Currency Wars

“The first panacea for a mismanaged nation is inflation of the currency; the second is war.  Both bring a temporary prosperity; both bring a permanent ruin.  But both are the refuge of political and economic opportunists.”

                -Ernest Hemmingway


Anyone who has analyzed the United States federal budget understands that this fine country spends a lot on its military.  In fact, based on estimates from the nonpartisan Congressional Budget Office defense spending, that is considered discretionary, will total $635 billion in fiscal 2013. This is more than 52% of the total discretionary budget of the U.S. government and just under 20% of total federal government spending.


In terms of all global defense spending, the  U.S. is dominant.  According to the Stockholm International Peace Research Institute’s (SIPRI) 2012 Yearbook, the U.S. spends more than 40% of the combined global military spending pie.  The next four countries on the list are as follows: China at 8.2%, Russia at 4.1%, the UK at 3.6%, and France at 3.6%. 


Since the U.S. spends the most on defense on a gross dollar basis and as a percentage of GDP at 4.7%, it is obvious that the U.S. has solidified its so-called “hyper power” status as the world’s primary military power.  As a Canadian, I can assure you that I appreciate the powerful U.S. military and the people that currently serve and have served in the military.  But as a global macro analyst, it is difficult not to question whether the U.S. is overspending, if not at least spending inefficiently.


The most recent military spending controversy occurred last month when a well-connected supplier received a contract to produce oil pans for $17,000 a pop.  (If I could get a deal like that, I might even consider getting out of the research business!) Yesterday, in fact, the ever-controversial Grover Norquist made the following statement regarding wasteful defense spending:


“Conservatives need to remember that, just as spending money on something called education doesn't mean people are educated and spending money on welfare doesn't mean it adds to the general welfare calling something national defense doesn't mean it is. It may not be. It may undermine national defense if it's a waste of resources, if it's a misallocation of resources.”


Later today the CBO will release its updated budget and economic outlook, we will analyze this update in a note, but we certainly do not expect positive news from the CBO.  It’s important because the direction of the U.S. budget is a key factor that will drive the value of the U.S. dollar over time. 


The obvious conclusions from the CBO’s reports will likely be that the U.S. needs to drastically cut spending and that an effective growth policy needs to be implemented to juice revenue.  On the military spending front, an improved spending outlook will come from more efficient spending and also more unique ways of waging war.


To the last point, next Wednesday at 11am we will be hosting a conference call with Jim Rickards, the author of Currency Wars: The Making of the Next Global Crisis. A key catalyst for writing this book was that Rickards has been a long time consultant to the Department of Defense and has participated in large-scale economic war games. 


Rickards’ view is that the U.S. is already facing national security threats via economic warfare including: clandestine gold purchases from the Chinese, to hidden agendas of sovereign wealth funds, to explicit threats from the Russians about diversifying away from the dollar.  In an even more controversial stance Rickards believes that the biggest economic threat we currently face may well be from an overly exuberant Federal Reserve Chairman in Ben Bernanke.  While it sounds like Rickards is carrying Hedgeye water so to speak, we actually disagree on a number of key points and will be pushing him on some of his more extreme views.


On the call with Rickards we will also provide you with our updated investment views on the major currency pairs.  Our institutional subscribers will automatically get access to the call, if you are not a current institutional subscriber but would like to participate, please email .


Now as for the war that is currently going on in your portfolio, I have a couple of points to highlight this morning.  Near the close yesterday, we released a note that emphasized the quantitative set up, which is what we call an “outside day”.  This occurs when the SP500 trades higher than the previous close intraday but then closes below it.  From a fundamental perspective, this suggests that there is likely a good overhead supply of stock for sale at that level.


The inability of the SP500 to break through that key level is even more negative when combined with where we see investor sentiment, which is in a word: complacent.  For starters, as we’ve stated repeatedly, the VIX at/or near the 15.0 level has consistently signaled a time to sell equities over the past three years.  After yesterday’s action, the VIX also became bullish from a TRADE duration in our models. This implies the VIX has even more upside in the short term. Further, the bull/bear spread from the U.S. Investors Intelligence Poll is now 2,260 basis points wide to the bull side.  So, yes investors are leaning long.


And on the old global growth watch, Japan posted a -8.1% decline in exports on a year-over-year basis.  Not surprisingly, exports to the European Union were down -25% and to China were down -11.9%.  But don’t worry, Japan is only the fourth largest economy in the world . . .


