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Praying For Courage

This note was originally published at 8am on December 17, 2012 for Hedgeye subscribers.

“Courage is rightly esteemed the first of human qualities because it guarantees all others.”

-Winston Churchill


That’s a quote from Churchill in “Great Contemporaries” that is cited by Paul Reid in the preamble to The Last Lion. “He believed in virtue and right … he taught himself well and created a code he could live by.” (page 23)


While I don’t think there are any words I can write to comfort families in my neighboring town of Newtown, CT, I just wanted to take time this morning to say that they are in our thoughts and prayers.


Back to the Global Macro Grind


US stocks closed down for the 2nd consecutive day on Friday, taking their 2-day correction to -1%. Despite the fanfare of “stocks being up YTD”, US stocks have been weak since mid-September. For Q4 of 2012, the SP500 and Nasdaq are down -1.9% and 4.7%, respectively.


Where do we go from here?


If it wasn’t for Apple (AAPL) and #EarningsSlowing (Schlumberger, the #3 component of the Energy Sector ETF (XLE) guided down on Friday), everything would be pseudo-fine this morning. But you can’t back those things out – they are big things.


So is the Global Growth Cycle – and while we aren’t raging bulls suggesting that growth is back, we are seeing the causal factor that stabilizes global economic growth (Commodity Price Deflation) start to take hold where it matters most – price and expectations.


On the expectations front, check out last week’s CFTC Futures and Options net long positioning in commodities:

  1. Total Net Long commodity contracts fell another -11% wk-over-wk to 802,817
  2. Net long commodity contracts continue to crash from their all-time high (SEP 2012), down -40%!
  3. Sugar contracts had their biggest 1 wk drop in 5 years at -68% last week to 6,056 contracts
  4. Wheat contracts plummeted -67% wk-over-wk to 11,219 net long contracts
  5. Oil net long positions were down -21% wk-over-wk (biggest drop since May)
  6. Farm Goods dropped another -10% in the aggregate to 484,088 net longs

While expected commodity deflation is crystal clear in the futures/options market at this point, prices and expectations don’t always agree. Gold is the not-so-shining example of that statement:

  1. Gold bets actually keep going up as the price goes down (price = down for 3 straight wks; net longs up for 4 of the last 5 wks)
  2. Net long contracts in Gold went up another +3% last week to 129,865
  3. Gold is down another -0.33% this morning to $1690, and remains bearish TRADE and TREND in our model

With Gold’s TRADE and TREND resistance overhead at $1709 and $1719, respectively, this makes for an interesting debate (ask Sales@Hedgeye.com for Darius Dale’s Gold research note from Friday if you didn’t read it). Long-term TAIL support of $1670 is the only big line left of support for Gold. If that holds, consensus bets on the net long side could be ok, but only if they own the right strikes.


If Gold’s TAIL breaks, watch-out below.


That’s how we thought about AAPL (see Chart of The Day, TAIL = $561). That’s how we think about TAIL risk. We have a line that moves dynamically as price/volume/volatility does, and we use that as our headlights. Is the probability of incremental risk rising or falling? That’s another way to simplify how we think about that. It’s not perfect, but it’s a consistent risk management code I can live by.


If you go back to the 3-factor Global Growth Model I’ve been calling out for the last 3 weeks:

  1. Chinese stocks (Shanghai Composite)
  2. Bond Yields (US Treasuries)
  3. Copper

There’s emerging evidence that supports a shift from global #GrowthSlowing to #GrowthStabilizing. We’re not wedded to this – we’re just courageous enough to embrace the market’s uncertainty and change our minds as markets suggest we do.


Bond Yields had a big move last week with the 10yr Treasury Yield not only rising from 1.62% to 1.70% on the week, but closing above my TREND line of 1.69%. This morning, the 10yr yield is up another 2 basis points to 1.72%, confirming the move.


That’s also bearish for Gold. Rising bond yields always have been bearish for Gold because they compete with the long-standing expectation of #GrowthSlowing embedded in both Bond market and Gold bubbles.


On Friday, that’s why I cut our Fixed Income asset allocation to 0%, raised our Global Equities allocation, and stayed with what’s served us well since mid-September (0% asset allocation to Commodities).


