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Potent Weapon

“Fear is a potent weapon in the hands of the power elite.”

-Chris Hedges


That’s an important quote in Death of The Liberal Class by Chris Hedges. If you believe, like I do, that risk management starts and ends with being empathetic to all politically polarized positions, I highly recommend this book. The first 50 pages will really make you think.


Imagine that, thinking for yourself within the context of how other people think. Instead of doing more of the same – more of what has not worked (print, bail, print), imagine a world where we aren’t centrally planned by Republican/Democrat economic policy dogma. Imagine a world where America wasn’t inching toward becoming Japanese European.


The power elite may have landlocked how Bernanke’s Fed and Geithner’s Treasury think about letting losers win, but they have not yet suffocated the rest of us free market capitalists into silence. Yesterday’s market reaction to the latest bailout scheme was a stiff reminder of that. For them.


Back to the Global Macro Grind


If you saw my market debate with the ING strategist on The Kudlow Report last night, you can see that I am pretty much #Fedup. I am tired of incompetent forecasting on both US and Global growth. I am done with letting these guys from the Old Wall change their perma-bull thesis to new ones every time they get the prior one wrong.




I think The People are done with it too. That’s why you see these outflows from stock and commodity funds. That’s why you see this American Zeitgeist of distrust in any idea that comes out of the Fed, Treasury, or IMF. That’s why you saw pretty near every pundit who was spewing about how high the market was going to go on yesterday’s bailout “news” get run right over.


“Fear is a potent weapon.” And our being right on Growth Slowing is not the fear I am talking about. That’s called being accurate. Fear is what both the Bush and Obama administrations run on. So did Nixon and Carter. Fear of Big Government Interventions and all their conflicts of political interest are what puts a confident and optimistic guy like me on hiring hold.


The Fed has a “full employment” mandate, so they think doing more of what has not worked is their job. To a degree, that’s their own problem – the inability to re-learn, re-work, re-think. But, from a bigger picture perspective, this is really a leadership problem. The Fed and Treasury take their policy making lead from the President of The United States.


Here’s what one of their chief group-thinkers (Chicago Fed Head, Charles Evans) had to say after yesterday’s market reaction:


“I’ve been in favor of pretty much any accommodative policy I’ve heard about.”


Great. Just really great, Chuck. You have got to be kidding me. If Obama created a tax shelter whereby I could hire you for free, I’d probably go for it just so that I could fire you. You and your cronies from Chicago who want Policies To Inflate commodity prices need a real life wake-up call.


I’m certainly not alone in feeling this way. And since I built this company with my own risk capital, I’ll write whatever I want. Chapter 1 of Death of The Liberal Class is called “Resistance.” That’s what I am doing. I have American kids, and I resist the institutional pressure to put short-term politics and stock/commodity market performance ahead of the long-term future of this country.


“Earnest Logan Bell, an unemployed twenty-five year old Marine Corps veteran, walks alone Route 12 in Update New York. A large American flag is strapped to the side of his green backpack… he is on a six-day, ninety mile self-styled “Liberty Walk” from Binghamton to Utica. He plans to mount a quixotic campaign…” (Death of The Liberal Class)


“Anger and a sense of betrayal: these are what Ernest Logan Bell and tens of millions of other disenfranchised workers express…” (page 6). If you don’t get that, you are completely out of touch with the real world in which central planners are forcing us to live.


So go ahead, get the US taxpayer to start back-stopping European and Japanese government losses through the IMF. Tim Geithner, I personally dare you to do that and explain it, as you like to say “deeply”, to the American people. Explain to us, with all your fear-mongerings, why we should trust you this time.


Sadly, for Bernanke and Geithner, this time is not different. The market gets that too.


In other Keynesian central planning news this morning:

  1. The IMF says the Japanese Yen is “overvalued” and that the Japanese should “stimulate”
  2. Italy’s Monti (who forecasted the European Sovereign Debt Crisis as “ending” in March) to meet with France’s Hollande
  3. India’s debt to likely lose “investment grade status” (whatever that still means)

Great. Just great. The Washington, DC based (and US tax payer backed) IMF now has market opinions on “valuation”, and Geithner is pushing Lagarde to pull a Krugman on Japan and Europe (1997 he told the Japanese to “PRINT LOTS OF MONEY”).


