Psychological Ballet

This note was originally published at 8am on March 20, 2013 for Hedgeye subscribers.

“There’s a kind of psychological ballet: who will outstare who?”

-John Vaillant, The Tiger


Sound familiar? After a 3-day correction of 1% from the YTD high in the SP500, look into my eyes and tell me how you really feel. And “you should not suddenly turn tail because the scent of fear passes quickly.”


You must back off, slowly, slowly – especially if the tiger has a kill, or if she’s a mother with cubs: she makes a step, you make a step – you must not run away.” (The Tiger, pg 126)


To be clear, I remain bullish – and to the well known newsletter author (who sent me hate mail intraday yesterday) who wants me to roll-over and die… well, I say good luck. “Tigers will bluff-charge the same way bears do and, in most cases, all the tiger wants is an indication of submission.” (pg 150). If this market rips from here, I don’t want his apology – I just want him to publicly admit defeat.


Back to the Global Macro Grind


I know, I know – fights are breaking out and it’s getting gnarly out there. Old Wall guys sending me emails, former Perma Bulls going bearish – it’s all out there right now. It’s a Psychological Ballet. And I like it.


I also liked buying on red yesterday. We bought the SP500 (SPY) after seeing the low-end of our immediate-term Risk Range (1538-1565) tested and tried. After 3 straight down days for US stocks, the US 10yr Bond Yield is down a whole 3 basis points.


End Of World (#EOW) or correction? Who will outstare who into month and quarter-end?


Let’s drop the Siberian tiger stuff and getting into the Global Macro meat of the matter (currencies, countries, fear, etc.):


1.   CURRENCIES: the fulcrum piece of our bullish case on Asian and US #GrowthStabilizing remains the US Dollar. What Cyprus Storytelling gave us this week was an even Stronger Dollar, and Weaker Oil. The US Dollar Index is now up for 6 of the last 7 weeks and, not ironically, the CRB Commodities Index is down for 6 of the last 7 weeks.


2.   COUNTRIES: note that I wrote Asian and US #GrowthStabilizing; so, if you want to freak-out about Europe, just get over it and short Europe – but make sure you sell the right country (we prefer Italy, Russia, and France – in that order, short side). China’s Shanghai Composite ripped a +2.7% move overnight and Germany’s DAX is +0.8% testing 5-year highs. Not #EOW, yet.


3.   VOLATILITY: the epicenter of fear is in both the front-month and term structure of US Equity Volatility (VIX). I’ve written about this exhaustively for 3-months because I want to be Fading Fear (buying High Short Interest, Shorting Gold, Shorting Treasuries, etc.). Front-month VIX just failed at immediate-term TRADE resistance of 14.74 and has no support to 10.77.


I could always smell them. Now that they are sending me idle threats of hereditary right, I can see the Old Wall very clearly now. So what is it, gentlemen? To be long or short of stocks here? Buy or sell?  It really is an ok question to answer, transparently and accountably. I am watching you.


There are two categories of people when it comes to extreme situations… One gets scared first, and then starts thinking; the other starts thinking first and gets scared after the fact. Only the latter survives in the taiga.” (The Tiger, pg 155)


Having made over 2,000 long/short calls (all #timestamped, since 2008), almost 50% of the calls I have made have been on the short side. Inclusive of having to manage plenty of risk to the upside, my batting average on the short side = 79.12%. So A) unlike some of these pundits, I get things wrong and B) I have no problem shorting markets when my process tells me to do so.


Fear of fiction or perceived top-calling wisdoms only computes one way into my process – as contrarian indicators. If it’s the Italian Election or Cyprus that you fear, I am not scared. If you’ve been bearish the whole way up and it’s your reputation you fear, I don’t blame you.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST10yr Yield, VIX, Russell2000, and the SP500 are now $1589-1613, $107.14-109.53, $82.61-83.29, 93.68-97.17, 1.89-1.97%, 10.77-14.74, 933-955, and 1538-1565, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Psychological Ballet - Strong Dollar   Strong America


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Macro Evolution

“The book of nature is written in the language of mathematics.”



More so than in any other year since we started the firm (2008), we are getting tons of questions from clients about our process – specifically, how we’ve applied breakthroughs in modern chaos theory (fractal math) to our global macro risk management process.


What’s interesting about answering these questions is that there is no silver bullet book you can read. No, they don’t teach this in business school (yet) either. I built the process on mathematical principles that are relatively new. When I want to consider evolving the process, I don’t read Jeremy Siegel – I dive into behavioral science, applied math, big history/data, etc.


