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Looking Back

This note was originally published at 8am on June 26, 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 farther back you can look, the farther forward you are likely to see.”

-Winston Churchill


It continues to both fascinate and frustrate me that our said leaders in our governments haven’t learned a damn thing about the relationship between debt and growth.


While plenty of both Bush and Obama’s economic advisors dismissed the seminal conclusion in Reinhart & Rogoff’s This Time Is Different, that certainly doesn’t mean that history isn’t rhyming.


Allow me to write this one more time in block letters. Once a country has crossed the proverbial Rubicon (90% Debt/GDP), DEBT SLOWS GROWTH. There is no other growth “policy” left other than getting out of the way.


Back to the Global Macro Grind


Breaking “news” this morning is that someone in Europe has a new plan to pile more debt-upon-debt. Great. Meanwhile, the US (via the Washington, DC based and US tax payer backed IMF) is wholeheartedly cheering it on. Just great.


Atta boy Timmy – you would have nailed it if you just had a bigger bazooka, right?


Right. And bears use baby wipes in the bush. Markets get how ridiculous all of this is becoming. Markets are now starting to get worried that the US fiscal cliff is getting closer too. Markets don’t lie; politicians do.


US Fiscal Cliff?


Get the denominator in the Deficit/GDP ratio right, and you’ll get the timing of the US Fiscal Cliff right. That’s just math. If #GrowthSlowing continues, GDP will fall and the Deficit/GDP ratio will rise, faster.


Looking Back, when we made this call in Q1 of 2010 on Europe, we signaled this sovereign “credit risk” pop on the short-end of the curve. We called it the “Sovereign Debt Dichotomy” (Hedgeye Macro 2010 Quarterly Theme) because not all debt maturity problems and sovereign credit risks occur on the same duration.


So, if you want a real-time risk management signal for the US Fiscal Cliff, we have your back in the Chart of The Day. Watch 2-year Treasury bond yields which have recently popped back above my long-term TAIL risk line of 0.28%. That is one of the biggest Bernanke balls that is still being held under water. When/if it pops, he’ll blame Congress.


Blame Congress? Blame Europe? Blame Hedgeye?


Yep, blame everyone that you can other than yourself. That’s US Politics 1.0. And it’s dying on opacity’s vine.


Looking Back, at all of this - and I mean all of it - from when Krugman told the Japanese to “PRINT LOTS OF MONEY” in 1997 to when Bush II gripped and ripped the money printing and spending handles, to Obama following through on both - I think the fundamental conclusions won’t be the same as Japan’s or Europe’s, but as Mark Twain would say, they will rhyme.




Where am I seeing the Growth Slowing signals accelerate on the downside this morning?

  1. Spain issued 3-month pig paper at 2.36%! (versus 0.84% at their last auction)
  2. Italian CDS is pushing back up towards 600bps after printing a bomb of a Retail Sales report (-6.8% y/y)
  3. Cyprus is asking for a Spanish style (or is it Greek) bailout equivalent of ½ the country’s GDP
  4. Japan passes its tax hike bill in the Lower-House (doubling the consumption tax to cover deficit spending)
  5. Germany’s DAX snapped its last line of consequential support (our immediate-term TRADE line of 6251)
  6. Chinese stocks are in the midst of their longest losing streak in 6 months (down -9.3% since May 2nd)

Oh, but that’s everywhere else. The USA is going to “de-couple” this time. This Time Is Different!

  1. US stocks are down for 3 of the last 4 days (down -3.2% since our 100% Cash call)
  2. US stocks (SP500) have snapped their immediate-term TRADE line of 1318 support
  3. US Treasury Yields (10yr) remain in a Bearish Formation, with a wall of resistance between 1.69-1.93%

Maybe you can click your red shoes and believe that there is no place like investing at home until month/quarter-end (Friday). But you better not be long anything pro-cyclically American in the meantime:

  1. Energy stocks (XLE) lead losers, down -2.53% for June (down -10.3% YTD)
  2. Industrial stocks (XLI) are 2nd worst, down -1.63% for June (barely up at +1.03% YTD)
  3. Tech and Consumer (XLK and XLY) stocks both broke immediate-term TRADE support yesterday

When both leaders (Tech) and losers (Energy) are snapping, that’s bad.


