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At The Front

This note was originally published at 8am on September 07, 2012 for Hedgeye subscribers.

“No man can properly command an army from the rear; he must be at its front.”

-General William Tecumseh Sherman


I don’t force myself to write every morning. I have a passion to find the truth. I want to be on the front lines of that daily search.


On the Research Front, that doesn’t mean I’ll always find the truth; it just means I expect to. On the Risk Management Front, that doesn’t mean I am certain of anything markets will do; I am constantly humbled by their uncertainty.


That’s my life At the Front. Research (Growth Slowing) and Risk Management (market moves) are 2 very different things. Long-term, I think you are best prepared to have a process that embraces both. Winning and losing battles happens in every position, everyday. The war, however, is far from over.


Back to the Global Macro Grind


Hats off to them. I have no problem giving credit to my competition where it is due. The last 48 hours of global equity market trading has provided for one of the more impressive Keynesian Central Planning performances in at least the last 40 years.


Just think, it was only January of 2008 when you could have bought the SP500 at this very same price. You’d have had to have taken a very “long-term investor” view from that price… and mostly everything the buy-high bulls told you to buy on would have changed at least once every 3 months during the next 5 years… but now, after a little volatility, you are back to break-even, right?


Back to reality…


At The Front of real-time risk management this morning, yesterday is over. Now, what we really need to ask ourselves is what I have been borrowing from Ray Dalio’s Principles as of late, “What Is True?”


This usually happens when I am short-term wrong – I have more questions than answers:

  1. Is the US bond or stock market right on growth?
  2. What is the US stock market? the SP500 (higher-highs yesterday) or Russell2000 (lower-highs yesterday)?
  3. Is the European bond or stock market right on growth?
  4. Are German stocks (higher highs vs March this morning!) or the Eurostoxx600 (lower-highs) right?
  5. Is the Asian bond or stock market right on growth?
  6. Was the 1-day +3.7% rip off the YTD low in Chinese stocks the bottom or another lower-high?

If you have all the answers to these questions nailed down, across immediate to long-term durations, give me a buzz. On growth, the answer isn’t what the SP500 is “up year-to-date.” That’s just a short-term proxy for how less and less people get paid.


If that was the answer in Weimar Germany in 1923 or, say today in Venezuela’s IBVC Index (+155% YTD post currency debauchery), that would have been good and fine until revised as a very wrong answer. I guess they needed “more time.”


To review: stock and commodity market inflation is not economic growth.


The former is helpful to some, the latter is hurtful to many. I didn’t hear that coming out of either the RNC or DNC in the last few weeks. Why? Because both parties are Keynesian in their economic policy. Sadly, Obama and Romney look a lot more like Carter and Nixon, than they do Reagan or Clinton to me.


At this point, maybe I can appeal to both the far left and right of each party. Political strategists, you will love this storyline: when I came to this country (mid-1990s), I was an immigrant… son of a teacher and firefighter


I had no money… I was the beneficiary of two US Administrations (Reagan and Clinton) who had the three things that someone like me could believe in – Strong Dollar, Low Oil Prices, and Free-Market Capitalism. I worked 3 jobs; I took risks; got married, had 2 beautiful American children, and hired 50 people – a Made In America exporter of ideas…


Enough of the storytelling drama already. I didn’t earn any of this kissing anyone’s rear at the 2007 September-October stock market highs. I didn’t beg for bailout money at the 2008-2009 lows either. I sucked it up; I took my losses; and I carried on.


So don’t expect me to fade and not face the front lines this morning. From the top, to the bottom, and back again - it’s been a long 5 years writing to you – and there is still a war to be won.


My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1674-1712, $112.21-114.92, $80.98-81.61, $1.24-1.26, 1.56-1.72%, and 1419-1435, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


At The Front - Chart of the Day


At The Front - Virtual Portfolio


The Macau Metro Monitor, September 21, 2012




Sheldon Adelson announced that Sands China has already received the government’s licence to go ahead with the construction of a fourth hotel tower at Sands Cotai Central.  According to Adelson, the US$450 million (MOP3.6 billion) tower will host a St. Regis hotel, with 460 rooms and serviced apartments.

