Roped In

“In the contest between inflation and deflation, the rope is the dollar.”

-James Rickards


I’ve finally jumped into a book I’ve been really excited about, James Rickards’ “Currency Wars”, and the preface does not disappoint. From a risk management perspective, I couldn’t agree more with the aforementioned quote.


Rickards takes the currency debate right up the middle on the Chairman of the Federal Reserve reminding us that “by printing money on an unprecedented scale, Bernanke has become a twenty-first century Pangloss, hoping for the best and quite unprepared for the worst.”


As a reminder to The Ben Bernank and his central planning followers, hope is not a risk management process.


Back to the Global Macro Grind


On Tuesday, I bought back my Strong Dollar position via the UUP. Yesterday, I sold my only remaining long Commodity position (Oil), taking my asset allocation to Commodities back down to ZERO percent.


Even though he’s never traded a Global Macro market with his own capital at risk in his life, Bernanke would probably smile when considering my 0% strategy move. The man likes zeroes.


The Zero Bound, or a 0% “risk-free” rate of return, concept is littered with unintended consequences. If you don’t believe that, ask the Japanese. They’ve had 20 years of anemic economic growth and will have 25% less people living in Japan come 2050.


If you do believe in the globally interconnected risk associated with the world’s reserve currency, you probably get why this entire “contest between inflation and deflation” comes down to what Bernanke/Geithner do to US Dollar policy (monetary and fiscal). When it comes to commodities inflating/deflating the CRB Index (19 commodities) has a 60-day correlation to the US Dollar of -0.64%.


Correlation? Yes Keynesians of the academic gridiron, unite! Correlation Risk in markets doesn’t always imply causality. But sometimes it does.


So why get long the US Dollar right here?

  1. It’s going up today, and we know performance chasers just love a good chase
  2. It is breaking out above our intermediate-term TREND support line of $79.33 again
  3. It has fortified its base, holding our longer-term TAIL support line of $76.11
  4. The Japanese Yen has moved into crash/crisis mode (bullish USD/YEN)
  5. The Euro continues to fail at $1.33 resistance as European Growth Slowing continues

Got Growth Slowing?


Apparently consensus doesn’t want to agree with us on this yet. In a note earlier this week I highlighted the Credit Suisse call to action that “economic momentum indicators suggest global and US growth is still well above consensus” – and while the people I used to work with there are good people, that call on growth is simply just wrong this morning.


1.   ASIA: China and India, in particular, are showing glaring signs of Growth Slowing sequentially here in March. Whether it was India’s stock market down another -1.8% overnight (down -6.1% since the Feb YTD top) on a mounting deficit problem or both the Shanghai Composite and Hang Seng snapping their respective immediate-term TRADE lines of support in the last week as China’s PMI (HSBC) was printed overnight at a fresh 4-month low – it’s all there. #GrowthSlowing


2.   EUROPE: Inflation Slows Growth; particularly when Europeans have to deal with Brent Oil prices of $122-127/barrel – never mind being bent over a barrel by that sneaky little Keynesian critter called debt (which structurally impairs long-term growth). Looking at Europe’s PMI numbers for March, here’s what the river cards look like:



A)     France 47.6 MAR (exp. 50.2) vs 50 FEB

B)      Germany 48.1 MAR (exp. 51) vs 50.2 FEB

C)      Eurozone 47.7 MAR (exp. 49.5) vs 49 FEB



D)     France 50 MAR (exp. 50.3) vs 50 FEB

E)      Germany 51.8 MAR (exp. 53.1) vs 52.8 FEB

F)      Eurozone 48.7 MAR (exp. 49.2) vs 48.8 FEB


Now we all know that Swiss turned American bankers can get creative in their accounting, but by our Canadian-American math, this morning’s Global Growth data is well below consensus.


How about US Growth?