Oh snap. Looking Back, it’s only the countries that don’t find it in themselves to change that end up like Japan or Argentina have for the last 20-30 years.


Do not stand idle. We have to stop these people before it’s too late. Stand up, and be the change in our society. Be patriots, and lead from the front. We are already there. We are Hedgeye. And we are not Looking Back.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1558-1593, $88.27-94.27, $81.96-82.66, $1.24-1.26, and 1305-1318, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Looking Back - Chart of the Day


Looking Back - Virtual Portfolio

President Obama’s Reelection Chances

The President’s climb continues, albeit slower. For the third consecutive week, President Obama’s odds of being reelected ticked up 20 basis points (0.20%) to 57.8%. Yes, this is the third week of an upward trend but it could be the last week. People were very disappointed with the jobs number last week and the uptick this week compared to last week is abysmal. If you didn’t believe growth is slowing, you better believe it now.


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.


President Obama’s reelection chances reached a peak of 62.3% on March 26, according to the HEI. Hedgeye will release the HEI every Tuesday at 7am ET until election day November 6.



President Obama’s Reelection Chances - HEI July10

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Lie To Us

“The average person lies 3 times for every 10 minutes of conversation.”

-Dr. Cal Lightman


Most recently, I have thrown a little spice into my life – staying up past 10PM, watching some Netflix. Since I generally don’t watch TV, the whole experience of viewing something that’s not on mute has been exhilarating.


This past week while on vacation, I stumbled upon a crime mini-series called “Lie To Me.” Dr. Cal Lightman (Tim Roth) is the star of the show. He runs a firm called The Lightman Group where, through the study of micro-expressions, body language, etc., his team’s job is to figure out when people are lying.


I loved the premise of the show because it’s all about something our head of Healthcare Research, Tom Tobin, and I have been studying since at least 2003 – liars. Formally, it’s called Kinesics. And, if you take some time to embrace its principles, it won’t take you long to figure out when a central planner or banker is probably lying.


Back to the Global Macro Grind


Fiction or non? This morning’s Global Macro news-flow had 2 different lines of storytelling:

  1. Pre-4AM US Futures down 6 handles on a bad start to US earnings season, Patriot Coal (PCX) filing for bankruptcy, and Chinese import growth continuing to slow.
  2. Post 5AM US Futures up 5 handles on Spain getting a re-do (almost as popular as getting a sticker for trying hard) on the timing of its bank bailout and Barclays execs lying on TV.

Ok, maybe these guys aren’t lying. Maybe they are just fibbing. Or, maybe, they aren’t lying to themselves as they (internally) attempt to define the difference between what Barclays Chairman, Marcus Agius, called the “difference between culpability and responsibility.”


You see, when deciding what ex-Barclays CEO, Bob Diamond, should be paid on the way out ($100M or $3M? What’s a few million, amongst friends?), you wouldn’t want things like the Sherman Act or a US criminal investigation to get in way of who has already greased whom in British politics.


Downward and upward we go.


Whether we are lying to ourselves or not that the bull case at this point isn’t bailouts, we have ourselves a classic Bull/Bear debate brewing that boils down to 1 very simple risk management question:


Is Global #GrowthSlowing fully priced into corporate earnings, or not?


From a long-term investor’s perspective, Kinesics (and a little probability based math) will help us start to answer this question. In trying to deduce the probability of whether or not the “earnings are great” bulls are lying to themselves, a picture will be more effective than prose.


In today’s Chart of The Day, our jedi Hedgeye mean reversion analyst from the Yale Shiller School of long-term cycles shows you all you need to know about where US corporate profit margins are in the context of long-term history.


In other words (sorry, had to use some words), if Global #GrowthSlowing continues, the longest of long-term corporate profit margin cycle peak is probably in.




