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If you’ve been following our work you know that we are bearish on Russia (forgive the pun). Russia’s stock market is down 12% this week and confirmed a new low with its close today at 549.21, 22bps below its October 24th low.

There are a few more data points out today that confirm more pain is ahead for the energy-levered economy:

-Russia’s unemployment rose to 8.1% in January, the highest since March 2005 and disposable income fell 6.7%
-January industrial output declined by 16%
-Average monthly wages fell by an annual 9.1% in January to ~$418 (the biggest drop since August 1999)

Russia forecast a 2009 contraction of 2.2% yesterday, which we believe may be a conservative estimate. We continue to follow the political gesturing from President Medvedev and PM Putin and the fluctuation in the ruble, which has depreciated 3.6% versus the dollar this week and is down 22% YTD.

Yesterday China lent Russia $25 Billion in exchange for larger supplies of crude oil. Should the Ruble continue to slide against major currencies, Russia’s debt will continue to compound. With capital investment in Russia down 15.5% in January M/M Russia can only hope for a re-flation in commodity prices. Russian leaders would be wise to get to the bottom of an apparent sinking of a Chinese merchant ship leaving the port of Nakhodka last week by their navy –violence is bad for business no matter how much the price of oil rebounds.

Matthew Hedrick


The SENSEX rose by 0.3% to 9,042.63 today, the first positive close this week as wholesale inflation data registered at a 13 month low of 3.92% - all but guaranteeing a rate cut when the central bank meets next.

Collapsing commodity prices may have been primarily driving inflation levels lower late last year, but with factory gate prices continuing to retreat and layoffs picking up speed the reality of sinking demand by domestic industry is here. Rate cuts, fuel subsidies and anemic stimulus proposals won’t be enough to replace external demand for India’s manufacturers products. The illiterate inhabitants of urban slums and rural farming villages (fully half the adult population of India cannot read by some estimates) now seem like the much vaunted rising consumer class that the India Bulls were flogging in research reports just 6 months ago.

We shorted IFN into today’s strength. Rate cuts and government intervention alone can’t turn this economy around, and we still do not see any sign that external demand will return soon.

Andrew Barber

US Employment: The Nasty Can Indeed Break The Buck

At 627,000 this morning’s initial jobless claims came in at the same level as last week (after last week was revised up 4,000) and 18,500 above the 4 week moving average.

There are 3 important points to be made on this:

1. Context – look at this 3 year chart below, and think about it in terms of what the masses thought was improbable – its horrifying!
2. The Level – on an absolute basis this is a flat out nasty level of jobless claims – nasty enough to break the buck, for at least today!
3. The Implication – the US stock market goes up when gold and cash lose their consensus bid – watch these macro signals closely…

Have a macro point of view that allows you to keep trading this market, aggressively. That’s one of the ways to beat it.

Keith R. McCullough
CEO / Chief Investment Officer

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%

Long America, Short Gold

“Never give a sword to a man who can't dance.”

Chaos theorists will remind us that any complex system of consequence requires predictable patterns of behavior. Without an understanding of the deep simplicity associated with those repeatable patterns, one can surely lose his mind in trying to figure out what exactly is going on... that’s why using a global macro investment process is such a powerful weapon. Behavioral patterns repeat.

Confucius reminds us that the scariest part about this investing game is issuing swords to men who can’t dance. Women, on balance, are simply better dancers. Sorry guys. Last night, my favorite contrarian market indicators – the men of CNBC’s Fast Money – we’re at it again. God bless America for their presence in this game – without being able to take advantage of their predictable patterns of behavior, we wouldn’t be able to consistently outperform the market. These guys are consensus.

Dylan and Joey kept talking about this “long gold, short America” trade… given that I just started investing more aggressively in America over the course of the last 48 hours (and started shorting gold for the first time in forever) I found their comic relief fascinating, particularly given the timing…

Today’s markets do not trade on valuation. They trade on price. Price momentum governs predictable human behavior, and within the bounds of this interconnected global market place of interrelated factors, those behavioral patterns can be profited from.

Timing in these volatile markets is everything. When American stocks are hitting 3 months lows, and gold 7 month highs – you do not enter the game “long gold, short America” and call that a unique investment idea. I call that risk.

If you use a one factor model (price), and all you know is that you need to chase it, that’s cool – at least it’s a process. But don’t for one second think that there aren’t a world full of global macro pros out there who aren’t watching you, and waiting on you to do the perfectly predictable.

Fundamentally, I get the gold trade. I have been talking about it since 2005. Until recently, I was long gold in our Asset Allocation Portfolio, and if I get the momentum correction that I am looking for, I will cover my short position and consider it on the long side once again. This isn’t an emotional relationship – this is math.

The intermediate “Trend” in gold remains bullish, but at a price. The real support line for gold is all the way down at $824/oz. Understanding that some of the Fast Money traders who love gold up here are the same cats that loved crude oil at $140/barrel, I hope someone is at least mindful that what goes straight up can indeed come down. Support is -16% lower from where I shorted gold yesterday afternoon.

