Gold Crushed

Client Talking Points

Gold Getting Crushed

Gold prices are dropping further and faster, down another 1.5% overnight, and down 25% since September. It’s getting close to our oversold signal. We’ve have crystal clear on the reasons why. Like 1982 when consensus didn’t think the US economy was recovering, it was actually recovering. Gold didn’t like #GrowthAccelerating 31 years ago, and it doesn’t like it today.

JGBs Again

We had one of the biggest moves in the JGB market in roughly a decade in the past week. We had a 30 basis point move higher, then overnight we had a 10 basis point drop to a yield of 0.82%. Machine tool orders were weaker, and consumer confidence was slightly lower in Japan. We’re watching JGBs closely here.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.  


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. 


With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

Three for the Road


“Some of these mining execs are straight out of Atlas Shrugged. Horrible for shareholders.” -- @KeithMcCullough


“It’s hard to beat the person who never gives up.” – Babe Ruth


45-3, the Miami Heat’s record in their last 48 games following their playoff series victory over Chicago last night


TODAY’S S&P 500 SET-UP – May 16, 2013   

As we look at today's setup for the S&P 500, the range is 27 points or 1.55% downside to 1633 and 0.07% upside to 1660.










  • YIELD CURVE: 1.70 from 1.70
  • VIX  closed at 12.81 1 day percent change of 0.31%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am: Fed’s Rosengren speaks in Milan
  • 8:30am: CPI M/m, April, est. -0.3% (prior -0.2%)
  • 8:30am: CPI Ex Food & Energy M/m, April, est. 0.2%
  • 8:30am: Init Jobless Claims, May 11, est. 330k (prior 323k)
  • 8:30am: Continuing Claims, May 4, est. 3m (prior 3.005m)
  • 8:30am: Housing Starts, April, est. 970k (prior 1.036m)
  • 8:30am: Housing Starts M/m, April, est. -6.4% (prior 7.0%)
  • 8:30am: Building Permits, April, est. 941k
  • 8:30am: Building Permits M/m, April, est. 3.8%
  • 8:30am: Annual revisions to earlier data
  • 9am: Fed’s Fisher speaks at NABE conference in Houston
  • 9:45am: Bloomberg Economic Expectations, May (prior -4)
  • 9:45am: Bloomberg Consumer Comfort, May 12 (prior -29.5)
  • 10am: Philadelphia Fed, May, est. 2 (prior 1.3)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: Fed to purchase $1.25b-$1.75b notes in 2036-2043 sector
  • 12:30pm: Fed’s Raskin speaks on economy in Washington
  • 3:05pm: Fed’s Williams speaks in Portland, Ore.
  • 6pm: Riksbank’s Stefan Ingves speaks in Chicago 


    • President Obama meets with Prime Minister Recep Tayyip Erdogan of Turkey to discuss Syria, trade, countering terrorism
    • 9:30am: Senate Armed Svcs Cmte holds hearing on 2001 Authorization for Use of Military Force
    • 9:30am: House Transportation and Infrastructure Cmte marks up H.R. 3, which would give Congress power to issue approval for Keystone XL pipeline
    • 10am: House Oversight and Government Reform Cmte, Data Transparency Coalition hold a “DATA Demonstration Day,” to show how digital technologies would improve efficiency, management, accountability of government
    • 10am: House Financial Svcs Cmte hears from SEC’s Mary Jo White on commission’s budget request
    • 10:30am: House Oversight and Government Reform panel holds hearing on oil, gas production on federal lands
    • 10:30am: Senate Small Business Cmte holds hearing on effect of E-Verify systems
    • 11am: House Judiciary panel holds hearing on electronic employment eligibility verification systems
    • 1pm: House Judiciary panel holds hearing on Agricultural Guest Worker Act
    • Obama seeks to revive reporter-shield bill post-AP subpoenas


  • Cisco 4Q adj. EPS view in line, rev. view midpoint misses
  • Time Warner Cable said to weigh stake in Hulu web-video service
  • Roche’s GA101 gets FDA breakthrough-therapy designation
  • Apple said to be subject of U.S. Senate offshore tax hearing
  • Obama forces out acting IRS chief in bid to restore trust
  • Novartis considers bid for Actavis: WSJ
  • Plosser says Fed should exit mortgage-backed securities market
  • Hartford Financial hires Deutsche Bank to seek buyer for Japanese unit
  • Japan 1Q GDP rose most in yr on consumer spending, exports
  • Tesla to raise as much as $830m to repay U.S. green-car program
  • Bristol-Myers drug cocktail quells melanoma tumors: Study
  • Cancer treatment’s brutal side effects may be cut: Studies
  • Platts retains energy trader confidence amid price-fix probe
  • U.S. wants $5b from Swiss banks to end tax row: Handelszeitung
  • William Lyon Homes raises $217.5m pricing shares above range
  • MSCI announces changes from semiannual global index review
  • Investors see U.S. markets with best return in global poll


