• run with the bulls

    get your first month

    of hedgeye free


Commodity Gap

This note was originally published at 8am on March 04, 2013 for Hedgeye subscribers.

“Icy with anger, warm with satisfaction, sharp with concern”

-Emmet Hughes


Allegedly, that’s how President Eisenhower reacted to Russian intelligence briefings in July of 1956. While he didn’t sign off on the depth of the American U2 spy plane mission to begin with, “the President’s skepticism (about Russia) had been confirmed by just five days of aerial reconnaissance. The Bomber Gap was a myth.” (Ike’s Bluff, pg 215) The Russians didn’t have anything real.


Like the “missile gap” concerns that came thereafter, the Bomber Gap was part of the political fear-mongering that kept the American People on edge, building home bunkers, and buying canned foods – essentially preparing to be attacked. But freaking people out with a false story that’s based on logical premise isn’t new in this country. That’s how the #PoliticalClass gets paid.


Ultimately, knowing the truth (but keeping it to himself) became Dwight Eisenhower’s advantage in a world that was perpetually on the brink of war. When I see the emerging advantages of sequestration (Strong Dollar born out of fiscal spending sobriety), but hear politicians trying to scare people (when they should just get out of the way), I think about leadership. I also think about Ike.


Back to the Global Macro Grind


Does President Obama get what a Strong Dollar does for the US Economy? Did George Bush? Nixon and Carter didn’t. Reagan and Clinton did. A pervasively Strong Dollar gave the US Down Oil prices in the two most impressive growth decades since Eisenhower.


Last week, the US Dollar Index was up another full +1%. That was the 4th consecutive up week for the US Dollar. At the same time (and not ironically), Commodities (19 component CRB Index) were down for the 4th straight week. Commodity Deflation has been absolute (CRB Index -4.9% in 4 weeks), and now prices are finally scaring expectations.


To expect or not to expect Commodity Inflation, remains the question. Let’s look at last week’s CFTC futures and options net long positioning (hedge funds speculating on money printing, Bernanke Policies to Inflate, etc.) for some clues:


  1. The net long position in all of commodities collapsed another -16% last wk to 447,106 contracts
  2. Oil’s net long position dropped another -16% wk-over-wk to 175,211 contracts
  3. Farm Goods (think food) net long position crashed (again) another -24% to 145,564 contracts


Oh yeah, baby. Strong Dollar – we people who put gas in car, and food in mouth – we love you long time. But what, in this manic market, is a long time?


  1. March 2009? Yep. This is the lowest speculative net long position in CFTC contracts (commodity inflation) since 2009
  2. Corn contracts (down -20% last wk) are perpetuating the lowest food inflation expectations since, again, March 2009


For those of you still long the consumption related assets you bought after the March 2009 lows (we bought Starbucks, SBUX, at $11.52 in April of 2009, and still have it on #RealTimeAlerts; not a typo!), you are probably quite happy.


Freaking-out about the Commodity Gap now isn’t much different than freaking out about it then. I remember then almost like it was yesterday. People were pinging me with live quotes of “Dr. Copper crashing” saying the world was going to end. It didn’t. People who were long of Copper did.


Since the #PoliticalClass always asks for “solutions.” Why not try something no US President (under their Keynesian Economics regimes) has tried since the 1990s.  Why doesn’t the President of the United States hold a press conference today saying something like:


“Today, folks, is a great day in America. We finally cut spending and we are about to get this Bernanke character out the way on your savings accounts. Your currency is strengthening and your purchasing power is being restored. God Bless a free-market America.”


Anyone think that might happen? Bueller? Or does he really get this (and he’s just keeping it to himself)?

In the meantime, all I can tell you is this:


  1. WTIC Oil prices snapped our TREND line of $93.41/barrel support last week (-7% in the last month)
  2. Russian Stocks (which trade off oil expectations) snapped TREND of 1566 on the RTSI (-8% in the last month)
  3. Our immediate-term TRADE correlation between WTIC Oil and the US Dollar is now -0.99!


Enough of the #ClassWarfare speeches already. Mr. President, if you really want to help people who drive to work every day, tell the truth about Strong Dollar (+4% in the last month) and all its benefits as a real-time Tax Cut! Long live the Commodity Gap (down).


