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Predicting The Past

This note was originally published at 8am on April 16, 2013 for Hedgeye subscribers.

“We cannot predict where it might be headed in the future, but we can describe how it came to be in the past.”

-Eric Chaisson


First, my entire team’s thoughts and prayers go out to all of the people affected by the horrible act at the Boston Marathon yesterday.


Without having inside information, predicting an external event like that is impossible. So is consistently predicting tops and bottoms in markets. They are processes, not points. It’s my job to A) contextualize the past so that B) I put us in the best position I can for the future.


Yesterday’s market collapse started with more of what has been happening for months – commodities collapsing. Combine intermediate-term TREND collapse with an immediate-term external event and you run out of time and space into the market’s close. That’s why describing where we came from to reach an intraday capitulation like that is critical this morning.


Back to the Global Macro Grind


Historical Context:

  1. SP500 was immediate-term TRADE overbought into last week’s all-time closing high of 1593 (so we made sales there)
  2. CRB Commodities Index was already in a Bearish Formation going into yesterday’s open (bearish TRADE/TREND/TAIL)
  3. Gold was not only in a Bearish Formation into Friday’s close, it started crashing pre-open yesterday too

Crashes (20% peak-to-trough declines) are very bad. We don’t buy those. Predicting The Past on that score is actually quite easy. Old Wall calls it “catching a falling knife” for a reason. Unless you have a catalyst, “cheap” gets a lot cheaper during a crash in price expectations.


But the thing about the past, on both things that matter to our process (Research and Risk Signals) is that you can see it today. That’s why our Research and Risk Management Models often get lucky in not being long something like Gold, Energy, or Brazil on days like yesterday. A multi-duration, multi-factor, Research and Risk Management #Process makes its own luck.


Describing how Bernanke’s Bubble (Commodities) is deflating is actually quite easy. You simply have to accept causality in terms of what made Bubble#3 (Greenspan/Bernanke Bubbles #1 and #2 were Tech and Housing) to begin with. If you reverse that causal factor’s intermediate-term TREND (Dollar Up instead of Debauched), you start describing why the Commodity/Gold Bubble is popping.


Reviewing 2013 YTD:

  1. Gold Miners (GDX) are down -37% YTD
  2. Gold is down -18% YTD
  3. Copper is down -11% YTD

Freeport McMoran (FCX) is a Gold and Copper expectations proxy (that’s why we’re short it); it’s down -14% YTD. And Brazil’s stock market (the best liquid proxy for a country commodity index) is down -13.1% YTD. For the month-to-date (APR) alone, Basic Materials (XLB) and Energy (XLE) stocks are down -4.8% and -5.7%, respectively.


This is why describing where we are matters. It’s the #CommodityDeflation that’s been driving US Consumption expectations higher all year long too. Q: So on the biggest down day for both US stocks and commodities of the year, why didn’t I buy US stocks yesterday? A: it’s the signal – and, above all else, I respect the market’s Risk Management Signal.


For US stocks, let’s go through why I’m at 10 LONGS, 9 SHORTS @Hedgeye instead of sending you another “Buyem” email into the close:

  1. SP500 broke my immediate-term TRADE line of 1557 support yesterday (that was new)
  2. US Equity Volatility (VIX) broke out above my immediate-term TRADE line of 14.07 resistance yesterday
  3. S&P Sector Studies flagged 5 of 9 core Sectors broken on our immediate-term TRADE duration

Those 3 things, combined with a nasty volume signal (+32% vs my TREND avg), predicts plenty enough for me to do 1 thing in a situation like that (a situation I have seen many times before) – to simply wait and watch.


I’m not happy to miss a big US stock market open, but if I do, I know why I made that decision. Having sold into an immediate-term TRADE overbought signal of 1593, I’m more than happy to wait and see if the bulls recapture 1557. If they can, with intermediate-term TREND support for the SP500 (1515) and TREND resistance for the VIX (18.69) intact, predicting the past gets easier again.


