Deflated Illusion

“Failure deflates illusion, while success only makes illusion worse.”

-Nassir Ghaemi


“This isn’t a settled debate, and these interpretations could be proven wrong. But if they are correct, they raise several questions. Why do positive illusions occur? Can we only arrive at realism through personal hardship?” (A First-Rate Madness, page 55)


This weekend, as I was reading through Ghaemi’s provocative psychological discussion in chapter 3 of A First-Rate Madness (“Heads I Win, Tails It’s Chance”), I couldn’t stop thinking about our profession. Oh how the last 4 years have deflated our illusions of our analytical competence.


Or have they? Every time we’ve seen asset prices inflate (Q1 of 2008, Q1 of 2010, Q1 of 2011), we’ve seen the said seers of this business attempt to convince you that it’s “different this time.” Every time there is a “successful” rally, the consensus illusion of inflation morphing into sustainable growth gets worse.


Back to the Global Macro Grind


The good news is that you can only pretend Growth Slowing doesn’t matter for so long. You can only ignore some of the worst volume and skew signals in global market history until you can’t. Gravity eventually bites.


Instead of Greece or Apple, this morning’s Top 3 Most Read on Bloomberg are as follows:


1.       “Monti Signals Spanish Euro Risk as EU to Bolster Firewall”

2.       “China Soft Landing May Be Hard For Commodity Exporters”

3.       “Asia Stocks Fall as US Home Sales Damp Economic Outlook”



Wasn’t Europe fixed? Isn’t China “decoupling” from the US? Can’t we pretend that Asian stocks and US Housing don’t matter until we get to quarter end?


“Under normal conditions, normal people overestimate themselves. We think we have more control over things than we do; we’re more optimistic than circumstances warrant…” (A First-Rate Madness, page 54)


There is absolutely nothing normal about the current Global Macro Economic conditions. Sure, you can be “optimistic” about life. I sure am. But realists tend to not blow their entire net worth to smithereens buying into fairy tales.


What is not normal and is not going away anytime soon?

  1. The Global Sovereign Debt Crisis
  2. The Bubble in Keynesian Economics (money printing)
  3. The Economic Reality that debt and inflation slow real (inflation adjusted) economic growth

If the US Stock market were to crash tomorrow, you’d have no business telling people you didn’t see any of this coming. This is the most obvious slow moving train wreck in world history – one that plenty of professionals still get paid to willfully ignore.


Since I doubt we’ll crash, that means the probability of a crash is going up as market prices do. Last week, global stock markets stopped going up (worst week for Asian and European stocks for 2012 YTD). Commodities have already started their decline.


Back to what’s just not normal:

  1. Sovereign Debt Crisis – we could have a healthy debate this morning as to who (Spain or Japan) has the more plainly obvious sovereign debt, deficit, and funding issues. The former Executive Director of the Bank of Japan (BOJ) said overnight that Japan has “crossed the Rubicon with really desperate measures.” Sounds like he was channeling his inner Hedgeye.
  2. Keynesian Policy Bubble – India (down another -1.8% overnight) has tried what every single Western academic dogma has suggested the Indians try, and it’s not working. They’ll be importing $125/barrel Brent Oil like the Japanese will in Q2 as their citizenry sees inflation running higher than real (inflation adjusted growth) = Stagflation.
  3. Inflation Slows Growth – yes, that is not only happening around the world (Commodity Inflation is generally priced in debauched Dollars), but you’ll see it in US Growth. So, when you see 3% US GDP growth for Q4 of 2011 (released on Thursday), pinch yourself and remind the person next to you that US GDP could be running at half of that growth rate right now.

The flip side of all this is that the success of our Global Macro model in forecasting intermediate-term growth slowdowns is making me delusional. Potentially, but that would imply that hedge funds who chased another top in commodity inflation are perfectly sane.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Japanese Yen (vs USD) and the SP500 are now $1, 124.55-126.62, $79.09-79.61, $82.22-$84.02, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Deflated Illusion - Chart of the Day


Deflated Illusion - Virtual Portfolio


TODAY’S S&P 500 SET-UP – March 26, 2012

As we look at today’s set up for the S&P 500, the range is 22 points or -0.58% downside to 1389 and 0.99% upside to 1411. 