Our immediate-term Risk Ranges for Gold, Oil (WTIC), Copper, US Dollar, USD/YEN, UST10yr Yield, VIX, Russell2000, and the SP500 are now $1549-1589, $89.72-92.93, $3.48-3.57, $81.44-82.65, 91.85-94.68, 1.81-1.94%, 11.96-17.18, 901-930, and 1502-1534, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Commodity Gap - Chart of the Day


Commodity Gap - Virtual Portfolio


The Macau Metro Monitor, March 18, 2013




The F.B.I. and Philippine investigators investigating potential bribery related to Universal Entertainment’s bid to build a casino in Manila have zeroed in on a $25 million payment the company now says should never have been made.  Rodolfo Soriano, a consultant with ties to the former head of the gambling regulator in the Philippines, received the fee in 2010 to secure land rights for the $2 billion casino, Universal had said.  But records reviewed by Reuters show those rights were obtained free in 2009.

The F.B.I. is involved because the payment originated with a Universal subsidiary based in Nevada. Both the F.B.I. and the Philippine National Bureau of Investigation have been looking into a total of $40 million in transfers to Mr. Soriano since last year as a possible case of bribery.


In a closed-door, three-day hearing with the Nevada Gaming Control Board that concluded Friday, directors of Universal, a Japanese company, were questioned about the payment.  Among those questioned was the company’s billionaire founder, Kazuo Okada.


CHART OF THE DAY: Trusting Fear-Dwellers


CHART OF THE DAY: Trusting Fear-Dwellers - Chart of the Day

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Trusting Fear-Dwellers

“Let no such man be trusted.”



According to John Meacham (author of Thomas Jefferson: The Art of Power), that was one of Jefferson’s favorite passages from Shakespeare’s Merchant of Venice – the tragic comedy about a man (Shylock) lending to another man (Antonio) for a pound of his flesh.


Thank goodness for Portia – in the end, she reminded Shylock that he must remove Antonio’s “flesh” (not the blood) and warned him that if he went a hair beyond a pound, “Thou diest and all thy goods are confiscate."


Written at the end of the 16th century (between 1596 and 1598), these were some pretty serious times of debate about debt and default. But looking at today’s consensus fear-mongering about Cyprus screwing its depositors, what has changed? Is the world about to end, again?


Back to the Global Macro Grind


I realize that’s maybe a little too philosophical for the monkey getting whipped around by the futures this morning. As Meacham himself points out, “Plenty of philosophical men live in abstract regions, debating types and shadows.”


But, my friends, behold! “The rarer sort is the reader and thinker who can see the world whole.” (Jefferson: The Art of Power, pg 47) And our risk management duty this morning is not to freak-out Italian Election style; it’s to see the world for what it is, not what Fear-Dwellers who have been getting run-over shorting US stocks for all of 2013 want it to be.


“To be, or not to be”, scared out of your mind this morning - remains the question. Todd Jordan and I took our wives to see Paul Giamatti in Hamlet this weekend so, admittedly, I have the Shakes; please bear with me as you read the Top 3 Most Read on Bloomberg this morning:


I know, I know – this is some scary stuff. If you’d like to freak-out alongside Old Media (must have crisis for ratings to stop crashing), I have a new hash-tag for you: #EOW (End Of World).


All of this comes after the US Dollar had its 1st down week in the last 6 (one week does not a new intermediate-term TREND make) – so what is a man or woman to do this morning but look at everything else that’s born out of the horror that is Cyprus:

  1. German and British stocks (after hitting new highs last wk) are down a whole -1% and -0.7%, respectively
  2. The Euro is actually now up on the session (versus the USD) at $1.29
  3. Irish stocks are up on the day too

Irish stocks? Yes me friends – ‘twas Saint Patty’s day yesterday. So, if the world is going to end today, have another pint, and smile about it will ya!


To be sure, at some point we will actually see the end of the world (and that day I will not be writing an Early Look), so I don’t want to be too complacent here. But I don’t want you freaking-out at another lower-high for the VIX and higher-low in the US stock market either.


