June 27, 2013

June 27, 2013 - DTR



June 27, 2013 - 10yr

June 27, 2013 - VIX

June 27, 2013 - dxy



June 27, 2013 - dax

June 27, 2013 - nik

June 27, 2013 - euro

June 27, 2013 - yen

June 27, 2013 - oil

June 27, 2013 - natgas

June 27, 2013 - gold

June 27, 2013 - copper

Paying The Price

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

“Somebody had to pay.”

-Lloyd George


That’s what Britain’s Prime Minister had to say about German reparations at the Paris Peace Conference of 1919. He added, “If Germany could not pay, it meant the British taxpayer had to pay. Those who ought to pay were those who caused the loss.” (Paris 1919,pg 181)


What George forgot to mention was his founding of the British welfare state; part of the British bill had to cover government spending. The Germans didn’t like that. They didn’t like the pomp of John Maynard Keynes floating around Paris smoking the peace pipe either.


Oh yes, my friends, there are roots to this central planning Gong Show. They run far deeper than through Krugman’s craw. Japan is going to learn that the hard way now. Indeed, someone needs to pay the price. For the last decade American, European, and Japanese politicians have tried imposing that tax on their people via currency devaluation. Now the timing is ripe for politicians to pay the piper.


Back to the Global Macro Grind


To be crystal clear on our conclusion on how we think this ends for the Japanese people: in tears. Never mind a country that starts doing it with a quadrillion in debt, there has never been a country in the history of humanity that has devalued their way to long-term economic prosperity. Championing Japan’s economics today is the equivalent of cheering on the Weimar Republic circa 1924.”


The title of that Early Look was “Weimar Nikkei.” The date was May 30th, 2012. Today, the Japanese stock market is crashing.


To crash or not to crash, remains the question. Darius Dale and I get into this debate with clients all of the time – “so, when do you guys think this all hits the fan?”, “can’t the Japanese keep this going for a little while longer?”


It’s a very intellectual debate because all of Wall Street is trying to figure out how long a failed team of politicians (we call Abe and Aso the Keynesian Duo) is going to be able to suspend economic gravity.


And maybe that’s why even a hockey and football player (Darius was a 325lb offensive lineman at Yale) can remind you that there’s nothing intellectual about Krugman and/or Abe’s Policy To Inflate at all. It might sound clever, but as a practical matter it’s just dumb.


So what’s the risk to the Japanese completely screwing this up?

  1. The currency market stops believing this will end well (i.e. in sustained Japanese economic growth)
  2. The Yen rips and the US Dollar falls
  3. The Correlation Risk (USD vs SPX = +0.84 on our TREND duration) goes squirrel

I’d say those are some pretty big risks.


But don’t blame the politicians. Don’t ask them to pay the price. This isn’t the time to be talking about pounds of flesh or anything at all like that. Instead, let’s just watch the country where this whole money-printing experiment started (Japan) implode on the world stage.


The context of central planning history is critical:

  1. Post 1913 Federal Reserve Act gave birth to Bloomsbury flower power act of John Maynard Keynes
  2. Paris Peace Conference 1919 gave a platform for government spending gurus to lay the railway tracks of political plunder
  3. Post 1971 Nixon abandoning the Gold Standard, 1997 was a no brainer for Krugman to tell Japan to “PRINT LOTS OF MONEY”

To be fair, going back to the 13th century, free-market folks like Genghis Kahn have been fighting the aristocracy of kingdoms and political plunderers. So the idea that Charles de Gaulle devaluing his people’s currency was going to fail inasmuch as the Weimar Republic’s did and/or the 2013 Japanese version of the same will may be consensus amongst people who have studied history.


But who cares about causality (central planners), let’s talk correlation – this is where this market’s risk is at!

  1. As soon as the Japanese Yen snapped our 95.85 TREND line, the Weimar Nikkei went squirrel last night
  2. Closing down -6.4%, that puts the #WeimarNikkei in crash mode (-20.4% since May 22nd!)
  3. When the big stuff starts snapping and crashing like that, we get out of the way

Actually, we got out of the way before it happened – think Hedgeye-style “Waterfall”  - and how we proactively risk manage the oncoming entropy of a burst of interconnected H20 crashing over the damn. #oncoming!


