Free-Market Confidence

This note was originally published at 8am on September 26, 2012 for Hedgeye subscribers.

“Free-Market capitalism offers the most efficient and just way to order an economy.”

-George W. Bush


While it’s a shame that when short-term politics met economic gravity that neither Bush nor Obama gave anything other than lip service to one of America’s greatest economic ideals, that doesn’t mean all is yet lost. Arresting the un-American trend of centrally planned markets may very well be our greatest opportunity.


While I’ve had some big market calls wrong in the last month, I haven’t been wrong on the fundamental realities born out of Big Government Interventions. First, Policies To Inflate slow growth. Then they slow corporate earnings. Bernanke Bailout Bulls can blame Europe for yesterday’s decline, or they can pull up a chart of Caterpillar (CAT). Markets don’t lie; politicians do.


To give the aforementioned quote the appropriate context, it comes from a book I’ll be critically reviewing in the coming weeks: The 4% Solution. Bush wrote the Foreword and admirably prefaced his comment about American Liberty by holding himself accountable. He admits that “market-distorting government policies” played a big part in the 2008 crisis. God help our children if we can’t learn from that.


Back to the Global Macro Grind


At the top of the market’s performance chasing squeeze (September 14th), we didn’t hide from our Q2 2012 Macro Theme, The Last War: Fed Fighting. We dug in our heels and stayed true to our process. Commodity inflation is not economic growth. It slows growth.


Headline this morning from Bloomberg: “Fed’s Plosser Says QE3 Risks Fed Credibility, Won’t Boost Jobs”




I’ll get to why I started covering shorts and buying stocks more aggressively yesterday in a moment, but first let’s rewind the tapes on what just happened after Bernanke pinned market prices at their YTD highs on no-volume:

  1. US stocks are down for 6 of the last 7 days (down -2.2% from the intraday high of 1474 Friday September 14th)
  2. CRB Commodities Index has lost -4.3% of its value in a straight line; Oil snapped TAIL risk support of $111.44 (Brent)
  3. US Treasury Bonds (10yr yield) just ripped a +13% move (yields down from 1.9% to 1.65% this morning)

I think Bernanke calls this something like “price stability.”


To their credit, a Perma-Bull might say, “a 2.2% correction is nothing.” Agreed. It’s only something if you bought the 1474 SP500 top in the Big Beta Sectors, with leverage. Underneath the beta-chasing hood, here’s what’s happened from the September 14th high:

  1. Financials (XLF) = down -4.2%
  2. Basic Materials (XLB) = down -4.2%
  3. Energy (XLE) = down -4.0%

While bulls sounded more like crickets into yesterday’s close, I can assure you that buying high and selling low, if done repeatedly for no other reason than chasing a benchmark, will leave a short-term performance mark.


What did we do? It’s all #timestamped, so you don’t have to take my word for it, but I’m encouraged that I didn’t meet my pre-September 14th mistakes with more mistakes-upon-mistakes. During the 1.5 week correction we sucked +1.71% of alpha out of the long side of Utilities (XLU) and, instead of buying a US Index into yesterday’s oversold close, we bought Apple.


Bought APPL? Yep. Not my 1st rodeo riding beta – it’s all about managing the risk of the immediate-term range. In a world where both Growth and #EarningsSlowing are going to dominate fundamental news-flow, I think investors will buck up for the growth that they can find.


Under the current US central planning regime of Obama, Bernanke, and Geithner, I think there’s a better chance of my becoming an adjunct professor of charlatan Economics at Yale than the USA seeing a 4% GDP print anytime soon. That’s what makes growth stocks attractive when A) you can find them, and B) they are on sale.


To review our Real-Time Positions, we have 10 LONGS and 6 SHORTS. On the long side, the best long-term Growth Ideas are:

  1. Las Vegas Sands (LVS)
  2. Apple (AAPL)
  3. Paccar (PCAR)
  4. Starbucks (SBUX)
  5. Under Armour (UA)
  6. Urban Outfitters (URBN)
  7. Brinker (EAT)

We also bought Brazil (EWZ) on red yesterday. While the government is moving towards making up its inflation numbers like Japanese, US, and European governments do, Brazilian economic growth looks ready to slow at a slower-rate. On the margin, that’s better than bad.


Unlike in the USA, where the manic media is attempting to tell you that yesterday’s Consumer Confidence print of 70.3 for September is bullish (see Chart of The Day for the historical context of US confidence – it’s lower than where it was in the 1970s), Brazilian Consumer Confidence clocked a 122.1 for September! That’s the kind of confidence we need.


