Back To Bed

This note was originally published at 8am on May 01, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“We are in bed too much.”

-Franklin D. Roosevelt


That classic FDR quote comes from a dramatic excerpt in Ian Toll’s latest book about WWII, The Pacific Crucible. If you are a history buff, I highly recommend it. The book is very well researched and provides a unique Japanese perspective on how they forced Americans to think differently about globally interconnected risks.


The context of the quote is important. FDR said it in the immediate aftermath of Pearl Harbor when being grilled by Senator Tom Connolly of Texas, “How did it happen that our warships were caught like tame ducks… How did they catch us with our pants down? Where were the patrols.” Roosevelt replied, “I don’t know, Tom. I don’t know.” (page 31)


Unlike most modern day Republican and Democrat “leaders”, Roosevelt didn’t point fingers. He went on to explain that it wasn’t enough not to know. It was time to take the time to re-think US strategy and understand. “They are doing things and saying things during the daytime out there, while we are all in bed.” (page 31)


Back to the Global Macro Grind


If you want to pretend it’s the 1990s or 2003-2007 bull markets, that’s cool. All you have to do is know where the 50-day moving average is and you won’t miss a thing. Just look at the US Equity futures every morning and go back to bed.


With the US Dollar being debauched (down now for 7 of the last 8 weeks), Risk Managers are starting to pick up on the idea that more QE would only inspire a weaker World Reserve Currency and higher oil prices. That, in turn, will slow growth further.


QE1 may have worked. But QE2 didn’t, and QE3 definitely won’t. Why? Because as the USA gets a short-term “pop” in stock prices, the rest of the world gets asset price inflation (i.e. in their cost of living and/or cost of goods sold) right when they need that the least. Policies To Inflate (from these prices) slows growth and compresses margins.


Global Equity markets have obviously figured this out. With the exception of Venezuela and Egypt, Global Equity prices have been making lower- highs since February-March. The slowdown in US Equities (which somehow were last to figure this out) was much more pronounced in April than it was in that February-March performance period.


Performance period? Qu’est-ce que c’est le performance chasing period? It’s been glaringly obvious that seasonal Institutional performance chasing has called the top in US Equities in Q1 of 4 of the last 5 years. Notwithstanding the no-volume rally in 4 of the last 5 days of the month, here’s how US Equities finished in April:

  1. SP500 -0.8%
  2. Nasdaq -1.5%
  3. Russell2000 -1.6%

From a S&P Sector performance perspective, the complexion of the SP500’s -0.8% loss is interesting:

  1. Top 3 Sectors = Utilities +1.8%, Consumer Discretionary +1.2%, Consumer Staples +0.3%
  2. Bottom 3 Sectors = Financials -2.3%, Industrials -1.1%, Tech -1.1%

With our only Global Equity asset allocations being US Utilities and Chinese Equities (up +1.8% and +5.9% for the month, respectively), we were quite pleased with being positioned for US Growth Slowing. The question now is what will please the monthly performance chasers for May?


Can the SP500 make higher-highs for the YTD if Financials and Tech continue to pull back? What happens to the Industrials if Growth Slowing continues? The Sector Studies tell me that the most bullish outcome for May could be Deflating The Inflation. That would be good for American Consumers (good for US Consumer and Healthcare longs).


Deflating The Inflation is already in motion, but you’ll only be able to take it out of market expectations if we stop waking up late every morning begging for Ben Bernanke to bail us out with another QE experiment.


Politicians hate the idea of Deflating The Inflation via a Strong Dollar because that would be bad (in the very short-term) for the stock market. Our Hedgeye Election Indicator has already picked this up (see Chart of The Day). President Obama just had his 1st bullish week in the last 5 (up +130bps week-over-week), primarily because the stock market was up +1.8% last week.


It’s perverse, but it’s real. That’s a big reason why neither Bush or Obama have been advised to back a Strong Dollar Policy.