Great. (link to the CNBC debate https://app.hedgeye.com/media/502)


So was my 0% US Equity asset allocation yesterday. My unlevered and un-invested position Cash can be a Potent Weapon too.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, Italy’s MIB, and the SP500 are now $1, $96.59-99.98, $82.01-83.17, $1.24-1.26, 5, 121, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Potent Weapon - Chart of the Day


Potent Weapon - Virtual Portfolio


TODAY’S S&P 500 SET-UP – June 12, 2012

As we look at today’s set up for the S&P 500, the range is 42 points or -1.90% downside to 1284 and 1.30% upside to 1326. 












  • ADVANCE/DECLINE LINE: on 6/00 NYSE -1830
    • Down from the prior day’s trading of 1238
  • VOLUME: on 6/11 NYSE 740.42
    • Increase versus prior day’s trading of 6.91%
  • VIX:  as of 6/11 was at 23.56
    • Increase versus most recent day’s trading of 10.98%
    • Year-to-date increase of 68bps
  • SPX PUT/CALL RATIO: as of 6/11 closed at 1.44
    • Up from the day prior at 1.34 


  • TED SPREAD: as of this morning 39
  • 3-MONTH T-BILL YIELD: as of this morning 0.05%
  • 10-Year: as of this morning 1.61
    • Increase from prior day’s trading at 1.59
  • YIELD CURVE: as of this morning 1.34
    • Up from prior day’s trading at 1.32 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Bus. Optimism, May, est. 94.0 (prior 94.5)
  • 7:45am/8:55am: ICSC/Redbook retail sales
  • 8:30am: Import Price Index (M/m), May, est. -1.0% (prior -0.5%)
  • 8:30am: WASDE
  • 10am: IBD/TIPP Economic Optimism, June, est. 47.3 (prior 48.5)
  • 11am: Fed to purchase $1.5b-2.25b notes in 2/15/2036 to 5/15/2042 range
  • 11:30am: U.S. to sell 4-wk. bills
  • 12pm: DOE short-term energy outlook
  • 1pm: U.S. to sell $32b 3-yr notes
  • 1pm: World Bank Releases Global Economic Forecast
  • 2pm: Monthly Budget Stmt., May, est. -$125.0b (prior - $57.6b)
  • 4:30pm: API inventories 


    • FDIC Board of Governors meets on implementing Basel III provisions on defining which companies are “predominantly engaged in financial activities,” 10am
    • SEC holds meeting of Dodd-Frank Advisory Committee, 10am
    • Senate in session, House meets in pro forma session
    • Senate Judiciary hears from Attorney General Eric Holder at oversight hearing, 10am
    • Senate Finance holds hearing on impact of tax reform on energy policy, 10am
    • DOE holds meeting of Nuclear Energy Advisory Committee on small modular reactors and used nuclear fuel, 8:30am
    • IMF Managing Director Christine Lagarde speaks at “Back to Rio, The Road to a Sustainable Economic Future” conference, presented by Center for Global Development, 10am
    • Postmaster General Patrick Donahoe discusses outlook for the U.S. Postal Service in keynote speech at PostalVision 2012 event of customers and shippers, 10:15am 


  • U.S. employers plan to add jobs in 3Q: Manpower survey
  • Europe’s AAA members at risk as debt crisis worsens: Fitch
  • Buffett pounces in private-jet slump with record $9.6b order
  • TomTom gains after Apple agreed to use its digital maps in new mobile services
  • Kodak says 20 patent bidders sign non-disclosure agreements
  • China’s new loans exceeded ests. in May, more money went into longer-term lending
  • Unitas Capital, Stanley Black & Decker, Carlyle Group said to be invited to make 2nd-round bids for Infastech
  • JPMorgan knew of London trading risks two years ago: WSJ
  • JPMorgan could have spotted trouble at its CIO long before traders there racked up at least $2b in losses; one reason it didn’t: CEO Jamie Dimon.
  • Rajat Gupta lost a bid to have a jury hear wiretaps of Goldman executive David Loeb tipping Galleon co-founder Raj Rajaratnam
  • U.S. Commerce Secretary John Bryson to take medical leave
  • U.S. media industry rev. rises 2nd straight yr: PWC
  • Goldman brings back Mark Schwartz as chairman for Asia
  • Lilly targets Sanofi’s top diabetes drug with weight loss effect
  • World Bank releases semi-annual global economic forecast
  • Morgan Stanley, other global banks undergoing credit review by Moody’s; decision expected by end of month 


    • FactSet Research Systems (FDS) 7am, $1.16
    • Michael Kors (KORS) 7am, $0.16
    • Casey’s General Stores (CASY) 4pm, $0.67 



COMMODITIES – despite Chucky telling you it’s still time to dance, the USD is holding its bid and Commodities continue toward crash zones (20% peak to now declines); Oil’s reversal yesterday was impressive; Brent will finally be immediate-term oversold at $96.29.

