Failed Policy

This note was originally published at 8am on June 05, 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 fact that this policy had failed spectacularly in 1973 did not deter the weak dollar crowd.”

-Jim Rickards


Between today’s G-7 meeting, tomorrow’s ECB decision, and Thursday’s Bernanke testimony, there will be plenty of opportunity for politicians and their pandering economists to beg and fear-monger for more of what simply has not worked.


That’s the short-run. The conflicted and compromised will do whatever it takes for their short-term political survival. In the long-run, apparently Keynes had the duration of the policy trade wrong – the rest of us aren’t all yet dead.


Taking a step back, the last 60 years of history are obviously littered with examples from Charles de Gaulle to Richard Nixon where sovereign currency devaluation and debt monetization did not work. If you’d like to get back up to speed on that, Jim Rickards does a great job walking through part of this  history in Chapter 5 of Currency Wars (1967-1987).


Back to the Global Macro Grind


Real-time market prices don’t lie; politicians do. Within hours of last week’s US Growth Slowing double-header (US GDP slowed to 1.9% in Q1 versus 3% in Q4, then the May Employment Report bomb detonated), the US Dollar stopped going up.


Why? Because the rest of the world fully expects an un-elected central planner in Washington (Ben Bernanke) to launch an iQe4 Upgrade. He did it on January 25th (pushing 0% rates out to 2014) and there’s no reason to expect he doesn’t do something again between Thursday’s Joint Economic Committee meeting and the FOMC meeting on June 20th. He’s fighting for his political life.


All that said, we have no idea what he is going to do. So don’t look for us to give you the super-secret whisper on that. Our strategy remains playing the game that’s in front of us, Embracing Uncertainty. We think the US Election puts him in a box.


Right, the man walked on water during 2008 and we should perpetually give him thanks and praise. But seriously, what Bernanke should have done and what he did have been 2 very different things since 2010.  


By the summer of 2010 Bernanke had bi-partisan support (the Republicans wanted to win the mid-term elections) to move to Quantitative Easing (Policy To Inflate). Both parties wanted the stock market up. Now only one of them do.


What Bernanke does next must also be contextualized on a relative basis. This is not 2008 or 2010 in that regard either. Today you have a currency war between the 3 major currencies of the world (Dollar, Euro, and Yen). They trade relative to the expedience of the latest Fiat Fool (failed) Policy that is designed to debauch them. The Fed, ECB, and BOJ don’t get paid to act unilaterally.


So what are currency markets signaling happens next?


1.   The US Dollar – remains in what we call a Bullish Formation (bullish across all 3 of our risk management durations, TRADE/TREND/TAIL) with immediate-term TRADE support at $81.55 and next resistance = $83.31.


2.   The Euro (vs USD) – remains in what we call a Bearish Formation (bearish across all 3 of our durations) with an immediate-term TRADE support/resistance range of $1.22-1.25.


3.   The Yen (vs USD) – is in a neutral position with long-term TAIL resistance at $77.68 and immediate-term TRADE support at $79.05.


In other words, if we had to pick one and #TimeStamp our highest probability scenario right now (we do), we’d be long the US Dollar and short the Euro (which we re-shorted on yesterday’s bounce).


It’s another way of saying that both Hedgeye and Global Macro markets think that the Europeans are in a much more dire situation (for now) than the United States of America is.


That could change at literally any minute of any day now – and that, of course, is why most sane people don’t trust these markets or the politicians attempting to centrally plan them.


Back to the ‘for now’…  


We still aren’t all brain dead, and we have to deal with whatever tomorrow’s European move to debauch the Euro back down to $1.22 brings. Then we have to react to Bernanke’s reaction to the reaction. Then we all have to pray.


Prayer, in markets, is obviously not a risk management process. Neither is hope. That said, my only long-term hope for this country and the free-market economy that we used to have is to get Ben Bernanke out of the way of expectations, let prices at the pump clear, and let US Consumption Growth recover again.


With Bernanke having not been able to really do anything for the last 5-6 weeks, the US Dollar has risen steadily and Oil, Gold, Copper, etc. prices have fallen precipitously. That’s good for American consumers.


That’s bad if you are long Energy stocks (the Energy ETF (XLE) is down -10.3% for the YTD). That’s good if you are short them and long Consumer Discretionary stocks (the Consumer ETF (XLY) is +7.4% for the YTD).


Strong Dollar = Strong America (via Stronger Consumption). That’s not more of a 1973 like Failed Policy. That’s a new idea.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1599-1625, $97.21-102.78, $1.22-1.25, and 1258-1283, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Failed Policy - Chart of the Day


Failed Policy - Virtual Portfolio

Italy, not Spain or Greece, should be on the mind at G20 meetings


The Macau Metro Monitor, June 19, 2012




Genting has raised its stake in Echo Entertainment to almost 10%, on par with Crown's James Packer.  Genting bought 2% of Echo, or 13.8 million shares worth around A$60 million, in a single trade on Tuesday morning with Malaysian broker CIMB facilitating the deal, according to one of the sources and brokers in Sydney.  That follows a block trade by Genting's Hong Kong unit on Monday for 19.26 million Echo shares, or about 2.8% of the Australian company, worth A$82.6 million, according to a stock market filing by Genting Hong Kong.  Genting Singapore previously held an unspecified amount of Echo shares, which analysts say amounted to 4.9%.  By that calculation, the latest deals would take Genting Group's stake through various group firms to 9.7%.


