Resist The Crowd

“Resist the crowd: cherish numbers only.”

-Jeremy Grantham


Doesn’t that sound hard core? We all aspire to know all of the numbers. We all want to sell every top, and buy every bottom. This is easy, right?


Whether I’m looking at rising US Equity futures this morning or whether I was looking at them in either March of 2008 or 2011, it’s the same old grind. In the last 4 years, literally every time US Stock Market Volatility (VIX) has tested the 14-15 zone, you’ve been paid to Resist The Crowd.


This time, despite the lowest trading volumes in US stock market history – oh, and the highest monthly US government deficit in US history (FEB = -$237.7B US Deficit) – is going to be different. Right?


Back to the Global Macro Grind


Flying back from California last week, I had the opportunity to crush my reading pile. Long-time readers of my rants know that from a process perspective, I just love digging into my pile.


Here are the 3 market views that jumped out of the required reading:

  1. Your Grandchildren Have No Value” - Grantham’s Quarterly Letter
  2. Defense” – Bill Gross Monthly
  3. S&P 1,700” – Birinyi Associates

Addressing these in the reverse order that they appear (not suggesting causality), the big round number from Laszlo Birinyi was backed up by the least impressive risk management process. If I recall his market views correctly from right around this time last year (pre 30% crashes in everything small cap, cyclicals, and commodities), they haven’t really changed.


After seeing his newly minted academic CEO, Mohamed El-Erian, get roughed up by Doubleline’s lynx-eyed Jeff Gundlach last year, Bill Gross’ title explains exactly how he feels after calling for US Credit Risk and a melt-down in US Treasuries (again, right around this time last year) – he’s playing defense. The most obvious defense for PIMCO is probably firing Mohamed.


Finally, back to Grantham, his longest Quarterly Letter ever was highlighted by the following 3 risk management thoughts:

  1. “Recognize your advantages over the professionals… the individual is far better positioned to wait patiently…”
  2. “Try to contain natural optimism… not easy, but easier…”
  3. “We can agree that in real life, as opposed to theoretical life… the enthusiasm of the crowd is hard to resist.”

Accuse me of having a confirmation bias towards Grantham – I’ll take that as a compliment. Like me, he’s had his own performance issues in this game. Unlike most, he’s self effacing in addressing our innate weaknesses as human beings. Markets humble the “smart.”


I personally do not think that calling for big round numbers and “year-end targets” in major indices requires any risk management process whatsoever. Neither does writing Op-Eds to support theoretical views that have no actual precedent.


The only thing I am certain of in this business is that the more I know about what it is that my competition thinks they know, the less I know about what is going to happen next.


Embrace Uncertainty.


Can Global Equities go a lot higher? Evidently yes. After that, can they go a lot lower (May-Aug of 2008, 2010, 2011)? Evidently yes.


So what do you do now? For me, the answer is always changing:

  1. Last Tuesday at 1129AM EST with the SP500 30 points lower, I was buying
  2. This Tuesday at some point in/around 10AM EST, I’ll probably be selling

That definitely doesn’t mean I nailed it. It just means that in the immediate-term, I am proactively managing the risk of the price range as both volume and volatility signals instruct me to front-run people staring at single factor-model moving averages.


Why “cherish the numbers” in our Global Macro Research (Growth, Inflation, Policy) model? Because over the intermediate to long-term (2007-2012), Resisting The Crowd’s career risk management decisions to ignore those numbers has worked.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, US Equity Volatility (VIX), and the SP500 are now $1, $123.87-126.79, $79.34-80.24, 15.23-17.98, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Resist The Crowd - 22. VIX


Resist The Crowd - 22. VP


TODAY’S S&P 500 SET-UP – March 13, 2012

As we look at today’s set up for the S&P 500, the range is 11 points or -0.59% downside to 1363 and 0.21% upside to 1374. 












  • ADVANCE/DECLINE LINE: -365 (-1567) 
  • VOLUME: NYSE 643.71 (-10.48%)
  • VIX:  15.64 -8.59% YTD PERFORMANCE: -33.16%
  • SPX PUT/CALL RATIO: 1.36 from 1.57 (-13.38%)


US Deficit – we know it doesn’t matter anymore, right? Right. At -$237B for FEB that’s a new US record for monthly deficit print and should remind genius growth forecasters that tax revenues are collected on a real-basis too. Inflation at the pump finally running as headline headwind for Obama even in the NY Times poll this morning. US Tax revs are down y/y in FY 2012 vs FY 2012, despite the GDP “recovery”… spin.


