This note was originally published at 8am on January 25, 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 I’m addicted to is winning.  This bootleg cult, arrogantly referred to as Alcoholics Anonymous, reports a 5 percent success rate.  My success rate is 100 percent.”

-Charlie Sheen


I’m not sure Keith realized that today was my birthday when he asked me to write the Early Look, rather he was likely focused on the fact that I’m Hedgeye’s resident political analyst and last night was President Obama’s fourth state of the union address.  This was also Obama’s last state of the union address ahead of the 2012 elections.


For those of you who aren’t active on the Twitter-sphere (my handle is @HedgeyeDJ if you are), the expression “#winning” was popularized by actor Charlie Sheen early last year when he started a one man campaign against the traditional world of entertainment. In effect, he was saying he wasn’t going to conform to Hollywood 1.0 any longer.  He also announced on twitter that he would continue to win and, amongst other things, the term #winning started trending in dramatic fashion.


Watching the state of the union address last night on Twitter was fascinating to say the least.  Keith has called twitter the new tape many times, and I think it’s also the new political pundit.  In terms of markets for opinion, at least in 140 characters, twitter is about as efficient as it gets.  If you make comments of interest and insight, your followers will increase and so will your influence via your Klout score. 


Last night as people were watching President Obama’s address, the key term that was trending on twitter was #fairshare and it is still trending this morning.  This morning I searched #fairshare on Twitter to get a sense for the consensus view of the speech and the general concept of #fairshare.  Here are the top tweets that came up:


@ewmonster: The defining issue of our time, is how to keep the American Dream alive.  THAT is a paraphrase worth making! #fairshare #sotu


@EconBrothers : Obama is right.  Everyone should pay their “fair share” of taxes, even those who currently pay no federal income taxes.  #FairShare #SOTU


@MonicaCrowley : And here we go again w/ the Warren Buffett warfare tax BS. #FairShare


@IAmSoSmart : I am thoroughly convinced that if democrats understood how hard I worked for my money, it would blow their tiny mind. #FairShare


@KeithMcCullough : #SOTU Word Score: #FairShare = 5, #Capitalism = 0


And my personal favorite:


@EricComedy : If Obama uses the phrase #FairShare one more time, I’m going to stomp on a live gerbil. #SOTU


In all seriousness, Obama clearly used this address to launch the key theme of his campaign, which is that he wants to, at least rhetorically, level the playing field for all Americans.  Whether that practically, or economically, makes sense is somewhat beside the point.  Certainly, in his speech last night President Obama didn’t offer much beyond platitudes.  If you don’t believe me on that last point, here is the New York Times’ interpretation:


“Mr.Obama presented a somewhat modest list of initiatives he could enact through executive authority coupled with more ambitious proposals unlikely to advance in Congress.”


In effect, there was nothing in his speech that would practically move the needle from an economic perspective.  Nonetheless, President Obama appears to be #winning.


According to InTrade this morning, President Obama’s chances of re-election have increased to 56%.  For the last eight months, this probability has been mired below or just above 50%, but in the last two weeks the election markets at InTrade are pricing in an increasing likelihood of an Obama re-election. This is in part due to the increasingly heated rhetoric and dysfunction emanating from the Republican primary.  That said, the economy has started to improve on the margin which benefits the incumbent and the President’s messages are broadly appealing.  #FairShare in 2012 is the #Hope and #Change of 2008.


One of our key criticisms of both the Obama and the George W. Bush Presidencies were their carte blanche backing of Keynesian economic policies.  In the Chart of the Day, we show the notional expansion of U.S. federal government debt under President Obama.  Under President Obama, the United States experienced the largest one year federal debt increase ever and in his first term, when complete, the United States will likely have added more than $6 trillion in debt to the national balance sheet.  This is more than both of George W. Bush’s terms combined.


The key risk of an Obama second term and a Fair Share agenda is that the growth of the federal government and its obligations continue to accelerate.  Already, the U.S. is beyond the 90% debt-to-GDP line in which long term economic growth becomes structurally impaired accorded to more than 200 years of data from Reinhart and Rogoff. In the shorter term, a view by the markets that the federal government is less focused on fiscal prudence is negative for the dollar and detrimental to our thesis that a strong dollar will increase the 70% of GDP that is consumption.