Of the top 3 books that have inspired me on the interconnectedness of the Global Macro ecosystem, Eric Chaisson’s Cosmic Evolution (2001) is one of them. If you are looking to learn about my framework, all you have to do is read his Preface and Prologue. Unless you are in the business of not constantly re-learning how to operate in markets, I guarantee you can’t put this book down after 20 pages.


Back to the Global Macro Grind


Change is good. So is being long gamma. Convexity in market pricing works on the upside too. And being long a market that continues to make higher-lows (on no-volume down days), and higher-all-time-highs on up days, works for me.


Much to the Crisis-Mongering and bit-coin advertising business chagrin, the SP500 made another fresh all-time closing high yesterday at 1570. That puts the SP500 up +10.1% for the YTD.


But, but (the most commonly used word when I keep telling people I am bullish on Asian and US Equities), “look at copper, coal, corn and…” Yes, precisely – that’s why we think both US Consumption Growth and Consumption oriented Equities are going higher.


To review how the Macro Evolution gods have scored the YTD, there are massive divergences developing between:


A)     Consumption assets

B)      Commodity assets


And no, an asset doesn’t have to be an asset class – that’s what people call something like Gold, after it’s gone up for 12 straight years. For the YTD, being long Gold (or Gold Miners) is what I call a liability.


#StrongDollar is driving this – there are both positive and negative correlations associated with this breakout in the US Dollar Index. For starters, let’s look at Countries (major macro equity Style Factor):

  1. US Equities (SP500) +10% YTD vs Brazil (Bovespa) -10% YTD
  2. UK (FTSE) +10% YTD vs Russia (RTSI) -6% YTD

So, Russia is not Brazil, but both are in an irrelevant #OldWall acronym (BRIC), and neither of these stock markets like it at all when Metal, Food, and Oil prices deflate.


In fact, this morning there’s a headline on Bloomberg that says “Gazprom Falls Under $100B, Putin Frets.” I know, poor Putin. But seriously, who the hell cares about Russians fretting over US Consumption taxes at the pump and their Cypriot laundry?


Enough about that – let’s look at the US Equity market and dig down beneath the ecosystem’s crust to look at another important quantitative Style Factor – Sector Style Risk:

  1. US Healthcare Stocks (XLV) +17.2% YTD
  2. US Consumer Staples (XLP) +15.1% YTD
  3. US Consumer Discretionary (XLY) +11.8% YTD
  4. US Basic Materials Stocks (XLB) +2.4% YTD

Yes, ‘one of these things is not like the other, one of these things just doesn’t belong’ (when you are modeling fractals you can go right batty at night, so listen to Romper Room tunes and you’ll be fine).


One of these things (Basic Materials) is being impacted by who wins/loses under a pervasively #StrongDollar macro environment.


But, but –


1.       “Copper and Coal and Corn going down is a bearish demand signal …”

2.       “Consumer Staples outperforming is a defensive signal… “

3.       “Italian Elections, Cypriot Chariots of Fire, and North Korean Chubby Wubby, are big risks…”


C’mon man. Let’s get real here.

  1. Commodity Deflation = good for corporate input prices and real (inflation adjusted) consumption growth, globally
  2. Consumer Staples companies (especially Food, Restaurants, etc.) have massive y/y margin expansion opportunities
  3. Crisis-Mongering about Korea? Join the club – CFTC SPY net long position hitting YTD lows as Treasuries net longs ramp

I know I’m whipping around and ranting a bit – but if you truly believe in Embracing Uncertainty like we do, you want to do more of that – especially when our globally interconnected signals do.


Contingency – randomness, chance, and stochasticity – pervades all of dynamic change on every spatial and temporal scale… science today is no longer in the prediction business… evolution predicts little of the future, yet strives to explain much of the past.” –Chaisson


Changing our positioning as the ecosystem does. Macro Evolution, Hedgeye-style.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1, $109.11-111.54, $82.58-83.49, 93.07-96.04, 1.84-1.94%, 12.15-13.41, 933-955, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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The Macau Metro Monitor, April 3, 2013




Macau received 107,230 visitors during the four-day Easter holiday ending on Monday representing a 2.27% increase in comparison with last year.  The Border Gate continued to be the major port for incoming and outgoing travellers, while Hengqin and the Outer Harbor Ferry Terminal were the other busy ports.



