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The Game

“The world is not the way they tell you it is.”

-‘Adam Smith’


That’s the opening sentence to one of my favorite books about markets, The Money Game, by George Goodman. He wrote it in 1967 under the pseudonym ‘Adam Smith.’ That was a metaphor for the anonymity of the game itself. It helped him tell it like it is.


When you call what it is that we do a “game”, most people feel something about that. Some people love it – some loathe it. But that doesn’t change the fact that, for me at least, this is the most competitive arena away from professional sport that I can find.


The irony is that this is a money game and money is the way we keep score. But the real object of The Game is not money, it is the playing of The Game itself. For the true players, you could take all the trophies away and substitute plastic beads or whale’s teeth; as long as there is a way to keep score, they will play.” (page 21)


Back to the Global Macro Grind


For those of us keeping score since Growth Slowing became obvious, globally in March, the game has largely been won by those who moved a significant amount of their asset allocation to Cash.


As a reminder, our Top 3 Global Macro Themes for Q2 2012 have been:

  1. Fed Fighting: The Last War (Growth Slowing)
  2. Bernanke’s Bubbles (Commodities)
  3. Asymmetric Risks (long US Dollar)

When you have Growth Slowing and Deflating The Inflation of Bernanke’s Bubbles (Commodities), at the same time, you get draw-downs in everything big beta (cyclical commodities, emerging market stocks, European bonds, etc.). You also see a “flight to quality” (i.e. low beta) like US Dollars, German Bunds, and US Treasuries.


Playing the game this way is not new. If you made this beta down-shift move at the end of Q1 in 2008, 2010, 2011, you won. At every Q1 turn, the Old Wall has been as dependable as the sun rising in the East in A) not taking down their GDP Growth estimates when markets implied they should and/or B) understanding the Correlation Risk associated with a Dollar up move.


So, while it’s fun to say “consensus is bearish”, it’s more fun when you say that at 1295. Winning is always more fun.


From a fundamental research perspective, consensus is not yet Bearish Enough on Growth. By the end of Q2 it might be. Market expectations change every day, so stay tuned. On that score, in the USA we’ll get 3 Big Hedgeye Mac-ro catalysts this week:

  1. Q1 2012 US GDP (to be revised well below Old Wall consensus that was running at 2.5-3% only 3 months ago)
  2. PMI and ISM readings for the month of May (expectations are high in the mid-50’s for both prints)
  3. US Employment Report (expectations are still relatively high for a 150,000 plus print on payroll adds)

From a quantitative risk management perspective in US Equities, here’s what I am looking for to register another buy/cover signal:

  1. VIX re-test of the 24-25 zone
  2. SP500 re-test of the 1 zone
  3. The II Bull/Bear Spread to narrow to +600bps wide or less (this morning it widened to the Bull side, back to +1500 bps wide as only 24% of those surveyed admit to being bearish – that’s called career risk management after an up week)  

Volume is another critical quantitative factor to consider relative to the games we’ve played coming out of Q1 2008, 2010, and 2011. The 2012 game has no volume on the rallies (most of those other years had volume).


Yesterday’s +1.1% up move in the SP500 to a lower-high (down -6.1% from the 1419 SP500 YTD peak) clocked a volume reading that was -26% below the average down day volume for the month of May alone.


Yes, that’s bad. So are the “flows.”


The flows are always key to the game. Sometimes I think they can be as important as any behavioral or quantitative risk management signal I can give you.


The flows (as in your money) are either flowing in or out of the market in real-time. Currently, in both commodities and equities, we have outflows, globally.


That’s where the run of the mill 2007-2012 Perma-Bulls get right whipped around buying high. They still think this is the 1990’s or the 2004-2007 period where money was easy (Greenspan and Bernanke) and the flows where rushin’ in.


The flows are like the fans of The Game. You can have the best game of your life, but if no one is watching, buying popcorn, and planning on coming back to the next game, who cares?


That’s why I have been so focused on the leadership principles of Transparency, Accountability, and Trust ever since I put on a Hedgeye jersey in 2008. I believe in the deepest part of my being that if we don’t, as a profession, get our free-market principles back – we’re not getting The People’s trust back.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $104.62-108.08, $81.87-82.91, $1.24-1.26, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Game - Chart of the Day


The Game - Virtual Portfolio


TODAY’S S&P 500 SET-UP – May 30, 2012

As we look at today’s set up for the S&P 500, the range is 21 points or -1.23% downside to 1316 and 0.34% upside to 1337. 