  1. It has never NOT slowed with oil prices over $100/barrel (that’s why the FEB ISM number dropped 3% from JAN)
  2. Since 71% of US GDP = Consumption, real (inflation adjusted) growth slows, big time, when inflation accelerates
  3. Q4’s US GDP print of 3.0% carried a 0.86% Deflator; that deflator should double or triple in Q1

In other words, our Global Macro Model will not be surprised if US GDP growth gets cut in 1/2 , sequentially, from Q4 of 2011 to Q1/Q2 of 2012. If we don’t see a Strong Dollar (like we did in Q4) soon, you’ll see weakening US Consumption.


So that brings me to a comma, instead of a full stop. If you are staying one step ahead of me, you’re going to ask if Strong Dollar would get me more bullish on both US Economic Growth and US Equities. The answer to that (as it was every day in January 2012 up until Ben Shalom Bernanke decided to debauch the Dollar on January 25th), is yes.


Whether our almighty central planners like to admit it or not, we’ve all been Roped In. This “contest between inflation and deflation” has been called “risk on and risk off.” But risk is always on – especially the globally interconnected stuff. Risk never sleeps.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1, $122.12-124.89, $79.33-80.58, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Roped In - Chart of the Day


Roped In - Virtual Portfolio

An Easier Solution

This note was originally published at 8am on March 08, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“At the end of this decade, in the year 1980, the United States will not be dependent on any other country for the energy we need to provide our jobs, to heat our homes, and to keep our transportation moving.”

- Richard Nixon, 1973


The current obsession in the US with energy independence is not a new one.  Richard Nixon, quoted above, embarked on “Project Independence” after the 1973 OPEC embargo led to a world oil crisis; nearly every president since has set a similar goal – none have come close to reaching it.  In 1973 the US imported 34% of its consumed petroleum; today, we import 45%.


In a speech yesterday, President Obama summarized his broad energy plan, “If we are going to control our energy future, then we’ve got to have an all-of-the-above strategy.  We’ve got to develop every source of American energy -- not just oil and gas, but wind power and solar power, nuclear power, biofuels.”


That sounds like a pretty good idea, particularly as prices at the pump have ripped to an all-time high for March, $3.76 per gallon.  As a direct result, gasoline consumption has fallen to the lowest level in over a decade, and is running 6.5% below last year’s level.


While energy independence is not an original idea, is it more realistic this time around?


It’s key to understand that the US does not have an energy crisis – it has a liquids fuel shortage.  71% of the petroleum consumed in the US is by the transportation sector; only 1% is used to generate electric power.  The US is actually abundant in its two largest power-generating sources, coal and natural gas, with the 1st and 6th largest recoverable reserves in the world, respectively.


Currently, solar and wind can only be used to generate electricity, so it is difficult to see how developing these renewable sources will lower gasoline prices or make us any more energy independent.  Further, because of issues with intermittency (the sun shines during the day, the wind blows at night, and the energy cannot be stored), low electricity conversion rates, large space requirements, and higher-than-expected operating and maintenance costs, solar and wind are simply not economic.  Even with government subsidies and private investment, the EIA estimates that solar will generate less than 1% of US electricity in 2035.  Solyndra…?  First Solar…?


Nuclear power, like solar and wind, can do very little to solve our liquids fuel shortage, as 100% of nuclear energy generated in the US is for electricity.  Regardless, there has been almost no new nuclear construction in the US in the last 30 years because of rising capital costs and risks, particularly after the nuclear disasters of the 80’s.  It is puzzling why President Obama is intent on revitalizing nuclear in the US only months after Japan’s Fukushima disaster.  And nuclear power is hardly a domestic resource – the US imports more than 80% of its required uranium.


Ethanol and biodiesel supplied 0.5% of the world’s primary energy in 2010; but increasing biofuel production comes at the cost of the world’s food and water supply.  If the US were to use its entire corn harvest to produce ethanol, it would only replace 8% of the country’s annual gasoline demand.  Cellulosic ethanol (ethanol produced from agricultural waste) has less of an impact on the world’s food, water, and fertilizer sources, though is challenged by extraction and aggregation costs as well as low energy density.


