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THE M3: COTAI APPLICATIONS; S'PORE CASINO FINE; S'PORE VISITATION

The Macau Metro Monitor, February 6, 2012

 

 

TWO COTAI GRANTS TO BE APPROVED Macau Daily Times

Two of three Cotai land grant applications could be approved within this year, Lands and Public Works Bureau (DSSOPT) director Jaime Carion said.  WYNN, SJM, and MGM have all submitted applications for a land concession in Cotai.  

 

Carion stressed that the approval process of these projects was difficult, especially when it comes to the calculation of land premiums, overall construction area and fire safety hazards.  “In terms of the proposal the operators submitted to the government, they have to be do-able technically, architecturally and legally – then we enter the approval process,” Carion explained.

 

MBS, RWS FINED FOR NOT COMPLYING FULLY WITH SOCIAL SAFEGUARD REQUIREMENTS Today Online

The Casino Regulatory Authority of Singapore (CRA) has fined Marina Bay Sands S$255k and Resorts World Sentosa S$130k for breaching the Casino Control Act from Oct 28, 2010 to April 30, 2011 and from Aug 15 2010 to April 30, 2011, respectively.  RWS was also separately censured for five cases of similar breaches.

The breaches include the failure to prevent Singapore citizens and permanent residents without valid entry levies, miniors and those with an exclusion order from entering and/or remaining on the casino premises.

INTERNATIONAL VISITOR ARRIVALS BY REGION/COUNTRY OF RESIDENCE STB

Singapore visitor arrivals rose 6.4% YoY in Nov 2011, the lowest monthly visitor growth since Oct 2009.  Mainland China visitors grew 7% in Nov 2011.

 

THE M3: COTAI APPLICATIONS; S'PORE CASINO FINE; S'PORE VISITATION - SPORE


THE HEDGEYE DAILY OUTLOOK

 

TODAY’S S&P 500 SET-UP – February 6, 2012

 

As we look at today’s set up for the S&P 500, the range is 26 points or -1.78% downside to 1321 and 0.16% upside to 1347. 

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - one

 

THE HEDGEYE DAILY OUTLOOK - tho

 

THE HEDGEYE DAILY OUTLOOK - three

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 1713 (1303) 
  • VOLUME: NYSE 905.31 (11.71%)
  • VIX:  17.10 -4.89% YTD PERFORMANCE: -26.92%
  • SPX PUT/CALL RATIO: 1.29 from 1.99 (35.18%)

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 45.58
  • 3-MONTH T-BILL YIELD: 0.07%
  • 10-Year: 1.92 from 1.92
  • YIELD CURVE: 1.69 from 1.69

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:55am: St. Louis Fed President James Bullard speaks on inflation targeting in Chicago; media Q&A
  • 11am: Export inspections: corn, soybeans, wheat
  • 11:30am: U.S. to sell $33b 3-month, $31b 6-month bills
  • 12:15pm: Dallas Fed President Richard Fisher speaks at Institute of International Finance on economy, monetary outlook
  • 12:15pm: IMF’s Olivier Blanchard speaks on global outlook at Carnegie Endowment for International Peace

GOVERNMENT:

  • VP Joe Biden speaks at Florida State University on tuition
  • 11am: House Majority Leader Eric Cantor, R-Va.; House Majority Whip Kevin McCarthy, R-Calif.; speak on economic growth, job creation at YG Network event
  • Congress:
    • House Rules Committee meets on line-item veto, budget transparency, 5pm

WHAT TO WATCH: 

  • Greek PM Lucas Papademos, party leaders agreed to spending cuts this year equal to 1.5% of GDP
  • Micron Technology CEO Steve Appleton’s death may delay DRAM industry consolidation
  • States must decide by today on proposed $25b nationwide settlement over foreclosure practices; some balking on bank liability releases
  • Lawmakers in the European Parliament’s economic and monetary affairs committee will discuss proposals to toughen rules against insider trading
  • PepsiCo said to seek to recruit former Wal-Mart executive Brian Cornell for key job
  • Great Atlantic and Pacific Tea Co. reorganization plan set for approval at confirmation hearing
  • AMR’s American Airlines may try to buy rival after leaving Chapter 11, CEO Tom Horton said
  • HTC forecast lower 1Q rev. that trails est.
  • U.S. will work with allies to put “immense pressure” on Syrian President Bashar al-Assad to step down after Russia vetoed resolution seeking to end fighting
  • Mitt Romney wins Nevada caucuses; Gingrich vows to press on

