Predicting The Past

This note was originally published at 8am on April 29, 2013 for Hedgeye subscribers.

“The problem with the future is that it isn’t as clear as the past.”

-John Lewis Gaddis


On a flight to Denver yesterday I had the opportunity to dig into John Lewis Gaddis’ most recent history book, George F. Kennan. Gaddis, professor of Military and Naval History at Yale, won the Pulitzer Prize for Biography with this book last year.


Kennan’s life is obviously a fascinating one, and I’ll draw on some of his Russian thoughts in upcoming Early Looks, but what I found most interesting was the deep simplicity of Gaddis’ process in writing about history. Empathy is a primary focus.


“The writing of biography particularly requires empathy, which is not the same as sympathy. It asks a very simple question: What exactly would I, knowing what they knew then, have done differently?” (pg 146).


Back to the Global Macro Grind


Last week I geeked out with some Chaos Theory in order to attempt to explain what it is that I do. In many ways, my Early LookContext Matters” draws, partly, on the process that Gaddis explains. Research and Risk Factors are my content and time is my context.


If my contextualization of time doesn’t have empathy, can it be considered objective? Of course not. That’s why Predicting The Past in markets and economies isn’t as trivial as it sounds. There are often two competing sides to the story.


One side of market history that doesn’t require qualification is the score. What a market price did and when is a fact. You may not like the facts, but that certainly doesn’t mean they cease to exist. For the last 5 months, the US Dollar and US Stocks are up; Commodities down.


Moreover, from a historical GDP reporting perspective:

  1. Q1 2013 US GDP #GrowthAccelerated to +2.50% (versus +0.38% in Q412)
  2. Q1 2013 US Consumer Services #GrowthAccelerated to +1.46% (versus +0.27% in Q412)
  3. Q1 2013 Export #GrowthAccelerated to +0.4% (versus -0.4% in Q412)

Dollar Up = Exports Up? Qu’est ce que c’est mes amis? Oui oui, c’est l’economie, eh! 


I can write that in the French tongue of Charles de Gaulle (who thought devaluing the French Franc was the best path to economic prosperity). I can translate it into Krugman/Bernanke if you’d like too. But facts don’t lie; economists and politicians do – and a strong currency has always been good for consumers in the United States of America.


I know. KM, that is so Q1 – this is Q2, and what have you done for me lately?


Well, so far, the US stock market has scored the 1st month of Q213 (April) as follows:

  1. SP500 +0.83%
  2. US Healthcare Stocks (XLV) +3.3%
  3. US Consumer Discretionary Stocks (XLY) +2.8%
  4. US Basic Materials Stocks (XLB) -0.70%
  5. US Energy Stocks (XLE) -2.7%

Looks like the performance divergence between Consumption (XLV, XLY) and Commodities (XLB, XLE) is widening. And with Brent Oil failing at $104.09 resistance again this morning, that is a very good thing (for Consumers).


Inclusive of last week’s dead cat bounce from oversold lows, YTD Commodities performance has not been pretty:

  1. CRB Commodities Index -3.3% (versus SP500 +10.9%)
  2. Oil (Brent) -4.6%
  3. Corn -11.1%
  4. Gold -13.3%
  5. Copper -13.3%

While some continue to plead that Commodities crashing is a bearish “internal indicator” for economic demand, I can’t for the life of me find that chapter in either 1983-89 or 1993-1999 US economic or stock market history.


That said, I am empathetic to their plight.


Plight (defined): “a situation, especially a bad or unfortunate one.” (


To be crystal clear on this, this week I fully expect both Ben Bernanke (Fed) and Mario Draghi (ECB) to continue with their storytelling plight that the world needs to devalue. The FOMC will descend from the high mountain of central planning on Wednesday. Then it’s the ECB’s turn on Thursday. As we’ve been saying for the last few weeks, the probability of the ECB cutting rates is going up, not down.


So what if that happens? What if the ECB either cuts rates or alludes to cutting rates? Since it’s all about expectations, market history has already answered part of that for you. The EuroStoxx600 outperformed all major regional indices last week, closing +3.7% - and it’s seeing some follow through buying/covering again this morning.