To Review: during the only 2 sustainable +4% US GDP Growth runs of the last 40 years:

  1. 1983-1989 (Reagan, Strong Dollar) = US Consumer Confidence tracked between 90-120
  2. 1993-1999 (Clinton, Strong Dollar) = US Consumer Confidence tracked between 100-140

In other words, USA is not Brazil. Today’s American Consumer Confidence (oscillating between 40-70 during Bush & Obama Dollar Debauchery Administrations) reflects, precisely, what the zeitgeist in America feels like. Brazil's confidence tracked between 95 and 120 from 2005 to 2010. That's the kind of confidence we need.


This is not the country I came to in the mid-1990s. This is not a “free-market” either. This needs to change, just like my positioning did.


My immediate-term risk ranges of support and resistance for Gold, Oil (Brent), US Dollar,  EUR/USD, UST 10yr Yield, AAPL, and the SP500 are now $1742-1769, $105.74-111.44, $79.15-80.59, $1.28-1.30, 1.63-1.72%, $671-693, and 1430-1458, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Free-Market Confidence - Chart of the Day


Free-Market Confidence - Virtual Portfolio


The Macau Metro Monitor, October 10, 2012




The head of the Gaming Inspection and Coordination Bureau, Manuel Joaquim das Neves, forecasts Macau’s casino gross gaming revenue to “to grow between 10% and 15%” for full 2012.  “We have a much higher base of comparison from 2011, especially during the second half of the year. Taking into consideration the global economic downturn, to achieve such growth would be a very good result,” Neves said.  “Based on the first week, we expect this October to be good month,” he added.



Average rates for hotel rooms during the National Day Golden Week holiday period (October 1 to October 7) registered a slightly YoY drop.  Data released yesterday by the Macau Government Tourist Office shows that average daily room rates of three to five-star hotels stood at MOP1,741 (US$218), down by 1.03% YoY.  On the contrary, average daily room prices for guesthouses recorded an increase of 33.84% during the Golden Week period.  Renting a room at a guesthouse, cost on average MOP526.57 during the holiday period.


According to an industry representative, despite the increase in tourist arrivals during the Golden Week holiday period, retail sales failed to follow suit.  The head of the Macau Association of Retailers and Tourism Services, Frederick Yip Wing Fat says mainland tourists were more cautious in their spending this year due to the economic slowdown there.  “We do not have the exact figure yet but there were drops in retail sales this year,” Yip said.  “The best scenario would only barely reach the same level as last year”.  Yip added one area where drops were recorded was in sales of luxury products and jewelry.  


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Smell The Truth

“Keep it simple. Tell the truth. People can smell the truth.”

-Steve Wynn


If you’re looking for Steve Jobs like thought leadership, product innovation, and job creation in this country, look no further than Steve Wynn. The guy gets what most of us who have built something from nothing get – he has vision.


If you and your spouse and/or business partners are really going to build something on your own in this good life, you have to, deep down in your bones, believe that people will side with the truth.


If what you deliver is better than what they currently use, both you and your customers win. If you believe that people are dumb – and that they’re generally not smart enough to Smell The Truth, you’ve already lost. Politics might be a better career path.


Back to the Global Macro Grind


Whatever central planners want to throw at us this morning, I say bring it. The only certainty I have in my life is that the sun will rise in the East and, God willing, I will be sitting right here at my post, preparing to play the game that’s in front of me.


Yesterday, we got long again. We bought Apple (AAPL), Michael Kors (KORS), and Taiwan (EWT). We started the day with 7 LONGS, 8 SHORTS and closed the day with 11 LONGS and 3 SHORTS. Progress embraces change. So that’s what we do.


I’m not saying that our Top 3 Global Macro Themes for Q4 2012 have changed this morning. In fact, I’ll reiterate Theme #1 this morning (#EarningsSlowing) as that remains the market’s most important risk. That risk, however, gets overbought and oversold, fast.


The most important driver of the market’s daily beta isn’t AAPL. It’s the US Dollar. If you get that right, you tend to get a lot of other things right. Here’s the refreshed immediate-term TRADE correlation between the US Dollar Index and stocks:

  1. SP500 = -0.95
  2. EuroStoxx600 = -0.97
  3. MSCI World Index = -0.97

Those are wicked high correlations. So, you can either run around like a chicken with his 50-day Moving Monkey cut off on AAPL… or, you can just build a model that probability-weights where the US Dollar is immediate-term TRADE oversold/overbought, and then buy/sell AAPL (or whatever it is that you really like in the US or Global Stock market) using those signals as your headlights.


At the house of Marcus Goldman (when it was private and Partner Capital was on the line every day), they used to evaluate talent by asking themselves if their players could make money if locked in a “dark room” (by themselves) with only their process.