This is not a smear campaign against alternative and renewable energy sources.  With investment and time, technologies that are not currently economic, viable, or scalable one day will be, lessening our need for petroleum fuels.  The US should invest more (wisely) in energy R&D, starting with natural gas vehicles and the necessary refueling infrastructure.


But energy transitions take time.  Not years – decades, perhaps even generations.  Natural gas took 60 years from the time it was first commercially extracted (1870s) before it was 5% of the world’s primary energy market.


President Obama stated earlier this week that, “Folks are getting killed right now with gas prices.”  Touting alternative energy does nothing to fix that; neither does blaming rising oil prices on tensions in Iran, growth in China, and those pesky Wall Street speculators.  The only legitimate way to lower gasoline prices in the immediate term is the one that most of our leaders never consider: raising interest rates.


Near-zero interest rates and massive liquidity injections from the developed world’s central banks have driven investors into real assets, like oil and gold, in an effort to preserve purchasing power.  Net length among non-commercial traders in NYMEX crude oil futures and options is 333,000 contracts, nearly double the July 2008 high of 170,000 contracts when oil spiked to $145 per barrel.  In 1991, there were 3.3 dollars of money supply to every 1 barrel of oil; today there are 7.1 dollars chasing that 1 barrel.  And while the price of gasoline in dollars has increased 95% since March 2009, gasoline priced in an ounce of gold is only +7% over the same period.


Many factors influence the price of oil – supply, demand, geopolitical risk – but monetary policy is really the only one within the US’s control, and that policy cannot be any more inflationary for the price of petrol.  Recognition of such would be a refreshing dose of accountability; it would also give consumers a much-needed break at the pump.


Our immediate-term support and resistance ranges for Gold, Brent Oil, WTIC Oil, Natural Gas, US Dollar Index, and the SP500 are now $1693-1725, $123.31-126.81, $106.13-109.22, $2.21-2.39, $79.36-80.21, and 1345-1363, respectively.


Kevin Kaiser



An Easier Solution - EL chart


An Easier Solution - vp 3 8


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The Macau Metro Monitor, March 22, 2012




The Casino Regulatory Authority of Singapore (CRA) has awarded the first batch of licences to two international market agents (IMA) Huang Yu Kiung and Low Chong Aun.  The two Malaysian junkets will operate at RWS.


CRA said the IMAs will focus on bringing in foreign high rollers to casinos here, and they will not target locals.  It is in the midst of evaluating a few other applications and conducting probity checks for these applications. Twelve applications have been rejected.


'The robust regulatory regime would ensure that licensed IMAs conduct business in a tightly regulated environment, said the CRA.  The licenses will be issued for an 1-year duration and licensed IMAs must ensure that they continue to remain suitable to hold the licences.



Allegations of junket activity at Marina Bay Sands have surfaced again, this time in court papers filed by Takami Shinichi, a Singapore-based Japanese businessman being sued by the casino over a $2 million gambling debt.  Shinichi, managing director of Avixs Master Fund Pte Ltd, claims in a High Court affidavit that he gained access to MBS's VIP gaming rooms through Chujo Tatsuya, a Nevada-licensed junket operator.  Shinichi said he met Tatsuya at a Las Vegas casino several years ago, that had arranged for him to gamble at MBS by putting him in touch with a Japanese VIP hostess and inviting him to MBS's opening party in late June 2010.

'I do not know if Mr Chujo received any 'kick-back' from the monies I gambled, but I do know that it is the practice for junkets to receive such commissions,' Mr Shinichi said. 'I am now told that if any player plays under a junket, no credit can be given to him.'


In Shinichi's case, Sunil Singh Panoo, his lawyer, argued that his $2 million debt is not enforceable because Mr Shinichi was not a premium player before he began gambling at the casino on June 25, 2010.  Shinichi also said in his affidavit that 'MBS didn't follow the rules and procedures required for credit transactions'.  But MBS disagreed, saying that Mr Shinichi was a premium player at its Paiza Club after he deposited $300,000 with the casino on June 17, 2010. 