In the chart of the day, I’ve actually included a picture of the Bassano Dam, which is a large irrigation dam south of my hometown of Bassano, Alberta.  When it was constructed in 1915, the Bassano Dam was the largest man made irrigation dam in the world and a game changer for the agricultural community of southern Alberta.  It was a project that was funded by the government.  The point being that not all government funded projects are negative for the economy.  On the other hand, government spending for the sake of ambiguous goals that lack an ROI, like #FairShare, is only likely to add to our debt balance and constrain future consumption and growth.


Since both parties like to channel Ronald Reagan these days, I’ll end with a quote from the Gipper:


“We must not look to government to solve our problems. Government is the problem.”




Our immediate-term TRADE ranges of support and resistance for Gold, Oil (Brent), EUR/USD, US Dollar Index, German DAX, and the SP500 are now $1656-1678, $109.44-110.85, $1.28-1.31, $79.41-80.43, 6359-6503, and 1304-1325, respectively.


Keep your head up and your stick on the ice,


Daryl G. Jones

Director of Research


#Winning - Chart of the Day


#Winning - Virtual Portfolio



TODAY’S S&P 500 SET-UP – January 30, 2012


As we look at today’s set up for the S&P 500, the range is 29 points or -1.47% downside to 1297 and 0.73% upside to 1326. 













TREASURIES – rising inflation expectations slow growth expectations – the 10yr yield is getting smoked this morning down to 1.86% and is right back into what we call a Bearish Formation. The Yield Spread has compressed 13bps in a week with Bernanke leaning on the long-end. Jaime Dimon won’t be pleased; neither will US Equity investors looking for rotation out of bonds.

  • ADVANCE/DECLINE LINE: 857 (918) 
  • VOLUME: NYSE 850.21(-1.89%)
  • VIX:  18.53 -0.22% YTD PERFORMANCE: -20.81%
  • SPX PUT/CALL RATIO: 1.94 from 2.03 (-4.43)


  • TED SPREAD: 50.03
  • 3-MONTH T-BILL YIELD: 0.05%
  • 10-Year: 1.85 from 1.89
  • YIELD CURVE: 1.65 from 1.68

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Personal Income, Dec., est. 0.4% (prior 0.1%)
  • 8:30am: Personal Spending, Dec., est. 0.1% (prior 0.1%)
  • 10:30am: Dallas Fed., Jan., est. 0.5 (prior -3.0)
  • 11am: Export inspections: corn, soybeans, wheat
  • 11:30am, U.S. to sell $31b 3-month, $29b 6-month bills
  • U.S. Treasury Releases Quarterly Borrowing Estimates


    • Quinnipiac University releases latest Fla. poll, a day before Republican primary, 8am
    • House not in session; Senate in session
    • House subcommittee field hearing on drilling in Cuba, Bahamas 10am


  • EU leaders gather for their first summit of 2012 as a deteriorating economy, struggle to complete Greek debt writeoff risk sidetracking efforts to stamp out financial crisis
  • ABB to buy Thomas & Betts for $72/shr, or $3.9b, to expand its North American distribution network, boost low-voltage equipment
  • Facebook said to plan IPO filing as early as coming week
  • U.S. consumer purchases in Dec. may have risen 0.1% for a third consecutive month, economists est.
  • Euro-area confidence in the economic outlook improved less than forecast in January
  • Ex-UBS trader Kweku Adoboli pleads not guilty over $2.3b loss
  • El Paso is in advanced talks to sell its oil-exploration unit to a group led by Apollo Global for ~$7b: WSJ
  • Citigroup Chairman Richard Parsons considers stepping down: WSJ
  • Bank of America named Christian Meissner sole leader of global investment banking
  • Morgan Stanley, Credit Suisse, Citigroup made some of the yr’s biggest pay cuts in compensation, avg. as much as 30%, according to data compiled by Bloomberg
  • TonenGeneral agreed to buy partner Exxon’s Japanese business for $3.9b
  • Delta Air Lines is studying a bid for US Airways Group
  • "The Grey,’’ an action film starring Liam Neeson, opened in first place in U.S., Canadian cinemas with $20m
  • Fed’s pledge to keep interest rates low, possibly boost asset purchases will release cash into system, helping equities, Templeton’s Mark Mobius tells Bloomberg
  • No IPOs scheduled: Bloomberg data