     EARNINGS:

    • CNA Financial (CNA) 6am, $0.70
    • Humana (HUM) 6am, $1.21
    • Loews (L) 6am, $0.90
    • Towers Watson & Co (TW) 6am, $1.20
    • Hasbro (HAS) 6:30am, $1.05
    • Nielsen Holdings (NLSN) 6:30am, $0.49
    • Lazard Ltd (LAZ) 7am, $0.38
    • HCA Holdings (HCA) 8am, $0.76
    • Sysco (SYY) 8am, $0.44
    • UDR (UDR) 8am, $0.34
    • National Retail Properties (NNN) 8:30am, $0.40
    • USG (USG) 8:30am, $(0.72)
    • NCR (NCR) 4pm, $0.56
    • Torchmark (TMK) 4pm, $1.24
    • Unum Group (UNM) 4pm, $0.75
    • Veeco Instruments (VECO) 4pm, $0.65
    • American Capital (AGNC) 4:01pm, $1.16
    • Anadarko Petroleum (APC) 4:01pm, $0.63
    • Coinstar (CSTR) 4:01pm, $0.65
    • Yum! Brands (YUM) 4:02pm, $0.74
    • Amylin Pharmaceuticals (AMLN) 4:05pm, $(4.23)
    • Leggett & Platt (LEG) 4:05pm, $0.21
    • PMC-Sierra (PMCS) 4:05pm, $0.13
    • PartnerRe (PRE) 4:05pm, $(2.09)
    • Dun & Bradstree (DNB) 4:15pm, $2.11
    • BRE Properties (BRE) 4:30pm, $0.56
    • Pioneer Natural Resources Co (PXD) 4:30pm, $1.04

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)


GOLD – down another -1.2% this morning after getting beat up a bit on Friday. We should remind people that what goes straight up will eventually come down, but Gold is a buy on red provided that UST Yields remain in a Bearish Formation (10s = 1.91% this morning, continuing to signal that US Growth Slowing in FEB vs JAN is the call to make). Gold’s immediate-term TRADE support = $1685. We’ll buy that and UST bonds on weakness.

  • Speculators Raised Bullish Wagers to 12-Week High: Commodities
  • Gold Declines in London as Stronger Dollar Cuts Investor Demand
  • Crude Declines on Greece Concern; Brent Crude Premium Widens
  • Copper Falls as Euro-Region Debt Crisis May Sap Chinese Growth
  • Wheat Gains on Concern Low Temperatures Damaged European Crops
  • Coffee Falls as Brazil’s Output Seen Increasing 17%; Sugar Rises
  • U.K. Gas Rises to 5-Year High as Cold, Exports Sap Storage
  • Aramco Cuts Most Asia Premiums; Iran Inspected: Persian Gulf Oil
  • Naphtha Crack Rebounds; Gunvor Buys Fuel Cargoes: Oil Products
  • Iran Crude Ban Difficult Without India, China: Chart of the Day
  • Hedge Funds Bullish on Gas Before Rally Fizzles: Energy Markets
  • Noble Names Former Goldman Asia Chief Alireza as Next CEO
  • Nine U.K. Power Plants Shut: Feb. 6 Generator Report (Table)
  • Speculators’ Bullish Bets at 12-Week High
  • Iran Sanctions Bid Targets Oil, Tanker Companies to Cut Exports
  • BHP Billiton Coal Workers in Australia Vote to Resume Strikes
  • O’Malley Plans U.S. IPO After Wrong Way Bet on Petroplus: Energy

THE HEDGEYE DAILY OUTLOOK - four

 

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - ffive

 

 

EUROPEAN MARKETS


FRANCE – keep an eye on the CAC because it just failed at its long-term TAIL line 3503 resistance this morning. Unlike Germany’s DAX (up +14% YTD and comfortably above long-term TAIL support of 6501), the CAC, MIB, and IBEX indices remain bearish TAILS. If they all continue to fail here and the Greek thing isn’t “news” anymore, what happens next?


THE HEDGEYE DAILY OUTLOOK - six

 

 

ASIAN MARKETS


CHINA – interesting, but not surprising, to see Chinese stocks fail at intermediate-term TREND resistance of 2342 on the Shanghai Comp last night; this week we’ll get inflation data out of China (Wed) and there’s a good chance its inflationary (sequentially) vs what we’d been calling Deflating The Inflation (DEC).

