
  • Treasury Secretary Geithner said he doesn’t expect Obama to ask him to stay in office if president re-elected Roche may need to raise $5.7b bid for Illumina to succeed; shrs closed 24% above Roche’s offer Sara Lee plans to buy full ownership of Senseo coffeemaker trademark from partner Philips
  • Pentagon said to plan proposal to spend ~$9.2b to buy 29 Lockheed F-35 jets in fiscal 2013 budget, 13 fewer than previously planned
  • Talks on a debt swap to avert a Greek default resume today
  • Orders for U.S. durable goods may have gained in Dec. for 3rd month, economists est.
  • Citigroup’s costs will be $2.5b-$3b lower next year as bank embarks on re-engineering, CEO Vikram Pandit says in BTV interview in Davos
  • BofA impeding investigation of loan modification practices by negotiating settlements with borrowers who must agree to keep them secret, not criticize bank in exchange for cash payments, loan relief, Arizona officials say
  • E*Trade Financial CEO sees loan portfolio declining by $600m-$650m per qtr in 2012: DJ
  • BofA investment bankers may get 75% of their year-end bonuses in stock: WSJ
  • Tablet-computer shipments more than doubled in 4Q, reflecting demand for Apple’s iPad, Amazon’s Kindle: Strategy Analytics
  • World Economic Forum coverage at DAVOS


      • Time Warner Cable (TWC) 6 a.m., $1.20
      • Ball (BLL) 6 a.m., $0.53
      • Covidien (COV) 6 a.m., $1.03
      • Nokia (NOK), 6 a.m.
      • Potash of Saskatchewan (POT CN) 6 a.m., $0.88
      • Cogeco Cable (CCA CN) 6 a.m., $1.05
      • Lockheed Martin (LMT) 6:30 a.m., $1.95
      • Eaton (ETN) 6:30 a.m., $1.12
      • AutoNation (AN) 6:45 a.m., $0.49
      • Raytheon Co (RTN) 7 a.m., $1.34
      • AmerisourceBergen (ABC) 7 a.m., $0.63
      • Baxter International (BAX) 7 a.m., $1.17
      • McCormick & Co (MKC) 7 a.m., $0.97
      • Colgate-Palmolive Co (CL) 7 a.m., $1.29
      • Zimmer Holdings (ZMH) 7 a.m., $1.34
      • Consol Energy (CNX) 7 a.m., $0.64
      • EQT (EQT) 7 a.m., $0.53
      • Ametek (AME) 7 a.m., $0.61
      • Under Armour (UA) 7 a.m., $0.60
      • Caterpillar (CAT) 7:30 a.m., $1.73
      • United Continental Holdings (UAL) 7:30 a.m., $0.11
      • Bristol-Myers Squibb (BMY) 7:30 a.m., $0.55
      • AT&T (T) 7:30 a.m., $0.43
      • Canadian Pacific Railway (CP CN) 7:30 a.m., $1.10
      • Invesco (IVZ) 7:30 a.m., $0.40
      • 3M Co (MMM) 7:30 a.m., $1.31
      • Airgas (ARG) 7:30 a.m., $0.97
      • Celgene (CELG) 7:30 a.m., $1.05
      • JetBlue Airways (JBLU) 7:30 a.m., $0.04
      • Mead Johnson Nutrition Co (MJN) 7:30 a.m., $0.51
      • Sherwin-Williams Co/The (SHW) 8 a.m., $0.83
      • Precision Castparts (PCP) 8 a.m., $2.21
      • Nucor (NUE) 9:01 a.m., $0.28
      • Celestica (CLS CN) 4 p.m., $0.26
      • Motorola Mobility Holdings (MMI) 4 p.m., $0.06
      • Chubb (CB) 4:01 p.m., $1.60
      • Federated Investors (FII) 4:01 p.m., $0.39
      • Amgen (AMGN) 4:01 p.m., $1.23
      • Starbucks (SBUX) 4:03 p.m., $0.49
      • VeriSign (VRSN) 4:04 p.m., $0.42
      • Juniper Networks (JNPR) 4:05 p.m., $0.28
      • KLA-Tencor (KLAC) 4:15 p.m., $0.65
      • QLogic (QLGC) 4:15 p.m., $0.34
      • Duke Realty (DRE) 4:29 p.m., $0.29
      • Eastman Chemical Co (EMN) 5 p.m., $0.79
      • Nstar (NST) 5:01 p.m., $0.52


