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Bursting Bubbles

Client Talking Points


Germany’s DAX is the new killing it. The index is hitting highs not seen since 2008; that includes holding above September closing highs (7451). That level has now become support instead of resistance. While the mainstream media is focused on the Dow, the DAX is where the real action is. Keep in mind that the DAX’s performance does not mean that the German economy is A-OK. Sure, it’s in better shape than our economy right now, but Germany has plenty of issues to deal with. The Eurozone crisis is still a crisis and is far from over.

Holler At The Dollar

Since 2007, we’ve had the pleasure of watching Hank Paulson, Tim Geithner and Ben Bernanke destroy the value of the US dollar. All this printing of money was supposed to fix all the bad stuff that happened to us but instead, we still have $3.50 a gallon gas, expensive food at the grocery store and bubbles all over the commodity space. Since the Bernanke Top (Sept. 14, 2012), we’ve seen the CRB Commodities Index drop -8.7% while the S&P 500 is only down -3.8% during the same time period. Our global macro theme of commodity bubbles deflating is coming true and strength is finally coming back to the US dollar, which has been up for 8 of the last 11 weeks.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

New unit openings in China and strength in YRI and US should offset China weakness in 1H13. China SRS growth is sensitive to the economy but new unit growth and ROIIC are likely to be supported by continuing growth of the consuming class in China. Looking at operating income by geography for YUM/MCD/SBUX, we can see that YUM is the most geographically diverse. This is manifest in YUM’s more stable EPS growth and price performance over the last 10 years.


Uncertainty in US from a macro perspective (jobless claims uptick) gives us pause from TRADE perspective although coffee prices will serve as a tailwind going forward. Company is becoming more complex, taking on risk as it acquires new brands. Longer-term, we view Starbucks, along with YUM, as one of the most attractive global growth stories in our space.


Margins are in a cycle trough as the USPS is on the brink. FDX is taking more share in the U.S. and following the recent $TNT news flow we think $UPS is in a tough spot.

Three for the Road


“If you were lucky enough to buy $AIG shares from the gov't at $32.50 last night in the follow-on, you're very happy right now.” -@GTWNJACK


“There is danger from all men. The only maxim of a free government ought to be to trust no man living with power to endanger the public liberty.” -John Adams


Baltic Dry Index falls by 3.9% to 900, the biggest drop since January.


The Macau Metro Monitor, December 11, 2012




The Venetian Macao and Sands Macau now accept payments via Alipay, China’s most widely used third-party online payment solution.  The service provider had more than 700 million registered accounts as of June, and began facilitating transactions from the Venetian Macao and Sands Macao websites on November 28.  Alipay is an affiliate of Alibaba Group.

“Offering Alipay as an additional payment option when booking our hotels online represents a fabulous convenience for our guests who book online from the mainland,” said David Sisk, COO of Sands China.



November new yuan loans totaled 522.9 BN yuan, missing estimates of 550 BN yuan.  M2 money supply grew a slower-than-expected 13.9% YoY in November.



Nasdaq-listed VIP room gaming promoter Asia Entertainment & Resources Ltd announced yesterday it intends to file a formal listing application with the Hong Kong Stock Exchange in the first half of 2013.    The company further announced yesterday that it has entered into engagement letters with professional advisors in order to complete the listing.


AERL promotes four VIP gaming rooms, all in Macau. They are located in StarWorld, Galaxy Macau, Venetian Macao and City of Dreams, respectively.  For the first 11 months of 2012, AERL’s rolling chip turnover was US$16.83 billion (MOP134.64 billion), down 7.4% YoY.




TODAY’S S&P 500 SET-UP – December 10, 2012

As we look at today's setup for the S&P 500, the range is 16 points or 0.96% downside to 1405 and 0.17% upside to 1421.    