Under Echo's constitution, no single party can hold more than 10% and will need a regulatory nod to go further.

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Play Tomorrow

“First rule is to be able to play tomorrow.”

-Warren Buffett


That’s what Warren Buffett said on May 5th at the Berkshire Hathaway 2012 Annual Meeting. While you don’t hear him focus the marketing message on risk management like he used to, it was nice to hear him highlight a version of his longstanding Rule #1 of investing – “Don’t lose money.”


The preface to his comment was addressing how early he was telling you to buy stocks during the thralls of 2008. “In October 2008, I wrote that article, should have been a few months later, but stocks were cheap.”


Not to keep score, but it wasn’t until 6 months later that “cheap” stocks got a lot cheaper. I’m not Buffett. I am just a small town Canadian who has never received a bailout dollar and would rather retire before accepting one. I went to 96% Cash in Q3 of 2008 and 91% cash yesterday. I may not be the best player in this game, but I will Play Tomorrow.


Back to the Global Macro Grind


With the SP500 recovering from its early session lows yesterday, US Equity Volatility (VIX) dropped -13.2% on the day and the US stock market moved to a 3 week closing high.


Was it a bird, a plane – or another iQe4 upgrade rumor? Could it be Geithner, Bernanke, or Obama? Sadly, being able to Play Tomorrow also requires an acute sense of hearing. Can you hear the bailout whispers now?


No one ever went broke booking gains, so instead of joining the circus, that’s what I’ll continue to do across asset classes on up-moves to lower highs. I’m not getting wacky net short. I’m just getting out.


After yesterday’s sales of the US Dollar, German Bunds, US Treasuries, Cattle, and Pigs (the COW ETF), here’s where the Hedgeye Asset Allocation Model stands for this morning’s US open:

  1. Cash = 91% (up from 61% yesterday)
  2. US Equities 9% (all Consumer Staples – XLP)
  3. International Equities = 0%
  4. Fixed Income = 0%
  5. Commodities = 0%
  6. International Currencies = 0%

Why sell everything other than US Equities (I might sell those this morning too)?


That’s simple:


A)     I have absolutely no idea what Bernanke (Fed) and Geithner (Treasury/IMF) are going to do next

B)      If you gave me the whisper (inside information), I wouldn’t know what the market’s reaction would be to it either


That, in a nutshell, is also why I’m going to stop hiring for the next couple of months.


You see, I not only run my mouth, but I run my own business. I backstop the company’s credit line. I know what meeting a payroll meant during the thralls of 2008, and I’m not going to be the greater fool rolling the bones on my firm and family’s future for the sake of other people’s short-term political pressures now.


But that’s just me.


I know there are many more important people in many higher places in this country that need to get paid. I’m not the only person who gets that. So have at it boys, centrally plan away.


President Obama is no one’s fool. His economic advisors have reminded him that if he gets the short-term moves in the stock market right, he’ll get the election right. In this morning’s Hedgeye Election Indicator (Chart of The Day), you can see that:

  1. Obama’s odds of re-election bounced by +200bps week-over-week to 56.1%
  2. Obama’s odds of re-election are now at their highest level in nearly a month
  3. Obama’s odds of re-election are still down, hard, from their peak (March 26th) of 62.3%

Now what?


Obama gets this. If he has his boys continue to debauch the US Dollar in the short-term, both commodities and stocks will like that. The People will have to take that in the pump, but that doesn’t really matter – because Bernanke says that’s “transient.”


Something else (that was not so funny) also happened on the way to the US Political Forum on March 26th. Both the Russell2000 (broad measure of US stocks) put in its YTD high and the US Equity Volatility Index (VIX) put in its YTD low.


Which begs the question– why am I not at 96% Cash again?


At 18.22 the VIX is immediate-term TRADE oversold at another higher-low. At 1344 and 772, the SP500 and Russell2000 aren’t yet immediate-term TRADE overbought. But they will be today. Both are also making lower long-term highs (on no-volume).


No Trust; No Volume. So we’ll see what this morning brings. Either way, and no matter what they throw at us next, we will be positioned to Play Tomorrow.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, and the SP500 are now $1, $95.07-98.26, 81.59-82.16, $1.24-1.26, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Play Tomorrow - Chart of the Day


Play Tomorrow - Virtual Portfolio


TODAY’S S&P 500 SET-UP – June 19, 2012

As we look at today’s set up for the S&P 500, the range is 24 points or -1.55% downside to 1324 and 0.24% upside to 1348. 












