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One Big Mess







Fib after lie after fib, there is always someone out there talking about China and how it has no concern for inflation (it most certainly does) and will still go into another round of easing soon, etc. This is nothing but nonsense. Six weeks of rumors have gone by and the Chinese stock market is still in the gutter. Now what do you say? Is there still hope in the form of central planner bailouts? We think not.




If the market goes up, it’s a mess for the economy. How? 0% rates are a bane for retirees with fixed-income portfolios, small business owners and higher commodity prices. If the market goes down, it’s a mess for the market. When stocks fall, everyone feels like a loser. Right now, growth is slowing all around us and while the market is up year-to-date still, it’s nothing to cheer about.






Cash:                Down


U.S. Equities:   Flat


Int'l Equities:   Flat   


Commodities: Flat


Fixed Income:  UP


Int'l Currencies: Flat  








Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.

  • TAIL:      LONG            



Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TAIL:      LONG



LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TAIL:      NEUTRAL







“According to the Chinese papers today : Big stimulus will limit economic growth. They get #inflation.” -@HedgeyeDJ




“After all is said and done, a lot more will be said than done.” –Unknown




$7.3 billion. The amount of money offered by Thai billionaire Charoen Sirivadhanabhakdi for beverage conglomerate Fraser & Neave. 




Walking Away

This note was originally published at 8am on August 30, 2012 for Hedgeye subscribers.

“In many cases, they simply walked away.”

-Hampton Sides


That’s a quote about the Anasazi people of Chaco Canyon in Chapter 31 of Blood and Thunder. By 1150 AD, “just as quickly as they had burst upon the scene, the Chacoan culture ebbed… the Anasazi had overfarmed, overhunted, and overlogged.


After a 200 year (950-1150 AD) “cultural boom that has no parallel in North American pre-history… archeologists have come to call this the Chaco Phenomenon… this environmental upheaval led, predictably enough, to a social upheaval.” (pages 266-267)


Whether some study history doesn’t matter. Markets do. They rise and fall. For centuries,  ideologies, regimes, and civilizations have lived and died by the sword of evolution. Just when you don’t think it could never happen to yours, it starts happening.


Back to the Global Macro Grind


How long can Keynesian governments over-spend, over-consume, and over-promise on bailout resources that they do not have?


I don’t know. And neither did Jim Rickards on our Currency Wars conference call yesterday. What we both agreed on, however, is that within the framework of considering global markets as a complex system, we’re getting real close to the tipping point.


Rickards explained it using “critical threshold” math. I always discuss it internally within the Chaos Theory of emergent properties triggering phase transitions. For those of you who are Keynesians or Monetarists, we’re talking a different risk management language here. Alongside physics, applied math, etc., we’ve chosen to think outside the Western academic box. We’ve evolved.


To simplify the complex, a “phase transition” is the transformation of a dynamic system (global markets, across asset classes) from one state to another. Pundits don’t get why they call it this, but they call it something like “risk on, risk off.”


Unfortunately, phase transitions don’t happen like the Karate Kid learning how to wax. There is no centrally timed “on, off.” There is no “smoothing mechanism” or certainty in analyzing when emergent properties (risk spreads) move into a phase transition.


In thermodynamics, you can understand what a phase transition is by reading an 8th grade Chinese textbook (they have them in English too). “For example, a liquid may become gas upon heating to the boiling point.” (Wikipedia)


What’s the market’s boiling point?


To answer that question, many people who have not evolved their process in this business would answer using the US stock market and maybe a 50-day moving average sprinkled with some storytelling dust.


*Risk Manager Note: the US stock market is not the dynamic and globally interconnected currency, commodity, bond, etc. market that our 27 multi-factor, multi-duration model is writing about every day.


Jim Rickards is very good because markets have humbled him enough over the years to answer the aforementioned question with “I don’t know.” That’s also a cornerstone of what we (Chaos and Complexity Theorists) do vs. what they (Keynesian Policy Makers) do.


We Embrace Uncertainty.


One suggestion I had to answering the most frequent question I get from clients (again, what’s the boiling point, or point when this entire centrally planned gong show of broken policy promises implodes) was measuring Spread Risk in key Global Macro relationships:

  1. The long-term spread between Money Supply (rising as they print money) and Velocity of Money (falling, fast)
  2. The long-term spread between the US Dollar and the CRB Commodities Index
  3. The long-term spread between the SP500 priced nominally versus priced in Gold (see Rickards’ Chart of The Day)

I’ve probably geeked out enough on the math this morning, but since Paul Ryan is going all-math on CNN’ers, I’m cool with it.  I’ll also leave you this morning with more questions than any of us have answers.


But that’s cool too - if that’s the story of your professional life, you really are constantly learning and evolving.


