Willing To Learn

This note was originally published at 8am on April 24, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“No nation is fit to teach unless it is also willing to learn.”

-Teddy Roosevelt


That was just an outstanding leadership quote from President Theodore Roosevelt as he was working his way towards getting the “Gentlemen’s Agreement” in 1908 between San Franciscans and the Japanese.


While I was on my pseudo vacation last week, I thought about the context of this leadership lesson while I was reading “Pacific Crucible” by Ian Toll. Then I thought about it again, and again, and again.


If you don’t have empathy, you don’t have much. As the world becomes more politically polarized, we run the greatest risk of all – we stop learning. The only way to lead is to learn the other side’s perspective. If you don’t take the time to understand it, you’ll never be able to resolve it. Leadership includes not making the same mistakes, over, and over, and over again.


Back to the Global Macro Grind


You don’t have to read much to understand that the divide between segregation and immigration is always bridged by education. Neither do you have to study economic history much to acknowledge the wide gap between Keynesian and Hayekian economics.


When I moved to this country, I learned quickly that people want to label other people in buckets. ‘Oh he’s a Democrat and she’s a Republican’ or ‘he’s a socialist and she’s a capitalist.’ But, somewhere along the way, I also learned that’s ridiculous. Maybe it’s because I was a 20 year-old bumpkin from 22 hours north of Toronto. Maybe it’s just because I don’t like being put in a bucket.


With the upcoming election in France you are starting to see the outcrop of political polarization that we’ll likely see in the US Presidential Election. The Germans are taking this opportunity to call the French Socialists, and the French are preparing to call the Germans something back. In the meantime, that’s not going to solve the European Debt Crisis, just fyi.


Neither are we going to solve the world’s debt problems with more debt. We aren’t going to solve anything by printing more and more moneys either.


I’m not saying that there shouldn’t be a time and place for printing money. I’m just saying that you shouldn’t have a policy to be perpetually printing money and debauching your country’s currency. History is already littered with politicians making that mistake.


If you want a European and American perspective on politicizing money consider the following:

  1. Give me control of a nation’s money and I care not who makes its laws.” –Mayer Rothschild
  2. I believe that banking institutions are more dangerous to our liberties than standing armies.” –Thomas Jefferson

When you read those quotes, you should feel something. If you are a central banker, you don’t like the Jefferson quote – but that’s not the point. Neither is feeling what it means to you – being empathetic to what the other side feels is leadership.


What I feel about this is no longer a minority voice. The Most Read story on Bloomberg this morning has the following title:


“Bundesbank’s Weidemann Says What No Politician Wants To Hear”


That’s a critical quote at a critical time because our politicians have put us all in a critical position. If the fiscally and monetarily conservative voice of the Bundesbank in Germany is Willing To Learn from the history of the Weimar Republic’s mistakes, I suggest you and I should too. Printing money and debauching Dollars doesn’t end well, so stop cheering it on.


Think about that, again and again. I beg you.


Rather than begging for bailouts from Ben Bernanke at tomorrow’s FOMC meeting, take a step back and try to learn what all of us who haven’t been blowing up your hard earned capital since late 2007 are saying.


We’re not crazy. We’re Willing To Learn from whomever can show us why the Germans are wrong this time. We’re Willing To Learn how this time really is different.


But fear-mongering about what could have been in 2008 is no longer teaching anyone anything. It’s 2012 and now we need to see some positive proof on price stability and employment that lasts more than a few quarters to believe that the Fed, ECB, and BOJ Policies To Inflate aren’t going to slow global growth. They just did, again.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Japanese Yen (vs USD), EUR/USD, and the SP500 are now $1630-1652, $118.35-119.28, $79.04-79.49, $81.09-82.14, $1.30-1.32, and 1360-1377, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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Ugly Beautiful

“Some are ugly and some are beautiful.”

-Ray Dalio


That’s what Bridgewater’s Ray Dalio wrote recently about Deleveragings. Spell (and box) checkers take note: the plural of deleveraging doesn’t yet register on Wikipedia as a word. By the time this Sovereign Debt Cycle is over with, it will.


I was flying back to New York from Toronto last night and Dalio bubbled up to the top of my Research Pile alongside another one of the most credible Global Macro Risk Management sources to emerge from 2007’s top, Eclectica’s Hugh Hendry.


Not surprisingly, both Dalio and Hendry are talking about the same risk to asset prices (stocks, bonds, commodities, etc. ) that have been supported by Policies To Inflate – deflation. But both have different views on the pace and timing of what asset price inflations and deflations could look like.


