Farmers Fight

“Farmers are good fighters but poor politicians.”

-Victor Davis Hanson


I spent last week with my family up on the big lake they call Gitchee Gumee. It was a much needed vacation where I was finally able to dig into a book that has been recommended to me multiple times, The Soul of Battle, by Victor Davis Hanson.


The first part of the book focuses on a Theban general Cicero called “The First Man of Greece” (Epaminondas) and the epic story of how he led a bunch of Boeotian farmers to crush the Spartans. These were not King Leonidas’ warriors from the movie “300” who held Thermopylae in 480BC. These were the tired and passionless troops of 371BC Sparta who fought for politicians.


Since introducing our Q2 Global Macro Theme of The Last War: Fighting The Fed, we have been pounding our pitchforks into the keyboards reminding you that an end to a politicized US Dollar could bring about the return of the King. Since April, that King has been Cash. The People who use US Dollars as their currency will continue to fight alongside us.


Back to the Global Macro Grind


Last week’s highlight in the Global Macro matrix was the US Dollar’s charge to fresh YTD highs. This is a currency war, so the other team (Europe’s currency) losing matters. With the Euro down -3.2% on the week, the USD Index closed up +2.1% to $83.38.


Strong Dollar Deflates The Inflation – some of us who like to buy things on red enjoy that. It allows us to invest some of our hard earned Dollars at better prices. With the US Dollar up last week, here’s how some of the week-over-week price deflation looked:

  1. WTIC Oil = -0.9%
  2. Gold = -1.3%
  3. Silver = -1.8%
  4. Copper = -2.2%
  5. Cotton = -1.9%
  6. SP500 = -0.5%

Behold, a 50 basis point deflation in the US stock market. Call in the cavalry, we need Qe5!


Let’s get real here folks. If the US stock market can’t sustain taking a few shots from the only thing that will save her in the end (a strong and credible currency backed by conservative fiscal and monetary policy), America will be looking just like Europe in no time.


That’s the long-run. In the shorter-run, given the US equity market’s manic depressive state, we can’t assume that Strong Dollar = Stronger US Consumption and Stronger/Sustainable Growth at the flip of a switch. Getting people off the Qe4 expectation drugs will take time; so will deflating food and energy prices.


In the meantime, the market has to deal with 3 very big things aligned with economic gravity this week:

  1. US Growth Slowing (both ISM reports and the unemployment update last week were terrible)
  2. China Growth Slowing (all of the June and Q2 data due this week)
  3. Q2 Earnings Season

Ah, the ole earnings season – what will the “fundamentals” bring?


It wasn’t long ago (March-April) that the bull case for US stocks was “growth is back, earnings are great, and stocks are cheap.” Therefore, assuming the bull case isn’t solely based on bailouts, it stands to reason that we should wait and watch for the reaction to #GrowthSlowing, earnings deteriorating, and stocks being valued on the right (instead of hopeful) numbers.


What’s already been discounted? I do not know.


Do you?


All I can tell you is what I have been telling you since we shorted Industrials on March 12th – you do not want to be buying pro-cyclical Sectors (Industrials, Energy, Basic Materials) at the top of another cycle.


Industrials (XLI) are already down -1.3% for July (versus the SP500 -0.55%), so I am not going to be willfully blind to the idea that some of the slowdown hasn’t already been priced in. But neither am I going to blindly accept forecasts from politician like CEOs that today’s outlook hasn’t changed dramatically from the conference calls they hosted in April.


Farmers Fight about the weather forecast too. But sometimes it’s pretty clear that everyone is getting wet while it’s raining.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $96.90-103.02, $82.42-83.49, $1.22-1.25, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Farmers Fight - Chart of the Day


Farmers Fight - Virtual Portfolio


TODAY’S S&P 500 SET-UP – July 9, 2012

As we look at today’s set up for the S&P 500, the range is 14 points or -0.64% downside to 1346 and 0.39% upside to 1360. 