  • YIELD CURVE: 1.40 from 1.38
  • VIX closed at 16.05 1 day percent change of 0.94%

MACRO DATA POINTS (Bloomberg Estimates):



  • Dollar General (DG) 7am, $0.60
  • Hudson’s Bay (HBC CN) Pre-mkt
  • Fed’s 2-day meeting begins
  • 7:30am: NFIB Small Business Optimism, Nov. (prior 92.5)
  • 7:45am/8:55am: ICSC/Redbook weekly retail sales
  • 8:30am: Trade Deficit, Oct., est. -$42.6b (prior -$41.5b)
  • 8:30am: Wasde report on agricultural commodities
  • 10am: Wholesale Inventories, Oct., est. 0.4% (prior 1.1%)
  • 10am: IBD/TIPP Economic Optimism, Dec. est., 50.0 (prior 48.6)
  • 10am: JOLTs Job Openings, Oct. (prior 3.561m)
  • 11am: Fed to buy $1b-$1.5b notes due 1/15/19-2/15/42
  • 1:30am: U.S. Treasury to sell 4W, $25b 52W bills
  • 1pm: U.S. Treasury to sell $32b 3Y notes
  • 4:30pm: API inventories


    • House, Senate in session
    • Bunge CEO Alberto Weisser speaks at Johns Hopkins Univ. on global issues in agriculture, Noon
    • Weekly release of FDA warning letters
    • ITC issues final ruling on whether to uphold penalties on imports of washing machines from Korea, Mexico, 9:30am
    • Global Intellectual Property Center hosts U.S. Patent and Trademark Office intellectual property attaches from around world to discuss enforcement of IP rights outside U.S., 9:30am


  • Fed seen expanding assets to $4t with Treasury buying
  • U.S. fiscal dispute shows sign of thaw before year-end deadline
  • U.S. Treasury to sell last 234.2m shares in AIG at sixth offering
  • Blackstone said to seek over $2b for Asia property
  • BofA gets judge’s approval to proceed with Taylor Bean fraud suit
  • HSBC to pay $1.92b to settle U.S. probes of laundering
  • ThyssenKrupp scraps dividend after $4.7b writedown at Americas unit
  • Diageo ends talks with Jb Y Compania, Lanceros on Cuervo brand
  • AMR’s Horton open to private-equity funding for bankruptcy exit
  • Spain borrowing costs fall as Treasury boosts 2013 prefunding
  • Texas Instruments sees 4Q sales in line with estimates


OIL – Bernanke’s Bubbles look like bubbles in the rear view mirror more and more by the day; CRB Index is down -8.7% from the Bernanke Top (SEP14) and Oil continues in a Bearish Formation as food prices deflate as well. All very good developments for global consumption.

  • Oil Rebounds From One-Month Low on German Investor Confidence
  • Tightest Corn Crop Since ‘74 as Goldman Sees Rally: Commodities
  • Contango in Gasoil Reaches Longest in 16 Months: Energy Markets
  • Wheat Reaches 8-Week Low on Signs of Waning U.S. Export Demand
  • Gold Halts Three-Day Advance as Investors Await Fed Meeting
  • Copper Slides as Investors Await Fed’s U.S. Economic Forecasts
  • Sugar Rises on Signs of Processor Demand in Brazil; Cocoa Falls
  • OPEC November Crude Output at Lowest in One Year as Saudis Cut
  • Russia Cuts Grain Exports, Seen by SovEcon Raising 2013 Imports
  • Iron Ore Climbs to Four-Month High as China Growth Boosts Demand
  • ThyssenKrupp Cancels Dividend After $4.7 Billion Writedown
  • Scorpio Seen Rising as Tanker Rates Gain Most Since ’08: Freight
  • Cooking Oil Imports by India Seen Dropping on Reserves, New Crop
  • Angola Says Only Iraq, Saudi Arabia in Race for Top OPEC Job







GERMANY – impressive is as impressive does; the DAX shrugged off the Italians yesterday and has held its ahead above the SEP closing highs (7451); that level was resistance – now its support, as the DAX crushes the Dow for 2012 YTD.




CHINA – Shanghai Comp failed to follow through 2095 TREND resistance overnight after Chinese Yuan based loans continued to surprise on the downside (523B in loans for NOV = down -7% y/y); don’t expect them to do what we do – reflating the credit bubble not in their plan, yet.








The Hedgeye Macro Team




Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

It Happened

“It would all be as if nothing had happened.”

-Michael Sallah & Mitch Weiss


That’s a quote from the end of the book I cited in last week’s Early Look,  Tiger ForceA True Story of Men and War. It’s a true story about American war crimes in Vietnam (Pulitzer Prize, 2004). Sadly, it’s how a lot of cover up stories involving the #PoliticalClass end.


