Keith shorted CSH in the virtual portfolio earlier today at $43.85. His quantitative levels show a TRADE (short-term) and TREND (intermediate term) levels of resistance at $44.61 and $45.97, respectively.


Our bearish view on CSH is growing. There are several factors at play here. 


* The YoY price change in gold is poised to roll from a 22% tailwind to an 8% tailwind in 2Q12 and if gold holds at its current level it will be a 7% headwind in 3Q12. A rough heuristic for the revenue model of a pawn store operator is that gold appreciation over the past decade has contributed 9.6%, or just over half, of the overall growth in revenue. We show this in the chart below. For CSH the effect should be more acute, because they hedge out the price of gold six months in advance. This means that when they reported 1Q12 results, they were actually reflecting the 38% 3Q11 YoY tailwind, meaning that gold price tailwinds will slow meaningfully for them for the coming 9 months.




* Judging from the divergence between expectations and reality, the consensus doesn't understand the amount of headwind the company if facing. Consider the net revenue growth expectations the Street is modeling in for the next 3 quarters relative to the headwind from gold.


CSH: A GOOD SHORT FOR THE REST OF 2012 - CSH expectations

Source: Factset Estimates, Hedgeye Research 



* The other issue at play here is whether gold volumes are drying up for the pawn operators. We wrote a note on this following EZPW's earnings, but to summarize: both FCFS and EZPW spoke to materially declining gold volumes, and EZPW attributed it to their borrower base running out of gold. Cash America came out and denied that they were seeing the same trends in their business, but call us skeptical. The main driver of the falling volumes is the emergence in the last few years of the pop-up gold buyer - ads for these places are now ubiquitous: billboards, radio, tv. These shops are taking share from traditional pawn business like CSH, EZPW and FCFS. A secondary factor is that the borrower base is running out of gold. The rise in the price of gold over the past decade has made for a largely one-way trade: gold leaves the population of pawn borrowers and returns, via scrap, to more affluent customers outside the pawn borrower population.




CSH: A GOOD SHORT FOR THE REST OF 2012 - Gold Macro Chart


CSH: A GOOD SHORT FOR THE REST OF 2012 - Rev by risk type


Joshua Steiner, CFA


Allison Kaptur


Robert Belsky


Having trouble viewing the charts in this email?  Please click the link at the bottom of the note to view in your browser. 

Treasuries Will Eventually Revert To The Mean . . . But When?

Conclusion:  We covered our mean reversion short position in long term treasuries via the etf TLT yesterday as there are number of catalysts that will keep long term yields from increasing meaningfully through the end of June.  Beyond that time frame, much of fixed income looks like it could be short (at a time and price).


Earlier today, we covered our short position in the etf TLT, which represents long term treasuries with a 20+ year duration.  A key insight for us to enter this position was 10-year treasuries yields hitting basically an all-time low earlier last week at 1.70%.  The chart below shows the long term range of the 10-year over the past decade.  Currently, the yield of the ten year is 1.79%.  This is more than two standard deviations below average yield of the last ten years of 3.8%.  


Treasuries Will Eventually Revert To The Mean . . . But When? - 10yr.avg


Over the longer duration, the risk reward set up remains asymmetric for yields to increase.  We can see this in our price ranges as the TRADE range is tight at 1.66% - 1.81%.  Meanwhile, the TREND resistance level is 2.03%.  So, up to our intermediate term support levels there remains significant upside in yields and downside in bond prices.


In the intermediate term, despite the massive longer term reversion to the mean potential, it is unlikely to be a money making opportunity being short U.S. treasuries for two key reasons:

  1. Operation Twist – The Federal Reserve’s operation twist is scheduled to continue through June 30th. By some estimates, the Federal Reserve has already surpassed their target of extending average maturities by 100 months, but regardless they will keep buying longer dated treasuries for the next forty days and this will keep yield increases muted.
  2. Europe – As highlighted in the chart below that compares 10-year yields of Germany versus Italy and Spain, the European debt debacle is far from resolved and will continue to support the relative safety (albeit very relative) of U.S. government debt.   As our colleague Josh Steiner highlighted in a note yesterday on Greek elections, the looming June 17th election in Greece will have critical impact on the future of austerity and reform in Europe, and as a derivative the yields of European sovereign debt.  If there is risk in European sovereign debt, U.S. treasuries will remain a safe haven of sorts.  

Treasuries Will Eventually Revert To The Mean . . . But When? - 10yr.euro


Longer term, the increasingly key consideration will be the U.S. fiscal and balance sheet situations, which continues to deteriorate in the year-to-date.  For starters, the Congressional Budget Office raised their estimate for the deficit in fiscal 2012 by $93 billion to $1.2 trillion in March.  This key reason for this is because revenue has basically been flat year-over-year.  As a result federal debt-to-GDP is hovering just over the 100% mark.


