Sandy Bayes

“The only safe ship in a storm is leadership.”

-Faye Wattleton


US markets are closed today, but rest of world is still open for risk to be managed. US Equity futures are down 8 as the US Dollar (+0.16%) continues on its strengthening path toward popping Bernanke’s Bubble (Commodities).


Like Sandy’s progression, the global growth and earnings slowdown is measurable. The closer it gets to you, the more obvious its risk management realities become. Try it at home. Buy a stock in front of a guide down.


Nate Silver does a great job simplifying this Bayesian process of managing risk through probability theory on page 243 of The Signal And The Noise: “we learn about it through approximation, getting closer and closer to the truth as we gather more evidence.”


Back to the Global Macro Grind


Bayes’ Theorum is by no means a silver bullet. It won’t tell you how many trees Sandy will knock down in your yard inasmuch as it won’t tell you the precise day when China will “bottom.” It’s simply a framework that allows us to think flexibly.


This is the primary reason why our risk management style is so different than most that you read. Any buy-side fund worth their fees gets this. The sell-side and media at large does not. Like monitoring a hurricane, we probability-weight every decision based on what real-time price, volume, and volatility information we receive (every 90 minutes).


Ninety minutes? No, that doesn’t make me “short-term” – that just makes me less likely to make mistakes within the context of the intermediate to long-term cycles that we have already studied. Watch the storm. Risk Happens Fast.


Across our core risk management durations (TRADE, TREND, and TAIL), here’s what I saw last week:

  1. US Dollar Index = up +0.6% and up for the 4th week in the last 6 (bullish TRADE and TAIL)
  2. EUR/USD = down -0.76%, and down for the 4th week in the last 6 (bearish TRADE and TAIL)
  3. US Treasury Yield (10yr) = down 1 basis pt to 1.75% (bearish TAIL, which is long-term bullish for Bonds)
  4. CRB Commodities Index = down another -2.7% (down -7.8% since Bernanke’s Top, SEP 14, 2012)
  5. Oil (WTIC) = down another -4.4% to $86.28/barrel in a Bearish Formation (bearish TRADE, TREND, and TAIL)
  6. Gold = down another -0.7% (bearish TRADE and TAIL)
  7. Copper = down another -2.1% (Bearish Formation, down -10% from its #GrowthSlowing high Q112)
  8. SP500 = down -1.5% last wk closing below both TRADE (1441) and TREND (1419) resistance
  9. Russell2000 = down -1.0% last wk closing below both TRADE (831) and TREND (846) resistance
  10. US Equity Volatility (VIX) = +4.3% last wk closing above both TRADE (16.29) and TREND (15.54) support
  11. Russian Stocks (RTSI Index) = down -3.7% leading European Equity decliners last wk (-18.5% since March)
  12. Chinese Stocks (Shanghai Composite) = down -2.9% remain in a Bearish Formation (TRADE, TREND, and TAIL) 

That last point (China) is a good one to qualify. Two weeks ago I heard plenty a pundit say “China has bottomed” without any process or conditional probability backing up their perma-bull proclamation of faith. Bottoms aren’t bottoms, until they bottom.


As a general rule, that’s why I like to teach the very basic risk management concept that tops and bottoms are processes, not points. To probability-weight them, you need to have a disciplined process to grind out evidence that risk is actually occurring.


Old Wall generally thinks about this bass ackwards. They call it “risk on” or  “risk off”, after the risk occurs. As a practitioner, you can safely assume that risk is never “on” or “off” – instead, it’s always moving. So embrace its uncertainty.


Speaking of which, I need to cut this Early Look short to get gas all over my hands and prime my generator. I’d hate to have a risk “on” moment in front of my kids where I didn’t proactively prepare for what’s staring me in the face.


Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, Shanghai Composite, and the SP500 are now $1, $106.08-110.66, $79.67-80.35, $1.28-1.30, 1.71-1.81%, 2048-2098, and 1, respectively.