With time this Correlation Risk (driven by political causality) will burn off – but not today; water doesn’t burn:

  1. USD/YEN snaps 95.85 TREND line as US Dollar Index snaps 81.21 TREND line
  2. Weimar Nikkei’s TREND line of 13,848 #snapped
  3. China, Hong Kong, Germany – all of their Equity markets are over the waterfall now too (bearish TREND)

Most of this isn’t new. It’s just all happening faster now. That’s how risk works – it happens fast. This is big water, moving real fast, and I can assure you that most of the macro “tourists” out there who didn’t respect either the Yen or Nikkei signal are now very wet.


What does this mean for our asset allocation?

  1. We already have a 0% asset allocation to Fixed Income (Bond Yields aren’t going down on this fyi)
  2. We already have a 0% asset allocation to Commodities (Gold is down on this, fyi)
  3. We’d already cut our US Equities allocation in half versus its max (on Monday)

Since we are bearish on #EmergingOutflows (Emerging Markets), we don’t have to deal with that this morning either. What we need to make a decision on is whether to get out of US Equities altogether.


Here’s how I think about US Equity Market risk:

  1. It all starts and ends with the Dollar; the TREND is broken (but can be recovered with time; long-term TAIL support = 79.11)
  2. SP500 TRADE line of 1624 is broken, but TREND support of 1583 remains intact
  3. US Equity Volatility TREND resistance of 18.98 is going to be under siege this morning

Volatility, entropy, convexity – this is the stuff that makes people go squirrel. Yes, I’ve used the squirrely metaphor 3x this morning because that’s what my inbox looks like. We are getting a lot of questions on this. Which means institutional clients are in the water.


My first move this morning will be to do nothing. We’re not wet, so we can watch this political gonger play out a little before we let the market tell us which of these interconnected TREND risks confirms.


As for who ultimately pays the price for all these unintended consequences, I formally nominate Bernanke, Kuroda, and Aso. Especially for that Aso guy, ripping their countrymen a new one via currency devaluation is something they should all be ashamed of.


Our immediate-term Risk Ranges for Gold, Oil, US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1370-1418, $100.36-103.94, $80.46-81.21, 93.69-95.85, 2.06-2.27%, 14.61-18.98, and 1601-1624, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Paying The Price - Chart of the Day


Paying The Price - Virtual Portfolio


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

As we look at today's setup for the S&P 500, the range is 60 points or 2.82% downside to 1558 and 0.92% upside to 1618.                                










  • YIELD CURVE: 2.14 from 2.16
  • VIX closed at 17.21 1 day percent change of -6.82%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Personal Income, May, est. 0.2% (prior 0.0%)
  • 8:30am: Init Jobless Claims, June 22, est. 345k (prior 354k)
  • 9:45am:  Bloomberg Consumer Comfort, June 23 (prior -29.4)
  • 10am: Pending Home Sales M/m, May, est. 1.0%  (prior 0.3%)
  • 10am: Freddie Mac mortgage rates
  • 10am: Fed’s Dudley speaks on labor market in New York
  • 10:30am: Fed’s Powell speaks on monetary policy in D.C.
  • 10:30am: EIA natural-gas storage change
  • 11am: Kansas City Fed Manuf Activity, June, est. 3 (prior 2)
  • 11am: Fed to buy $4.25b-$5.25b debt in in 2017-2018 sector
  • 12:30pm: Fed’s Lockhart speaks on economy in Marietta, Ga.
  • 1pm: U.S. to sell $29b 7Y notes


    • 10am: Senate Banking Cmte hears from Rep. Mel Watt, D-N.C., to be head of FHFA, Jason Furman on his nomination to be CEA chairman, and Kara Stein, Michael Piwowar to be SEC members
    • 10am: House Transportation panel hears from Federal Railroad Administration chief Joseph Szabo on national rail policy
    • 10am: House Ways and Means Cmte hears from acting IRS Commissioner Danny Werfel on agency’s taxpayer targeting practices
    • 10am: Senate Environment and Public Works Cmte holds hearing on federal oversight of chemical plants, including those in West, Tx., and Geismar, La.
    • 10:30am: FCC Acting Chairwoman Mignon Clyburn will seek protection against disclosure of some information stored on mobile devices at agency monthly meeting
    • 10:30am: Qualcomm’s Dean Brenner, CTIA’s Christopher Guttman-McCabe, NTIA’s Karl Nebbia, Defense Dept CIO Teri Takai testify before House Energy and Commerce Cmte on equipping carriers, agencies in wireless era
    • 11am: Center on Budget and Policy Priorities briefing on changing projections in long-term budget outlook, incorporating Social Security, Medicare trustees’ reports, CBO’s May budget baseline