The Hedgeye Portfolio is beta adjusted net short for this morning’s US market open. We continue to think you sell stocks and commodities at VIX 14-15 and buy bonds there too.


Timing matters; especially when entire populations of investors are Walking Away from something that’s been abused and broken – the market’s trust.


My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr Treasury Yield, and the SP500 are now $1652-1679, $111.79-113.76, $81.11-81.97, $1.23-1.26, 1.58-1.71%, and 1401-1419, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Walking Away - Chart of the Day


Walking Away - Virtual Portfolio


TODAY’S S&P 500 SET-UP – September 13, 2012

As we look at today’s set up for the S&P 500, the range is 32 points or -1.22% downside to 1419 and 1.01% upside to 1451. 











    • Decrease versus the prior day’s trading of 1030
  • VOLUME: on 09/12 NYSE 663.83
    • Decrease versus prior day’s trading of -0.47%
  • VIX:  as of 09/12 was at 15.80
    • Decrease versus most recent day’s trading of -3.72%
    • Year-to-date decrease of -32.48%
  • SPX PUT/CALL RATIO: as of 09/12 closed at 1.12
    • Down  from the day prior at 1.64


QE4 – pushing the goal posts out a full year to 2014 on January 25th was Qe3. That, in turn, slowed growth (oil up). Now the question is will Bernanke push out investor duration by 12 months at a time every 3-6 months? Just pull forward all the yield and performance chasing into 2012 and hope for the best. US Dollar is the biggest ball under water trade I have seen in a very long time into a very big event.

  • TED SPREAD: as of this morning 29.77
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.74%
    • Decrease from prior day’s trading of 1.76%
  • YIELD CURVE: as of this morning 1.51
    • Down from prior day’s trading at 1.52 

MACRO DATA POINTS (Bloomberg Estimates)

  • 8am: RBC Consumer Outlook Index, Sept. (prior 46.4)
  • 8:30am: Producer Price Index M/m, Aug. est. 1.2% (prior 0.3%)
  • 8:30am: Initial Jobless Claims, Sept. 8, est. 370k (prior 365k)
  • 8:30am: Continuing Claims, Sept. 1 est. 3.318m (prior 3.322m)
  • 9:45am: Bloomberg Consumer Comfort, Sept. 9 (prior -46.5)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas change
  • 11am: U.S. to announce plans for 10-yr TIPS auction on Sept. 20
  • 12:30pm: FOMC rate decision
  • 1pm: U.S. sells $13b 30-yr bonds
  • 2pm: Fed to release projections of economy, interest rates
  • 2pm: Monthly Budget Statement, Aug. est. -$170.0b (prior - $134.1b)
  • 2:15pm: Fed’s Bernanke holds news conference


    • Obama administration may detail sequestration cuts
    • House, Senate in session
    • House Armed Services panel holds hearing on F-22 pilot physiological issues, 10am
    • House Oversight panel meets on spending for reconstruction in Afghanistan, 10am
    • Interior Dept. officials testify on land, minerals management at House Natural Resources hearing, 10am
    • House Energy panel holds hearing on U.S. energy independence, with Daniel Ahn, chief commodity economist for Citi; John Freeman, managing director of Raymond James; John Purcell, vice president for wind Energy at Leeco Steel, 10am
    • Senate Banking hears from Consumer Financial Protection Bureau Director Richard Cordray on agency operation, 10am
    • House Financial Services, Government Reform panels hold joint hearing on implementation of Jumpstart Our Business Startups Act, known as the JOBS Act, passed in April, 10am
    • House Financial Services panel holds hearing on “Examining the Uses of Consumer Credit Data,” 2pm
    • Senate Judiciary considers amending US law to clarify video tape service providers’ consent policies, 10am
    • House Intelligence holds hearing on “National Security Threats Posed by Chinese Telecom Companies Working in the U.S.,” with representatives from Huawei, ZTE, 10am
    • House Energy panel holds hearing on “Creating Opportunities through Improved Government Spectrum Efficiency,” with Steve Sharkey of T-Mobile USA, 10:15am
    • House Transportation panel holds hearing on effectiveness of DOT’s truck and bus safety program, with Scott Mugno, vice president at FedEx Ground, 10am 


  • U.S. investors betting central bank will keep rate near zero
  • Possible EADS, BAE merger may generate FY sales of ~$100b
  • ECB member says central bank may never need to buy bonds
  • SNB to maintain FX ceiling at 1.2 francs per euro
  • Freddie Mac may get additional $3.4b in mortgage buybacks
  • Moore Capital said to cut jobs in team restructuring
  • Itochu in talks with Dole to buy packaged-food unit, Asian fruit & vegetable business
  • Nomura’s Americas equities chief O’Kelly leaving amid overhaul
  • Manhattan apartment vacancy rate rises as rents reach record
  • U.S. embassy compound in Yemen stormed as film protests spread 

EARNINGS: (All times ET, with Bloomberg est.)