If you are buying stocks based on the premise that they are “cheap” (based on the wrong sales, margins, and earnings expectations), you are lying to yourself. Cheap, when using the right numbers, gets a lot cheaper.


To be clear, I’m not calling everyone a liar. To the contrary, if Dr. Lightman is right (and if you read this far in 10 minutes), you could accuse me of lying at least 3 times already.


But just because most politicians get paid to Lie To Us, that doesn’t mean I’ve been lying to you about #GrowthSlowing too. My team has been storytelling about that, since March.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, and the SP500 are now $1, $96.76-103.07, $82.49-83.47, $1.22-1.24, 6, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Lie To Us - Chart of the Day


Lie To Us - Virtual Portfolio


TODAY’S S&P 500 SET-UP – July 10, 2012

As we look at today’s set up for the S&P 500, the range is 29 points or -1.66% downside to 1330 and 0.48% upside to 1359. 











  • ADVANCE/DECLINE LINE: on 07/09 NYSE -340
    • Up versus the prior day’s trading of -1048
  • VOLUME: on 07/09 NYSE 649.72
    • Increase versus prior day’s trading of 8.94%
  • VIX:  as of 07/09 was at 17.98
    • Increase versus most recent day’s trading of 5.15%
    • Year-to-date decrease of -23.16%
  • SPX PUT/CALL RATIO: as of 07/09 closed at 2.09
    • Down from the day prior at 2.31 


  • TED SPREAD: as of this morning 37
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.53%
    • Increase from prior day’s trading at 1.51%
  • YIELD CURVE: as of this morning 1.27
    • Up from prior day’s trading at 1.25 

MACRO DATA POINTS (Bloomberg Estimates):

  • 6:05am: Fed’s Bullard speaks in London
  • 7:30am: NFIB Small Bus. Optimism, June, est. 93.3 (prior 94.4)
  • 7:45am/8:55am: ICSC/Redbook weekly retail sales
  • 10am: IBD/TIPP Economic Optimism, July, est. 46.9 (prior 46.7)
  • 10am: JOLTs Job Openings, May, est. 3.588m (prior 3.416m)
  • 11am: Fed to purchase $1b-1.5b TIPS maturing 7/15/2018-2/15/2042
  • 11:30am: U.S. to sell 4-wk bills
  • 12pm: DOE short-term energy outlook
  • 1pm: U.S. to sell $32b 3-yr notes
  • 4:30pm: API inventories


    • Obama to deliver remarks on economy at Kirkwood Community College in Cedar Rapids. 12:50pm
    • House, Senate in session
    • Senate Banking meets on mobile payments, 10am
    • Senate Finance holds hearing on tax overhaul, 2pm
    • House Oversight holds hearing on Obama administration’s auto bailouts, Delphi pension decision, 10am
    • House Rules meets on the “National Strategic and Critical Minerals Production Act of 2012,” 3pm
    • House Energy panel holds hearing on alternative fuels, 10am
    • House Financial Services panel holds hearing on Dodd- Frank’s impact on consumers, job creators, 10am
    • House Ways and Means meets on tax implications of Supreme Court upholding Affordable Care Act, 10:30am
    • National Transportation Safety Board meets to determine cause of Enbridge pipeline rupture in 2010 that spilled oil into tributary of Kalamazoo River in Michigan, 9:30am
    • CFTC meets to consider final Dodd-Frank rules, 9:30am
    • World Trade Organization’s Dispute Settlement Body holds mtg where U.S., EU, Japan to request establishment of panel to rule on legality of Chinese curbs on rare earth exports   


  • Alcoa earnings beat ests. after carmakers buy more aluminum
  • U.K. manufacturing unexpectedly surges most in a year, boosted by additional working day
  • RIM CEO Thorsten Heins faces investors at annual meeting
  • Duke CEO Rogers to testify in N.C. on leadership change
  • AMD says 2Q sales to fall 11%, reducing forecast
  • Intel agrees to buy 15% of ASML in $4.1b investment
  • Google said near $22.5m settlement over breach of browser
  • ASML rises 11% after Intel investment
  • Alibaba said to get $1b loan to fund stake buyback from YHOO
  • Euro states to speed Spanish bank aid
  • Spanish Economy Minister says Spain may pay <4% on bank bailout debt
  • Hurricane Emilia strengthens to Category 4 storm over Pacific 