Promoter Bob Arum said he is trying to put together a fifth fight between Pacquiao and Juan Manuel Marquez and shopping it to casinos in Macau and Singapore.  He said on Saturday night at the Brandon Rios-Mike Alvarado fight that the bout would likely be at one of the Venetian hotel-casinos in Macau or Singapore.



TODAY’S S&P 500 SET-UP – April 3, 2013

As we look at today's setup for the S&P 500, the range is 17 points or 0.72% downside to 1559 and 0.37% upside to 1576.         










  • YIELD CURVE: 1.62 from 1.62
  • VIX closed at 12.78 1 day percent change of -5.89%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, March 29 (prior 7.7%)
  • 8:15am: ADP Employment Change, March, est. 200k (prior 198k)
  • 10am: ISM Non-Manuf Composite, March, est. 55.5 (prior 56)
  • 10:30am: DoE inventory reports
  • 11am: Fed to buy $3b-$3.75b in 2019-2020 sector
  • 3:30pm: Fed’s Williams speaks in Los Angeles
  • 5pm: Fed’s Bullard to introduce lecture in St. Louis


    • Senate, House not in session
    • President Obama speaks on gun control in Denver
    • FDIC holds discussion about community banks, 8:30am
    • Hagel speaks on consequences of fiscal constraints
    • NRC staff meets w/ officials from Edison Intl, which is seeking to resume operations at its San Onofre plant. 1pm
    • House Energy and Commerce panel holds hearing on ACA’s Pre-Existing Condition Insurance Program, 1pm


  • News Corp. is said to consider sale of its community newspapers
  • Verizon denies report that it’s considering a bid for Vodafone
  • SEC approves using Facebook, Twitter for company disclosures
  • Lagarde says IMF to contribute ~EU1b to Cyprus Deal
  • Cyprus swears in new finance minister as bank controls eased
  • Adelson’s Sands faces $328m trial over Macau license
  • MBIA wins ruling on loan buybacks in Bank of America lawsuit
  • S&P says U.S. didn’t disclose role with states to court
  • Related said to sell NYC’s Monterey Apartments for $250m
  • Euro-Area March inflation slows less than economists Eetimated
  • China’s service industries expanded at faster pace in March
  • BOJ’s Kuroda faces 1-yr window on ending deflation
  • U.K. Banks try to dodge EU bonus caps by defining risk-taker
  • Rio Tinto seeks buyers for Australian coal mine stakes: WSJ
  • CNPC, Petronas eye Marathon Oil’s Angola fields: Reuters


    • Conn’s (CONN) 7am, $0.56
    • ConAgra Foods (CAG) 7:30am, $0.56
    • Monsanto (MON) 8am, $2.57
    • Schnitzer Steel (SCHN) 8:30am, $0.25
    • Acuity Brands (AYI) 8:32am, $0.63
    • Dominion Diamond (DDC CN) 5pm, $0.18
    • Harry Winston (HW CN) 5pm, $0.18



  • Corn Joins Bear Market for Crops as Demand Slows, Planting Gains
  • Lonmin New CEO Shoulders Output Push as Costs Soar: Commodities
  • WTI Drops as U.S. Crude Stockpiles Increase Most in Four Weeks
  • Copper Falls for Fourth Day on Concern Demand Has Yet to Rebound
  • Silver Drops to 8-Month Low in Bear Market in London; Gold Falls
  • Rice Gains to Highest in a Month as U.S. Farmers Cut Planting
  • Asian Palm-Oil Planters Head to Africa to Meet World Demand
  • Wheat From India Seen Shunned as State-Set Price Deters Buyers
  • Corn-Price Drop Won’t Deter Sugar Buys for Ethanol, Vilsack Says
  • Canada Seen Beating U.S. in $150 Billion Asia LNG Race: Energy
  • Rebar Rises for Second Day on Expectations for Spring Demand
  • Nestle to Spend $16 Million on China Coffee Center on Sales View
  • Silver Seen Extending Losses to $26 an Ounce: Technical Analysis
  • Palm Oil in Malaysia Climbs as Much as 0.5%, Erasing Losses






















The Hedgeye Macro Team










VIDEO: End of a Golden Era?


Hedgeye CEO Keith McCullough appeared on CNBC’s Fast Money this evening to talk stocks and how the gold market is breaking down. Keith notes that now that gold has been breaking down over the past four weeks, sell-side analysts are going to get bearish on it, which will only add to the sell off. To see Keith’s full take on gold, skip ahead to 2:35 in the video posted above.

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