Globally Interconnected Mess

Client Talking Points


Just a nasty session for Asian Equities ex-Japan. Indonesia down -3% continues to see #EmergingOutflows. Meanwhile, the Hang Seng dropped another -2.5% (down -15.4% since January 30). It is becoming crystal clear at this point that most things Chinese equals #GrowthSlowing. Every TREND line in our model other than the Nikkei is now bearish across Asia.


So Greece was already crashing (down -30% since May). Now we've got Portugal gapping down -5.7% this morning, leading Spain to a -3% loss (down -12.5% since the January top) too. Incidentally, both the DAX and FTSE broke their TREND support a few weeks ago, so weakness there isn’t new. Meanwhile, UK Services PMI beat big at 56.9 JUN. Guess what? It didn’t matter – German Services PMI of 50.4 was another miss.


Oil is up on Egypt and whatever else is going to happen next in the Middle East. Watch this TREND line of $104.95 for Brent closely. It is key. Bottom line here is breaking out above that line would be an incremental, potential tax on consumption in July and August. 

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.


Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016. 


Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road. 

Three for the Road


And so it begins again -- guy emailed me calling my note on $BBEP "a short hatchet job." Sooo it's probably a great idea



“I believe that banking institutions are more dangerous to our liberties than standing armies.” – Thomas Jefferson


West Texas Intermediate surpassed $100 a barrel for the first time in nine months on shrinking U.S. stockpiles and concern that political turmoil in Egypt may disrupt Middle Eastern supply. (Bloomberg)

Taper or Tighten?

This note was originally published at 8am on June 19, 2013 for Hedgeye subscribers.

“Start slow, and taper off.”

-Harry Truman


If I was Ben Bernanke today, that’s what I’d tell the world I am going to do. US consumption, employment, and housing growth supports a slow start to tapering. So does the Russell 2000 closing at an all-time high  of 999 (+17.7% YTD) yesterday.


As we often remind history buffs, all-time is a long time, and there comes a time (within all-time) when things start to change. Gold and Treasuries have already been front-running Bernanke on this. All-time lows in US Treasury rates are ending.


The beginning of the end of Bernanke’s financial market “innovations” is a good thing. I think most people in this country are tired of listening to politicians preface the need for their interference in our lives and markets with “what would have happened” if they didn’t save us from the problems they perpetuated. That’s now half a decade ago. Get over it.


Back to the Global Macro Grind


I spent the entire day meeting with our Institutional Clients in San Francisco, California yesterday. And I don’t know if it was something in the air (gorgeous day) or what, but investors down here are a lot more chill about the end of QE than some folks on the East Coast.


In most meetings, it seemed like a generally accepted reality that A) tapering expectations are in motion and B) this is potentially a pro-growth signal. In other words, tapering is becoming yesterday’s news. The next debate is about tightening.




Oui, oui, mes amis. This is what happens after the tapering – the tightening. And since every measure of consensus you can consider is not considering a Federal Reserve rate hike, that’s what my sharpest clients were asking me about; not what Liesman rehashes today.


Six months ago, consensus didn’t expect a tapering decision at the June 2013 Fed meeting. We did. That’s why we have 0% asset allocations to Commodities and Fixed Income.


The fundamental view wasn’t based on getting a whisper from a Washington “consultant.” It was based on the following forecast:

  1. US Dollar was going to stabilize and strengthen from Bernanke’s burning 40 year lows
  2. Commodity Prices would deflate from their 2011-2012 all-time highs
  3. US consumption, employment, and housing growth would enjoy that and surprise to the upside

That’s not a victory lap. That was just our call.


So the question now is where will we be 6 months from now?

  1. Will the US Dollar continue to make a series of higher-lows and higher-highs?
  2. Will Commodity Deflation remain a 2013 reality?
  3. Will the US Housing and Stock markets continue to add to their double digit YTD gains?

I think that if Bernanke starts slow and follows through with tapering through the fall, Americans will be ok with that. And when I say Americans, I mean the 95 to 99% of us who want:

  1. #StrongDollar
  2. Down Oil prices
  3. Appreciating home and equity prices

To be clear, the dudes who are riding the Bernanke Zero-Bound train (long Mortgage Backed Securities, Gold, Treasuries, MLPs, and whatever else it was that he jammed yield chasers into like mashed potatoes into a garden hose), do not want this.


But what % of the population cares about being long unproductive assets likes Gold (or depleting assets like an Oil and Gas MLP) and selling ads on Sirius satellite radio about the end of the world anyway?


The sad reality is that the 1-5% of Americans who need the #EOW (end of world) trade to work probably control 50% of the airtime. Oh, and by the way, they also get paid to fear-monger. That’s why their ratings suck. America gets it. We are the silent majority that tweets loudly on mute.