 

THE HEDGEYE DAILY OUTLOOK - seven

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - eight

 

 

 

The Hedgeye Macro Team

 


Black Gold

This note was originally published at 8am on February 01, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

"In my humble opinion, we should now have reached peak oil. So it is high time to close this critical chapter in the history of international oil industry and bid the mighty peak farewell."  

- Ali Samsam Bakhtiari, Vice President of the National Iranian Oil Company 

 

To say that oil makes the world go ’round is an understatement.   Every day we consume almost 85 million barrels of oil.  At $112 per barrel, the current price of Brent oil, this is $9.3 billion of oil consumed every day, or $3.4 trillion per year. Global GDP is estimated at just over $65 trillion, so the cost of oil itself, setting aside additional refining, distribution, and marketing costs for oil and oil products, is more than 5.2% of global GDP.

 

A meaningful move in the price of oil has a clear and definite impact, all things equal, on GDP.  While it is not a zero-sum game, as global consumers spend more on oil and energy products, they clearly spend less in other areas. 

 

The value of the U.S. dollar is a key driver of the direction of oil.  In fact, the correlation of Brent to the U.S. dollar on a three year duration is -0.67.  Globally, oil is priced in U.S. dollars, so dollar down equates to oil up, and vice versa. 

 

As we’ve reiterated many times, dovish U.S. monetary policy is a key driver of the price of the U.S. dollar.  In turn, as noted above, the U.S. dollar inversely drives the price of global commodities priced in U.S. dollars.   Keith has started calling this The Bernanke Tax.   By keeping interest rates and monetary policy at levels not seen even in the Great Depression, Chairman Bernanke is explicitly adopting a weak dollar policy.  As oil and other commodities prices inflate, they take global GDP share.  Unfortunately, what’s good for the oil company, is negative for the consumer.

 

In the United States, The Bernanke Tax is seen most directly on purchases of gasoline for motor vehicles.  According to a recent report in Scientific American, Americans spent more than $490 billion on gasoline in 2011.  This was an increase of more than $100 billion over 2010, despite the number of miles being driven in the United States remaining relatively flat.  In aggregate, U.S. consumption of oil as a percentage of GDP very closely parallels the global numbers at just over 5%.

 

The other key factor, setting aside geopolitical concerns for the time being, in analyzing oil is global supply, specifically the idea of peak oil.  U.S. geologist M. King Hubbert is widely considered the father of peak oil theory.  Hubbert first created peak oil models in 1956 to accurately predict that United States oil production would peak between 1965 and 1970.   Models have since been used to predict, with reasonable accuracy, the peak of various fields and regions around the global.

 

Tomorrow, at 11am EST we will be hosting a conference call with geologist and renowned peak oil theorist, Jeffrey Brown, in a presentation call titled, “Peak Oil: Fact or Fiction?”.  (If you don’t subscribe to our energy vertical and would like details on the call, please email sales@hedgeye.com .  Obviously our research isn’t pro bono, but our Head of Sales Jen Kane will work with you.) Jeffrey has prepared a detailed presentation that outlines the case and support for peak oil, and much higher oil prices. 

 

Despite the rapidly accelerating price of oil over the last decade, the concept that global oil production is peaking is far from mainstream.  In fact, investors polled at a Credit Suisse energy conference revealed that 94% of investors believe that peak oil is at least twenty years or more away or will never occur.  As well, energy company earnings only make up 12% of SP500 earnings versus 30% in 1980.

 

Peak oil advocates point to a multitude of supporting evidence to defend their case.  The historical evidence revolves around looking at the production of a number of the world’s largest oil producing areas, most notably the North Sea and the continental United States.  An analysis of the peaking of these oil producing areas follow very similar patterns of decline, which are supporting evidence of M. King Hubbert’s models.  In effect, oil is a finite resource, which on a global basis has very predictable decline patterns.

 

The other, and more obvious, support for peak oil is simply the price of oil. Over the course of the last decade, the price of Brent oil is up 454%.  In a typical commodity market without supply constraints, or really any type of market for that matter, production should increase to create greater supply to offset dramatic price hikes.  In the last decade global oil producers have seemingly been able to grow production at a level that offset accelerating prices.  The domestic natural gas market is the contra example of this as accelerating prices routinely lead to more production and a natural correction in price. 

