Surviving Tops

This note was originally published at 8am on September 10, 2012 for Hedgeye subscribers.

“The first definition of victory is survival.”

-Hampton Sides


Tops are processes, not points. From both an intermediate and long-term perspective, at least that’s what we have learned in the last 5 years. Big Central Planning in what used to be “free-markets” continues to A) shorten economic cycles and B) amplify price volatility.


But, Keith, the market is up year-to-date.” Yep. And the SP500 was up double-digits for the year-to-date on October 9th, 2007 too (1565 for those of you who still remember that cost basis and the people who told you to buy there). Just think, only 18 months later you could have bought Starbucks $SBUX at $11 (i.e. 78% lower). That’s when stocks were “cheap.”


Cheap is as cheap does. People get that. How else can you explain money flowing out of Equity funds in the latest Lipper data (-$6.8B in outflows last week)? People also remember late 2007 and all the storytelling about growth recovering via centrally planned “shock and awe” rate cuts back then too. I never thought we’d get back to that same sell-side narrative. Never say never, I guess.


Back to the Global Macro Grind


The aforementioned quote is the last one I wanted to highlight from this summer’s reading about the founding of the 19th century American West (page 469 in Blood and Thunder). It was a creed Kit Carson lived by. And it’s one I’ve embraced as a Risk Manager of my own capital too. Spending 5 years of your life trying to get your investors’ capital back to break-even is no life to live.


Getting back to break-even is another way to think about why I am constantly measuring LOWER-HIGHS across intermediate to long-term investing cycles. Those define memory, losses, and pain. If you have a friend who bought the 2007 top in the SP500, he only has another +10% higher to go (from here) to get back to his high-water mark. I hope he didn’t use leverage.


Across intermediate-term durations (since February-March 2012), here are some LOWER-HIGHS to think about (across asset classes):

  1. US Treasury Bond Yields (10yr) = 1.66% (down from 2.4% in March 2012)
  2. EUR/USD = $1.27 (down -5.2% from March 2012)
  3. CRB Commodities Index = 311 (down -4.4% from March 2012)
  4. Gold = $1736 (down -3.2% from February 2012)
  5. Oil (Brent) = $115 (down -9.2% from March 2012)
  6. Copper = $3.69 (down -7.1% from February 2012)
  7. Russell2000 = 842 (down from 846 on March 26th,2012)
  8. Chinese Stocks (Shanghai Composite) = 2134 (down -13.2% from March 2012)
  9. Japanese Stocks (Nikkei225) = 8869 (down -13.5% from March 2012)
  10. European Stocks (Eurostoxx50) = 2533 (down -2.9% from March 2012)
  11. Spanish Stocks (IBEX) = 7861 (down -11.9% from March 2012)
  12. Italian Stocks (MIB) = 16,050 (down -6.3% from March 2012)
  13. Russian Stocks (RTSI) = 1468 (down -16.2% from March 2012)
  14. Brazilian Stocks (Bovespa) = 58,321 (down -14.7% from March 2012)

In other words, if you bought any of these asset classes and went short and/or “underweight” Treasury Bonds, you are underwater since Growth Slowing began to be obvious, globally in March of 2012. That side of the research call has been dead on.


Are there any outliers?

  1. SP500 = 1437 (up +1.3% from March 2012)
  2. German Stocks (DAX) = 7217 (up +0.8% from March 2012)
  3. US Equity Volatility (VIX) = 14.38 (up +0.8% from March 2012) 

Hoowah, what a return versus the risk you had to take! (*note: SPX and RUT had 10 and 13% draw-downs from March to June)


To be fair to the “growth is back, earnings are great, and stocks are cheap” bull crowd of economists (rewind the tapes and/or read their Feb/Mar 2012 research), Venezuelan, Egyptian, and Pakistani stocks are right ripping since March 2012. So bullish.


But let’s not fuss about the details on why “the market is up-year-to-date” (Bernanke doing Qe3 on January 25th, pushing 0% rates to 2014; and the market baking in a Qe4 or push for 0% rates to 2015 now)…  


Let’s not talk about the real-time P&L impact of this little detail called timing in anything pro-cyclical since March. The very same economists and Old Wall Street strategists weren’t fussing about it in September-October of 2007 either.