The Casino Regulatory Authority said last night that it does not comment on ongoing court cases. 

Robert Goldstein, LVS president of global gaming operations, said that he is patiently waiting for the government's instruction.  "But I don't think it'll be that material either way. If they do approve junkets, it will be a very, very restrictive environment, which will make it difficult for those junkets that operate in Macau to be here.  So our approach has been and will continue to be very focused on developing a sales team that can go direct to customers. We do take on credit, direct credit, and are so far comfortable with that.'


TODAY’S S&P 500 SET-UP – March 22, 2012

As we look at today’s set up for the S&P 500, the range is 16 points or -0.56% downside to 1395 and 0.58% upside to 1411. 












  • ADVANCE/DECLINE LINE: -32 (986) 
  • VOLUME: NYSE 726.47 (2.16%)
  • VIX:  15.13 -2.89% YTD PERFORMANCE: -35.34%
  • SPX PUT/CALL RATIO: 3.27 from 2.22 (47.30%)


  • TED SPREAD: 38.78
  • 3-MONTH T-BILL YIELD: 0.08%
  • 10-Year: 2.26 from 2.30
  • YIELD CURVE: 1.89 from 1.93 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Jobless claims, week of Mar. 17, est. 350k (prior 351k)
  • 9:45am, Bloomberg Consumer Comfort, week Mar. 18 (prior -33.7)
  • 10am: House Price Index (M/m), Jan., est. 0.3% (prior 0.7%)
  • 10am: Leading Indicators, Feb., est. 0.6% (prior 0.4%)
  • 10am: Fed’s Tarullo testifies to Senate committee on regulation and Volcker rule
  • 10am: Freddie Mac 30-yr mortgage
  • 10:30am: EIA natural gas storage
  • 12:45pm: Fed Chairman Bernanke lectures at George Washington U. (2 of 4)
  • 1pm: U.S. to sell $13b 10-yr TIPS (reopen)
  • 4pm: Fed’s Evans speaks on communication at Brookings
  • 8pm: Fed’s Bullard speaks in Hong Kong
  • U.S. Treasury announces 2-, 5-, 7-yr auction sizes 


  • President Barack Obama to speak on energy infrastructure in Oklahoma, 10:55am
  • Obama attends event on energy-related research, development at Ohio State University, 4:30pm
  • House, Senate in session:
    • Senate Armed Services Committee holds hearing on the situation in Afghanistan, 9:30am
    • House Ways and Means subcommittee hears from IRS Commissioner Doug Shulman on its operations and the tax filing season, 9:30am
    • Senate Appropriations subcommittee hears from Commerce Secretary John Bryson on his agency’s proposed budget, 10am
    • Senate Environment Committee hears from Environmental Protection Agency Administrator Lisa Jackson on the agency’s budget, 10am
    • Senate Banking Committee hears from Treasury Undersecretary Lael Brainard, Fed member Daniel Tarullo and FDIC acting Chairman Martin Gruenberg on the Volcker rule, 10am
    • House Appropriations subcommittee hears from acting Federal Aviation Administration chief Michael Huerta on the agency’s budget, 10am
    • House Appropriations subcommittee hears from Commodity Futures Trading Commission Chairman Gary Gensler on the agency’s budget, 10:30am   


  • McDonald’s CEO Jim Skinner is retiring after almost 8 yrs at helm, to be succeeded by COO Don Thompson
  • Bats Global Markets will seek more than $100m for owners today, plans to sell 6.3m shrs at $16-$18 each
  • Abstracts for EASL’s International Liver Congress may be
  • released on embargo
  • Chinese manufacturing index indicated a worse contraction this month; prelim. 48.1 reading in a purchasing managers’ index is the lowest since Nov.
  • Sony said to tap Studio Chief Lynton to oversee U.S. media units
  • Former Fed Chairman Paul Volcker says U.S. needs reforms in financial sector, govt.
  • Nomura said to be involved in Inpex insider-trading breach
  • American Airlines said to plan to start a bankruptcy-court process for rejecting union contracts by next week
  • Euro-area services, manufacturing output contracted more than economists forecast in March
  • Hartford fails to satisfy holder John Paulson with plan to shrink insurer
  • Vantiv raised $500m in IPO at mid-point of price range 