    • Prestige Brands (PBH) 5:30am, $0.35
    • Flowers Foods (FLO) 6:30am, $0.43
    • Kohl’s (KSS) 7am, $0.57 - Preview
    • Wal-Mart Stores (WMT) 7am, $1.15 - Preview
    • CAE (CAE CN) 8:18am, C$0.18
    • Applied Materials (AMAT) 4pm, $0.13
    • Dell (DELL) 4:01pm, $0.35
    • Autodesk (ADSK) 4:01pm, $0.45
    • Aruba Networks (ARUN) 4:03pm, $0.12
    • Brocade Communications (BRCD) 4:04pm, $0.15
    • Brady (BRC) 4:04pm, $0.60
    • Nordstrom (JWN) 4:05pm, $0.76 - Preview
    • ViaSat (VSAT) 4:05pm, $0.01
    • J.C. Penney (JCP) 4:30pm, $(1.05) - Preview


  • Gold Near One-Month Low as Soros, Blackrock Reduce ETP Holdings
  • Soros Joins Gold-Stake Cuts Before Bear Market Drop: Commodities
  • Strict Checks on China Scrap Copper Imports Boost Ore Demand
  • Copper Falls for Third Day on Mounting Signs of China Slowdown
  • Gold Demand Slid 13% to Three-Year Low on Investor ETP Sales
  • China’s Copper Output in April Rises 14 Percent to 558,000 Tons
  • Gold Demand in China Surges 20% to Record in First Quarter
  • WTI Crude Declines as Fuel Demand Drops Amid Economic Weakness
  • Sugar Falls to 2010-Low on Brazil, Thailand Output; Cocoa Drops
  • Soybeans Advance on Indications of Sustained Demand From China
  • China’s June Soybean Imports May Reach Record, Govt Center Says
  • Gold Price Slump Increased India Appetite for Bullion, WGC Says
  • Paulson Sold Gold Miners, Bought Family Dollar Last Quarter
  • Platts Retains Energy Trader Confidence Amid Price-Fix Probe
  • Freeport Stops Papua Mining After Tunnel Collapse Kills Five





















The Hedgeye Macro Team












Unstable Systems

This note was originally published at 8am on May 02, 2013 for Hedgeye subscribers.

“Certainty does not necessarily hold for unstable systems.”

-Eric Chaisson


Markets and economies are unstable systems. They could be less unstable if governments just left them alone – but that’s not going to happen, so Embrace Uncertainty. By changing a few words in a FOMC or an ECB statement, a central planner can change your life.


For the growing base of the gainfully employed trying to sell you certainty, I am becoming the anti-christ. I kind of like that. My team’s work is grounded in history (context), math (process), and evolution. Government forecasters are more like Newtonian navel-gazers.


The biggest risk to Bernanke (Fed), Draghi (ECB), and Kuroda (BOJ) policies isn’t the policy itself; it’s the expectation embedded in their forecasts that drive those policies . No one actually trusts that these guys will ever get it right – we’re all just trying to front run them.


Back to the Global Macro Grind


“When a system is orderly (that is, low in entropy and rich in structure), more can be known about that system than when it is disorderly and high in entropy” (Cosmic Evolution, pg 49). That’s a great way to characterize what the modern day market system is not (orderly).


Expectations drive volatility. Unless you are the guy on the other end of the phone getting inside information on a central planner’s next big move, there is nothing orderly about market expectations. Everything can change, fast.


For now, the only thing that’s been changing really fast (down Gold, Oil, etc.) is the expectation that Bernanke is going to be able to devalue the dollar in perpetuity. That expectation has two big year-over-year parts:

  1. ABSOLUTE – both US fiscal and monetary policy expectations are tighter, on the margin
  2. RELATIVE – both ECB and BOJ fiscal/monetary policy expectations are looser, on the margin

And, unless the collective consensus that is America’s new transparency/accountability/trust transmission mechanism (Twitter) fails at demanding more of what has been working in the US economy (and at the pump, and in the stock market, and in terms of home price appreciation) for the last 4 months, I expect to see more of the same on those two big parts throughout the coming months.