This isn’t my 1st rodeo with perma-bulls. They are loud and they change their thesis to suit last market price. That’s why Surviving Tops isn’t easy. Particularly when the storytelling, groupthink, and performance chasing is coming on thick.


My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, 10yr US Treasury Yield, and SP500 are now $1689-1739, $113.39-115.02, $80.11-81.29, $1.24-1.28, 1.56-1.70%, and 1419-1438, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Surviving Tops - Chart of the Day


Surviving Tops - Virtual Portfolio


The Macau Metro Monitor, September 24, 2012



STUDIO CITY CAN APPLY FOR CASINO: GOV'T Macau Business, Macau Daily Times

According to Secretary Tam, Studio City can apply for a casino.  This was the first time a government official had said so, after a string of statements to the contrary.  Tam said the government had already agreed that Studio City could apply for a casino in 2006, when the original investors in the project requested it.  Tam also admitted that some of the new 2,000 live gaming tables to become available until 2023 under the 3% average yearly growth rate cap to be introduced next year, could go to Studio City.


Mr Tam added the information that “they were given the land already in 2003.  The question is whether or not this land can have casinos or not”, he stated. “At the time of the first request they did not include any projects for casinos. It must be evaluated.” According to the Secretary, “this can’t be done fast.” 


Also, the requested 400 gaming tables for the recently opened Sheraton Hotel in Sands Cotai Central will probably be approved “only next year”.  The government had originally agreed to this number of tables and 200 were approved already.  The Secretary also referred to Sands’ “little Paris” project saying, “This is no new project, as it had already been integrated into the Venetian and Four Seasons projects. It’s only the construction works that are divided into different phases.”



Visitor arrivals totaled 2,681,141 in August 2012, down slightly by 0.6% YoY.  In August 2012, the average length of stay of visitors stood at 1.0 day, down by 0.1 day YoY.  Visitors from Mainland China increased by 4.1% YoY to 1,635,080, with those travelling to Macao under the Individual Visit Scheme rising by 10.6% to 772,534.





Singapore's consumer prices rose at a slower pace in August, as costs of accommodation and services moderated.  The consumer price index (CPI) rose 3.9% from a year earlier, after rising 4.0% in July.  The CPI rose 0.6% in August from July, after a MoM rise of 0.2% in July.  The Monetary Authority of Singapore said core inflation, which excludes accommodation and private road transport costs, fell to 2.2% in August from 2.4% the previous month.

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%

Elegant Outcomes

“Not everything I say is elegant.”

-Mitt Romney


For 5 straight weeks both Romney and the US Dollar took a public brow-beating from both Obama and Bernanke. We’ll see where the Hedgeye Election Indicator scores Romney tomorrow. For now, all I can tell you is that last week the US Dollar just had its 1st up week in six.


Can Policies To Inflate, deflate? Oil just did, fast. Gold, Silver, and US Stocks are on their way lower this morning too. Did last night’s 60 Minutes moment for Romney mark a short-term top for Obama? Intrade had him at a fresh new high of 70% last week. At a bare minimum, that has some short-term mean reversion risk heading into the 1st debate (October 3rd).


From Greenspan/Bernanke asset price bubbles (Internet stocks in 2000, Housing in 2007, and Commodities in 2012) to mean reversion and correlation risks, Macro hasn’t been elegant over the course of the last 15 years. Neither is writing about the truth.


Back to the Global Macro Grind


With 43 days to the #Election and 99 days to the #FiscalCliff, both the US Dollar’s direction and the Obama vs. Romney Spread matter to markets – big time. Causality (policy) is driving correlation in market pricing right now. When that changes, we’ll let you know.


Correlation Risk Update (30-day immediate-term USD correlations, across asset classes):

  1. Gold = -0.98
  2. Copper = -0.97
  3. Silver = -0.96
  4. Coffee = -0.84
  5. CRB Commodities Index = -0.82
  6. SP500 = -0.89

In other words, if Obama gets the Dollar right (down), he should be fine for the next 30 days. If he doesn’t, Dollar up may very well be read as Romney building momentum off his mid-September lows.


