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Long Time Leaving

“I been a long time leaving, but I’m going to be a long time gone.”

-Willie Nelson


I think we have been pretty clear on this – Global Growth is slowing and the USA is not going to “de-couple” from this globally interconnected world. This time is not different.


Last night on CNBC I asked Goldman’s chief of everything US economic forecasting, Jan Hatzius, when he was going to cut his US GDP forecasts again. He didn’t really answer the question.


That doesn’t mean that you don’t have to answer it for yourself and/or your clients out there today. Real-time risk waits for no one.


Back to the Global Macro Grind


Willie Nelson is also known as the Red Headed Stranger. He’s the kind of Red-White-and-Blue blooded American we Canadian folks from Northern Ontario grew up respecting. He was born during a legitimate Great Depression (1933). He was self-made. And he didn’t wake up every morning looking to point fingers at anyone but himself.


That’s who I am. That’s who many of you are. That’s why this entire political Gong Show that has become our policies and markets gets us so fired up. That’s also why we are going to lead from the front and change it. The day you stop blaming everyone but yourself, is the day you start to lead.


Morgan Stanley got a subpoena last night for doing what it is that the Old Wall does. So, they put out a press release admitting as much – but, in doing so, entirely missed the point – i.e. what it is that they do during the IPO process doesn’t make sense to The People. This is a huge political football going into the US Presidential Election.


Since Morgan Stanley was a recipient of socialized bailout policies, now that’s their problem to deal with. That’s the other side of the Hank Paulson trade. It’s now the US stock market’s problem too. The US Financial Sector ETF (XLF) is laden with the Too Big To PR names.


In the last 2 days I have basically yard-sale’d my Global Equity exposure. On Monday morning we had 27% US Equity and 12% International Equity exposures, respectively. I’ll go into the open with the following:

  1. US Equities 6% (Healthcare = XLV)
  2. International Equities = 0%
  3. US Dollar = 9%

I’m not going to apologize for playing this game fast. Sometimes you have to. I’ve been a Long Time Leaving this charlatanic parade of storytelling. There are only so many times you can assure people that growth “is back” or it just “feels like” an economic recovery.


Enough of the “feel” already.


Quantitatively, this doesn’t feel like anything other than what the score is telling you. Growth Slowing has been plainly obvious to any economist/strategist who has live quotes and real-time data since March.


Inclusive of this morning’s selloffs, here are the asset price draw-downs (ie real-time indicators) since February-March:

  1. Japanese stocks (Nikkei225) = -16.6%
  2. Hong Kong stocks (Hang Seng) = -13.3%
  3. Indian stocks (BSE Sensex) = -13.5%
  4. German stocks (DAX) = -11.8%
  5. Italian stocks (MIB) = -23.8%
  6. Russian stocks (RTSI) = -27.5%
  7. Commodities Index (CRB) = -12.3%
  8. Oil (WTIC) = -17.8%
  9. Gold = -13.0%
  10. Copper = -14.1%

If you bought into any of the cockamamy “surveys” that growth “feels” fine, you can tell me how that’s going to feel in your P&L today. We, as a profession, have been living through growth slowdowns for 5 years and we are better than some of the said sources on growth have repeatedly proven to be.


You’ll note that I didn’t include Spain or the US stock market in the draw-down table. But they are in our refreshed Chart of The Day. You’ll recall that you’ve had plenty of opportunity to sell US Equities in the last 3 months; plenty of opportunity to ask yourself ‘heh, why on God’s good earth would the US, China, and Japan “de-couple” from mean reversion risk?’


Even if you didn’t say it to yourself that way, you probably thought about it in terms of what we have coined as The Correlation Risk. Get the US Dollar right, and you’ll get pretty much everything else right. That’s not a perma-strategy. Nothing is. It’s just the one that’s not losing you money right here and now.


With the US Dollar up for the 4thconsecutive week to $81.80 this morning, here’s your refreshed immediate-term inverse correlations between the USD and everything else:

  1. SP500 = -0.95
  2. Euro Stoxx600 = -0.96
  3. MSCI Emerging Market Index = -0.97
  4. CRB Commodities Index = -0.93
  5. US Treasury 10-yr Yield = -0.93
  6. Copper = -0.97

How does that “feel”?


I’ve been a Long Time Leaving the broken forecasting processes of the Old Wall. Most of these outfits have missed every single Growth Slowing call since 2007. Unless they change what it is that they do, they might just be a long time gone soon too.


My 27 person research team and I will be grinding through our long/short positions on our Best Ideas Conference Call this morning at 11AM EST. Please ping if you’d like access to Risk Managed Buy-Side Research built by buy-siders.


