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Dancing With the Bear

“Theory helps us to bear out ignorance of facts.”

-George Santayana


I have a good friend whose dad is legendary for giving his sister’s suitors a difficult time.  As it’s been told to me, this young lady will bring guys she is dating home and her father will take them for a little walk outside and basically warn these young lads that they don’t want to dance with the bear – the bear being him.  Since he is a small town burly Canadian fire chief, the daughter’s suitors are pretty clear on the message.


As it relates to being stock market operators, I don’t think any of us enjoy dancing with bear markets.  A good friend of mine, and former colleague, is one of the head traders at a major mutual fund complex.  Every day I get his morning internal news summary which leads off with the ACWI etf, which is a proxy for global large cap equities.  On April 2ndhis note had the ACWI up +11.9% and on May 29thhe had the ACWI up +0.76%.  In effect, any investor who has a long only mandate has had to dance with the bears over the past couple of months and likely, just due to the inflexibility of their mandate, had to endure giving back performance.


But even as many of us have had to dance with U.S. and global equity bears, the Japanese have perhaps had it the worst.  The most populous bear in Japan is the Asian black bear, also called the moon or white chested bear, which is medium sized and, luckily enough, largely a herbivore.  While the Asian Black Bear is mostly focused on eating plants, the Japanese stock market has been focused on eating investors whole. Specifically, overnight the Nikkei close -1.1% and finished the month down -10.3%.


Our bearish thesis on Japan is, hopefully, at this point relatively well known.  In late February we hosted a conference call with a 100 page presentation (email us at sales@hedgeye.com if you aren’t a subscriber of our macro product and would like to trial and view the presentation) that outlined our view that Japan is facing a debt, deficit and demographic reckoning.  It seems Japanese equities are agreeing with us.  


One of the key catalysts we highlighted back then was the potential for a sovereign debt downgrade.  Early last week this catalyst came to fruition as 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.  As the other rating agencies follow suit and the ratings continue to tumble downwards, the larger risk is that the Japanese banking system has to do a massive capital raise in the future to keep their Tier 1 capital ratio at appropriate levels.  This is an increasingly realistic risk that you may want to bear in mind.


By the time you get this missive, the U.S. will have reported GDP and jobless claims this morning.  Both our predictive tracking algorithms and the stock market have been telling us that GDP is slowing and we would expect the data this morning to reflect the same.  On some level, of course, slowing growth is starting to be priced into the market.  Currently, in the Virtual Portfolio we are leaning slightly net long and have 8 longs and 7 shorts. 


The three most recent positions that we have added to the Virtual Portfolio on the long side are as follows:


1.   Apple (APPL) – As oil and commodities deflate, from a macro perspective the outlook for the iEconomy improves.  Additionally, and not that I have any edge of course, Apple is cheap at 10x forward earnings but also growing the top line, based on the last quarter, at north of 30%.  The simple fact is that many investors still don’t get that Apple is not a hardware company; it is a software company with long term sustainably high margins (think moat and barriers to entry).


2.   Amazon (AMZN) – Amazon, much like Apple, is a play on consumption which we believe continues to improve as oil, and energy input costs generally, continue to break down.  As my colleague Brian McGough wrote about Amazon yesterday:


“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.”


3.   Utilities (XLU) – On our quantitative model, utilities are the only sector that is bullish on both TRADE and TREND durations.  This is in part due to the predictability of the cash flow streams in utilities and thus relatively safety, but also a compelling dividend yield of right around 4% which, when compared to the government bond market, is downright juicy.


So, even in the doldrums of dancing with the bear market, we’ve been able to find some compelling long ideas.  Time and price will tell whether they are rentals or names that, like Starbucks, we will hold for multiple years.  But the bottom line is this: if you are going to dance with the bear, be prepared to keep your hands, feet, and portfolio moving.


In fact as Wikihow instructs us, the top three tips for avoiding bear attacks are as follows:

  1. Avoid close encounters;
  2. Keep your distance; and
  3. Stand tall, even if the bear charges you.

For stock market operators, the last point is probably the most instructive and translates into buying high quality names when the bear market is charging away and providing a compelling entry point.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $103.27-106.97, $81.99-83.24, $1.23-1.26, and 1, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Dancing With the Bear - Chart of the Day


Dancing With the Bear - Virtual Portfolio


Dollar strength is helping to deflate the inflation; with the exception of hogs, dairy, and (of course) chicken wing prices, all of the commodity prices that we track declined week-over-week.  Corn and wheat continue to track lower on optimism that this year’s spring crop will boost supplies.  Analysts are attributing the decline in grain prices to many factors including heavier-than-normal rain in some growing areas of the United States and mounting fears of economic growth slowing. 


