Housing: The Recovery Continues

The MBA Mortgage Purchase Applications Index rose 1% last week, the fifth consecutive week of gains for the index; purchase applications are now 12.8% higher than they were a year ago. Refinance applications rose 8% last week as rates fell to 3.39%. Demand to buy homes continues to rise rapidly on a week-over-week basis as recovery in housing strengthens.


Housing: The Recovery Continues - MBA apps2


Housing: The Recovery Continues - refi


Housing: The Recovery Continues - YoY

U.S. Monetary Policy & Fiscal Cliff; Expert Call with John Taylor

U.S. Monetary Policy & Fiscal Cliff; Expert Call with John Taylor - taylorcall2

We will be hosting an expert conference call Tuesday, December 18th, at 1:00pm EST featuring Professor John B. Taylor of Stanford University. Professor Taylor is a highly regarded scholar known for his research on the foundations of modern monetary theory and policy, which has been applied by central banks and financial market analysts around the world. In the call entitled, Will Monetary Policy Take Us Over the Fiscal Cliff?, Professor Taylor will discuss our nation's current fiscal situation and the policy actions that are essential to augment our economy.

Please dial in 5-10 minutes prior to the 1:00pm EST start time using the number provided below. A link to the presentation will be distributed before the call, if you have any further questions email .

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 485213#


  • Economic problems still remain detrimental to the nation's economic stability following the Presidential Election    
  • Continued policy to not deleverage has hindered economic growth
    • Fiscal, regulatory, and monetary
    • A drag will continue even if fiscal cliff is avoided
  • Risks are two sided
  • A change in policy will bring back strong growth and stability



  • Currently a Professor of Economics at Stanford University and a Senior Fellow in Economics at the Hoover Institution
  • Formerly served on the President's Council of Economic Advisers and as a member of the Congressional Budget Office's Panel of Economic Advisers
  • Served as Under Secretary of Treasury for International Affairs from 2001- 2005
  • Oversight of the International Monetary Fund and the World Bank
  • Responsible for coordinating financial policy with the G-7 countries
  • Accredited author, his latest the winner of the 2012 Hayek Prize, entitled: "First Principles: Five Keys to Restoring Americas' Prosperity"
  • Received numerous awards for his work as a researcher, public servant, and teacher
    • Awarded the Alexander Hamilton Award for his overall leadership at the U.S. Treasury, the Treasury Distinguished Service Award for designing and implementing the currency reforms in Iraq, and the Medal of the Republic of Uruguay for his work in resolving the 2002 financial crisis 


Bullish Reasoning

This note was originally published December 12, 2012 at 07:41 in Early Look

“Man has only one tool to fight error: reason.”

-Ludvig von Mises


The goal of this game isn’t to be bullish or bearish; it’s to be right. A long time ago, I’d start with my own pig-headed fundamental reasoning on why a market price should go up or down. Now I let the market tell me what to do. It’s a humbling learning process.


So is embracing uncertainty. And that’s really what we do here as a research and risk management team. Every day we wake-up with a clean sheet of paper in our notebooks. We’re always looking forward to markets surprising us with something bullish or bearish.


All the while, Old Wall Street is still trying to sell you certainty. ‘The SP500 will trade at this PE’ and ‘our year-end target is’ this or that. That’s as over as people assuming that market risk isn’t non-linear. Risk changes fast. It’s globally interconnected – and it goes both ways.


Back to the Global Macro Grind


Whether it was the German DAX breaking out to higher-highs yesterday or the SP500 busting a move back above our intermediate-term TREND line of 1419 resistance yesterday, bullish is as bullish does.


If the SP500 were to sell off from here and close back below 1419, I’d call that bearish. Everything that matters in our macro model occurs on the margin. It’s really not that complicated once you accept the deep simplicity of it all.


What’s the Bullish Reasoning behind the SP500 trading higher from here?

  1. Commodity Deflation = a global consumer tax cut (Consumption = 71% of the US Economy)
  2. Treasuries Making Lower-Highs = big opportunity for US Equity fund flows (which we haven’t seen in months)
  3. Hedge Fund Sentiment: our US Equity model is showing short interest at its highest level since September

I could probably make up 7 more reasons and give you a Top 10 sell-side looking list for 2013. Most of it would be storytelling about things no one has any business claiming certainty about. ‘Stocks are cheap, earnings have bottomed…’ blah, blah, blah.


Lets dig into points 1-3 a little deeper:


1.   CRB Commodities Index (19 Commodities) is down on the week (stocks are up) and has deflated -8.7% since the September Bernanke Money Printing Top. Oil is in a Bearish Formation (bearish TRADE, TREND, and TAIL). Food prices are getting smoked.


