Short Covering Opportunity: SP500 Levels, Refreshed

POSITION: Long Utilities (XLU), Short Consumer Discretionary (XLY)


That beta “down-shift” from 1 was good for 30 handles, or -2.2%, in the SP500. We’ll take that – literally. At a minimum, you should be covering oversold short positions here.


Across all 3 core risk management durations in my model, here are the lines that matter most right now: 

  1. Immediate-term TRADE resistance = 1366
  2. Immediate-term TRADE support = 1346
  3. Intermediate-term TREND support = 1283 

Snapping that 1366 line yesterday is now yesterday’s risk management news.


Now we’re right at support. This is a Short Covering Opportunity.



Keith R. McCullough
Chief Executive Officer


Short Covering Opportunity: SP500 Levels, Refreshed - SPX

Shorting The Pursuit of Inflation: FXY Trade Update

Conclusion: The Japanese yen carries a great deal of asymmetric downside risk over the long-term TAIL. This view is supported by the combination of incrementally aggressive inflation targeting and accelerating sovereign debt risk.


Position: Short the Japanese Yen via the ETF: FXY


This morning, Keith used this morning’s short-term pop in the Japanese yen to short the currency via the ETF FXY, which tracks the USD/JPY pair in lockstep across multiple durations. As we have seen in recent years, that cross continues to be dominated largely by the spread between short-term interest rate expectations emanating from Federal Reserve and Bank of Japan monetary policy.


Shorting The Pursuit of Inflation: FXY Trade Update - 1


Longer term, we think the yen will come under increased selling pressure as the Bank of Japan looks to meaningfully step up its pursuit of inflation, which would serve to erode the real yield advantage of holding Japanese fixed-income assets – including JGBs, which are an asset we have flagged in recent weeks for its heightening risk profile.


For more details behind these conclusions, refer to our Triangulating Asia note from MAR 5 and our DEBT, DEFICIT & DEMOGRAPHIC RECKONING presentation from MAR 2: 

Our quantitative risk management levels on the yen are included in the chart below.


Darius Dale

Senior Analyst


Shorting The Pursuit of Inflation: FXY Trade Update - 2

Shorting Misguided Expectations: STPP Trade Update

Position: Short the iPath U.S. Treasury Steepener (STPP)


Yesterday afternoon in our Virtual Portfolio, Keith shorted the iPath U.S. Treasury Steepener ETN (STPP). By shorting this security, we are making an explicit call that we expect the U.S. Treasury curve to compress. Our conviction in this position is rock solid – especially given that we’re already long the iPath U.S. Treasury Flattener ETN (FLAT) in our Virtual Portfolio.


Broken TRADE and TREND, the U.S. sovereign debt market is not confirming higher-highs in U.S. equities – at least for now. That could of course change, but we need to see more data to assign a higher probability to the view that the equity market will lead domestic bond yields higher. After all, long-term Treasury yields have led U.S. equities lower in every market sell-off dating back to 2007.


Shorting Misguided Expectations: STPP Trade Update - 1


For now, we maintain our conviction that Growth Slows As Inflation Accelerates and that the latter is largely driven by weak-dollar monetary and fiscal policy out of D.C. – which remains the one factor [among many] that few investors analyze with any real scrutiny. Moreover, why consensus continues to confuse accelerating inflation expectations with a faster outlook for growth via storytelling about topics such as “peak oil”, “emerging market demand”, and “U.S. manufacturing/exports” is far beyond our ability to comprehend at this point.


While it is not our style to search for confirmation from talking heads, it’s comforting to know that Federal Reserve Bank of Dallas President Richard Fisher shares our sentiment to some degree:


"I am personally perplexed by the continued preoccupation, bordering upon fetish, that Wall Street exhibits regarding the potential for further monetary accommodation… Trillions of dollars are lying fallow, not being employed in the real economy. Yet financial-market operators keep looking and hoping for more. Why? I think it may be because they have become hooked on the monetary morphine we provided when we performed massive reconstructive surgery."