It is to be ready within 18 months, he said.


Also, according to Sands China executives, US$1 billion of the financing for Lot 3 will come from the company’s equity base with the remainder coming from international banks.


Adelson confirmed yesterday that the new Pacifica casino at Sands Cotai Central, inaugurated yesterday, opened with no new live gaming tables; instead, the units available there came from Sands China’s existing four casinos.  But Sands China executives said they were confident the government would grant the casino operator 200 new tables next year, once the current 5,500 live table cap expires.



Macau CPI for August 2012 increased by 6.33% YoY and 0.23% MoM.

Early Look

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Pain & Progress

“Pain plus reflection equals progress.”

-Ray Dalio


As a hedge fund analyst, turned Portfolio Manager, turned Canadian-American Entrepreneur, there are very few quotes that resonate with me more than that one. Ray Dalio remains, The Man.


In order to really learn how to win, I need to feel the pain of my mistakes. If I’m not making mistakes, that means I’m probably not pushing myself hard enough to try something new. John Cage frames that thought about risk taking another way: “I can’t understand why people are frightened of new ideas. I’m frightened of the old ones.”


As you watch the bull market crowd cheer on 10 million iPhone5 sales this weekend but, at the same time, beg for more of what has not worked (Spain Bailouts), remember that in order to foster Apple like innovation, we can’t incubate an American culture of socializing losses.


Back to the Global Macro Grind


For me at least, last week’s pain was this week’s gain. With the US Dollar Index having its 1st up week in the last 7, the CRB Commodities Index has had its long-term TAIL spanked for a -4.4% wk-to-date move.


Within the parameters of our Multi-factor, Multi-duration Risk Management Model, we focus on 3 key durations of risk (TRADE, TREND, and TAIL). We define TAIL risk on a bi-partisan basis; it works both ways (up and down).


Across the Global Macro waterfront, here are some key TAIL duration risks (3 years or less) for long-term risk managers to consider:

  1. US Dollar Index long-term TAIL support = $78.11
  2. CRB Commodities Index long-term TAIL resistance = 309
  3. Oil (Brent) long-term TAIL resistance = $111.44/barrel
  4. US 10yr Treasury Yield long-term TAIL resistance = 1.91%
  5. EUR/USD long-term TAIL resistance = $1.31

The first and last TAIL risks are the mirrors of one another. One up, one down. That’s why I’ve been saying for a while now that if you get the US Dollar right, you get a lot of other things right. That’s where most multi-duration Correlation Risks associated with Policies To Inflate live.


The other thing that you need to get right is economic growth. Put another way, if you’ve had US and Global Growth right in 2012, you’ve had Treasury Bonds right (long). Despite all of the broken promises from Bernanke on delivering you the elixir of a centrally planned life, the bond market continues to make a series of higher-lows, as the 10yr yield’s TAIL resistance remains intact.


When you get both A) the biggest Ball Under Water Macro trade of the last decade (US Dollar) and B) US Growth (demand) right, you have a tremendous opportunity to get the holy grail of investing right – timing. Personally, I’ll always have room to improve on that.


But does Ben Bernanke? Who holds this man accountable? With a lack of progress, is America’s economy about to experience the most amount of pain yet? If we go back into the soup, what will he do next? Is he out of bullets?


If you know the answer to these critical long-term questions, tweet me.


