Too Big To Bail

This note was originally published at 8am on July 24, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“It occurs at first very slowly, then all at once.”

-Ernest Hemingway


That’s what Hemingway said about going broke. That’s also what I said in response to my research team’s questions in the morning meeting yesterday about levered sovereign nations and their banks. From a time and price, this entire thing becomes Too Big To Bail. If it wasn’t, why are the Spaniards banning short selling?


But do people really believe they won’t be bailed out? Listening to the sad whisper of Qe Begging each and every market day, I’m not so sure. While the likes of Timmy Geithner may believe “deeply” that it would be “irresponsible” to not raise taxes, this economy is digging into a deepening hole that some of these banks may not be able to exit without the government’s hand.


But how many hands does the US government have? How many Spanish and Italian banks is Geithner going to have to attempt to bailout via the US tax payer backstopped IMF? How much time does the government have in a stagflating economy to bailout a domestic bank like Morgan Stanley? If it’s happening All At Once, neither you nor I know.


Back to the Global Macro Grind


As Keynesian central planners around the world continue to spin their wheels looking for the next “growth policy”, they continue to perpetuate #GrowthSlowing by piling more debt-upon-debt.


As Growth Slowing’s Slope accelerates on the downside, some of the few remaining leading indicators that were relatively stable for the last 6 weeks are now showing signs of the same economic gravity that has gripped them since March:

  1. Hong Kong’s Hang Seng Index – down -3.8% in the last 2-days has once again snapped intermediate-term TREND support
  2. Italy’s MIB Index – down -13% from its July high has snapped its YTD closing lows established at the end of May
  3. USA’s Russell 2000 – down -5% from its early July high has snapped both its TRADE and TREND lines of support

Oh snap.


All the while, some investors are obviously getting whipped around, buying high and shorting low. But that institutional performance chasing problem isn’t nearly as problematic as the causality driving the whip.


The worse the global economic data gets, the more Qe begging for bailouts the market hears. The more they beg, the more the government creates an expectation that they’ll be there to bail them out. These expectations are now in and of themselves becoming the market’s biggest risk.


Now, you could say that “growth expectations are low and stocks are cheap.” If I hear that a dozen times a day, I see it tweeted 100x over. So that’s consensus. It’s also what consensus has been saying since March. Growth continues to surprise on the downside and “cheap” stocks keep getting cheaper.


Looking at the Big Macro Data this morning, you can say whatever you want to say – but the data is the data:

  1. German PMI (manufacturing index) tanked in July at 43.3 versus 45.0 in June
  2. Chinese “flash” PMI rose in July from 48.2 to 49.5
  3. Brazilian inflation rose “surprisingly” on the mid-July reading back up to 5.2%

Hedgeye Playbook: get the slopes of Growth and Inflation right (sequentially) and you’ll get a lot of other things right:


1.   GROWTH: given that any PMI reading below 50 is just plain bad, you can call the growth data better than awful in China – but, at the same time, agree with Moody’s that Germany’s economic growth picture is, well, awful.


2.   INFLATION: that’s the most important Global Macro inflation data point we’ve had so far in July (primarily because it’s one of the few July numbers that have been reported!). This is the first sequential uptick in Brazilian inflation since September.


Does anyone remember September 2011? Ooh-lah-lah. Lots of bad stuff started happening to markets All At Once. In a #GrowthSlowing global economy, marginal food/energy price inflations also slow growth further.


Whether you go back to the July 2011 highs in stocks or commodities (and trace a draw-down line to the October lows), you’ll see the same thing. The world’s growth slowed, All At Once, after the Qe2 sponsored commodity price inflation shocks of July-August.


Now, I’ll be the first to agree, this is not 2011. This isn’t 2008 either. This Time Is Different! This is 2012. And, oh my, does the entire world have more sovereign and bank liquidity issues today than Lehman or Greece did in either of those periods. In 2012-2013, this globally interconnected web of debt, banks, and broken political promises might just be Too Big To Bail.


My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Hang Seng, and the SP500 are now $1559-1580, $98.39-108.37, $83.22-83.98, $1.20-1.22, 18829-19364, and 1331-1356, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Too Big To Bail - Chart of the Day


Too Big To Bail - Virtual Portfolio


The Macau Metro Monitor, August 7, 2012




Neptune Group Ltd announced it has entered into several MOUs to enlarge its footprint in Macau by investing in new junket operations.  The agreements involve the junket promoter of the Guangdong 31 Sky Club at Grand Lisboa, the junket representative of the Guangdong VIP Club at MGM Macau, and the junket promoter of Wynn Guangdong VIP Club at Wynn Macau.