  • Pink Slime No Brake to Beef Rally as Herd Contracts: Commodities
  • Gold Hinges on Emerging Markets, Not Inflation: Chart of the Day
  • Oil Declines for a Fourth Day on Naimi Comments, Iran Exemptions
  • Japan May Take Indonesia to WTO Over Ban on Ore Shipments
  • Copper Seen Declining on Skepticism About Spanish Bank Rescue
  • Robusta Coffee Falls to One-Month Low as Indonesian Sales Rise
  • Thai Mills to Boost Refined Sugar Output as Premium Climbs
  • Palm Oil Falls on Speculation Malaysian Production Set to Climb
  • Shanghai Rubber Support Seen at 22,000 Yuan: Technical Analysis
  • Soybeans Gain as U.S. Crop Conditions Deteriorate; Corn Rises
  • Oil Supplies Fall Most in Five Months in Survey: Energy Markets
  • Japan Seeks Least Milling Wheat in Seven Weeks in Tender
  • Rinehart Seeks to Reclaim 3 Billion-Ton Iron Deposit Stake
  • Gold Drops First Day in Three on Europe
  • Gold Drops With Commodities on Concern Europe Crisis Escalating
  • Cooking-Oil Imports by India Set to Advance for Fourth Month
  • Rubber Declines on Concern European Debt Crisis Is Deepenin











ITALY Geithner/Lagarde forgot to tell the Italians they’re going to get bailed out; MIB Index hammered for the wk to-date, adding to losses this morning (don’t forget Italy is also in crash mode, down -24% since March 19th) and economic stagflation continues to be a reality of a centrally planned life. Not 1 European stock market has recovered 1 of our immediate term TRADE lines on this no volume bounce.






JAPAN – Japan is suspiciously out of the news (other than in Japan or for those that are risk managing it) but Japanese stocks led losers again last night, down another 1%, inching closer to their own fiscal cliff and a market crash zone (Nikkei -17% since March). The IMF now has an opinion on the Japanese Yen’s “valuation” (not kidding) and has joined Krugman in telling the Japanese to print/stimulate. Won’t end well.










The Hedgeye Macro Team

President Obama’s Reelection Chances Slip – Hedgeye Election Indicator

 If the US Presidential election were held today, President Obama’s chance of winning  reelection stands at 54.1%, the lowest level in five months, according to the Hedgeye Election Indicator (HEI). Similarly, Intrade shows a 53.9% probability that President Obama will win reelection.



President Obama’s Reelection Chances Slip – Hedgeye Election Indicator  - HEI



According to the HEI,  a slightly weaker US stock market and a stronger US dollar contributed to the President’s lower reelection odds. 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. 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.

HedgeyeRetail COTD: Pricing Crack

We’re seeing the already wide gap between Hanes and Fruit of the Loom pricing widen, as prices for FOTL come off by 30% inside KSS. We still think that pricing integrity will be tough to come by.  


We’ve been very closely monitoring the pricing spread at retail for Hanes vs. Fruit of the Loom since it became more of a concern for us six months ago. We’ve gotta hand it to HBI, as they have maintained a consistent pricing premium to Fruit of the Loom in all major channels. But we’ve been floored to see a 40% price gap between the two on the same exact product at KSS vs. JCP. In other words, Kohl’s sold that same exact product as JCP, but advertized at a 40% higher price.


Now, we see the pricing dynamics change again. But not as we’d think. KSS has reduced its Fruit of the Loom Pricing to $11.99 from $17.99 for 5 pack crew t shirts, boxer briefs & a-shirts while Hanes' pricing is unchanged for the same pack size. As a result, the Hanes to Fruit of the Loom premium on crew necks has increased from 89% to 184% while the premium in boxer briefs is now 113% from 42% in April.


Fruit of the Loom has clearly been impacted by the EDLP battle between KSS and JCP, while Hanes’ pricing has remained seemingly unchanged.


Our view is that this closely mirrors the consensus view, and company guidance. HBI needs pricing integrity in 2H to hit earnings. As gaps like this widen, we think that pricing integrity dynamics can change quickly.


HedgeyeRetail COTD: Pricing Crack  - HBI FOL pricing gap

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