McCullough Says Dollar to Strengthen Over...

Tight & Trade-able: SP500 Levels, Refreshed...

Tomorrow, the 2009 game ends. The score is on the board. The Crash Callers of 2009 feel shame.


Will yesterday’s close and this morning’s open bring back the Depressionistas? Or did they end up being those who are rightly depressed? Was the 1st down day for the SP500 in the last 7 marking the top, or just another higher-low?


These are questions that will have answers. Our goal is to find the risk adjusted ones to place capital behind.


In the chart below, I have outlined how tight and trade-able the immediate term risk management setup has become:


  1. Immediate term TRADE support = 1115
  2. Immediate term TRADE resistance = 1136


Since we have raised such a large cash position in the Asset Allocation Model, my plan is to buy and cover on the way down to the 1115 line. If that line breaks, the plan is that the plan is going to change.


The intermediate term TREND line of SP500 support is all the way down at 1080.


You don’t have to be a super smart Crash Caller to trade a proactively predictable range. Buy red, sell green.



Tight & Trade-able: SP500 Levels, Refreshed...  - spx


It's a shortened holiday week so volume and newsflow are naturally light. That said, no one seems to be paying attention to the fact that this morning's October home price data from Case-Shiller showed the first outright home price decline in six months.




Why is this a big deal? It was the decline in home prices that triggered the credit and liquidity crisis of 2007-2009, and the stabilization and modest improvement in home prices that played a major role in the rally since March. The following chart demonstrates.


In 1Q09 encumbered US home equity value approached zero. Zero. Since then, the modest advance in home prices coupled with a roughly 2% paydown in residential mortgage debt has pushed equity levels back to the mid-single digits. If we start to see home prices rollover again for a second dip (as the above chart may be an early indicator of), expect to see this razor-thin equity cushion pushed back to zero and the trouble to begin anew. Even though people are now paying off mortgage debt on a net basis, it is only at a 1-2% annualized rate - not enough to move the needle. Rather, it is home prices that drive where equity, and, by extension, credit go.




Josh Steiner



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The Macau Metro Monitor.  December 30th, 2009




Macau’s Statistics and Census Service (DSEC) reported that the jobless rate dropped 20bps to 3.3% for the 3 months ended November 30, 2009.  The 3.3% unemployment rate marks an 11-month low on the 10th anniversery of the former Portuguese enclavess's return to Chinese rule.



According to Macau’s Statistics and Census Service (DSEC), the trade deficit widened to MOP 2.78BN in November from MOP 2.60BN last month. Exports plummeted 40.4% y-o-y to MOP 635MM, with domestic imports dropping 65.4% to MOP 195MM.  Imports edged up by 0.4% to MOP 3.41BN, which was driven by an increase in consumer durable imports.  YTD, the value of merchandise exports fell 53.7% y-o-y, while imports fell 16.9% for a total trade deficit of MOP 26.04BN.



According to the Las Vegas Sun, the departure of MGM's General Counsel Gary Jacobs earlier this month stemmed from NJ regulator's concerns about the way Jacobs handled MGM's Macau partnership.  During the state's investigation of the Macau JV, regulators found that Jacobs, who structured the deal and served as the company's go-to man in Macau, was not forthcoming with inforrmation about the deal and how it was vetted by the company.


Whether the investgation initiated by NJ regulators in 2005 eventually forces MGM to chose between exiting its interests in Macau or NJ remains to be seen.  However, the departure of Jacobs might pave the way for a more favorable outcome in the regulatory hearing, according to "familiar" sources.

Happy Freedoms

"Doing what you like is freedom. Liking what you do is happiness."

-Frank Tyger 


Sometimes I wake up in the morning to bullish market factors. Sometimes they are bearish. All of the time, I want to consider those risk factors and make a call on markets. Taking a stand and being accountable to my team and our clients is what makes me happy.


Sometimes people think my going after people like Larry Kudlow is mean. Sometimes they love it. All of the time, I consider protecting your money a full contact sport. I want to find a player on this proverbial market ice that we can beat. Getting out there and competing every day is what makes me happy.


Sometimes money makes people happy. Sometimes it doesn’t. Some people are never happy. Having been fortunate enough to have made enough money to not have to worry about it anymore, I can tell you this - genuinely liking what you do is happiness.


People say you can’t time markets. So I am on a mission to prove that you can call the probabilities of risk in markets every day. History will judge me not by the perceived wisdoms and be nice policies of this business, but by the score. I like history. It doesn’t lie.


Yesterday’s risk management call was to not chase the higher-highs being trumpeted by the perpetually bullish. Today’s call will be to buy longs and cover your shorts on weakness. Tomorrow’s call will become clear to me tomorrow.


In the US stock market, here are some important lines of immediate term support and resistance to manage risk around:

  1. SP500 support 1115; resistance 1136
  2. Nasdaq support 2247; resistance 2323
  3. Russell 2000 support 622- resistance 644

In global equity markets, here are some important moves that we have seen change the game in the last 24 hours:

  1. China’s Shanghai Composite Index has shot back up, above its immediate term TRADE line of 3216, closing up +1.6% overnight
  2. HK’s Hang Seng continues to underperform, closing down again last night, and remains broken from an intermediate term TREND perspective
  3. Japanese stocks lost -0.86% last night on legitimate bankruptcy concerns surrounding Japan Airlines
  4. European Sovereign Debt issues continue to shake select European country indices: today Greece is -0.6%; Austria -0.7%; Spain -0.6%
  5. Russian stocks are down for the second day in a row, trading down more than -1%, and breaking their immediate term TRADE Line
  6. Brazilian stocks were up for the second day in a row, breaking out above my immediate term TRADE line on the Bovespa of 67,735

In global commodity trading, here’s what’s new:

  1. Oil has taken geopolitical risk associated with terrorism quite seriously and has broken out above its immediate term TRADE line of $75.37/barrel
  2. Gold is a broken TRADE (that line of resistance = $1147/oz), but continues to look like a long at the right price ($1071/oz is the intermediate TREND line)
  3. Copper is breaking out to higher-highs this morning at $3.33/lb

So what does all of this mean? Well for me at least, it means that today is going to be a good one. We’re long Brazil (EWZ). We’re short Russia (RSX). We’re are carrying a 68% position in cash in the Asset Allocation Model and we’re ready to go shopping for some post Christmas sales.


