The Grind: What's In My Notebook Today...

Another day, another grind. Here are the bullish and bearish DATA and PRICES in my notebook from the last 24 hours:



  1. SP500 continues to hold our bullish immediate term TRADE line of support = 1107
  2. The Range in our 3-day probability model (upside/downside for SP500) narrowed day/day to 52 points from 78 yesterday
  3. Our S&P Sector Risk Management Model continues to flash bullish across all 9 sectors on immediate term TRADE (3 weeks or less)
  4. Japanese Equities reacted very bullishly (+2.3% overnight) on the Yen devaluation, taking out the crash call we’ve seen in Nikkei since April
  5. Indonesia ripped a big positive divergence (vs global equities) to the upside last night with a +3.9% price move; we remain bullish on Indonesia
  6. Both the FTSE and the DAX continue to flash bullish on both TRADE and TREND with the DAX holding TREND line support of 6084
  7. UK unemployment remains impressively below that of the US at 7.8% y/y (in line with last month as opposed to seeing the rate rise y/y)
  8. Commodities (CRB Index) continues to flash Bullish Formation (bullish on all 3 of our investment durations: TRADE, TREND, and TAIL)
  9. Corn pushing back towards $5 and Cotton prices hitting 15 year highs as the softs/ags continue to rock and roll
  10. Oil prices continue to hold our intermediate term TREND line of support (was resistance 3 weeks ago) of $75.31/barrel
  11. Gold is golden as the fear of US Congress trade reaps gains; higher-highs and higher-lows
  12. Yield spread expands day over day by 2bps
  13. TED spread remains extremely tame (15bps wide)
  14. JPM’s Jaime Dimon says he’s going to pay the dividend and hire 10,000 people



  1. SP500 still down -8% from its April YTD peak and broken from an intermediate term TREND perspective (resistance = 1144)
  2. Our risk/reward daily model for the SP500 is now flagging lower-highs of resistance and risk outrunning reward by 2 to 1
  3. US market breadth deteriorated yesterday for the 1st day in 5
  4. Financials and Small Caps led yesterdays decliners  - Americans need both for US GDP growth to hold above 1%
  5. Chinese equities had their 1st down day today in the last 4, selling off -1.3%
  6. Greek Equities broke our circuit breaker line yesterday (1575 on the ATG Index) and see follow through selling this morning
  7. Brazilian equities backed off 50bps yesterday and are flagging the same marginal immediate term (overbought) sell signal that the SP500 is
  8. 2-year US Treasury yields broke their immediate term TRADE line of support (0.52%) intraday yesterday and see follow through bond buying today
  9. US Dollar continues to flash Bearish Formation (bearish across all 3 of our investment durations: TRADE, TREND, and TAIL)
  10. ABC/Washington Post Consumer Confidence stopped improving week/week, stuck in mud at minus -43
  11. MBA mortgage applications stopped improving week/week, dropping -0.4% this week vs last
  12. II Bullish to Bearish Survey has popped 1500 basis points to the bullish side of the ledger in the last 3 weeks with Bulls up 400bps w/w to 37%
  13. Tea Party wins in NY, Delaware, etc last night impose a headwind to the consensus/expected Republican romp at midterms
  14. US Industrial Production growth reported this morning slows sequentially for the 3rd straight month to 6.2% (AUG) vs 7.4% (JULY)


Net net, we’ve started making some sales in the last 24 hours in the Hedgeye Portfolio (12 LONGS, 8 SHORTS vs. 14 LONGS 12 SHORTS yesterday) and we’ve taken some beta out of our Hedgeye Asset Allocation Model (selling Cocoa/Commodities, buying Bonds).


Finally, the CHART OF THE DAY below stands behind my 14th bearish point of the day and should elicit plenty of questions in any risk managers mind about go forward US growth expectations. US industrial production “comps” only get tougher from here – that doesn’t mean we are calling for a newsy “double dip” (which implies negative Q3/Q4 US GDP growth), but it definitely suggests US GDP growth can continue to drop sequentially for the next 3-6 months.


I’ll leave you alone with that red arrow to noodle over for today.



The Grind: What's In My Notebook Today...  - 2





Cash 55%, Int'l FX 21%, Bonds 12%, Commodities 6%, Int'l Equities 6%, US Equities 0%