    • Wolverine World Wide (WWW) 6:30am, $0.45
    • Wendy’s (WEN) 8am, $0.04
    • Gannett (GCI) 8:15am, $0.68
    • Hologic (HOLX) 4:01pm, $0.32
    • Plum Creek Timber (PCL) 4:04pm, $0.39
    • McKesson (MCK) 4:10pm, $1.38
    • Graco (GGG) 4:30pm, $0.51
    • Reinsurance Group of America (RGA) 5pm, $1.84
    • SL Green Realty (SLG) Aft-mkt, $1.00


  • Hedge-Fund Bulls Add to Bets as Rally Accelerates: Commodities
  • Gasoline Shutdowns Spur Record Bullish Futures: Energy Markets
  • Gold Drops From Seven-Week High as Euro Declines, Demand Weakens
  • Natural Gas Rises for Second Day on Forecast for Colder Weather
  • Copper Falls for Second Day on Speculation Prices Rose Too High
  • Soybeans, Corn Drop as Rains Ease South American Crop Concern
  • Cocoa Falls on Ivorian Forward Sales Speculation, Sugar Advances
  • Vietnam May Export up to 3.5 Million Tons of Rice in First Half
  • EU to Decide in July on Free Post-2012 CO2 Permits for Power
  • Africa Seen Mirroring Brazil in Atlantic Coast Drilling:Energy
  • Rubber May Gain to Highest Since September: Technical Analysis
  • JFE Forecasts First Annual Loss as Slowing Economies Hurt Demand
  • Barclays Says Sell Usiminas on Steel Imports: Brazil Credit
  • COMMODITIES DAYBOOK: Hedge-Fund Bulls Add to Bets as Rally Gains
  • Oil Falls a Second Day on Speculation EU Debt Talks May Fail
  • Gold January Rally Pointing to Record $2,300: Technical Analysis
  • Kloeckner Drops as CEO Sees Lower Steel Demand: Frankfurt Mover










GERMANY – if the Greeks think they’re going to play a game of chicken with the Germans, we’ll take the Germans. Critically, the DAX backs off its long-term TAIL line of 6503 hard this morning as European stocks and bonds finally have a down day of consequence.




ASIA – the Chinese came back from holidays and just sold (we’re long Chinese Equities). They should have because Bernanke just jammed them with a commodity inflation tax and that’s the #1 thing, on the margin, that slows Chinese, Indian, etc growth. India’s Sensex(we’re short) failed at its TAIL line of 17,643 resistance and the Nikkei (we’re short) closed down for 3rd consecutive day.










The Hedgeye Macro Team



The Macau Metro Monitor, January 30, 2012




Sands China Ltd said visitors to its Macau casinos grew by 5-6% to more than 1 million during the Chinese New Year (Jan 23-29) holidays.  The Venetian Macao casino drew 750,000 visits, Sands Macao had 160,000 and the Plaza Macao had 150,000.



real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.


“The conclusion is straightforward: self-control requires attention and effort.”

-Daniel Kahneman


That’s a very simple quote from a very important chapter in “Thinking, Fast and Slow” titled The Lazy Controller. I personally have a lot of work to do on this front. As an athlete, I was much better at this than I am as an investor – control what you can control.


It required some attention and effort to sell into the stock and commodity market inflations inspired by The Bernank Tax last week. With the S&P futures trading at 1305 this morning, US stocks are down over -2% from Thursday morning’s intraday 2012 high of 1333.


With China coming back from the holiday closing down -1.5% overnight, it looks like I should have sold that too (I sold everything else). The Chinese do not appreciate US policies to inflate because food and energy inflation slows Chinese growth.