According to HK filings, the Guangdong 31 Sky Club generates an average rolling turnover of HK$4.8BN (US$619MM) per month and has at least 11 gaming tables.  The Guangdong VIP Club at MGM Macau has at least 24 gaming tables, generating a rolling turnover averaging at approximately HK$15.1BN per month.  The Wynn Guangdong VIP Club at Wynn includes at least 29 gaming tables, posting an average monthly rolling turnover of HK$9.3BN.



AERL announced it has entered into a non-binding MOU to acquire junket operator Bao Li Gaming Promotion Ltd.  Bao Li currently operates one VIP room with 5 tables at City of Dreams.

AERL expects to close the transaction by the end of September, paying US$15MM (MOP120MM) for 100% of Bao Li’s operations. The price could be higher, depending on Bao Li’s performance.  Upon the closing of the acquisition, AERL will have 34 tables in four VIP rooms.



Legislative Assembly (AL) yesterday passed a new law increasing the age of those allowed to work or play in casinos from 18 to 21.  The new law would take effect from November 11, 2012. 


TODAY’S S&P 500 SET-UP – August 7, 2012

As we look at today’s set up for the S&P 500, the range is 34 points or -1.45% downside to 1374 and 0.99% upside to 1408. 











    • Down  versus the prior day’s trading of 1998
  • VOLUME: on 08/06 NYSE 647.20
    • Decrease versus prior day’s trading of -14.12%
  • VIX:  as of 08/06 was at 15.95
    • Increase versus most recent day’s trading of 1.98%
    • Year-to-date decrease of -31.84%
  • SPX PUT/CALL RATIO: as of 08/06 closed at 1.54
    • Up from the day prior at 1.27 


  • TED SPREAD: as of this morning 36
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 1.59%
    • Increase from prior day’s trading of 1.57%
  • YIELD CURVE: as of this morning 1.35
    • Up from prior day’s trading at 1.33 

MACRO DATA POINTS (Bloomberg Estimates):

  • 6am: EFSF to sell up to EU1.5b 91-day bills
  • 7:45am/8:55am: ICSC/Redbook retail sales
  • 10am: JOLTs Job Openings, June, est. 3717 (prior 3642)
  • 11am: U.S. Fed to purchase $4.25b-$5b notes in 8/15/2018 to 5/15/2020 range
  • 11:30am: U.S. to sell 4-week bills
  • 1pm: U.S. to sell $32b 3-year notes
  • 2:30pm: Fed’s Bernanke speaks by video on financial education in Washington
  • 3pm: Consumer Credit, June, est. $10.5b (prior $17.118b, revised)
  • 4:30pm: API inventories 


    • House, Senate meet in pro-forma sessions
    • Senate Majority Leader Harry Reid, D-Nev., Center for American Progress host National Clean Energy Summit, with speakers include Interior Secretary Ken Salazar, former President Bill Clinton
    • FCC Chairman Julius Genachowski, Ben Hecht, chairman of Connect2Compete announce launch of nationwide computer recycling, donation effort, 11am 


  • Standard Chartered plunges; faces New York suspension on Iran
  • HTC extends decline to 2008 low after forecast of sales drop
  • Pfizer-J&J drop Alzheimer’s drug trials after second failure
  • Chesapeake posts record profit as asset-sale goals expand
  • Knight Capital’s three new board members will be picked by Blackstone, General Atlantic, the board w/ Jefferies approval
  • SEC freezes another $6m in Nexen insider-trading case
  • Icahn seeks talks to buy remaining CVR Energy shrs, $29 ea.
  • Second TSE system error in seven months halts derivatives
  • Italian economy contracts for 4th straight quarter amid slump
  • CFA Level III exam results due today
  • Hedge funds gained 0.2% last month, trailing stocks
  • U.S. CEOs less confident on economy: survey 