    • IHS (IHS) 6 a.m., $0.82
    • Dollar General (DG) 7 a.m., $0.82
    • Lululemon Athletica (LULU) 7:15 a.m., $0.49
    • ConAgra Foods (CAG) 7:30 a.m., $0.48
    • FedEx (FDX) 7:30 a.m., $1.35
    • Signet Jewelers Ltd (SIG) 7:30 a.m., $1.77
    • GameStop (GME) 8:30 a.m., $1.72
    • Accenture (ACN) 4 p.m., $0.86
    • Steelcase (SCS) 4:01 p.m., $0.14
    • Micron Technology (MU) 4:04 p.m., $(0.19)
    • Nike (NKE) 4:15 p.m., $1.17
    • Silver Wheaton (SLW CN) 5 p.m., $0.40 


OIL – probably the only good news this morning is that Oil stopped going up. We sold our long Oil position and took our asset allocation to Commodities to 0% because the US Dollar looks like it could put on a big move to the upside again. Immediate-term support lines that broke for WTIC and Brent are $106.79 and $124.89, respectively. 

  • Newedge Says Soy Beats Corn as Cekander Talks Seeds: Commodities
  • Copper Reaches Two-Week Low as Chinese Manufacturing Contracts
  • Gold Drops to Lowest Since January on Manufacturing, U.S. Dollar
  • Crude Declines on Stockpile Release Speculation, China Slowdown
  • Iran Seeking to Import Farm Commodities From India, Group Says
  • Sugar Erases Gains in New York Trading After Rising 0.8%
  • China Grain Output May Have Been Overstated, Imports to Rise
  • England Tsunami Risk Swells Costs at EDF After 40% Slump: Energy
  • Sinofert Has Been in Potash Acquisition Talks, CEO Feng Says
  • Gold Tax Aids Rupee as Deficit Fight Spurs Strike: India Credit
  • Vale, Rio, BHP to Join China’s Spot Iron Ore Platform
  • Water Scarcity to Fuel Global Tensions, Intelligence Report Says
  • BHP Leading Record Foreign-Currency Bond Sales: Australia Credit
  • Crude Futures Decline on Stockpile Release
  • European Crops Damaged by Winter Freeze Now Face Drought Risk
  • H.K. Mercantile Bourse Plans RMB Gold, Silver, Copper Contracts
  • Jewelers in North, East India Continue Strike Over Gold Tax










SPAIN – Growth Slowing was the most obvious message for the PMI reports across Europe for the month of March. Central Planners can arrest stock market deflations in the short-term, but in the long-run, their ideas to stop economic gravity are dead. Spain’s IBEX remains bearish across all 3 of our risk management durations (down -1.5% this morn).





INDIA – Energy stocks (XLE) stopped making higher-YTD-highs on Feb 24 and India stopped going up on Feb 21; this morning India’s Sensex was down another -1.8% on fundamentals (Growth Slowing As Inflation Accelerates) and is down over 6% from its YTD high. India’s Yield Curve has pancaked.










The Hedgeye Macro Team



Commodity moves were mixed over the past week as the dollar index declined.  Coffee gained 0.6% week-over-week but are down more than 19% year-to-date.







Gasoline prices are assuming more importance in the political debate and management commentary, while thus far playing down the impact of gas prices, is likely to change if this current trend continues. Domino’s Pizza yesterday mentioned three ways in which elevated gas prices impacts its business perhaps more directly than many of its peers in the restaurant industry: first, reimbursing drivers for gasoline usage; second, the change in consumer behavior than can result from pressure at the pump; third, the flow through to commodity prices due to higher cost of production for food processing companies.









Wheat futures have declined to the lowest level in over a week on signs that precipitation in the Great Plains are improving prospects for winter crops that recently emerged from dormancy. 





