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America Reborn?

“America is the only country that is constantly being reborn.”

-William Knudsen, 1945


I’ll be turning my attention to a fresh new history book this weekend. I’m looking forward to that. I always do. It’s the only way I learn how to proactively manage for future risks – by contextualizing history’s behavioral patterns and economic cycles.


The aforementioned quote comes from the conclusion of the book I have been reviewing as of late – Freedom’s Forge. It’s an interesting quote. It probably makes an American feel good. As much as I respect Bill Knudsen, it’s completely inaccurate too.


How do you think the Chinese and Germans feel about that? If you’ve studied the last 400-500 years of economic history, you’ll recall that global economic hegemons are slowly, but constantly, changing. Before its war with Britain began in 1839, China had almost 1/3 of Global GDP. In the last 3 years, the USA has fallen from 23% to 21% of Global GDP. Where will it go from here?


Back to the Global Macro Grind


Now that the bull case for US stocks has gone from “growth is back” (Q112) to “but earnings are great” (Q212) to the government is going to save us from themselves (Q3/Q4 2012, Qe and #Keynesian Cliff), is America Reborn? As what?


If we really are asking to be reborn, maybe we should consider birth rates. Looking at America’s birth rates (officially released this morning), as US GDP as a % of Global GDP has fallen in the last 3 years, the USA’s birth rate has fallen -8% to a record low.


Sound familiar?


Japan has a negative population growth rate. And while the Keynesian Quacks who have been perpetuating unlimited Quantatitive Easing, Currency Devaluation, and Debt Financed Government Spending in Japan for the last 20 years doubt they’ve had a causal impact on the correlation between Japan’s economic decline and societal despair, to me at least, gravity is readily apparent.


So, let’s “get a deal”, kick the can, print some more money, and do more of that…


It’s sad to watch. And while I think I am doing my own part in being the change we need to see in our profession, my hope for an America “Reborn” on the principles of equality, liberty, and “free” markets is fleeting.


My hope for a Strong Dollar isn’t a risk management process either – and risk, of course, works both ways – so the best I can do is attempt to risk manage a tape that’s begging for more of what will ultimately make America look more like a European Social Democracy.


In terms of US Equity performance chasing, where is American risk trading into month-end?

  1. SP500 has rallied back from the thralls of its Q4 lows (on no volume) to down -4% from its Bernanke Top
  2. US Equity Volatility has been stamped right back down to its long-term TAIL risk zone of 14-15
  3. SP500 close > 1419 (TREND resistance) = bullish; a close below 1419 = bearish

All the while, despite the Dollar Debauchery (Cliff can kicking and Qe4 rumors have the US Dollar down for 2 weeks in a row), the US Treasury Bond market doesn’t care:

  1. UST 10yr Bond Yields down 7 basis points on the week, from 1.69% to 1.62%
  2. Treasury Bond Yields remain in a Bearish Formation, reflecting Global #GrowthSlowing expectations
  3. Yield Spread (10yr minus 2yr Yields) has compressed another 5 basis points wk-over-wk to +137bps wide

Now some still think the US stock market is the global economy, so just a reminder on our answer to that:

  1. CHINA – Shanghai Composite hit a fresh 3yr low this week; no China “stimulus” in sight
  2. COPPER – lower-highs continue since March (we shorted Copper yesterday)
  3. BOND YIELDS  - Treasuries are going to beat Corporate Bonds in November (Corporate #EarningsSlowing)

But, again – if you are more concerned about what the government can do for your year-end bonus in December, all we need to see are 2 things:

  1. Japanese Style Can Kicking on the #KeynesianCliff
  2. Rumors from Hilsenrath (WSJ) into the close on Bernanke doubling (heck, tripling) his monthly printing

Who would have thunk? The great American Republic of “free-market liberties” reborn as a casino of market expectations driven by what Pelosi and Boehner might say next. Think about it in historical context before you beg for more of it – then think about it again.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $109.88-111.49, $3.43-3.62, $79.94-80.58, $1.29-1.31, 1.57-1.67%, and 1, respectively.