2.   Treasury Bonds finally just made their 1st lower-high all year (bouncing off 1.59% in the last week, the 10yr UST yield didn’t make a lower-low this time versus either the July or November closing lows of 1.44% and 1.57%, respectively). Bond bulls are giddy and fund flows to Fixed Income are bubbly (ex ETFs, US Equities had outflows of $4.1B last week).


3.   Hedge Fund behavorial factoring is fascinating right now. Plenty hedge funds have become beta. For whatever reason, they keep shorting low and covering high. Our composite short interest study shows short interest up in the most recent 2-wk period to 3.69% of total shares outstanding versus 3.64% last. Directionally that’s a contra-indicator that you want to fade alongside volatility.


To be fair to the bearish side of the trade, aggregate short interest isn’t as high as it was when hedge funds got squeezed out of their short positions in September (it was 3.78% then, and the Russell proceeded to drop 10% from there), but it’s just inside of it.


At the same time, as I pointed out in yesterday’s Early Look with the 6 Hedgeye Best Ideas (LONGS) we came up with in mid-November, it’s a lot easier buying stocks on red with the VIX is trading 17-19 than it should be at VIX 14 when hedge funds typically capitulate.


I’m certainly not trying to submit that I nailed every move. No one does. I just tend not to get plugged at tops and bottoms because I have made enough mistakes in my career to evolve what it is that I do. Fading Beta works.


Where do we go from here?


1.   The Fed  - that’s midday today, and it will matter, reflexively, because bonds would become immediate-term TRADE oversold at 1.68% on the 10yr, and stocks should signal an immediate-term TRADE overbought around 1432 in the SP500.


2.   The Macro Calendar – has 3 pending bullish catalysts on the Commodity Deflation front in the next 3 days (Import Prices, PPI, and CPI all release in the US Wednesday-Friday).


3.   Japan’s Election – that’s this weekend and the currency market (Yen hitting 8 month lows this morning as it front-runs the LDP ‘s Abe’s promise to do what Bernanke did, debauch the Japanese currency through money printing)


What’s bearish for the Yen is bullish for the Dollar. What’s bullish for the US Dollar is bullish for the US Consumer. What’s bullish for the US Consumer is bullish for Global Growth.


I know, now I am thinking too much on the fundamentals. So I’ll stop, and get back to letting the market tell me how to reason.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, German DAX, and the SP500 are now $1690-1719, $105.92-109.38, $3.60-3.71, $79.59-80.31, $1.29-1.31, 1.59-1.68%, 7451-7611, and 1419-1432, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bullish Reasoning - Chart of the Day


Bullish Reasoning - Virtual Portfolio

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DG: Smokes And Mirrors

Dollar General might have beat on EPS on yesterday morning’s earnings report, but the road ahead is a bumpy one that will be tough for the company in the near-term. The company saw consumables grow as a percent of sales in the third quarter but at a decelerating rate sequentially on a trailing twelve month basis. Q4 comps will be particularly difficult as one of Dollar General’s competitors, Family Dollar (FDO), has started offering tobacco products at its stores as a way to achieve its comp (something no other dollar store is doing at the moment). Lastly, DG’s inventories are outpacing sales growth this quarter; more bad news that makes next quarter a difficult one to manage.


DG: Smokes And Mirrors - DG CatMix

Moving The Markets

Client Talking Points

Getting It Right

It’s not about being bullish or bearish in the market; it’s about getting a trade right. After all, if you’re losing money, you’re obviously doing something wrong. Investors like to fight the market but in reality, they should go with the flow of the market and trade alongside it. For instance, we now see the S&P 500 is above our TREND line of resistance of 1419. That’s a bullish signal for us unless it sells off below 1419 and closes there - then it’s a bearish signal. We play the game as it was meant to be played and do things right here at Hedgeye. 

Commodity Corner

Commodity deflation continues to take center stage with the CRB Commodities Index down on the week and down -8.7% since the Bernanke Top (September 14). Oil continues its bearish formation on all three of our durations: TRADE, TREND and TAIL. Essentially, the big ol’ rally commodities experienced after multiple rounds of quantitative easing is coming to an end. 

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


“I love Gundlach, but I've heard the short yen trade for a while. I agree BOJ and Japanese govt likely to get more aggressive, but how much?” -@Commodity_Bull


“It is a far, far better thing to have a firm anchor in nonsense than to put out on the troubled sea of thought.” -John Kenneth Galbraith


MBA purchase applications up another +0.7% week-over-week.


TODAY’S S&P 500 SET-UP – December 12, 2012

As we look at today's setup for the S&P 500, the range is 13 points or 0.62% downside to 1419 and 0.29% upside to 1432.       















