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Calling 2010

“To go beyond is as wrong as to fall short.”



When I think about making macro calls on 2010, I think about yesterday’s prices. Then I think about this morning’s. Then I think about our intermediate term macro themes. Then I think again. All the while, I think my hockey head had too many undiagnosed concussions.


I keep it simple. Real-time prices are the driving factor in our global macro risk management model. Prices don’t lie. They are leading indicators, telling us where we need to be asking research questions. Without asking the right questions, we usually don’t get the right answers.


When I was on the buy side, the biggest problem I had with Wall Street strategist “calls” on the new year wasn’t so much that they reverted to a mean, but that they all had the exact same duration. From a risk management perspective, it makes no sense to be boxed into a 12-month view.


As is customary with our quarterly Global Macro Theme calls, my team will hold a conference call for clients in the coming weeks to expand upon our 2010 calls. To be clear, these calls are for the 1st quarter of 2010. For now, to go beyond that “is as wrong as to fall short.”


Today we are going to initiate the following three Global Macro Themes for Q1 of 2010 (I’ll also go through these on Bloomberg TV this morning if you’d like to see my smiling fake hockey teeth):


1.      Buck Breakout

2.      Rate Run-up

3.      Chinese Ox In a Box


The first theme is self explanatory. From the authors of Breaking The Buck (Q1 of 2009), we think the buck is primed to breakout to the upside. As a result, in Q1, we also think that Gold is going to struggle.


The second theme is born out the Fed acknowledging that they have plain eyesight. As the data rolls in, a “data dependent” Ben Bernanke is going to watch interest rates continue to run-up. He is way behind the yield curve and now he’s going to be forced to chase it by preemptively raising rates. Both inflation and growth data are going to continue to be higher than Wall Street consensus throughout Q1 of 2010.


The third theme is nowhere in the area code of consensus. We have been writing about this for the better part of December, so our view is probably no surprise here, but we think Chinese economic data is setting up to slow sequentially in the next 3-6 months.  We were bullish on China all year.


On behalf of my teammates, I’d like to take this opportunity to thank all of you for taking the time out of your busy day to read our work this year. When a lot of people were complaining about the end of the world coming, we tripled the size of our firm, hiring as many of the best people as we could. You, as opposed to the Government, supported that. We are forever grateful.


We hope we made you think about risk, smile about this business, and protect your hard-earned capital along the way.


Best of luck and health to you and your respective families in 2010,





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


EWG - iShares GermanyBuying back the bullish intermediate term TREND thesis Matt Hedrick maintains on Germany. We are short Russia and, from a European exposure perspective, like being long the lower beta DAX against the higher beta RTSI as well.

EWZ - iShares Brazil As 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 Gold We 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 Yuan The 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 TIPS The 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 Industrials We 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 Discretionary We 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.


Optimism about the market is at the highest level since April 1987.  Yesterday, the Investors Intelligence pessimism level fell to 15.6% from 16.7% last week.   Sentiment has improved since October 2008, when the financial crisis drove the figure to a 14-year high of 54.4%.  Volatility is the other extreme. The VIX closed at 19.96 yesterday down 0.25% and is now down 50% in 2009.


The Dollar Index has traded higher for the past two days, but is looking at its biggest decline since December 1st in early trading today.


With the market painfully quiet and volume on the NYSE at the lowest levels of the year, preparing for next week seems like time better spent.  The MACRO calendar is busy next week: ISM manufacturing data on Monday, Pending home sales and domestic vehicle sales on Tuesday, MBA mortgage applications on Wednesday and the December payrolls data on Friday.  On the corporate front, we will be getting the much anticipated holiday sales updates from the retail community. 


Yesterday, the S&P 500 closed flat on the day, with only two sectors positive – Technology and Financials.  On the MACRO calendar there were no significant headlines yesterday, outside of the better-than-expected Chicago Purchasing Managers reading.  The Chicago PM could be a precursor to next week's ISM number.  The Chicago PM increased to 60 from 56 in November and was above the consensus of 55. 


Technology was the best performing sector yesterday as semis and hardware led the way.  NVDA and DELL were the two best performing stocks (following upgrades) while MSFT was the notable underperformer.  The Financials also outperformed, led by Real Estate management companies and the brokers – the two best performing stock were CBG and GS.  The Research Edge MACRO models have the XLF broken on both the TRADE and TREND durations.


The notable underperformer yesterday and for the past week is Energy (XLE).  Crude oil rose for a seventh day as shrinking U.S. crude stockpiles increase confidence that demand is recovering.  Increased geopolitical concerns and the tensions in IRAN are also helping crude trade near the $80 level.  The XLE underperformed the S&P 500 by 0.1% yesterday and 0.8% over the past week.  The Research Edge Quant models have the following levels for OIL – buy Trade (76.49) and Sell Trade (80.76).


The range for the S&P 500 is 22 points or 1.0% upside and 1.0% downside.  At the time of writing, the major market futures are trading flat on the day.  Today on the MACRO calendar Initial jobless claims are due out at 8:30; consensus is for 460,000 versus the prior reading of 452,000  


COPPER is up five of the last six days, trading at the highest price in almost 16 months.  Copper continues to trade 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 (3.17) and Sell Trade (3.38).


In early trading today GOLD is trading up $15.00 to 1,107.50.  Gold is up 24% this year and is now looking at its 9th annual gain in 2009.  The Research Edge Quant models have the following levels for GOLD – buy Trade (1,071) and Sell Trade (1,149).


Howard Penney

Managing Director










McCullough Says Dollar to Strengthen Over...

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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




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.

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.