As we look at today’s set up for the S&P 500, the range is 26 points or 0.7% (1,072) downside and 1.7% (1,098) upside.  Equity futures are trading below fair value after Japanese Q2 GDP data came in below expectations providing evidence QE does not revive economic growth.


The important MACRO data is due out tomorrow are PPI, Housing Starts/Permits and Industrial Production.  On the earnings front, retailers will be in focus this week with Lowe's, Home Depot and Wal-Mart reporting.

  • ADVANCE/DECLINE LINE: -278 (+158) positive on a down day - day 2!
  • VOLUME: NYSE - 871.65 (-13.47%) - 2nd slowest day of the week!
  • SECTOR PERFORMANCE: One sector positive - XLU
  • MARKET LEADING/LOOSING STOCKS: Nvidia +4.8%, Ameren +3.2 and Nordstrom (-7.15%) and Devry (-5.74%)


  • VIX - 26.24 1.98% - Big move last week up 20%.
  • SPX PUT/CALL RATIO - 1.83 down from 2.98 (low of 0.87 on 07/15/10)


  • TED SPREAD - 22.43 0.203 (0.913%)
  •  3-MONTH T-BILL YIELD .15% Unchanged
  • YIELD CURVE - 2.2063 to 2.1408 (close)  - Now at 2.1265 


  • CRB: 268.79 -0.03% (ugly week down 2.15%)
  • Oil: 75.39 -0.46% (-6.58% last week)
  • COPPER: 327.25 -1.00% (-2.72% last week)
  • GOLD: 1,214 +0.11% (up 0.79% last week)


  • EURO: 1.2754 -0.74% - (trading down 3.96% last week)
  • DOLLAR: 82.948 +0.38%) - (trading up 3.16% last week)


  • ASIA - Asian markets traded mixed after data from Japan showed Q2 GDP rose +0.4%, worse than the median forecast for 2.3% growth; China traded up 2.1%.
  • EUROPE - Major markets are trading lower as weaker than expected Japanese Q2 GDP sets the early tone
  •  EASTERN EUROPE - Trading mixed to higher - Russia is struggling while Romania is up 1.4%.
  • MIDDLE EAST/AFRICA - UAE is trading higher 
Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends













EARLY LOOK: Friday the Thirteenth

This note was originally published on August 13, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK in real-time, published by 8am every trading day.




“Dude, that goalie was pissed about something.”
-Freeburg (Freddy vs. Jason, 2003)
It’s certainly been an interesting week and its ending with a flurry of shots on goal for global macro risk management net-minders. Sophisticate coaches from Mass call them “net-mind-ahs” by the way. Canucks call dem de goalies, eh.
Today is also Friday the 13th, and de goalies with de coaches who got dem-selves lee-verd up long last week are feeling shame. The most infamous American goalie mask of them all has to be Jason’s. He’s seen a lot of red rubber as of late.
Another American who found fame on this day in 1907 was a stock market manipulator from Massachusetts by the name of Thomas W. Lawson. Ole Lawsy tried to slip one by de goalie back then by publishing a book titled “Friday The Thirteenth”, which attempted to scare the horses into believing that the market was setting up for a crash on that very day (his book sold 28,000 copies in its 1st week).
Per Wikipedia, Lawsy was “a highly controversial Boston stock promoter – he is known for both his efforts to promote reforms in the stock market and the fortune he amassed for himself through highly dubious stock manipulations.” He was a hybrid Barney Frankenstein - fear mongering Americans, then flip flopping his position to the other side of the trade. All the while forgetting that people would remember what he said/did on the last go around.
While stock market futures have whipped around a great deal this morning, the Dodd-Frankenstein reform bill doesn’t appear to be today’s excuse. Germany reported a blockbuster Q2 GDP report (+2.2% sequential growth) and Europe’s “net-mind-ah” has apparently left the building on the news. European markets are being chased lower by the old Friday The Thirteenth fear that we call ‘selling on the news.’
In addition to the week-to-date Nightmare on Wall Street drop of -3.3%, here’s what is legitimately scaring US equity investors (in the order that the data points occurred):
1.      China bought 456B Yen worth of JGB’s (Japanese Government Bonds) in June = most since 05’ (and remains a net seller of US Treasuries).

