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Command and Control

“How do you tell a communist? Well, it’s someone who reads Marx and Lenin.  And how do you tell an anti-Communist? It’s someone who understands Marx and Lenin.”

-Ronald Reagan


As Hedgeye has grown over the past five years, we’ve gone from a ramshackle group of less than ten to a team that is fifty or more with a view to a much higher employee count as our growth continues.   For those of us that started here near day one, it has been an exciting and fulfilling experience.


Many of you that have started you own businesses know full well the management challenges associated with growth – compensation plans, career paths, titles, HR meetings, committees, and so on.  I can’t speak for Keith, but there are certainly times where I wish I could channel my inner Karl Marx and completely control our day-to-day functions.   That, of course, would be a disaster because our company, like most companies, benefits greatly from disparate opinions and personalities.


The caveat to that last point of course is China - a country that has seen fabulous growth and development with top down controlled management.  In 1978, China was one of the poorest countries on the planet with a GDP of roughly one-fortieth of the United States.  As Xiaodong Zhu, a Professor of Economics at the University of Toronto, writes:


“Since then, China’s real per capita GDP has grown at an average rate exceeding 8 percent per year.  As a result, China’s per capita GDP is now almost one-fifth the U.S. level and at the same level as Brazil.  This rapid and sustained improvement in average living standard has occurred in a country with more than 20 percent of the world’s population so that China is now the second-largest economy in the world.”


If President Ronald Reagan were alive today, it would be interesting to hear his assessment of the Chinese economic miracle.  Despite his, and many a dour assessment of Communist economies, China has certainly proven the critics wrong. 


In the short term, yesterday certainly provided some fuel to the proverbial fire for those negative on the Chinese economy this year. China’s CSI 300 index was down -4.6%, its biggest drop since November 10th, the Shanghai Composite was down -3.7% (the most since August 11th), and the Shanghai Property index was down -9.3%.  The decline in the property index was hit on reports that Beijing has introduced new property curbs calling for higher down-payment requirements, higher interest rates on second home mortgages and a 20% tax on individual profits from property sales.


One of the top ideas in our recently launched Best Ideas product was China, via the closed end fund CAF.  Given the performance of Chinese equities noted above, this position is now against us, but our Senior Analyst covering Asia, Darius Dale, addressed this directly yesterday in a note titled, “China Pukes”.  As Darius wrote:


“In short, while we think this latest round of tightening measures is definitely impactful, they are not nearly as negative as we initially feared. The heightened concerns mostly stem from the new 20% capital gains tax on existing home sales; prior to Friday’s announcement, existing home transactions were taxed at a rate of 1-2% of the sale price.


To some extent, today’s “puke” instructs us that our initial interpretation of the tightening measures was not bearish enough. That said, however, rather than react to headline-grabbing 1D % change moves, we turn to our quantitative factoring for true guidance.


On this metric, the Shanghai Composite is still healthily bullish from an intermediate-term TREND perspective and continues to support our bullish intermediate-term fundamental bias on Chinese equities. If, however, the now-confirmed immediate-term TRADE breakdown is but a leading indicator for further breakdowns, then we’d happily abandon our bullish bias upon confirmation of that signal.”


In the Chart of the Day, we highlight our quantitative levels that still support being long of China.  In fact, news this morning from China’s Premier Wen last “state of the country address” in which 2013 GDP growth was set at +7.5% and CPI at +3.5% bolsters our thesis.  On the latter point, if CPI actually declines from 4.0%, which commodities support, this is positive for our thesis, especially if combined with what we believe will be a sandbagged GDP number.


The other interesting call-out from Wen’s speech is that China intends to raise its budget deficit by 50 percent to boost consumer spending.  Longer term structural deficit spending is not something that we find overly appealing, but this is likely supportive for GDP targets in 2013.