Our natural intuition is to prosper and grow.  We all know that waiting on the whim of a central planning overlord’s whispers about tapering is no way to live. It’s time to tighten our belts, hold ourselves to the future’s account, and stop fighting the last 5 year’s war.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Nikkei, and the SP500 are now $1361-1389, $104.55-106.64, $80.31-81.21, 93.27-96.17, 2.09-2.29%, 14.62-18.64, 12371-13641, and 1631-1669, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Taper or Tighten? - Chart of the Day


Taper or Tighten? - Virtual Portfolio


TODAY’S S&P 500 SET-UP – July 3, 2013

As we look at today's setup for the S&P 500, the range is 28 points or 0.93% downside to 1599 and 0.80% upside to 1627.      










  • YIELD CURVE: 2.10 from 2.12
  • VIX closed at 16.44 1 day percent change of 0.43%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, June 28
  • 7:30am: Challenger Job Cuts, June (prior -41.2%)
  • 7:30am: RBC Consumer Outlook Index, July (prior 51.8)
  • 8:15am: ADP Employment Change, June., est. 160k (prior 135k)
  • 8:30am: Trade Deficit, May, est. -$40.1b (prior -$40.3b)
  • 8:30am: Init Jobless Claims, June 29, est. 345k (prior 346k)
  • 8:30am: Cont Claims, June 22, est. 2960k (prior 2965k)
  • 9:45am: Bloomberg Consumer Comfort, June 30, prior -28.3
  • 10am: ISM Non-Manuf Index, June, est. 54 (prior 53.7)
  • 10am: Freddie Mac mortgage rate survey
  • 10:30am: DoE weekly inventories
  • 11am: Fed to buy $4.75b-$5.75b notes, 4/30/18-3/31/19 range
  • Noon: EIA natural gas
  • 1pm: Baker Hughes rig count


    • House, Senate not in session
    • Treasury Sec. Jack Lew speaks at naturalization ceremony ahead of July 4 natl holiday, 10am
    • President Barack Obama returns from trip to Africa


  • U.S. stock markets mostly closing at 1pm today
  • Markets closed tmw for Independence Day holiday
  • Prudential is first to challenge Treasury’s risk tag
  • Credit Suisse, Deutsche, Barclays ratings cut by S&P
  • Biggest U.S. exchanges said to seek delay in regulations
  • N.Y. state AG examing Wal-Mart, Home Depot fee system
  • Softbank bid for Sprint said to win majority vote at FCC
  • Gardner Denver investors say former CEO helped KKR on deal
  • Yahoo buys iPhone video app maker Qwiki
  • Nasdaq seeking to have Facebook suit dismissed, WSJ says
  • US Airways-AMR merger is subject of antitrust lawsuit
  • Apple said to near deal with Time Warner Cable
  • Fmr. Yves St. Laurent CEO hired by Apple
  • Michael Dell said to have not answered request to raise bid


    • Intl Speedway (ISCA) 7:30am, $0.48


  • WTI Rises Above $100 on Drop in U.S. Stockpiles, Egypt Unrest
  • Israel Chemicals Moves Dead Sea Salt for $1 Billion: Commodities
  • Copper Gains as Traders Close Bearish Bets Amid Supply Concern
  • Wheat Advances for Second Day After Egypt Purchases 180,000 Tons
  • China Said to Buy U.S. Wheat With Purchases Seen at 600,000 Tons
  • Gold Swings as Investors Weigh Physical Demand Against Stimulus
  • Abe’s Third Arrow Seen Striking Tariffs From Pork to Beef
  • Cocoa Climbs on Speculation About Crop Delays; Coffee Declines
  • Japan Nears Switching on Reactors After Tepco’s Meltdown: Energy
  • Paris Wheat Futures Seen Extending Decline: Technical Analysis
  • Wheat-Less in the Pampas Worsens Dollar Drain: Argentina Credit
  • Carbon Plan Wins EU Parliament Backing After Glut Spurs Collapse
  • Nickel Inventories Ease Pace of Growth, Still at Highs: BI Chart
  • Europe-to-U.S. Gasoline Arbitrage Cargoes Seen Plunging 28%


























The Hedgeye Macro Team












July 3, 2013

July 3, 2013 - DTR



July 3, 2013 - 10yr

July 3, 2013 - spx

July 3, 2013 - nik

July 3, 2013 - VIX

July 3, 2013 - dxy



July 3, 2013 - dax

July 3, 2013 - euro

July 3, 2013 - yen

July 3, 2013 - oil

July 3, 2013 - natgas
July 3, 2013 - gold

July 3, 2013 - copper

Heaven and Power

I am quite unable to see why Heaven or any other Power should object to our telling the Moslem what he ought to think.”