For SAFM, falling corn prices are bullish for the company’s margins.  Heading into a stronger period of demand for chicken, a tight supply of chicken nationally and more favorable feed costs could boost the stock’s prospects.  It is worth being wary of seasonality in how this stock trades during the summer months, but on a longer-term duration we feel that this stock is a compelling long. 


Looking at the table below, we see +144% chicken wing inflation as a problem for BWLD.  We know that every 10% of chicken wing price inflation adds $3.8mm in COGS to the company’s P&L. 


Beef prices coming down is a positive for several names in the industry like TXRH, CMG, WEN, and one of our favorite longs, JACK.  Jack in the Box has been trading well over the past couple of weeks and we still like the stock. 















Supply: Egg sets placements continue to contract at -4%, according to the Broiler Hatchery report released by the USDA today. This implies that supply will remain tight as the industry looks for more favorable business conditions before expanding production.






















WEEKLY COMMODITY CHARTBOOK - chicken whole breast


WEEKLY COMMODITY CHARTBOOK - chicken wing prices







Howard Penney

Managing Director


Rory Green



Happiness Oversold

This note was originally published at 8am on May 17, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The happiness that Jack and Jill experience is determined by the recent change in their wealth.”

-Daniel Kahneman


Across Global Equities and Commodities, this morning our Globally Interconnected Macro Models are signaling the best immediate-term TRADE oversold signal we’ve had in 2012. The perma-bulls have been under siege for 2-3 months. Happiness from their February-March highs is oversold too.


In Chapter 25 of Thinking, Fast and Slow, Kahneman does a great job debunking one of the many dogmas of modern economics. He calls it Bernoulli’s Error – and it’s one that’s pervasive in our profession today. It’s the classic mistake of generalization in assumptions when it comes to utility curves and expectations.


“Bernoulli’s theory assumes that the utility of their wealth is what makes people more or less happy. Jack and Jill have the same wealth, and the theory therefore asserts that they should both be equally happy, but you do not need a degree in psychology to know that today Jack is elated and Jill is despondent.” (page 275)


Back to the Global Macro Grind


At the end of March, if Jack bought Chinese stocks (my son Jack indirectly did), and Jill bought US stocks, Jack is up +5% and Jill is down 7%. So, even if I had a daughter named Jill, Jack would be relatively happier than her if they were going shopping this morning.


If Jill’s Dad was right levered up long in everything US, Asian, and European stocks… and he had a side pocket of Gold, Oil, and maybe a special situation basket that included long JC Penney… Jill and her Dad are going to be eating hot-dogs instead of steaks this summer.


Anyone who has run real-money under the real-time performance pressure cooker for the last 5 years knows precisely what I am talking about. Timing Matters. If you buy high and are forced to sell low, you could wreck your year in a very short period of time.


What does immediate-term TRADE oversold mean?

  1. It doesn’t mean we are all bulled up about Global Growth Accelerating
  2. It doesn’t mean we are bullish on our intermediate-term TREND (3 months or more) duration either
  3. It means that, on a 3 factor basis (price, volume, volatility), stocks and commodities are simply oversold

So the first thing I do with that is start covering short positions. That gets me longer on a net basis. Then I start to slowly take up my gross invested position, selectively, in our best ideas.


I’ve screwed this up enough times to know that you really need to wait and watch on that second part. Your gross long exposure to the market is where you can get run-over; particularly if the market continues to trend lower with no mean reversion bounce.


The good news for US Stocks is that has already happened:

  1. US Dollar Index has been up for 12 consecutive days (new all-time record – all-time is a long time)
  2. US Stocks have been down for 10 of the last 11 days
  3. SP500 and Russell2000 draw-downs from the YTD tops in March-April = -6.7% and -8.7%, respectively

Jill (and her Dad) are not happy. And they probably won’t be until their hard earned capital gets back to break-even. That’s another concept that dysfunctional gamblers don’t quite understand until it’s too late either. The market doesn’t owe you a break-even. Mr Macro Market couldn’t care less about what’s in your pocket either.