    • Up from the prior day’s trading of 114
  • VOLUME: on 5/29 NYSE 714.24
    • Increase versus prior day’s trading of 19.91%
  • VIX:  as of 5/29 was at 21.03
    • Decrease versus most recent day’s trading of -3.35%
    • Year-to-date decrease of -10.13%
  • SPX PUT/CALL RATIO: as of 05/29 closed at 1.71
    • Down from the day prior at 2.03 


GROWTH – 1st Commodities, then Bonds, and now Stocks getting it; the Old Wall’s economists do not, yet – but they will; we’ve yet to see Hyman or Hatzius cut their US GDP Growth estimates to where we or the bond market has them (1.7-1.9% US GDP is our best case, for now). Looking for that consensus capitulation, blaming Europe.


  • TED SPREAD: as of this morning 39
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 1.68
    • Decrease from prior day’s trading at 1.74
  • YIELD CURVE: as of this morning 1.40
    • Down from prior day’s trading at 1.46 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, week of May 25
  • 7:45am/8:55am: ICSC/Redbook weekly sales
  • 10am: Pending Home Sales (M/m), Apr., est. 0.0% (prior 4.1%)
  • 10am: Pending Home Sales (Y/y), Apr., est. 22.0% (prior 10.8%)
  • 11am: Fed to purchase $4.5b-$5.25b notes in 8/15/2020 to 5/15/2022 range
  • 11:30am: U.S. to sell $25b 52-week bills
  • 11:30am: U.S. to sell 4-week bills
  • 1:20pm: Fed’s Fisher speaks on economy in San Antonio, Texas
  • 1:30pm: Fed’s Dudley to speak on regional economy in New York
  • 4:30pm: Fed’s Rosengren speaks in Worcester, Mass
  • 5pm: API weekly petroleum inventories


    • House returns to work following recess; Senate out until Jun 4
    • President Obama signs U.S. Export-Import Bank reauthorization
    • Commerce Dept. announces level of wind tower import tariffs
    • Mitt Romney wins Texas, giving him enough delegates to clinch Republican nomination


  • Euro-area economic confidence dropped more than est. in May
  • America Movil discussed cooperation with KPN before offer
  • Spain’s Ordonez says Bankia bailout terms still unknown
  • Pep Boys terminates $1b merger with Gores Group
  • Fiat to list in NY after CNH unit merger
  • Apple’s CEO says focus is TV, sees closer Facebook ties
  • Euro-area loans grew at slowest pace in 2 yrs. in April
  • Atlantic Broadband said to seek $1.4b sale
  • RIM shares plummet after surprise 1Q op loss
  • BankAtlantic must face SEC disclosure fraud lawsuit
  • Facebook’s Zuckerberg drops off Billionaires Index


    • Fresh Market (TFM) 6am, $0.36
    • Yingli Green (YGE) 6am, $(0.22)
    • CorVel (CRVL) 6:15am
    • Booz Allen Hamilton (BAH) 7am, $0.40
    • Daktronics (DAKT) 7am, $0.03
    • RBC Bearings (ROLL) Bef-mkt, $0.63
    • TiVo (TIVO) Aft-mkt, $(0.16)
    • Lions Gate Entertainment (LGF) Aft-mkt, $0.22


  • Marubeni Follows Glencore to Boost Grain Trading: Commodities
  • Brent Falls to 5-Month Low as U.S. Supplies Seen at 22-Year High
  • Gold Falls a Second Day as Europe’s Debt Crisis Boosts Dollar
  • Copper Drops as Spain’s Credit Rating Revives Crisis Concern
  • Wheat Slides as U.S. Harvest Accelerates While Soybeans Decline
  • Cocoa Falls as Ivory Coast’s Mid-Crop Harvesting Gathers Pace
  • Felda Said to Seek $3.2 Billion in Year’s Second-Biggest IPO
  • Iraq Begins First Oil, Gas Exploration Auction Since Saddam Era
  • Japan Aluminum Buyers Said to Agree to Record Quarterly Fee
  • Standard & Poor’s GSCI Index Drops to Lowest Since October
  • Dollar’s Gold Backing Drops With Metal’s Price: Chart of the Day
  • Pakistan Seen Shipping 100,000 Tons Sugar by September on Prices
  • ONGC Plans Shale, Deepwater Strategy in Bid to Double Production
  • Oil Drops as U.S. Stockpiles Seen Rising
  • Rubber Inventory Climbing in China as Slowdown Cuts Demand
  • Rubber Drops as Rising Thai Supply Adds to Chinese Stockpiles
  • Palm Oil Set for Worst Monthly Loss Since 2009 on China Outlook










SPAIN – still crashing. IBEX down another -1.4% (immediate-term TRADE oversold) to a fresh new low (down -31% from the Feb top when Global Growth Slowing became readily apparent in our models); Russia down -27% from the March top and Italian bond yields ripping a move > 6.00% this morning; there is no “de-coupling” from this.