While they may have not put it that way precisely, I just did. Because I think that’s a great way to think about risk management and what it is, precisely, that you do. When everything goes straight down like it did yesterday, what do you smell? Buy or sell?


As a risk management process, smelling buy/sell opportunities should go both ways. That’s why I have had no problem changing my mind in the last 4 weeks. This isn’t politics – in real life business, flip-flopping your opinion is critical to success.


In the immediate-term, in particular for the beta implied in US stocks, there are always positives and negatives to consider.



  1. USD immediate-term TRADE overbought at $80.16
  2. EUR/USD immediate-term TRADE oversold at $1.28
  3. SP500 Immediate-term TRADE oversold at 1434
  4. VIX immediate-term TRADE overbought at 16.74
  5. UST 10yr yield holding 1.64% support
  6. II Bull/Bear Survey compresses by 1,000 basis points to the bear side


  1. Equity Volume is as dead as a doornail, nowhere to be found on last week’s bounce
  2. Tech (the market leader up until 3 weeks ago) is leading the decline
  3. S&P Sector Studies just saw 4 of 9 Sectors snap immediate-term TRADE support (XLK, XLI, XLY, XLB)
  4. KOSPI (South Korea) broke its immediate-term TRADE line again overnight
  5. Oil (Brent) is back above its TAIL risk line of $112.69/barrel
  6. Bernanke and Geithner are still gainfully employed

But, like any risk manager of any professional game, you have to make a call at some point on which way to lean. That’s why I have built a model that removes most of the emotion that I used to have when making those decisions. An emotional Mucker fights too much.


I don’t want to fight you. I want to help you. I don’t always lean, but when I do, I go with the process that most often tells me the truth.


My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, AAPL, and the SP500 are now $1, $112.69-115.01, $79.69-80.16, $1.28-1.30, 1.64-1.76%, $630-642, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Smell The Truth - Chart of the Day


Smell The Truth - Virtual Portfolio

CMI Preannouncement Negative for CAT, KMTUY, Not PCAR: On-Road vs. Off-Road

Takeaway: $CMI's lower guidance suggests mining/off-road/power activity was below expectations. Negative for $CAT,$KMTUY. No new information on $PCAR.

Off-Road vs. On-Road: Cummins Lowers Guidance

  • Little Relevance to PCAR, North American Truck OEMs:  Investors already have North American truck orders and already know that they are anemic.  The Cummins’ pre-announcement provides little new information on this market.  North American Class 8 build schedules are already expected to drop.
  • Mining Equipment Slowdown Confirmation:  Cummins specifically cited mining equipment as an area of weakness.  Cummins sells high value engines to off-road markets, mining equipment among them.  Komatsu, for example, is a major Cummins customer. 
  • Class 8 Less Relevant to CMI:  Cummins has diversified away from heavy-duty engines and North America.  Only around 40% of the company’s sales are in the U.S.  Further, global heavy-duty on-road engine, distribution and parts sales are probably less than 1/3 of CMI’s total sales, with the North American heavy-duty market a fraction of that. 
  • Mix Shift: Power generation and off-road vehicles (particularly with Tier IV) have become bigger parts of CMI’s mix.  Medium-duty and light-duty engines, in which Paccar has little or no presence, are significant markets for Cummins but do not have the same positive cyclical drivers as the Class 8 market (e.g. a record old fleet).
  • Brazil & China:  Cummins noted weaker than expected activity in China and had already discussed weakness in Brazil with 2Q results.  While a negative economic signal, Paccar is not currently selling in those markets.
  • Margin Pressure:  We expect Cummins to struggle with the transition from adding emissions controls for on-road trucks, where efficiency is paramount, to off-road vehicles, where efficiency is less relevant.  This transition, along with the challenge of being a supplier to highly consolidated industries, may contribute to weaker margins.
  • CAT, Komatsu, and Weak Industrial Activity: The lower guidance is the latest sign that global industrial activity has weakened, particularly in key emerging markets.  We expect the pre-announcement to impact stocks like CAT and KMTUY, as expectations have yet to fully readjust for these companies, in our view.  While PCAR has reacted in aftermarket trading, there is little new information in the Cummins release relevant to Paccar.

Earnings Season Slowdown


Hedgeye CEO Keith McCullough appeared on CNBC's Fast Money this evening to discuss stocks and earnings season.


Earnings Season truly begins with JP Morgan reporting on Friday. We have both earnings slowing and growth slowing right now. We're currently in a stock picking environment right now. Chevron (CVX) reported after the close today and offered caution on guidance, in line with our stance on earnings slowing.


Apple remains an emotional stock. It could see margin compression going forward if it comes out with new products in its iPhone line. Buyers want to see expansion in EBIT.


Check out the clip above to see Keith and the Fast Money team in action.

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