Gold is what you own as a safety currency when everything around you is in crisis. Asset classes like Gold and Cash can “re-flate” while other asset classes like stocks, bonds, real estate, etc… deflate. 

After we took a good hard look at yesterday’s intraday low in the SP500 of 782, we issued a note to our macro clients titled “Buying/Covering” (www.researchedgellc.com <http://www.researchedgellc.com> ). At 782, the US market was only 4% away from its November 20th, 2008 capitulation low. Yesterday’s lows came on much lower volatility (VIX 50 rather than VIX 80), and much lower volume. The only volume of consequence in my macro model was the audible kind – that sound of Fast Money traders chirping something about “long gold, short America”… C’mon guys… at least try to respect that there is a fiduciary aspect to this profession.

As always, putting that 782 SP500 line in context is critical. This had the SP500 down -50% from the Fast Money “buy everything Chindia” highs of 2007, and down a stiff -15.4% for 2009 to-date. Are we really investors “for the long run” here folks, or are we one factor model price chasers? My Dad, who is a firefighter, has always warned me of the psyche of those who chase his fire engines – they are not emotionally stable.

On an intermediate basis, Volatility (VIX) remains bearish. Unless the VIX can close above $53.44, I am very comfortable buying American stocks. I have not minced words and I am accountable for this call – unless we have another 6 standard deviation event, I do not think that the US stock market will penetrate that November 20th low.

What other signals in my 27 factor global macro model are signaling my conviction?

1.      The US$ is overbought anywhere north of the 88.11 line in the US Dollar Index

2.      Gold is overbought on an immediate term basis anywhere north of $983/oz

3.      The SP500 is oversold on an immediate term basis anywhere under the 790 line

4.      Other than the Russian stock market, there are NO major global equity indices that have penetrated and closed below their Oct/Nov lows

5.      China and Brazil continue to add to their YTD positive performance

6.      Credit has improved materially, particularly when it comes to global counterparty risk; the TED spread is 400 basis points lower than Oct/Nov

The inverse correlation between the US Dollar and the SP500 has been the anchor of this year’s call to remain bearishly positioned on US stocks. With the exception of one week where the US$ weakened, the US$ has been as relevant a heavyweight champion of global macro as gold has – but guess what, these factors are now very much correlated.

The US$ is trading down overseas this morning to the tune of -77 basis points. The S&P Futures are trading up +106 basis points. And looky here Joey… gold is trading down off of its 7 month highs as a result. How ironic…

Other than telling CNBC’s viewers that you love gold and hate US stocks based on a revisionist price, I have one question for Dylan and Joey… what is it exactly that you do? I know what it is that I do … and I am now Long America, Short Gold - thanking you for your predictable behavior. Sincerely,

Keith R. McCullough

Long America, Short Gold - etfs021909

Trading Gold?

By my math (using my immediate term duration model), gold has now had a 3 standard deviation move. While “Fast Money” may indeed buy high here in hopes of selling higher – hoping and praying is not an investment process that is repeatable. If I am right in that the US market is setting up to lock in another higher low, the last thing you want to be holding at this level in the SP500 is a bag full of gold.

Below I have painted a dotted red line whereby you can short Gold for an immediate term “Trade” – at effectively any price north of $973/oz, the risk associated with being short gold actually goes down, in the immediate term. You can cover at the green dotted line ($927/oz). This isn’t a huge projected return, but it pays for lunch.

I understand and support the bullish case for gold as a safety currency – I have been pitching that for the better part of a year. The intermediate “Trend” line of support for gold is all the way down at $886/oz however, and we need to be mindful of that. I will likely buy it again down there, if I am so lucky to see that price. In the meantime, don’t confuse the hype with the reality of the math. Gold, right here and now, is overbought.

Keith R. McCullough
CEO & Chief Investment Officer

Buying/Covering: SP500 Levels Into The Close...

Today feels like we’re playing that game where we have the banker sitting on the stool of the dunk tank. Lift him up, then drop him… lift him up, then drop him… and all the while Bloomberg TV is talking about ways to play the “double and triple down” financials ETFs… the groupthink that’s taken hold of this market is borderline sad.

While it may be their goal to entertain, this is not a circus… and shooting fish in a barrel on the short side is not going to last forever. Below I have outlined the possible depth of the water that remains in that proverbial dunk tank (shaded green like the oceans that Allen Stanford is probably sailing on right about now) in the 752-790 range.

If you can’t be buying and covering in this SP500 range, you probably think the apocalypse cometh – good luck with that – that’s not the unique thought that it was 12 months ago.

I have invested another 9% of the Cash I was holding in the Asset Allocation Model, dropping Cash down to 58% of the Model Portfolio.

Buy low… for the immediate term Trade up to the dotted red line at SP500 831.

Keith R. McCullough
CEO & Chief Investment Officer

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