    • Pier 1 Imports (PIR) 6am, $0.19
    • Empire (EMP/A CN) Pre-mkt, C$1.40


  • Soy Rally Pushes Amazon Growers to Sow Record Crop: Commodities
  • Chesapeake’s McClendon Taps Expanding Shale Oil Demand: Energy
  • Gold Seen Falling Before Federal Reserve; Palladium Extends Gain
  • Oil Trades Near Three-Week High on Mideast Protests, Fed Meeting
  • Copper Swings Between Gains and Drops Before Fed Policy Decision
  • Sugar Rises a Second Day as Brazil Rains May Return; Cocoa Gains
  • Wheat Futures Climb as Importers Including Egypt Seek Supplies
  • Indonesian Tin Smelters Resume Output After Metal Rallies
  • Aluminum Stockpiles Climb the Most This Year on Detroit Jump
  • LNG Shortage in Japan Spurring Record Expansion: Energy Markets
  • Rebars Poised for First Weekly Gain in Five on Baoshan Pricing
  • Cocoa Shipments From Indonesia Seen Declining on Local Grinding
  • ‘Tomato Trade War’ Seen Sparking Broader U.S.-Mexico Food Fight
  • Rubber Drops From Eight-Week High Ahead of Fed Stimulus Decision
  • Palm Oil Declines as Stockpiles Set to Climb on Output Increase
  • Thai Government May Buy 300,000 Tons of Rubber to Bolster Prices









EUROPE – with the exception of Germany (making higher-highs vs March), all European Equity Indices are making lower-highs again this morning; stagflation is ultimately what Europe has to deal with now at $116 Brent Oil. 1970s stagflation kept US Equities at 7-8x earnings don’t forget. Short-term market moves do not represent economic realities.






CHINA – We know, it’s weird, but after 6wks of rumors about the stimuli coming out of China, reality is there has been none – the Chinese do not appreciate the food/oil inflation Bernanke is perpetuating; Chinese stocks down -0.8% before his un-elected lordship provides causality and correlation to commodity markets.










The Hedgeye Macro Team

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Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Bernanke's Mess

“It took a lot of hard work to get us into this mess.”

-Neil Barofsky’s Dad


The more I learn, the scarier Washington, D.C. gets. The aforementioned quote didn’t come from a politician. It came from Barofsky’s freshly printed tell-all book about crony socialism, Bailout (page 32). That time it was about TARP. This time it’s about Qe. Unless you want to wander on into the next politically perpetuated crisis willfully blind, I highly recommend you read it.


I wasn’t born in this country, but I do love it – and I will fight for its liberties. Hell would freeze over before the Founding Fathers of the Unites States of America signed off on a centrally planned market event like the one an un-elected academic will host today.


Whether he wants to accept responsibility or not, Ben Bernanke has signed off on the #1 thing that has been driving stock and commodity markets for the last 2 months – expectations. Up or down, whatever happens today will be Bernanke’s Mess.


Back to the Global Macro Grind


A)     Market up = mess for the economy: that’s right, if the man pushes 0% money out to 2015, 2016, then infinity and beyond, that’s a mess for a lot of people in this country. Just ask a retiree living on a fixed income, or a small business owner. When your cost of living is rising faster than your income, that’s called a tax hike.


B)      Market down = mess for the market: yep, since corporate revenue growth is slowing at its fastest rate since 2008, where do you think corporate margins go from their all-time peak? What do you think a collapse in the Fed’s final bubble (1st it was internet stocks, 2nd housing; now it’s commodities) is going to do to companies like Caterpillar (CAT) who aren’t prepared for that?


But, like it was in October 2007 (up double digits YTD), the “market is up” and we don’t hold the Fed accountable to its mandate? As a reminder, that mandate is:

  1. Price Stability
  2. Full Employment

Meanwhile, this is what we have:

  1. Price Volatility like markets have never ever seen (ever is a long time)
  2. Unemployment that’s higher than where it was on January 20, 2009 (7.8%)

So we better empower this guy to do more of whatever has not worked. And I mean really beg for it. If this insanity can only end in a blow up, I say get on with it so that I can start hiring again and get on with my day.


Since I have nothing else to write about this morning, let’s just review where we stand pre-game (1230PM Bernanke release):

  1. Financials (XLF) are up +3.83% in less than 2 weeks, front-running the Fed
  2. Energy stocks (XLE) are up +3.96% in less than 2 weeks, front-running the Fed
  3. Basic Materials (XLB) are up +3.76% in less than 2 weeks, front-running the Fed

Front-running? Bad word, for people who actually take on the Orange Jump Suit risk to be in the know pre-game. But that’s the game of expectations Ben Bernanke and his group-thinkers have perpetuated; that’s where the money’s at. Follow the money.