  • YIELD CURVE: 1.42 from 1.42
  • VIX closed at 15.57 1 day percent change of -2.99%
  • TREASURIES – finally bonds sold off yesterday (primarily because they were immediate-term TRADE overbought); 1.68% is an important line of resistance for the 10yr yield (inasmuch as 1.58% was support), so we’ll see where risk moves vs that today – risk ranges remain very tight and trade-able in stocks and bonds.

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Dec. 7 (prior 4.5%)
  • 8:30am: Import Price Index M/m, Nov. est. -0.5% (prior 0.5%)
  • 10:30am: DoE inventories
  • 11:30am: U.S. Treasury to sell $21b 10Y notes in reopening
  • 12:30pm: FOMC Rate Decision
  • 2pm: Monthly Budget Stmt, Nov., est. -$171b (prior -$137.3b)
  • 2:15pm: Bernanke holds news conference in Washington


    • House, Senate in session
    • Boeing Co.’s Jay McNerney announces Business Roundtable CEO economic outlook survey results on conference call, 11am
    • OPEC oil ministers meet in Vienna on production targets
    • House Financial Services panel holds a hearing on market implications of Dodd-Frank Act derivatives measures, 10am
    • FCC Chairman Julius Genachowski testifies on airwaves auctions before House Energy and Commerce panel, 10am
    • FCC votes on Dish Network plan to offer mobile phone service using airwaves it acquired last year, 1pm


  • Greece meets goal in debt buyback as nations seeks to unlock aid
  • U.S. probe of SAC’s trading said to be linked to 2010 SEC case
  • U.K. unemployment falls in sign of labor-market resilience
  • JPMorgan pressed by SEC on prop trading before London whale loss
  • SEC chief’s exit may stall Dodd-Frank rules including Volcker
  • Costco 1Q adj. EPS beats estimates, revenue in-line
  • Google said to be close to settlement with FTC over patents case
  • Goldman says its job in Dragon sale didn’t include due diligence
  • HSBC Mexico branches said by U.S. to be drug trafficker favorite
  • Williams bets $2.4b on pipeline venture that Chesapeake quit
  • Avon to cut about 1,500 positions as part of cost savings
  • Molycorp CEO Smith exits six months after buying Neo Material
  • Warburg said to hire Goldman to seek Bausch & Lomb sale
  • Teva’s Levin vows focused drug development as patents expire
  • Dish smartphone service approved by U.S. FCC in unanimous vote
  • Inditex profit gains on emerging-market sales, online growth
  • U.S. economic optimism highest in 3yrs: Bloomberg National Poll
  • OPEC oil ministers meet in Vienna on production targets
  • 3M to provide 2013 forecast; conference call at 9:30am
  • SolarCity said to delay IPO for day


    • Joy Global (JOY) 6am, $1.91 - Preview
    • Restoration Hardware (RH) After-mkt, $0.03


  • Crude Futures Advance as IEA Boosts Demand Forecast, OPEC Meets
  • Gold CEOs Told to Fix Slump With Investors Restless: Commodities
  • London’s Dominance in Shipping Seen Threatened by EU Regulation
  • OPEC Uniting to Keep Quota Steady as Oil Heads for Best Year
  • Copper Rises on Expectations Fed Will Move to Stoke U.S. Growth
  • Gold Trades Near One-Week High in London on Stimulus Speculation
  • Coffee Rises in London as Vietnamese Sales Slow; Sugar Declines
  • U.K. Natural Gas Demand Rises to 10-Month High; System Tightens
  • Coffee Farmers in Vietnam Curb Sales After Fast Harvest Progress
  • Refining Rebound Seen in Asia on Reliance Halt: Energy Markets
  • Italian Grain Imports Drop as Wheat and Corn Purchases Decline
  • Rebar Climbs to Seven-Week High as China Boosts Economic Growth
  • New Pipeline Could Raise Turkmen Exports to Iran: Outlook
  • IEA Boosts Global Oil Demand Forecasts on China Economic Rebound







GERMANY – power forward move by the Germans continues, well above the SEP closing highs (7451) to 7611, pulverizing the Dow at +30% YTD. German stocks are up +9.5% since mid November! Someone was either short Europe in size (we have no European short positions currently) or they’re just jamming this thing into yr end. Higher-highs are bullish, regardless.




JAPAN – before you get too excited about the no volume breakouts, remember that stock markets aren’t economies right now; Japan is a disaster (down -3.5% SAAR GDP and -6.5% y/y Export declines), but the Bernanke move of devaluing the Yen (new lows today) is something the machines have been trained to love via long stocks, for a trade – ends really badly, but no one cares.








The Hedgeye Macro Team




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