My Macro Team and I will be hosting our Q213 Global Macro Themes Call at 1PM EST today. Please ping Sales@Hedgeye.com for the details. Our intermediate-term TREND to long-term TAIL Research Views will be the focus of that call. That always helps us contextualize what was confusing about yesterday’s immediate-term duration risk too.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, EUR/USD, UST10yr Yield, VIX and the SP500 are now $1291-1464, $100.21-104.79, $82.04-83.14, 95.87-102.11, $1.28-1.31, 1.69-1.76%, 14.07-18.69, and 1537-1568, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Predicting The Past - Chart of the Day


Predicting The Past - Virtual Portfolio

CHART OF THE DAY: Spectators and Actors


CHART OF THE DAY: Spectators and Actors - Chart of the Day

Spectators and Actors

“We have become both spectators and actors in the great drama of existence.”

-Niels Bohr


You can’t geek out on quantum mechanics without giving a big shout-out to the great Danish atomic physicist, Niels Bohr. He won the Nobel prize for Physics in 1922. He would have been a beauty running the Hedgeye Research Team. No offense, DJ.


I was on a plane to Kansas City from Denver yesterday and couldn’t stop thinking about the progress that our research team has made. I’m actually becoming quite humbled when I read the work of junior analysts who have matured into senior analysts at our firm. They are well ahead of where I was 5 years into being in the game. A collaborative culture provides them a convex learning curve.


Applying chaos theory, predictive tracking algos, and the principles of thermodynamics to our Global Macro research is what we are doing. Yes, we are early. And, no, we don’t need to call a management team for “edge” on what the Euro is going to do next. In order to execute on our process, we have to submit ourselves to being both attentive spectators of the game and proactive actors within it.


Back to the Global Macro Grind


Not unlike playing team sports, you have to adapt to the game that you are in and play it accordingly. Because, no matter where you go this morning, here you are – at the all-time highs in the SP500 (+11.7% YTD). And the great drama of our existence within the game continues…


A few weeks ago I contrasted approaching markets from a Darwinian (evolutionary) rather than a Newtonian (time-independent) perspective. “Newton’s 17th century view stipulated the physical world as a closed system dominated by cause and effect” (Cosmic Evolution, pg 34). Whereas opening your mind and risk management process to non-linearity, uncertainty, and interconnectedness is the new frontier.


In both calling market tops on “valuation” and picking stocks irrespective of style factor risks, what we are learning here is that we all have a lot more to learn. “Gone is the deterministic and mechanistic paradigm” (Chaisson). Gone is the idea that central planners can smooth economic gravity and/or the unintended consequences associated with their trying to control the game.


Tomorrow and Thursday, central planners will once again attempt to do precisely the opposite of what I just wrote:

  1. Fed’s Open Market Committee will hopefully do nothing to our intermediate-term #StrongDollar TREND
  2. European Central Bank (ECB) will either cut rates or allude to cutting them soon

Rather than get upset about what we think these people who are paid to print political compensation should do, what we’ve done is build a model that front-runs their proactively predictable behavior (yes that’s sad). We call it our GIP Model (Growth, Inflation, Policy) where:


A)     POLICY is causal to a currency’s price, volatility, and expectations (across risk management durations)

B)     INFLATION is local (to currency moves) and will accelerate or decelerate based on POLICY (causal)

C)     GROWTH reacts (on a currency adjusted basis) to real-time local inflation expectations


No one is going to give my team a Nobel Prize for this. We’d have to had racked up debt and toiled in academia to prove out our practitioner’s model (with no real-world experience) for decades – and by that time we would have been way late. But, our Growth and Inflation forecasts have been better than anyone in the marketplace for the last 5 years, and I’m not going to apologize for that. We’re proud of it.


So back to the why on an ECB rate cut:

  1. #CommodityDeflation is perpetuating “lower than expected inflation readings” across Europe
  2. Both European employment and real (inflation adjusted) consumption growth remain weak
  3. So, in their central planning box of thinking, this provides theoretical air-cover to devalue the Euro

In market speak, this won’t save what the Europeans have been desperately trying to solve for (GROWTH). To the contrary, this POLICY to INFLATE will devalue the Euro versus the US Dollar, rally European stock markets, and plug the people (again). #EuroCrats, Unite.


Sound familiar?

  1. United States of America’s monetary POLICY to inflate (2010-2012) = US Dollar hits 40yr lows
  2. Japan’s Weimar Republic POLICY to inflation (2012 to ?) = Burning Yen, to be continued

Perversely, this is a great opportunity for America. This provides both the President of the United States and his conflicted and compromised Fed and Treasury an opportunity to get out of the way (Treasury just announced they’ll pay down $35B in borrowings!) and let the US Dollar strengthen versus her socialized European and Japanese counterparts.


