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Market Relationships

“Zeus ordained that only in sorrow and in suffering do we find wisdom’s way . . . by suffering we shall gain understanding.”

-AESCHYLUS, Agamemnon


A week ago I had memorable birthday and while I’m not quite forty, I’m getting pretty darn close.  As usual, my friends and family delivered in helping me celebrate.  Keith and his wife Laura invited me out to their house for a fine birthday dinner.  I also received a few books, including one called, “How to Be an Adult in Relationships: The Five Key Lessons to Mindful Loving.”


I think the person that sent me this book meant it as a gag gift, although I’m sure, as with most jest, there was some truth imbedded in the gift. Setting aside an analysis of my relationship history, I think we can all agree on the fact that relationships, and fruitful ones, are really the key to success and happiness in life.  As stock market operators, we all have a relationship with a gentleman called Mr. Market.


The quote at the start of this note is actually very applicable to the stock market.  The best lessons learned from investing typically come from the mistakes.  Further, as my colleague and Hedgeye restaurant Sector Head tweeted last night:


“$YUM is the annual reminder of how humbling this job actually is . . .”


In this instance, Howard Penney was referring to the results from Yum Brands, a company he had been favorably disposed to going into the quarter, which provided disappointing guidance based on worse than expected results in China.  Howard gets many more calls right than he gets wrong (see our 300%+ gain in Starbucks as evidence), but his point on $YUM is a good one – just when we are least expecting it the market humbles us. 


Speaking of humbling markets, the European sovereign debt market is once again becoming relevant.  In the Chart of the Day today, we look at the Spanish 10-year over the last three weeks.  On January 14th, the Spanish 10-year was yielding 4.95% and today is yielding 5.44%.  In the last three weeks, Spanish yields have spiked 10%. 


If I were an investor in Spanish and European sovereign debt generally, I’d probably be demanding a higher yield for the inherent acceleration in risk over the last few weeks.  First, Spanish Prime Minister Mariano Rajoy has been under attack for purportedly taking secret payments over a more than ten year period, with the evidence seemingly well documented.  Secondly, ahead of the EU Summit this week, French President Francois Hollande stated:


“A monetary zone must have an exchange rate policy or else it ends up subjected to an exchange rate that does not match the true state of its economy.”


The translation from French is simply this: Hollande does not believe the market should determine the price of the Euro.


The economic data out of Europe this morning will likely only serve to bolster Hollande’s arguments.  The Eurozone PMI Services numbers were reported this number and on aggregate January came in at 48.6 versus 47.8.  There were a number of positive surprises with the U.K. coming in at 51.5 and Germany at 55.7.  Unfortunately, for Hollande and his government’s policies France was a disaster at 43.6.  The other disaster in European economic data was December retail sales down -3.4% year-over-year. 


On one hand, Hollande is correct that with both Japan and the United States actively devaluing their currencies, Europe will be at a disadvantage in terms of exports if they don’t follow suit.  Unfortunately, like most wars, this ongoing currency is destined to end poorly.  The reality remains that no country in the history of the world has devalued its way to prosperity, though the Japanese have certainly tried.


On that last point, this morning the Japanese are once again upping the devaluation ante.  Bank of Japan Governor Shirakawa announced late yesterday that he would be leaving office on March 19th, a full three weeks earlier than planned.  At the same, two deputy governors will be leaving office.  It seems Prime Minister Abe realizes that political life in Japan is short, and that he needs new leadership at the Bank of Japan to aid in implementing his inflationary policies as soon as possible.  And so, the currency wars continue.


The question related to Japan is just how aggressive will the government get in terms of devaluing.  As my colleague Darius Dale wrote yesterday:


“The Japanese yen, which is down roughly -16% since we initially outlined our bearish bias back on 9/27, continues to get Taro Aso’d.


The latest developmental jawboning on this front has come in the form of Finance Minster Aso’s recent remarks that the Japanese government is taking a page out of its own historical playbook by pursuing strong anti-deflation policies:


“There is no one in the government, the bureaucracy or the BOJ who has experience in anti-deflation policy. We can only learn from history.”