  • EU finance chiefs reach deal on how to handle failing banks
  • New York Times set to sell Globe for ~10% of purchase price
  • U.K. 1Q GDP rises 0.3%, matching previous est.
  • U.K. disposable income in 1Q fell most in 25 yrs
  • HD Supply, CDW raise 31% less than sought after stocks tumble
  • Oracle, to hold call on partnership at 4pm
  • Canada regulators to rule on BCE’s bid to acquire Astral Media, 4pm
  • Eurozone June economic confidence rises to 91.3; est. 90.4
  • German unemployment unexpectedly drops as eco. recovery seen
  • FHFA nominee faces Senate skepticism of skills to oversee GSEs
  • KKR submits formal bid for Bushnell, N.Y. Post says


    • McCormick (MKC) 6:30am, $0.61
    • Commercial Metals (CMC) 7am, $0.18
    • ConAgra Foods (CAG) 7:30am, $0.59
    • KB Home (KBH) 8am, $(0.06)
    • Worthington Industries (WOR) 8:30am, $0.63
    • Empire (EMP/A CN) 9:30am, C$1.33
    • Accenture (ACN) 4:01pm, $1.14
    • Nike (NKE) 4:15pm, $0.74 - Preview


  • StanChart to Build Hong Kong as Metals Center as East Moves
  • Corn Futures Swing to Limits on China-Sized Errors: Commodities
  • Risk of Cookie Shortage Prompts Japan to Test New Wheat Tender
  • WTI Rises for a Fourth Day on U.S. Refining Boost, China Profits
  • Nickel Leads Metals Rebound as Lower Prices Attract Investors
  • Palm Oil Drops to One-Month Low on Rising Soybean Oil Supplies
  • Sugar Falls After Unica Report on Higher Output; Cocoa Declines
  • HKEx, LME and China Beijing Intl Mining Exchange Sign Agreement
  • Rebar Pares Quarterly Loss as China’s Industrial Profit Improves
  • Aluminum Shipments by Japan Decrease For Seventh Month in May
  • LNG in Paradigm Shift as Shippers See Savings: Energy Markets
  • Cocoa Crop in Ivory Coast Seen by Growers Boosted After Rain
  • Colombia Coffee Growers Threaten Road Blocks, Strikes, Protests
  • Corn Declines for a Sixth Day as Record Production Is Forecast






















The Hedgeye Macro Team











Early Look

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May passenger volume at Singapore's Changi Airport rose 4.7% in May to 4,281,153.  





The unemployment rate for March - May 2013 was 1.8%, down by 0.1% point over the previous period (February-April).


Trade of the Day: EVEP

Takeaway: We re-shorted EV Energy Partners (EVEP) at 9:45 AM at $36.90.

Hedgeye “Energy Jedi” Kevin Kaiser is seeing darkness, his old friend in EVEP. It is rising back to immediate-term TRADE overbought, within a very bearish TREND. So we are re-Shorting EV Energy Partners and their need to raise capital again.


Trade of the Day: EVEP - EVEP



What the Fed Needs

Takeaway: The Fed does not need an economist to run it. Perhaps it needs someone able to meet operating budgets.

(Editor's note: The following commentary was originally posted on Fortune.)


Scientists observing bird flight patterns tell us the lead goose in the migratory V-pattern switches back and forth between looking ahead and looking back. It constantly checks the formation behind and adjusts its position to make sure it remains at the point of the flock. Periodically, the lead goose swerves out and another moves up to replace it, going through the same drill of lead, reposition, lead, and reposition.


What the Fed Needs - Geese


President Obama made noises last week about Bernanke's future, comments which are being read as a clear signal that Bernanke will leave the Fed when his current term expires. Hot speculation was set off when President Obama said Bernanke has been on the job "longer than he was supposed to." Will Bernanke be fired? Will he be allowed to serve out his term? Is he in the Presidential doghouse? Commentators are furiously connecting the dots as pundits smack themselves on the forehead saying, We shoulda known when Bernanke failed to show at this year's global central bank confab at Jackson Hole, Wyo. What could all this mean?