Back to the Global Macro Grind


If your risk management process doesn’t embrace the uncertainties associated with a Globally Interconnected Marketplace of colliding factors, it’s more difficult to apply the principles of Chaos (or Complexity) Theory to what it is that you do every day.


People get whipped around by questioning what is “causality versus correlation” all of the time. Our process embraces the idea that both can occur at the same time.


In Chaos Theory you have Emergent Properties and Phase Transitions. The Correlation Risk born out of an emergent property like the World’s Reserve Currency (USD) and asset prices is very real. So are the phase transitions (crashes) born out of that Correlation Risk.


The US Dollar Index is up for the 5thconsecutive day to $79.58 this morning. Look at the immediate-term TRADE correlations that our model is spitting up versus the USD:

  1. WTIC Oil = -0.72
  2. Brent Oil = -0.64
  3. Gold = -0.77
  4. Copper = -0.76
  5. Wheat = -0.71
  6. Soybeans = -0.81

In other words, that’s how I can show you, in real-time, the answer to both Dalio and Hendry’s question on timing asset price inflations and deflations. US Dollar driven Correlation Risk doesn’t matter all of the time. Neither is it perpetual. But some of the time, it matters big time. And that’s when you get paid to be long or short beta.


If you believe (like I do), in the causal relationship between Monetary Policy and Currency moves, you’ll absolutely love learning about this. It forces us to Re-Think and Re-Learn, every day. If you believe, like a dogmatic Keynesian (Bernanke) does, that monetary policy doesn’t infect currency prices which then, in turn, affect inflations/deflations, this will drive you right batty.


Chaos Theory is not part of the current Western Academic Curriculum in Economics. By the time I am dead, it will be. It’s math. And the math will ultimately trump the social science of studying the 1930’s depression in a vacuum.


Don’t take my word for it on this. Read economic history. Overlay Reinhart & Rogoff teachings about the relationships between deficits, debts, and inflation/deflation with what modern day practitioners are writing about. It’s all out there. Educate yourself.


Dalio’s February 2012 research note is titled “An In-Depth Look at Deleveragings” and in it he does exactly what Professor Robert Shiller taught me to do here at Yale – study the long-term cycles, across countries, so that you can begin to understand the scenarios, probabilities, and mean reversion risks.


Dalio considers both the “Ugly” (1920’s Germany) and the “Beautiful” Deleveragings. The most relevant scenarios I thought he nailed down to the risk management board were:

  1. UK Deleveraging 1
  2. Japan Deleveraging 1990-Present
  3. US Delevergaing 2008-Present

Not one of these deleveragings were the same in terms of numbers of years and/or asset price % moves, but the monetary policies that were engaged in by central planners during all 3 certainly rhyme.


Dalio calls the UK and US Deleveragings of 1 and 2008-Present “beautiful.” I’ll call what happened in the UK thereafter (1970s) and what is about to happen in the US (if we abuse the US Dollar through debt monetization further), his version of “ugly.”


Hendry said he was long asset price inflation (Equities and Agricultural Commodities) in February. That’s was a good call until the end of February and early March when Global Equity and Commodity price inflations stopped.


Now what you see is what we call Deflating The Inflation. It’s not what Hendry calls “hyper-deflation”, yet. Neither is it the “ugly deflationary deflation” that Dalio warns of. Unless you are long of anything Spanish, Italian, or Greek Equities, that is…


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, and the SP500 are now $1, $112.42-113.87, $79.36-79.68, $1.30-1.32, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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President Obama's Reelection Chances Hold Steady at 60.6% -- Hedgeye Election Indicator


If the US Presidential election were held today, President Obama would stand a 60.6% chance of winning reelection, according to the Hedgeye Election Indicator (HEI). That level is unchanged from last week, and marks the seventh time in the past eight weeks that President Obama's reelection chances have stood above 60%, according to the HEI. Two factors that can contribute to a decline in the President's reelection chances, a stronger US dollar and a weaker performance in US stocks, were offset by other factors in the HEI model to keep the likelihood of the President's reelection chances the same as last week. 



President Obama's Reelection Chances Hold Steady at 60.6% -- Hedgeye Election Indicator  - HEI



Hedgeye developed the HEI to understand the relationship between key market and economic data and the US Presidential Election. After rigorous back testing, Hedgeye has determined that there are a short list of real time market-based indicators, that move ahead of President Obama’s position in conventional polls or other measures of sentiment.


