Looking Backward

"The farther backward you can look, the farther forward you are likely to see."



If you think it’s more progressive to look forward than backward, we should take a walk in the bush together on Northern Ontario right before the black bears go into hibernation. My Dad and I recommend keeping your head on a swivel.


Looking back at sovereign debt cycles (Reinhart & Rogoff go back to the year 1500) helps us look forward at how ridiculous expectations are that Greece is going to be fixed.


I couldn’t make this up if I tried this morning, but this is what Greece Prime Minister, Antonis Samaras, had to say about the latest Greek debt deal: “A new day begins for all Greeks!”


Back to the Global Macro Grind


A new day in storytelling it is. World Equity markets initially rallied on the Greek “news”, then reversed, and quickly. Chinese stocks closed down -1.3% making fresh new lows, Greek stocks went from +1% to -1.5%, and US Equity Futures went from green to red.


If you’ve never played a shell game, this is how it works: now you see it, now you don’t. Here’s an abbreviated version of the Greek debt deal: €40B in debt is evaporated, then they get a fresh €44B in bailout debt within the next few months (€34.4 billion paid out in Dec and €9.3 billion in Q1 linked to MoU milestones agreed by Troika).


Great. Right? Yeah, just great. For those of you still looking backwards as you attempt to proactively risk manage forward, you can see what all this Greek noise has added up to over the years in Josefine Allain’s Chart of The Day:

  1. Greek stocks -1.5% on the news to 831 on the Athens Stock Exchange Index
  2. Greek stocks -7% from their lower long-term highs in October (894 on the Athex)
  3. Greek stocks -49% from the lower highs they established 2 years ago (November 2011)

To be fair, 2 years ago requires a decent look back. And, admittedly, I forget what the bailout rumors on Greece were 3 years ago. All I know is that whatever the rumors were, they were lies.


Martin Luther King, Jr. said “a lie cannot live.” And, if you have the risk management mandate to look forward far enough, that’s generally an accurate mean reversion assumption to make.


But, if you have an investment mandate to chase weekly and monthly performance bogeys, you’re probably ok to suspend disbelief and pretend the lies are realities. I read my kids fairy tales at bedtime too.


Reality: if you bought Greece (Athex Index) or Apple (AAPL) in November 2011 or September of 2012, you need to be up +96% and 19%, respectively, to get back to break-even. That’s just math.


Ultimately, betting on more of what has not worked (more debt financed government spending) is destroying the world’s long-term equity capital. That’s why I am wedded to looking back at LOWER-HIGHS in long-term prices. While this is a relatively new phenomenon to those who got plugged buying American or Greek stocks in 2007-2008, it’s been happening in Japan for 20 years.


Back to China (and Global #GrowthSlowing)…


Evidently those who were suggesting “China has bottomed” a few months ago were a little off on the timing. Last night’s -1.3% smack-down in the Shanghai Composite puts China 90 basis points away from going back into crash mode.


A crash, by our risk managed definition, is a price that’s made lower-highs on the order of 20% or more. Try it at home with your own money. I can promise you it will feel like what I just called it.


The Shanghai Composite is down -19.1% since #GrowthSlowing started, globally, in March of 2012. While it’s fun for passive Captain Stock Picker to talk about what the Dow is “up year-to-date”, real money that’s managed from a global macro perspective has been seeing lower-highs in prices in pretty much everything that matters since the March-April 2012 highs.


Here’s one really simple 3-factor Hedgeye Global Macro Growth Model to beam up onto your globally interconnected screens:

  1. CHINA (Shanghai Composite in a Bearish Formation = bearish TRADE, TREND, and TAIL)
  2. COPPER (Bearish Formation as well, down -11% from its Q112 lower-high)
  3. BONDS (US Treasuries in a Bullish Formation as Bond Yields are in a Bearish Formation)

Now, if my #OldWall competition wants to tell me that China, Copper, and Bond Yields are flashing a “back to growth” global economy, I’m happy to debate them live anywhere, anytime. Looking Backward, they’ll be forewarned that the Thunder Bay Bear will hold them accountable for missing the 2012 US and Global Growth slowdown just like they did in 2008.