  • ADVANCE/DECLINE LINE: 1262 (2770) 
  • VOLUME: NYSE 741.64 (-2.79%)
  • VIX:  14.82 -4.82% YTD PERFORMANCE: -36.67%
  • SPX PUT/CALL RATIO: 1.96 from 2.49 (-21.29%)


  • TED SPREAD: 40.19
  • 3-MONTH T-BILL YIELD: 0.07%
  • 10-Year: 2.28 from 2.23
  • YIELD CURVE: 1.91 from 1.88 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: Fed’s Plosser speaks in Paris
  • 8am: Fed Chairman Bernanke speaks in Virginia
  • 8:30am: Chicago Fed Nat Activity Index, Feb. (prior 0.22)
  • 10am: Pending Home Sales (M/m), Feb., est. 1.0% (prior 2.0%)
  • 10:30am: Dallas Fed Manufacturing, Mar., est. 16 (prior 17.8)
  • 11:30am: U.S. to sell $30b 3-mo., $29b 6-mo. bills 


    • Supreme Court hears health-care challenge
    • President Obama attends nuclear summit in South Korea
    • FTC hosts press conference on release of final privacy framework report
    • House, Senate in session 


  • Supreme Court hears first of three days of arguments over President Obama’s health-care law
  • Yahoo named three new board members after failing to reach compromise with Third Point, which pledged a proxy fight
  • Rick Santorum won Louisiana Republican primary on Saturday; next major primary is Wisconsin on April 3
  • Obama warned North Korea its plan to fire long-range rocket undermined prospects for future negotiations
  • Bats Global blamed computer malfunction for trading errors last week that results in Bats pulling IPO
  • Pending home sales may have climbed 1% in Feb. after a 2.0% gain in Jan., economists est: Weekly eco preview
  • U.K., most of Europe set clocks ahead one hour over weekend
  • Citigroup expects $700m impairment charge in 1Q as it cuts its investment Turkey’s Akbank by more than half
  • Roche extended its $5.7b hostile takeover offer for Illumina for a second time
  • U.S. Treasury Department set to sell on or around today preferred stock in six banks it bought stakes in as part of TARP
  • ING said to be seeking at least $7b for Asian insurance business and has drawn interest from potential suitors including MetLife 


    • Cal-Maine Foods (CALM) 6:30 a.m., $1.02
    • Kior (KIOR) 4:01 p.m., $(0.15)
    • Apollo Group (APOL) 4:05 p.m., $0.37    


COPPER – the Doctor continues to look exactly like the slope of global growth, slowing. Copper now bearish TRADE and TAIL with big TRADE resistance overhead at $3.85/lb. 

  • Hedge Funds Make Wrong-Way Bets for a Fourth Week: Commodities
  • Soybeans Jump to Six-Month High as U.S. Growers Favor Corn
  • Copper Swings Between Gains, Drops as European Crisis May Worsen
  • Oil Falls, Extending Two-Week Drop on Europe Debt, Slower China
  • Sugar Falls to One-Week Low on Indian Supplies; Cocoa Advances
  • Gold May Fall in London as Dollar Strengthens, ETP Holdings Drop
  • China’s Soft Landing Still May Be Hard for Commodity Exporters
  • Robusta Coffee May Gain 10% as Emerging Markets’ Demand Climbs
  • Gold Imports by India to Slump as Jewelers Extend Shutdown
  • Shale Boom in Europe Fades as Polish Wells Come Up Empty: Energy
  • Vitol Said to Buy Diesel From Mangalore Refinery for May Loading
  • Total Says North Sea Elgin Field Output Halts After Gas Leak
  • Asia Naphtha Crack Rebounds; Chevron Sells Fuel: Oil Products
  • Hedge Funds Make Wrong Way Bet for 4th Week
  • BG, Eni Make New East Africa Gas Finds Larger Than U.K. Reserves
  • Japan Has One Reactor With 1.9% of Total Capacity Online
  • German Next-Month Clean-Dark Spread Falls to Lowest Since August 










SPAIN – continued selling in Spanish stocks, down -1.8% to start the week and now down -5.1% for the YTD (vs Germany +18.6%) and Super Mario Monti wants “firewall.” It ain’t over, till its over folks.






JAPAN – clients want a “catalyst” in the Japanese Sovereign Debt Crisis – here’s ours: gravity. The Yen kicks off the week down -0.4% vs the USD (after Goldman said buy Yen Fri) and former exec director of the BOJ (Hirano, from 2002-2006) saying that Japan has “crossed the Rubicon with really desperate measures.”










The Hedgeye Macro Team


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 80.46%
  • SHORT SIGNALS 78.35%


The Economic Data calendar for the week of the 26th of March through the 30th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.