    • Emerson Electric (EMR) 6:30am, $1.00
    • CVS Caremark (CVS) 6:45am, $0.80; Preview
    • Church & Dwight (CHD) 7am, $0.55
    • Fossil (FOSL) 7am, $0.79
    • Marsh & McLennan (MMC) 7am, $0.58
    • Sirius XM Radio (SIRI) 7am, $0.02
    • TransDigm Group (TDG) 7am, $1.70
    • MGM Resorts (MGM) 7:30am, $(0.15)
    • Molson Coors Brewing (TAP) 7:30am, $1.20
    • Oaktree Capital (OAK) 7:30am, $0.61
    • Tenet Healthcare (THC) 7:30am, $0.05
    • Pepco Holdings (POM) 7:35am, $0.31
    • Melco Crown (MPEL) 7:40am, $0.17
    • Brookfield Renewable Energy (BEP-U CN) 8am, $0.10
    • Charter Communications (CHTR) 8am, $(0.21)
    • Cablevision Systems (CVC) 8:30am, $0.19
    • FirstEnergy (FE) 8:30am, $0.64
    • PG&E (PCG) 9:01am, $0.82
    • Primaris Retail REIT (PMZ-U CN) 4pm, C$0.36
    • Rackspace Hosting (RAX) 4pm, $0.18
    • TW Telecom (TWTC) 4pm, $0.14
    • (PCLN) 4:01pm, $7.36
    • XL Group (XL) 4:01pm, $0.55
    • Alterra Capital Holdings (ALTE) 4:04pm, $0.58
    • Live Nation Entertainment (LYV) 4:04pm, $0.06
    • Express Scripts Holding (ESRX) 4:05pm, $0.82; Preview
    • Walt Disney (DIS) 4:14pm, $0.93
    • Energy Transfer Equity (ETE) 4:40pm, $0.38
    • Energy Transfer Partners (ETP) 4:40pm, $0.46
    • Renren (RENN) 5pm, $(0.04) 



OIL – ripping humanity a new one this morning on the real (inflation adjusted) consumption growth front. At $110, Brent is up +25% since June! So get ready for every CPI and PPI report to accelerate, after they’ve deflated for the last few months; economic tailwind is now a big headwind.

  • Iron-Ore Rout Seen Curbing Losses for Commodity Ships: Freight
  • Rice Hoard Offers World Respite as Food Costs Surge: Commodities
  • SovEcon Says Russian Wheat Harvest May Be Lower Than in 2010
  • Soybeans Gain as Rains Seen Failing to Revive Drought-Hit Crop
  • Barrick Gold Studies Acquiring Assets as It Reviews Costly Mines
  • Chinese Smelters May Boost Copper Exports After Tolling Tax Cut
  • Gold Increases on Speculation a Weaker Dollar Will Spur Demand
  • Japan Seeks to Buy 106,530 Tons of Milling Wheat in Tender
  • Copper Gains for Third Day Before China Inflation Data This Week
  • CBH Says Western Australia Grain Shipments May Climb to Record
  • Crude Supplies Fall to Three-Month Low in Survey: Energy Markets
  • Palm Oil to Drop on Weak Demand, Stockpiles, TransGraph Says
  • Asteroid Mining Venture Adds Google-Backed Billionaire Investors
  • Richest Family Offices Seeing Fastest Growth as Firms Oust Banks
  • Cotton Harvest in India to Tumble as Dry Weather Hurts Crops
  • China Overtakes South Africa on Ferrochrome Output, Merafe Says










ITALY – good news, Italy is experiencing a stagflating recession (Q2 GDP -2.5% y/y), youth unemployment just hit 36%, but “the stock market is up.” So is Venezuela’s. This short squeeze has been impressive.






ASIA – Asia’s 2-day equity rally ends on a whimper w/ China closing +0.13%, KOSPI +0.05%, and Singapore -0.14% (Japan was up +0.88%, failed right at immediate-term TRADE resistance of 8813). Where do we go from here? Australia said no more rate cuts for you. Brent Oil at $110 is not good for whatever is left of Eastern consumption growth.











The Hedgeye Macro Team








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Comanche Market

“… and meant, anyone who is against me all the time.”

-S.C Gwynne


That’s what the white guys in New Mexico “translated in various ways (Cumanche, Commanche), but eventually as “Comanche.” It would take the Spaniards years to figure out exactly who these new invaders were.” (S.C. Gwynne)


As I come to the end of what’s been a wildly educating experience reading Gwynne’s Empire of The Summer Moon, it’s twisting so many thoughts in my head that I don’t particularly know what I’m allowed to write about it. So I’ll just stop there.


All I can tell you is that as a professional short seller of everything US Dollar debauchery and centrally planned markets, I’m getting really comfortable having all of the same people against me all of the time. Their moves are becoming blatantly predictable.


Back to the Global Macro Grind


Against me? How about +25% at the pump against you? That’s what the price of Brent Oil has done since it bottomed at the end of June. With the US Dollar down now for 3 consecutive weeks, the purchasing power of your currency is once again under enemy attack.