 

The counter case for peak oil is that there is more oil out there, we simply have to explore to find it and invest to get it out of the ground.  In fact, our friend the ever thoughtful Peter Orszag, recent penned an article for Bloomberg flagging the impact that development of fracking technology in the United States has had on oil production by increasing access to so called “tight oil”.  As Orszag writes:

 

“In 2010, oil companies produced 5.5 million barrels per day of domestic crude [in the U.S.].  The Energy Information Administration estimates that figure will rise to 6.7 million barrels per day by 2020, mostly because of the continued development of tight oil, in combination with the development of offshore resources in the Gulf of Mexico.” 

 

Assuming that EIA’s forecasts prove correct, U.S. oil production is on a path to grow 22% over the next decade and reach aggregate daily production levels not seen since 1994.  If this occurs, the idea of peak oil becomes seriously questionable.

 

So, is peak oil fact, or fiction? We will dig into this debate tomorrow morning at 11 am EST with peak oil expert Jeffrey Brown.  While these types of discussions are rarely conclusive, this conference call will outline the key theory behind peak oil, which will enable us to evaluate its validity as data points reveal themselves in the coming years.

 

Regardless of the side you are on in the peak oil debate, J. Paul Getty left us with one truism about oil:

 

“Formula for success: rise early, work hard, strike oil.”

 

I’d actually add to that slightly:

 

“Formula for success: rise early, work hard, strike oil, AND subscribe to Hedgeye.”


Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Black Gold - peak oil early look chart

 

Black Gold - VP heut


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.

MONDAY MORNING RISK MONITOR: POSITIVE MOMENTUM SLOWS WHILE THE SHORT-TERM SETUP LOOKS NEGATIVE

*Interbank risk has been one of the most important gauges YTD for the outperformance in the big cap Financials. We've quantified what the improvement in Euribor/OIS means for each of the Moneycenter banks along with GS and MS. It's worth noting that Euribor/OIS ticked down again last week vs. the week prior, but it's also important to note that the amount of improvement was very small, falling less than one basis point. The TED Spread, however, showed sharp improvement week over week.

 

* Tightening Bank CDS in both American and European financials mirror what we're seeing in the equity market. 

 

* All Downside from Here - In spite of the generally receding risk environment, our firm's Macro quantitative model indicates that in the short term there is 3.5% downside in the XLF vs. 0.0% upside. This is part of the reason we shorted PNC on Friday.   

 

* The MCDX measure of municipal default risk continued to fall sharply week over week.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 12 improved / 1 out of 12 worsened / 6 of 12 unchanged

 • Intermediate-term(WoW): Positive / 8 of 12 improved / 2 out of 12 worsened / 2 of 12 unchanged

 • Long-term(WoW): Negative / 1 of 12 improved / 7 out of 12 worsened / 4 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: POSITIVE MOMENTUM SLOWS WHILE THE SHORT-TERM SETUP LOOKS NEGATIVE - Summary

 

1. US Financials CDS Monitor – Swaps tightened for 27 of 27 major domestic financial company reference entities last week.

   

Tightened the most WoW: GNW, AIG, XL

Tightened the least WoW: COF, AON, MBI

Tightened the most MoM: AIG, BAC, MS

Widened the most/ tightened the least MoM: MTG, CB, MMC

 

MONDAY MORNING RISK MONITOR: POSITIVE MOMENTUM SLOWS WHILE THE SHORT-TERM SETUP LOOKS NEGATIVE - CDS us

 

2. European Financials CDS Monitor – Bank swaps were tighter in Europe last week for 31 of the 40 reference entities. The median tightening was 1.8%.

 

MONDAY MORNING RISK MONITOR: POSITIVE MOMENTUM SLOWS WHILE THE SHORT-TERM SETUP LOOKS NEGATIVE - CDS  europe

 

3. European Sovereign CDS – European Sovereign Swaps mostly tightened over last week. Italian sovereign swaps tightened by 17.0% (-73 bps to 354 ) and Spanish sovereign swaps widened by 5.8% (22 bps to 390).

 

MONDAY MORNING RISK MONITOR: POSITIVE MOMENTUM SLOWS WHILE THE SHORT-TERM SETUP LOOKS NEGATIVE - Sovereign CDS 1

 

MONDAY MORNING RISK MONITOR: POSITIVE MOMENTUM SLOWS WHILE THE SHORT-TERM SETUP LOOKS NEGATIVE - Sovereign CDS 2

 

4. High Yield (YTM) Monitor – High Yield rates fell 49 bps last week, ending the week at 7.45 versus 7.94 the prior week.