Remember, this isn’t like the April/May ‘sell and go away’ calls that Hedgeye has made, literally, every year for the last 3 years (2010, 2011, 2012 #timestamped). The spring/summer of 2013 is more like 2009 where:

  1. Q109 #StrongDollar drove #CommodityDeflation (lower prices at the pump into the spring/summer into Q209)
  2. Consumption #GrowthAccelerating (from Q109 to Q2/Q3 2009) when consensus didn’t expect it

Our proprietary Hedgeye GIP (Growth/Inflation/Policy) Model has not changed since 2008. That’s why we were as bullish in March of 2009 on the US Consumption #GrowthAccelerating front as we are now. Competitively speaking, the good news is that Old Wall’s models didn’t change either.


What was different in 2010, 2011, and 2012 (coming out of Q1 versus 2009), wasn’t our model – it was what makes an already (and endemically) unstable market system more unstable – incremental government policy expectations (ie. multiple QEs).


In each of the last 3 years, Bernanke imposed a Dollar Devaluation Policy on global market expectations in Q1:

  1. Inflation expectations then rose, sequentially, from Q1 to Q2
  2. Markets front-ran the Fed, chasing food/oil prices higher from Q1 to Q2
  3. And, rising inflation (sequentially) slowed real inflation-adjusted consumption growth

Then… the Fed’s finest, in their vigilant pursuit of selling their employers (politicians) “stability” and certainty, had to whisper sweet nothings to the old boys throughout the market swallows of the summer. Then… ta-dah… another QE coming out of Jackson Hole… markets (especially Gold) ripped… economy did nothing… etc. etc. etc.


Unfortunately (for him), that’s all Bernanke’s historical baggage to deal with now. I’m personally done with the guy. Away from some family weddings, the best news of my 2013 summer is that he’s not going to be in Jackson Hole this year.


When I read yesterday’s FOMC statement, I breathed a sigh of relief. My life is uncertain enough. Having a little more certainty that this man is going to be doing nothing for the next little while made me sleep easier. I hope it did the same for you too.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST10yr Yield, VIX, Russell2000, and the SP500 are now $1374-1483, $98.41-103.92, $81.42-82.53, $1.29-1.32, 97.11-100.53, 1.63-1.73%, 12.91-14.96, 918-955, and 1576-1605, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Unstable Systems - Chart of the Day


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Mercy Calling

“Nothing emboldens sin so much as mercy.”



US stock market bears and Gold bulls alike are begging for mercy this morning, and we will give it to them. I am getting my first coordinated overbought (SP500) and oversold (Gold) signal of 2013. Both signals are explicitly linked to an overbought one in the US Dollar Index. #StrongDollar, on behalf of the 99% of us, we salute you.


The aforementioned quote is one of my favorites in Shakespeare’s Timon of Athens. When I read it in college, I glazed right over it. When I re-read it in William Silber’s Volcker – The Triumph of Persistence, I smiled. I have had 2 feet on the floor, every day, for 5 years competing with sell-side research that doesn’t have the downside I do if I start to get things really wrong. I don’t want mercy.


Volcker believed in mercy – but he also believed free market actors needed to understand and feel pain. After the Policies to Inflate of the 1970s , Volcker reminded Dan Cordtz on ABC in 1980 that “people need to change their expectations and their behavior, and that is always an uncomfortable process.” (Volcker, pg 198). So was being long “inflation” and/or commodities for the next 7-8 years.


Back to the Global Macro Grind


Bernanke, of course, doesn’t have the spine to say anything remotely close to what Volcker did throughout the early 1980s. And the sad reality of our centrally planned market lives (after Bernanke) is that someone like Janet Yellen or Turbo Tax Timmy won’t either.


But, as my man Einstein, would say – everything is relative. And the probabilities continue to mount that both the Japanese and Europeans will be more dovish than anyone at the Fed is allowed to be; particularly when we see a 6% handle on US unemployment.


American confidence in government was so beaten down by Nixon, Carter, and Arthur Burns (the 1970s version of Bernanke), that by the time 1982 rolled around consensus couldn’t believe that #CommodityDeflation served as a tax cut. Growth stabilized and:

  1. Gold kept getting hammered as #GrowthAccelerating became clearer in 1
  2. Oil prices went straight down – the average price per barrel under Reagan = $16.53!
  3. US Dollars ripped the #EOW America camp a new one (average USD Index = $115.25 under Reagan)

No this isn’t an I love Reagan thing. Have mercy on me, please. US politics makes me sick, blah! If the US Dollar Index were to scream +37% to the upside (from today’s price), and Oil were to crash (like down more than 80% from here), would you be happy?