Our immediate-term Risk Ranges (support and resistance) for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $109.91-111.48, $3.43-3.56, $80.05-80.61, $1.28-1.30, 1.54-1.68%, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Looking Backward - Athens2


Looking Backward - vp


The Macau Metro Monitor, November 27, 2012




Five slot parlours must either relocate or shut down under the new slot machine rules that took effect today.  Among the slot parlours affected, are the Yat Yuen Canidrome Slot Lounge and the Treasure Hunt Slot Lounge, both operated by SJM. The Mocha Lan Kwai Fong, Mocha Marina Plaza and Mocha Hotel Taipa Best Western clubs, operated by Mocha Clubs (MPEL), are the other three slot parlours impacted by the new rules.


The new rules stipulate that slot parlours can only be located inside five-star hotels, in non-residential buildings located within a 500-metre range of a casino or within a resort “not integrated in a densely populated area”.  The non-compliant slot parlours have one year to make the needed changes.  Angela Leong On Kei, executive director of SJM said that the gaming operator is studying new locations for its affected slot parlours.



The unemployment rate for August-October 2012 declined further to 1.9%, down by 0.1% point from the previous period (July-September).  In August-October 2012, total labor force was 353,300 and the labor force participation rate stood at 72.3%. Total employment reached 346,600, an increase of 2,400 over the previous period. 


This note was originally published at 8am on November 13, 2012 for Hedgeye subscribers.

“When you get to the end of your rope, tie a knot and hang on.”

-Franklin D. Roosevelt


Much ado has been made about the Fiscal Cliff in recent weeks and rightfully so. As we outlined in the Keynesian Cliff section of our 4Q12 Macro Themes presentation, it’s only the biggest fiscal retrenchment in US history; the latest report from the CBO suggests a complete plunge over the cliff would have an estimated impact of $503 billion and $684 billion in FY13 and FY14, respectively.


Moving along, the aforementioned “plunge” comes at a time where underlying real GDP growth has crept to a near stall speed, slowing to an adjusted +0.9-1.3% QoQ SAAR rate in 3Q12, as we detailed in our 10/26 note titled: “BREAKING DOWN THE US GDP REPORT: THE ODDS OF A RECESSION JUST INCREASED”.


Needless to say, going over the cliff – proverbial or actual – could actually tilt the US economy into recession into and through the event, joining what are highly likely to be confirmed recessions in the European Union (confirmation pending the 3Q GROWTH data) and Japan (confirmation pending the 4Q GROWTH data).


While it may be trivial to suggest that having three of the world’s four largest economies mired in recession at the same time is not a bullish catalyst, we’ll gladly do so at this time. Someone has to take ownership of flagging Global Macro risks before they happen.


This we know: corporate management teams and sell-side analysts will almost-universally blame any negative guidance and/or estimate revisions on the Fiscal Cliff in the coming weeks. Even if we don’t actually traverse the cliff in the US, the sell-side will simply find some other “exogenous” catalyst for everyone to attribute further bottom-up weakness to. They’ll have to; the latest survey data suggests hedge funds are still very exposed to the long side of equities.


For now at least, few beyond the Hedgeye Macro client base will point to mean reversion within asymmetrically stretched corporate profit margins, broad-based corporate cost cutting and/or the continued popping of Bubble #3 (commodities and mining CapEx) as the likely culprits.


Keynesian Cliff Update

It’s worth stressing that the US, Japan and China are each dealing with some version of their own Keynesian Cliff, as each country’s government debt-fueled GROWTH model faces political headwinds to varying degrees.