 

MONDAY MORNING RISK MONITOR: POSITIVE MOMENTUM SLOWS WHILE THE SHORT-TERM SETUP LOOKS NEGATIVE - High Yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 7 points last week, ending at 1633.

 

MONDAY MORNING RISK MONITOR: POSITIVE MOMENTUM SLOWS WHILE THE SHORT-TERM SETUP LOOKS NEGATIVE - LLI 2

 

6. TED Spread Monitor – The TED spread fell 4 points last week, ending the week at 45.6 this week versus last week’s print of 50.

 

MONDAY MORNING RISK MONITOR: POSITIVE MOMENTUM SLOWS WHILE THE SHORT-TERM SETUP LOOKS NEGATIVE - TED spread

 

7. Journal of Commerce Commodity Price Index – The JOC index fell 3.1 points, ending the week at -12.5 versus -9.4 the prior week.

 

MONDAY MORNING RISK MONITOR: POSITIVE MOMENTUM SLOWS WHILE THE SHORT-TERM SETUP LOOKS NEGATIVE - JOC index

 

8. Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by less than 1 bps to 76 bps.

 

MONDAY MORNING RISK MONITOR: POSITIVE MOMENTUM SLOWS WHILE THE SHORT-TERM SETUP LOOKS NEGATIVE - Euribor OIS

 

9. ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

MONDAY MORNING RISK MONITOR: POSITIVE MOMENTUM SLOWS WHILE THE SHORT-TERM SETUP LOOKS NEGATIVE - ECB liquidity facility

 

10. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 14-V1. Last week spreads tightened, ending the week at 121 bps versus 128 bps the prior week.

 

MONDAY MORNING RISK MONITOR: POSITIVE MOMENTUM SLOWS WHILE THE SHORT-TERM SETUP LOOKS NEGATIVE - MCDX

 

11. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production. Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion. Last week the index fell 79 points, ending the week at 647 versus 726 the prior week.

 

MONDAY MORNING RISK MONITOR: POSITIVE MOMENTUM SLOWS WHILE THE SHORT-TERM SETUP LOOKS NEGATIVE - Baltic Dry

 

12. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure.  Last week the 2-10 spread widened to 169 bps, 1 bps wider than a week ago.

 

MONDAY MORNING RISK MONITOR: POSITIVE MOMENTUM SLOWS WHILE THE SHORT-TERM SETUP LOOKS NEGATIVE - 2 10

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.0% upside to TRADE resistance and 3.5% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: POSITIVE MOMENTUM SLOWS WHILE THE SHORT-TERM SETUP LOOKS NEGATIVE - XLF

 

NYSE Margin Debt - December

We publish NYSE Margin Debt every month when it’s released. NYSE Margin debt hit its post-2007 peak in April of 2011 at $320.7 billion. The chart below shows the S&P 500 overlaid against NYSE margin debt going back to 1997. In this chart both the S&P 500 and margin debt have been inflation adjusted (back to 1990 dollar levels), and we’re showing margin debt levels in standard deviations relative to the mean covering the period 1. While this may sound complicated, the message is really quite simple. First, when margin debt gets to 1.5 standard deviations or greater, as it did last April, that has historically been a signal of extreme risk in the equity market - the last two times it did this the equity market lost half its value in the ensuing period. We flagged this for the first time back in May 2011. The second point is that margin debt trends tend to exhibit high degrees of autocorrelation. In other words, the last few months’ change in margin debt is the best predictor of the change we’ll see in the next few months. This is important because it means that margin debt, which retraced back to +0.53 standard deviations in November, still has a long way to go. We would need to see it approach -0.5 to -1.0 standard deviations before the trend runs its course. There’s plenty of room for short/intermediate term reversals within this broader secular move, as we saw in November and December's print of +0.55 and +0.53 standard deviations.  Overall, however, this setup represents a headwind for the market. One limitation of this series is that it is reported on a lag.  The chart shows data through December.

 

MONDAY MORNING RISK MONITOR: POSITIVE MOMENTUM SLOWS WHILE THE SHORT-TERM SETUP LOOKS NEGATIVE - Margin Debt 

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

Having trouble viewing the charts in this email?  Please click the link below.