-Taro Aso, 2/3/13


The history lesson Mr. Aso is referring to is Depression-era Japanese Finance Minster Korekiyo Takahashi’s mandating of the BOJ to directly monetize Japanese sovereign debt (as opposed to open-market operations), which began in 1932 and continued for the next 14 years.


During this era, the ratio of JGB issuance financed directly by the BOJ peaked at 89.6% in 1933 and remained elevated throughout the program. This monetization strategy assisted in doubling JGB issuance and boosting Japanese public expenditures by a whopping +34% in 1932 alone.”


The short answer is that Japan can get a lot more aggressive and this won’t be positive for the Yen, despite the recent sharp correction.  If you’d like to set up a time for us to do a briefing with you or your firm on the risks associated with Japan, please email .  Japan is a risk that you should keep front and center because in this day and age, all global markets are related.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, 10yr UST Yield, and the SP500 are now $1, $114.55-116.88, $79.02-79.83, $1.34-1.36, 90.77-93.22, 1.91-2.10%, and 1, respectively.


Best of luck out there today,


Daryl G. Jones

Director of Research


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The Macau Metro Monitor, February 5, 2013




Local authorities are forecasting the number of border crossings during the Lunar New Year holiday period to increase by 5 to 8%.  Fuelling the increase is the opening in late December of the Gongbei railway station, the last stop of the high-speed railway link connecting Zhuhai to Guangzhou.


Last year, the police recorded a total of around 2.5 million border crossings during the Lunar New Year holiday period, including tourists, residents, non-resident workers and others.  To handle the peak in border crossings, the Public Security Police has suspended the holidays of all frontline officers and deployed extra staff at the checkpoints, TDM reported.



The Director of the Chinese Liaison Office in Macau Bai Zhijian said the central government would help Macau to determine how many visitors it can accommodate, which he believed should be done as soon as possible and denied Beijing is playing its visa restriction cards by loosening or tightening the border control targeting the gaming industry. 


Asked if that means visa restriction is looming on the horizon, he said “it all depends on Macau.  If they think there’re too many people, then we can make it fewer, but that doesn’t mean we’re targeting the gaming industry, or testing the water by relaxing the restrictions at one time and tightening it at another.


TODAY’S S&P 500 SET-UP – February 5, 2013

As we look at today's setup for the S&P 500, the range is 24 points or 0.45% downside to 1489 and 1.16% upside to 1513.             














  • YIELD CURVE: 1.74 from 1.71
  • VIX  closed at 14.67 1 day percent change of 13.72%

MACRO DATA POINTS (Bloomberg Estimates):


  • 6:30am: ESM to sell as much as EUR2b 91D bills
  • 7:45am/8:55am: ICSC/Redbook weekly retail sales
  • 8:30am: Fed’s Duke speaks on community banks in Duluth, Ga.
  • 10am: ISM Non-Manf. Composite, Jan., est. 55.0 (prior 55.7)
  • 10am: IBD/TIPP Economic Optimism, Feb. est. 47 (prior 46.5)
  • 11am: Fed to purchase $1.25b-$1.75b debt in 2036-2042 sector
  • 11:30am: U.S. Treasury to sell 4W bills, $25b in 1Y bills


    • CBO releases federal budget projections, economic outlook
    • Yahoo’s Mayer, Goldman’s Blankfein in Obama immigration session
    • CFTC holds public roundtable to discuss agency’s proposed rulemaking, “Enhancing Protections Afforded Customers and Customer Funds Held by Futures Commission Merchants and Derivatives Clearing Organizations,” 9:30am
    • SEC holds a roundtable discussion on decimal-based trading, tick sizes for small, medium sized companies, 10am
    • CFPB Director Richard Cordray, National Credit Union Administration Board Chairman Debbie Matz hold “town hall webinar” on “Ability-to-Repay” rule, 3pm
    • HHS, FDA discuss creation of alternative pathway for expediting approval of drugs needed for unmet medical needs, 9am
    • FCC Chairman Julius Genachowski holds field hearings on Hurricane Sandy to consider how nation’s communications networks work during crises, 9am, 2pm.
    • FCC Commissioner Robert McDowell and David Gross, former U.S. ambassador for international communications and information policy, testify at hearing on Internet freedom before 3 House subcmtes, 10:30am