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1684-1709, $105.71-108.93, $79.41-79.99, $1.29-1.31, 1.69-1.76%, and 1408-1431, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Praying For Courage - Chart of the Day


Praying For Courage - Virtual Portfolio

The Week Ahead

The Economic Data calendar for the week of the 31st of December through the 4th of January is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - 44. calendar


Today we shorted gold via the SPDR Gold Trust ETF (GLD) at $160.71 a share at 9:45 AM EDT in our Real-Time Alerts. Gold's long-term TAIL line of resistance was tested and tried (and failed) on the bounce today. Our long-term view of the great Commodity Bubble remains a big Hedgeye Macro Theme.



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 80.48%
  • SHORT SIGNALS 78.35%

Fiscal Cliff: Sour Milk

What do milk and the fiscal cliff have in common? Quite a bit, actually. As it stands, our government sets a minimum price for milk creating a floor. This helps milk producers in their financial planning and the like. If Congress can’t come to an agreement over the fiscal cliff, the calculation mechanism for the minimum price will revert to a 1949 law that reflects milk production technology that is 6 decades obsolete, adjusted for inflation. 


This new floor would be about twice as much as the current market price. With a gallon of milk costing around $3.50 on average, consumers would see that double to $7 over time. That’s a meaningful impact to low income families and represents a total tax hike of $22.7 billion considering that per capita milk consumption is approximately 20.6 gallons per person per year. Retailers who rely on milk to drive store traffic will also feel the pain as well.


Fiscal Cliff: Sour Milk - Unknown

Weekly European Monitor: Into Year-End

Takeaway: Despite ECB intervention, economic policy uncertainty remains high into 2013, which should weigh on markets.

-- For specific questions on anything Europe, please contact me at to set up a call.


Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed down -0.8% week-over-week vs +0.6% last week. Bottom performers: Luxembourg -1.8%; Switzerland -1.8%; Spain -1.6%; Finland -1.6%; Belgium -1.4%; Portugal -1.2%; France -1.2%; Netherlands -0.9%.  Top performers:  Greece +7.6%; Romania +5.4%; Turkey +2.5%; Hungary +2.1%; Latvia +1.6%; Estonia +1.5%. [Other: UK -0.6%; Germany -0.5%].
  • FX:  The EUR/USD is up +0.23% week-over-week vs +0.11% last week.  W/W Divergences:  RUB/EUR +1.38%; SEK/EUR +0.63%; DKK/EUR +0.25%; CHF/EUR +0.21%; GBP/EUR -0.11%; NOK/EUR -0.23%; HUF/EUR -0.24%; ISK/EUR -1.35%.
  • Fixed Income:  The 10YR yields for sovereigns were largely flat week-on-week.

Weekly European Monitor: Into Year-End - 66 10yr yield



EUR/USD: Our TRADE range is $1.31 – 1.33

  • Our call - the EUR/USD will trade within our quantitative levels and reflect much of the daily headline risk (from Spain, Greece, and Italy in particular), however ECB President Mario Draghi’s September announcement that “the ECB is ready to do whatever it takes to preserve the euro” and the resolve of Eurocrats to maintain the Union will prevent levels falling anywhere near parity.
  • We expect a long road towards a fiscal union as states will be reluctant to give their sovereignty up to an external entity, which should limit the cross’ upside.
  • The cross could weaken alongside the ECB showing some willingness to cut the benchmark interest rate.

Weekly European Monitor: Into Year-End - 66 eur usd



Into Year-End:


As we conclude 2012 we reiterate the recent shift in our research call from #SlowingGrowth to #StabilizingGrowth.” While the fundamental data we track is far from showing a resounding inflection from a weak to negative trend, we are on the margin seeing slight improvement.  


We expect 2013 across much of Europe to be a continuation of 2012 – that is a struggle to form a fiscal union (despite marginal improvement in tying a bow around a modified “Banking Union”) and continued weak sovereign and banking pockets (in particular in Spain, Italy, Portugal, and France) that will influence the entire region from growth and stock market perspectives. 


