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This note was originally published at 8am on November 12, 2012 for Hedgeye subscribers.

“It wasn’t where he started, but where he’d finished, that mattered.”

-Arthur Herman, Freedom’s Forge


To be clear, in building the vision for My Business, I’m not finished – I’m just getting started. No matter what your political and/or economic view this morning, trust in yourself, family, and firm is what is going to help you build something that lasts.

Especially in this profession, where many are hyper-focused on what they get paid today, we can all learn a lot from the aforementioned quote in Freedom’s Forge about Bill Knudsen. That’s how he thought about the opportunity to compete with Ford. That’s how I think about competing with the Old Wall.

“What were you getting paid at Ford?” “Fifty thousand dollars a year,” came the answer. So Sloan started him on February 23, 1922 at six thousand dollars a year. Knudsen didn’t care.” (page 28) In 1922, Bill Knudsen took over “GM’s lowest-priced, but also least profitable, division.” It was called Chevrolet.

Back to the Global Macro Grind

With Global Equity markets down hard last week (USA -2.5%, China -2.3%, Europe -1.7%), all of a sudden November of 2007 doesn’t seem so far away. Remember, that’s when the global corporate revenue and #EarningsSlowing cycle started last time. In November of 2007, the SP500 was down -4.4%. It wasn’t all about “the cliff” then – it isn’t now, either.

I’m not suggesting the Fiscal Cliff doesn’t matter this time – I’m simply reminding you that:

A)     It’s not new and should have been proactively prepared for (it wasn’t)  

B)      It’s the outcome of a much larger causal factor that the country is begging for more of (Keynesian Policy)

C)      It’s not happening in a vacuum; both Japan and Europe are going off #KeynesianCliffs of their own

This is why we warned our clients of the #KeynesianCliff (Hedgeye Macro Theme #3) before it became the perma-bull marketers latest crutch. This is also why we’ll remind you that Japan reporting a -3.5% QoQ SAAR GDP for Q3 of 2012 (Nikkei down -15.4% since #GrowthSlowing started, globally, in March) is how it ends. Japanese stocks have been making lower-highs for 20 years.

Deficit spending and money printing has a very causal relationship with long-term #GrowthSlowing. Kicking this can down the road for the sake of a “market pop” is the dumbest thing Americans can hope for right now. We need to start anew by taking the pain, so that we our kids and theirs can finish strong. That’s what matters.

What doesn’t matter to the 97% of people who don’t get paid by them is creating asset bubbles that inflate, then pop. To review, there have been 3 Major Policy Bubbles perpetuated by Greenspan/Bernanke in the last 15 years:

  1. Tech
  2. Housing
  3. Commodities

Bubble#3 (our 2nd Hedgeye Macro Theme for Q412) remains Commodities. Looking at last week’s CFTC (Commodities and Futures Exchange) data, here’s what that looks like in real-time:

  1. CFTC net long contracts down -11% wk-over-wk (biggest weekly drop since June) to 931,048 futures/options contracts
  2. CFTC net long contracts down -31% from The Bernanke Top we’ve been focused since mid-September 2012
  3. Copper contracts down -70% last week to 2,077!

Now the Doctor (Copper) has been signaling #GrowthSlowing in our multi-factor, multi-duration, risk management model since February of 2012 (see Chart of The Day). Seeing copper implode since then is not new – but it doesn’t mean it has stopped.

On that score, last week’s commodity price moves highlight what I think summarizes the overall Q412 beta environment for stocks and commodities in particular:

  1. Copper = down another -1.1% wk-over-wk to $3.44/lb (bearish on all 3 of our core durations: TRADE/TREND/TAIL)
  2. Gold = up +3.4% wk-over-wk to $1730/oz (recapturing intermediate-term TREND support of $1702/oz)

To me, that’s demand slowing (Copper falling) versus long-term growth fear (Gold rising). Don’t forget that people choosing to invest in Gold are explicitly making a decision to invest in a relatively unproductive asset instead of high-growth companies like Hedgeye.

These people who are running around like chickens with their heads cut off saying the stock market falling is all about “the cliff” should also be reminded that Gold was down for 4 consecutive weeks into the US Election.  

Is Obama’s win bullish for Gold? Is it bearish for growth? Ask the bond market. If there’s so much “credit risk” now associated with “the cliff”, why are US Treasury Yields falling (and not rising like they did in Europe)?

If you know the answers to all these questions, good – because I don’t. All I know is that after blaming Bush for where he started, President Obama has a wide open opportunity to change growth expectations in this country. Where he finishes matters too.

My immediate-term risk ranges for Gold, Brent (Oil), US Dollar, EUR/USD, UST 10yr Yield, Copper, and the SP500 are now $1712-1745, $105.22-109.72, $80.39-81.28, $1.26-1.28, 1.60-1.71%, $3.41-3.50, and 1364-1406, respectively.

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

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