In the meantime, here’s what you get for your Burning Bernanke Bucks:

  1. Unemployment: US Jobless Claims Rising on a 4-wk rolling average basis to 378,000 (382,000 reported for this wk)
  2. Inflation Expectations: 10yr Breakevens testing all-time highs immediately following Bernanke’s decision last Thursday
  3. Fund Flows: ex-ETFs, US Equity Fund Flows were negative (again) at -$1.9B wk-over-wk (outflows)

In other words, at 4.5 year highs in the US stock market, this is what multiple “Quantitative Easings” and countless “communication tools” about the pending Qe-upon-prior-Qe got us:

  1. Higher US unemployment than we had in 2009 (unemployment rate in January 2009 was 7.8%)
  2. The 3rd of 3 Greenspan/Bernanke Asset Bubbles (Commodities) that every money manager is dared to chase
  3. No trust and/or volume in what used to be America’s beacon of free-market capitalism (the US stock market)

Great job, dude.


Both Bush and Obama signed off on this guy. See the Chart of The Day (10yr Breakeven Inflation Expectations 2007-2012) and you tell me how much longer he can keep America’s Purchasing Power (US Dollar) down, Savings Rates on hard earned moneys at 0%, and show zero reflection on his academic dogma’s mistakes, never mind progress.


My immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500, are now $1, $108.03-111.44, $78.61-80.43, $1.29-1.31, 1.72-1.87%, and 1, respectively.


Best of luck out there today and enjoy your weekend,



Keith R. McCullough
Chief Executive Officer


Pain & Progress - Chart of the Day


Pain & Progress - Virtual Portfolio


TODAY’S S&P 500 SET-UP – September 21, 2012

As we look at today’s set up for the S&P 500, the range is 20 points or -0.63% downside to 1451 and 0.74% upside to 1471. 












  • ADVANCE/DECLINE LINE: on 09/20 NYSE -623
    • Decrease versus the prior day’s trading of 473
  • VOLUME: on 09/20 NYSE 678.75
    • Increase versus prior day’s trading of 5.44%
  • VIX:  as of 09/20 was at 14.07
    • Increase versus most recent day’s trading of 1.37%
    • Year-to-date decrease of -39.87%
  • SPX PUT/CALL RATIO: as of 09/20 closed at 1.07
    • Down from the day prior at 1.53 


  • TED SPREAD: as of this morning 27.16
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.77%
    • Increase from prior day’s trading of 1.76%
  • YIELD CURVE: as of this morning 1.52
    • Up from prior day’s trading at 1.51 

MACRO DATA POINTS (Bloomberg Estimates)

  • U.S. Rates Daily Agenda
  • 11am: Fed to purchase $1.5b-$2b notes 11/15/2022-2/15/2031
  • 12:40pm: Fed’s Lockhart speaks in Atlanta
  • 1pm: Baker Hughes rig count


    • House, Senate in session
    • House Financial Services holds hearing on Fed interest rate policy, 9:30am
    • House Ways and Means holds hearing on Medicare Advantage health plans, 9:30am
    • CFTC holds closed meeting on enforcement matters, 10am
    • State Dept. advisory panel meets at Fed Bank of New York on enforceability of close-out netting, a contractual mechanism used by financial institutions to reduce risk exposure, 10am
    • FDA holds meeting of Orthopaedic and Rehabilitation Devices Panel, 8am
    • FDA holds meeting on generic drug user fees, 9am
    • Energy and Commerce panel holds hearing on FCC handling of LightSquared, 9:30am
    • FCC advisory panel meets on broadband adoption, 2pm
    • FTA Administrator Peter Rogoff addresses Transit Rail Advisory Committee for Safety meeting, 9am
    • Transportation Dept. advisory panel meets on vessel financing, ship capacity for marine highway services, 11am
    • Space Transportation Assoc. holds discussion on launch systems, with NASA program manager Todd May, 11:30am