Contextualizing where people are freaking-out from is usually more important than the why (their storytelling) after the correction (it’s called mean reversion, and yes it happens after stocks are up for 10 of the last 11 weeks).


First, here’s the context of Cyprus’ stock market:

  1. Down -8% in the last month
  2. Down -16% in the last 3 months
  3. Down -62% in the last year

Evidently, aside from some Russian money launderers (who don’t do Macro) getting smoked this morning, someone down there in the Socialized South of Europe knew something was going on, for a while now.


Then, there’s the US stock market’s context:

  1. Immediate-term TRADE overbought line = 1567
  2. Immediate-term TRADE support line = 1535
  3. Intermediate-term TREND support = 1486

In other words, with US Equity Volatility (VIX) down another -10.2% last week to a fresh 5-yr weekly closing low of 11.30, the Fear-Dwelling (front-month VIX) is down -41% from the last day you could have freaked right out and sold low (February 25th, Italian Election Day). So you might not want to do that again today. After selling some on green last week, we’ll be covering shorts and getting longer again, on red.


Our immediate-term Risk Ranges for Gold, Oil, US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000 and the SP500 are now $1, $107.27-110.17, $81.94-83.04, 93.64-97.39, 1.91-2.01%, 10.72-14.47, 938-958, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Trusting Fear-Dwellers - Chart of the Day


Trusting Fear-Dwellers - Virtual Portfolio

Domestic Credit: The Policy Transmission Channel Is Beginning to Open

Summary Takeaways: 

  • It has been a combination of Credit Standards and Consumer & Business loan demand that have dampened credit creation over the last 5 years. 
  • Bank Credit policy is reactive and credit availability pro-cyclical as banks will ease credit standards on a lag as demand rises.  Demand is rising, credit standards continue to ease and accelerating labor market trends should support further improvement.
  • The 1Q13 Senior Loan Officer survey suggests loan growth should begin to accelerate as Commercial & Industrial loan demand picked up sharply, prime residential loan standards continued to ease, and auto & other consumer loan demand accelerated sequentially.
  • The confluence of a wealth effect (equity and/or housing), sustained improvement in labor market trends, and accelerating credit creation should continue to support domestic #GrowthStabilization


The chart below shows the velocity of money versus the monetary base and bank excess reserves held at the fed.  Policy makers hate that chart as it’s a singularly expressive reminder of a five year exercise in monetary policy string pushing in the face of credit tightening and private sector deleveraging.   


Domestic Credit: The Policy Transmission Channel Is Beginning to Open  - M1  Monetary Base    Excess reserves


Post-Crisis Economic & Policy Redux:

To briefly review the economic dynamics underpinning the above chart:  The Fed, through policy initiatives and open market operations, can effectively control the base money supply (ie. Fed prints money --> buys bonds from the banks --> bank reserves increase).  What it can’t control is consumer demand for credit or banks willingness to lend.   


So, while the Fed can print as much money as it wants in hopes of moderating both an acute shock and a protracted deleveraging, if that money simply sits at the Fed as excess bank reserves, it can’t work to drive credit creation, money turnover (M1 Velocity) or end demand growth.  In effect, the Central Banks’ normal monetary policy transmission channel becomes ineffectual and the Fed is largely impotent to counter this dynamic, regardless of the magnitude of easing initiatives – thus, policy string pushing.    


The prevailing dynamic characterizing the post-recession period can, perhaps, be most simply understood in the context of the GDP componentry:


GDP = Consumption (C) + Investment (I) + Government (G) + Net Exports (E)


Consumption (C) remains depressed for a protracted period due to employment loss and a secular private sector deleveraging, Investment (I) fails to accelerate because businesses don’t want to ramp spending in the face of slowing/stagnated topline growth, the government (G) faces structural debt/deficit issues and has largely exhausted its stimulus bullets, and Exports (E) can’t get traction because  1. We’re no longer an export economy and 2. because Bernanke’s explicit attempts at currency debauchery have been repeatedly trumped by the safe haven and relative value plays driven by the EU, Arab Spring, and other global economic and geopolitical crises.