Based on our analysis, market prices will adjust in real-time ahead of economic conditions, which will ultimately shape voters’ perception of the Obama Presidency, the Republican candidates and influence the probability of an Obama reelection.  The model assumes that the Presidential election would be held today against any Republican candidate. Our model is indifferent toward who the Republican candidate is as the sentiment for Obama and for any Republican opponent is imputed in the market prices that determine the HEI. The HEI is based on a scale of 0 – 200, with 100 equating to a 50% probability that President Obama would win or lose if the election were held today.



TODAY’S S&P 500 SET-UP – May 8, 2012

As we look at today’s set up for the S&P 500, the range is 24 points or -0.41% downside to 1364 and 1.34% upside to 1388. 











    • Up from the prior day’s trading of -1545
  • VOLUME: on 5/07 NYSE 754.30
    • Decrease versus prior day’s trading of -8.60%
  • VIX:  as of 5/07 was at 18.94
    • Decrease versus most recent day’s trading of -1.15%
    • Year-to-date decrease of -19.06%
  • SPX PUT/CALL RATIO: as of 05/07 closed at 1.31
    • Down from the day prior at 1.42 


  • TED SPREAD: as of this morning 38
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.83
    • Decrease from prior day’s trading at 1.87
  • YIELD CURVE: as of this morning 1.58
    • Down from prior day’s trading of 1.62 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Bus. Optimism, April: est. 92.3, prev. 92.5
  • 7:45am/8:55am: ICSC/Redbook weekly sales
  • 8:30am: ECB’s Draghi, Praet speak in Frankfurt
  • 9:45am: Fed’s Lacker meet with students at Greensboro Community College, North Carolina
  • 10am: IBD/TIPP Economic Optimism, May: est. 48, prev. 49.3
  • 10am: JOLTs Job Openings, March: prev. 3498
  • 11:30am: U.S. to sell $30b 4-wk bills
  • 12pm: DoE short-term energy outlook
  • 12:45pm: Fed’s Fisher speaks on panel in Dallas
  • 1:00pm: U.S. to sell $32b 3-yr notes
  • 4:30pm: API inventories


    • House Financial Svcs panel, led by Rep. Ron Paul, holds hearing on changing mission, structure of Federal Reserve, 10am
    • House, Senate negotiators meet to discuss $109b highway bill, first multi-year transportation plan since 2005 3pm
    • Indiana, North Carolina, West Virginia hold primary elections
    • Voters in Wisconsin pick Democrat to challenge Republican Gov. Scott Walker in June recall vote
    • FEC holds closed meeting on compliance matters, 10am
    • HHS Secretary Kathleen Sebelius, Transportation Secretary Ray LaHood, Homeland Security Secretary Janet Napolitano;, GSA Acting Administrator Dan Tangherlini speak at Partnership for Public Service event on shrinking federal budget, 8:30am
    • Senate holds test vote to see whether support exists to debate bill to prevent student-loan interest rates from doubling
    • House Speaker John Boehner, R-Ohio, U.S. Trade Representative Ron Kirk speak at Council of the Americas conference, 10:30am
    • Senate Armed Services panel holds hearing on Pentagon aviation programs, 3pm
    • NRC advisory committee meets on reactor safeguards, 8:30am
    • FERC meets on environmental impact of facilities by Columbia Gas Transmission LLC in Maryland, 7pm    


  • America Movil offers to buy stake in KPN for $3.4b
  • Ally Finl. gets Treasury Dept. approval for ResCap bankruptcy
  • Yahoo! board members have met to discuss CEO Thompson
  • Morgan Stanley raised estimates for collateral and termination payments to $9.6b
  • FDA to release staff reports for May 10 advisory panels on Arena/Eisai’s weight-loss pill lorcaserin and Gilead’s Truvada to prevent HIV infection
  • Marubeni said close to buying U.S. grain trader Gavilon for $5b
  • SEC planning to hire investigator to review complaints about the agency’s internal watchdog unit
  • AMR’s local TWU leaders encourage workers against final contract offer
  • Movie-chain owner AMC Entertainment said to be in sale talks with Wanda Group, NYT says
  • HSBC Holdings 1Q pretax profit rose 26%, beating est.
  • Pershing Square’s Bill Ackman among speakers at Bloomberg Link “Canada Economic Summit” 