    • Wolverine World Wide (WWW) 6:30am, $0.44
    • Jean Coutu Group (PJC/A CN) 7am, C$0.24
    • Shaw Group (SHAW) 7am, $0.58
    • Helen of Troy (HELE) 7:30am, $0.86
    • Alimentation Couche Tard (ATD/B CN) 1:30pm, $0.39 



GOLD – continues to be the stealth leading indicator on what’s really left in these #bailouts (not much); Bearish Formation for the Gold price remains intact as long as TRADE line resistance of $1599 does; no support to $1551, but that’s loose. 

  • Bulls Lift Wagers by Most in Two Years After Rally: Commodities
  • Norway Ends Oil Strike, Averting Lockout of Platform Workers
  • Oil Declines as Norway Ends Energy Strike, China Curbs Imports
  • Wheat and Corn Futures Fall as Recent Price Jump May Curb Demand
  • China’s Gold Demand Seen Rising 13% as Council Pares Target
  • Sugar Climbs for a Third Day as Weather Fuels Supply Concern
  • Gold Set to Decline as Dollar Strength Curbs Investment Demand
  • Copper Rises 0.1% to $7,568 a Ton in London, Erasing Decline
  • Malaysian Palm-Oil Reserves at 14-Month Low as Output Slows
  • Hedge Funds Raise Bullish Gas Bets to Year High: Energy Markets
  • Oil-Backed Bond Losing Haven Status on Strike: Argentina Credit
  • Food-Stamp Clash Combines With Election to Slow Farm Law Revamp
  • Palm Oil Drops as Forecast Rain May Ease Stress on U.S. Soybeans
  • U.K. Dairy Farmers Face Going Out of Business or Taking Milk Cut
  • Rubber Declines to One-Week Low as China’s Demand May Weaken
  • China Cuts Copper Exports as Public Works Jump: Chart of the Day 










SPAIN – was teetering on free-fall and tah-dah, another #bailout – or was it just a reiteration of the strong buy bailout that they already did on a different timeline? Piling more debt-upon-debt will only perpetuate the growth slowdown and amplify the market’s volatility in the meantime; TREND resist line for IBEX = 7361.






CHINA – down another -0.3% on bad trade data, but finally moves to immediate-term TRADE oversold within the context of a Bearish Formation (bearish on all 3 of our risk mgt durations – TRADE/TREND/TAIL); Shanghai Comp = -12% drawdown from the March highs; should bounce to another lower-high tomorrow.










The Hedgeye Macro Team

Conference Call: Q3 Retail Themes

The HedgeyeRetail Team will be hosting a Q3 RETAIL THEMES call this Thursday. There are some critical themes evolving within Retail that should be the bedrock for idea generation in 3Q. The HedgeyeRetail team will explore them in depth with a conference call and Black Book on Thursday, July 12th at 11am EST.


Topics will include:


  • James Cash Rolling in Other People's Graves. We all know about the problems at JCP. After a year, that call is finally consensus. But what is not consensus is the impact that JCP will have on different competitors, suppliers, and 'partners' as its shop-in-shop build out program rolls out. 
  • Capital Intensity Intensifying. 'Invested Capital' is completely misunderstood in retail. It's not just capex, working capital, or sg&a. A company can tweak any of these factors at any point in time, and get much different outcomes. The reality is that we need to look at them in aggregate, for each company and the industry. The results are not pretty as it relates to industry returns. 
  • Who's Margin Dollar Is It Anyway. We're now in 2H, where raw materials costs are 'easy' vs. last year. But when most retailers say they're going to keep the savings, brands say they're going to keep it, and manufacturers staking their claim as well, it adds up to a number above 100%. We'll identify who wins and who loses. 


Please reach out or contact  if you would like to attend this conference and receive the materials.  

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