Why is it that Kudlow and Company only like to buy things on the way up? I have no idea. Maybe there was something in the snow I chewed on growing up in Thunder Bay that makes me this way. Maybe I’m just normal and don’t like to pay up for anything (or eat yellow snow). Who knows…


What I do know, is that the summary of all of the aforementioned global macro risk factors in my model are leading to one thing – an earlier than expected rate hike from the US Federal Reserve.

He Who Sees No Bubbles (Bernanke) is getting a Northern Ontario style face wash in the snow-bank by the bond market. The short end of the Treasury market is getting buried, as 2-year yields are breaking out to the upside, across all 3 of my key durations (TRADE, TREND, and TAIL), acknowledging the bullish intermediate term TRENDS in everything from the price of Copper to American, Chinese, Brazilian stocks, and global bond yields.


Bernanke has been completely politicized, but marked-to-market prices, are doing what they like. That’s called freedom. And I, for one, feel blessed to live in this country under the watch of America’s bravest, having mine. God bless Freedom of Speech.


Best of luck out there today,





VXX - iPath S&P500 VolatilityFor a TRADE we bought some protection at the market's YTD highs by buying volatility on 12/14.

EWZ - iShares BrazilAs Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8 we started buying back exposure via our favorite country, Brazil, with the etf trading down on the day. We remain bullish on Brazil's commodity complex and believe the country's management of its interest rate policy has promoted stimulus.

GLD - SPDR GoldWe bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

CYB - WisdomTree Dreyfus Chinese YuanThe Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP - iShares TIPSThe iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

RSX – Market Vectors Russia
We shorted Russia on 12/18 after a terrible unemployment report and an intermediate term TREND view of oil’s price that’s bearish.  


EWJ - iShares JapanWhile a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

XLI - SPDR IndustrialsWe shorted Industrials again on 11/9 on the up move as the US market made a lower-high.  This is the best way for us to be short the hope of a V-shaped recovery.   

XLY - SPDR Consumer DiscretionaryWe shorted Howard Penney's view on Consumer Discretionary stocks on 10/30 and 12/2.

SHY - iShares 1-3 Year Treasury BondsIf you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.

US STRATEGY – Running in Place

Yesterday, the S&P 500 finished the day with a modest loss, the first one is six days.  Again, the internals of the market continue to be characterized by very low volume and volatility trading near the lows for the year.  The Dollar index traded up 0.14% yesterday and is trading higher again today.  


Yesterday, five of the S&P 500 sectors declined, while four advanced.  Of the sectors that outperformed, Consumer Discretionary (XLY) was the best performing, followed by Industrials (XLI) and Consumer Staples (XLP).   The XLY and the XLP outperformed on media reports that retail spending held up well during the holiday season and the December consumer confidence reading at 52.9, which was in line with consensus at 53; the November reading was revised upward to 50.6 from 49.5.  It should be noted that after the close the ABC consumer confidence number ticked down to -44 from -42 the week before.  


With most people out for the holidays no one seems to be paying attention to the fact that yesterday October home price data from Case-Shiller reported the first outright home price decline in six months.  The October Case-Shiller was 146.58, roughly in line with the 147 consensus and down 7.28% year-over-year and down from 146.65 last month.


The Airlines continue to be the big losers, with the XAL down 2.2% over the past two days. 


The range for the S&P 500 is 21 points or 1.0% upside and 1.0% downside.  At the time of writing the major market futures are slightly lower.   There appears to be very little corporate news again today.  On the MACRO front, MBA Mortgage Applications are due at 7ET; December Chicago PMI is estimated to be 55.1 versus the last reading of 56.1 and the DOE crude oil inventories are to be released at 10:30.


The Asian markets are trading mixed, with China up on a report that new loans in Dec will increase month-to-month.  The European markets are trading lower on the day on very light volume


Crude oil is trading higher for a sixth day on the belief that U.S. stockpiles are shrinking, while unrest in Iran sows concerns of a supply disruption.  According to analysts, U.S. crude inventories are expected to decline by 1.85 million barrels last week, according to a Bloomberg survey.  The Research Edge Quant models have the following levels for OIL – buy Trade (75.37) and Sell Trade (79.91).


Gold fell to a one-week low in London on speculation U.S. economic growth will curb demand.  The Research Edge Quant models have the following levels for GOLD – buy Trade ($1,071) and Sell Trade ($1,147). 


Copper rose for a fourth day in London to the highest price in almost 16 months.  Today, Copper is trading higher on speculation that supplies from Chile, the world’s largest producer, may be disrupted by a mine strike.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.21) and Sell Trade (3.36).


Howard Penney

Managing Director


US STRATEGY – Running in Place - sp1


US STRATEGY – Running in Place - usd2


US STRATEGY – Running in Place - vix3


US STRATEGY – Running in Place - oil4


US STRATEGY – Running in Place - gold5


US STRATEGY – Running in Place - copper6


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.34%