• run with the bulls

    get your first month

    of hedgeye free



CONCLUSION: Our analysis of derivative positioning and its impact on the FX spot market as a leading indicator strongly suggests that it likely won’t pay to fade consensus as it relates to being bullish on the U.S. Dollar over the intermediate-term TREND. Further, the math supports our fundamental stance of being bearish on things that are inversely correlated to the Greenback over the same duration. The outcome of the JUN 20 FOMC meeting is particularly key to this view.


VIRTUAL PORTFOLIO: Long the U.S. Dollar (UUP).


On OCT 21, 2011, we published a note titled, “ARE YOU BULLISH ENOUGH ON KING DOLLAR?”; the conclusion of that note is identical to the conclusion above (w/ the exception of the FOMC callout). 

  • Since then, the US Dollar Index is up roughly +7.5% and the 19-commodity CRB Index is down about -13%;
  • Turning to domestic equity markets, the XLE and XLB have underperformed the S&P 500 by -1,271bps and -370bps, respectively over that duration;
  • Turning to global equity markets, the MSCI Energy and MSCI Basic Materials Indices have underperformed the MSCI World Index by -812bps and -745bps, respectively, over that duration;
  • Turning to emerging markets, the MSCI EM Energy and MSCI EM Basic Materials Indices have underperformed the MSCI EM Index by -740bps and -774bps, respectively, over that duration; and
  • The JPM EM FX Index is down roughly -4.3%, with notable currencies like the Brazilian real and the Indian rupee down about -13.7% and -10%, respectively. 

As we often say: “Get the US Dollar right and you’ll get a lot of other things right.”


Upon hearing a financial market pundit warn about the overstretched nature of the EUR short position in the speculative community (213k contracts net short is an all-time extreme in either direction), we took an opportunity this morning to refresh our DXY speculative positioning analysis. The results were quite interesting indeed.




Jumping back to the DXY, the following chart highlights the point we just made regarding the “interesting” nature of what is taking place in the non-commercial futures and options markets. Specifically, we’ve just witnessed three consecutive, indistinguishable peaks in the DXY net long positioning – an event that has not yet occurred in the data (since MAR ’95) until the latest reported data point.




In the OCT iteration of this analysis, we found that each peak or trough in the speculative position of the DXY (as measured by futures and options contracts) had a corresponding trough or peak position, as well as a corresponding peak or trough in the US Dollar Index – each on its own lag. Perhaps more  importantly, we found that the move off the bottom in speculative positioning tended to produce an equivalent or greater move off the bottom in the DXY from a standard deviation perspective.






This really highlights the peculiar nature of having three consecutive extremes in net long positioning, w/ no corresponding extreme in net short positioning. Perhaps more importantly, as the above table highlights, the DXY trough-to-peak move has lagged the trough-to-peak move in speculative positioning by ~1 standard deviation in each of the first two peaks.


The key takeaway here is that if that analysis still holds true – particularly the lag between a peak/trough in the speculative positioning and a commensurate peak/trough in the DXY from a standard deviation perspective – we could be looking at higher-highs in the DXY over the intermediate term TREND (see above table for scenario-analyzed timing and magnitude).


As we’ve shown in much of our research over the last six months, a narrowing spread between Obama and Romney is fundamentally supportive of this view – particularly as we draw closer to the election because we think that will force the Fed into a political box; as is an escalation of Europe’s Sovereign Debt Dichotomy. Key catalysts on this front include: 

  • JUN 14: Eurogroup Meeting
  • JUN 15: G20 Summit of Finance Ministers
  • JUN 17: Greece – probable date for next general election
  • JUN 18-19: G20 Summit in Los Cabos, Mexico
  • JUN 19-20: FOMC Meeting; Fed releases its revised economic projections***
  • JUN 20-21: Eurogroup Meeting; Ecofin Meeting in Luxembourg
  • JUN 28-29: EU Summit in Brussels, aim to formally sign off on growth proposals; EC meets to discuss Institutional Affairs
  • JUL 5: ECB governing council meeting
  • JUL 11: Minutes from the FOMC’s JUN 19-20 meeting
  • JUL 19: ECB governing council meeting
  • JUL 31-AUG 1: FOMC Meeting*** 

All-told, if consensus doesn’t get what it wants from the Fed in the immediate-term (i.e. a bailout of global stock and commodity markets), we are likely to see continued USD strength vs. peer currencies over the intermediate-term TREND. This would have potentially dour implications on the near-term returns of various asset classes (trailing 2MO correlations to the DXY): 

  • S&P 500: -0.92
  • EuroStoxx 600: -0.94
  • MSCI World Index: -0.94
  • CRB Index: -0.93
  • US Junk Bond Yields: +0.83 

As always, the Correlation Risk will eventually burn off, allowing for alpha generation to resurface in dynamic asset allocation strategies. Until that happens, however, expect the USD to continue to be the dominant driver of Global Macro beta (i.e. the directionality of various asset classes).  


Darius Dale

Senior Analyst

SBUX: Playing The Game

Starbucks has been a stalwart holding in the Hedgeye virtual portfolio considering that we’ve owned the stock for more than three years. But those who are looking to get long SBUX now should wait, according to Hedgeye Restaurants Sector Head Howard Penney. Last week’s acquisition of La Boulange Bakery will dilute earnings per share for the second half of fiscal year 2012. Getting the infrastructure and distribution in place for a national rollout is going to be capital intensive and Penney says he would not buy the stock right now. Hedgeye believes that the consensus for EPS is simply too bullish.


SBUX: Playing The Game - SBUX.SP.final


Another headwind that exists is Europe, who apparently can’t catch a break on anything these days. Starbucks CFO Troy Alstead spoke at a conference on Monday and aside from the lower EPS estimates, he also warned that the company is experiencing increased pressure in its EMEA (Europe, Middle East & Africa) division during the third fiscal quarter ending June 30.


Essentially, Starbucks is going to have to work hard through the rest of the year to justify its recent spree of high dollar acquisitions.

Idea Alert: Shorting EWP

Positions in Europe: Short Spain (EWP); Long German Bunds (BUNL)

Minutes ago Keith shorted Spain via the etf EWP in the Hedgeye Virtual Portfolio. The etf is in a bearish formation, meaning the current price is below its immediate term TRADE and intermediate term TREND levels (see chart below).


Idea Alert: Shorting EWP - AAA. IBEX


We’ve detailed our thinking on Spain post Saturday’s €100B bank credit line announcement in our note publish 6/11 titled “Spain’s Cracked Credibility and Europe’s Bailout Messaging”. If you need a copy please email me at .


Below we've updated key risk signals for Spain. You'll note that since the introduction of the EUR the 10YR Spanish government bond yield is at its highest high at 6.726% as 5YR Spanish CDS trades just under all-time highs at 598bps!


Idea Alert: Shorting EWP - aaa. up and right


Matthew Hedrick

Senior Analyst

The Game

This note was originally published at 8am on May 30, 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 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 1283-1295 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 $1538-1568, $104.62-108.08, $81.87-82.91, $1.24-1.26, and 1316-1337, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Game - Chart of the Day


The Game - Virtual Portfolio


The Macau Metro Monitor, June 13, 2012



According to the latest Monetary Authority of Singapore (MAS) survey of 25 professional economists, the Singapore economy will grow 3% in 2012, up from 2.5% previously.  Growth in the accommodation and food services sector was revised from 3.8% to 4.5%.  The economists also upgraded 2Q GDP growth from 2.5% to 2.8%.  S'pore inflation is expected at 4.2%, up from 3.5% in the previous survey. 

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