Best of luck out there today and enjoy your weekend,



Keith R. McCullough
Chief Executive Officer


America Reborn? - 55.household


America Reborn? - 55. vp


TODAY’S S&P 500 SET-UP – November 30, 2012

As we look at today's setup for the S&P 500, the range is 13 points or 0.70% downside to 1406 and 0.22% upside to 1419.     















  • YIELD CURVE: 1.36 from 1.36
  • BONDS – Treasuries haven’t cared, at all, about the no volume performance chase in US Equities into another month end; #GrowthSlowing expectations continue to dominate both bond yields and fund flows; 10yr down from 1.69% at the start of the wk to 1.62%.

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Personal Income, Oct. est. 0.2% (prior 0.4%)
  • 8:30am: Personal Spending, Oct. est. 0.0% (prior 0.8%)
  • 8:30: PCE Deflator M/m, Oct. est. 0.1% (prior 0.4%)
  • 9am: NAPM-Milwaukee, Nov. est. 47.0 (prior 43.3)
  • 9:45am: Chicago Purchasing Mgr, Nov. est. 50.5 (prior 49.9)
  • 11am: Fed to buy $1.75b-$2.25b notes due 2/15/36-11/15/42
  • 1pm: Baker Hughes rig count
  • 5pm: Fed’s Stein, Kocherlakota at panel discussion about evaluating large-scale asset purchases at Boston Fed


    • House may vote on overhaul of U.S. work visa system, establish new kind of green card for foreign students who graduate in U.S. with advanced degrees in sci/tech
    • Deadline for Barclays to respond to FERC proposal for $470m in penalties for alleged market manipulation
    • American Gas Association holds a news conference to outline vision for natural gas in 2013, 9am
    • CFTC Chairman Gary Gensler speaks at agency’s 2012 Research Conference on key issues in derivatives markets
    • American Trucking Associations hosts final day of conference on expanding use of natural gas as a trucking fuel, with executives from UPS, Navistar, Swift


  • Supervalu says in active sale talks; Cerberus talks said to stall
  • TNT, UPS propose steps to satisfy EU competition requirements
  • Zynga loosens ties with Facebook in order to seek growth
  • MSCI index changes effective as of mkt close today
  • VeriSign to discuss .com registry agreement
  • Health Management to hold call on allegations on “60 Minutes”
  • ITC Judge Pender may release finding in HTC vs Apple case
  • U.S. regulators not granted access JPMorgan emails to investigate potential energy-market manipulation, judge rules
  • Steven Cohen testified to SEC on share sales, FT says
  • Univerity of Michigan professor linked to SAC Capital trades resigns
  • Hostess wins final bankruptcy court approval to shut down, unwind assets
  • Microsoft said to plan next Xbox console for 2013 holiday season


    • United Natural Foods (UNFI), 7:30am, $0.46
    • Genesco (GCO) 7:31am, $1.33
    • WhiteWave Foods (WWAV) Pre-Mkt, $0.17
    • Exco Technologies (XTC CN) 4:30pm, C$0.14


  • Oil Heads for First Monthly Gain Since August on Economic Growth
  • Sugar Traders Most Bearish in Two Months on Brazil: Commodities
  • Gas Pricing in U.K. Is No Libor as Probe Begins: Energy Markets
  • Codelco Seeing Solid Interest From China for Copper Contracts
  • Copper Advances to Five-Week High on China Growth Optimism
  • Shanghai Copper Stockpiles Drop to One-Month Low, Lead Increases
  • Gold Extends Monthly Gain in London as Physical Demand Improves
  • Felda Global Profit Slumps 40% on Lower Palm Prices, Production
  • Rebar Rises First Day in Five as Discount to Spot Spurs Buying
  • Aluminum Demand Growth in China Seen Least in More Than 10 Years
  • Hong Kong Bourse in $1 Billion Placement for LME Purchase
  • Asia to Boost West African Crude Imports to Most in Six Months
  • Mistry Predicts Palm Oil Bear Market in 2013 on Supply, Reserves
  • Fonterra Fund Surges Above Offer Price on Yield, Asia Links