Consistently misguided growth expectations are personally perplexing indeed.


Darius Dale

Senior Analyst


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We follow the ICSC U.S. Chain Store Sales Index closely and see the trend quarter-to-date as a red flag for Cheesecake Factory’s top line.


The ICSC-Goldman Sachs weekly chain store sales index rose by 1.3% in the latest week through March 3rd.  According to the ICSC, “year‐over‐year sales softened appreciably to a 1.7% pace‐‐its weakest pace since the week ending January 9, 2011 (+1.6%).”  Tellingly for CAKE, the ICSC-Goldman Sachs consumer tracking survey found a “modest pickup in discount store business over the past week, but weaker business at department stores.”  We see Cheesecake Factory’s business as being more closely tied to department store traffic than traffic at discount stores.


The two lines in the chart below represent Cheesecake Factory comps and the ICSC Chain Store Sales Index year-over-year change.  The aforementioned ICSC dataset details the weekly change but, clearly, for comparability purposes it is necessary to monitor Cheesecake Factory comps versus the year-over-year move in the ICSC data. The 1Q12 data point for Cheesecake Factory represents current consensus expectation of +2.63% while the ICSC Chain Store Sales Index year-over-year number is the quarter-to-date figure including all weeks through March 3rd.  The correlation for the data represented in this chart for 1Q02 through 4Q11 is 0.8. 





Howard Penney

Managing Director


Rory Green








Comments from CEO Keith McCullough


Can’t say we didn’t say Growth Slowing was in motion…

  1. INDIA – after getting tagged for a -1.6% loss last wk, down both days this week and down -6.8% since topping on Feb 21. With inflation running higher than nominal growth, this is what you get – modern stagflation. That’s why India’s Yield Curve has gone flat.
  2. COMMODITIES – Dollar Up = Deflates The Inflation; but it doesn’t all happen in a day. This should be bullish provided that the USD Index can hold its gains > $79.03 TREND line support – a Romney win tonight in Ohio could do it. What’s good for the USD is good for US Consumption. After snapping my TRADE line of 1735 last wk, Gold testing TREND line of 1691 right now.
  3. GROWTH – Small Caps, Basic Materials, Industrials – they’re all leading indicators inasmuch as Dr Copper and 10yr yields are – they are all telling me my model isn’t broken. The Old Wall’s is. Growth Slowing, globally, occurs b/c A) debt structurally impairs growth and B) inflation slows growth. Not from every time/price and debt levels – just these ones.

1366 is the line to watch now on the SP500.











MCD: McDonald’s franchisee Arcos Dorados is set to open no fewer than 50 locations in Brazil during 2012, according to Brazilian media publication, Valor.


ARCO: Arcos Dorados said yesterday that Brazil comps were up 6.3% in 4Q.  The short-term outlook is set to be “challenging”, according to management, with weaker currencies likely affecting results this year.


THI: Tim Hortons is to buy back up to 1.2mm shares for cancellation.





PFCB: P.F. Chang’s is rated “Buy” by Miller Tabek with a price target of $44.


PFCB: P.F. Chang’s was revealed yesterday as a “Long Research Tactical Idea” at Morgan Stanley.


DRI: Darden Restaurants was added to Bank of America’s list of favored equities.





PFCB: P.F. Chang’s outperformed on accelerating volume following yesterday’s upgrades.


DIN: Dine Equity underperformed the group on accelerating volume as the company presented at the Raymond James Institutional Investors Conference.





Howard Penney

Managing Director


Rory Green



Le Greek Deluge

This note was originally published at 8am on February 21, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Apres nous, le deluge.”

-Madame de Pompadour


Greece Wins 2nd Bailout.” The Top 3 Most Read articles on Bloomberg this morning are about Greece. Great job by the world’s central planners. They have saved us from themselves, again.