Bernanke's term as Fed Chairman runs through January 31, 2014. His term as a member of the Federal Reserve Board ends January 31, 2020. Speculation aside, there seems little point in letting him go at this juncture ("Maybe President Obama didn't look at his teleprompter when he made that remark," one commentator mused.) President Obama is not up for reelection, and with the wheels of the economy grinding, it's too late for someone else to step in and take either credit or blame.


Of course there are those who wish he'd never gotten the appointment in the first place. Hedgeye has taken exception with Bernanke's policies from the beginning -- starting well before him. Bernanke is in many respects not a leader, but rather a follower of the Alan Greenspan-Henry Paulson-Tim Geithner school of coddling the rich. We have been firmly in favor of a Volcker-like jolt, one that pushes all the pain into a short time frame, then gets it out of the way.


At the same time, we wish to state for the record that we have tremendous admiration for Bernanke's intelligence, for his dedication, and for the profound commitment he has brought to his stint in public service. Serving as the appointed Head of Bloody Everything is a damned-if-you-do/damned-if-you-don't proposition under the best of circumstances. It does not take a Princeton Ph.D. to recognize that Bernanke has not been faced with the best of circumstances.


The question remains, though, how much of that is his fault?


Bernanke's approach has been to stimulate the financial markets, and with them the major banking and financial firms. It is not clear to us that Bernanke ever believed the multiple trillions of dollars in guarantees, free profits on Treasury spreads, and actual cash handouts were ever going to turn into actual loans to America's businesses. Bernanke's read of the Great Depression -- a topic on which he is famously a world-renowned expert -- is that the government did not do nearly enough. And history may in fact judge him in a positive light. In a society with so many freedoms tugging at the strings of policy -- and with such a compromised and conflicted process driving both legislation and the regulatory process -- it can't be simple to manage the economy from the top down.


Or can it?


As Hedgeye CEO Keith McCullough has repeatedly observed, the most predictable and constant effect of government intervention is to increase volatility in the marketplace by accelerating economic cycles, rather than letting things play out in their own time. We do not know how one measures societal pain, but we have always been of the opinion that a Volcker-like short, sharp shock to the system would have been far healthier than the extended malaise we have lived through over nearly three presidencies.


We think the next president may want to consider a substantive shift in policy. The Fed does not need an economist to run it. It may not even need someone with a deep understanding of the financial markets. Increasingly, as our elected government has abdicated its responsibility for decision-making, the nuts and bolts of running the economy has been handed over to appointed experts. Perhaps the Fed needs to be run like a business. Perhaps the Fed needs someone with experience meeting operating budgets, hiring and managing employees, and tracking flows in the economy to stay on budget. We never need to stay within a budget as long as we have unlimited access to the printing press. Maybe the next Fed chair should be the owner of a major plumbing supply house or a machine-tool shop.


What the Fed Needs - benn


Bernanke's task has been made more difficult by the fact that major economies' central banks are all pushing on the same accelerator. From Japan to Europe, printing presses are running 'round the clock to create liquidity, in hopes it will stimulate the global economy. This has had the effect of making Bernanke's QE "To Infinity and Beyond" what folks in the hedge fund world call a "crowded trade." When one smart person buys a cheap stock, they can make money with it. When everyone piles into the same "smart idea," two things happen: First, it drives the price to levels where there is no more profit to be made by the next buyer, and it sucks the liquidity out of the market, leaving holders with no one to sell to. In the ultimate crowded trade, the profits vanish and the next move is down. Usually way down. Usually with a thud.


In his most recent testimony, Bernanke expressed himself as "surprised" that interest rates have edged up recently. This is not occurring in a vacuum. This week Keith writes, "The last of the central planning bubbles left in the world is now popping. It's called the bubble in super sovereign debt." May we flatter ourselves to point out that Bernanke should have been subscribed to Hedgeye's research?


The impenetrable aspect of the Fed policy game is that we don't actually know what Chairman Bernanke thinks. The game is played as much with carefully selected public utterances as with actual open-market transactions to add liquidity. (We know there is also a theoretical policy option to decrease liquidity, but it has long been treated as hypothetical. Bernanke is like a driver who never learned that cars have brakes.)


Our take on Bernanke's performance is that he acknowledges the markets are moving away from his ability to control them. QE or not QE is no longer the question. Having led from the front, checking market reactions assiduously along the way -- and having apparently followed Americans' most ardent policy desire by focusing on employment and housing -- Bernanke is now trying to get out of the way gradually enough that the entire edifice does not collapse like a 10-story building into a vast sinkhole.

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