Causality? Policies To Inflate cause “speculators” to bet on the inflation policies they expect from conflicted and compromised politicians at the Fed and Treasury. From an immediate-term correlation risk perspective, the writing is on the wall too:


Immediate-term TRADE correlations between the US Dollar and:

  1. SP500 = -0.83
  2. WTIC Oil = -0.86
  3. Equity Volatility = +0.93

In other words, as Colonel Jessep would have said, “You want the truth? you can’t handle the truth!” (YouTube video from A Few Good Men It’s the US Dollar, Stupid.


There should be no politics associated with the Purchasing Power of America’s Currency. Every American who championed the Strong Dollar Periods of 1983-1989 (US Dollar Index Averaged $115.18) and 1993-1999 (US Dollar Index Averaged $92.93), gets this.


At $78.69 this morning, the US Dollar Index is -32% and -15% below those 1980s and 1990s averages. The price of oil is +377% and +465% higher than those 1980s and 1990s Strong Dollar, Strong American GDP Growth Peiods of 4.3% and 3.8%, respectively.


We have a Crisis of Credibility in this country because no one wants to talk about the truth. Our currency is what we buy things with. It’s not something we can borrow respect with. Fighting for it is what should be getting you out of bed.


My immediate-term support and resistance ranges for Gold, Oil (WTIC), US Dollar Index, and the SP500 are now $1647-1667, $103.96-105.23, $78.69-79.22, and 1391-1408, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Back To Bed - Chart of the Day


Back To Bed - Virtual Portfolio


The Macau Metro Monitor, May 15, 2012




The number of new home sales in Singapore reached 2,487 in April, surpassing March's total of 2,393 units. 



As the first legal poker room in Singapore, ‘Poker World’ opened for business today and will be operating 24 hours, seven days a week for the foreseeable future.  The room has a capacity of seven tables with available stakes ranging anywhere from SGD $5/$10 to $500/$1000. 


TODAY’S S&P 500 SET-UP – May 15, 2012

As we look at today’s set up for the S&P 500, the range is 37 points or -0.70% downside to 1329 and 2.07% upside to 1366. 












  • ADVANCE/DECLINE LINE: on 5/14 NYSE -2114
    • Down from the prior day’s trading of -637
  • VOLUME: on 5/14 NYSE 802.79
    • Increase versus prior day’s trading of 2.17%
  • VIX:  as of 5/14 was at 21.87
    • Increase versus most recent day’s trading of 9.95%
    • Year-to-date decrease of -6.54%
  • SPX PUT/CALL RATIO: as of 05/14 closed at 2.50
    • Down from the day prior at 2.72 


TREASURIES – We shorted the long-bond (TLT) yesterday as our model signaled immediate-term TRADE overbought with the 10yr capitulating intraday at 1.77%. This morning’s bounce is to 1.79% and there’s no mean reversion resistance to 1.89%. Growth Slowing, globally, obviously gets priced in at the most painful pt of the pain trade (which was down). 

  • TED SPREAD: as of this morning 37
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.80
    • Increase from prior day’s trading at 1.76
  • YIELD CURVE: as of this morning 1.54
    • Up from prior day’s trading of 1.50

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am/8:55am: ICSC/Redbook weekly sales
  • 8:30am: CPI (M/m), Apr., est. 0.0% (prior 0.3%)
  • 8:30am: Empire Manuf., May, est. 9 (prior 6.56)
  • 8:30am: Advance Retail Sales, Apr., est. 0.1% (prior 0.8%)
  • 9am: TIC Flows, Mar. (prior $107.7b)
  • 9am: Long-term TIC Flows, Mar., est. $32.5b (prior $10.1b)
  • 9:30am: Fed’s Duke speaks on housing in Washington
  • 10am: Business Inventories, Mar., est. 0.4% (prior 0.6%)
  • 10am: NAHB Housing Market Index, May, est. 26 (prior 25)
  • 11am: Fed to sell $8b-$8.75b notes in 2/15/2014 to 5/31/2014 range
  • 11:30am: U.S. to sell $30b 4-week bills
  • 4:30pm: API inventories 