Below, we summarize where each country is in its respective process (email us if you’d like to engage in a deeper discussion regarding anything you see below):

  • US: This has morphed into nothing short of a Manic Media gong show despite the event just getting kicked off post last Tuesday’s election. The news flow in recent days has centered on the willingness to compromise on tax reform emanating from both President Obama and House Speaker John Boehner. Specifically, there seems to be a newfound willingness to extend the Bush-era tax cuts for the wealthy in exchange for “broadening the base” by tightening up loopholes and deductions. Outspoken fringe parties within both camps continue to be polarized on possible solutions, with unions largely in support of Obama playing “hardball” and not caving in to Republican demands and Senate Budget Committee chairwoman Patty Murray saying that the Democrats would agree to go over the cliff before agreeing on an unfair deal. Senate Minority Leader Mitch McConnell was recently out reaffirming the GOP mandate to “not raise taxes” and his lack of trust in the Obama administration, while some 60-80 Republican representatives have allegedly told Boehner that they would not support him on any backdoor deal struck with the White House without their consent.
  • Japan: In recent weeks, Japan’s Finance Minister Koriki Jojima has repeatedly reminded investors that the Japanese sovereign will run out of money in late NOV, rendering it unable to pay its bills without the ability to issue more debt – an ability that had been previously delayed by partisan protest of the FY12 deficit financing bill. This morning, we received some directionally positive news on this front as Japan’s two main political opposition parties (the LDP and New Komeito Party) agreed to approve the deficit financing legislation in exchange for the ruling DPJ agreeing to call snap elections by late DEC or early JAN – after the previous impasse slowed public expenditures enough to begin causing increasing disruptions in funding at the regional and local levels. It’s worth noting that Japan’s Real GDP GROWTH slowed in 3Q to -3.5% QoQ SAAR from 0.3% in 2Qwithout public consumption being a net drag on the economy in the quarter! Any further delays to ratifying the legislation would surely have equated to Japan reporting its second recession in the last two years when the 4Q12 GROWTH figures are published. It still might.
  • China: We continue to think the Chinese economy is in the later stages of a bottoming process, with GROWTH slowing for the better part of the last three years to levels more consistent with the revised political objectives of those atop the Chinese Communist Party leadership. Over the past ten years, China’s investment-fueled GROWTH model – a model perpetuated by GDP targets at the State, provincial and municipal levels – has accounted for 23.6% of global real GDP growth vs. only 9.8% in the ten years preceding the Hu-Wen administration. Heightening concerns about macroeconomic sustainability and general asset quality throughout the purposefully-repressed Chinese financial system amid broad-based vertical and horizontal malinvestment have compelled Chinese officials to focus intently on heading off excesses and rebalancing their economy – gradually scaling down the Keynesian Cliff in the process. That process appears to be nearing completion from a GROWTH rate perspective, but we continue to warn that it’s too early to put capital to work largely on the premise the Chinese economy has bottomed. In fact, since a large swath of pundits and analysts decided to lock arms and agree to agree that China bottomed on OCT 18, the Shanghai Composite has fallen another -3.9% and remains in a Bearish Formation on our quantitative factoring.

All told, we will continue to let the market tell us how to risk manage the confluence of the aforementioned POLICY scenarios.


Domestically speaking, a confirmed break out above the S&P 500’s 1,419 TREND line would be a signal to us that the “can” is likely to be sufficiently kicked down the road in a way that will not upset the bond market from a sovereign credit risk perspective.


A confirmed break down below the S&P 500’s TAIL line of 1,364 suggests Obama and Boehner are likely unable to lead their respective Parties to a grand compromise and/or they were able to and the bond market does not like the solution.


It’s worth noting that a domestic sovereign credit risk scare is not at all out of the band of probable outcomes – especially given the likely JAN ‘13 timing of the debt ceiling breach. That would put a summer of 2011-type scenario in play in our opinion. Per the latest commentary from credit ratings agency Fitch:


“Washington needs to put in place a credible deficit-reduction plan to underpin the economic recovery and confidence in the full faith and credit of the US… As reflected in the Negative Outlook on the rating, failure to avoid the fiscal cliff and raise the debt ceiling in a timely manner, as well as securing agreement on credible deficit reduction, would likely result in a rating downgrade in 2013.”