If the Europeans cut rates, that’s bad for the Euro – good for the US Dollar – bad for Commodities - and good for US Consumers. Bernanke disagrees with me on that. Unfortunately, history doesn’t side with his version of the story. Neither does the US stock market or her economy. Ben, empathize with economic gravity – and please, get out of the way. Devaluing the Dollar again would be a disaster.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1340-1481, $97.18-104.09, $82.04-83.32, $1.29-1.31, 97.21-100.92, 1.66-1.76%, 11.77-14.63, 928-955, and 1567-1598, 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


TODAY’S S&P 500 SET-UP – May 13, 2013   

As we look at today's setup for the S&P 500, the range is 34 points or 1.14% downside to 1615 and 0.94% upside to 1649.










  • YIELD CURVE: 1.65 from 1.66
  • VIX  closed at 12.59 1 day percent change of -4.11%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Adv. Retail Sales, April, est. -0.3% (prior -0.4%)
  • 10am: Business Inventories, March, est. 0.3% (prior 0.1%)
  • 11:30am: U.S. to sell $29b 3-mo., $24b 6-mo. bills
  • U.S. Rates Weekly Agenda


    • Obama meets with U.K. Prime Minister David Cameron
    • Final deadline for sending public comment to State Dept on Enbridge’s request to double volume of oil it ships through pipeline from Alberta to Wisc.
    • Senate Energy and Natural Resources Cmte holds forum on natural gas, including pipeline infrastructure, use of gas in transportation sector, w/ GE’s Water & Process Technologies BVBA CEO Steve Bolze, Northwest Natural CEO Gregg Kantor
    • Rep. Scott Garrett, R-N.J., hosts Equity Market Structure Roundtable on history of statutes, regulations governing America’s equity markets, 10am
    • Washington Weekly Agenda
    • Top IRS officials knew of Tea Party spying months pre-denial


  • Lazard Capital weighs sale among options for broker
  • NY A.G. presses Apple, Google, MSFT on device thefts
  • BoNY Mellon appeals ruling on Chesapeake’s early bond call
  • China investment unexpectedly slows as output trails forecasts
  • Citigroup’s Corbat says spending needed for full recovery
  • Yellen, Geithner, Summers seen as Fed chair contenders: WSJ
  • Mosaic may unveil new buyback, dividend program
  • Commerzbank slides after report of $3.2b share sale
  • Elan to pay $1b for stake in Theravance’s royalties
  • Fed settles on plan for unwinding bond-buying program: WSJ
  • G-7 signals tolerance of yen drop for now as Japan debated
  • Retail Sales: Weekly U.S. Economy Preview
  • U.S. Retail Sales, Pakistan Vote, Cisco: Wk Ahead May 13-18


    • Stratasys (SSYS) 6am, $0.38
    • Solarcity (SCTY) 4:01pm, $(0.32)
    • Take-Two Interactive Software (TTWO) 4:05pm, $0.23
    • Enerflex (EFX CN) 4:42pm, C$0.23
    • Post Holdings (POST) 4:48pm, $0.27
    • Summit Midstream Partners (SM) 5:22pm, $0.24
    • Northern Tier Energy (NTI) 5:24pm, $1.00
    • Element Financial (EFN CN) 5:26pm, C$0.07
    • Aimia (AIM CN) 6:02pm, C$0.31
    • RenRen (RENN) 6pm, $(0.07)
    • Turquoise Hill Resources (TRQ CN) Aft-mkt, $(0.04)