We remain fully aware that “risk” has largely abated across Europe (especially the periphery) since the summer and particularly following Mario Draghi’s September ECB statement (9/6) to buy “unlimited” sovereign debt via the OMT program. Of note is the influence central banks can have on market performance. Here, Germany is worth a highlight, with the DAX climbing 29% YTD and 6% since the speech.


However, Europe’s issues are far from in the clear. We believe that Europe in 2013 will have to continue to be monitored on a day-by-day basis as the wild cards of government intervention remain high coupled with the tenuous nature of the union of uneven states bound currently only under monetary policy.


A look at the European Economic Policy Uncertainty Index from www.policyuncertainty.com tells quite a story of just how high the level of economic policy uncertainty still is in Europe despite the first European bailout (of Greece) way back in May 2009 and all the interventions since. We think this level of uncertainty should weigh on markets in 2013.


Weekly European Monitor: Into Year-End - 66. uncertainty



The European Week Ahead:


Monday:  Greece Oct. Retail Sales


Wednesday:  Eurozone Dec. PMI Manufacturing – Final; Germany Dec. PMI Manufacturing - Final; CPI – Preliminary; UK Dec. House Prices (Jan. 2-5); PMI Manufacturing; France Dec. PMI Manufacturing - Final; Spain Dec. CPI - Preliminary; PMI Manufacturing; Italy Dec. New Car Registrations; Budget Balance; PMI Manufacturing; Greece Manufacturing PMI


Thursday: Eurozone Nov. M3; Germany Dec. Unemployment; UK Dec. PMI Construction; Nov. Net Consumer Credit; Net Lending Sec. on Dwellings; Mortgage Approvals; M4 Money Supply; Spain Dec. Unemployment


Friday: Eurozone Dec. PMI Services and Composite - Final; CPI Estimate; Germany Dec. PMI Services – Final; UK Dec. Official Reserves; PMI Services; France Dec. PMI Services – Final; Spain Dec. PMI Services; Italy Dec. CPI - Preliminary; PMI Services



Call Outs:


Italy – Monti say he will not run in the Feb. 24-25 election but he’s available to lead a coalition committed to his reforms.


Deficits - El Pais said the European Commission will propose giving Spain, France and several other Eurozone states more time to cut their public deficits below the target limit of 3% of GDP. The report cited senior Spanish and EU sources that said France could get an extra year, while Spain would be given one or two more years beyond that date. It added that the Commission has agreed on a new Spanish deficit path of 7% of GDP this year and 6% in 2013, compared to current targets of 6.3% for this year and 4.5% for 2013.


Portugal - A report by the European Commission says weaker-than-expected economic growth and recent political setbacks mean Lisbon is at risk of missing even new, loosened deficit targets and must find an additional €4B in cuts in time for its next bailout review, scheduled for mid-February. The article added that although Portugal's bailout program runs through to the middle of 2014, it faces its most critical test in September when it must repay €5.8B in sovereign bonds without help from bailout lenders, which have already distributed €64B to Lisbon, or more than 80% of the total cash in the program.


Spain - Lloyds Banking Group said while Germany, Italy, France, the Netherlands and Belgium are forecast to lower the amount of debt they sell in 2013, Spain probably will raise its issuance to €110B. Morgan Stanley also said Spain will need to sell €111B of bonds in 2013, compared with the Spanish Treasury's provisional estimate for gross issuance of €90.4B. Lloyds' forecast for 2013 bond sales exceeds that of Spain's because it assumes the nation will miss this year's deficit target.


Italy - Italy’s centrist politicians (centre-left Democrats, Mr. Berlusconi's centre-right People of Liberty and the anti-establishment Five Star Movement) rallying behind Monti’s offer to lead alliance into Feb elections


Italy - Pier Luigi Bersani, says he would be ready to cede more sovereign powers to Brussels over government spending - in exchange for greater freedom to boost key economic sectors. Bersani, whose Democratic party has a strong lead in opinion polls ahead of February's elections, said he is open to supporting an ambitious German plan for EU control over national budgets, while stressing that it is essential for Europe to take more aggressive steps to revive economic growth. He added that he wants more equity and attention to social cohesion, and intends to continue Mr. Monti's drive for a deeper mutualization of European debt through the issuance of Eurobonds.



