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The Macau Metro Monitor, May 22, 2012




Sands China's CEO and president, Edward Tracy, is hoping the Macau government will soon loosen restrictions on foreign hiring to help the gaming industry sustain growth.  “There’s a political process that has to happen.  My belief is, as long as we develop the next one or two projects, we’ll begin to see some relaxation.  You have a base population of 500,000 and an unemployment rate of 2.1%. That 2.1 is almost zero: those people are probably not looking for a job.”  Tracy says a big worry for him is the 4,000 positions he’d like to fill at Sands China Ltd.



Passenger traffic at Singapore's Changi Airport rose 12.7% YoY to 4,206,420 in April 2012



Ugly Beautiful

This note was originally published at 8am on May 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.

“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 1947-1969
  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 1947-1969 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 $1627-1651, $112.42-113.87, $79.36-79.68, $1.30-1.32, and 1364-1388, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Ugly Beautiful - Chart of the Day


Ugly Beautiful - Virtual Portfolio


TODAY’S S&P 500 SET-UP – May 22, 2012

As we look at today’s set up for the S&P 500, the range is 42 points or -2.13% downside to 1288 and 1.06% upside to 1330. 












    • Up from the prior day’s trading of -1586
  • VOLUME: on 5/21 NYSE 798.10
    • Decrease versus prior day’s trading of -31.32%
  • VIX:  as of 5/21 was at 22.01
    • Decrease versus most recent day’s trading of -12.31%
    • Year-to-date decrease of -5.94%
  • SPX PUT/CALL RATIO: as of 05/21 closed at 1.58
    • Down from the day prior at 2.08 


  • TED SPREAD: as of this morning 39
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 1.76
    • Increase from prior day’s trading at 1.74
  • YIELD CURVE: as of this morning 1.47
    • Up from prior day’s trading at 1.46

MACRO DATA POINTS (Bloomberg Estimates):

  • 6:15am: Atlanta Fed President Lockhart talks in Hong Kong
  • 7:45am/8:55am: ICSC/Redbook retail sales
  • 10am: Richmond Fed, May, est. 11 (prior 14)
  • 10am: Existing Home Sales, Apr., est. 4.62m (prior 4.48m)
  • 10am: Existing Home Sales (M/m), Apr., est. 3.0% (prior -2.6%)
  • 11:30am: U.S. to sell 4-week bills
  • 1pm: U.S. to sell $35b 2-yr notes
  • 4:30pm: API inventories 


    • Republican presidential primaries in Arkansas, Kentucky
    • Senate in session, House meets in pro forma session, 10am
    • Senate Banking holds a hearing on derivatives rules required by Dodd-Frank; CFTC Chairman Gary Gensler, SEC Chairman Mary Schapiro will testify
    • Treasury Secretary Tim Geithner attends Financial Stability
    • Oversight Council mtg
    • Interior Secretary Ken Salazar, Bureau of Safety and
    • Environmental Enforcement Chief Jim Watson conduct forum on oil-well blowout preventers, federal oversight, 8am
    • NRC advisory panel subcommittee on Fukushima meets to review guidance documents on task force recommendations, 8:30am
    • FDIC Acting Chairman Martin Gruenberg speaks at American
    • Securitization Forum’s annual meeting, 9am


  • OECD said Europe’s debt crisis risks spiraling, damaging world economy; cuts 2012 euro-area GDP forecast to -0.1% from 0.2%
  • Facebook fell 11% to $34.03 in 2nd day of trading
  • U.S. antitrust regulators told EBay, Yelp to provide information on whether Google is competing unfairly, speeding up a probe that began a year ago, people familiar said
  • Accor agreed to sell Motel 6 hotel chain to Blackstone- managed fund for $1.9b
  • Fitch cuts Japan L-T ratings to A+; outlook negative
  • U.S. sales of existing homes probably rose in April for 1st time in 3 months to 4.61m annual rate
  • CFTC to release clearing proposal for index swaps, Gensler says
  • Merkel, Hollande head for showdown on debt at EU summit
  • U.K. inflation slowed more than economists forecast in April
  • IMF says U.K. needs more monetary stimulus, possible tax cuts
  • Former Yahoo! executive, former mutual fund manager at a unit of Ameriprise pleaded guilty to insider trading, the U.S. said
  • MetLife seen scaling back annuities as CEO Kandarian unveils his plan to improve returns
  • Spain borrowing costs rise at 6-month bill auction
  • KKR said to be close to raising $2b for second Asia fund
  • IAEA, Iran reach agreement on atomic inspections
  • No IPOs expected to price today 