Back to the Global Macro Grind


I make a lot of mistakes. The biggest ones tend to occur when I either get influenced by someone else’s process and/or when I don’t let the market stop me out of my own.


Thinking fast about the immediate-term while thinking slow about the long-term is the holy grail of being at what Kahneman calls “cognitive ease.” I can’t work any harder – so for me, at this stage of my career, my goal is to work smarter.


I think Kahneman nails my own issues to the boards in saying that, sometimes, “too much concern about how well one is doing in a task sometimes disrupts performance by loading short-term memory with pointless anxious thoughts.” (page 41)


But, most of the time, that’s our over-supplied profession’s short-term cross to bear more than it is my own – and we can turn that regressive energy into positive P&L by coming to the most straightforward conclusion, fast.


As a reminder, our primary conclusions about Big Government Interventions in markets for the last 4 years has been:


1.       They Shorten Economic Cycles

2.       They Amplify Market Volatility


This is the #1 reason why I am such a bull on stabilizing/strengthening the #1 factor in my Global Macro Model that drives short-termism in global market prices/volatilities – the US Dollar Index.


Last week’s price action doesn’t lie, Keynesian policy makers do. With the US Dollar down -1.6% week-over-week, here’s what the big stuff did:

  1. CRB Index (18 commodities) Inflation = straight up +1.6%
  2. US Stocks = flat (Dow down -0.5%; SP500 up +0.1%)
  3. US Treasuries = 10-year yields dropped -6.4% to 1.89%



1.       Inflation Expectations were rising

2.       Growth Expectations were falling


And, again, that’s how my risk management model rolls:

  1. Policy drives currency
  2. Currency debauchery drives inflation expectations
  3. Inflation expectations drive growth (and margin) expectations

If you go back and analyze every single big investment mistake I have made in the last 13 years (I have), unless there’s something like a take-out in one of my short positions (I was short Reebok when Adidas bought them), almost all of the time I was long something where Growth Slowed and Margins Compressed.


That’s why I think, fast and slow, about Countries/Economies this way. Ultimately, on the margins of Growth and Inflation, they act like companies.


I know there’s a lot of controversy around my macro views. I know there’s a lot of emotion in what we do. I know I should have been long Gold last week. I know what I know.


What I don’t know is what really matters to me. That’s why I need the Self-Control to Embrace Uncertainty and let the market tell me what to do next.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, Shanghai Composite, German DAX, and the SP500 are now $1, $110.12-112.06, $1.29-1.31, 2, 6, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Self-Control - Chart of the Day


Self-Control - Virtual Portfolio

Weekly Asia Risk Monitor: Silent, but Japan

Conclusion: As predicted, the silence of Lunar New Year brought forth a largely uneventful week in Asia. Ahead of next week’s headlines, which will hit fast and furious amid a bevy of economic data releases, we take a moment to briefly focus on Japan from a fiscal policy perspective – especially in light of the negative long-term fundamentals that were reported this week.


Virtual Portfolio Positions in Asia: Long Chinese equities (CAF); Short Indian equities (INP); Short Japanese equities (EWJ).



All % moves week-over-week unless otherwise specified.

    • Median: +0.8%; High: India +3%
    • Low: Philippines -1.4%
    • Callout: Thailand +12.1% over the last three months vs. a regional median of +0.1%
  • FX (vs. USD)
    • Median: +1.3%
    • High: Malaysian ringgit and New Zealand dollar +2.2%
    • Low: Indonesian rupiah -0.2%
    • Callout: New Zealand dollar +11.3% over the last two months vs. a regional median of -0.1%
    • High: Philippines +51bps
    • Low: Indonesia -10bps
    • Callout: India -92bps over the last six months
    • High: India +19bps
    • Low: Indonesia -9bps
    • Callout: Australia +15bps YTD
    • High: India +19bps
    • Low: Philippines -51bps
    • Callout: Australia +15bps YTD
  • 5YR CDS
    • Median: -3.9%
    • High: China, Thailand, S. Korea, and Thailand all flat wk/wk
    • Low: Indonesia -9.9%
    • Callout: Japan +23.6% over the last three months vs. a regional median of +3.2%
    • Median: flat wk/wk
    • High: India +12bps
    • Low: Singapore 4bps
    • Callout: China -61bps/-28.3% over the last three months vs. a regional median of -1.3%
    • Median: flat wk/wk
    • High: India +40bps
    • Low: Thailand -25bps
    • Callout: India +137bps/+17% over the last six months vs. a regional median of -1%
    • The gradual receding of European sovereign debt risk since NOV has been supportive of foreign inflows into Asian capital markets, with the JPM Asian Dollar Index garnering a +97% correlation to the MSCI AC Asia Pacific Equity Index on a six-week basis.