Politically driven causal factors driving entropy into an unstable and non-linear market ecosystem of colliding global currencies, commodities, and country factors … Yes, this is war - a Currency War (thank you Jim Rickards). We’re just spectators and actors trying to perform within it.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $97.13-104.38, $3.06-3.26, $81.93-83.31, $1.29-1.31, 97.11-100.94, 1.66-1.76%, 11.71-14.61, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Spectators and Actors - Chart of the Day


Spectators and Actors - Virtual Portfolio

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


In preparation for PNK's F1Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • "These trends continued into January, with similar patterns to what we saw in the fourth quarter, that being, overall visitation softness and declines largely seen in the Retail segment."
  • [Baton Rouge] "Overall, we're very pleased with the visitation trends, and look to keep our focus on driving additional regional plays, continuing our brand awareness efforts and hosting high-profile events throughout 2013 remains a priority. It's important to remember that cultivating VIP business take time, and we're confident that we can reach our goals, based on the quality of the property, extremely favorable guest response and the infrastructure we have in place, with an experienced host team, branch offices and a network of independent agents."
  • [River Downs] "Demolition of the grandstands and related facilities will be completed shortly, and we expect to begin construction of a new gaming entertainment center this quarter. We plan to open in the second quarter of 2014."
  • [River City] "The next two phases are progressing rapidly, with a multipurpose event center expected to come online by the summer and the hotel is scheduled to open in the third quarter of 2013."
  • [Baton Rouge room renovation] "We're trying to get this next phase done before the summer season hits and then we would not continue with rooms until after Labor Day, next September."
  • "Now the other thing I'll just add is that we feel pretty good about the airlift that comes into Baton Rouge, the commercial airlift. And Baton Rouge is a vibrant and growing city. So from a longer-term point of view, we are very bullish on what we have in Baton Rouge."
  • [Marketing plans]  "We have forecasting tools, so we can anticipate the business volumes for those properties that have hotel demand. So there is trends that you can look out into the future and, therefore, adjust accordingly versus waiting for business volumes and then reacting. So I would just answer it more succinctly that we can react. And, really, plus react we can proactively adjust our marketing spend based on the business volumes that we're seeing with future demand, whether it be hotels, events, those kind of things, response rates. So we're pretty nimble when it comes to that." 


TODAY’S S&P 500 SET-UP – April 30, 2013  


As we look at today's setup for the S&P 500, the range is 33 points or 1.48% downside to 1570 and 0.59% upside to 1603.










  • YIELD CURVE: 1.45 from 1.46
  • VIX  closed at 13.71 1 day percent change of 0.73%

MACRO DATA POINTS (Bloomberg Estimates):

  • FOMC opens two-day meeting
  • 7:45am: ICSC weekly sales
  • 8:30am: Employment Cost Index, 1Q, est. 0.5% (prior 0.5%)
  • 8:55am: Johnson/Redbook weekly sales
  • 9am: NAPM-Milwaukee, April (prior 50.98)
  • 9am: S&P/CS 20 cities, M/m SA, Feb., est. 0.80%
  • 9am:S&P/CS Composite 20 cities, Y/y, Feb., est. 8.90%
  • 9am: S&P/CaseShiller Home Price Index, Feb. (prior 146.14)
  • 9:45am: Chicago Purchasing Manager, April, est. 52.6
  • 10am: Consumer Confidence, April, est. 60.0 (prior 59.7)
  • 11am: Fed to purchase $4.25b-$5.25b notes in 2017 sector
  • 11:30am: U.S. to sell 4W bills, $23b 52W bills
  • 4:30pm: API energy inventories


    • House meets in pro forma session, Senate not in session
    • Federal Open Market Cmte meets on eco, interest rates, 9am
    • Bloomberg LINK holds Washington Summit w/ CFTC Chairman Gary Gensler, FCC Chairman Julius Genachowski, Lazard Vice Chairman Gary Parr, White House CEA Alan Krueger, CAP Chairman John Podesta, Va. Gov. Bob McDonnell, 8am