That’s what I am talking about when I say #StrongDollar, Strong America. Russian oligarchs, Middle Eastern Kings, and American Oil/Mining execs might disagree with me on that. Just a bit.


What’s in your wallet? How much Gold are you going to bring to buy beers at tonight’s Bruins game? The shiny metal expectations of a Ben Bernanke to Infinity and Beyond world are fading folks. Gold is crashing (-25% since that epic policy day for Bernanke in September of 2012, when Cramer proclaimed “I love Gold here!”); smoked again this morning, -1.5% to $1372/oz.


Here are my big mercy signals (immediate-term TRADE overbought and oversold) born out of this USD/Gold capitulation:

  1. US Dollar Index = immediate-term TRADE overbought at $84.21 (remains in a Bullish Formation)
  2. Gold = immediate-term TRADE oversold at $1370 (remains in a Bearish Formation)
  3. SP500 = immediate-term TRADE overbought at 1660 (remains in a Bullish Formation)

Overbought and oversold is as prices do. So I could be wrong on this (i.e. early) by 1-2 days or I could be really right. The entire point about my risk management process is making mercy decisions when the pain points to the highest probabilities I can model.


The hardest thing to do in this game is wait on your pitch. I still swing at outside pitches way too often. Whenever I do, it’s either my emotions or our research views that get the best of me. For those mistakes, I have no one to blame but myself.


The easiest thing to do in Global Macro is ride trends. The big moves (particularly at bifurcation points in policy) tend to be more glacial than you see in single stocks. Gold went up for 12 straight years don’t forget. Unwinding #EOW (end of the world trade) will take time.


Process Review - our risk management model is Duration Agnostic. That means we contextualize the short term within the long-term:

  1. TRADE = 3 weeks or less (our immediate-term risk ranges live in this time frame)
  2. TREND = 3 months or more (our best backtests live here – i.e. the calls we tend to get the most right)
  3. TAIL = 3 years or less (usually our best rate of change signal, only when the TREND agrees with it)

So, Bullish Formations are securities that are bullish on all 3 of our core durations (TRADE, TREND, and TAIL) and Bearish Formations are just the mirror opposite of that.


Gold is the mirror opposite of the US Dollar and the SP500 right now. That’s why we are very loud and consistent about our views on all 3 of these big macro moves. Get the US Dollar right, and you tend to get a lot of other big things right.


Getting the mercy pain points right is a very immediate-term risk management exercise. I do all of that timing/probability work underneath the hood myself. I used to tar basement walls for my Dad too. I like getting my hands dirty (if someone pays me to). Mercy Calling is a dirty job, but someone has to do it.


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 $1, $100.18-103.98, $82.93-84.21, $1.28-1.30, 100.21-103.39, 1.86-1.99%, 12.23-13.87, 971-993, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Mercy Calling - Chart of the Day


Mercy Calling - Virtual Portfolio


The Macau Metro Monitor, May 16, 2013




CEO Ambrose So and COO Louis Ng are selling a total of 20 million shares in a price range of HK$21.50 to HK$22.00 each (representing up to $56.7MM).  The price range represents a discount of 4.4% to 2.2% to Wednesday's closing price of HK$22.50, it says. Deutsche Bank is handling the deal.



Double-digit growth from VIP customers is “sustainable” for the industry and the casino operator’s business from high-stake gamblers is “solid,” said MGM China CEO Grant Bowie.  “Everyone was speculating some negative impact, but the leadership change wasn’t an impact,” Bowie said, referring to the government transition in mainland China. “There’s also a level of resilience in terms of how China market is performing relative to the global market.”



Secretary Tam sent a letter to one of LVS’ bankers to assure that the company could operate in Macau autonomously from its Chinese partner, Galaxy, even in the event of termination and extinction of Galaxy Casino’s concession contract.  Venetian Macau is technically a sub-concessionaire of Galaxy Casino S.A. since 2002.  A copy of the letter was sent to Bank of Nova Scotia – at the time a lead arranger of project debt for LVS – in 2006 and signed by Mr Tam.


According to Business Daily, that assurance was important, because some of the gaming operator’s banking partners – many of them Western companies – fretted that the company’s Macau rights, technically and officially a sub-concession, could be at risk if the supposedly senior partner Galaxy Casino S.A., a local unit of Galaxy Entertainment Group, lost its primary licence.  The letter states that “Venetian Macau S.A. shall be able to exploit games of chance and other games in casino [sic] in Macau autonomously from Galaxy Casino S.A., even in the event of termination and extinction of Galaxy Casino S.A.’s concession contract…”





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