2.      Goldman Sachs (Jan Hatzius) cut his US GDP growth estimate to 1.9% for 2011 (that’s the closest estimate to Hedgeye’s 1.7%).

3.      Chinese Imports dropped 1100 basis points sequentially in July to 23% (vs. 34% in June) = Chinese demand continues to slow.

4.      Chinese property prices dropped to +10.3% y/y in July versus +11.4% in June.

5.      USA’s NFIB survey for small business confidence hit another sequential low this month dropping to 88.

6.      Bernanke’s QE2 was met with selling of both US stocks and get this, Treasuries!, with this morning’s 2-year yields trading UP versus Tuesday.

7.      China’s bank regulator ordered the transfer of off-balance sheet loans to its books by 2011 (and make provisions for defaults)

8.      US MBA mortgage applications held flat week-over-week, enforcing the reality that Americans refuse to lever themselves up again.

9.      Chinese industrial production, retail sales, and money supply growth (M2) all slowed again sequentially in July versus June.

10.  Chinese inflation hit a 20 month high, accelerating +3.3% in July versus +2.9% in June = oil, food… you know… the things they need.

11.  Venezuelan and Argentinean bond yields pushed higher as their dysfunctional governments try to issue the world sovereign debt.

12.  America’s budget deficit tacked on another $165 BILLION loss in July, taking spending up +10% y/y with tax revenues barely flat.

13.  Russian Bond sales saw only 44% of the demand de goalies in de Kremlin were looking for (25 BILLION Rubles) = Russian bond yield up.

14.  General Disaster (GM) announced their pending $12-16 BILLION Dollar IPO = 2nd largest IPO in US history; what is wrong with America?

15.  US weekly jobless claims ripped higher to 484,000 = representing the highest jump in rolling weekly claims for 2010 YTD!

16.  The Fed’s Balance sheet expanded again week/week going up to $2.33 TRILLION DOLLARS after Ben bought $1.7B more MBS this week!

Sorry, for penmanship’s sake I tried to go with 13 bearish points, but I had to print 16 as pushing Hedgeye’s own book of ideas trumps my literary aspirations.
Look on the bright side, Monday will be a new day for the professional storytellers in Washington and it won’t be Friday The Thirteenth either. By the way, Thomas W. Lawson died poor.
On a fair amount of bearish global macro news, I’ll call the SP500 fairly oversold at 1080 or lower. As a result, we’ll open up the Hedgeye Asset Allocation coffers and move from 70% cash (last Friday) down to 55% on this Friday the 13th, 2010 by going to a 6% allocation to US Equities.
My immediate term TRADE lines of support and resistance for the SP500 are now 1080 and 1197, respectively, eh.
Best of luck out there today and have a great weekend with your families,


This insight was originally published on July 16, 2010 for subscribers. RISK MANAGER SUBSCRIBERS have access to SELECT MACRO content in real-time.





Position: Long Chinese Yuan via the etf CYB.
Conclusion: Slowing economic data supports sequentially slowing growth in China, and policy actions suggest more slowing is to come. Despite this, China's organic growth story is right on track. Eventually, investors will pay a premium for it again.
Like we’ve been saying since our January 15th  Chinese Ox in the Box theme, China’s 6-9 month economic outlook looks bearish. As bearish as that may be, the long term economic outlook for China is equally bullish and at a point, investors will again pay a premium for that growth. The whole concept of premium is hinged upon relative economic health and that will begin to matter a great deal more than it did in 1H10, as investors begin to rightfully get long those nations with strong balance sheets.
China has been tightening its economy to cool its white hot growth and inflationary pressures. Those methods have included: targeting a reduction in loan growth, raising lender’s reserve requirements, selling bills to soak up excess liquidly, and tightening controls on the expansion of businesses that are heavy energy users (i.e. manufacturing). As a result of these actions, we have seen Chinese economic growth slow as verified by the following data points:

  • GDP slowed sequentially: 10.3% y/y in 2Q vs. 11.9% y/y in 1Q;
  • Money supply growth (M2) continues to slow: 18.5% y/y in June vs. 21% y/y in May – June marks the slowest growth since Dec. 2008 and has slowed each month since November;
  • Loan growth continues to slow: 603B Yuan ($89B) in June vs. 639.4B Yuan ($94B) in May vs. 774B Yuan in April;
  • Property Prices continue to slow: 11.4% y/y in June vs. 12.4% y/y in May vs. 12.8% y/y in April;
  • CPI slowed sequentially: 2.9% y/y in June vs. 3.3% y/y in May
  • Commercial Real Estate sales growth slowing – Floor Space sold declining: 15.4% y/y Jan-June vs. 22.5% y/y Jan-May; Sales Volume slowing: 25.4% y/y Jan-June vs. 38.4% y/y Jan-May;
  • Fixed Assets Investment continuing to slow: 25.5% y/y Jan-June vs. 25.9% y/y Jan-May;
  • Funds In Place for Investment continuing to slow: 29.2% y/y Jan-June vs. 33.8% y/y Jan-May;
  • Investment in Construction Projects slowing: 27% y/y Jan-June vs. 28.7% y/y Jan-May.








As suggested by the data above, China’s tightening measures are producing the desired results and China has no plans to loosen the reins anytime soon. On Tuesday, The Ministry of Housing and Urban-Rural Development reiterated that it will maintain curbs on speculative purchases and increase market supply. Furthermore, China’s banking regulator said it has made no changes to policies on home loans, calling on commercial banks to strictly enforce home loan rules.
The momentum associated with these declining statistics and the government’s resolve to maintain tightening policies towards the Chinese property market suggest that the easy money in China has likely moderated for now. As a result, the Chinese equity markets have suffered (the Shanghai Composite is down 27% YTD and is underperformed by only Greece since the start of the year). Chinese entrepreneur confidence followed suit, down 2.5% Q/Q in 2Q, alongside slowing imports, slowing PMI, and slowing industrial production. Furthermore, weakening commodity prices in the face of a dollar decline are all sings that the Chinese demand side of the REFLATION trade is diminishing.












All is not cause for alarm, however. As I pointed out in a note last Tuesday, the Chinese government has been busy making moves to position itself to better weather a slowdown in international trade. Those measures include increasing minimum wages by as much as a third in more than 21  provinces and municipalities this year, and, of course, relaxing the Yuan peg. Those measures, combined with further appreciation of the Yuan from here, will help stimulate domestic consumption, which has fallen from 46.4% of GDP in 2000 to 35.6% of GDP in 2009. Domestic consumption in China, much like Singapore, has a very bullish long term outlook and recent developments are further enhancing those prospects.