My immediate-term support and resistance ranges for Gold, Oil (WTIC), US Dollar Index, EUR/USD, and the SP500 are now $1, $90.13-93.28, $1.26-1.28, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Long Time Leaving - Chart of the Day


Long Time Leaving - Virtual Portfolio


CONCLUSION: We continue to flag what we view as heightened risk for a JGB market rout; for now, however, the coast remains clear.


POSITION: Short the Japanese yen (FXY).


In the wee hours of the morning (US time) the international ratings agency Fitch downgraded Japan’s long-term local-currency sovereign debt rating one notch to A+; additionally, the agency reduced the country’s long-term foreign currency debt rating two notches to the same level. This action is critical in nature because we are now one step (i.e. a downgrade from another “Big 3” agency: S&P = AA- w/ NEG outlook and Moody’s = Aa3 w/ STABLE outlook) closer to triggering a ~$78B capital shortfall across the Japanese financial system.




One catalyst we see in accelerating the time frame of additional downgrades is that Japanese bureaucrats may wait until scheduled Upper House elections in the summer of 2013 to hold elections in the Lower House, per Azuma Koshiishi, secretary-general of the DPJ. Unless the LDP has backed off of their demand to dissolve the Diet prior to negotiating on the VAT hike, there will be no progress made on this front for over one full year – a major catalyst for further downgrades of Japanese sovereign debt further per commentary out of both of the remaining agencies.


The most recent downgrade (today) had a fair impact on the currency market, with the USD/JPY cross jumping from ¥79.58 to as high as ¥79.77 within minutes following the downgrade.




Looking to the Japanese sovereign debt market – which has been a key focus of ours this year as it relates to potentially being the next domino in the context of our Sovereign Debt Dichotomy theme – prices are not confirming Fitch’s worry that “[t]he country’s fiscal consolidation plan looks leisurely relative even to other fiscally-challenged high-income countries, and implementation is subject to political risk.”


Two, ten and thirty-year nominal JGB yields have trended down in recent months to ~7, ~9 and ~2 year lows, respectively. From a market demand perspective, a couple of recent developments highlight the [arguably] well-deserved complacency within that market in that the BOJ failed to receive enough offers from financial institutions for its recent Asset Purchase Program open market operation (only ¥480.5B of a ¥600B target); this is in addition to failing to meet a ¥310B target (¥174.7B offered) for its Rinban operation (purchases of JGBs w/ a maturity < 1yr). For now, Japanese financial institutions can’t get their hands on enough JGBs!




Given the impressive demand conditions, it’s no surprise to see that L/T-S/T nominal JGB yield spreads have compressed meaningfully over that same duration. Part of this is due to the risk that the BOJ decides on implementing further easing measures in its monetary policy meeting, which is currently underway (results published tomorrow). Increasing the [bond] duration of their purchases and potentially acquiring foreign assets are two policy initiatives we think they may pursue if they do decide to incrementally ease at the current juncture.




For context, we’re of the view that the Cabinet Office’s recently upgraded 2012 economic outlook and the central bank’s increasingly hawkish fiscal 2012-13 inflation guidance limits the need for them to pursue further easing measures in the near term; a chart of medium term breakeven inflation expectations in Japan confirm our view. On the flip side, the threat of rolling blackouts this summer ranging from 7-20% of peak consumption (depending on region) could force downward pressure on the Japanese economy over the intermediate term and force the central bank to react preemptively to maintain Japanese Real GDP growth, which, after four consecutive quarters of YoY contraction, accelerated to +2.7% YoY in 1Q12.




Jumping back to JGB risk, Japanese sovereign credit default swaps of the 5yr and 10yr tenors have backed up a fair amount in recent weeks, widening +18bps and +31bps, respectively, from their YTD lows. As the table below highlights, however, the widening seen in Japanese swaps recently has dramatically lagged the region, lending credence to our view that Japanese sovereign debt risk on this metric is merely accelerating as a function of global financial market contagion borne largely out of Europe. The same can be said regarding the recent widening of Japanese bank CDS as well, though perhaps to a lesser degree, given their outsized exposure to JGB risk (25% of total assets).








All told, we continue to flag what we view as heightened risk for a JGB market rout – particularly from current prices. That said, however, our call has not and will not invoke the consensus storytelling that simply focuses on highlighting the unsustainable nature of Japanese fiscal imbalances; rather we will continue to stay finely in tune with any/all catalysts that we find material enough to potentially shift sentiment within this market. For now, the coast remains clear and we remain bearish on the JPY vs. the USD from a long-term TAIL perspective – of course trading it with a bearish bias over the intermediate term, given its preponderance to appreciate in the context of our TREND-duration fundamental Global Macro view.


Darius Dale

Senior Analyst





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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. 

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