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are now $1, $113.52-115.18, $81.91-82.46, $1.22-1.24, 1.75-1.82%, and 1, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Currency Wars - Chart of the Day


Currency Wars - Virtual Portfolio

Magnificent Investing

This note was originally published at 8am on August 08, 2012 for Hedgeye subscribers.

“Another thing that freaks me out is time.  Time is like a book.  You have a beginning, a middle and an end. It’s just a cycle.”

-Mike Tyson


This week I enjoyed a few days off in the Banff and Lake Louise region of Alberta in the heart of the Canadian Rockies.  As part of my tour, I hiked up to view the Takakkaw Falls in Yoho National Park.  The falls are the second highest natural falls in Canada at 245 metres.  In Cree, the word Takkakaw is loosely translated to mean “it is magnificent” and is an apt description of this natural wonder.


Interestingly, while much of North American is being adversely impacted by record hot temperatures, Western Canada seems to be thriving.  Specifically, the crops appear to be in excellent condition.  In fact, the Canadian Wheat Board issued its first crop outlook for the 2012 – 2013 season and in it said the following:


“Wheat fundamentals are favorable to prices. World wheat production is forecast to fall by over 40 million tonnes to 646 million tonnes.  A weather-related shortfall in Russia, Ukraine, and Kazakhstan is the main driver behind the global production decline. The U.S. corn belt has been hit by a severe drought, resulting in dramatic declines in corn and soybean production potential.”


We Canadians are known for our subtleness and this report from the Canadian Wheat Board is no exception.  To translate: it is going to be a record year for Canadian farmers because of shortage of supply of both wheat and corn globally.  This shortage of supply is primarily being supported by drought like conditions in both the U.S. and key growing areas in Europe. As a result, many agricultural commodity prices have been in a mini bull market.  As an example, the corn ETF, aptly named CORN, is up more than 50% in the last two months. Being on the right side of a trade like this is what I would call: Magnificent Investing.


Personally, I haven’t studied global warming enough to either be a proponent or opponent, although this year certainly gives some credence to the concept. That said, Keith and I have at times discussed our longer term investment view of Canada and even presented this view to various municipal governments across Canada.  A key component of this view is obviously the vast resources of Canada as typified by the agricultural production capabilities and the Saudi Arabia like oil resources in Alberta.  But another important potential tailwind for Canada is weather patterns.


UCLA Geography Professor Laurence C. Smith has done much of the work that underscores our long term investment view of Canada.  In his book, “The World in 2050: Four Forces Shaping Civilization’s Northern Future”, Smith highlights some of the key forces driving economic share gains of the Northern Rim Countries, or as he calls them NORCs.  A key point in his thesis related to NORCs is that their share of crop production will increase dramatically if and when the world becomes warmer because they will be less directly impacted by an increase in temperature.  His prediction is for this trend to really have an impact by 2050, even though it sounds a little like 2012 . . .


No doubt climate cycles can be challenging to invest around, though industrial cycles can be much more predictable and create longer term (in our models TAIL duration) investable fundamentals.  Our recently hired Industrials Sector Head Jay Van Sciver has spent more than a decade on the buy-side and a key component of his investing framework is that if you get the industrial cycle right, you’ll get a lot of other things right.  An example he uses in his presentation is being on the right side of U.S. electrical transmission infrastructure investment cycle.  A couple of points to consider:

  • In the down cycle from Q1 1992 to Q1 2000, the SP500 returned 243%.  In that same period, the primary players in this industry, Copper Industries, Hubbell, and Thomas & Betts, returned on average 25%.
  • In the up cycle from Q1 2001 to Q1 2012, when investment in transmission infrastructure was accelerating, the SP500 was up 51%.  Meanwhile, the key players noted above were all up more than 300%.

I’ll say it again, if you get the cycle right, you’ll get a lot of other things right.


Van Sciver’s launch presentation on June 27th was a bearish call on the airline cycle.  Call him lucky or good, but as we highlight in the Chart of the Day, airline stocks have basically been in free fall since he launched.  In fact, speaking of Magnificent Investing, one of his least favorite names, UAL, is down almost -20% in that period.  His next deep dive will be on the global truck OEM market and he will be hosting a conference call on August 16th to discuss. Ping us at or contact your sales person if you are an eligible institution and would like to join this call and review Van Sciver’s work.