Partisan people may not like this analysis, but the math is quite elegant when you show it in bullet point form. With the US Dollar Index up +0.6% last week, here’s what Big Macro data did:

  1. CRB Commodities Index = down -3.8%
  2. Oil = down -6.2%
  3. Copper = down -1.6%
  4. Coffee = down -4.1%
  5. SP500 = down -0.34%
  6. Russell2000 = down -1.0%
  7. Chinese stocks = down -4.6%
  8. Italian stocks = -3.8%
  9. Russian stocks = -3.8%
  10. Gold = +0.2%

Yes, Gold prices diverged from the rest of reality last week – but they aren’t this morning. That’s an interesting callout, if only because Gold was the last holdout in Bernanke’s Bubble (Commodities) to not make higher all-time highs.


The all-time high (not pricing it in rice beans or Thai Baht) in nominal Gold was established in February of 2012. And if you really want to think bubbly, it makes sense for it to potentially have topped before Bernanke printed to “Infinity & Beyond.” After all, Gold has been up for 12 consecutive years, discounting something, no?


What’s next?


If the US Dollar falls again from here and Gold recovers this morning’s losses to make higher-all-time-highs, I’ll likely cover my short position in GLD. If it doesn’t, well, I guess that’s not going to be my problem.


Within the weekly CFTC futures/options contract data, Gold is as frothy right now as Corn was in mid-August (Corn, by the way, is down -11% since then, in a straight line):


Here’s the update on Commodity speculation within that CFTC data:

  1. Total contracts finally fell wk-over-wk (-1.7%) after hitting their February 2012 highs of 1.33M contracts last week
  2. Gold contracts ripped another +8% wk-over-wk (up 5 weeks in a row with USD down) to a February high of 178,426 contracts
  3. Oil contracts made higher YTD highs into and out of Bernanke = +6% wk-over-wk to 214,647 contracts

All the while, Commodity speculation on Farm Goods (corn, wheat, soy, etc.) dropped -7% wk-over-wk, AFTER corn prices fell, not before. Super secret: hedge funds chase commodity beta high and sell it low (they’ll sell oil today, watch) – that’s why these prices whip around so much within the construct of Bernanke’s broken promise of “price stability.”


In other Contrarian Signal news, Fund Flows may be negative in Equities (ex-ETFs, Equity Fund outflows were another -$1.9B last wk), but they dog-piled into Raw Material/Commodity funds last week at +$2.36B (per EPFR data), and Goldman just upped their “Commodities” forecast to another +18% from here!


If Goldman and Obama are right, I’ll be wrong on Gold and Oil highs for 2012 being in the rear-view mirror. And the USA will probably be in a recession within 6-12 months. Don’t take my word for it on that - ask the bond market. Policies To Inflate slow growth. To Keynesians advising Bush and Obama, that hasn’t been an elegant economic outcome either.


My immediate-term risk ranges in Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $107.60-111.44, $78.69-79.96, $1.28-1.30, 1.69-1.79%, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Elegant Outcomes - Chart of the Day


Elegant Outcomes - Virtual Portfolio



Express Carriers: Getting Interesting

Takeaway: While early, we are getting interested in $UPS & $FDX on the long side. FDX may pull capacity. Lucrative USPS contract up for grabs.

Express Carriers: Getting Interesting

  • Express Carriers Long Out of Favor:  We have covered Fedex and UPS for a really long time and have not been interested in them for a really long time.  However, recent underperformance (i.e. valuation improvement) and a better cyclical set up is starting to make the group look more promising.
  • Capacity Reductions?:  Fedex appears to have added excess express capacity after the financial crisis and may announce its withdrawal at its October analyst meeting.  That capacity reduction, among other factors, could be a help to industry utilization and margins.
  • USPS Contract Up:  We also note that the Fedex USPS contract is up for grabs now.  UPS has a bid in.  It’s a ~$1 billion in revenue with above average margins, so it moves the needle – down for FDX if it loses the business.

Express Carriers: Getting Interesting - 2



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.