Talk of early planting and big acreage is said to be pressuring the market.


Indications of rising ethanol supplies could be pushing corn process lower.  Ethanol inventories gained 3% to a record 22.7 million barrels in the week ended March 16th, up 13% from a year earlier, according to the Energy Department.





Last week’s cattle slaughter totaled 619k, down 1.9% from the week prior and flat year-over-year.  Year-to-date, according to cattlenetwork, cattle slaughter is down 6% versus the same period last year.


U.S. beef producers have started the early stages of herd expansion, according to Purdue Extension agricultural economist Chris Hurt.  Beef cow numbers have dropped by 9% since 2007.  Lower slaughter numbers are expected through 2014.





Egg sets placements continue to contract at around the same rate, roughly -5.3% year-over-year for the six-week moving average, according to the Broiler Hatchery report released by the USDA today. This implies that supply will remain tight as the industry looks for more favorable business conditions before expanding production.






Beef: Most companies are expecting beef cost inflation to be up mid-to-high single digits versus last year


TXRH: We expect approximately 8% food inflation in 2012, primarily due to higher beef costs…on the beef side we do have fixed price – pricing arrangements in effect for over 90% of our beef costs in 2012.


CBRL: To the continued pressure on ground beef prices and other commodities partly offset by lower average dairy and produce prices, along with benefits from our supply chain initiatives, we expect cost of sales to increase 60 basis points to 80 basis points over 2011 to near 26% in 2012.


RUTH: We project 2012 beef inflation to be between 5% and 8%. We currently have purchase agreements for beef representing approximately 30% of our needs through August of 2012, which represents an approximate 7% premium compared to the prior years.


CMG:  While we're cautiously optimistic we'll see more reasonable prices in 2012 for avocados, dairy and produce, we expect these benefits will be more than offset by higher costs for our beef, chicken, rice and beans. Beef costs will be especially challenging due to protracted supply shortages, despite recent reductions in grain prices.


MCD: As we look at our guidance for 2012, we've built another mid-teens increase for beef, expecting that the dynamics in the marketplaces that we see, and are expecting, will continue.


DRI:  U.S. beef production will continue decline though over the next 24 months, placing continued upward pressure on beef prices because of the slow economic recovery hamburger and value oriented beef, cattle beef are in high demand and can be priced accordingly by the packers. At Darden we purchased mainly tenderloins and other premium steakcuts, while we expect pricing for our beef products to increase by 12% our pricing has been tempered by consumers' resistance to record higher retail prices for premium stakes and the resulting shift to value oriented cuts and as you can see beef is approximately 14% of our cost basket … We have 75% of our beef requirements contracted for fiscal 2012 and 40% of the June to December usage under contract for fiscal 2013.


SONC: One item to note is that we recently locked in our beef contract for calendar year 2012… given the potential for beef costs going even higher, which there are a lot of reports out there that speculate that could happen, that we chose to go with making this more of a known quantity here, and the idea of having a set price for the next 12 months, we feel like would be good for our business, adds some predictability to the business.



Coffee: Prices are now down more than 33% versus last year


PEET: We expect 2012 coffee costs to rise 12% instead of last year's 42%.


SBUX: We've taken advantage of the recent declines in the C-price to lock in more of our coffee needs for fiscal 2013. We now have six months of our fiscal 2013 requirements secured at costs moderately favorable to 2012.



Dairy: CAKE, DPZ, PZZA, TXRH and others could benefit from favorable cheese costs this year


TXRH: The volatility around that 8% estimate for food cost inflation would really be driven by produce and dairy.  Those are of the biggest components that we float around the market, and that's about 15% to 20% of our total cost of sales.


CMG: While we're cautiously optimistic we'll see more reasonable prices in 2012 for avocados, dairy and produce, we expect these benefits will be more than offset by higher costs for our beef, chicken, rice and beans.






















WEEKLY COMMODITY CHARTBOOK - chicken whole breast













Howard Penney

Managing Director


Rory Green


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