Best of luck out there today – stay safe,



Keith R. McCullough
Chief Executive Officer


Sandy Bayes - Chart of the Day


Sandy Bayes - Virtual Portfolio



The Economic Data calendar for the week of the 29th of October through the November 2nd is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


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Trade Of The Day: JPM

Today we bought JP Morgan (JPM) at $41.41 a share at 3:27 PM EDT in our Real Time Alerts. The company put up a solid quarter and Hedgeye Financials Sector Head Josh Steiner wants to be net long financials if Romney momentum continues to build. A Romney win would be a positive for banks and other financial institutions as he plans on toning down regulation. 


Trade Of The Day: JPM - image001

GDP Report: Accelerating The Recession

Takeaway: Growth and earnings are slowing. The current recession is likely to get worse before it gets better.

Net-net, the 3Q12 GDP report suggests weak imports may be leading a sequential slowdown in both “C” and “I”  in the upcoming quarter(s). Additionally, an demonstrable and unsustainable acceleration  in “G” was all that stood in the way of a -35% deceleration to +0.9% QoQ SAAR, allowing the headline figure to come in at +2% QoQ SAAR. This means that growth is trending along a +0.9% QoQ SAAR run rate and potentially headed lower if “C” and “I” exhibits signs of slowing.



GDP Report: Accelerating The Recession  - GDPGrowthpic



Unfortunately, dual slowing of “C” and “I” is indeed a probable scenario, given the uncertainty surrounding the election, fiscal cliff and debt ceiling breach. Moreover, each catalyst may actually be contributing to a noteworthy acceleration in corporate cost-cutting initiatives (layoffs?), as highlighted on 3Q earnings calls. Recessions happen when baseline GROWTH is weak, the corporate earnings cycle slows and companies start trying to cut their way into meeting peak-cycle, peak-margin forward EPS estimates. In this respect, 4Q12 is very much like its 2007 counterpart.


Our updated US GIP model is included in the chart above.


Weekly European Monitor: Some Optimism for the Bailout Union

Takeaway: Wage reduction and deposits gains in the periphery are positive signs, however a united Eurozone under growth is far off.

-- For specific questions on anything Europe, please contact me at to set up a call.


Positions in Europe: Long German Bonds (BUNL)


Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed down -1.3% week-over-week vs +1.7% last week. Bottom performers: Austria -3.7%; Russia (RTSI) -3.7%; Ukraine -3.3%; Denmark -2.6%; Czech Republic -2.4%; Switzerland -2.3%; Germany -2.0%; France -2.0%; Hungary -2.0%.  Top performers:  Cyprus +11.7%; Slovakia +0.5%; Greece +0.4%. [Other: UK -1.5%].
  • FX:  The EUR/USD is down -0.68% week-over-week.  W/W Divergences: GBP/EUR +1.24%; DKK/EUR -0.00%; CHF/EUR -0.03; CZK/EUR -0.26%; PLN/EUR -0.78%; RUB/EUR -0.89%; HUF/EUR -1.08%; SEK/EUR -1.15%; NOK/EUR -1.19%.
  • Fixed Income:  The 10YR yield for sovereigns were mostly higher on the week across the core and periphery.  Greece rose the most week-over-week at +43bps to 17.21% (but is down -2% over the last month), followed by Portugal +37bps to 8.04%, Spain +33bps to 5.67% and Italy +16bps to 4.93%. Germany was a main outlier, falling -8bps to 1.52%.

Weekly European Monitor: Some Optimism for the Bailout Union - aa. yields


Weekly European Monitor: Some Optimism for the Bailout Union - aa. eur


Weekly European Monitor: Some Optimism for the Bailout Union - aa. cftc eur



Some Optimism for the Bailout Union:


“But let me tell you, if you are sick and you do not go to the doctor just because you are afraid that somebody will think that you are very sick, you will not get healthier.”

-Jacob Frenkel (Chairman of JPMorgan Chase International) with Tom Keene on 10/24/12


Frenkel really gets to the heart of the matter here with this quote. In assessing the fiscal condition of Eurozone sovereigns and banks there’s both an unwillingness of governments and banks to admit their imbalances, but also uneven or impractical expectations for minimizing these imbalances and/or asking for a bailout. Interestingly, and in response to missing their fiscal and economic targets, many governments, Eurocrats and central bankers alike have moved in recent weeks towards agreement (or acquiescence) that fiscal consolidation is not the answer to long-term health economically. This is flawed thinking in our view and as Frenkel points out will not return the sick patients to health. What’s key is to set realistic expectations and promote a balance between fiscal consolidation and growth.