  • Dell board said to meet to vote on $24b leveraged buyout
  • Virgin Media in talks with Liberty Global on possible transaction
  • Hartford announces buyback, debt repayment plan after Sandy
  • Goldman hired by Russia as corporate broker to boost image
  • U.K. economy faces risk of a prolonged stagnation, NIESR says
  • German push to speed bank bondholder-loss plan gains momentum
  • Wells Fargo to target sovereign wealth funds in Dubai expansion
  • Buffett gets $1.8b in investment assets from Cigna deal
  • Fidelity said to press Endo Health to consider selling itself
  • Facebook said to develop location-tracker app for smartphones
  • Homes sell in 2 weeks as U.S. spring buyers face low inventory
  • MF Global customer funds rules will get another hearing at CFTC
  • UBS 4Q loss narrower than est. after Libor fine, job cuts
  • Hemispherx fails to win U.S. approval for chronic fatigue drug
  • IBM adds cheaper power servers to expand in emerging markets
  • Boeing asks U.S. FAA to permit test flights with Dreamliner
  • J.C. Penney asks judge to bar claim retailer defaulted on bonds
  • Consumer Reports says Ford, GM turbo engine benefits overstated
  • Shirakawa plans to exit as Bank of Japan governor on March 19


  • Becton Dickinson (BDX) 6am, $1.23
  • Diamond Offshore Drilling (DO) 6am, $1.09
  • Centene (CNC) 6am, $0.36
  • Emerson Electric (EMR) 6:30am, $0.62
  • Spectra Energy (SE) 6:30am, $0.31
  • Eaton (ETN) 6:30am, $0.93
  • Littelfuse (LFUS) 6:30am, $0.84
  • Church & Dwight (CHD) 7am, $0.57
  • Cardinal Health (CAH) 7am, $0.86
  • Sirius XM Radio (SIRI) 7am, $0.02
  • Archer-Daniels-Midland (ADM) 7am, $0.59
  • Delphi Automotive (DLPH) 7am, $0.87
  • OneBeacon Insurance Group (OB) 7am, $0.12
  • Techne (TECH) 7am, $0.77
  • Aecom Technology (ACM) 7am, $0.30
  • HCA Holdings (HCA) 7:03am, $0.83
  • Alliant Techsystems (ATK) 7:30am, $1.71
  • Teco Energy (TE) 7:30am, $0.21
  • Estee Lauder (EL) 7:30am, $1.05
  • Automatic Data Processing (ADP) 7:30am, $0.71
  • Vishay (VSH) 7:30am, $0.08
  • Arch Coal (ACI) 7:45am, $(0.15)
  • Inergy Midstream (NRGM) 7:45am, $0.16
  • Inergy (NRGY) 7:46am, $0.08
  • SunCoke Energy (SXC) 7:59am, $0.34
  • Magellan Midstream (MMP) 8am, $0.65
  • Spectra Energy (SEP) 8am, $0.37
  • Computer Sciences (CSC) 8am, $0.65
  • Kellogg Co (K) 8am, $0.66 - Preview
  • UDR (UDR) 8am, $0.34
  • Agco (AGCO) 8am, $0.98
  • Liberty Property Trust (LRY) 8am, $0.63
  • Lennox International (LII) 8am, $0.55
  • Allergan (AGN) 9am, $1.18 - Preview
  • Bell Aliant (BA CN) Pre-Mkt, C$0.41
  • Unum Group (UNM) 4pm, $0.77
  • Chipotle Mexican Grill (CMG) 4pm, $1.95
  • Expedia (EXPE) 4pm, $0.65
  • Ultimate Software (ULTI) 4pm, $0.39
  • Universal (UVV) 4pm, NA
  • Panera Bread Co (PNRA) 4pm, $1.74
  • CBL & Associates Properties (CBL) 4pm, $0.57
  • Kimco Realty (KIM) 4:01pm, $0.31
  • Cerner (CERN) 4:01pm, $0.64
  • Fiserv (FISV) 4:01pm, $1.40
  • CME Group (CME) 4:01pm, $0.64
  • NeuStar (NSR) 4:01pm, $0.72
  • Hanesbrands (HBI) 4:01pm, $1.04
  • Team Health (TMH) 4:01pm, $0.35
  • Shutterfly (SFLY) 4:02pm, $1.39
  • Thoratec (THOR) 4:02pm, $0.37
  • Take-Two Interactive (TTWO) 4:05pm, $0.55
  • Zynga (ZNGA) 4:05pm, $(0.03)
  • Jack Henry & Associates (JKHY) 4:05pm, $0.50
  • Myriad Genetics (MYGN) 4:05pm, $0.38
  • Alterra Capital Holdings (ALTE) 4:05pm, $(0.44)
  • Trimble Navigation (TRMB) 4:05pm, $0.55
  • Aflac (AFL) 4:07pm, $1.48
  • Hain Celestial Group (HAIN) 4:10pm, $0.69
  • Genworth Financial (GNW) 4:10pm, $0.27
  • KKR Financial Holdings (KFN) 4:12pm, $0.39
  • Walt Disney (DIS) 4:15pm, $0.77
  • CH Robinson Worldwide (CHRW) 4:15pm, $0.70
  • Equity Residential (EQR) 4:25pm, $0.76
  • Genworth MI Canada (MIC CN) 4:30pm, C$0.78
  • Acadia Realty Trust (AKR) 5pm, $0.28
  • HNI (HNI) 5:30pm, $0.43
  • Suncor Energy (SU CN) 10pm, C$0.74
  • BioMed Realty Trust (BMR) Post-Mkt, $0.34
  • MDU Resources Group (MDU) Post-Mkt, $0.39