“The Pentagon had decided that is was better to cover up what had happened. Let the country move on… there would be no press conferences. There would be nothing at all… and so it was.” (page 306)


To be fair, maybe our central planning overlords do know what’s best for the country. But maybe they don’t. All I know is that whether it’s Bernanke, Geithner, or Petraeus – as Canadian-American Patriots, it’s our responsibility to keep questioning.


Back to the Global Macro Grind


I’ve been questioning Bernanke and Geithner’s Keynesian Policy To Inflate via US Dollar Debauchery for 6 years. Even if they refuse to acknowledge what has happened publicly, proving this out has been a daily dog fight – and I’m proud to have done the work.


All-time highs in food and energy prices? It Happened in the last 6 years. It all happened under Bernanke and Geithner’s watch. Causality was both fiscal (debt/deficit spending) and monetary (money printing). They both deserve their #FairShare of the blame.


As Bernanke and Paulson promised “shock and awe” rate cuts and bank bailouts, the all-time high in Oil prices happened during the economic crisis (2008). Think about that. Then think about why Gold and Food prices hit their all-time highs in 2011 and 2012, respectively as net long positions in futures & options commodity positions hit all-time highs (twice) in 2012.


All-time is a long-time. It Happened.


Now, deflating these policy mistakes, and popping the bubble in commodity price expectations, perversely, becomes the American and Global consumer’s greatest opportunity to get a real-time tax cut. I like that. If you don’t take car service to D.C. to work every day on US tax moneys and have all your meals bought and paid for, you should too.


From a Global Macro perspective, I also like the following positions:

  1. LONG Consumption
  2. SHORT Commodities

Perma marketers can attempt to label me whatever they want. Our clients only pay us if A) we are helping them avoid blowups and B) we are helping them get things right. Never mistake “negativity” with reality. Reality is that, since we launched our Bernanke’s Bubbles Theme, it started happening – the commodity bubble has started to pop, faster, and louder.


Since Bernanke’s Top (September 14th, 2012 when he decided to print to infinity and beyond), the CRB Commodities Index (19 commodity basket) is down -8.7%. That compares with the SP500 that is now down only -3.8%. Some global equity markets (like Germany’s DAX, which is crushing the Dow YTD) are now up versus their early September highs.


The US Dollar, of course, has been up for 8 of the 11 weeks since Bernanke’s last decision. Tomorrow’s FOMC meeting offers him an opportunity to get out of the way. We’ll see if he has the political spine to do that now that the election is out of the way.


All the while, you have had great buying opportunities presented by the #PoliticalClass and their cliff babbling along the way. Our critics will be the last to remind you that on the Hedgeye Best Ideas Conference Call on November 15, 2012, 6 of our 8 Best Ideas were actually longs. Timing matters. And we have a great deal of pride focusing on it.


To review, our 6 LONG US Equity Ideas have returned, on average, +9.9% (versus SP500 +5% off the lows) during the same period:

  1. International Game Technology (IGT) – Todd Jordan idea = +14.3%
  2. C&J Energy Services (CJES) – Kevin Kaiser idea = +12.4%
  3. Jack in The Box (JACK) – Howard Penney idea = +10.4%
  4. Paccar (PCAR) – Jay Van Sciver idea = +6.5%
  5. Nike (NKE) – Brian McGough idea = +8.0%
  6. TCF Financial (TCB) – Josh Steiner idea = +4.8%

That’s not a victory lap. That’s just the score. In what most would agree is a tough alpha generation environment, It Happened.


And I think, for me at least, it’s really important to highlight all the great work the men and women who grind it out for us every day do. They are both resilient and adaptive. They are also transparent and accountable. And for that, I am thankful to have the opportunity to work alongside them each and every day.


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, $105.99-109.26, $3.62-3.72, $80.01-80.51, $1.28-1.30, 1.59-1.65%, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


It Happened - Chart of the Day


It Happened - Virtual Portfolio

Looking Backward

This note was originally published at 8am on November 27, 2012 for Hedgeye subscribers.

"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 $1728-1748, $109.91-111.48, $3.43-3.56, $80.05-80.61, $1.28-1.30, 1.54-1.68%, and 1380-1419, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Looking Backward - Athens2


Looking Backward - vp

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%