The US Stock market (SP500) is down -15.4% and -6.7% from its 2007 and 2012 highs, respectively. That doesn’t mean if you’re up +6.7% from here you break-even. It means you have to be up +7.1% from here to get back to your April 2nd2012 break-even, then up another +10.3% from there to get back to your 2007 high-water mark.


This isn’t easy.


Neither is being happy in this business. But your greed can get overbought and your happiness can get oversold, in the meantime.


Immediate-term TRADE oversold lines, across asset classes in our model are as follows:

  1. SP500 = 1320
  2. Russell 2000 = 770
  3. Nikkei = 8709
  4. Shanghai Composite = 2338
  5. German DAX = 6341
  6. Spanish IBEX = 6548
  7. Gold = $1531
  8. Oil (Brent) = $109.78
  9. Copper = $3.44
  10. Apple = $543

That’s why we bought Apple (AAPL) yesterday. It was immediate-term TRADE oversold right where we bought it at 3:06PM EST. I took our US Equity Asset Allocation up to 12% with that (Cash down to 76%). I’d much rather buy AAPL at immediate-term oversold than buy Tech (XLK) which wasn’t yet signaling the same. Not all happiness gets oversold in the same way, at the same time.


Our immediate-term term support and resistance ranges for Gold, Oil (Brent), US Dollar, and the SP500 are now $1531-1588, $109.78-112.34, $80.48-81.55, and 1320-1351, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Happiness Oversold - Chart of the Day


Happiness Oversold - Virtual Portfolio

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The Macau Metro Monitor, May 31, 2012




According to Business Daily, the Independent Liquor and Gaming Authority of New South Wales will investigate MPEL. Crown Ltd is looking to increase its stake in another Australian company with casinos in Sydney and Queensland and faces a “probity and suitability” test.  “This will involve liaison with a large number of regulatory and enforcement agencies, both nationally and internationally,” said the Independent Liquor and Gaming Authority of New South Wales.  The report also quotes sources saying that Crown chairman James Packer already has regulatory approval in two other Australian states and in Nevada.



Yang Kun, an executive vice-president of the Agricultural Bank of China, has been detained by the Central Commission for Discipline Inspection of the Communist Party of China, over allegations he used customers’ money to pay gambling debts at Macau casinos.  


TODAY’S S&P 500 SET-UP – May 31, 2012

As we look at today’s set up for the S&P 500, the range is 39 points or -1.39% downside to 1295 and 1.57% upside to 1334. 












  • ADVANCE/DECLINE LINE: on 5/30 NYSE -2264
    • Down from the prior day’s trading of 1709
  • VOLUME: on 5/30 NYSE 768.67
    • Increase versus prior day’s trading of 7.62%
  • VIX:  as of 5/30 was at 24.14
    • Increase versus most recent day’s trading of 14.79%
    • Year-to-date increase of 3.16%
  • SPX PUT/CALL RATIO: as of 05/30 closed at 2.35
    • Up from the day prior at 1.71 


  • TED SPREAD: as of this morning 40
  • 3-MONTH T-BILL YIELD: as of this morning 0.07%
  • 10-Year: as of this morning 1.63
    • Increase from prior day’s trading at 1.62
  • YIELD CURVE: as of this morning 1.36
    • Unchanged from prior day’s trading 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: Challenger Job Cuts (Y/y), May, (prior 11.2%)
  • 8am: Fed’s Pianalto speaks on monetary policy in Cleveland
  • 8:15am: ADP Employment Change, May, 150k (prior 119k)
  • 8:30am: GDP (Q/q) (Annualized) 1Q S, est. 1.9% (prior 2.2%)
  • 8:30am: Personal Consumption 1Q S, est. 2.9% (prior 2.9%)
  • 8:30am: Core PCE (Q/q) 1Q S, est. 2.1% (prior 2.1%)
  • 8:30am: Initial Jobless Claims, week of May 29, est. 370k (prior 370k)
  • 9:45am: Chicago PMI, May, est. 56.8  (prior 56.2)
  • 9:45am: Bloomberg Consumer Comfort, week of May 27, (prior -42)
  • 10:00am: NAPM-Milwaukee, May, est. 53.4 (prior 52.9)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural gas change
  • 11am: DOE inventories
  • 11:00am: Fed to purchase $1.5b-$2b notes in 2/15/2036 to 5/15/2042 range 


