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Belittling Gold Markets

This note was originally published at 8am on March 13, 2013 for Hedgeye subscribers.

“Keep away from people who belittle your ambitions. Small people always do that, but the really great make you feel that you, too, can become great.”

-Mark Twain


The quote at the top of this note is certainly true for my experiences in life.  Every time I have met someone who has truly succeeded, whatever their domain, I’ve noticed they do their best to encourage others on the path to success. In the past week, I had a very good example of this when I met Senator John McCain.


Now setting aside your political affiliation, I think it is fair to say McCain has been one of the more successful politicians of this generation.  In this instance, I met him briefly in a small T.V. studio as he was going on to do a clip for CNN and I was waiting to go on for CNBC.  As we waited, he wolfed down a bag of chips, hopped on and off various calls, and planned out his town hall appearance in a small Arizona town for later in the day.


So, yes, at 76 years of age and after 26 years in the Senate, McCain is still grinding.  Therein lies the point of greatness and great people, they understand that the path to success is based on hard work and repetition. Investing in the public markets epitomizes this idea. 


The one market that has belittled us as of late is China.  Chinese equities remain one of our top long ideas, but as my colleague Darius Dale wrote in an update on the idea on Monday some of the recent economic data from China does give us pause. Specifically, industrial production, fixed asset investment and aggregate financing (a driver of money supply) were marginally below expectations and saw sequential declines.


Now to be fair, many of these economic metrics are showing year-over-year growth rates, that relative to the rest of the world, are outstanding.  In the Chart of the Day, we highlight this by showing Chinese Fixed Asset Investment for the last three years.  As the chart shows, in the most recent period fixed asset investment was up 21% year-over-year and remains well off its lows.


As it related to fixed asset investment in China, as the chatter out of China over night is that Shenzhen may implement a price cap at every housing project within 2013.  This pressure on Chinese property stocks was then compounded by the fact that Governor Zhou of the People’s Bank of China said he is on “high alert” in regards to inflation.  So the belittling point on China is that while growth remains relatively strong, the outlook for inflation and policy (the other two key factors in our country models) are more belittling to discern.


An investment asset class that has been less belittling for us to analyze recently is gold.  Yesterday, my colleague Christian Drake wrote a note titled, “Gold: Anatomy of a Breakdown”.  The breakdown of gold has been a key asset call on the back of our view that global growth is stabilizing.  This hasn’t been a popular call as many institutional investors have been over allocated to  gold based on the idea that as growth decelerates, expectations for future QE rise, the dollar depreciates and investors flock to gold as protection against further dollar debauchery.


The reality of the interplay above is that both the dollar and gold are large driven by economic data versus expectation and the view of future monetary policy.  As the note emphasized:

  • Gold versus Federal Reserve Balance Sheet:  The correlation between Gold and the Fed’s Balance Sheet is strong across durations with an R^2 = 0.92 over the last 14 years.  If you think this relationship makes common and economic sense (we do), a deceleration and unwind of policy (or the expectation for) on the back of an improving growth outlook is a decidedly bearish catalyst for gold; 
  • Gold vs. Dollar:  Gold’s Inverse correlation to the dollar has been moderate-to-strong across durations.  Gold is levered to the USD directly given that gold generally settles in dollars, and indirectly via expected inflation and policy impacts on fiat currency value.   Correlations aren’t perpetual – they build and decay - but when they start to tighten alongside other relevant/corroborating factors, it’s generally worth paying attention.  Gold’s 30D correlation to the dollar is currently -0.90;
  • Gold - CFTC Data:  Bullish Speculative positioning looks like its capitulating as net length in combined non-commercial futures & options contracts has collapsed since November.  It hasn’t paid to speculate on the end of the world (again) as extremes in bullish positioning (>1STDEV) have been followed by negative subsequent price performance in gold 100% of the time over the last year.  Net length is currently down ~62% from the late 2012 highs; and
  • Gold ETF Flows:  Gold flows to the GLD and ETFs in aggregate, have rolled over since the beginning of the year and have accelerated to the downside over the last month.  For example, total Gold Holdings in the SPDR Gold Trust (GLD) are down ~114 Tonnes (-8%) from peak 2012 levels according to Bloomberg data.