  • Italy, Spain won’t seek aid unless yields surge, official says
  • China central bank adviser sees slowdown persisting into 2013
  • Apple poised to sell 10m iPhones in record debut
  • IPhone 5 restrictions to spark Samsung discounts in Europe
  • Knight names chief risk officer, seeks chief tech officer
  • SEC said to scrutinize private equity on share of fund profits
  • Oracle revenue misses ests. as hardware sales decline
  • UnitedHealth to join DJIA after close of market
  • U.K. posts record Aug. deficit as slump hits tax revenue
  • Fed’s Kocherlakota says battling unemployment may mean keeping interest rates close to zero for 4 years
  • Syngenta to buy biotech seed maker Devgen for $523m
  • Glencore, Xstrata said to meet seperately as deadline looms
  • Wells Fargo loan bias settlement with U.S. wins approval
  • News Corp said to consider giving James Murdoch U.S. TV ops
  • GM reaches 4-yr labor agreement with CAW
  • European Medicines Agency CHMP announcements expected
  • UN, Congress in Recess, Xstrata, Libor: Week Ahead


    • Darden Restaurants (DRI) 7am, $0.83
    • KB Home (KBH) 8am, $(0.15)



COMMODITIES – evidently Bernanke’s Inflation Policy trade didn’t like a week of the Fed and Hilsenrath saying nothing thereafter; Qe rallies are getting shorter (and steeper); US Dollar having its 1st up wk in the last 7 gets you a CRB pancaked -4.4% for the wk to-date, snapping its TAIL risk line of 308.

  • Gold Bulls Extend Streak as Prices Jump on Stimulus: Commodities
  • Coal Era Beckons for EU as Carbon Giveaway Ends: Energy Markets
  • Crop Prices Probably Peaked After Drought Cuts U.S. Output
  • Bananas in Latin America Crunch as Fyffes Plans to Raise Prices
  • India Wins on Livestock-Feed Exports as Drought Cuts U.S. Crops
  • Gold Seen Gaining in London as Stimulus Spurs Investor Demand
  • U.K. Natural Gas Rises to Seven-Month High on Supply Shortfall
  • Crude Oil Rebounds to Trim Biggest Weekly Decline Since June
  • Copper Stockpiles at Four-Month High in Shanghai; Zinc Drops
  • Cooking-Oil Imports by India Seen at Record as Food Demand Grows
  • China’s Iran Oil Imports Drop to Five-Month Low Amid Sanctions
  • Duke Chief Answers Critics After Coup at Biggest Utility: Energy
  • Cocoa Supply, Demand to Even Out; Pricing Pressures Diminishing
  • Soybeans May Slump 14% After Momentum Stalls: Technical Analysis
  • Corn Heads for Biggest Weekly Loss Since June on Slowing Demand
  • Gold Seen Luring Wealthy as Central Bankers Expand Stimulus





EURO – EUR/USD bounces +0.5% on Spain bailout rumoring; that monster correlation risk FX pair is in a very important positions right now w/ TRADE support of $1.29 under attack at the same time as our long-term TAIL risk line of $1.31.54 remains a wall of resistance; a break and close below $1.29 gets me $1.26, fast – so watch that.






SPAIN – what would the week have been if we actually went 5 full days with no central planning rumors? Spain gets the bailout begging back into the headlines, and that’s good for a European/US futures bounce; IBEX continues to make lower-highs vs March; its risk range is now 8031-8214; doing nothing in European Equities right now, waiting/watching.















The Hedgeye Macro Team


Corporate Earnings Slowdown


Hedgeye CEO Keith McCullough appeared on CNBC's Fast Money this evening to discuss the market and the pressure on corporate earnings.

Keith reiterated that the corporate earnings slowdown is a big issue; it's the one thing that Ben Bernanke can't take care of no matter what policies he implements. Norfolk Southern (NSC) was down 9% today, so you can clearly see that earnings are at risk. Growth is slowing on a global level and affecting corporations as factors like slowing exports and rising inflation take hold.

Also discussed was energy and oil. Demand is down and supply is up in the US. But the real question is: how will Bernanke's policy of further easing affect energy prices in the long run?

As QE3 continues, commodity prices will continue to drive higher. Eventually, the cycle will turn and prices will come down, especially when the US dollar stops heading lower (keep in mind the USD has been falling for 6 consecutive weeks now).

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