-Arthur Balfour


It’s no wonder why history remembers Lloyd George’s decision making process in Paris in 1919 as so politically conflicted and morally confused. Balfour (British Foreign Secretary 1916-191) and Henry Wilson (George’s chief of the British Imperial Staff) would almost come to blows on big imperialist planning topics (like what to do in Turkey).


Also overlooked were the Turks themselves. Almost everyone in Paris assumed that they would simply do as they were told. When Edwin Montagu, the British Secretary of State for India cried, “Let us not for Heaven’s sake, tell the Moslem what he ought to think, let us recognize what they do think.” (Paris 1919, Six Months That Changed The World, pg 380)


Does getting a bunch of pompous politicians in a room in Paris solve or perpetuate the world’s long-term risks? Post WWI, the answer to that was a disaster. There’s no reason to believe that trying to centrally plan the Egyptians or Portuguese this morning is going to be a success story either. Our centrally planned world is long of political arrogance and short of human empathy.


Back to the Global Macro Grind


From a globally interconnected risk perspective, this morning is one of the uglier ones I’ve seen in the last few months. It’s not just Egypt jamming oil prices up and Portuguese bond yields blasting higher either. Here’s what’s going on:


1.   ASIA – Indonesian stocks (-3%) and the Hang Seng (-2.5%) led a broad based ex-Japan meltdown in Asian Equities overnight. China printed another miss on the Services PMI front (53.9 vs 54.3) in June and it has become clear that Asian #GrowthSlowing is a reality. Every single Asian Equity market other than Japan is now bearish TREND @Hedgeye.


2.   EUROPE – Greek stocks continue to crash this morning (-30% since May 17th); Portugal’s stock market is down -5.7% (10yr bond yield in Portugal tested 8% for the 1st time since November); and the rest of European major Equity markets are trading straight down (Spain -3%, Germany -1.8%, etc); every European Equity market remains bearish TREND @Hedgeye.


3.   CURRENCIES/COMMODITIES – Dollar down small so far, and that’s not a good thing for US Equities (6mth correlation between SPY and USD = +0.76); Brent Oil is testing a breakout back above its $104.95 TREND line @Hedgeye this morning – any sustained close above that price could impose a sequential tax on global consumption in July-August.


Then of course you have Snowden banging around in Bolivia with Morales (or will they be dining in Vienna this evening?) as Obama fans try to put out multiple fires, including another delay on Obamacare.


What on earth could possibly go wrong?


They begged for (and obtained) a mandate for global central planning and now we’re going to have to deal with their mess. How much longer this can continue is anyone’s guess. All the while, there’s one mother-load of their sovereign debts we can short while we wait.


Under our new Global Macro Theme (that was born out of a Q2 one #EmergingOutflows) we are going to roll with emerging #DebtDeflation here in Q312. Yesterday we re-shorted the iShares USD Emerging Market Debt Bond Fund (EMB) and we’re looking forward to introducing a whole new bag full of short ideas in our upcoming Q3 Hedgeye Macro Themes Call. Basically, short politicians.


So if you can’t buy Sovereign Storyteller’s Debt – and you can’t buy Asian or European Equities, what’s left?

  1. US Dollars
  2. US Equities
  3. Beer, Wine, etc.

It’s a good thing US Equity markets close early today. You can get an early start on allocating some of your hard earned 2013 US Equity gains to option #3.


Since we have 26% of the Hedgeye Asset Allocation in US Dollars this morning and only 14% in US Equities (60% is in Cash, which means 0% allocations to International Equities, Fixed Income, and Commodities), we don’t feel like we’ll look entirely naked if the tide rolls out on our 1592 intermediate-term TREND line of support for the SP500 either (5 LONGS, 4 SHORTS @Hedgeye).


Buying anything US Equities is no way to live. Utilities (XLU) versus Consumer Discretionary (XLY) already has a +215 basis point performance spread for Q312 to-date (Utilities -1.28% vs Consumer Discretionary +0.87%). Don’t forget that #StrongDollar and #RisingRates punishes Yield Chasers, people investing in MLPs that can’t pay their dividend (LINE), etc.


As for Heaven and Power, and for the Moslem and Canadian out there that some American central planner wants to pass personal judgment on next, well – on this 4th of July, I’ll be betting on the men and women who will fight for their freedoms, all day long.


Our immediate-term Risk Ranges are now:


UST 10yr 2.41-2.63%



VIX 15.31-17.97

USD 82.78-84.04

Oil 100.22-104.95


Happy 4th of July, and best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Heaven and Power - Bond Price Deflation


Heaven and Power - vp 7 3

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