    • Down from the prior day’s trading of 1149
  • VOLUME: on 6/18 NYSE 707.28
    • Decrease versus prior day’s trading of -53.26%
  • VIX:  as of 6/18 was at 18.32
    • Decrease versus most recent day’s trading of -13.22%
    • Year-to-date decrease of -21.71%
  • SPX PUT/CALL RATIO: as of 6/18 closed at 1.51
    • Down from the day prior at 1.72 


TREASURIES – you can whip the manic equity guy around on no-volume (down -38% volume study yesterday was awful), but you can’t budge bonds. 10yr down again to 1.58% this morning and the Yield Spread is about to snap +130 wide again. Not good for the Financials – it wasn’t yesterday either. 

  • TED SPREAD: as of this morning 38
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.57
    • Unchanged from prior day’s trading
  • YIELD CURVE: as of this morning 1.29
    • Unchanged from prior day’s trading 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am/8:55am: ICSC/Redbook weekly retail sales
  • 8:30am: Housing Starts, May, est. 721k (prior 717k)
  • 8:30am: Building Permits, May, est. 730k (prior 723k)
  • 10am: JOLTs Job Openings, April, est. 3685 (prior 3737)
  • 11am: Fed to buy $1.5b-$2b notes in 8/15/2018-2/15/2031 range
  • 11:30 am: U.S. to sell 4-week bills
  • 4:30pm: API inventories
  • FOMC Meeting, Day 1 


    • U.S. Federal Open Market Committee policy makers begin two- day meeting in Washington to decide on interest rates, 10am
    • Mexican President and G-20 summit host Felipe Calderon may hold late-afternoon press conference on meeting’s final day
    • House, Senate in session
    • Joint Economic Committee holds hearing on economic impact of ending funding for certain government data, 2:30pm
    • Senate Finance hears from former White House Budget Director Alice Rivlin on looming fiscal crisis, 10am
    • CFTC Commissioner Bart Chilton delivers keynote address at Mutual Fund Directors Forum policy conference, 7pm 


  • JPMorgan CEO Jamie Dimon testifies at House cmte hearing
  • U.S. Federal Open Market Committee begins two-day meeting
  • Greek parties to form group to renegotiate bailout terms; borrowing costs fall at 91-day bill auction
  • Microsoft unveils Surface tablet computer, taking on IPad
  • Oracle rises after earnings beat estimates on software sales
  • German investor confidence dropped more than forecast in June
  • G-20 leaders hold a 2nd day of meetings in Mexico, to urge euro-area govts to take all steps to protect currency union
  • China leads 12 nations helping boost IMF’s firewall to $456b
  • CBS billboard unit worth a look: Clear Channel Outdoor CEO
  • Insight said to top $25.50/shr offer to buy Quest Software
  • Danone cuts profitability goal on southern Europe, costs
  • France plans 3% div. tax to be paid by cos., Les Echos says
  • China said to order checks on maturing bonds to avoid defaults 


    • FedEx (FDX) 7:30am, $1.92
    • John Wiley & Sons (JW/A) 8am, $0.73
    • Jefferies Group (JEF) 8am, $0.27
    • Discover Financial Services (DFS) 8:30am, $1.00
    • Barnes & Noble (BKS) 8:30am, $(0.91)
    • Jabil Circuit (JBL) 4:02pm, $0.64
    • Adobe Systems (ADBE) 4:05pm, $0.59
    • La-Z-Boy (LZB) 4:05pm, $0.26



OIL  - both WTIC and Brent act horribly ahead of what is supposed to be another Bernanke Bailout tomorrow; consensus better watch what they are begging for here as Dr Copper also disagrees (down -0.4% this morning and still in a Bearish Formation); Gold has had a good move front-running Fed expectations, but now bumps up against a wall of resistance at $1642. 

  • Rubber Glut Extends Bear Market as Bridgestone Wins: Commodities
  • Corn Set for Biggest Two-Day Advance Since April on U.S. Weather
  • Robusta Coffee Declines as Slowing Economies May Erode Demand
  • Oil Declines for a Second Day on Europe Concern, Iranian Talks
  • Copper Swings Between Gains and Declines as Spain Sells Debt
  • Gold Seen Gaining an Eighth Day as Europe Crisis Spurs Demand
  • Australia Sugar Exports at 3-Year High to Boost World Supply
  • Korea Boosts Corn Imports From South America as Real Slumps
  • Oil Supply Falls on Refinery Demand in Survey: Energy Markets
  • Uralkali Rating to Pave Way for Debut Eurobonds: Russia Credit
  • Australia to Boost Beef Supplies as Herd Climbs to 37-Year High
  • Itochu Mirrors Xstrata in Trader to Miner Shift, Seeks Copper
  • India’s Gold Imports Seen Lower as Record Price Cuts Demand
  • Oil Supply Falls on Refinery Use in Survey
  • GDF Suez Quits Europe as Belgium Plans to Shut Reactors: Energy
  • BlackRock’s Hambro Says Mining Dividend Crusade Reaping Rewards
  • Global Economy to Curb Wool Demand Even as China Boosts Supplies 










GERMANY – just an outright nasty ZEW (German expectations rpt) this morning at -16.9 for June (vs +10.8 in May) tells you all you need to know about #GrowthSlowing (at an accelerating rate) in one of the few remaining countries that didn’t have a big growth problem. Sold our German Bunds on green yesterday as growth tends to trump all other risk management factors at the turns.














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