    • Williams-Sonoma (WSM) 6am, $0.32
    • Express (EXPR) 7am, $0.49
    • AutoZone (AZO) 7am, $6.25
    • DSW (DSW) 7am, $0.90
    • Cracker Barrel Old Country Store (CBRL) 7am, $0.75
    • Medtronic (MDT) 7:15am, $0.98
    • Best Buy (BBY) 8am, $0.59
    • Ralph Lauren (RL) 8am, $0.85
    • Collective Brands (PSS) 4pm, $0.44
    • Analog Devices (ADI) 4pm, $0.51
    • Universal (UVV) 4pm, NA
    • Dell (DELL) 4:01pm, $0.46
    • PetSmart (PETM) 4:02pm, $0.73
    • Guess? (GES) 4:04pm, $0.26
    • Take-Two Interactive Software (TTWO) 4:05pm, $(0.54)
    • Avago Technologies (AVGO) 4:05pm, $0.63
    • Compuware (CPWR) 4:13pm, $0.14
    • HEICO (HEI) 4:30pm, $0.37
    • Qihoo 360 (QIHU) 5pm $0.15 


  • Diamond-Seller Choksi Takes on World With Bollywood: Commodities
  • Wheat Falls as Rain in Russia and Ukraine May Aid Parched Crops
  • Oil Drops as OECD Cuts Europe Growth, Iran Agrees to Inspection
  • Gold Declines as Rally Prompts Sales and Physical Demand Falls
  • Copper Falls 0.5% in New York Trading, Declines 0.2% in London
  • Palm Oil Climbs for Fourth Day as 10% Drop Lures Investor Demand
  • Robusta Coffee Falls in London on Speculation Price Rose Too Far
  • U.S. Said to Oppose Easing Oil Sanctions at Iran Nuclear Talks
  • Oil Supplies Grow as Seaway Relief Valve Looms: Energy Markets
  • GrainCorp Climbs After Raising Full-Year Forecast to Record
  • Cotton May Drop 23% by Year-End on Inventories: Chart of the Day
  • Flint Hills Has Release at Corpus Christi Plant, NRC Filing Says
  • BHP ‘Chopping Block’ Looms for Nickel, Aluminum Assets Amid Cuts
  • Ships Deter Pirate Stalkers by Signaling Armed Guards’ Presence
  • Indonesia May Cut June Palm Oil Export Tax to 18%: Association
  • Brazil Set to Lose Out as Thailand Meets Chinese Sugar Demand 





US DOLLAR – we bought back our bullish position in the US Dollar on red yesterday and still think it offers the most asymmetry to the upside of almost any big Global Macro trade; the fallout, if we continue to be right on that, will be in the Commodities – we re-shorted Gold yesterday as its immediate-term correlation to the USD is -0.89.











JAPAN – our bearish call on Japan is starting to pick up a broader audience (launched it in March); Fitch downgrades Japan to A+ this morning for some of the wrong reasons, but who actually reads what they say anyway? bottom line is that Japan has huge fiscal/debt issues; we re-shorted Yen on Friday and that’s reacting negatively on the Fitch headline, down -0.54% (vs USD).


INDIA – nope, it’s not all about Greece/Europe folks – India’s stock market stopped going up in February and now their fiat currency is in freefall (Rupee); Sensex failed at its 1st line of (16341) resistance last night and is down -12% from its Feb top. India is not China.










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CHART OF THE DAY: Prospects of Survival


CHART OF THE DAY: Prospects of Survival - Chart of the Day

Prospects of Survival

“Organisms that treat threats as more urgent than opportunities have a better chance to survive.”

-Daniel Kahneman


If you only have time to read one chapter of Dan Kahneman’s Thinking, Fast and Slow this summer, I’d go with Chapter 26, Prospect Theory. It helped me bridge some gaps between the fractal dimensions in our models (math) and behavorial factors.


Prospect Theory is a behavioral economic framework that will be much more relevant to the next generation of economists than this one. It will take time to pound the Keynesianism out of our system. Sadly, seeing centrally planned economic systems in Europe and Japan (maybe at some point in the USA) fail, will be the only way to expedite this evolution.


On pages 282-283 of Kahneman’s latest book, you’ll get Prospect Theory both with a simple picture and three bullet points of prose:


1.       “Evaluation is relative to a neutral reference point.”

