While the market is down 11.7% from its high in April, over the last three days the S&P is up 0.25%, despite the weakness in global markets. Yesterday’s news flow was focused on stresses in the Spanish banking system and the escalating geopolitical tension surrounding the Korean peninsula. Supporting the performance has been a reduction in the RISK trade as the VIX declined 9.6% yesterday and is now down 26.5% over the past three days. The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (26.89) and Sell Trade (45.83).


Our “Sovereign Debt Dichotomy” theme continues to play out, as the focus has begun to shift to the forced consolidation in the Spanish banking sector stemming from the Real Estate asset bubble. At the same time yesterday, we saw an increased level of stress in the funding markets with three-month dollar Libor rising for an 11th straight session to 53.6 bp, the highest level since early last July. This morning, three-month LIBOR has held steady day-over-day, unchanged at 53.6 bp. The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.21) and Sell Trade (1.24). Despite the recent resilience in the euro, the issues in Europe continue to drag on sentiment.


In early trading, the DXY is trading higher for the third day in a row. The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.08) and Sell Trade (86.97).


From a MACRO perspective, the outperformance of the US recovery is taking a back seat to the MACRO headwinds from Europe. Yesterday, the Conference Board's consumer confidence index rose to 63.3 in May from 57.7 in April, the highest level since March 2008. The expectations index posted its third straight meaningful gain, increasing to 85.3 from 77.4 last month, and the highest level since August 2007. The Conference Board tends to be at best concurrent indicator; we use ABC weekly and Michigan bi-monthlies as pseudo concurrent-to-leading looks into consumer confidence. The Consumer Discretionary (XLY) was the second best performing sector yesterday.


The Materials (XLB) was the best performing sector yesterday, and one of four sectors that was positive on the day. The XLB outperformance came despite pressure on commodities and commodity equities from the strength in the dollar. The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.01) and Sell Trade (3.31).


Precious metals were also up on the day; Gold closed up 0.2% to $1,197. At the time of writing, gold is trading at $1,213, down 2.4% from the record high of May 12th. The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,184) and Sell Trade (1,255).


The Financials finished higher on the day after underperforming earlier in the day. While legislative issues remain, the outperformance was driven by the banking group with BKX up 1%. Regional names were among the best performers with KEY up 3.9%, STI up 3.6% and PNC up 2.1%. In addition, the investment banks and the mortgage insurers were another bright spot.


The Industrials (XLI) declined 0.1% yesterday on the continued scrutiny surrounding the RECOVERY trade. Conglomerates, E&Cs and machinery names were among the laggards. Another notable underperformer was Technology (XLK); the S&P Software index was down 0.7%, while the semis finished higher with SOX up 0.6%.


As we look at today’s set up, the range for the S&P 500 is 61 points or 2.5% (1,047) downside and 3.2% (1,108) upside. Equity futures are trading above fair value as global markets rebound from Tuesday's slump. The OECD has raised global economic forecasts and US GDP forecasts to +3.2% vs. previous +2.5%. For the fourth day, the Hedgeye Risk management models have 0/9 sectors on TRADE and 0/9 sectors positive on TREND.


On the economic front, to be reported today are: 

  • MBA Mortgage Applications
  • US Durable Goods (Apr) consensus 1.5%; ex-transportation 0.5%
  • New Home Sales (Apr) consensus 421K; MoM 2.3%
  • DOE Crude Oil Inventories released
  • Treasury Auctions in 5-yr notes 

Oil is trading higher after the American Petroleum Institute said gasoline supplies fell 3.19 million barrels last week. Crude has dropped 20% since reaching $87.15 a barrel on May 3. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (67.33) and Sell Trade (71.72).


Howard Penney

Managing Director













The Great Enemy Of The Truth

"The great enemy of the truth is very often not the lie - deliberate, contrived and dishonest - but the myth - persistent, persuasive, and unrealistic."
-John F. Kennedy


Modern day Rome (Washington) has rendered itself a very sad place. When it comes to storytelling, that is…


JFK’s prescient point in 1962 may very well explain the fall of the modern day Keynesian Empire as much as it explains who our professional politicians see when they look in the mirror.  Collectively, the myths of their “pretended patriotism” can be “persistent, persuasive, and unrealistic.”


As I sat beside Bloomberg’s Deirdre Bolton yesterday, watching Timmy Geithner represent the US government’s latest storytelling to the Chinese, I couldn’t help but notice the shadows that became Mr. Geithner. Both the proverbial shadow of global doubt and the two Chinese flags enveloping Timmy’s conflicted representation of the American “truth” were ominous.


As Geithner prepares to reach the heights of hypocrisy this morning (speaking in London), here’s our version of the sad truth - America is 3-6 months away from becoming the global spotlight that is a European debtor and deficit disaster.