GREEECE – remember where the bulls were at the beginning of the wk? Greece was the catalyst, then it failed – Athex going out on the lows for the wk, down -9% from the OCT lower-highs; European economic data this morning is just plain bad (Italy unemployment 11.1% = 13yr high; German and French Consumer Spending down y/y).





JAPAN – one way to fool some of the people that the economy is good is to devalue your currency; Japan gets that – Yen testing 7mth lows again this morning at $82.62 vs USD and that’s good for a +10% squeeze in the Nikkei off the OCT lows – all the while, life in Japan gets worse (Exports at 3yr lows, despite the debauchery).








The Hedgeye Macro Team




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Fish Stories

This note was originally published at 8am on November 16, 2012 for Hedgeye subscribers.

“Many men go fishing all of their lives without knowing that it is not fish they are after.”

-Henry David Thoreau


The thing with fishing trips is they end more often with stories of massive fish that were on the hook, rather than actual proof of the whopper.  The best evidence of catching a trophy fish is of course taking a picture of it.  My colleague Keith McCullough and I went fishing off of Long Island more than a decade ago with some buds, back when we were hedge fund pups, and caught a whopper.  Being the accountable market operators we are, we actually took a picture of it and it is featured in today’s Chart of the Day.


Managing money is a little like fishing.  You can tell tall tales of your performance, but at the end of the day you need to be able to show the results.  In that sense, I’m pretty certain 2012 it is going to be a year of great tales but few whoppers reeled into the boat.  Simply, this has not been a year in which navigating the global macro waters has been easy.


All year we’ve been spinning the tale of both slowing growth and declining corporate earnings, but for much of the year the market shrugged off these concerns.  Now, of course, these concerns are front and center again.  As always, the most dangerous markets of all are those that go up in the face of declining fundamentals because ultimately those markets will have further to fall. 


In the global macro waters this morning, there are a number of key points to consider:


1.   Chinese leadership – After much speculation, the final names of the seven gentlemen (down from nine) that will run China was announced.  The conclusion is that they are more “conservative”.  The key takeaways are that we are likely to see fewer human rights reforms and likely a more tepid pursuit of economic growth.   Under the outgoing leaders, China experienced a decade of 10% growth and passed both Japan and Germany to become the second largest economy in the world.  At the very least, that growth rate will decelerate.


2.   Japanese easing – The Japanese equity markets are up almost 2% this morning, but don’t confuse that move with economic growth.   The LDP is widely expected to win in the December 16th election and LDP President Abe put his cards on the table and is calling for “unlimited easing” to achieve a 2 – 3% inflation target.  Ironically, or not, one of our top ideas yesterday was shorting the Yen.  Email sales@hedgeye.com if you’d like to get our Senior Asia Analyst Darius Dale on the phone to discuss this thesis.


3.   American political dysfunction – Today, President Obama is set to meet with key Congressional leaders as formal negotiations on the fiscal cliff begins.  Obama unofficially began the negotiations on Wednesday when he said in a press conference that he expects tax increases for wealthy Americans to be part of any deal.  This is a much more aggressive stance than the House Republicans were willing to accept in the prior negotiations, so it is unlikely to be accepted this time either. 


Of the three macro points highlighted above, the most pressing concern from a current and future growth perspective is clearly the fiscal cliff, or as we call it The Keynesian Cliff. Unfortunately, the election did not solve much in the way of giving either party a mandate to solve this issue.  At the table today, we have exactly the same cast of characters: President Obama, Senator Harry Reid, Senator Mitch McConnell, Congresswoman Nancy Pelosi, and Congressman John Boehner.  As Yogi Berra would say:


“It’s déjà vu all over again.”