    • CFTC meets on hedge, market-making provisions of Volcker rule
    • House in session, Senate holds pro forma session
    • House Energy and Commerce panel hears from FCC Commissioner Robert McDowell on international proposals to regulate the Internet, 10am
    • Woodrow Wilson International Center for Scholars holds forum on Chinese investment in North American energy, 9am
    • Trial begins in Apple suit seeking to block Samsung products from U.S. market, before a judge at International Trade Commission; lasts through June 6 


  • Retailers report May sales data before market opens
  • Euro-area inflation slowed more than economist est. in May
  • CGI Group to buy Logica for $2.6b cash
  • Oracle looked at Buddy Media before agreeing to acquire Vitrue
  • Prudential Plc to buy Swiss Re’s SRLC for $621m
  • German unemployment unchanged in May, adj. jobless rate falls
  • Graff cancels $1b IPO in Hong Kong, citing falling stock mkts
  • Maple provides update on plans for TMX Group at 12pm
  • United to cut 1,300 jobs at Houston’s main airport
  • U.S. stock exchanges propose changes to trading curbs
  • Short sales of U.S. homes reached 3-yr high in 1Q: RealtyTrac
  • Japan industrial production misses ests’ South Korea’s rises
  • Australian business investment rises 6.1%, more than forecast 


    • Canadian Imperial Bank of Commerce (CM CN), 5:50am, C$1.88
    • Joy Global (JOY) 6am, $1.96; Preview
    • Descartes Systems (DSG CN) 6am, $0.11
    • Ciena Corp (CIEN) 7am, $(0.04)
    • Movado (MOV) 7:30am, $0.25
    • National Bank of Canada (NA CN) 7:45am,  C$1.85
    • Esterline Technologies (ESL) 4pm, $1.29
    • Vera Bradley (VRA) 4:01pm, $0.29
    • Ascena Retail Group (ASNA) 4pm, $0.36
    • SAIC (SAI) 4:02pm, $0.33
    • OmniVision (OVTI) 4:18pm, $0.22 


  • Nickel Slump Seen Ending as China Faces Ore Curbs: Commodities
  • Gold Gains in London Trading as Weaker Dollar Bolsters Demand
  • Oil Set for Biggest Monthly Drop in Three Years on Debt Crisis
  • Copper Advances, Narrowing Monthly Decline, on German Figures
  • Cocoa Rebounds on Speculation Lower Prices Will Spur More Demand
  • Palm-Oil Shipments From Indonesia Seen Climbing on Ramadan
  • China Plan to Open Metal Futures to Foreigners to Help LME
  • Felda Targets $3.3 Billion in Biggest Share Sale Since Facebook
  • PetroChina Seeks Oil Assets as Shale Gas Seen Years Away: Energy
  • Soybeans Poised for Worst Month Since September on U.S. Planting
  • Palm Oil Has Worst Monthly Loss Since 2009 on Europe Crisis
  • Commodity, Stock Price Link Near 16-Year High: Chart of the Day
  • Vale as Cheapest Miner Signals Buy to Aberdeen: Corporate Brazil
  • Oil Set for Monthly Drop on Debt Crisis
  • Marubeni to Borrow for Half of Gavilon Payment, Sell Assets
  • Rubber Slumps to Six-Month Low on European Crisis: Tokyo Mover
  • Dalian Soybeans May Drop on Bollinger Trend: Technical Analysis 
























The Hedgeye Macro Team

Proactively Prepared

This note was originally published at 8am on May 16, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Most people have the will to win, few have the will to prepare to win.”

-Bobby Knight


We don’t have to apologize, fear-monger, or point fingers while everyone is reacting to the news again this morning. This has been going on for 5 years. Get both the Slope of Global Growth (slowing) and the direction of the US Dollar right, and you’ll get a lot of other things right.


Winning in this country (or being right in this business) should be celebrated instead of shunned. It’s not easy out there – and it’s not going to get any easier any time soon. Life is hard.