Remember, the math doesn’t lie; politicians do. Here the latest:

  1. Fed’s Balance Sheet: last week the Federal Reserve’s balance sheet expanded by another $14.8B on a week-over-week basis, after the Fiat Fools signed off on the Fed buying another $21B in Mortgage Backed Securities (on the week!). This puts the Fed’s balance sheet at a new sequential peak of $2.35 TRILLION dollars (Transparency/Accountability check: Bernanke said he was going to reduce the size of the Fed’s Balance Sheet)…
  2. America’s Balance Sheet: post yesterday’s $42B in 2-year Treasury issuance, the United States of America’s total debt balance has officially eclipsed the $13 TRILLION dollar mark, or 86% of projected 2010 GDP (as a reference point for sovereign debt/GDP ratios, our Managing Director of Macro, Daryl Jones, has Spain’s 2010 Debt/GDP at 69%).
  3. America’s Off Balance Sheet Liabilities: post another day in the life that has become the fictional equivalent of extend and pretend until another professional politician can hold the bag for our kids, this mother nut of debt does not cease to exist. I have recently finished reading David Walker’s “Comeback America”, so for the sake of time this morning, let’s use his estimate from 2008 of $42.9 TRILLION dollars and persuade ourselves that since Walker left working for Groupthink Inc. in Washington (he worked on these numbers for 4 presidential administrations), his estimate from almost 2 years ago is plenty conservative/low.

Now Walker calls this America’s “$56 TRILLION Financial Hole”, but the hole is actually getting deeper. That’s what happens when you keep digging in with more debt. This is the sad truth. From Hank The Market Tank Paulson to Tricky Dick Fuld, America has not learned the most important lesson of the 2008 crisis: borrowing short to fund long term liabilities heightens the probability of a balance sheet blowup. Instead of Lehman’s, now it’s America’s.


Back to Timmy being engulfed by the Star Spangled Banner’s shadow of doubt…


When Bloomberg’s Peter Cooke asked Geithner about America’s financial positioning, Timmy was quick to acknowledge that all of the aforementioned TRILLIONS of issues have the USA in a “very strong position”…


Too make things worse… the man, the myth, that would be Keynesian Legend in a Roman Empire past… went on to say that it’s the Europeans who face the “difficult challenge of trying to restore sustainability to an unsustainable system”…


All righty then…


With a calculation of the world’s most significant Debtor Nation in hand, your risk management choice this morning is clear. Believe the government or your gut. The myth that America’s deficit and balance sheet issues are not heading down the same path as Europe’s is both “persistent and persuasive”, indeed. It is also unrealistic.


I re-shorted the SP500 (SPY) into yesterday’s closing rally, and I will re-short it again on strength. My allocation to US Equities mirrors Bernanke’s Japanese style monetary policy at zero percent. After all, if you want to take their word for it – the risk free rate of return in America is actually zero. Risk free is where I want my family and firm’s hard earned incomes to be, for now…


My immediate term support and resistance lines for the SP500 are now 1047 and 1108, respectively. The SP500’s long term TAIL of support is now 1074. This powder keg of government-sponsored volatility remains.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Great Enemy Of The Truth - JFK

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Last week I asked this question: “Home prices down, the market down, the European debacle, a massive natural disaster and the no confidence vote for incumbents is in the books.  Are you feeling any better about the world?”


Today we got our answer; according to the Conference Board Consumer Confidence Index, confidence among U.S. consumers increased in May to the highest level since March 2008.  The Conference Board's confidence index rose to 63.3 from a revised 57.7 in April, even exceeding the highest estimate in a Bloomberg News survey.  The consensus estimate was for a reading of 58.5.  According to the Conference Board pessimism is fading, as its measure of expectations surged to the highest level since August 2007. 


While the official U.S. unemployment rate rose nearer to the 10% mark in April, the Conference Board data suggest that most consumers are still holding out for better days as far as the job market is concerned. 


While consumer expectation may have improved in the month of April, it’s likely to be short lived; 


(1)    Europe's debt crisis punishing stock prices

(2)    Lower equity prices are bad for the balance sheet

(3)    Last week’s Initial jobless claims number suggests the unemployment rate is headed higher

(4)    GDP growth is slowing

(5)    Housing prices are declining (but mortgage rates are low) – Shiller says outlook “uncertain”

(6)    The gulf oil spill is depressing

(7)    “The bear market is upon us” - Keith McCullough on the Hedgeye AM call - 5/25/10

(8)    Rasmussen has Obama’s approval rating near an all time low at -20


I will be interested to see if consumer confidence can defy the gravitational pull of the factors outlined above.  The chart below shows the S&P vs consumer confidence.  Thus far, May Showers doesn’t seem to have impacted consumer confidence too much.  The Conference Board said today that May 18th was the cutoff date, meaning that the May 6th “Flash-Crash” was taken into account.  Consumer Confidence is being cited as a positive data point by the media today; while this is true, I don’t see it sustaining these levels. 