The summary of the points above are that gold will go down for exactly the same reasons it went up – slow growth and loose monetary policy.  So if the dollar continues to strengthen and growth continues to stabilizes, the record outflows from gold ETFs will only continue.  Thus as Mark Twain wrote:


“Moralizing, I observed, then, that "all that glitters is not gold."




Our immediate-term Risk Range for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1569-1604, $109.02-110.78, $82.36-82.97, 93.76-96.82, 1.96-2.09%, 11.21-13.83, and 1538-1565, respectively.



Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research




Belittling Gold Markets - Chart of the Day


Belittling Gold Markets - Virtual Portfolio

I'm Thinking

“I’m thinking, Mom, I’m thinking.”

-Bill Gates


That’s how Joey Reiman starts Chapter 2 of Thinking For A Living – “The Golden Age of Ideas and Nine Thinkers Who Figured Out How To Make It Work For Them.” It’s a quick read and I’m enjoying it. Studying success inspires me more than Cyprus does.


Thinking for yourself isn’t easy. Maybe that’s why I find being on the road therapeutic. Since I’m not the brightest bulb on the tree to begin with, I’ll take every competitive advantage I can get. One of the big ones is having broad diversity in our client base.  Thinking for a living about markets wouldn’t be complete without feedback loops. Thoughtful clients provide those. So does Twitter.


I was in Philadelphia for the day yesterday and had a dinner in Delaware last night. I’ll be in Baltimore today. Every client has a different style. They have different questions too. Selfishly, sometimes the best answer I can give in a meeting is ‘I don’t know.’ It means I haven’t thought about that enough; it means I need to be more thoughtful; and it means there is work to be done.


Back to the Global Macro Grind


Got US #GrowthStabilizing and #HousingsHammer in the bag as your Big Macro Theme thoughts for Q113?

  1. US Durable Goods ramped +5.7% in February to a new intermediate-term TREND cycle high
  2. Case-Shiller’s US Home Price Index ramped to a new high of +8.1% vs 6.9% last month
  3. In response, the SP500 closed at its 2013 high of 1563 yesterday, two points off its all-time high

What about the Italian Election? What about Cyprus? What about the coffee you spilled on your white shirt?


There’s always something to be worried about in this good life. When it comes to your performance, the question is are you worried about the things that actually matter? And, if you are, have you expressed those concerns correctly in terms of your portfolio’s positioning? If you are bearish on Spain and Italy, why sell US Equities? Why don’t you just sell Spain or Italy?


To be sure, at the end of the world all of this will come home to roost. And the timing on that is something I think about a lot. It’s called mortality. But, in between now and then, I still need to grind through our interconnected Global Macro Risk Management Signals and see what we might want to be thinking about this morning:



  1. US Dollar: up for the 7th week in the last 8, #StrongDollar continues to be a pro-growth signal (for the USA) in our model
  2. US Stocks (SP500): making higher-lows and higher-highs, they remain in a Bullish Formation with a risk range of 1
  3. US Equity Volatility (VIX): making lower-highs and lower-lows, fear remains in a Bearish Formation (risk range 10.82-14.42)


  1. Chinese Stocks (Shanghai Comp): bullish TREND support of 2206 holds as economic data sets up to accelerate in March
  2. South Korean Stocks (KOSPI): trading back above its TRADE and TREND (1975) lines of support this morning
  3. Broad Based Rally: overnight, Philippines +2.7%, Indonesia +1.8%, Thailand +1.4%


  1. The Euro (vs USD): continues to break-down (lower-highs and lower-lows) with a bearish risk range now of $1.27-1.29
  2. German Stocks (DAX): testing immediate-term TRADE support of 7861 this morning; bullish TREND remains intact
  3. Spanish and Italians Stocks: both the IBEX (Spain) and MIB Index (Italy) are bearish on our TRADE and TREND durations

BREAKING NEWS: Italy is not the Philippines. Seriously.


Who cares about 92 million people and a stock market that’s up +15% YTD (Philippines) when we can freak ourselves out about 1 million people in Cyprus whose stock market is down 98% since 2007?


Who cares about the Philippines getting its sovereign debt upgraded to investment-grade for the first time ever (Fitch this morning – ever is a long time), when we can still try to sell crisis coverage advertising when Italy’s debt gets downgraded?