Repeatable risk management processes trump pundits. Either our profession’s broken sources go away, or whatever is left of the trust, inflows, and volumes in our markets will.


Back to the Global Macro Grind


From a Global Macro perspective (currencies, countries, commodities, etc.) I am finally seeing the early signs of capitulation (immediate-term TRADE oversold) on the downside as the US Dollar approaches immediate-term TRADE overbought.


That’s what happens when The Correlation Risk goes “on.” Policy (or in this case the lack thereof in expectations of an iQe4 upgrade) drives the US Dollar; and the US Dollar drives mostly everything else (USD up for the 11th consecutive day today).


Correlation Risk has a reflexive impact on demand (markets that go straight down scare people), but it is not traditional demand in terms of how we measure it – it’s behavioral. Our Leading Indicators on Global Demand (Growth) have been slowing since February-March.


Commodities and Asian Equities stopped going up in February; most other major Global Equity markets stopped going up throughout March; and US Treasury bond yields stopped going up in March as well.


In other words, if you have a Globally Interconnected Risk Management Process (or just a Twitter feed with credible sources), why people are freaking out right now (instead of when they should have), should at least give you a chuckle.


People freak-out (buy high, sell low) because we have institutionalized asset management into a very short-term game of performance chasing. Sadly, gaming the game of the next policy move is paramount on people’s minds – and the intermediate-term draw-downs (from peak-to-trough) for the last 5 years have been epic.


Here’s how the draw-downs (losses of your capital from the YTD tops) look in some of the majors:

  1. Japanese stocks (Nikkei) = down -14.2%
  2. Hong Kong stocks (Hang Seng) = down -11.2%
  3. Indian stocks (Sensex) = down -13.0%
  4. German stocks (DAX) = down -11.3%
  5. Spanish stocks (IBEX) = down -25.1% (crashing)
  6. Russian stocks (RTSI) = down -22.3% (crashing)
  7. CRB Commodities Index = down -11.3%
  8. Gold = down -14.2%
  9. Oil = down -11.8%
  10. Treasury Yields (US 10yr) = down -24.8%

Bullish, right?


Right, right. And all of this, including JPM’s news is all about Greece, right?


C’mon. Let’s get real here before whatever is left of the world’s investors yank all their capital from our fee based businesses. Ben Bernanke may very well have dared you to chase yield on January 25th, but that doesn’t mean you should have taken on the dare. You have seen this Qe expectations game before. You should have sold into it.


US Equities, which I didn’t list in the top 10 draw-downs, have done a complete round trip from where we were banging the risk management drums here in New Haven. While the Russell2000’s draw-down is about the same as the Hang Sang’s (-8.2%), the SP500’s is just -6.3%. So, if you bought the April 2ndtop, you only have to be up about 7% (from here) to get back to break-even.


Break-even? Yes. That matters. And so does timing – that’s why we are so focused on both.


Check out the timing of this trifecta:

  1. Russell 2000 peaks on March 26that 846
  2. US Equity Volatility (VIX) bottoms on March 26that 14.26
  3. Obama’s probability of winning the US Election peaks on – yep, March 26th

Political pundits probably don’t read this Newsletter. But if they did, they’d think that last point can’t be true. After all,  it doesn’t come from Washington or the accepted wisdoms of partisan paralysis.


We call it objective analysis. That’s all the Hedgeye Election Indicator is, math.


So, as US Equity markets draw-down from their March/April peaks (as they have from Q1 to Q3 in every year of the last 5 other than in 2009 when we were the most bullish firm on Wall Street 2.0), that’s obviously going to be a headwind for Obama.


It’s also going to be a headwind for Ben Bernanke.


Don’t forget that any headwind for Obama is, on the margin, a tailwind for Romney. Anything compression in the spread between Obama versus Romney (Obama had a huge lead in March), puts Bernanke’s career risk in play.


That, dear friends of the risk management gridiron, is US Dollar bullish.


And, with the US Dollar Index breaking out across all 3 of our core risk management durations (TRADE, TREND, and TAIL), you want to continue to be Proactively Prepared for what may very well be the most epic economic debate of our generation.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, and the SP500 are now $1531-1598, $110.27-112.99, $80.04-81.22, $1.27-1.29, 1324-1358, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Proactively Prepared - Chart of the Day


Proactively Prepared - Virtual Portfolio

Early Look

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