TREASURIES – either 2s and 10s are testing a breakout in the US this morning because credit risk is rising on the margin (deficit) and/or Bernanke is going to be less dovish than he has been for the last 6yrs at today’s FOMC whisperings. Asymmetric risk lives on as long as this ridiculously short-sighted game of chasing yield does. Breakout lines for 2s and 10s = 0.26% and 2.03%, respectively. 

  • TED SPREAD: 39.72
  • 3-MONTH T-BILL YIELD: 0.08%
  • 10-Year: 2.05 from 2.03
  • YIELD CURVE: 1.72 from 1.71 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Business, est. 94.5 (prior 93.9)
  • 7:45am/8:55am: ICSC/Redbook weekly comp sales
  • 8:30am: Advance Retail Sales, Feb., est. 1.1% (prior 0.4%)
  • 10am: IBD/TIPP optimism, est. 50.0 (prior 49.4)
  • 10am: JOLTs Job Openings, Jan., est. 3334 (prior 3376)
  • 10am: Business Inventories, Jan., est. 0.5% (prior 0.4%)
  • 11:30am: U.S. to sell $40b 4-week bills
  • 1pm: U.S. to sell $21b 10-yr notes (reopening)
  • 2:15pm: FOMC Rate Decision, est. 0.25% (prior 0.25%)
  • 4:30pm: API


    • President Obama takes British PM David Cameron to a basketball game in Ohio
    • Senate Democratic Leader Harry Reid will force a vote on 17 of Obama’s judicial nominees starting today
    • House in recess all week
    • Supreme Court not in session
    • Defense Secretary Leon Panetta traveling in Kyrgystan  


  • U.S. to file complaint at WTO today over Chinese limits on exports of rare earths used in high-tech products
  • Retail sales probably rose 1.1% in Feb., the most in five months, spurred by strongest demand for automobiles since 2008
  • FOMC meets today; Fed Chairman Bernanke said Jan. 25, after last meeting, that policy makers were considering additional asset purchases to boost growth
  • Intel said to be considering creating online pay-TV service that works on TV sets, computers, mobile devices
  • Alabama, Mississippi hold primaries in the Republican presidential race; Hawaii holds caucuses
  • Facebook accused in lawsuit by Yahoo! of infringing patents covering functions critical to websites, including Internet advertising, information sharing and privacy
  • Disney annual meeting in K.C, Missouri today; Glass Lewis opposes five nominees to board
  • Chevron hosts analyst meeting, 9am
  • Euro-area finance ministers signed off on second Greek bailout
  • Employers in U.S. plan to boost hiring during next three months as pace of economic growth picks up: Manpower survey
  • More than twice as many Americans view economy’s prospects as brightening as see them darkening, reversal from nine months ago, according to Bloomberg National Poll conducted March 8-11 


    • Factset Research (FDS) 7 a.m., $1.12
    • Empire Co (EMP/A CN) 7:20 a.m., C$1.10
    • Raven Industries (RAVN) 9:10 a.m., $0.48
    • Transcontinental (TCL/A CN) 9:50 a.m., C$0.34
    • Power Financial (PWF CN) 11:20 a.m., C$0.59
    • Alimentation Couche Tard (ATD/B CN) 11:23 a.m., $0.48
    • Francesca’s Holdings (FRAN) 4:01 p.m., $0.17
    • Zhongpin (HOGS) 4:10 p.m., $0.51
    • Capital Power (CPX CN) 5:59 p.m., $0.35    


  • Milk Souring as Record Profit Spurs Herd Expansions: Commodities
  • Copper Advances as Economic Rebound in U.S. May Stoke Demand
  • Oil Gains From One-Week Low as Economy Lifts Fuel-Demand Outlook
  • Gold Declines in London Before Fed Meeting as Dollar Strengthens
  • Vekselberg Quits Deripaska’s Rusal, Citing ‘Deep Crisis’
  • Soybeans Advance as China Seen Boosting Purchases; Wheat Rises
  • Palm Oil Gains to Nine-Month High as Malaysian Inventory to Drop
  • Kansas Wheat Faces Weather Risk as Warm Spell Aids Crop Progress
  • Water Pollution Tied to Agriculture Increasing, Costing Billions
  • Viterra Soaring on Bid Talk Still Offers 42% Discount: Real M&A
  • Iran Oil Power Declining as Explorers Increase Spending: Energy
  • Obama Takes Aim at China With WTO Case on Rare-Earth Export Caps
  • Ore-Shipping Rates Seen 13% Lower as China Cuts Target: Freight
  • Natural Gas Falls to 10-Year Low on Weather
  • Natural Gas Falls to 10-Year Low on Mild Weather, Record Output
  • Copper ETP Investments Increase to Record, ETF Securities Says
  • Rubber Climbs for Fourth Day as Yen Weakens, Supply May Decline 









SPAIN – despite the concept that all is fine in no-volume rallies until it isn’t, the rest of the world’s deficit/debt problems do not cease to exist. The recent breakdown in Spanish stocks and bonds show you that in pictures – now the Euro is failing to overcome $1.32 resistance as well. Sovereign Debt risk never goes away, but its intensity focuses the mind when country currencies, stocks, and bonds do the same thing at the same time.