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



 On Monday, we’ll be releasing the second installment of our Japan’s Jugular thesis, which details our long-term research and risk management views on the country.  The following charts are a sneak peak at what we promise will be a thought-provoking slide deck:


The year 2012 has the potential to be a rather volatile year for the JGB market, with a few key months worth monitoring from a bond auction perspective:


Weekly Asia Risk Monitor: Silent, but Japan - 1


Relative widening in the CDS markets suggests that this incremental credit risk is being priced in, on the margin:


Weekly Asia Risk Monitor: Silent, but Japan - 3


If Japan does face an environment of sovereign debt challenges this year, the Bank of Japan has limited resources to step in and calm the market under current statutes (which, as we’ve learned, can always be changed mid-game):


Weekly Asia Risk Monitor: Silent, but Japan - 2



Growth Slowing’s Bottom:

  • Japan: Export growth slowed in DEC to -8% YoY vs. -4.5% prior. The country posted its first annual trade deficit since 1980, driven by the strong yen and weak external demand on the export front and a surge in post-tsunami energy imports. Japanese nuclear power generation remains -85.3% below pre-crisis levels and will face structural political headwinds going forward.
  • Japan: Retail Sales growth accelerated in DEC +2.5 YoY vs. -2.2% prior, as Japanese consumers (some flush w/ insurance payouts) took advantage of the first post-crisis Holiday Season to treat themselves.
  • Japan: The Bank of Japan lowered its economic growth outlook for FY12 to +2% from +2.2% prior while maintaining is +0.1% CPI target.
  • Hong Kong: Export growth slowed in DEC to +7.4% YoY vs. +2% prior.
  • South Korea: Real GDP came in essentially flat on a YoY basis in 4Q: +3.4% vs. +3.5%. On a QoQ basis, growth slowed to +0.4% vs. +0.8%.
  • South Korea: Korea’s JAN Business Survey came in slightly better than the DEC version, with the Manufacturing Index ticking up to 81 (from 79) and Non-Manufacturing Index holding flat at 79.
  • Thailand: Rebounding from generational flooding, Thailand’s Manufacturing Production growth accelerated in DEC to -25.8% YoY vs. -47.5% prior. Capacity Utilization ticked up as well: 52.3% vs. 40.5% prior.

King Dollar:

  • Japan: CPI accelerated in DEC to -0.2% YoY vs. -0.5%. Any erosion of Japan’s real interest rate advantage applies pressure, on the margin, upon JPY/JGB assets relative to the USD/USTs.
  • India: Amid receding inflation, the Reserve Bank of India lowered the country’s Cash Reserve Ratio -50bps to 5.5%, which should add around 320B rupees ($6.4B) in liquidity for Indian banks. Ironically, Indian O/N Interbank Rate closed up +40bps wk/wk, indicating that at least some lenders were anticipating perhaps a greater degree of easing (rate cuts). Refer to our Thursday note titled “Re-Shorting India: INP Trade Update” for more details regarding the scope for monetary easing in India.
  • Singapore: CPI slowed in DEC to +5.5% YoY vs. +5.7% prior. More importantly, the Monetary Authority of Singapore said that it expects inflation to average +2.5-3.5% in 2012 – a slowdown that would give it room to ease by revaluating the Singapore dollar’s USD-peg lower.
  • Thailand: The Bank of Thailand cut the country’s Benchmark Interest Rate -25bps to 3%.
  • Australia: Australia came in with some mixed-to-slightly dovish 4Q inflation data: CPI slowed to +3.1% YoY from +3.5% prior; Core CPI accelerated to +2.6% YoY vs. +2.4% prior; and PPI accelerated to +2.9% YoY vs. +2.7% prior. From a monetary policy perspective, this data doesn’t force the RBA to react dramatically in either direction.