Weekly European Monitor: And These Are the Days of Our Lives

Positions in Europe: Short Greece (GREK), Short Spain (EWP)


Asset Class Performance:

  • Equities:  The EuroStoxx50 closed down -3.2% week-over-week. Bottom performers: Russia (MICEX) -4.6%; Finland -3.5%; Italy -3.5%; Sweden -3.5%; France -3.3%. Top performers:  Greece 1.0%; Portugal 70bps; Slovakia 10bps.  
  • FX:  The EUR/USD is up +0.67% week-over-week.  W/W Divergences: HUF/EUR -1.41%, NOK/EUR -1.09%, PLN/EUR -0.77%; RON/EUR +0.28%. YTD Performance: PLN/EUR +7.56%, RUB/EUR +7.28%, HUF/EUR +7.17%, CZK/EUR +3.93%, NOK/EUR +1.42%, CHF/EUR +0.90%; ISK/EUR -5.11%, RON/EUR -1.00%, GBP/EUR -0.21%, SEK/EUR -0.12%.
  • Fixed Income:  Greek 10YR yields gained +192bps week-over-week to 20.04%, with a +181bps change in the Friday/Thursday period ahead of today’s deadline for holders of international law Greek bonds to give notice on swap participation.  10YR yields for Spain and Italy move higher by 34bps (to 5.53%) and 31bps (to 5.15%), respectively, as Portugal saw the largest contraction versus its peers at -98bps to 12.66%.

Weekly European Monitor: And These Are the Days of Our Lives - 11. yields



Call Outs:

Germany - Merkel is planning to build offshore wind farms that will cover an area six times the size of New York City and erect power lines that could stretch from London to Baghdad.

  • The program will cost €200 billion (~ 8% of 2011 GDP) and aims to replace 17 nuclear reactors that supplied about a fifth of its electricity with renewables such as solar and wind, according to the DIW economic institute in Berlin.
  • (+) Suntech Power Holdings Co. (STP) (Solar Panel), Vestas Wind Systems A/S (VWS) (Wind Turbines). (-) nuclear stations, RWE AG (RWE) and EON AG (EOAN).

Germany - Mercedes dealers in China are offering record markdowns of 25% on high-end models such as the S300 sedan, according to data stretching back to 2009 at

Ireland - A fund affiliated with Apollo Global Management said that it will buy the Irish consumer-credit-card portfolio from Bank of America BAC.


Spain/Ireland - Goldman notes Spanish housing market is bad and getting worse.  Ireland remains the worst of the worst and Goldman sees yet another growing divide between the haves and have-nots of Europe as the residential property price performance can essentially be split into four groups: Strong, Recovering, Weak, and Ireland/Spain.


France - Sarkozy vs. Hollande: A BVA poll of 978 voters taken March 21 and 22 after the terrorist incident gave Hollande 29.5 percent support, compared with 28 percent for Sarkozy.


In Review:

In last week’s European Monitor titled “Guiding Expectations” we set out the fundamentals and market trends that we believe should temper expectations that Europe is “out and in the clear”. These days of our lives spell very weak growth in Europe due to fiscal consolidation, a necessary evil in particular for the PIIGS.


This week, equity market performance tanked alongside Manufacturing and Service PMIs for March that showed a decidedly negative month-over-month move to the downside, to levels at or below the 50 line representing contraction (see chart below).


Weekly European Monitor: And These Are the Days of Our Lives - 11. pmi


As we explained in recent research, we’re increasingly worried about Spain. This coming Friday’s budget announcement from Spanish PM Rajoy will be an important signal for the market. Rajoy must push through further fiscal consolidation to help meet the deficit target of 5.3% of GDP this year from 8.5% in 2011. This is a tall order, and already there’s been much push-back from the populace on issued austerity. Given an already fractured economy with weak confidence and sky-high unemployment (23% avg. and +50% for youth), we think a social uprising is in the cards.  


One indicator of rising concern is 10 YR Spanish bond yields rising higher then Italian, the first occurrence since August 2011.  Further there’s indication that many Spanish lenders have yet to recognize the full extent of their loan losses, which puts further pressure on the underfunded EFSF and ESM bailout packages.   



CDS Risk Monitor:


CDS fell -94bps to 1217bps in Portugal on a w/w basis to lead decliners. Ireland fell -18bps to 617bps.  Spain led gains, advancing +36bps to 440bps (or 140bps over the Lehman Line of default risk) and Italy pushed up +20bps to 384bps. 