  • Gold Drops for Third Day as Dollar’s Strength Curbs ETP Holdings
  • Gold Bears Pull $20.8 Billion as BlackRock Says Buy: Commodities
  • WTI Drops a Third Day as OPEC Boosts Output to Five-Month High
  • Barclays Considers Hiring in U.S. Metals, Power After Reductions
  • Robusta Coffee Falls as Vietnam Drought Eases; Cocoa Advances
  • Rubber on Cusp of Bull Market With Yen Near 102 as China Imports
  • Gold Imports by India Jump as Auspicious Festival Lures Shoppers
  • Corn Gains as Persistent Rain Raises Risks for Record U.S. Crop
  • Hedge Funds Bulls Cut Bets on Natural Gas Rally: Energy Markets
  • Platinum Posts Biggest Shortage Since 2002 as Output Contracts
  • French Chef Puts Crickets on Menu in Push to Use Insects as Food
  • Dowa Boosts Silver Output for Japan Post-Quake Solar Demand
  • Ted Turner Taking Coal Funds to Create Solar Odd Couple: Energy
  • Copper Rises on Indications Chinese Demand Is Set to Strengthen






















The Hedgeye Macro Team














The Macau Metro Monitor, May 13, 2013




Ambrose So, CEO of SJM, expects that their MOP20b Cotai casino-resort project will obtain formal approval by the government in 1H 2013.  So expected the authority to finalize the approval procedures within two months, and construction works are expected to start within the year, in order to complete the project by 2016-17.


At initial planning, So said the project would create some 500,000 square meters of floor area.  SJM said it is planning to have 700 gambling tables in its first gaming project in Cotai. So also is in discussions with SJM's director Angela Leong on how they can rent Leong's land (180,000 sq mt plot near Macau Dome on Cotai devoted to a family-focused non-gaming resort).


When asked about the low performance of SJM’s casinos in the first air quality test, So admitted that the company would have difficulties in making all of its casinos meet the requirements.  However, the operator will try to use supplementary facilities to improve the gaming venues’ air quality. 



Galaxy will be added to Hong Kong’s benchmark Hang Seng Index with effect from June 17.  Galaxy will take the place of Esprit Holdings Ltd – a retailer and manufacturer of fashion clothing.  Becoming a member of the Hang Seng index could provide a boost to a firm’s share price, Business Daily reports.

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.

Fed Front-Running

“Do we really need the Fed?”

-Ronald Reagan


Don’t go all Democrat on me. It was just Mother’s Day and I’m still in a light-hearted Canadian mood. Remember, I am not a Republican either. Both Nixon and Carter devalued the Dollar and monetized the US Debt inasmuch as Bush and Obama have. I’m just a man in a room analyzing it all (and trying my best to front-run the Fed’s next move).


Front-run? Yep, this email may not make it through your compliance firewall due to the nature of its title. There are two ways to front-run the Fed: Strategy 1. By getting inside information (hire a “consultant” in Washington) or Strategy 2. By getting growth and inflation right before consensus does. We do the latter strategy.


The zeitgeist of American distrust in the Fed was very similar to today when Reagan wondered the aforementioned quote out loud in 1980. If you are thinking through what a post Fed slowing of bond purchases looks like, the early 1980’s aren’t a perfect fit but studying the time period helps you contextualize how to front-run a pattern of expectations shifts.


Back to the Global Macro Grind


Gold has been front-running the Fed since Bernanke said he’s print to infinity and beyond (September 2012). On the heels of John Hilsenrath’s WSJ article on Friday night, the Gold price is down another -1.3% this morning to $1427/oz. Its worst YTD start since 1982.


In other words, by the time the Central Planner in Chief comes to agree with economic gravity, Gold’s price inflation will be long gone. Gold’s last central planning cycle top ended in early 1980 – not 1982 (US economy started to recover in 1982). This time, Gold stopped going up 2 years before economic acceleration as well (Gold’s all-time bubble top = 2011).


So, to get Gold right, you need to get the rate of change in the economy right. How do you front-run economic gravity?

  1. Get the USD Dollar right
  2. Get US Consumption right
  3. Get US Treasuries right

We like to think it through in that 1-3 order actually – and that’s primarily because that’s how we have built our GIP (Growth, Inflation, Policy) Model. There is no better front-runner for the marginal rate of change in country’s fiscal/monetary policy than her currency.