  • GOP presidential primary elections in Nebraska, Oregon
  • President Obama delivers remarks at National Peace Officers Memorial Service, U.S. Capitol, 11am
  • House, Senate in session:
    • Senate Finance holds hearing on effects of tax reform on tribes and territories, 10am
    • Trial of EPA lawsuit against Anadarko Petroleum seeking $25b to clean up as many as 2,772 polluted sites, begins in N.Y., 9am
    • NRC meets on developing guidance for U.S. nuclear power plants in wake of the Fukushima Dai-Ichi nuclear accident, 9am
    • IRS holds hearing on how and when some aspects of Foreign Account Tax Compliance Act will be implemented
    • Comment period ends on proposed USDA rules to boost beef exports, 5pm 


  • Euro-area GDP unchanged in 1Q from prior qtr; est. drop 0.2%
  • German first-quarter GDP grew five times more than forecast
  • Moody’s cut ratings on 26 Italian banks, kept outlook neg.
  • Facebook said to plan to raise IPO price range to $34- $38/shr
  • JPMorgan said to weigh bonus clawbacks after $2b loss
  • Coty withdraws $10.7b offer for Avon on “lack of engagement”
  • China foreign investment falls in sixth monthly drop
  • Groupon 1Q profit beat ests. as intl sales expanded
  • Hertz’s bid for Dollar Thrifty seen doubling in price
  • Eastman Kodak seeks interest in patents by today
  • U.S. retail sales probably slowed in April on weather, jobs
  • Amylin said to attract interest from Pfizer, AstraZeneca, Sanofi
  • Euro chiefs may offer leniency to ‘functioning’ Greek govt.
  • MSCI announces index changes, 5pm or later
  • Deadline for funds to disclose quarterly holdings in 13-F filings
  • Credit-card monthly charge-off data released by banks
  • JPMorgan, Morgan Stanley among cos. holding annual meetings 


    • Home Depot (HD) 6am, $0.65 -- Preview
    • Dick’s Sporting Goods (DKS) 7:30am, $0.38
    • Saks (SKS) 8am, $0.18
    • TJX (TJX) 8:34am, $0.54
    • Valspar (VAL) 8:40am, $0.82
    • Alacer Gold (ASR CN) 9:28am, $0.14
    • Carlyle Group (CG) Pre-mkt
    • Acxiom (ACXM), $0.20 Pre-mkt
    • Nationstar Mortgage Holdings (NSM) Pre-mkt
    • JC Penney Co (JCP) 4pm, ($0.08)
    • Sina (SINA) 4:30pm, ($0.22)
    • SEMAFO (SMF CN) 4:50pm, $0.10
    • Ralcorp Holdings (RAH) 5:44pm, $0.85
    • Boardwalk REIT (BEI-U CN) 5:46pm, C$0.61
    • Centerra Gold (CG CN) Post-mkt, $0.04
    • Tumi Holdings (TUMI) Post-mkt
    • Pan American Silver (PAA CN), $0.51 


  • Lead Shortages Loom on Record Demand for Batteries: Commodities
  • Naimi’s $100 Oil Target Challenged by Saudi Heat: Energy Markets
  • Oil Trades Near Five-Month Low on Forecast of U.S. Supply Gain
  • Copper Seen Gaining on Stronger-Than-Estimated German Expansion
  • Gold Seen Gaining as Plunge to Lowest This Year Spurs Investment
  • Coffee Nears a Three-Month High as Prices in Vietnam Advance
  • Soybeans Rebound From Six-Week Low as U.S., Brazil Exports Rise
  • Rubber Declines to Four-Month Low as Greek Impasse Saps Demand
  • Japan to Ration Power Coping With Reactor Shutdowns: Energy
  • Obama Asked by Environmentalists to Halt Shell’s Arctic Drilling
  • Cocoa Grindings in Brazil Advance to Record, Hartmann Says
  • Japan Seeks to Buy Most Milling Wheat in 4 Months in Tender
  • Biggest Ship Hedge Fund Turns Bullish on Supertankers: Freight
  • Palm Oil Gains on Speculation Demand to Climb Ahead of Ramadan
  • Sugar-Cane Area in India’s Biggest Producer to Drop This Year
  • Chesapeake’s Loan Exceeds Highest Bond Yield: Corporate Finance 









EUROPE – covered my Italy short yesterday and have covered both France and Spain shorts as well as we are getting immediate-term TRADE oversold signals in MIB, CAC, and IBEX of 13,629, 3049, and 6726, respectively. Levels and timing matter – Italy’s Stagflation this morning notwithstanding (GDP down -1.3% y/y w/ inflation +3.7%), manage the risk of the bearish range, proactively.