I am obviously not thinking about the #EOW (end of the world) thesis correctly. But neither are the Asian and US equity market bears. Henry Ford said, “thinking is the hardest work there is, which is probably why so few engage in it.” Indeed.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1, $106.74-110.29, $82.65-83.38, 94.02-96.71, 1.88-1.96%, 10.82-14.42, 941-955, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


I'm Thinking - Chart of the Day


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The Macau Metro Monitor, March 27, 2013




Singapore expects overseas visitor arrivals to grow at a slower pace of between 2.8% and 7.6% this year, hurt by a tight domestic labour market that has made it harder for firms to expand, the Singapore Tourism Board said.


The city-state hopes to attract 14.8 to 15.5 million visitors this year, which is an increase from last year's estimated 14.4 million, STB said.  Visitor arrivals rose by 9.1% in 2012 over 2011, while tourism receipts grew around 3% to S$23 billion.



Wynn Macau was fined MOP20,000 (US$2,500) for breaching the privacy law by publicly disclosing the personal information of hotel guests.  The Personal Data Protection Office said yesterday that the gaming operator has already paid two MOP10,000 fines for breaching two principles regarding the handling of personal data.  The case refers to an investigation launched by Wynn Resorts in late 2011 into its former shareholder Kazuo Okada.

Wynn Macau disclosed “sensitive data” of its hotel customers to a third party, which was “already beyond the reasonable expectation of the hotel customers”, the office said in its annual report.  The gaming operator also failed to get the regulator’s approval before transferring data outside Macau, to the United States where its parent company Wynn Resorts Ltd is based, the office added yesterday.  


The total number of non-resident workers in Macau stood at 113,276, up by 13% YoY in February.  The majority – over 68,000 – came from the mainland.

The hospitality sector was the number one employer of imported labour, accounting for over 30% of the total. The number of imported workers is expected to continue going up, as several new casino projects in Cotai are in the pipeline.  The number of imported workers surpassed the 110,000-mark for the first time in November.



Macau unemployment rate (1.9%) held stable as the previous period (November 2012-January 2013).


TODAY’S S&P 500 SET-UP – March 27, 2013

As we look at today's setup for the S&P 500, the range is 13 points or 0.56% downside to 1555 and 0.27% upside to 1568.         










  • YIELD CURVE: 1.63 from 1.66
  • VIX  closed at 12.77 1 day percent change of -7.06%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am:  MBA Mortgage Applications, March 22 (prior -7.1%)
  • 10am: Pending Home Sales M/m, Feb., est. -0.3% (prior 4.5%)
  • 10am: Pending Home Sales Y/y, Feb., est. 8.7% (prior 10.4%)
  • 10:30am: DOE Energy Inventories
  • 11am: Fed to purchase $1.25b-$1.75b notes in 2036-2043 sector
  • 11:30am: Fed’s Rosengren speaks on economy in N.H.
  • 12:15pm: Fed’s Pianalto speaks on monetary policy in Cleveland
  • 1pm: Fed’s Kocherlakota speaks on monetary policy in Minn.
  • 1pm: U.S. to sell $35b 5Y notes


    • 9am: Exec. Office of the Pres., OMB meet w/ EC’s Enterprise, Trade Directorates-General on promoting U.S.-EC regulatory compatibility
    • 9am: FCC Chairman Julius Genachowski, Google Fiber Vice Pres. Milo Medin, speak at Gigabit City Challenge
    • 2pm: American Society of Clinical Oncology, Conquer Cancer Foundation discussion on using big data to improve cancer care


  • Cyprus program isn’t “template” for Euro-area bailouts, EU says
  • Moynihan says he’d like to be BofA’s chief for rest of his life
  • Obama signs 2013 U.S. funding bill locking in cuts he opposes
  • Ericsson said to discuss buying Microsoft’s TV-software unit
  • Apple seeks new trial over appeal in Samsung patent dispute
  • Deutsche Telekom’s T-Mobile adds iPhone as MetroPCS deal looms
  • China said to let more foreign investors trade stock futures
  • Fannie Mae, Freddie Mac ruled exempt from paying transfer tax
  • Focus Media suit over Carlyle buyout is dropped by pension fund
  • Automakers display products at New York International Auto Show
  • Toyota’s U.S. auto outlook improves on consumer confidence
  • EU antitrust regulators may charge banks on CDS collusion: WSJ
  • Prosecutors probing JPMorgan on fullness of Madoff alerts: NYT
  • J.C. Penney raises prices at stores in policy change: NY Post