  • KKR said to weigh bid for Rio Tinto Australia copper mine stake
  • Best Buy exits Europe with sale of stake to Carphone Warehouse
  • CBOE plans post mortem on response, procedures amid outage
  • BofA urges dismissal of U.S.’s $1b faulty mortgages suit
  • Time Warner Cable appoints AOL’s Minson CFO as Esteves departs
  • MBIA bid for pretrial ruling in Countrywide lawsuit is rejected
  • UBS 1Q profit beats ests. on investment bank
  • BP 1Q profit beats analyst estimates on trading
  • Deutsche Bank seeks $6.5b as co-CEO Jain reverses course
  • AB InBev’s quarterly results miss estimates on Brazil, U.S.
  • Heinz holders vote on acquisition by Berkshire, 3G Capital
  • Heinz wins ruling tossing investor suits over Berkshire buyout
  • Suncor Energy 1Q operating EPS beats est.
  • US Airways-AMR in talks on credit cards w/Barclays, Citigroup
  • German unemployment climbs in sign economic recovery delayed
  • Japan-to-Korea output misses estimates as Taiwan cools


      • Enterprise Products Partners (EPD) 6am, $0.65
      • Aetna (AET) 6am, $1.38
      • Starwood Hotels & Resorts Worldwide (HOT) 6am, $0.53
      • Huntsman (HUN) 6am, $0.16
      • Norbord (NBD CN) 6am, $1.36
      • NiSource (NI) 6:30am, $0.71
      • CGI Group (GIB/A CN) 6:30am, C$0.49
      • Rockwood Holdings (ROC) 6:30am, $0.67
      • Harris (HRS) 6:30am, $1.12
      • Pitney Bowes (PBI) 6:30am, $0.44
      • Cummins (CMI) 6:44am, $1.86
      • Legg Mason (LM) 6:59am, $0.20
      • Pfizer (PFE) 7am, $0.55
      • Thomson Reuters (TRI CN) 7am, $0.32
      • Sirius XM Radio (SIRI) 7am, $0.02
      • Fidelity National Information Services (FIS) 7am, $0.61
      • Cobalt International Energy (CIE) 7am, ($0.14)
      • Wisconsin Energy (WEC) 7am, $0.71
      • Avon Products (AVP) 7am, $0.14
      • TRW Automotive Holdings (TRW) 7am, $1.43
      • Xylem (XYL) 7am, $0.27
      • Oshkosh (OSK) 7am, $0.86
      • MGIC Investment (MTG) 7am, ($0.14)
      • Office Depot (ODP) 7am, $0.04
      • Marathon Petroleum (MPC) 7:03am, $2.17
      • McGraw-Hill (MHP) 7:10am, $0.73
      • MeadWestvaco (MWV) 7:15am, $0.24
      • NextEra Energy (NEE) 7:30am, $1.02
      • Public Service Enterprise Group (PEG) 7:30am, $0.74
      • Invesco (IVZ) 7:30am, $0.47
      • Tenet Healthcare (THC) 7:30am, $0.30
      • Domino’s Pizza (DPZ) 7:30am, $0.55
      • Vishay Intertechnology (VSH) 7:30am, $0.11
      • Valero Energy (VLO) 7:42am, $0.99
      • U.S. Steel (X) 7:45am, ($0.22)
      • Affiliated Managers Group (AMG) 7:54am, $2.03
      • HCP (HCP) 8am, $0.72
      • UDR (UDR) 8am, $0.33
      • AGL Resources (GAS) 8am, $1.34
      • BOK Financial (BOKF) 8am, $1.18
      • Hudson City Bancorp (HCBK) 8am, $0.11
      • 3D Systems (DDD) 8am, $0.21
      • Arcos Dorados Holdings (ARCO) 8am, $0.06
      • Agco (AGCO) 8:15am, $0.88
      • Martin Marietta Materials (MLM) 8:15am, ($0.35)
      • Ecolab (ECL) 8:20am, $0.59
      • Franklin Resources (BEN) 8:30am, $2.49
      • Zoetis (ZTS) Pre-mkt, $0.33
      • Arthur J Gallagher (AJG) Pre-mkt, $0.24
      • Athabasca Oil (ATH CN) Pre-mkt, (C$0.03)
      • Edison International (EIX) 4pm, $0.66
      • Vertex Pharmaceuticals (VRTX) 4pm, ($0.21)
      • Western Union (WU) 4pm, $0.32
      • SolarWinds (SWI) 4pm, $0.37
      • Regal Entertainment Group (RGC) 4pm, $0.13
      • AvalonBay Communities (AVB) 4:01pm, ($0.63)
      • Fiserv (FISV) 4:01pm, $1.34
      • Canadian Oil Sands (COS CN) 4:01pm, C$0.42
      • Amdocs (DOX) 4:01pm, $0.72
      • Flextronics International (FLEX) 4:01pm, $0.13
      • IAC/InterActiveCorp (IACI) 4:01pm, $0.68
      • DreamWorks Animation (DWA) 4:01pm, ($0.03)
      • EXCO Resources (XCO) 4:01pm, $0.08
      • NCR (NCR) 4:02pm, $0.42
      • Oneok Partners (OKS) 4:05pm, $0.58
      • Oneok (OKE) 4:05pm, $0.59
      • Trimble Navigation (TRMB) 4:05pm, $0.38
      • QEP Resources (QEP) 4:05pm, $0.30
      • Questar (STR) 4:05pm, $0.43
      • Questcor Pharmaceuticals (QCOR) 4:06pm, $0.96
      • Verisk Analytics (VRSK) 4:10pm, $0.53
      • Genworth Financial (GNW) 4:10pm, $0.28
      • Access Midstream Partners (ACMP) 4:15pm, $0.34
      • Fortinet (FTNT) 4:15pm, $0.10
      • Yamana Gold (YRI CN) 4:20pm, $0.18
      • TECO Energy (TE) 4:24pm, $0.17
      • FMC (FMC) 4:30pm, $1.07
      • Willis Group Holdings PLC (WSH) 4:30pm, $1.31
      • Jones Lang LaSalle (JLL) 4:30pm, $0.23
      • Genworth MI Canada (MIC CN) 4:31pm, $0.81
      • Equity Residential (EQR) 4:55pm, $0.65
      • DDR (DDR) 5pm, $0.26
      • Boston Properties (BXP) 5:09pm, $1.21
      • SM Energy Co (SM) 5:30pm, $0.57
      • UGI (UGI) Post-mkt, $1.44
      • American Capital (ACAS) Post-mkt, $0.28
      • Manitowoc (MTW) Post-mkt, $0.14