JAPAN – capitulation? Nikkei225 down another -0.8% overnight, leading losers in Asia (which stabilized overall on FDI in China slowing at a slower rate in April). The Nikkei is down 20 of the last 27 trading days (down -13.2%) and few in the manic media have even mentioned it. Keep your eyes on the island importer of oil and Keynesian economics.










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 80.43%
  • SHORT SIGNALS 78.34%

President Obama’s Odds of Winning Reelection Decline to 58.2% -- Hedgeye Election Indicator


If the US Presidential election were held today, President Obama’s odds of winning reelection would be 58.2%, according to the Hedgeye Election Indicator (HEI).  The President’s reelection chance fell to its lowest level in two months, and suffered its biggest weekly decline since November 2011, according to the HEI.



President Obama’s Odds of Winning Reelection Decline to 58.2% -- 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.


Two of those indicators, the relative strength of the US dollar versus a basket of international currencies and the weak overall performance of the US stock market, contributed to President Obama’s weaker chances to win reelection, according to the HEI.


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.


Hedgeye releases the HEI every Tuesday at 7am ET until the election November 6.


Keith bought MPEL in the Hedgeye Virtual Portfolio at $13.02.  According to his model, the TRADE resistance is $14.21 and the TREND support is at $12.96.



Assuming Macau hangs in, better mass volumes should drive higher profitability and continued earnings beats.  MPEL continues to gain Mass share with their focus on the premium segment.  At the end of April 2012, MPEL garnered a 13.2% market share in mass revenues, an all-time high.  Meanwhile, market share losses from the opening of Sands Cotai Central in mid April have been less than expected.  MPEL remains one of the cheapest Macau gaming plays, despite their strong operations and fundamentals.   



Tossing Up BRIC(k)s: India’s Upcoming Roadshow

Conclusion: We do not currently view the announcements of truly positive reforms as a probable events in the near-term and, thus, remain bearish on Indian equities, the rupee and rupee-denominated debt from an intermediate term perspective.


For those of you who may be unable to get allocated a share of the upcoming Facebook IPO, next month the Old Wall will roadshow another “juicy” deal for interested parties. That’s right, gov’t and central bank officials from India will enlist the services of investment banks such as C, GS and JPM to embark on their own version of a global dog and pony show.


The plan is to attract an incremental $75 billion of capital into the Indian economy over the next two years – a marked acceleration from the $117 billion cumulative investment into India’s debt and equity capital markets since they were opened up to the world in 1993. They are certainly working uphill here; global investors have withdrawn 447.8M and 2.1B rupees from India’s equity and debt markets, respectively, from their respective YTD peaks in foreign ownership.


Tossing Up BRIC(k)s: India’s Upcoming Roadshow - 1


Since we are all but certain that the accompanying presentation will be filled with hopeful projections surrounding India’s growth potential and outlook for both urbanization and industrialization, we thought it would be helpful to equip you with a mini-presentation designed to help you appropriately combat the pollyannaish storytelling you’re very likely to hear in these meetings.


Key “Highlights” of the world’s ninth-largest economy:

  • Real YoY GDP growth at an 11-quarter low (+6.1% in 4Q11) and below the rate of headline inflation in every quarter since 4Q10;
  • A fiscal deficit target of 5.1% of GDP in FY13 – 50bps wider than the 4.6% target that was missed in FY12 (actual figure came in at 5.9%);
  • Record sovereign borrowing needs of 5.69 trillion rupees in FY13 to crowd out a record requirement of international capital (all-time wide current account deficit of 3.6% of GDP in 2011);
  • 75% of its 1.2 billion population living on less than $2 per day;
  • A reliance on external supplies for 80% of its crude oil consumption;
  • A ranking of 95th (out of 182 countries) in Transparency International’s 2011 Corruption Perceptions Index;
  • A ranking of 56th (out of 142 countries) in the World Economic Forum’s 2011-12 Global Competitiveness Index (89th in Infrastructure);
  • A currency that has fallen nearly -17% over the LTM to a record low of 53.96 per USD in concurrence with rate cuts and ongoing QE (despite inflation consistently hovering 300-500bps above the central bank’s unofficial 4.5% target since DEC ’09);
  • An local equity market that has a dividend yield of only 1.47% that has fallen nearly -23% from an all-time high in NOV ’10; and
  • Partisan gridlock – made worse by routs of the ruling Congress Party in recent regional elections – that has delayed key economic reforms such as opening up India’s retail market to majority FDI stakes, the so-called Direct Tax Code Legislation and implementing a nationwide goods and services tax (GST). 

Net-net, if economic management were akin to basketball, Indian policymakers have truly put the “brick” in BRIC over the past ~18 months. Moreover, they have yet to introduce a credible strategy to reverse the negative course they are currently on.


That said, however, not only are the aforementioned bearish data points largely in the rear-view mirror, we’d be remiss to ignore the bullish storytelling that is likely to accompany next month’s roadshow. A such, we would view some combination of the following reform proposals as broadly bullish for Indian capital markets (from a price): 

  • An overhaul of the country’s tax code designed to widen the base and discourage tax evasion;
  • A focus on reigning in the country’s outstretched budget deficit via credible fiscal consolidation rather than hopeful expectations of revenue and/or GDP growth;
  • A shift to credible inflation-targeting out of the central bank, rather than hopeful expectations of where they’d like rates of inflation to eventually arrive at;
  • A shift away from supporting financial market liquidity at all costs towards protecting the nation’s currency from making continued all-time lows vs. the USD; and
  • A adoption of a credible system to investigate and, more importantly, punish officials convicted of corruption (currently, the average criminal case for Indian politicians lasts 15 years). 

All told, we do not currently view the announcement(s) of truly positive reforms as a probable event(s) in the near-term and our quantitative analysis of India's equity market affords us confidence in our view. Thus, we remain bearish on Indian equities, the rupee and rupee-denominated debt from an intermediate term perspective – accepting any rallies into next month's storytelling as potential short opportunities if the risk management levels remain supportive of our fundamental thesis.


Tossing Up BRIC(k)s: India’s Upcoming Roadshow - 2


Darius Dale

Senior Analyst


As an aside, we’ve been bearish on Indian equities since early NOV ’10 and the country’s L/C bond and currency markets since MAY ’11. India remains a country that can’t seem to get out of its own way from a monetary, fiscal and regulatory policy standpoint. An increasingly questionable long-term growth outlook and persistently elevated rates of inflation form a colorful backdrop for consistent “misses” relative to the country’s budget deficit, growth and inflation targets. India remains dramatically short of both capital and crude oil – having to import both in size at steep costs to the economy. As detailed in our recent work, India’s latest budget fiasco has set the country up for a repeat of our 2010-11 Nasty Trifecta thesis. 


Recent Relevant Research (email us for copies):

  • 11/9/10: India’s Two Big Problems;
  • 1/6/11: India’s Two-Factor Squeeze;
  • 1/26/11: Top Emerging Market Short Ideas – Indian Equities;
  • 2/28/11: India – Missing Where It Matters Most;
  • 5/3/11: India’s Nasty Trifecta;
  • 10/21/11: Weekly Asia Risk Monitor – Global Bankruptcy Cycle?;
  • 11/28/11: Weekly Asia Risk Monitor – The Many Faces Of King Dollar;
  • 1/20/12: Weekly Asia Risk Monitor – Stress-Testing Asian Risk;
  • 1/9/12: Awful Fundamentals – Out Updated Thoughts On India and Shorting INP Trade Update;
  • 2/17/12: Triangulating Asia – Is It Time for India To Take a Breather?;
  • 3/5/12: Triangulating Asia – Policy Ping Pong Sets Indian Equities Up For a Sustainable Breakout or Breakdown;
  • 3/30/12: India Strikes Out Again; and
  • 4/17/11: Is India Out of Bullets?