Those prospects are exactly the reason the international community is pouring capital into the country. Foreign Direct Investment in China just hit its second-highest reading on record in June. Investment sequentially accelerated to 39.6% Y/Y in June to $12.5 billion, the Ministry of Commerce said in Beijing yesterday – the most since December 2007. For the first six months of the year, Foreign Direct Investment rose 19.6% Y/Y to $51.4 billion, after a 14.3% Y/Y increase in the first five months. Foreign Direct Investment in China has shifted on the margin towards investing in China’s growing urbanization. Tesco, the U.K’s biggest retailer, said in April it will spend 2.5 billion pounds ($3.7 billion) over five years to open shopping malls and hypermarkets in China. For China this is a step in the right direction vs. last year when nearly 52 percent of foreign investment went to manufacturing and another 19 percent to real estate (National Bureau of Statistics). Furthermore, China could see even higher foreign investment if it opened up more industries, including telecommunications, transport, and resources to overseas companies. Any policy shifts in that direction will only accelerate the amount of capital flowing into the economy.
Rising incomes and the likely urbanization of hundreds of millions of people has also attracted private equity funds flows into the economy. At only 40%, China’s urbanization has a great deal of headway to grow, which is one of the reasons China attracted $10.5 billion (275% Y/Y) of private-equity capital in the first half of this year, accounting for 68 percent of the $15.4 billion raised in Asia in the period (Centre for Asia Private Equity Research). Following in the footsteps of Blackstone Group LP and Carlyle Group, KKR is seeking to raise $800 million to invest in China.
All told, China’s organic growth story will matter more when consensus finally comprehends the downside risk associated with the U.S.’s 12-18 month forward economic outlook. As easy money brought on by REFLATION, accelerating trade, and industrial production slows globally, organic growth stories will move to the forefront of investment opportunities. Governments worldwide will have to think twice about levering up and implementing further stimulus, so those economies that have proactively prepared themselves to grow organically will see their equity markets and currencies strengthen in 2H10 and 2011, and beyond.
Darius Dale

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.


This insight was originally published on July 15, 2010 for subscribers. RISK MANAGER SUBSCRIBERS have access to SELECT MACRO content in real-time.





Oh, down in Mexico
I never really been so I don't really know
Oh, Mexico
I guess I'll have to go
 - James Taylor
Conclusion:  We are short Mexico via the etf EWW due to its exposure to sequentially slowing growth in the U.S., drug wars that are accelerating, and declining oil revenue.

On July 6th we initiated our short position in Mexican equities.  Currently, we are down -1.8% on the position.  As Risk Managers, we aren’t happy being down on any position, even if just a couple of percent.  Call us lucky, or call us Risk Managers , but we have fortuitously only used one allocation for this position, so we still have the opportunity to average down up to three total allocations.
The short thesis for Mexico is threefold: oil, drug wars, and U.S. exposure.

  • The oil industry in Mexico is nationalized via PEMEX, the Mexican oil conglomerate.  In 2004, Mexico was producing 3.5 million barrels per day and that number is expected to be 2.5 million barrels in 2010, or a 29% decline over six years.  The bulk of this decline has come from the Cantarell field, which has declined ~70% from its peak production in 2004 (2.1MM barrels per day).  In the most recently reported quarter ending March 2010, oil production by Pemex was flat y-o-y, but the long term trend of declining volumes remains intact.
  • PEMEX funds an estimated ~35% of the federal budget of Mexico, so as the production of oil declines over time, the federal government will be required to find other sources to fund its budget, or will be required to cut government spending.  In terms of general economic growth, the declining aspect of this national funding mechanism will be a sustained headwind well into the future. The chart below of Mexican oil production on a daily basis shows this clear trend of declining production.





Drug Wars:

  • In 2009, there were more than 6,500 fatalities attributed to Mexican drug wars.  To put this in perspective, in the totality of the Iraq War, over an almost six year period, less than 4,500 U.S. troops were killed.  Based on year to date results in the Mexican drug war, the number of fatalities is expected to exceed 10,000 in 2010.  Currently, the Mexican government has over 45,000 troops directly focused on the drug war.  As the drug war continues to accelerate, alongside the headlines of murders, it will have a direct and significant impact on one Mexican industry: tourism.
  • Tourism is one of the most important industries to the Mexican economy.  Globally, Mexico ranks tenth in tourism with more than 23 million tourist visitors every year.  In 2008, U.S. dollar spending by tourists was north of $13 billion.  In aggregate, tourism contributes roughly 13% of Mexico’s GDP.  Clearly as drug war violence accelerates, as it is, it will have a negative future impact on the tourism industry, a key driver of the Mexican economy.