CRB Index – Commodities failing at our long-term TAIL risk line for the CRB Index (306) was a big reason why we got longer of Asian/US stocks into yesterday’s close; CRB Index (peaked in 2011) = long-term bubble that is popping as the US Dollar continues to make a series of long-term higher lows; Oil is overbought up here, but we need to see that drop back below $113 (Brent).


  • Iron Ore Seen Poised for Bear Market by Smirk as Supply Expands
  • Platinum Supply Falls to 13-Year Low as Mines Close: Commodities
  • Oil Rises From One-Week Low as Recovery Signs Counter Supplies
  • Platinum Trades Near 17-Week High on Concern Supplies Will Fall
  • Nickel Drops Most in Three Weeks as Investors Seek to Curb Risk
  • Soybeans Rise for Third Session as Brazil Rain May Slow Harvest
  • Coffee Gains as Vietnam Growers Hold Supplies; Sugar Advances
  • Oil Supplies Rise in Survey on Seaway Disruption: Energy Markets
  • Gasoline at U.S. Pumps Jumps Most in Two Years on Crude Rally
  • Mongolia Should Get More Control of Rio Mine, President Says
  • ADM Profit Beats Estimates After Soybean-Processing Margins Gain
  • Niger in Talks With Areva for Uranium Mines to Give More Funds
  • Record China Flour Cost Spurring Wheat Imports: Chart of the Day
  • Anglo American CEO Carroll Says Platinum Industry Is ‘in Crisis’








EUROPE – didn’t take much to freak people out in European Equities – Socialist Quote of The Day “the Euro shouldn’t fluctuate as the market sees fit” (Hollande), as France reports a bomb of a Services PMI print for JAN at 43.6 (vs 45.2 last month); UK and Germany both had very solid PMI reports – both equity markets look very bullish compared to France, Italy, and Spain.





KOSPI – continues to be a stealth leading indicator (broke TRADE and TREND supports in the last 3 weeks) and confirmed that bearish TREND overnight, down another -0.8% to 1938 (TREND resistance = 1959); China, Singapore, and Hong Kong look nothing like the KOSPI (so buy those); Shanghai Comp closed up +0.2% last night, despite the European freak-out.








The Hedgeye Macro Team





Let's Do This

This note was originally published at 8am on January 22, 2013 for Hedgeye subscribers.

“C’mon! Let’s do this.”

-Ray Lewis


If Japanese policy makers really want to get nuts, they should sign Ray Lewis for the 2014 Money-Printing season. After taking down the Patriots this weekend, the 13x Pro Bowler is going back to the Super Bowl. It’ll be his last game. If Baltimore wins, it will be epic.