Best of luck out there handicapping the world’s increasingly compromised political event risk.


Our immediate-term risk ranges for Gold, Brent (Oil), US Dollar, EUR/USD, UST 10yr Yield, Copper and the SP500 are now, 1712-1714, 105.32-109.69, 80.56-80.44, 1.26-1.28, 1.58-1.71%, 3.41-3.49 and 1364-1403,  respectively.


Darius Dale

Senior Analyst





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TODAY’S S&P 500 SET-UP – November 27, 2012

As we look at today's setup for the S&P 500, the range is 39 points or 1.87% downside to 1380 and 0.90% upside to 1419.      















  • YIELD CURVE: 1.39 from 1.40

MACRO DATA POINTS (Bloomberg Estimates):

  • 6:30am: Fed’s Lockhart speaks in Berlin
  • 7:45am/8:55am: ICSC/Redbook weekly retail sales
  • 8:30am: Bernanke speaks, College Fed Challenge, Washington
  • 8:30am: Durable Goods Orders, Oct. est. -0.7% (prior 9.8%)
  • 9am: S&P/CS 20 City M/m SA, Sept. est. 0.4% (prior 0.49%)
  • 10am: Richmond Fed Manufact. Index, Nov., est. -9 (prior -7)
  • 10am: Consumer Confidence, Nov. est. 73.0 (prior 72.2)
  • 10am: House Price Index M/m, Sept. est. 0.4% (prior 0.7%)
  • 11am: Fed to purchase $1.5b-$2b notes due 2/15/23-2/15/31
  • 11:30am: U.S. to sell $40b 4-week bills
  • 1pm: U.S. to sell $35b 2-year notes
  • 1pm: House Price Purchase Index Q/q, 3Q, est. 1.4%
  • 4:30pm: API inventories
  • 5pm: Fed’s Potter speaks at NYU Stern School
  • 6pm: Fed’s Evans speaks in Toronto


    • House, Senate in session
    • Army Private First Class Bradley Manning, accused of releasing classified documents to WikiLeaks website, faces preliminary hearings in Fort Meade, Md.
    • IEA Executive Director Maria Van Der Hoeven holds briefing on 2012 World Energy Outlook, 4pm


  • European finance ministers eased the terms on emergency aid for Greece
  • Federal Reserve Bank of Dallas President Richard Fisher said he advocates limits on U.S. quantitative easing
  • Lehman Brothers agreed to sell its Archstone unit to Equity Residential and AvalonBay for $6.5bn, scrapping plans for IPO
  • Durable goods orders probably fell 0.7% in Oct.
  • Las Vegas Sands CEO Adelson to earn $1.2b from special div.
  • HP sued over losses from alleged fraud at Autonomy before buyout
  • Apple, LG Electronics face trial over Alcatel-Lucent patents
  • Fiscal cliff in U.S. raises risk of global recession, OECD says
  • U.K. GDP rose 1% in 3Q, matching median forecast
  • JPMorgan’s Jamie Dimon would be best to lead Treasury Dept. in financial crisis, Buffett says
  • Bombardier wins record $7.8b order from U.K.’s VistaJet
  • Italy borrowing costs fall at zero coupon 2014 auction
  • Rajat Gupta bid to remain free while appealing verdict opposed by U.S.


    • Ralcorp Holdings (RAH) 7am, $0.87
    • ADT (ADT) Pre-mkt, $0.43
    • Alimentation Couche Tard (ATD/B CN) 11am, $0.94
    • Analog Devices (ADI) 4pm, $0.57
    • Green Mountain Coffee Roasters (GMCR) 4pm, $0.48
    • PVH (PVH) 4:02pm, $2.29
    • Guidewire Software (GWRE) 4:05pm, $0.01
    • Copart (CPRT) After-mkt, $0.36