The Hedgeye Macro Team



Early Look

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The Macau Metro Monitor, March 13, 2012




According to sources, MPEL is targeting syndication in April for a loan of about US$1.25 billion (MOP10 billion) to be likely used for construction of the Macau Studio City project.  MPEL is considering a five-year tenure for the syndicate loan.


Kazuo Okada is seeking a court order voiding the redemption of his shares decided by WYNN's board last month, and unspecified compensatory and punitive damages.


Okada, Chairman of the Board of Directors of Universal Entertainment, said, "We are taking this action to protect our investment from what we believe to be an unconscionable course of conduct perpetrated by Steve Wynn and the Wynn Resorts Board of Directors to facilitate Mr. Wynn's agenda of maintaining his absolute control over Wynn Resorts and in order to enrich himself."  Universal Entertainment's Counterclaim contains allegations, among others, that 1) No redemption has occurred and that there is no legal basis for the redemption. 2) The stock held by Aruze USA is subject to transfer restrictions in a stockholders agreement, which preclude any redemption of Aruze USA's stock. 3) Unlike most Wynn Resorts shares, Aruze USA's shares were never subject to the redemption provision of the Wynn Resorts Articles of Incorporation, as Aruze USA acquired its interest before the redemption provisions became effective.



Minister Vu Duc Dam, chief of the Vietnam Government Office, has confirmed that the Government was considering licensing a huge resort complex (US$4-5 BN) including a casino in northern coastal Quang Ninh Province's Van Don District.  Located on an 1,800 hectare area in Van Yen Commune, the complex is expected to help develop the Northern Economic Zone and attract more visitors, especially foreign tourists, to the province.


Vietnam has yet to license casinos, but the Government has granted licences to a number of entertainment-gaming complexes in southern Phu Quoc Island, the New City in central Phu Yen Province, Silver Shores and Furama in central Da Nang and Sai Gon Atlantic in southern Vung Tau.  None of them admit local visitors.


Sheldon Adelson, CEO of LVS, has expressed interest in building resort complexes worth as much as $6 billion in HCM City and Ha Noi.

President Obama with 58.5% Likelihood to Win Presidential Election If Held Today



President Obama with 58.5% Likelihood to Win Presidential Election If Held Today - HEI

Making the Call: VXX Trade Update

Conclusion: Looking to recent history, VIX ~15 has been an explicit signal to get hedged; thus, we are doing so in our Virtual Portfolio.


Position: Long the iPath S&P 500 VIX Short-term Futures ETN (VXX)


In this morning’s Early Look, Keith used a very appropriate quote from Daniel Kahneman that we feel describes the appropriate state of our industry:


“The illusion of skill is not only an aberration, it is deeply ingrained in the culture of the industry. Facts that challenge such basic assumptions – and thereby threaten people’s livelihood and self-esteem – are simply not absorbed.” (Kahneman, page 217)


Regarding the first part of the quote, perhaps the reason the VIX has a coincident relationship with the S&P 500 instead of a leading one is that it’s simply human nature to not want to buy downside protection when the market feels like it wants to trend higher. Everyone’s best ideas are working on the long side and both sell-side consensus and legacy financial media sources cheer on gains instead of focusing on the catalysts which could bring about mean reversion. While it’s not always an appropriate time to position for mean reversion, we’ve been consistently making calls to hedge for meaningful downside risk in U.S. equities when the VIX is trading with a 15-handle on it – just as it is today.


Making the Call: VXX Trade Update - 6


That brings us the second point Kahneman makes, which is that “facts that challenge such basic assumptions” (like combining top-down fundamentals with a quant overlay to make an explicit call not to chase “Dow 15,000”) and are threatening to the “livelihood and self-esteem” of market operators “are simply not absorbed”. Often times, they are, in fact, refuted with great vigor as we have seen in our inboxes from making similar calls in years past.


That said, however, our number #1 goal as an outsourced Macro Team remains to help our clients preserve and grow capital across economic cycles and all types of market environments; thus, making contrarian calls is not something we shy away from.


Today, that call is to get hedged, no matter how counterintuitive it feels at current prices. Our quantitative levels on the VIX are included in the chart below.


Darius Dale

Senior Analyst


Making the Call: VXX Trade Update - 7

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