2.       “A principle of diminishing sensitivity applies to both sensory dimensions and the evaluation of changes in wealth.”

3.       “The third principle is loss aversion… losses loom larger than gains.”


And that brings me right back to the top of this morning’s Early Look quote, to the bottom of your gut feeling at Friday’s lows, and back again to yesterday’s biggest market rip in 2 months. Your Prospects of Survival in this business depend on your process.


Back to the Global Macro Grind


Losing other people’s money isn’t cool. Losing your own money is even less cool. If you are doing both at the same time, my sense about the matter doesn’t really matter – where your emotions fit on the slope of the loss aversion curve does.


That’s why we bought red on Friday and sold green into yesterday’s close. When it comes to your decisions to buy or sell something, there really are no rules about reversing everything you did in the prior day. I am not Warren Buffett. I am your Risk Manager. The only rules in our profession are self imposed by the institutions who think they are managing our risk.


But what is risk? What are these institutional investing styles? Why are either measures relevant to what’s happening in your portfolio today as opposed to risk measurements and style factors you may have used in 2005-2007?


There are many more questions here than answers. My goal, at the top of every risk management morning, is to Embrace Uncertainty and have markets pick me. The more I try to pick markets, the more risk I impose on myself. What is supposed to work, rarely works. And what shouldn’t happen, usually happens. Either accept that, or whine about it – it’s reality.


I sold my SP500 (SPY) long position yesterday – here’s why:

  1. Immediate-term TRADE upside resistance into the close = 1329 (so I only had 1% upside left)
  2. Immediate-term TRADE downside support into the close = 1288 (2% downside makes my risk vs reward 2:1)
  3. Immediate-term RANGE of risk (3 day probability model) = 89 S&P points (that means volatility will be real)
  4. US Equity Volatility (VIX) was down -12.3% on the day but holding my TRADE and TREND lines of support
  5. US Equity Volume was down -17% versus the average volume of last week’s down days
  6. US Equity Correlation Risk to the US Dollar Index remains wacky elevated at -0.96 (USD vs SPY)

Multi-factor, Multi-duration Risk Management – that’s how I roll. On the immediate-term TRADE duration (3 weeks or less), those were the 6 glaringly obvious reasons to be at least a lot less net long. Catalyst wise, I gave you my calendar ones in yesterday’s note.


In the Hedgeye Portfolio, we opened the day with 16 LONGS, 4 SHORTS and closed the day with 10 LONGS, 8 SHORTS. That’s easily the most aggressive 1-day swing in what can be considered a proxy for my “net” exposure in 2012.


But was it aggressive? Or wasn’t it aggressive enough? Maybe I should have sold everything and gone to 100% Cash. Maybe I should have shifted to net short. Maybe I shouldn’t have done anything at all.


Maybe I should just stick with the process and take the high probability cut at the ball, and live with it.


And I will.


With the US Dollar Index down for the 2ndday in a row, we bought that long position back yesterday on red. That position is one we have been pounding the pavement on with clients as the most asymmetric long-term long idea in Global Macro (email for Theme #3 in our Q2 Macro Themes called “Asymmetric Risks” and you’ll see the long-term mean reversion case for Strong Dollar).


In addition to the aforementioned Correlation Risk of staying long the SP500 (SPY) in the face of a -0.96 USD/SPY correlation this morning, here’s a refresh of the other big immediate-term USD correlations jumping off the page:

  1. Commodities (CRB Index) = -0.92
  2. Euro Stoxx600 = -0.97
  3. Gold = -0.89

That’s why I re-shorted Gold (GLD) yesterday too.


There’s rain in Connecticut, but Prospects of Survival out there this morning look better than bad.


My immediate-term support and resistance ranges for Gold, Oil (WTIC), US Dollar, EUR/USD, and the SP500 are now $1, $90.57-94.12, $80.82-81.97, $1.26-1.28, and 1, respectively.


Best of luck out there today,




Keith R. McCullough
Chief Executive Officer


Prospects of Survival - Chart of the Day


Prospects of Survival - Virtual Portfolio

President Obama’s Reelection Chances Dip to Their Lowest Level in Three Months


President Obama’s odds of winning reelection slipped to 56.5%, according to the Hedgeye Election IndicatorDaryl Jones (HEI). That’s the lowest reading on the HEI since early February, and it marks the fourth consecutive weekly decline. The HEI measures the likelihood that President Obama would win reelection if the election were held today.



President Obama’s Reelection Chances Dip to Their Lowest Level in Three Months - 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.


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