    • Lindsay (LNN) 7am, $1.29
    • UniFirst (UNF) 8am, $1.13
    • AGF Management (AGF/B CN) 8am, C$0.14
    • Steelcase (SCS) 4pm, $0.19
    • Synnex (SNX) 4pm, $0.88
    • Paychex (PAYX) 4:01pm, $0.39
    • PVH (PVH) 4:02pm, $1.50
    • Forest City Enterprises (FCE/A) 4:02pm, $0.27
    • Red Hat (RHT) 4:04pm, $0.30
    • Five Below (FIVE) 4:04pm, $0.38
    • Verint Systems (VRNT) 4:05pm, $0.75
    • Progress Software (PRGS) 4:30pm, $0.25
    • Texas Industries (TXI) 5:15pm, $(0.41)
    • HB Fuller (FUL) Aft-mkt, $0.50


  • Gold Declines a Fourth Day as U.S. Recovery Signs Curb Demand
  • Corn Supply Slumps Most Since ’75 on Ethanol Profit: Commodities
  • WTI Drops From Near Five-Week High as U.S. Crude Supplies Rise
  • Rebar Prices Rise as Spring Construction Demand Trims Stockpiles
  • Raw Sugar Falls to Five-Week Low on Stocks Buildup; Cocoa Drops
  • Wheat Heads for Quarterly Decline Before USDA Stockpiles Report
  • Nuclear Output at 17-Year High During Refueling: Energy Markets
  • Rubber Advances on Data Showing Expansion at U.S. Companies
  • Fonterra Raises Payout, Cushioning Blow From N.Z. Drought
  • China Revises Fuel-Price Controls; Sinopec, PetroChina Gain
  • South Korea’s Daehan Flour Mills Tenders to Buy Wheat Today
  • Gold in Yen Set for Record Bucks Bullion Slump: Chart of the Day
  • Falkland Oil Claimed by Argentina Sees Islanders Join 1%: Energy
  • Aluminum, Zinc Advance While Copper Little Changed: LME Preview 






















The Hedgeye Macro Team









UA: Looking Good in 1Q. Not 2H

Takeaway: UA is seeing a nice pop in sell-thru at retail, which clears the way for a 1Q beat. But be on the lookout for lower growth in 2H.

We think UnderArmour is seeing a nice pop in its first quarter performance at retail, buoying our view that there will be a bifurcation this year in the company’s earnings trajectory. The Street is at $0.03, we’re at $0.09, and the company earned $0.14 last year.  We think that UA set itself up for a beat in 1Q, but then by 2H when it needs to rely on Footwear and International, we’ll see its EBIT growth rate slow down as it invests more SG&A to grow those newer businesses.


What gives us confidence in the first quarter? Simply put, for 10 quarters, UA’s wholesale sell-in to retail outstripped sell-thru by about 1,000bps. To get those numbers, we took total apparel sales, backed out International, e-commerce and company retail to get a true like-for-like US wholesale number. Then we compared to the weekly SportscanINFO sell-through data. That fueled an average Gross Margin decline of over 100bp over the past two years.


UA: Looking Good in 1Q. Not 2H - sellinvssellthru


The good news is that in 1QTD, the retail sales data suggests that UA’s sell-through has been up near 30%. We should caution against simply jacking up UA’s top line in you model or taking up Gross Margins. Rather, this is the retailers clearing out inventory that has been building up for some time. But at a minimum, it should clear the way for the channel to accept Spring product at a clip sufficient enough for UA to deliver 20%+ growth in the upcoming quarter.



But Watch Out in 2H

We continue to think that UA will join the band of companies in the retail supply chain that is stepping up capital investment this year – both in capex and in SG&A -- but at the higher end. Growth in Footwear and International are both absolutely critical to UA’s aggregate top line. When that happens, we think that revenue and EBIT growth will diverge. If we’re wrong, then we think it is a matter of time until the top line slows, which would be even more damaging to UA’s multiple.


We still think that this is an exceptional brand, but simply think that it belongs to a company that needs to go through some growing pains before it could deliver upon the expectations currently embedded in the stock.


We think it’s more likely than not that earnings growth gets pushed out by a year sometime in 2H, and that investors should take advantage of this on or just after the 1Q print.


UA: Looking Good in 1Q. Not 2H - ua2


UA: Looking Good in 1Q. Not 2H - ua3 

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