If 2 weeks of causality (Fed policy expectations) is too short-term for you, let’s look at the last month instead. Here are the inverse correlations between the US Dollar (down) and everything big that people are being forced to chase (30 day correlations):

  1. Gold -0.96
  2. Silver -0.95
  3. CRB Commodities Index -0.94
  4. Eurostoxx600 -0.86
  5. SP500 -0.74

In other words, get the US Dollar right, and you get everything but the US Economy right. Gold, last I checked, is not a “Full US Employment” trade. It wasn’t in the 1970s either.


Back to the two risk management words never uttered by our Central Planner in Chief (Correlation Risk), if I shorten that back up to 2 week correlations front-running Bernanke, the SP500’s inverse correlation to the US Dollar goes higher to -0.86. That’s because it’s closer to the main event. And that’s being driven by the aforementioned moves in the Financials and Commodities.


As Neil Barofsky says at the end of Chapter 2, “I might be completely on my own” (page 38) in calling Bernanke out on this mess of expectations at this point. But I doubt it.


When I started this firm in early 2008, I vowed to fight Old Washington and Wall Street for the truth. “What is the truth?” If that ruffles the odd feather, I’m doing my job. That’s what Canadian-American Patriots fighting for the purchasing power of their dollars do.


My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, Russell2000, and the SP500 are now $1, $114-116.22, $79.45-80.94, $1.26-1.29, $1.69-1.77%, 830-846, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bernanke's Mess - Chart of the Day


Bernanke's Mess - Virtual Portfolio

Expert Call Summary

Takeaway: $NAV- Other manufacturers have yet to decide on further legal action on the EPA's NCP regime at Navistar. Decision due in about 50 days.

Emissions Call Summary

Below, we highlight some of the key topics covered on our emissions expert call with Dick Penna today.  Dick currently represents Paccar and previously represented Volvo on truck emissions issues related to the non-conformance penalties applied to Navistar’s engine.  The call was excellent and contained a number of valuable details, which can be heard by listening to a replay of the call at https://app.hedgeye.com/feed_items/23116-emissions-expert-call



       Legal Options

  • Volvo, Daimler and Paccar, among others, are meeting tomorrow to discuss litigation strategies regarding the EPA’s non-conformance penalties with respect to Navistar.
  • Further litigation could shatter the “clarity” that Navistar has said the “Final” rule provides.
  • If competing manufacturers decides they want to challenge the EPA ruling (which they must do no more than 60 days after appearance in the Federal Register, which was September 5th, 2012) they will have a good shot, but it is still very difficult to predict court cases in the DC Circuit.
  • There is a citizen suit provision in the Clean Air Act where if somebody believes the EPA is not enforcing the law, they can give the EPA 60 days notice to do so.   If the EPA does not change what it is doing, then they can be taken to court.  The odds of that happening are pretty slim, but that is another possible legal path.  The most likely groups to attempt this would be the environmental and other public interest groups.

The Landscape Created by the EPA

  • The EPA will create deterrents for companies who do not comply with their regulations, but they will also stand on their head to not put anyone out of business.
  • As for the competitors who were complying with EPA standards, you can quarrel whether or not the $3,700 fine was enough to act as a deterrent.
  • Navistar may purchase emissions credits from Cummins to gain compliance.

2014-2018 Regulations

  • To comply with the 2014-2018 emissions standards, companies will be using different tires and aerodynamics which will likely introduce additional costs.  There is not much concern here about a pre-buy mainly because despite the additional costs these new EPA regulations will align fuel efficiency incentives for both truck manufacturers and operators.
  • The manufacturers all signed on to meet the 2014-2018 regulations, so they probably think they can meet the standards at a reasonable cost.

Looking Ahead

  • The EPA has just completed the 2017-2025 emissions rules for light-duty trucks, and we can expect to start hearing about future heavy duty regulations in the next few months.
  • These post 2018 regulations will likely depend on the outcome of the presidential election.
    • If Romney is elected he will most likely not make future regulations more stringent than the 2014-2018 regulations.
    • If Obama wins the election, regulations are likely to become even more rigorous after 2018.
    • We would probably need to switch to lower sulfur fuels for further tailpipe emissions gains.  That has ripple effects because there are costs that the refiners must now pay to reduce the level of sulfur in their diesel.

Light Vehicles

  • New emissions standards for light vehicles are rigorous. The changes coming over the next 7 to 10 years are likely to be rather aggressive.
  • In the future we are also going to see a lot more “light weighting”, as manufacturers turn to lighter metals or carbon fibers. 
  • We will also see multispeed transmissions and continuously variable transmissions as well as direct injection gasoline.