In our global macro research, a key theme we’ve been hammering on for the last few years has been the global debt super cycle.  An important point of this cycle is that as government debt accelerates past 90% debt-to-GDP, economic growth slows.  This morning’s data from Europe does little to change our debt cycle thesis. Spanish 10-year yields are back pushing that 7% line at 6.98% and so there’s no surprise that the IBEX 35 is down -1.9%.  Further, German June exports were down -1.3% year-over-year and German industrial production was down -0.3%.  Clearly, even a relatively well situated country like Germany cannot escape the growth slowing debt cycle.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1603-1624, $107.34-111.83, $81.89-82.69, $1.23-1.24, and 1381-1407, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Magnificent Investing - Chart of the Day


Magnificent Investing - Virtual Portfolio


The Macau Metro Monitor, August 22, 2012




Casino Regulatory Authority of Singapore (CRA) has fined MBS and RWS S$357,500 and S$140,000 respectively for breaking social safeguard requirements, such as letting Singaporeans and Permanent Residents enter without paying the S$100 entry levies.  The breaches took place between May and October 2011. In addition, RWS has been censured for three cases of similar breaches during the period and MBS censured for failing to display appropriate message on its progressive jackpot system on Oct 18, 2011.



Visitor arrivals decreased by 4.2% YoY to 2,444,264 in July 2012.  The average length of stay of visitors stood at 1.0 day, down by 0.1 day YoY.  Visitors from Mainland China decreased slightly by 0.3% YoY to 1,456,351, coming mostly from Guangdong Province (683,285), Fujian Province (70,439) and Zhejiang Province (56,937); Mainland visitors traveling under the Individual Visit Scheme rose by 4.1% to 643,147.  Visitors from the Republic of Korea (36,030) and Japan (35,132) increased by 2.0% and 20.1% YoY respectively, while those from Hong Kong (639,580) and Taiwan (112,263) both registered a decrease of 11.1%.





Passenger traffic at Changi Airport grew by 4.5% in July to hit 4.36 million.  Changi Airport Group said that traffic to and from the Middle East, Southwest Pacific and the Americas remained strong and witnessed double-digit growth.  However, the growth in Southeast Asia and Northeast Asia traffic was weaker and in the low single digits. These two regions account for about 70% of total passenger traffic at Changi.




the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.


TODAY’S S&P 500 SET-UP – August 22, 2012

As we look at today’s set up for the S&P 500, the range is 10 points or -0.30% downside to 1409 and 0.41% upside to 1419. 











  • ADVANCE/DECLINE LINE: on 08/21 NYSE -344
    • Decrease versus the prior day’s trading of -343
  • VOLUME: on 08/21 NYSE 640.96
    • Increase versus prior day’s trading of 16.39%
  • VIX:  as of 08/21 was at 15.02
    • Increase versus most recent day’s trading of 7.13%
    • Year-to-date decrease of -35.81%
  • SPX PUT/CALL RATIO: as of 08/21 closed at 1.10
    • Down from the day prior at 2.44


  • TED SPREAD: as of this morning 33
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.78%
    • Decrease from prior day’s trading of 1.80%
  • YIELD CURVE: as of this morning 1.50
    • Down from prior day’s trading of 1.51

MACRO DATA POINTS (Bloomberg Estimates)

  • 7am: MBA Mortgage Applications, Aug. 17 (prior -4.5%)
  • 10am: Existing Home Sales, July, est. 4.51m (prior 4.37m)
  • 10am: Existing Home Sales, July, est. 3.2% M/m (prior -5.4%)
  • 10:30am: DoE Inventories
  • 2pm: FOMC Meeting Minutes


    • House, Senate not in session
    • SEC holds meeting on disclosure rules regarding conflict minerals, payments to governments made by resource extraction issuers, 10am
    • Federal Reserve Bank of Chicago President Charles Evans holds press briefing at U.S. embassy in Beijing, 11:30pm
    • U.S. Census Bureau holds webinar on foreign trade rules, with ombudsman Omari Wooden, 1pm
    • Commerce Dept.’s National Telecommunications and Information Administration meets on consumer data privacy codes of conduct concerning mobile application transparency, 9:30am
    • NRC, FEMA hold conference call to discuss emergency preparedness plans at U.S. nuclear power plants, 2pm