If you disagree with that, you probably aren’t short the Yen or long the US Dollar. If you share our position on both, you probably agree that on the margin (y/y):


A)     US fiscal policy is tighter (sequestration) and monetary policy can’t get any looser (less bond buying than $85B/mth = tighter)

B)      Japanese monetary policy (CTRL+PRINT) and fiscal policy (about the spend their brains out) is looser


This makes for a phenomenal cocktail if you are bearish of the 2nd to last Fed policy bubble (Commodities). Oh, and the last of Bernanke’s Bubbles is in Treasuries, fyi.


We’ve been crystal clear on getting out of (and shorting) Commodities, Gold, etc. Whereas we have been quiet as of late on how to trade Treasuries in and around Bernanke’s super secret “communication” tools. We were actually bullish on Treasuries until November of 2012 because our GIP Model was still signaling #GrowthSlowing. That’s no longer the case.


With US Employment, Housing, and Consumption #GrowthAccelerating both sequentially from Q412 to Q113 and again here in Q213, this is what we mean by front-running the Fed. The Fed is behind us on acknowledging the market’s shift in growth expectations. Gold does not like real-inflation adjusted economic growth.


What we like is what the Global Macro market still likes YTD:

  1. US Dollar Index +1.25% last wk and +4.3% YTD
  2. Commodities (CRB Index) -0.7% last wk and -2.4% YTD
  3. Gold -1.9% last wk and -15% YTD

Don’t kid yourself – someone who operates under Strategy 1. of Front-Running knew that Hilsenrath was going to pop that in the paper on Friday night. Someone always knows something. Never stop respecting that.


If you didn’t freak-out about Sequestration or Cyprus, should you finally freak-out about this Fed policy shift? Is this the end-of-the-world trade the bears have been waiting on while not calling for it for the right reasons (#GrowthAccelerating)? What do you do now?

  1. Why not start with doing more of the same – short more Commodities, Gold, etc.
  2. Why not then cut your asset allocation to Treasuries to 0% (we did on Friday)

If you’re not going to 100% cash this morning, your 1st two go-to-moves are out and out of the bubbly stuff. Then you have to decide where you buy/sell US Dollars and US Equities. On those fronts I’ll probably:

  1. Keep buying every dip in US Dollars when it hits the low-end of our immediate-term risk range
  2. Keep risk managing the TRADE range for US consumption stocks within their bullish intermediate-term TREND

Channel your inner progressivism this morning. Do you really have to be long a 0% interest rate forever expectation? If you are long US Dollars and/or US stocks, do you really need the Fed?


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and SP500 are now $1, $100.28-105.52, $82.37-88.36, 99.04-101.93, 1.82-1.92%, 11.97-13.61, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fed Front-Running - Chart of the Day


Fed Front-Running - Virtual Portfolio

Defense Stocks Ignore Sequestration

Takeaway: Despite the sequestration, defense stocks are sitting near multi-year highs. Here's why and why it might not stay that way.

Here's an excerpt from a note that Industrials sector head Jay Van Sciver wrote to his insitutional clients earlier this week about the performance of  stocks in the defense sector.


He writes:


"Who would have thought that a couple of months after sequestration, many defense stocks would be sitting near multi-year highs? 


When consensus on a group is fairly uniform, it can present challenges and Defense has been heavily out of favor.  Easing concerns around the U.S. budget deficit and hawkish sentiment with respect to North Korea, Syria and Chinese hacking have no doubt helped boost the shares."


Defense Stocks Ignore Sequestration - Aerospace


Van Sciver continues:


"We would not chase defense shares here.  In a longer-term context, the post-sequestration rally is just a squiggle at the top of a defense spending driven mountain. 


As we understand it, much of the impact of either sequestration or whatever agreement supersedes it, should come in later years.  Further, orders received today will usually not generate revenue for months and years.  Military retirement, healthcare and other benefit costs are set to rise meaningfully in coming years, potentially crimping procurement spending. 


The nature of weapons seems to be shifting toward lower cost/unit unmanned drones and there are risks for contractors as this defense transformation plays out.  Reduced overseas commitments and a lack of prime contractor consolidation prospects may also be negative."



Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.