To the extent that the participants get away from a grand plan, it may actually be a positive for the markets.  Simply, there is an immediate term catalyst.  In six weeks, dramatic spending cuts and tax increases go into effect, to the tune of some $500 billion annualized.  If this short term catalyst can be taken off the table it is likely to at least calm equity markets.  This would of course imply rational action from Washington, D.C. 


Since it is unlikely, based on recent history, that the elected officials in Washington act rationally, perhaps they will act in a more bi-partisan spirit.  Senator McConnell’s opening statement seems to suggest that, too, is unlikely.  As the Senator stated:


“I was glad to hear the President’s focus on jobs and growth and his call for consensus. But there is no consensus on raising tax rates, which would undermine the jobs and growth we all believe are important to our economy. While I appreciate and share the President’s desire to put the election behind us, the fact is we still have yet to hear an actual plan from the President for addressing the great economic challenges we face. What’s needed now is a realistic and specific proposal from the President that can actually pass the Congress.”


It’s pretty clear, so far, that tax hikes on the rich won’t pass Congress, so President Obama’s opening gambit may ultimately be a sign that we are in for a very volatile next six weeks.


Our immediate-term risk ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1714-1748, $108.19-111.10, $3.41-3.47, $80.58-81.33, $1.26-1.28, 1.53-1.68%, and 1346-1364, respectively.


Enjoy the weekends with your families and all the best to Yale Football up in Cambridge!


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Fish Stories - Chart of the Day


Fish Stories - Virtual Portfolio

Crude Correlations

Our adage of "get the US dollar right and you'll get a lot of other things right" reigns true across multiple asset classes. With the US dollar appreciating in value since September of this year, Brent crude oil has gone the opposite way, dropping in value as the dollar rises. We believe there's room for further downside in crude oil but the US dollar will need to continue to strengthen.


Crude Correlations - 1yearoil


In-line with us but below the Street



"The second quarter was a period of achievements and challenges. Similar to other regional gaming operators, we experienced softening net revenues during September and October. Cost containment efforts led to increased adjusted EBITDA and margins at several of our properties; however we could not overcome the softness in our Mississippi business."


Virginia McDowell- CEO of ISLE



  • Miss in Mississippi; other regions performed well
  • Natchez entrance ramps have been repaired but still limited access to the property
  • Cape Girardeau - ramping up to ISLE's expectations
  • FQ2:  $2.5 million cost - sub-note offering in July
  • $75.5MM in cash; $1.18BN debt ($38MM outstanding in revolver, $300MM 7.75% senior notes, $350MM new subnotes, $4MM other debt)
  • FQ2:  debt increased by $30MM; Capex: $46MM.  
  • Leverage cap: increased a couple of tenths to 5.9x, should start to trickle down as Cape Girardeau ramps up
  • Borrowing capacity: $200MM; $1.3MM cap interest



  • Cap interest and pre-opening will go away when Nemacolin ramps
  • No Cape Girardeau in FQ2 results
  • $1 million in increased legal costs--will not continue going forward
  • Nemacolin budget went up since previous estimate occurred when construction was on hold waiting for regulatory decision
  • REIT conversion in the future? 
    • PENN may be an one-off situation
    • ISLE doesn't have the size or leverage to do something similar
  • Nemacolin feeder markets:  Morgantown, WV and Nemacolin
  • Credit amendments:  function of timing;  before amendment, there was an expectation that Nemacolin would be open by now.  Because of the delay in Nemacolin, ISLE needed more room in their credit agreements.
  • Capex guidance:  $80-90MM (for balance of fiscal year 2013)- $20-30MM will be for Nemacolin;
  • Vicksburg essentially done; renovation of Lake Charles will be done by end of FY 2013. 
  • Cash from Biloxi: ~$50MM
  • Target leverage:  around 5x