CHINA – but the rumors of Chinese stimulus have, at least for today; the Shanghai Comp backed off at an important TRADE line of resistance (2393) last night and the Hang Seng got crushed again, down -1.9% - no follow through from the USA day of no volume US Equity buying (US volumes down -26% vs our composite avg of the down days in May).










The Hedgeye Macro Team

Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

AMZN: Adding TRADE, Respecting TREND and TAIL

Conclusion: AMZN already had a favorable TREND and TAIL setup. Now it scores the trifecta by working within our near-term TRADE framework as well. As with all TRADES, it might be a short-lived event. But do not ignore the power of the story across our TREND (3 months or more) and TAIL (3 yrs or less) durations.


TRADE (30 Days or Less)

Keith added it to the Hedgeye Virtual Portfolio as he was looking for names levered to US Consumption with favorable TREND and TAIL setups. In Retail, AMZN clearly fits that bill.


From a near-term perspective, AMZN does not have all the characteristics we’d ordinarily look for in a long idea at face value. First off, while 2Q estimates appear to be in check, this is a company that's not afraid to miss. It's happened in 3 of the past 10 quarters. With the company going up against a 51% revenue comp this quarter, the hurdle is a big one.


From a sentiment standpoint, of the 41 Analysts, there are no sells, and the 71% ‘Buy rating ratio’ just set a 5-year peak. Yes, this definitely concerns us, especially with AMZN facing its toughest yy revenue growth compare in 2Q (51% growth in 2Q11). Its trough, fyi, was 21% in 1Q 2007.


TREND (3 Months or more)

But make no bones about it... after the 2Q print, revenue compares start to ease, while margin compares start to get quite easy effective immediately (including 2Q).  Margins were cut in half last year to 1.8%, with an even distribution across quarters. People beat Bezos up – as usual -- for that investment. But now he has Fire, expanded DC capacity, a new B2B initiative...


We’ve been at a point where AMZN has had Eight quarters is a row where inventories grew faster than sales. Note that this is at the same time capex as % of sales ramped by another 90bps to 3.8%. None of this is sustainable, and ultimately very bullish for cash flow and therefore, the stock.


In the back half of this year, our estimates are 10% above consensus.



TAIL (3-years or less)

Let's not forget that it is the Haley’s Comet of retail. It's a retailer with $48bn in revenue growing at 40% with 2% EBIT margins that's investing on its balance sheet and p&l at a rate to make a third of retailers alive today extinct in 5+ years.  Capex is inflated, margins are depressed, and while sentiment has rebounded considerably from the latest 1Q upside, the fact of the matter is that estimates for next year are likely low as investments today drive sales and margins tomorrow. For a world class franchise like AMZN, you generally don’t want to get in the way of that. The ‘it’s too expensive’ call simply holds no water when the company can earn the $4.50 2014 consensus estimate a year early.


AMZN: Adding TRADE, Respecting TREND and TAIL - AMZN TTT


CONCLUSION: When it comes to spurring growth and protecting its currency, we are of the view that India “can’t have its cake and eat it too” at the current juncture. The benchmark SENSEX Index remains in a Bearish Formation – a clear quantitative signal to us that the recent spate of oft-conflicting policy maneuvers is likely to have a muted effect on turning around the Indian economy and the country’s poor investment climate over the intermediate term. 


The phrase “[insert proper noun] wants to have its cake and eat it too” doesn’t really make sense to me. As a former offensive lineman, I generally enjoyed eating all the cake I could get my hands on. That being said, I believe the saying refers to an individual or entity’s desire to pursue an outcome that is conflict with another one of his/her/its wishes.


In the case of India, a country we have generally remained fundamentally bearish on across asset classes (stocks/rupee/rupee-denominated debt) for much of the past 19 months, the aforementioned phrase is quite appropriate. The Reserve Bank of India, in the midst of battling what we’d consider a full-fledged currency crisis (a peak-to-present decline > 20% over the LTM), is being forced to chose between fighting inflation – which is 270bps above their +4.5 YoY unofficial target (APR) and above it every month since OCT ’09 – or protecting growth, which has slowed to an 11-quarter low of +6.1% YoY in 4Q12 and looks to continue that trend when 1Q GDP is reported on Wednesday.