As depressing and mindboggling as it can be following the conflicted action of Eurocrats to fix the region’s deep cracks, we came across a couple positive charts and data points this week to highlight.


The chart below comes from The Economist and shows changes in nominal compensation across Eurozone countries from the inception of the Eurozone until 2009 and 2009-12.


Weekly European Monitor: Some Optimism for the Bailout Union - EURO WAGE CHANGES


Clearly a couple key steps to getting the Eurozone back on track include dropping wages and prices to make companies and countries more competitive. As the chart points out, Germany was early (pre global downturn) in taking the pain through job reforms and limiting wage inflation. Consequently (among other factors), Germany has been in a stronger position since 2008. While the chart shows the compensation cuts taken across the periphery in the period 2009-12, clearly there’s more room to go on the downside, particularly from Spain and Portugal, while some progress has already taken place.


Another positive data point comes from bank deposits. ECB data showed this week that consumers and businesses put money back into Spanish and Greek banks in September. Private sector deposits at Spanish banks rose to €1.505T at the end of September from €1.492T a month earlier, reversing an August decline. In addition, Greek bank deposits rose to €160.1B from €158.7B, and of note is that Greek deposits have been relatively stable since the repeat elections in June.


We continue to expect Eurocrats to pull out all stops to maintain the Eurozone’s current fabric to maintain their jobs, live up to the promises of a united Europe, and prevent the domino risk from a country leaving or being forced out of the Union. While the data points above are encouraging signs, and throw in a willingness of the ECB to leverage its balance sheet, we still believe that the path towards a highly functional monetary and fiscal union is years away and that growth expectations for much of the region are too optimistic.


One fact to keep in mind when assessing the Eurozone is the black or shadow economy. It is in fact sizable (and significantly larger in the periphery) and worth consideration as you work through GDP expectations versus “health” on the ground.  The chart below from Bloomberg Briefs, is an estimate and a starting place for sizing this economic activity off the books.


Weekly European Monitor: Some Optimism for the Bailout Union - Europe Shadow Economy


The European Week Ahead:

Monday: Oct. Germany Consumer Price Index – Preliminary; Sep. UK Net Consumer Spending, Mortgage Approvals, M4 Money Supply; Sep. Spain Retail Sales


Tuesday: Angela Merkel meeting with Christine Lagarde; Oct. Eurozone Consumer Confidence – Final, Business Climate Indicator, Economic Confidence, Services Confidence; Oct. Germany Unemployment Data Released by Federal Labor Agency, Unemployment Change, Unemployment Rate; Oct. UK CBI Reported Sales, GfK Consumer Confidence Survey; Oct. Spain Consumer Price Index – Preliminary, Budget Balance; Sep. Spain Producer Price Index; 3Q Spain GDP – Preliminary


Wednesday: Spanish short-selling ban expires (expected to be extended until Feb), New EU short selling regulation takes effect; Oct. Eurozone CPI Estimate; Sep. Eurozone Unemployment Rate; Sep. Germany Retail Sales; Sep. France Producers Prices, Consumer Spending; Aug. Spain Total Housing Permits, Current Account; Oct. Italy CPI Preliminary; Sep. Italy Unemployment Rate – Preliminary, PPI; Aug. Greece Retail Sales


Thursday: Oct. UK Nationwide House Prices, PMI Manufacturing; Oct. Spain Manufacturing PMI; Greece Manufacturing PMI


Friday: Oct. Eurozone PMI Manufacturing – Final; Oct. Germany PMI Manufacturing – Final; Oct. UK PMI Construction; Oct. France, PMI Manufacturing – Final; Oct. Italy PMI Manufacturing, Budget Balance


Saturday/Sunday: G20 Fin Min Meeting in Mexico



Extended Calendar:

NOV 8  -              ECB Governing Council Meeting

NOV 8-9 -            AFME 7th Annual European Government Bond Conference in Brussels