Weekly European Monitor: And These Are the Days of Our Lives - 11. cds   a


Weekly European Monitor: And These Are the Days of Our Lives - 11. cds   b


Data Dump:

Eurozone Construction Output -1.4% JAN Y/Y vs 9.8% DEC   [-0.8% JAN M/M vs -1.9% DEC]

Eurozone Composite 48.7 MAR (exp. 49.6) vs 49.3 FEB

Eurozone Current Account (net nsa) -12.3B EUR JAN vs 18.3 B EUR DEC  [4.5B EUR JAN vs 3.4B EUR DEC]

Eurozone Industrial New Orders -3.3% JAN Y/Y (exp. -3.1%) vs -0.4% DEC  [-2.3% JAN M/M (exp. -2.2%) vs 3.5% DEC]


Germany Producer Prices 0.4% FEB M/M (exp. +0.5%) vs 0.6% JAN   [3.2% FEB Y/Y (inline) vs 3.4% JAN]

Italy Industrial Sales -4.4% JAN Y/Y vs 5.4% DEC

Italy Retail Sales -0.8% JAN Y/Y (exp. -3.4%) vs -3.7% DEC   [0.7% JAN M/M (exp. -0.1%) vs -0.8% DEC]


France Business Confidence Indicator 96 MAR (exp. 93) vs 93 FEB

France Production Outlook -15 MAR (exp. -28) vs -27 FEB

France Own-Company Production Outlook 6 MAR vs -1 FEB


Switzerland Industrial Production 7.9% Q4 Q/Q (exp. +2.6%) vs -2.0% in Q3 

Switzerland Money Supply M3 6.4% FEB Y/Y vs 7.3% JAN

Switzerland Exports 9.2% FEB M/M (exp. +0.3%) vs -10.4% JAN

Switzerland Import -12.3% FEB M/M vs 5.5% JAN


UK CPI 3.4% FEB Y/Y (exp. 2.3%) vs 2.6% JAN   [0.6% FEB M/M (exp. 0.4%) vs -0.5% JAN]

UK RPI 3.7% FEB Y/Y (exp. 3.5%) vs 4.0% JAN

UK Public Sector Net Borrowing 12.9B GBP FEB vs -10.2B GBP JAN

UK Retail Sales w/ Auto Fuel -0.8% FEB M/M (exp. -0.5%) vs 0.3% JAN   [1.0% FEB Y/Y (exp. 2.4%) vs 1.4% JAN]

UK BBA Loans for House Purchase 33,103 FEB (exp. 37,250) vs 37,977 JAN


Spain Producer Prices 3.4% FEB Y/Y (exp. 3.4%) vs 3.7% JAN   [0.6% FEB M/M (exp. 0.7%) vs 0.9% JAN]

Portugal Producer Prices 4.1% FEB Y/Y vs 4.7% JAN   [0.3% FEB M/M vs 2.3% JAN]


Ireland PPI 2.3% FEB Y/Y vs 2.7% JAN

Ireland Q4 GDP -0.2% Q/Q (exp. +1.0%) vs -1.1% in Q3    [0.7% Y/Y (exp 2.2%) vs 0.2% in Q3]


Finland Unemployment Rate 7.7% FEB vs 7.8% JAN


Interest Rate Decisions:

(3/21) Iceland Sedlabanki Interest Rate HIKE 25bps to 5.00%



The European Week Ahead:

Monday: Mar. Germany Import Price Index (Mar 26-20), IFO Business Climate, Current Assessment, and Expectations; Mar. UK Nationwide House Prices; Feb. France Jobseekers; Mar. Italy Consumer Confidence Indicator


Tuesday: Apr. Germany GfK Consumer Confidence Survey; Mar. UK CBI Reported Sales; Mar. France Consumer Confidence Indicator; Feb. Spain Budget Balance YtD


Wednesday: Feb. Eurozone Money Supply; Mar. Germany CPI; Q4 UK GDP – Final; Q4 France GDP – Final, Total Business Investment – Final, Current Account; Mar. Italy Business Confidence


Thursday: Mar. Eurozone Consumer Confidence Indicator – Final, Business Climate Indicator, Economic, Industrial, and Services Confidence; Mar. Germany Unemployment Data; Mar. UK GfK Consumer Confidence Survey, Feb. UK Net Consumer Credit, Net Lending, Mortgage Approvals, M4 Money Supply; Jan. UK Index of Services; Mar. Spain CPI – Preliminary; Jan. Spain Total Housing Permits


Friday: Mar. Eurozone CPI Estimate; Feb. Germany Retail Sales; Feb. France Producer Prices, Consumer Spending, Hourly Wages; Feb. Italy PPI; Jan. Greece Retail Sales; Spain Prime Minister Rajoy to present 2012 Budget; Feb. Spain Retail Sales; Jan. Spain Current Account



Extended Calendar Call-Outs:

22 April:  French Elections (Round 1) begins, to conclude in May.


29 April:  Potential Greek Presidential Elections.


30 June:  Deadline for EU Banks to meet €106 billion capital target/the 9% Tier 1 capital ratio.


1 July:  ESM to come into force.



Matthew Hedrick

Senior Analyst

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