Rather than biting the bullet and hiking rates to protect the purchasing power of their citizenry, which is what many developing nations have been forced to do historically during periods of international stress (usually accompanied by USD strength), India has chosen the route of easing and tightening at the same time (more on this later). Their policy confusion has been rather unsupportive for the rupee, which has fallen to an all-time low vs. the USD as recently as MAY 23.




As we penned in our APR 17 note titled “IS INDIA OUT OF BULLETS?”, the country’s twin deficits, which have widened in recent years, are a real risk to the nation’s currency in times of heighted global volatility due to the typical slowdown in cross-border capital flows to developing nations like India. Coincidentally, inflows into India’s equity and bond markets peaked in the YTD right around the time we started getting loud about our expectations for a breakout in cross-asset volatility over the intermediate term (mid-MAR).






Per the aforementioned note: “No doubt, a further Deflating of the Inflation will eventually be supportive of the Indian economy; that said, however, we think India’s intermediate-term growth outlook, as well as the country’s financial markets are particularly at risk in an a higher-vol. environment over the intermediate term due to its widening current account and fiscal gap. India’s bloated fiscal deficit is of particular importance given that any slowing of capital inflows or outright capital outflows ultimately translates to a crowding-out of private sector funding.” With money supply (M3) growth at a ~7yr low, we’re seeing this phenomenon show up in the data in real-time.




Regarding the point we made about them easing and tightening at the same time, below is a list of the recent measures Indian policymakers have taken in order to combat either currency deprecation pressures (via fiscal and/or monetary tightening/capital controls) or economic growth headwinds (via fiscal and/or monetary easing/stimulus), which, if done at the same time, can seem a bit oxymoronic, or of the “having one’s cake and eating it too” variety: 

  1. In MAR, the central government introduced an import duty on gold and platinum bars and coins, which facilitated a -33% YoY decline in gold and silver imports in APR;
  2. Raised interest rates on foreign currency deposits by as much as 300bps in addition to easing restrictions on foreign exchange loans for Indian exporters;
  3. Reduced the amount banks can hold in FX derivatives contracts to < $100M or 15% of the total such agreements (whichever is lower);
  4. Reduced the amount of overseas income Indian corporates can hold in foreign currency-denominated assets to 50% from 100%;
  5. Sold $5.4B of FX reserves (USD) to the market over the past 3-4 weeks, taking their total reserves down to $290B (-6% YoY); and
  6. Late last week, the central government allowed the State-run refiners to increase gasoline prices by +11% in a bid to combat fiscal deficit pressures stemming from the bloated subsidy bill (12.7% of total expenditures). 

Interestingly, to point #5 above, providing USD liquidity to India’s FX market can be helpful for the exchange rate, but only because it tightens monetary conditions by curbing supply of Indian rupees in the domestic market. As such, their options here are limited given the Indian banking system’s persistent liquidity deficit (having borrowed nearly a trillion rupees from the central bank on average via reverse repo transactions a – form of monetary easing – over the last five days).






To point #6, we’ve crunched the numbers on the deficit below; the conclusion is short and simple: while the +11% increase can be taken by market participants as a signal that they are willing to cut further, it accomplishes very little in the direction of moving the needle on the fiscal deficit: 

  • In FY12, the subsidy bill on energy-related expenses was 59.1% of the total… holding that flat, we get to 1.123T rupees for FY12;
  • Reducing that by -11% leaves us with 999.45B rupees for on energy-related subsidy expenses for FY13E;
  • That takes our total planned subsidy expense 1.77T rupees or 11.9% of FY13E expenditures;
  • The -123.5B rupees in savings is a mere 0.8% of the total planned expenditures and just 2.4% of the budgeted deficit;
  • All in, the maneuver shaves a whopping -12bps off of India’s FY13E deficit/GDP ratio (assuming all other revenues and expenditures meet their targets). 

All told, the math doesn’t lie. When it comes to spurring growth and protecting its currency, we are of the view that India “can’t have its cake and eat it too” at the current juncture. As the chart below highlights, the benchmark SENSEX Index remains in a Bearish Formation – a clear quantitative signal to us that the recent spate of oft-conflicting policy maneuvers is likely to have a muted effect on turning around the Indian economy and the country’s poor investment climate over the intermediate term.


Darius Dale

Senior Analyst



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