  • ADVANCE/DECLINE LINE: on 07/06 NYSE -1048
    • Down versus the prior day’s trading of -371
  • VOLUME: on 07/06 NYSE 596.39
    • Decrease versus prior day’s trading of -12.82%
  • VIX:  as of 07/06 was at 17.10
    • Decrease versus most recent day’s trading of -2.29%
    • Year-to-date decrease of -26.92%
  • SPX PUT/CALL RATIO: as of 07/06 closed at 2.31
    • Up from the day prior at 1.50 


10yr – US Treasuries have told you all you need to know about growth throughout another US Equity no-volume rally; at 1.51% this morning, the 10yr bond is immediate-term TRADE overbought (we’re long it). New risk range = 1.51-1.62% for the immediate-term as Treasuries remain in a Bullish Formation on the long end. 

  • TED SPREAD: as of this morning 39
  • 3-MONTH T-BILL YIELD: as of this morning 0.07%
  • 10-Year: as of this morning 1.52%
    • Decrease from prior day’s trading at 1.55%
  • YIELD CURVE: as of this morning 1.26
    • Down from prior day’s trading at 1.28 

MACRO DATA POINTS (Bloomberg Estimates):

  • 11 am: Fed to purchase $1.5-2b coupon securities maturing 2/15/2036-05/15/2042
  • 11:30 am: U.S. to sell $30b 3-mo bills; $27b 6-mo bills
  • 11:55 am: Fed’s Williams speaks in Couer d’Alene, Idaho
  • 3pm: Consumer Credit, May, est. $8.5b (prior $6.5b) 


    • House, Senate in session 


  • Euro drops to two-yr low ahead of EU regional finance meeting
  • Alcoa releases earnings after the close
  • Bank of England’s Tucker to testify on Barclays Libor scandal
  • Sony’s ‘Spider-Man’ tops N.A. box office with $65m in sales
  • Boeing set to win GE jet order of 100 narrow-body 737s
  • Farnborough Air Show coverage
  • Monsanto trial against DuPont over Roundup-Ready crops to start
  • Media moguls gather in Sun Valley, Idaho this week
  • China GDP, JPMorgan, Air Show, Hollande: Week Ahead July 9-14 


    • Alcoa (AA) 4:03pm, $0.06
    • WD-40 (WDFC), 4pm, $0.82
    • Pricesmart (PSMT) After-mkt, $0.59 


  • Chavez Buys Enemy U.S.’s Fuel While Lauding Iran: Energy Markets
  • Alcoa Profit Seen Plunging 81% on Aluminum Smelting Surplus
  • JPMorgan Probe Shows FERC Priority on Policing Energy Markets
  • U.S. Corn Growers Farming in Hell as Heat Spreads: Commodities
  • Oil Rebounds From Biggest Drop in Two Weeks as Norway Halt Looms
  • Corn Jumps While Soybeans Rally to 2008 High on U.S. Dry Weather
  • Gold Set to Decline a Fourth Day as Stronger Dollar Cuts Demand
  • Copper Advances 0.6% to $3.4305 a Pound in New York Trading
  • LME Shareholders to Vote on $2.2 Billion Takeover on July 25
  • El Nino May Widen Indian Rain Deficit as U.S. Flood Risk Gains
  • Palm Oil Gains as Concerns Mount Over El Nino, U.S. Heat Wave
  • Total Said to Buy 35,000 Tons of Naphtha From Bharat Petroleum
  • Farms Break Subsidy Reliance With Record Exports: BGOV Barometer
  • World to Dodge El Nino’s Spur to Cost of Food: Chart of the Day
  • Rain Deficit in India Narrows to 25% as Monsoon Gathers Pace
  • Rubber Declines Most in Two Weeks as Demand Concerns Strengthen 










SPAIN – stocks and bonds are just a mess; after failing at TREND line resistance last week, the IBEX leads losers this morning, -1.6%, remaining solidly in crash mode at -25% from its YTD high. Central planners cannot change growth slowing; instead, more debt schemes perpetuate it.