  • Palladium Shortage Looms as Russian Sales Dwindle: Commodities
  • Gold Rises to Seven-Week High on Demand for Dollar Alternatives
  • Oil Gains a Second Day After Fed Commits to Low Interest Rates
  • Copper Rises for Second Day as Fed Extends Interest-Rate Pledge
  • Wheat Climbs as Declining Russian Supplies May Increase Demand
  • Cocoa Gains as Ivory Coast May Cut Tax Breaks; Sugar Prices Rise
  • Industrial Metals Have Best Annual Start in 11 Years on Demand
  • Metal Producers in Japan Brace for Tepco Power Cost Increase
  • Silver Beats Gold as Put Bet Drop Signals Gain: Chart of the Day
  • Gas Rout Lures Asia LNG Buyers Hurt by Oil Link: Energy Markets
  • Foster Sticking With Petrobras Plan Signals Glut: Brazil Credit
  • No Slower Steaming as Container Lines Run Like Clippers: Freight
  • Potash Profit Misses Estimates After Fertilizer Demand Declines
  • COMMODITIES DAYBOOK: Oil Gains as Fed Commits to Low Rates
  • Zinc May Climb 19% More on 200-Day Average: Technical Analysis





















The Hedgeye Macro Team



In preparation for WMS's FQ1 2012 earnings release Thursday afternoon, we’ve put together the recent pertinent forward looking company commentary.




  • “We've reached an inflection point in our performance, with quarterly sequential improvement anticipated in the December 2011 to be followed by what we expect to be a return to growth over prior-year periods beginning in the second half of fiscal '12.”
  • “We expect to receive additional jurisdiction approvals for these [Portal application and WAGE-NET] products by the end of December quarter, which we expect will put us on a path to resume a more normal flow of product approvals in calendar '12.”
  • “Our focus continues to be on taking cost out of the Bluebird xD and Bluebird2 cabinets through continuous improvement initiatives, and significant progress has been made over the last 12 months.”
  • “As a result of realized cost savings to-date and further expected savings throughout the remainder of fiscal 2012, we anticipate a stronger product sales margin in the second half of the fiscal year than in the first half”
  • “We still expect that revenues for fiscal 2012 will follow the pattern of most prior years where the September quarter is the lowest and revenues build in each subsequent quarter, with the June quarter being the strongest of the year”
  • "In our Gaming Operations business, we've received initial approvals in recent weeks for five innovative new Participation games including THE WIZARD OF OZ Journey to Oz, MONOPOLY Party Train, Pirate Battle, Leprechaun's Gold, and BATTLESHIP, based on the iconic board game of the same name.  In the December quarter, in those jurisdictions where these games are approved, we are installing to refresh our installed base, replacing those games whose performance has declined over time and are now nearing the end of their performance life.  With the focus on refreshing the installed base this quarter, we expect most of these placements will be replacements and not incremental to our footprint in the December 2011 quarter, but they will be the key factor in stabilizing both our footprint and average revenue per day by the end of the quarter”
  • “We expect to resume growth in the installed base and average revenue per day in our second fiscal half”
  • “So I believe Gaming Ops is well positioned once we get through this next quarter. I would not look for any improvements in Q2; as Scott mentioned, that's really a replacement market to stabilize the installed base and the win-per-day. And then second half, we should see an uptick in both the footprint and the win-per-day, and that's what we're focused on”
  • “I think that seasonality-wise, Q2 is always a challenge with the holiday season, and so forth. Although Christmas is a great week, the month of December is not a great month. So, I would guess that I would use the word stabilized…to describe what I would look for in Q2.”
  • “From approximately 300 networked gaming machines running at 14 locations at the time of our August conference call, we now have our three Portal applications on over 480 gaming machines, and including our WAGE-NET System with Remote Configuration and Download functionality, we're now either at full commercialization or trial at a total of 29 casinos globally on over 700 gaming machines…Our goal is to have 100 casinos networked by the end of June, and that's going to be an aggressive schedule but that's our internal goal here. And going forward, you'll see some meaningful revenue beginning in fiscal '12 and beyond.”
  • “But going forward, you'll see our margins get back to the 53% to 55% over the second half of the year.”

Daily Trading Ranges

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