Changing gears, from an asset allocation perspective, even as many are starting to call for a rotation into bonds, the U.S. 10-year Treasury is holding its 1.84% line. As a result, we continue to see a rotation out of the “end of the world” trade of long gold and treasuries and into U.S. equities in 2013.  There are very large bond investors that disagree with our call, but as always – watch what they do and not what they say.


Since we are on the topic of China, I wanted to end with a quote from Thomas Friedman that on some level summarizes the future:


“When I was growing up, my parents told me, finish your dinner. People in China and India are starving. I tell my daughters, finish your homework. People in Indian and China are starving for your job.”




Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST10yr Yield, VIX, and the SP500 are now $1, $109.01-112.68, $3.48-3.55, $81.68-82.39, 91.89-94.79, 1.84-1.93%, 12.57-15.61, and 1, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Command and Control - Chart of the Day


Command and Control - Virtual Portfolio

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

As we look at today's setup for the S&P 500, the range is 23 points or 1.06% downside to 1509 and 0.45% upside to 1532.       














  • YIELD CURVE: 1.66 from 1.64
  • VIX  closed at 14.01 1 day percent change of -8.79%

MACRO DATA POINTS (Bloomberg Estimates):

  • 10am: ISM Non-Manf. Composite, Feb., est. 55.0 (prior 55.2)
  • 10am: IBD/TIPP Eco. Optimism, March, est. 48.1 (prior 47.3)
  • 11am: Fed to purchase $2.75b-$3.5b notes in 2020-2023 sector
  • 11:30am: U.S. to sell 4W bills, $25b 52W bills
  • 2pm: Fed’s Lacker speaks on monetary policy in Washington
  • 4:30pm: API Energy Inventories


    • Senate Budget Cmte holds hearing on tax code, 10:30am
    • Senate HELP Chairman Tom Harkin, D-Iowa, House Education & Workforce ranking member Rep. George Miller, D-Calif., announce introduction of legislation to raise federal minimum wage to $10.10/hr from $7.25, then provide automatic annual increases linked to changes in cost of living, 12pm
    • Agriculture Sec. Tom Vilsack among witnesses testifying on state of rural econ. at House Agriculture Cmte. hearing, 10am
    • Nuclear Regulatory Commission staff meets officials from Duke Energy to discuss whether company violated license for fire protection at a South Carolina nuclear plant, 1pm
    • Rep. Maxine Waters, D-Calif., FDIC Chairman Martin Gruenberg, SEC Commissioner Luis Aguilar speak at Greenlining Institute conference on diversity in financial industry, 8:30am
    • Treasury Dept, OCC hold a meeting to discuss the minority depository institution industry, 8:30am
    • House Fin Svcs panel holds hearing on Bernanke’s recent testimony on monetary policy, 10am
    • North American Securities Administrators Assoc. releases 2013 legislative agenda, including measures to regulate crowdfunding and fiduciary duty rule for broker-dealers, 10am
    • House Ways and Means panel holds hearing on tax provisions in Affordable Care Act, 11am
    • U.S. Homeland Security Secretary Janet Napolitano discusses airport, airspace security at International Air Transport Assn conference in Brooklyn, N.Y., 9:30am


  • EU opens way for easier budgets after Italian austerity backlash
  • Martha Stewart to testify today in J.C. Penney/Macy’s suit
  • House budget bill would continue automatic spending cuts
  • Compuware said to attract private-equity firms’ buyout interest
  • Pearson CEO said to tell FT staff to brace for fewer jobs
  • Commonwealth stock sales may be completed, U.S. judge rules
  • Fannie Mae regulator sets securities platform for post-GSE world
  • J&J, Bayer fail to win U.S. backing for expanded Xarelto use
  • Heinz CEO Johnson would get $200m in post-Berkshire exit
  • Rexnord said to draw Watts as suitor for water-management unit
  • News Corp. said to start cable-sports challenge to ESPN
  • Anadarko, Dhoot start sale of Mozambique gas stake: Reuters
  • Artisan Partners Asset Mgmt IPO books close tonight, terms show
  • Senate report faults JPMorgan’s “whale” disclosures: NYT
  • Tribune said to aim to sell all newspapers in single deal
  • Chavez health worsens with second lung infection, Venezuela says