CHINA – growth slowing in China is evidently not yet fully priced in; the Shanghai Comp got crushed again last night -2.4% and the Hang Seng was down -1.9% after failing at intermediate-term TREND resistance (20,091). Chinese inflation (CPI) hit a 29mth low in June (that’s good, but it all came pre the +9% rip in Commodities into 1st wk of July).










The Hedgeye Macro Team

The Week Ahead

The Economic Data calendar for the week of the 9th of July through the 13th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - TheWeek

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HedgeyeRetail Visual: Unemployment: Who’s to Benefit?

The unemployment rate continues to improve relative to last year across all age groups. The fastest improving demographic is the 25-34 age group which is net positive for much of discretionary retail, while the weakest improvement is in the older consumer (55 and older), who spends less on the margin in the mall and online. 


HedgeyeRetail Visual: Unemployment: Who’s to Benefit? - COTD

Industrial Indicator: Commercial Printing Short-Squeeze Amid Secular Decline

Chart of the Day

Commercial Printing in Secular Decline, Stocks a Potential Short Squeeze

  • Commercial Printing has been the top performing Industrials sub-industry over the past 30 days, in what appears to be a bit of a short squeeze.  Given that short interest is *one-third* of the float in names like RRD and QUAD, this could well continue.
  • Substitution of digital media for print media has left the commercial printing industry with chronic excess capacity – it is a current example of an industry in decline.
  • The industry is fragmented, impeding capacity rationalization, and facing a host of substitutes for printed materials including online bill pay, reduced mail volumes, e-books, PDAs (fewer printed calendars) and online magazine/blogs.
  • A more significant squeeze in RRD or QUAD could present an interesting entry point for shorts in this troubled industry.

 Industrial Indicator: Commercial Printing Short-Squeeze Amid Secular Decline - commercial printing capacity utilization


Sector Comment:  Navistar’s call this morning raised more questions than answers for us.  It seems that it did for the market as well.  We expect to launch our next detailed “black book” on commercial trucking in coming weeks and will have more to say then.  For now, we again note that NAV has significant liabilities (pension and debt) that make it less “cheap” than it feels relative to better organized competitors.


Reminder:  Expert Call This Wednesday at 1PM

We have an expert call coming up on July 11th at 1PM to discuss AMR/US Air and other regulatory matters.  Our expert will be Lisa Harig, a Partner at McBreen & Kopko and head of the firm’s Washington D.C. office.  She is a former in-house counsel for Trans World Airlines, Inc. and BearingPoint, Inc.  Ms. Harig represents domestic and international clients, including airlines and manufacturers.  Her practice focuses on a wide range of corporate, transactional, compliance and regulatory matters, including representation before the U.S. Department of Transportation and Federal Aviation Administration.  Please contact us or your Hedgeye Sales representative to participate.   


Industrial Indicator: Commercial Printing Short-Squeeze Amid Secular Decline - perf 7612



Unemployment Chart of the Day

Unemployment Chart of the Day - hedgeye unemploymentrate



Jumping back to the JUN jobs report, the key takeaway from our analysis is that the US labor market remains firmly stuck in the mud, failing to improve or outright deteriorating on a number of key metrics:


•           Non-Farm Payrolls, Net of Birth-Death Adjustment YoY: -43k from +138k

•           Headline Unemployment Rate SA: flat at 8.2%

•           Hedgeye-Adjusted Unemployment Rate SA (10YR Average Labor Force Participation Rate): flat at 11%

•           Unemployed-to-Working-Age-Population Ratio SA: flat at 41.4%

•           Labor Force Non-Participation Rate SA: flat at 36.2%


Not that anyone was expecting a major step forward, but it’s clear that the data firmly implies the US labor market remains far worse off than the headline Unemployment Rate (SA) of 8.2% would suggest. You know conditions are not good when an 8.2% Unemployment Rate is being touted as an indicator of “strength” on the incumbent’s campaign trail. Perhaps the populace buys it, perhaps they don’t; we’ll see come NOV 6th. For now, a rigorous analysis of the data (as opposed to overreacting to the headline print) would suggest that Obama’s odds of reelection may be less than indicated by various polls, as well as the latest reading from our Hedgeye Election Indicator.