  • Oil Trades Near One-Week Low as Supply Counters Europe Optimism
  • Speculators Raise Wagers First Time in Seven Weeks: Commodities
  • Soybeans Advance to Two-Week High on South American Crop Concern
  • Copper Reaches Three-Week High as Greece Gets Eased Rescue Terms
  • Financing Deals May Keep Aluminum Premiums Elevated: Outlook
  • Gold Swings Between Gains and Declines as Greek Deal Reached
  • China Poised to Delay Corn Imports Until Price Drops, Group Says
  • Wheat Exports From India to Surge as Drought Cuts Global Harvest
  • Cocoa Swings Between Gains and Losses; Sugar, Coffee Climb
  • Rebar Falls for Second Day After Iron Ore Drops to One-Month Low
  • LNG Rising Most Since Fukushima Spurring 21% Golar Gain: Freight
  • Thailand to Surpass India as Top Rice Shipper on Stockpile Sales
  • Rebound in Shipping Fundamentals Unlikely Until 2H13: Outlook
  • Aluminum 2013 Demand Growth May Reach Mid-Single Digits: Outlook




EURO – shorting the Euro on the Greek “news” is the most obvious move to make here in FX; looking at re-shorting the Yen as well; long USD and long the long Bond (TLT) as bond yields couldn’t care less about Greece.





GREECE – up, up, then down; if you believe anything Greece, Spain, or Italy says, that’s an entirely different discussion; in the meantime, market’s don’t lie; politicians do – Greek stocks (Athex Index) -1% on the day now; down -7% and -48% from their OCT2012 and NOV2011 lower-highs, respectively.




CHINA – a new day in Chinese stocks brought fresh YTD lows; down -1.3% on the Greek “news” to 1991 on the Shanghai Comp, now only 90bps away from being back in crash mode (-19.1% from the #GrowthSlowing top in March).








The Hedgeye Macro Team




Lower-Highs: S&P 500 Levels, Refreshed

This note was originally published November 26, 2012 at 11:33 in Macro

POSITIONS: Long Bonds (TLT and FLAT), Short Industrials (XLI)


I sold our long Utilities (XLU) position this morning because it was up. When something is up, but fails to re-capture TREND support, I sell it. That discipline holds for the US stock market post last week’s no-volume bounce to lower-highs too.


Across our core risk management durations, here are the lines that matter to me most:

  1. Intermediate-term TREND resistance = 1419
  2. Immediate-term TRADE resistance = 1406
  3. Immediate-term TRADE support = 1379

In other words, as we make lower-highs, the probability of the YTD highs for US stocks for 2012 being in (September 14th) are rising.


As a result, with the TREND bearish, you’ll likely get paid to risk manage the range between 1364 (TAIL support) and 1419 (TREND resistance) proactively. In the meantime, the bond bull driven by #GrowthSlowing rages on.




Keith R. McCullough
Chief Executive Officer


Lower-Highs: S&P 500 Levels, Refreshed - SPX

Employment Growth To Slow?

The Chicago Fed National Activity Index is an index of 85 economic indicators that are aggregated into an index meant to project the overall level of US economic growth.  The Chicago Fed updated the National Activity Index this morning, coming in at -0.56, versus 0.00 last month. The Chicago Fed interpretation of the rolling 3 month index readings is below...

  1. A reading of 0.0 signals economy expanding at historical growth rate
  2. A reading of +0.7 signals a period of sustained increasing inflation
  3. Below -0.70 following a period of economic expansion signals the beginning of a recession
  4. Above -0.70 following a period of economic contraction signals the end of a recession


Employment Growth To Slow?  - Chicago Fed Explanation Slide normal


Our Healthcare team has isolated certain components of the Chicago Fed National Activity Index to build an employment forecasting model, which calls for employment growth to slow to 4Q12 and decelerate further in 1Q13.  If employment growth decelerates over the next 2 quarters as our model projects, we should expect an increased level of caution from management teams as they release and update 2013 outlooks.


Employment Growth To Slow?  - Employment Forecast 1Q13 Chicago Fed 11 26 12 normal

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