 



Giant Defense

“Defense is superior to opulence.”

-Adam Smith

 

If your 2012 defense can shut down both Aaron Rodgers and Tom Brady in back-to-back playoff games, evidently you deserve to win the Super Bowl. Opulent offensive statistics often win awards. Giant Defenses win Championships.

 

Anyone who has followed my hockey or professional career closely knows that I take pride in playing defense. Blocking shots and not losing money on market down days may not get my name in the paper – but that’s ok, I don’t read the Old Wall’s paper.

 

In a consciously conservative move to defend against both US and Global Growth Slowing again sequentially in February, I shorted the US stock market twice last week (at 1327 and 1343 in the SP500). This week, we’ll see if I played defense too early.

 

Back to the Global Macro Grind

 

Being early in this business is also called being wrong. For me, since I’m usually buying on red and selling on green, that happens a lot. After seeing the US stock market fall for 4 consecutive days after Ben Bernanke imposed an Inflation Tax on Consumers and Savers, most of last week’s squeeze came in 4 hours of Friday’s trading.

 

How do you defend against that? It’s not easy. And since there are tens of thousands of fund managers who are in the business of the stock market going up, that doesn’t make explaining why I decide to go on defense any easier.

 

To review my Global Macro Risk Management Process, when I think about countries and probability-weighing the bullish or bearish momentum of their respective economies, I heavily weight the following 3 factors:

  1. Growth (slowing or accelerating?)
  2. Inflation (slowing or accelerating?)
  3. Policy (perpetuating or fighting inflation?)

Most Deflationistas don’t agree with me on this because they are either academics who are not accountable to trading daily, weekly, and monthly P&L risk, and/or they don’t have a Giant Defense that has proactively prepared them to make these calls on the margin.

 

It’s what happens on the margin that matters to Macro Market Expectations most.

 

The reason why I pay such close attention to what Bernanke does is that he drives point #3 – Policy. If you get Fed Policy (hawkish or dovish on the margin) right, you’ll get the US Dollar right. If you get the US Dollar right, you tend to get most other things right.

 

Now plenty of people who are always taking offense to the Strong Dollar = Strong America point probably don’t agree with me on this either. Since we’ve been right on 26 of 27 long/short calls on the US Dollar since founding the firm in 2008, I’m not sure I care.

 

What I care about most is what Policy does to the Dollar - then what the purchasing power of that Dollar does to everything else that’s priced in Dollars. In the last 3 weeks, with the US Dollar down -3.2%, this is what Growth and Inflation Expectations have done:

  1. Inflation Expectations = Gold +7%, Copper +7%, and Oil +4%
  2. Growth Expectations = US Treasury Bonds (10yr) -5%, Yield Spread -6%

Again, a lot of people will take as much issue with me suggesting that falling US Bond Yields and a compressing Yield Curve (Yield Spread = 10-yr yields minus 2-year) represents Growth Slowing Expectations right here and now as they did in July, August, or November of 2011. This is the goal-line of the bull/bear US Equity debate.

 

This morning’s Global Macro Market signals only amplify my Growth Slowing point:

  1. Despite a stiff rally in US Equities on Friday, most other Asian and European equity markets didn’t agree
  2. Chinese stocks (Shanghai Composite) stopped going up at intermediate-term TREND resistance of 2342
  3. France, Spain, and Italy all backed off, hard, at their long-term TAIL lines of resistance (CAC = 3503)
  4. Dr. Copper said no thank you at its long-term TAIL of $3.98/lb resistance (down -1.1%)
  5. EUR/USD failed, again, at its intermediate-term TREND line of $1.34 resistance (down -0.5%)
  6. US Treasury Yield on the 10-year is down to 1.91% this morning and remains in a Bearish Formation

A Bearish Formation in US Growth Expectations (bond yields) is what made me bearish on US Growth in February of 2011 inasmuch as it is right here in February of 2012. Thankfully, unlike in January 2011, I caught most of the January 2012 up move in stocks.

 

Unlike most strategists in this game, I have no problem shifting from offense to defense – I usually slap on the Giant Defense when I see an inflection in the slope of Growth and Inflation Expectations. My process hasn’t changed. The game-time signals have.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, Shanghai Composite, and the SP500 are now $1, $111.36-114.02, $1.29-1.32, 2, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Giant Defense - Chart of the Day

 

Giant Defense - Virtual Portfolio


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