The key negative fiscal catalyst for Treasuries beyond June 30thand the end of Operation Twist is the debt ceiling getting hit again and the potential for another downgrade of U.S. sovereign debt (The caveat is that the last downgrade did not lead to an increase in yields.) The current debt ceiling is $16.4 trillion and the public debt balance as of May 18this $15.7 trillion.  Interestingly, roughly seven months ago the public debt balance was $15.0 trillion, which at a similar rate of growth suggest we should hit the debt ceiling by the end of calendar 2012.  Once again, this will be major political football that will increase consternation related to low historical yields.


One last point we wanted to highlight in this note was that of relative yields.  In the table and chart below, we compare U.S. investment grade yields to U.S. junk bond yields to the earnings yield of the Dow Jones Industrial Index to the yields of 10-year treasuries.  Not surprisingly, given the bubble in treasuries, there is a relative bubble of sorts in the rest of fixed income. 


Treasuries Will Eventually Revert To The Mean . . . But When? - 3



Specifically, both investment grade bonds and junk bonds are trading well below their long run average yields and at, relatively, tight spreads to treasuries despite the artificially low yields in the treasury market.  Trailing twelve month earnings yields for the Dow Jones Industrial Index appear relatively cheap, but, as always, equity valuations depend on the future view of growth.  Interestingly, historically the earnings yield spread between the DJII and 10-year treasuries has actually been meaningfully tighter than between junk bonds and 10-year treasuries.   This implies high yield could be most at risk in a mean reversion scenario or if economic growth slows more dramatically.


Treasuries Will Eventually Revert To The Mean . . . But When? - 4


Clearly, Japanese sovereign debt yields have stayed low despite major growth and fiscal headwinds.  The same scenario may well play out in the U.S., or, as they say, this time could be different and reversion to the mean in the fixed income market could catch many off guard. As Hemmingway famously wrote:


“It occurs very slowly, then all at once.”




Daryl G. Jones

Director of Research

Buying German Bunds (BUNL): Trade Update

Positions in Europe: Long German Bunds (BUNL)

Keith bought German Bunds (BUNL) in the Hedgeye Virtual Portfolio today. The move is a continuation of how we are thinking about Europe: there’s a relative advantage to playing the capital markets of the stronger countries on the long side and weaker countries on the short side, at a price. We’re highly sensitive to price and well aware that there’s no simple equation to pair or hedge risk in Europe: political headline risk, even from the tiniest of countries in Europe, can roll country equity indices and influence yields across the continent. 


Buying German Bunds (BUNL): Trade Update - 1. bunl


And we don’t expect political risk to abate the slightest from here. We’re also of the opinion that very little substance will come out of tomorrow’s European Summit. The market hopes to see Eurobonds rolled out to subsidize the region. While we don’t rule them out as a potential “tool” down the road, we think the strong anti-Eurobond stance of the Germans will hold weight. Further, should Eurobonds be highly considered, they’d have to be approved by 27 Parliaments across Europe. This is a tall order, especially considering the UK’s firm opposition to Eurobonds, and logistically there is no chance of this happening over a matter of days.


From a political positioning perspective, we see Eurocrats putting the ball in Greece’s court to decide its fate. Should the anti-austerity party of Syriza win elections (with a coalition) on June 17th, we expect the outcome to be a swift bank-run, bankruptcy, default, and exit from the Union. Again we don’t see this as a high probable event as polls continue to show that nearly 80% of Greeks want to stay in the Eurozone and with the EUR. The gun is loaded, do Greeks want to pull the trigger?


The only other options at hand under a Syriza victory are that the Greeks called the Eurocrats bluff, in which austerity is thrown off the table (we also view this as highly unlikely) or that another massive bailout scheme is issued (possibilities included another Eurobonds, giant EIB loan to Greece) around the election, but this too seems less probable than an outcome in which a pro-austerity coalition (probably New Democracy and Pasok) wins the elections and then maybe concessions are made to Greece’s fiscal consolidation targets. 


For more on the specifics mentioned above, please contact me at and we can set up a call.




Matthew Hedrick
Senior Analyst



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%

Boom, There It Is: SP500 Levels, Refreshed

POSITIONS: Long Healthcare (XLV), Short Industrials (XLI) and Basic Materials (XLB)


The game is moving fast out there, and I like it.


Across risk management durations, here are the lines that matter to me most: 

  1. Intermediate-term TREND resistance = 1369
  2. Immediate-term TRADE resistance = 1330
  3. Immediate-term TRADE support = 1288 

The good news is that we bounced right from where we should have. The bad news is that we can go right back there, fast. Below 1288 support is my long-term TAIL line of 1282, so that’s bullish enough for me to buy back what I sell today, down there again too.


Keep managing your gross and net exposure to this bullish TREND in Volatility proactively.




Keith R. McCullough
Chief Executive Officer


Boom, There It Is: SP500 Levels, Refreshed - SPX


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

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.