    • Bank of Nova Scotia (BNS CN) 7:30am, C$1.25
    • Infinity Pharmaceuticals (INFI) 4pm, $(0.84)
    • VeriFone Systems (PAY) 4:01pm, $0.49
    • Smith & Wesson (SWHC) 4:05pm, $0.23
    • First Quantum Minerals Ltd (FM CN) 5pm, $0.33
    • Qihoo 360 Technology Co Ltd (QIHU) 5pm, $0.17
    • Trilogy Energy (TET CN) 5pm, C$0.03
    • Allied Properties Real Estate (AP-U CN) Aft-mkt, C$0.46
    • Gibson Energy (GEI CN) Aft-mkt, C$0.34
    • Uranium One (UUU CN) Aft-mkt, $0.02
    • Taro Pharmaceutical Industries Ltd (TARO) Aft-mkt, NA


  • Gold Hoarders Turn Sellers as Bull Run Decays: Chart of the Day
  • Rice Glut Expands With Farms Poised for Record Crop: Commodities
  • Gold Rises for First Time in Five Days on Stimulus; Silver Gains
  • Copper to Climb on Chinese Demand This Year, Jiangxi Copper Says
  • Soybeans Reach One-Week High on Signs of Stronger Export Demand
  • Sugar Rises for Second Day on Ethanol Outlook; Coffee Also Gains
  • WTI Crude Rebounds From 10-Week Low; Brent Pipeline Remains Shut
  • Cooparaiso Sees Brazil Reaping Record Off-Year Coffee Harvest
  • Palm Oil to Trade at 1,950-2,500 Ringgit a Ton, Sauthoff Says
  • CME’s Asian Business Expanding 35% Stoked by Gold to Currencies
  • U.K. Natural Gas Stores May Empty in Two Weeks: Chart of the Day
  • Oil Inventories Gain a Seventh Week in Survey: Energy Markets
  • Scorpio Wins as U.S. Crude Curbs Spur Shale Refineries: Freight
  • Copper Advances Most in a Week as China Maintains Growth Goal


















The Hedgeye Macro Team







The Macau Metro Monitor, March 5, 2013




The CEO of SJM Holdings, Ambrose So, forecasts Macau’s overall casino revenue growth will be 'in the low teens.'



Wynn Resorts said it might need to borrow more money to fund its Cotai project, forecast to cost up to US$4 billion (MOP32 billion).  “As our project budget is an estimate only as of the date of this report, we may require additional financing to complete construction of our Cotai project,” Wynn Resorts said in the filing of its annual results.  Wynn Resorts also admitted that the company’s profit might drop if former director Kazuo Okada wins a lawsuit challenging the company’s purchase of his shares.


Okada is still challenging the forcible buyout. He has meanwhile made a request to a Nevada court, that an escrow account be set up to hold the money payable to him by Wynn Resorts from the forcible buyout, totalling US$1.9 billion.

Trust Mr. Market

This note was originally published at 8am on February 19, 2013 for Hedgeye subscribers.

“He knew that he had a gift: the power to make people trust him.”

-Evan Thomas


With the Chinese allegedly hacking US corporations and the Keynesians in an all-out currency war with the world’s savers this morning, what could possibly go wrong? The US stock market doesn’t seem to care. Do you trust it?


The aforementioned quote about old-school trust comes from an excellent leadership book I’m reading titled “Ike’s Bluff: President Eishenhower’s Secret Battle to Save The World.” Since I am finishing up our year-end review process, trust is a factor I thought a lot about while I was in London last week. The people you choose to work with either get it, or they don’t.


Americans believed in President Dwight Eisenhower, big time. He had the highest approval rating of any post WWII President, not because he gave the best speeches (he hated the teleprompter, and it showed) – it was because poll after poll revealed an endearing quality that the modern polarizing #PoliticalClass has not been able to achieve – the underlying trust of The People.