“You’ve got to go out and show them that I’m a different creature now than I was 5 minutes ago, cause I’m pissed off for greatness. Cause if you ain’t pissed off for greatness, that just means you’re okay with being mediocre.”


Yep. That’s what I am talking about Japan – some ole school Raven rants in those BOJ pressers.


Back to the Global Macro Grind


Evidently, the global currency market didn’t get the BOJ’s marketing message overnight. The Japanese Yen rallied a full +1% on the “news”, and Japanese stocks snapped immediate-term TRADE support for the first time in months. Isn’t a #QuadrillYen fun?


PM Shinzo Abe called the BOJ’s “2% inflation” targeting and asset purchase plan both “bold” and “epoch making.” That might sound like some serious stuff, but the new asset purchases don’t start until January of 2014 – so there’s this little thing called timing that people short the Yen today are getting Taro Aso’d by in the meantime.


If you didn’t know the Global Currency War is on, now you know. The Russians and South Koreans talked about it last week, and the President of the Bundesbank (Germany) is calling it out, explicitly, in the FT (Financial Times) this morning. If you want to show the world you are a “different creature”, you’re going to have to one-up The Bernank’s 2012 performance.


That’s no easy task – neither is seeing the US Dollar stabilize alongside weekly US economic growth data:

  1. US Dollar Index closed up another +0.6% last week and continues to make a series of higher long-term lows
  2. US Housing Demand (MBA weekly mortgage applications) ripped a +12.9% move, taking the MBA series to 205
  3. US Weekly Jobless Claims dropped to fresh new intermediate-term lows at 335,000

If what’s bad for a country’s currency is eventually really bad for that country’s real (inflation adjusted) economic growth, the opposite should hold true when a country’s currency stabilizes.


What if a stabilizing US Dollar became a strengthening one? How about strengthening the US Dollar +15% (from here) and hammering energy/food inflation next? Didn’t the President of the United States say “we, the people, are all in this together” now?


Can you think of a more galvanizing, progressive, and uniquely American marketing message than Strong Dollar = Strong America? I bounced it off the Keynesians in the Romney camp, and they didn’t get it either. But you, The People can get this – Yes You Can!


In other major global #GrowthStabilizing news:

  1. Chinese monthly data for December (Industrial Production and Retail Sales) accelerated versus November
  2. Chinese Exports for December ramped by +14.1% (versus +2.9% NOV)
  3. Germany’s ZEW Index (reported this morning) just hit a 2.5 year high (31.5 DEC vs 6.9 in NOV)

It’s been a while here, folks – but, setting aside the economic disaster that is Japan for a minute, we have the other 3 major global engines no longer stalling/slowing (USA, China, and Germany). That’s better than bad. And so is sentiment.


The problem with sentiment, of course, is that it tends to turn after markets move. And right now that’s precisely what many of my key sentiment indicators are starting to flag:

  1. US Equity Volatility (VIX) = immediate-term TRADE oversold at a 5-year low of 12.46
  2. II Bull/Bear Spread (Bulls minus Bears) = 3,090 basis points wide (53.2% Bulls, 22.3% Bears)
  3. Fund Flows (to US Equities, ex-ETFs) = +3.8B last week (versus +7.5B in the week prior)

In addition to last week’s -6.7% drop in the VIX, we’re seeing aggregate short interest in US Equities fall fast from their late November highs (that was a bullish signal) at the same time that NYSE Margin Debt rips to the high-end of its 5-year range (perma bulls lever themselves up on the long side at the end of a move trying to chase performance).


So, it’s all out there – the economic data; the price action; the sentiment indicators – and, no, they don’t always signal that you should be doing the same thing at the same time. But that doesn’t mean you don’t have to get out there every morning and get it. As Japan’s new ‘let’s get nuts’ prospect, Ray Lewis, might add: “Effort, is between you, and you, and nobody else.”


Our immediate-term Risk Ranges for Gold, Oil, US Dollar Index, USD/YEN, UST 10yr Yield, AAPL, and the SP500 are now $110.75-112.35 (Oil is back above TAIL support, bearish for Consumption), $1654-1692, $79.75-80.17, 88.58-90.61, 1.84-1.91% (Bonds continue to signal #GrowthStabilizing), $482-561 (into Earnings tomorrow), and 1471-1489, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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