Trade with the United States:

  • Given the massive shared border and the nature of the North American Free Trade Act, Mexico is inextricably tied the economic fortunes of its largest trading partner, the United States.  Mexico is the United States’ third largest supplier of goods at ~$177 billion in 2009, which is more than 15% of Mexican GDP.  The United States is Mexico’s single largest export market.  Therefore, as the United States slows, so too will Mexico.
  • In an attached chart we’ve outlined GDP growth in Mexico versus the United States.  The data for the past few years show us, not surprisingly, that there is a high correlation of growth rates between the two countries.  Additionally, the last down turn indicated that the Mexican economy has a tendency to overreact to the downside versus the United States.  Specifically, in 2009 Mexico experienced negative growth of -7.9% and -10% in Q1 and Q2 of 2009, which lagged the troughs in U.S. GDP growth of -5.4% in Q4 2008 and -6.4% in Q1 2009 by one quarter.

Given these systemic risks to Mexican GDP growth, we continue to like Mexico on the short side and will average in as prices permit.





Daryl G. Jones
Managing Director

The Week Ahead

The Economic Data calendar for the week of the 16th of August through the 20th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - c1

The Week Ahead - c2

Latin America CDS ... Risk Is Always On

Conclusion: CDS Spreads are widening from Europe to Latin America, which may spell near-term trouble for U.S. equities.


As my colleague Matt Hedrick pointed out in a note today, European sovereign CDS has risen 15-30% week-over-week for many countries, which is attracting some Manic Media attention back to Europe’s sovereign debt issues.


Latin America CDS ... Risk Is Always On  - 3


Shifting gears to Latin America, we have seen a similar weekly up move in these CDS markets – most notably Venezuela and Argentina (up 112bps and 44bps, respectively). In what consensus is calling “risk-on”, these global CDS moves suggest risk is back in the global marketplace. We’ll take the other side of that statement, however, as risk is always on in financial markets.


Latin America CDS ... Risk Is Always On  - 1


Broken down individually, we see that Venezuela recently agreed to pay debts to Colombian exporters in the area code of $800 million, which is obviously a large incremental strain on the country’s budget. In Argentina, things appear much worse and could be the start of a longer term issue that could lead the country to eventual default. The Argentinean Central Bank is boosting the amount of short term sovereign debt to absorb the excess liquidity from their recent dollar purchases. In this effort to reduce inflation, which has surged to a four-year high of 11%, the bank has boosted the nominal amount of short term debt sold in weekly auctions by 67% Y/Y! What’s worse, they are doing it at incredibly high rates. On August 10th the central bank sold notes maturing in 679 days at a yield of 14.8%, which is ~1430bps higher than 2-year U.S. Treasury notes. Regardless of how effective this proves to be in the short term, we’ll take the other side of Argentina being able to comfortably finance this unsustainable borrowing over the next two years – particularly in light of our bearish outlook for global growth.


Over the next couple of years we’ll find out whether Argentina is doing the right thing from a monetary policy perspective. What we don’t have to wait as long for is where the S&P is likely headed. On today’s Morning Call, Keith mentioned that he might not be bearish enough on the U.S. consumer – which is incremental to our street-low U.S. 2011 GDP estimate of 1.7%. While we aren’t yet ready to revise down our estimates, we still believe the S&P at these levels is a severe disconnect from the reality that is U.S. economic and fiscal health. The Latin American CDS markets agree with our assessment.


Using an equally-weighted basket of CDS spreads for six select Latin American countries, we found that moves in these credit markets are a decent proxy for the direction of the S&P 500 in the following week. The inverse correlation in this relationship has an r-squared of 0.72 over a 5-year duration, which is reasonably significant from a statistical perspective. Given the current week-over-week move in Latin American CDS, we can cautiously expect the S&P 500 to trade down from the current ~1080-1090 range next week. We express caution because, obviously, correlation does not equal causation. Keeping that in mind, the inverse relationship is what matters here as it relates to globally interconnected risk management.


Risk is always on.


Darius Dale



Latin America CDS ... Risk Is Always On  - 2