    • Patriot Coal (PCX) 6am, $(0.34)
    • Keyera (KEY CN) 6:19am, C$0.25
    • Starwood Property Trust (STWD) 6:30am, $0.51
    • Quicksilver (KWK) 6:44am, $(0.04)
    • Fossil (FOSL) 7am, $0.92
    • International Flavors & Fragrances (IFF) 7am, $1.00
    • Scotts Miracle-Gro (SMG) 7am, $2.06
    • Discovery Communications (DISCA) 7am, $0.60
    • NV Energy (NVE) 7am, $0.04
    • TransDigm Group (TDG) 7am, $1.45
    • Henry Schein (HSIC) 7am, $0.92
    • Apollo Global Management LLC (APO) 7am, $0.77
    • OfficeMax (OMX) 7am, $0.16
    • DIRECTV (DTV) 7:30am, $1.05
    • Tenet Healthcare (THC) 7:30am, $0.09
    • Health Care REIT (HCN) 7:30am, $0.88
    • Molson Coors Brewing Co (TAP) 7:30am, $0.43
    • Perrigo Co (PRGO) 7:47am, $1.21
    • Hecla Mining Co (HL) 8am, $0.08
    • Charter Communications (CHTR) 8am, $(0.32)
    • Wendy’s Co/The (WEN) 8am, $0.03
    • George Weston Ltd (WN CN) 8am, C$0.80
    • Liberty Interactive (LINTA) 8:30am, $0.16
    • Liberty Media - Liberty Capital (LMCA) 8:30am, $0.70
    • CI Financial (CIX CN) 11:17am, C$0.33
    • Invesco Mortgage Capital (IVR) 4pm, $0.65
    • XL Group (XL) 4:01pm, $0.40
    • Solera Holdings (SLH) 4:05pm, $0.68
    • Walt Disney (DIS) 4:15pm, $0.55
    • Kinross Gold (K CN) 4:15pm, $0.21
    • Chesapeake Midstream Partners (CHKM) 4:15pm, $0.36
    • Energy Transfer Partners (ETP) 4:25pm, $0.44
    • Energy Transfer Equity (ETE) 4:27pm, $0.38
    • Franco-Nevada (FNV CN) 5:15pm, $0.32 



OIL – now some good news – Brent Oil has now snapped my long-term TAIL line of $113.87 support and is moving into a Bearish Formation. With the US Dollar up for 5 consecutive days, we’re seeing exactly what we should – Deflating The Inflation (this will be the new perma-bull chant) = good for Consumers, globally, on the margin. 

  • Soybean-Crop Bust Spurs China to Drain U.S. Supply: Commodities
  • Oil Declines for a Fifth Day After Al-Naimi Says Prices Too High
  • LME Says It Received ‘A Number’ of Proposals After Deadline
  • Copper Declines on Concern European Austerity Will Be Derailed
  • Gold Falls a Second Day as Stronger Dollar Cuts Investor Demand
  • Wheat Advances for Second Day as Demand Gains for U.S. Supplies
  • Palm-Oil Companies Boost Refining Capacity in Indonesia on Taxes
  • Marubeni Said to Be Close to Buying U.S. Grain Trader Gavilon
  • El Nino May Develop This Year, Australian Forecaster Says
  • China’s Gold Imports Jump as Country May Become Biggest User
  • Oil Supplies Expand for Seventh Week in Survey: Energy Markets
  • Miners Tap Junk Bonds to Rescue Stranded Projects: Canada Credit
  • Copper May Rise 11% on Fibonacci Retracement: Technical Analysis
  • Cocoa Rises in London After New York Climb; Robusta Coffee Gains
  • Record U.S. Chemical Exports Show Kirby Barges Now Full: Freight 









ITALY – total gong show across European Equities again this morning as hedge funds who covered on the “news” yesterday gave Italian and French stocks a no-volume bounce to lower-highs. We shorted Italy on that yesterday as the MIB remains in a Bearish Formation (see our intraday note), down -18% since March #GrowthSlowing.






INDIA – so they tried the Keynesian thing and now the Rupee is in free-fall; deficit also climbing as they import inflation; India down -0.9% overnight (down -9% from its Feb 2012 top) looks very different than China right now. We like China long (+11.3% YTD) as Deflating The Inflation (Commodities) helps countries with strengthening FX more.










The Hedgeye Macro Team



In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance.



OVERALL:  WORSE - Not only did Wynn miss in Las Vegas and Macau but poor hold played a smaller role than we previously thought, collections were worse, and the LV convention business disappointed.

    • WORSE:  1Q bad debt expense rose $8 million YoY (all in Macau) as a few large accounts went past 150 collection days.  Collections in 2Q are 'very stable and normal.'  Last quarter Wynn said bad debt reserve as a % of receivables would be flat and there was nothing alarming in terms of receivables.
    • WORSE:  WYNN spoke previously that they see 1Q convention channel revenue being flat.  1Q REVPAR actually came in 4% lower YoY as it was hurt by lower occupancy and two fewer conventions.
  • OKADA 
    • SAME:  No new news

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