  • China: Xi Jinping, the likely candidate to replace Hu Jintao as China’s next president in MAR '13, will likely be a catalyst for China to take additional steps toward free-market capitalism, based upon his economically liberal reforms as party chief of the Zhejiang province.
  • China: Chinese property prices need to decline an additional -30% in various areas to reach a “reasonable” level, according to He Keng, who serves as deputy director of the National People’s Congress. This is in-line with our view that China will keep its “foot on the brake” with regards to its property market for the foreseeable future.
  • Japan: Per the Japanese Cabinet Office, the country will likely miss its goal of balancing the budget by at least fiscal 2020 – even if it doubles the consumption tax to 10%! Slow projected growth (+1% per annum) and an unavoidable surge in entitlement spending will continue to grow Japan’s sovereign debt load well beyond the ¥1,086,000,000,000,000 (QUADRILLION) its projected to rise to in FY13.
  • Japan: Understanding the growing urgency to tackle the challenges above, the Diet is debating a DPJ-backed bill that would increase the consumption tax +300bps to 8% in 2014 (followed by another +200bps hike in 2015). The bill, which is opposed by 60% of Japanese voters, is unlikely to pass, as LDP appears to not want Noda’s administration to take credit for attempting to finally tackle the nation’s fiscal imbalances despite having similar goals in mind. Amid the political squabbling, which Standard & Poor’s cited as a reason for another [potential] downgrade, the Japanese public assigns a 17 and 16% approval rating for the DPJ and LDP, respectively.


Key economic data releases and policy announcements:

    • Philippines: 4Q Real GDP
    • New Zealand: DEC Services PMI
    • Japan: JAN Manufacturing PMI ; DEC: Unemployment Rate; DEC: Industrial Production
    • South Korea: DEC Industrial Production; DEC Service Industry Output
    • Singapore: 4Q Unemployment Rate
    • Taiwan: DEC Unemployment Rate
    • Australia: DEC NAB Business Sentiment; DEC Private Sector Credit
    • China: JAN Manufacturing PMI (2x)
    • Japan: DEC: Construction Orders; DEC Housing Starts; JAN Small Business Confidence
    • India: JAN Manufacturing PMI
    • South Korea: JAN CPI; JAN Manufacturing PMI; JAN Trade Data
    • Indonesia: JAN CPI; DEC Trade Data; JAN Consumer Confidence (2x)
    • Thailand: DEC: Business Sentiment Index; DEC Trade Data; JAN CPI
    • Taiwan: 4Q Real GDP; JAN Manufacturing PMI
    • Australia: JAN Manufacturing PMI; DEC New Home Sales; 4Q House Price Index
    • Malaysia: Monetary Policy Decision
    • Japan: JAN Vehicle Sales; JAN Monetary Base
    • India: DEC Trade Data
    • Singapore: JAN Manufacturing PMI
    • Australia: DEC Trade Balance
    • China: JAN Services PMI (2x)
    • Hong Kong: DEC Retail Sales; JAN Manufacturing PMI
    • India: JAN Services PMI
    • Australia: JAN Services PMI
    • None

Darius Dale



Weekly Asia Risk Monitor: Silent, but Japan - 4


Weekly Asia Risk Monitor: Silent, but Japan - 5


Weekly Asia Risk Monitor: Silent, but Japan - 6


Weekly Asia Risk Monitor: Silent, but Japan - 7


Weekly Asia Risk Monitor: Silent, but Japan - 8


Weekly Asia Risk Monitor: Silent, but Japan - 9


Weekly Asia Risk Monitor: Silent, but Japan - 10


Weekly Asia Risk Monitor: Silent, but Japan - 11

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 80.45%
  • SHORT SIGNALS 78.38%