Howard Penney

Managing Director





Changing Perceptions of the Euro

Related positions: Long Germany via EWG; Short France via EWQ; Long Gold via GLD


While a common currency in Europe has been contemplated as far back as the League of Nations in the 1930s, it wasn’t until the Maastricht Treaty of 1992 that established a framework that led to the Euro’s official launch on January 1, 1999 and general circulation via notes and currency in 2002. Importantly, it’s worth emphasizing that the Euro is just over a decade old.


In that time period, the Euro has quickly become the world’s second largest reserve currency after the U.S. dollar.  In fact, the Euro has taken consistent reserve share from the U.S dollar over the past decade, going from roughly 18% of global currency reserves in 1999 to just over 28% in 2009.  Currently, roughly 330 million Europeans use the currency on a daily basis and almost 175 million additional people use currencies that are pegged to the Euro.


This strength and scale of the Euro led former Federal Reserve Chairman Alan Greenspan to opine in 2007 that it was “absolutely conceivable that the euro will replace the dollar as the reserve currency, or will be traded as an equally important reserve currency.”  Not surprisingly, Greenspan’s statement is, in hindsight, at best a contrary indicator.


The current sovereign debt crisis in Europe is creating some rightful questions about the future of the Euro and whether its structure is fundamentally flawed.  While the recently approved €750 billion plan to backstop European debt by the European Central Bank seems to signal that the Eurozone will protect its common currency at all costs, this action also highlights the key structural flaws associated with the Euro. 


As stipulated by the Stability and Growth Pact, which grew out of the Maastricht Treaty, certain monetary and budgetary requirements were mandated for Euro adoption, including that each nation has a budget deficit as a percentage of GDP below 3%, debt as a percentage of GDP of less than 60%, and inflation over the trailing twelve months of less than 3.2%. 


Interestingly, and as outlined in the table below, many of the most prominent nations in the Eurozone currently far exceed the stipulations outlined in the Stability and Growth Pack.  This obviously shines the light on the lack of fiscal discipline of the European Union as whole, and presents two main questions:  1.) What are appropriate targets for fiscal imbalance reduction?, and 2.) Should these parameters be adhered to at all? 


Changing Perceptions of the Euro - 1


In addition to the specific fiscal requirements for entrance into the European Union, the Maastricht Treaty also mandated that no country would ever be bailed out.  The intention of this was, it seems, to protect the broader fiscal order of the Eurozone and to ensure that there were consequences for bad fiscal policy.  Obviously, with the recent ECB sovereign debt bailout, this tenet of this Maastricht Treaty has been willfully ignored.


In ignoring this key tenet of the Maastricht Treaty, the Eurozone is revealing one of the key risks to the Euro -- interconnectedness.   Most nations within Europe borrow from, and lend to, each other.  So, while in theory, the Eurozone should likely let Greece restructure based on the Maastricht Treaty, most major banks within the Eurozone hold Greek debt, and would feel the pain of a Greek debt restructuring.


And this interconnectedness goes well beyond Greece: one-third of Portugal’s debt is held by Spain; Italy owes France more than $500 billion; Spain owes Germany $238 billion and so forth.  Therefore a restructuring or writing down of the debt of any nation will impact the banks and economies of many other Eurozone nations.


The primary structural flaw that is being revealed with the Euro is that because of the disparate economies in Europe, a one-size-fits-all monetary policy is ineffective.  As an example, while Spain may require a monetary policy that attempts to combat its 20% unemployment, Germany may require monetary policy that ensures its economy doesn’t begin to heat up.  In essence, without a political union that can manage the disparate economic goals of each member nation, the monetary union is destined to be weak, which is what we are seeing evidenced by it not adhering to the Maastricht Treaty.


In summary, the issue is not really whether the Euro will fail or disband, because the European sovereign debt bailout package suggests the Euro will endure for the longer term.  The issue, rather, is that the ongoing illumination of these structural flaws will create a growing lack of confidence in the Euro and reverse any perception that one day the Euro would surpass the U.S. dollar as the world’s reserve currency.   And with this change in perception, it is likely that Euro is revalued and continues its slide towards its all-time lows versus the U.S. dollar and beyond.


Daryl G. Jones
Managing Director


Changing Perceptions of the Euro - USDEUR Reserve Currency


Gaming revenues still on track for 85% YoY growth in May.



According to our contacts on the ground in Macau, preliminary numbers through May 23rd have reached HK$11.9bn, and still look on track to hit HK$16bn for the month of May.  So far, there doesn't appear to be any gaming slowdown in sight for VIP volume even though Golden Week has ended.  Wynn Macau (HK:1128) and MPEL, our favorite Macau names, continue to retain their share gains from LVS. 


Below are the MTD market shares:



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