Back to the Global Macro Grind


I trust Mr. Market. I believe in his real-time signals. I trust that The People ultimately trust his scorecard too (he might be a she by the way). You don’t have to like someone in order to trust them.


You don’t get paid to play the market you’d like to have either. You get paid to play the game that’s in front of you.


That’s just too complicated for a dumb bunny like me.” –President Eisenhower (page 29)


Or is it?


At the end of the day, it’s all about your attitude. Sure, it really is hard to let Mr. Market humble you into the daily position of A) embracing uncertainty and B) accepting that risk doesn’t care about your positioning.


You can, however, dynamically (daily) risk adjust your positioning based on the highest probabilities that Mr. Market is giving you. Would you play any other game any other way? For us, since late November, that overall Global Macro position has been:

  1. Long US Dollar, Short Japanese Yen
  2. Long Equities (Asian and US specifically, not Europe)
  3. Short Gold and Treasury Bonds

I can be a dumb bunny too. That’s why I maintain a model that accepts dumb government policy as causal to currency moves. That’s also why we get currencies more right than wrong. Stocks, Bonds, and Commodities tend to react to big policy driven currency moves.


The US Dollar was up for the 2nd consecutive week last week (+1.8% over that time) and for the #1 concern my competitors are signaling as the US stock market’s greatest risk (inflation), Strong Dollar did what it should have done – it Deflated The Inflation:

  1. CRB Commodities Index = down another -0.9% last week (down -2.2% in the 2 weeks of Dollar Up)
  2. Gold = down another -3.5% last week to a fresh YTD low (down for the last 2 weeks as well)
  3. Silver = down -5.3% on the week and Food Prices deflated too (Cocoa -4.1%, Corn -1.4%, etc.)

Now a lot of people in this world (especially Americans) like it when the purchasing power of their hard earned currency appreciates. Others (like Venezuelans for example) don’t have a say in the matter. Their overlords debauch their currency whenever they please.


Eisenhower was lucky in that he was able to compete with British and French debaucherers of currency. These were weak governments who were addicted to debt and the cowardly messaging of #ClassWarfare. No one trusted that then – and they don’t trust it now.


Not all Equity markets like Commodity Deflation. Brazil’s Bovespa Index is the poster child for commodity exposure – it was down another -1% last week and is now down -5% for 2013 YTD.


What could really get this US and Asian Equity party started would be another blast higher in the US Dollar from here:

  1. Then Oil will eventually start to mean revert versus the rest of the CRB Commodities Index (which is breaking down)
  2. And Consumers, globally, will get a much needed TAX CUT at the pump

What’s actually quite amazing is that US Consumption hasn’t been hammered with Brent Oil trading up here at $117-118. In our GIP Model (Growth, Inflation, Policy), a Brent Oil price that is in a Bullish Formation is an explicit headwind.


But maybe that’s more of a headwind for those cheering on a weak currency in Europe. Enter France:

  1. France’s CAC40 snapped its immediate-term TRADE line of 3711 support in the last few weeks
  2. French Services PMI of 43.6 in JAN was god awful relative to A) itself (45.2 in DEC) or any other major country

So, the French have economic issues that, evidently, weren’t resolved with a 75% tax rate…


Now that their economic data really sucks again, the first thing their conflicted and compromised #PoliticalClass does is jawbones for a weaker Euro – then they tell the world they really didn’t do that at the G20 meetings, n’est-ce pas? But, with the CAC and the Euro breaking immediate-term TRADE support, who do you trust? Mr. Market doesn’t trust them.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, and the SP500 are now $1602-1652, $116.09-118.91, $3.67-3.72, $1.31-1.33, 92.53-94.38, 1.96-2.05%, and 1516-1524, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Trust Mr. Market - Chart of the Day


Trust Mr. Market - Virtual Portfolio

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