Data Dump:


France Q3 Final GDP +0.1% Q/Q vs initial +0.2% and expectation +0.2%   [0.0% Y/Y vs initial +0.2% and expectation +0.1%]


France Consumer Spending -0.2% NOV Y/Y vs -0.3% OCT

France Consumer Confidence 86 DEC vs 84 NOV

France Producer Prices 1.9% NOV Y/Y vs 2.8% OCT


Italy Business Confidence 88.9 DEC vs 88.5 NOV

Italy Economic Sentiment 75.4 DEC vs 76.5 NOV

Italy PPI 2.2% NOV Y/Y vs 2.6% OCT


UK BBA Loans for House Purchases 33634 NOV vs 33128 OCT

UK Hometrack Housing Survey -0.1% DEC M/M vs -0.1% NOV = fall for a 6 months   [-0.3% DEC Y/Y vs -0.3% NOV]


Spain Mortgages on House -14.4% OCT Y/Y vs -32.2% September

Spain Retail Sales -7.8% NOV Y/Y vs -8.4% OCT


Austria PPI 0.4% NOV Y/Y vs 0.7% OCT

Netherlands Producer Confidence -5.7 DEC vs -7.0 NOV

Ireland Property Prices -5.7% NOV Y/Y vs -8.1% OCT

Switzerland UBS Consumption Indicator 1.23 NOV vs 1.30 OCT


Sweden Wages (non-manual workers) 2.7% OCT Y/Y vs 2.7% September

Sweden Retail Sales 0.9% NOV Y/Y vs 1.1% OCT


Finland Business Confidence -15 DEC vs -13 NOV

Finland Consumer Confidence 3.5 DEC vs 1.0 NOV


Russia Manufacturing PMI 50 DEC vs 52.2 NOV

Russia PMI Services 56.1 DEC vs 57.1 NOV


Czech Republic Business Confidence 1.6 DEC vs 0.3 NOV

Czech Republic Consumer and Business Confidence -3.9 DEC vs -5 NOV

Czech Republic Business Confidence -26 DEC vs -26.3 NOV


Slovakia Consumer Confidence -38.9 DEC vs -33.1 NOV

Slovakia Industrial Confidence -10 DEC vs -15.7 NOV


Slovenia CPI 2.7% DEC Y/Y vs 2.3% NOV

Slovenia Retail Trade -6.1% NOV Y/Y vs -6.7% OCT


Matthew Hedrick

Senior Analyst

Milk Prices and the Fiscal Cliff

An interesting and unintended consequence of the fiscal cliff is the “milk cliff” (perhaps better thought of as a "milk mountain") – lost in the budget battle is the fact that there is a Senate ratified farm bill that has yet to make it to the floor of the House.  The farm bill covers multiple billions of dollars in various agricultural programs, including dairy.


As it currently stands, the government sets a price minimum for milk that supports the supply of a very important staple product for families and also affords some stability with respect to financial planning for milk producers.  Obviously, if supply and demand dictates a higher price than the government “floor”, producers happily sell on the open market for an incremental profit.  Our understanding is that unless a new deal is put in place, the calculation mechanism for the price floor will revert to a 1949 law that reflects milk production technology that is 6 decades obsolete, adjusted for inflation. 


We have seen various sources that suggest this would put the government in a position where it is forced to support a “floor” that will be about 2x the current market price.  The potential impact to consumers is a doubling, over time, of the current average cost of $3.50 for a gallon of milk.

While milk consumption has been on a steady decline since the 1960s, per capita milk consumption is still approximately 20.6 gallons per person per year (U.S. Department of Agriculture).  And while a doubling of the price represents “only” an annual price increase of $72 per person, the total “tax” hike is a highly regressive $22.7 billion.  Again, not the end of the world, and there are certainly ways for the government to delay and or mitigate the impact, but the reality is that the potential exists for consumers and producers to see a material disruption in the dairy market.


Finally, even with declining per capita consumption as a backdrop, retailers still rely on the milk category to drive traffic, so this development represents a marginal negative for food retailers as well.


Robert  Campagnino

Managing Director






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