NOV 12 –             Eurogroup Meeting in Brussels

NOV 15 –             Catalonia regional election in Spain

NOV 22 –             ECB Governing Council Meeting

NOV 27 –             AFME 4th Annual Spanish Funding Conference in Madrid

DEC 1 –               Beginning of the Russian Presidency of G20

DEC 3 –                Eurogroup Meeting in Brussels

DEC 6 –                ECB Governing Council Meeting

DEC 12-13 –          First public consultation between the Russian government, B20 Coalition and international civil society representatives on G20 agenda for 2013 (in Moscow)

DEC 20 –               ECB Governing and General Council Meeting

APR 2013 –            Parliamentary elections in Italy

MAY 2013 –           Presidential elections in Italy



Call Outs:

Eurozone - Govt. debt as % GDP rose to 90% in Q2, a new record high.


Italy - Former Italian Prime Minister Berlusconi has decided not to stand as a candidate for prime minister in next spring's elections. He said in a statement on Wednesday that his People of Liberty Party (PDL) plans to hold elections in December to choose his successor.


Germany/Greece - German Finance Minister Schaeuble said that his country may be willing to show some flexibility when it comes to Greece's fulfillment of its bailout terms if there are obstacles that are beyond the control of Athens. He noted that "If the troika should come to the conclusion that there are objective things that the Greeks cannot change on their own and if it makes suggestions for how to solve this, then we will consult on that in the German Bundestag and decide on them accordingly."


Spain - The Spanish government has reported to Eurostat that the deficit is going to come in worse than forecast at 7.2% - 7.4% of GDP versus agreed limit of 6.3% of GDP. 


Spain - Moody’s downgraded by one to two notches the ratings assigned to five Spanish regions. It said the decision to downgrade the ratings of the four Spanish regions of Andalucia (to Ba2 from Baa3), Castilla-La Mancha (to Ba3 from Ba2), Catalonia (to Ba3 from Ba1) and Murcia (to Ba3 from Ba1) was driven by the deterioration in their liquidity positions, as evidenced by their very limited cash reserves as of September 2012 and their significant reliance on short-term credit lines to fund operating needs. It added that Catalonia, Andalucia and Murcia face large debt redemptions in Q4 2012 when retail bonds issued in 2011 are due to mature.


Spain - Spanish lenders will transfer newly constructed housing assets into Spain's bad bank at an average discount of 52.2% of original book value, and used homes at an average discount of 47.5% (a report in Expansion was said to have put the haircuts at 54% and 48%, respectively, along with an 86% haircut for land).


Spain - Expansion, citing sources at the Economy Ministry, reported that the Spanish government will formally ask the EU for a bailout package of up to €60B to recapitalize its banking sector. The EU has agreed to make up to €100B available to Spain for the restructuring. The sources said that while Madrid believes that recapitalization needs are really in the ~€40B range, it wants to take a conservative approach.


Spain - Bloomberg, citing people familiar with the talks, reported that European authorities are pushing Bankia to impose losses on junior bondholders. The ECB and European Commission want investors, including preference shareholders, to swap their securities for new shares to reduce the cost to taxpayers. It added that forcing the retail investors who purchased preferred shares as part of publicity drives by banks makes it harder for the government to rebuild Bankia, which was nationalized in June.



Data Dump:


Eurozone Government Debt/GDP Ratio 87.3% in 2011 vs 85.4% in 2010

Eurozone M3 2.7% SEPT Y/Y vs 2.8% AUG

Eurozone PMI Manufacturing 45.3 OCT Prelim (exp. 46.5) vs 46.1 SEPT

Eurozone PMI Services 46.2 OCT Prelim (exp. 46.4) vs 46.1 SEPT

Eurozone Composite 45.8 OCT Prelim (exp. 46.5) vs 46.1 SEPT


Germany PMI Manufacturing 45.7 OCT Prelim (exp. 48) vs 47.4 SEPT

Germany PMI Services 49.3 OCT Prelim (exp. 50) vs 49.7 SEPT


Weekly European Monitor: Some Optimism for the Bailout Union - aa. pmi


Germany IFO Business Climate 100 OCT (exp. 101.6) vs 101.4 SEPT

Germany IFO Current Assessment 107.3 OCT (exp. 110) vs 110.3 SEPT

Germany IFO Expectations 93.2 OCT (exp. 93.6) vs 93.2 SEPT


Weekly European Monitor: Some Optimism for the Bailout Union - aa. ifo


Germany GfK Consumer Confidence 6.3 NOV vs 6.1 OCT

Germany Import Price Index 1.8% SEPT Y/Y vs 0.9% AUG


France PMI Manufacturing 43.5 OCT Prelim (exp. 44) vs 42.7 SEPT

France PMI Services 46.2 OCT Prelim (exp. 45.4) vs 45 SEPT

France Consumer Confidence 84 OCT (inline) vs 85 SEPT

France Business Survey -21 OCT vs -25 SEPT

France Own-Company Production Outlook -8 OCT vs -5 SEPT

France Production Outlook -56 OCT vs -52 SEPT
France Business Confidence 85 OCT vs 90 September


UK Q3 GDP Prelim 1.0% Q/Q (exp. +0.6%)  vs -0.4% in Q2 (officially ends double dip recession)   [0.0% Y/Y (exp. -0.5%) vs -0.5% in Q2]

UK CBI Business Optimism -12 OCT (exp. -2) vs -6 SEPT


Italy Business Confidence 87.6 OCT vs 88.3 September

Italy Economic Confidence 76.6 OCT vs 76 September

Italy Consumer Confidence 86.4 OCT (exp. 86.4) vs 86.2 SEPT

Italy Retail Sales -1.0% AUG Y/Y vs -3.2% JUL

Italy Hourly Wages 1.4% SEPT Y/Y vs 1.6% AUG


Spain Unemployment Rate 25.02% in Q3 vs 24.63 in Q2

Spain Mortgages on Houses -28.5% AUG Y/Y vs -17.5% JUL

Spain Mortgages-capital Loaned -33.2% AUG Y/Y vs -27.4% JUL

Spain Producer Prices 3.8% SEPT Y/Y vs 4.1% AUG


Switzerland KOF Swiss Leading Indicator 1.67 OCT vs 1.68 SEPT

Switzerland Money Supply M3 8.9% SEPT Y/Y vs 8.3% AUG


Sweden Consumer Confidence -2.9 OCT (exp. 1.7) vs 2.0 SEPT

Sweden Manufacturing Confidence -16 OCT (exp. -12) vs -11 September

Sweden Economic Tendency 92.3 OCT (exp 95) vs 95.6 SEPT

Sweden Household Lending 4.5% SEPT Y/Y vs 4.6% AUG

Sweden PPI -1.9% SEPT Y/Y vs -1.9% AUG


Finland Unemployment Rate 7.1% SEPT vs 7.3% AUG

Finland House Prices 1.8% in Q3 Y/Y vs 0.9% in Q2

Denmark Consumer Confidence -5.5 OCT vs -2.2 September


Netherlands Producer Confidence -7.7 OCT vs -6.7 SEPT

Netherlands Consumer Spending -2.0% AUG Y/Y vs -1.5% JUL

Netherlands House Price Index -7.9% SEPT Y/Y vs -8.0% AUG


Austria Industrial Production 3.5% AUG Y/Y vs 3.0% JUL

Ireland Property Prices -9.6% SEPT Y/Y vs -11.8% AUG


Czech Republic Business Confidence 2.6 OCT vs 2.7 SEPT

Czech Republic Consumer and Business Confidence -3.3 OCT vs -3.8 SEPT

Czech Republic Consumer Confidence -27 OCT vs -29.8 SEPT


Poland Retail Sales 3.1% SEPT Y/Y vs 5.8% AUG

Poland Unemployment Rate 12.4% SEPT vs 12.4% AUG

Slovakia Unemployment Rate 13.4% SEPT vs 13.2% AUG

Croatia Unemployment Rate 18.3% SEPT vs 17.7% AUG


Turkey Foreign Tourist Arrivals 1.7% SEPT Y/Y vs 9.7% AUG



Interest Rate Decisions:


(10/25) Sweden Riksbank Interest Rate UNCH at 1.25%


Matthew Hedrick

Senior Analyst

Early Look

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