Enemy? Who is the enemy? Is it Johnny Hilsenrath with his now almost daily Dollar debauchery articles in the Wall Street Journal? Or is it his editor? Or is it his editor’s brother’s boss who just plowed back a $35,000 plate at Obama’s CT dinner last night?


Whoever you are, market prices can see you now.


Got causality (begging for more Qe policies) that are driving immediate-term market price correlations? Here’s an update on that (USD versus Big Macro stock and commodity market moves in the last 3 weeks):


  1. Brent Oil vs USD = -0.74
  2. SP500 vs USD = -0.90
  3. EuroStoxx600 vs USD = -0.92


That’s right folks. Today’s centrally planned market is American-European. How else can Italy deliver a -2.5% year-over-year GDP disaster for Q2 2012 this morning (and 36% youth unemployment), and have their stock market “up” on that? Dollar down this morning.


Devaluing your currency is cool though, right? Look at how well life is going in Venezuela after Chavez devalued The People’s currency by 50%. The stock market  in Venezuela leads the world YTD at +110% YTD (not a typo). How screwed up is that?


President Obama and his centrally planned stock market advisors have figured this out. If the US stock market goes up, his chances of winning the Presidential Election go way up. In this morning’s Chart of The Day, we show you that in our Hedgeye Election Indicator:


  1. Obama’s chances went up +110 basis points wk-over-wk
  2. At 58.7% probability, this is the highest we’ve scored Obama’s chances since mid-May
  3. Unless the US Dollar stops going down (and US stock stop going up), Obama could run the tables


Now isn’t that a tad perverse? Burn The People’s hard earned currency at the stake, keep rates of return on hard earned Fixed Incomes at 0%, and pretend that jamming them with $4.50/gallon at the pump isn’t going to leave a mark on the 99%’s dinner table tonight.




Unfortunately, the globally interconnected growth signals around the world get that Down Dollar, Up Oil is only going to perpetuate the world’s biggest problem (#GrowthSlowing) further.


Here’s your latest real-time signaling on the Global Macro front:


  1. Chinese Stocks (Shanghai Composite) whimpered in day 2 of the “stock market rally”, closing up +0.13%, failing at resistance
  2. South Korea’s leading indicator (KOSPI) barely banged out a green close last night, closing +0.05%, failing at resistance
  3. Dr. Copper, one of the world’s best growth indicators, was down -1.7% last week, and remains broken this morning at $3.40


Those are just growth signals though (Asia, demand, etc.). But who needs those when we can chase Energy and Basic Material stocks in order to keep up with the SP500’s “being up” +1% already for August?


We’ve seen this movie before. Month by month, we’re killing whatever trust remains in our said “free” markets. Like the devastation of what was a wild, yet free, Comancheria, a centrally planned life ends in tears for many, and smiles for some.


Eric Rosengren, inflation is not growth.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Russell2000, and the SP500 are now $1, $106.40-110.84, $82.05-82.84, $1.23-1.24, 782-803, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Comanche Market - Chart of the Day


Comanche Market - Virtual Portfolio

RL: Idea Alert

Keith shorted RL into tomorrow’s print for a TRADE. To be clear on this one, there’s a sharp delineation between where we like RL over each duration. In the event of a sell-off, we'd be looking for a point of entry once the dust settles to get involved with what could be $12 in earnings power. 


TAIL (3-Years or Less): This is one of our favorite TAIL ideas, as we think that the consensus is underestimating RL’s 3-year earnings power by  nearly a dollar. When we add up the opportunities by country, product category, and most notably – by channel (ie, we think that people are underestimating the leverage inherent to this model.  Specifically, we’re looking at nearly $10 in EPS next year, and over $11.50 the year after. A 10% premium to the market suggests a stock near $175. A 1x PEG is $200+ over 2 years.


TREND (3-Months or More): RL still has a full 75% of its (March) FY left to go, so the company will be guarded into the print. RL laps European category expansion (intro of Polo FW), Denim & Supply, FX, and double digit retail comps – which are tougher to bank on this year.


TRADE (3-Weeks or Less): The company has every reason in the world to offer up a cautious outlook – given all that’s going on in the world – especially Western Europe (it has minimal exposure to China) and the clear trend of other companies putting up weak numbers. Add in the Olympic spending, tough wholesale and store productivity comps, and our analysis that stretches to find more than 10% of CFO changes that end up being a near-term positive earnings event, and we’re more inclined to be on the negative side of this print. This is a perfect ‘buy on pullback’ stock. 


RL: Idea Alert - RL TTT

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