  • Verizon Wireless said to be planning to sell Nokia with Microsoft’s Windows 8 software this year
  • UPS extends offer period for TNT to Nov. 9 from Aug. 31
  • Dell says PC business deteriorated more than expected
  • RBS said to be probed by U.S. over Iranian sanctions
  • Carl Icahn withdraws offer to take CVR Energy private
  • Jury in Apple, Samsung patent trial begin deliberations
  • ATP wins prelim. approval for bankruptcy financing
  • Sales of existing U.S. homes probably climbed 3.2% in July
  • Exxon, BHP, other energy, mining firms may need to report what they pay each country they tap resources from under rule SEC has votes to adopt
  • BHP delays $68b of project approvals, profit plunges
  • Sirius directors sued by investors for failing to defend co. from potential takeover by Liberty Media
  • IAC/InterActiveCorp said to have offered more than $300m to buy, topping bid from Answers Corp.
  • Allianz trims asset-mgmt unit targets on Europe debt crisis
  • Microsoft, Samsung may face greater scrutiny of labor practices as Apple’s biggest supplier improves conditions at its Chinese plants
  • Japan swings to trade deficit as Europe drags down exports
  • Wet Seal hired financial advisers, adopted poison pill
  • SEC should approve Nasdaq’s proposal to pay firms $62m for losses suffered in Facebook’s IPO, Citadel said
  • Electronic Arts’s PopCap Games fired ~10% of staff


    • Express (EXPR) 7am, $0.17
    • Chico’s FAS (CHS) 7:15am, $0.30
    • American Eagle Outfitters (AEO) 8am, $0.21
    • Eaton Vance (EV) 8:40am, $0.47
    • International Rectifier (IRF) 4pm, $(0.15)
    • Kayak Software (KYAK) 4pm, $0.24
    • Hain Celestial (HAIN) 4pm, $0.45
    • Synopsys (SNPS) 4:05pm, $0.50
    • Prospect Capital (PSEC) 4:05pm, $0.40
    • Guess? (GES) 4:05pm, $0.51
    • Hewlett-Packard (HPQ) 4:05pm, $0.98
    • Semtech (SMTC) 4:30pm, $0.41
    • Heico (HEI) 4:40pm, $0.41


























The Hedgeye Macro Team


A pictorial view


  • IGT bought back 110 million shares over the past 8 years, or almost 30% of the outstanding shares
  • The buyback has been very accretive to EPS but hasn’t done much for the stock.  The stock is at the low end of its 8 year range and 76% off its high in early 2008
  • Nevertheless, we are currently projecting almost 25% EPS growth in FY2013 which, if achieved, would likely result in significant share appreciation – the one advantage of low expectations



The Reversal: SP500 Levels, Refreshed

Takeaway: With global growth slowing, this isn’t the place to chase low volume equity rallies.

POSITIONS: Long Healthcare (XLV), US Dollar (UUP), Flattner (FLAT), Longer Term Treasury Bond (TLT), Short Euro (FXE), France (EWQ) and SPY


Midmorning today, it looked like the bulls were once again fully in charge of the SP500.  The index traded through 1,425 and appeared to be on pace to close at a new yearly high . . . and then we reversed.  From the highs of the day, the SP500 is now off 0.85%.


In our models, this type of a move is significant.  It is called an “outside day” and occurs when the market tests the prior closing high, fails, and then closes below the prior closing high.  In this case, that prior closing high is 1,419.


In the chart below, we’ve highlighted our current risk management levels.  The sell TRADE line is at 1,419, the buy TRADE lines is 1,410, and the buy TREND line is down at 1,384.  In essence, if 1,410 doesn’t hold . . . look out below.


We’ve been clear on our view that with global growth slowing, this isn’t the place to chase low volume equity rallies.  In particular, chasing equities at a time when the VIX is sub 15 has been exactly the wrong call over the last three years.  Currently, the VIX is up 7.4% on the day to 15.07.


For those looking to add some short exposure to your portfolios, we are currently short these individual stock names in the Virtual Portfolio:


  • Freeport-McMoran Copper and Gold (FCX);
  • Caterpillar (CAT);
  • United Airlines (UAL);
  • Dominoes Pizza (DPZ);
  • American Express (AXP);
  • MGM Resorts (MGM); and
  • Morgan Stanley (MS).

Ping if you want to talk to one of our Sector Heads on these names. 


Daryl G. Jones

Director of Research


The Reversal: SP500 Levels, Refreshed - SPX

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.