Now what?


Not to be confused with one of the alleged prostitutes from the ex-Keynesian Chief at the IMF, Dominique Strauss-Kahn’s, “sex ring” this morning, Jeanne Antoinette Poisson (Madame de Pompadour) was big player in the French courts of 1740s France. As Chief Mistress to Louis XV, she had intimate edge on everything political that was going to happen next.


Short-term career risk management of conflicted politicians vs. Long-term globally interconnected what? Yes, it’s sad and pathetic to watch, even if that means we get a little short-term stock and commodity price inflation to lather us up somewhere in between.


My thoughts on what I call Duration Mismatch between long-term wants versus short-term political needs are not new. Never mind 18th century France or Rome in 49BC, this is 2012 baby. If you’re in the game of chasing short-term performance, you’ve just got to believe!


Or do you?


As our good ole counter-punching friend Friedrich von Hayek once said about Keynes and his throw-away line about “in the long-run, we are all dead”, “I fear that these believers in the principle of après nous le deluge may get what they have bargained for sooner than they wish.” (Keynes Hayek, page 186)


Back to the Global Macro Grind


While some of the world’s insider trading, tax evading, and prostitution ringing politicians of the Global Bubble in Keynesian Economics may want you to believe that “this time is different”, we still think that a Rising Price of Oil Slows Global Growth.


To be crystal clear, we’re not talking any price of oil. We like to talk about the price that’s being set on the margin. There has never been an oil price with a $100 handle per barrel that didn’t slow growth. Never is a long time.


Whether you look at Brent or West Texas crude oil, here’s what prices did last week: 

  1. Brent Oil = +2.0% to $119.58
  2. WTIC Oil = +4.6% to $103.24

Now, to be sure, there are a lot of things going on here like correlations, causalities, and Iranians – all at the same time - but the one thing that’s been consistent since Ben Bernanke’s Policy To Inflate (January 25th) are Inflation Expectations Rising

  1. Brent Oil (since January 25, 2011) = +9.1% (from $109.86/barrel)
  2. WTIC Oil (since January 25, 2011) = +7.6% (from $98.33/barrel) 

While it’s not clear to us why Old Wall Street’s economists and strategists have not yet cut their US GDP Growth forecasts for Q1 and Q2 of 2012 due to rising oil prices, it wasn’t clear to us why they didn’t at this time last year either.


Not to remind some of these perma-bull growth forecasters about the score, but last year plenty of them said that the price of oil crossing the Consumption Rubicon wasn’t going to matter. In fact, a lot of them said rising oil prices were a function of “accelerating demand.”


Oh, ok.


Someone might want to tell the Chinese about that…


Something (hint: Growth Slowing) is making the Chinese very nervous about this whole Global Money Printing thing. Nervous enough to cut the reserve requirement on banks for the 2nd time in the last few months. There are very few high-frequency economic data points coming out of China and/or Asia in the last week that don’t support this non-Greek headline of growth slowing sequentially.


But have no fear, Andrea Mitchell is here. Yes, as in the Maestro on these macro matters, Alan Greenspan’s, wife (and Foreign Affairs correspondent on everything NBC). On Meet The Press this Sunday Andrea called out that she saw “$5 Dollars for Supreme” at the pump.




“Apres nous, le deluge.” Sadly, maybe then, and only then, our elite central planners won’t have us pay for their taking car service to work.


After being long Consumer Discretionary (XLY) stocks for most of December-January (on Strong Dollar = Strong Consumption), I shorted the Sector ETF on Friday. My immediate-term support and resistance ranges for Gold, Brent Oil, WTIC Oil, EUR/USD, and the SP500 are now $$1730-1747, $116.89-120.56, $100.91-105.88, $1.30-1.32, and 1350-1363, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Le Greek Deluge - Chart of the Day


Le Greek Deluge - Virtual Portfolio

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.