  • Gold Rush From Dubai to Turkey Saps Supply as Premiums Jump
  • Lumber Mills Expand as Prices Rise Most Since 1993: Commodities
  • WTI Crude Heads for Monthly Decline as Stockpiles Seen Rising
  • Gold Swings Between Gains and Losses Before Policy Makers Meet
  • Copper Heads for Biggest Decline Since May on Demand Concern
  • Corn Extends Biggest Gain Since June as Rain Slows U.S. Planting
  • Sugar Climbs With Grains Before May Futures Expiry; Cocoa Falls
  • Perth Mint Works Through Weekend to Meet Most Demand Since 2008
  • Noble Group Said to Hire Former Goldman Trader Evans for Metals
  • India May Consider Cutting Wheat Export Price to Boost Shipments
  • Greeks Bet Ship Rout Ending With Most Orders Since 2008: Freight
  • Voestalpine Sees Steel Recovery Taking Until 2014 on Europe Glut
  • Crude Stockpiles Gain in Survey as Output Climbs: Energy Markets
  • Gold Exchange-Traded Products Poised for Record Monthly Decline






















The Hedgeye Macro Team












The Macau Metro Monitor, April 30, 2013




Singapore’s wages will grow at a faster pace in 2013, contributing to higher labor costs and price pressures even as the economy expands at a “modest” pace, the Monetary Authority of Singapore said.  Overall wage growth could average 3% in 2013, compared with 2.3% in 2012.  The island’s job market will remain “tight” this year as demand for workers outpaces supply amid the continued tightening in foreign labor.  A Manpower Ministry report today showed job creation in the three months through March 31 was the weakest in 10 quarters, and the unemployment rate rose from a five-year low.


Singapore tightened curbs on overseas workers for a fourth straight year in February and unveiled measures that will raise wage costs for companies through 2015, as the government steps up efforts to increase productivity. The central bank, which uses its exchange rate to manage inflation, stuck to a policy of allowing gradual gains in its currency even after the economy unexpectedly contracted last quarter.


The economy added 20,800 jobs last quarter, compared with 44,000 in the previous three months, said the Ministry of Manpower.  The seasonally adjusted jobless rate rose to 1.9% from 1.8%, it said.


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