With the typical, and most efficient policy transmission channel blocked at two junctures, the implicit, singular policy objectives became to continue to support housing while daring investors, via financial repression and negative real interest rates, to chase risk assets in hopes of re-flating financial assets and inducing the some measure of wealth effect.  More or less, this remains the current policy playbook.  


If the Fed’s policy initiatives are ultimately successful in jumpstarting consumption and business investment, the trajectory of bank excess reserves should begin to reverse and M1 velocity inflect upwards as aggregate demand and economic activity accelerate.   The Fed’s Senior Loan Officer Survey is one measure offering some insight into the directional trend in investment and consumption.  




Anecdotally, the explanations offered for the lack of demand via loan and credit growth in the post-crisis epoch tend to take a binary, mutually exclusive view on credit availability and consumer demand.  Many argue that credit growth is  bottlenecked exclusively by tighter credit standards and banks unwillingness to lend in the face of existing/rising private sector demand, while others argue the reverse. 


In reality, understanding the prevailing trends in Commercial/Industrial, Real Estate, and Consumer Loan activity requires taking a composite view of Bank Credit Standards and Consumer & Commercial Loan Demand.  It’s a combination of and interplay between the two that have defined the trajectory of loan growth over the last five years, and both are currently trending favorably. 


Generally, Bank Credit policy is reactive and credit availability pro-cyclical as banks will ease credit standards on a lag as demand rises.  The combination of Improving economic/labor market trends and easing credit standards feedback on one another and benefit credit growth from both ends during an upswing.   Higher employment helps drive organic credit demand while easing credit standards expands the pool of available borrowers.  Similarly, improving economic and consumption trends drive both a decrease in corporate credit risk and marginal demand for C&I and commercial real estate loans. 


In the context of our view of housing as a Giffen good, the pro-cyclical nature of credit sets up a positive feedback cycle whereby rising demand drives home prices higher which, in turn, drives easing credit standards for residential real estate and a further increase in demand in a virtuous cycle. 


Measures of Credit Availability and Demand from the Fed’s Senior Loan Officer survey can provide some insight into trends in consumer and business consumption expenditures.  The latest 1Q13 data suggests loan growth should begin to accelerate as Commercial & Industrial loan demand picked up sharply, prime residential loan standards continued to ease, and auto & other consumer loan demand accelerated sequentially. 


While trends have been showing positive improvement over the last 4 quarters or so, an acceleration in employment alongside a sustained (& accelerating) housing recovery and some fiscal policy clarity on the other side of the Fiscal Cliff/debt Ceiling/Budget/HealthLaw issues, would serve to further increase consumer and business loan demand and support ongoing credit standard easing.   The confluence of a wealth effect (equity and/or housing), sustained improvement in labor market trends, and accelerating credit creation is a factor cocktail capable of perpetuating virtuous economic reflexivity.   


The trends are certainly encouraging, but we’d like to see a deceleration in the decline of M1 velocity in print and current credit trends confirm a bit further.  We’ll get our next update to the Senior Loan officer survey in April.  


Domestic Credit: The Policy Transmission Channel Is Beginning to Open  - Senior Loan Officer Survey Credit Standards


Domestic Credit: The Policy Transmission Channel Is Beginning to Open  - Senior Loan Officer Survey Demand



Christian B. Drake

Senior Analyst 


DOJ/BUD/STZ Take a Beer Frame – Discussions to Continue Until April 9th

On Friday, the parties to the Department of Justice’s lawsuit seeking to block the merger between Anheuser-Busch InBev and Grupo Modelo requested a stay of the proceedings until April 9th, suggesting to us that the additional three weeks will be sufficient for the ongoing discussions to be completed.

Recall that a stay was originally granted until March 19th – the companies and the DOJ appear to be progressing toward an agreement, but simply needed more time than the original petition to the court allowed.

We suggested an extension of the stay was a likely occurrence in our prior note (“Talks Between the DOJ and Anheuser-Busch InBev ‘Progressing Smoothly’" – March 9th) and view the news on Friday as being entirely consistent with a process that is moving toward a consent judgment.

Both STZ and BUD should react favorably to the likely eventual news that the transaction has garnered regulatory approval, but at this point we see more upside over the medium duration in shares of BUD (ABI BB ordinary).


Have a great week,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst

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%