But their intervention makes our acts to serve ever less merely the immediate claims of our instincts.”
-Albert Einstein
I started intervening in the Hedgeye Portfolio yesterday, making my first sales (long or short) since September 3rd.
We’re still long Gold (GLD) and we didn’t sell any of that 6% position in the Hedgeye Asset Allocation Model as we saw yesterday’s melt-up in the World’s Replacement Currency a direct function of the fear trade – the fear of US Congress being back in session. We remain short the US Dollar (UUP).
Today’s market headlines are going to be dominated by the bad kind of intervention – government intervention. Particularly when it comes to the Fiat Republics of Japan and America, you have professional politicians who fundamentally believe that this is the only way out. It’s sad to watch losing teams repeat their mistakes.
Japan is intervening in its currency market this morning (bearish for the Yen - we are short FXY) and America is going to host another Groupthink Conference in Washington, DC where Timmy Geithner leads the unaware in pointing fingers at the Chinese for not intervening.
On Japan’s intervention, I found an interesting quote from Geithner who believes “deeply” in the Monetary and Fiscal Policy Manipulation model of the United States of America:
“They’re working through some difficult problems… My view is they should be focusing like we are on how to make sure they’re reinforcing recovery in Japan and doing things that are going to help.”
God help us all.
I’ve ended a few of my morning missives with this thought over the course of the last few days and it’s worth repeating in order to explain why I started making sales yesterday. The biggest risk to NOT selling US Equities here is US Congress and the “economists” that lead their decision making (Geithner says he’s “not an economist” by the way, so we’ll give him a hall pass as he’s only responsible for advising the President on economic matters).
Back to taking matters into my own hands via the Hedgeye intervention strategy…
Here are the moves we made intraday in the Hedgeye Portfolio yesterday. As opposed to Washington’s broken lip-service model, we are big believers in the modern day transparency/accountability model. We think the biggest opportunity in finance is showing the world what it is exactly you do when you make risk management decisions and why. Opacity is dying on the political vines of perceived wisdom.

1.      09/14/2010 10:22 AM

We're looking forward to seeing what happens to the Yen when the Chinese start blowing out of their short term JGBs. Japanese Yen intervention imminent - thats what Fiat Republics like this do.



2.      09/14/2010 10:42 AM

I haven't made a sale (long or short) since September 3rd. It's time to book a gain and I'll let a Financial out the door first. Steiner remains bullish on CIT's intermediate term TREND.




3.      09/14/2010 12:49 PM

See Tom Tobin's bearish note on Zimmer today for details. The stock is up today but is broken from an intermediate term TREND perspective. Shorting green. KM


4.      09/14/2010 03:20 PM

Keeping a mean reversion TRADE a trade. We don't have to buy-and-hold cocoa. KM






These are just the headlines for research reports we put out on these positions. They are punchy because we like punching some of the hedgies out there whose business model is bullying the sell-side. Everyone knows the sell-side’s horse and buggy whip model is stale. This market needs new blood – and we’re happy to be hated by those we can beat.
On the same day that we bought Chinese equities (CAF) we also published a research note titled “Japan - The World's Easiest LayuP” that outlines why we were shorting the Japanese Yen as it approached 83 versus the US Dollar. Rather than listen to a revisionist sell-side bull tell you today is a “buying opportunity” in the Yen, please email <>  if you’d like the view of the interventionist firm that called this before the “risk on” day.
Our immediate term TRADE lines of support and resistance for the SP500 are now 1107 and 1128, respectively. That’s the first time I’ve issued a lower-high of immediate term TRADE resistance for the SP500 since September 3rd. That’s a marginally bearish signal and the SP500 not being able to eclipse 1144 on a closing basis to the upside is an explicitly bearish one.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer



Subscribe to Hedgeye to receive research and portfolio positions in real-time.  This note was originally published at 8am, September 15,2010.

Musing on Europe, after a week off

Hedgeye Portfolio Position: Long Germany (EWG); Long British Pound (FXB)


Where’s Europe at? Last week I was on vacation and had some time to think about how fear has run in and out of European markets over the last 18 months. Here’s a read-through regarding our top-down pulse on Europe.


Contagion Fears

Despite the contagion fears and Europe “parity” callers that occupied front-page news in 1H10, the fear trade has settled down across most of the region to the benefit of the Euro. The EUR-USD has held its TREND line of support at $1.26 since 7/5.


Musing on Europe, after a week off - mh1


Europe’s Baby

Our view is that Greece (and debt and deficit-laden countries like it) will remain the EU’s baby in the sense that European commissioners and heads of state will do everything in their power to prevent the immediate term failure (default) of member states for fear of the associated volatility (contagion).


Remember, leaders had a good taste of contagion fears in the first half of the year, which led to the decision on May 9th to issue a €750 Billion package of medicine to contain it. Politics are generally local, but recently the EU’s political scene has gone global.


Evidence refuting European Contagion over the immediate to intermediate term:

  • Investor Protection: on Monday, Greece received its second tranche of funds, worth €6.5 Billion, and we expect future payments to go off without a hitch. Due to the highly interconnectedness of European debt across European banks, it’s in the interest of the EU to prevent default by any member state.  In the case of Greece, our call is for the EU to continue to work in close cahoots with Greek PM Papandreou to show a good face to the investment community. Papandreou has promised to reduce the country’s budget deficit to 8.1% of GDP this year, versus 12.2% in 2009.  
  • Credible Buyers: Norway’s sovereign wealth fund (the 2nd largest in the world) decided to buy an undisclosed amount of Greek, Spanish, Italian and Portuguese debt late last week.  This confirms that Norway is also betting that the EU will be feeding the PIIGS the bottle for quite some time. [Greece’s most recent sale of €1.17 Billion of 26-week bills commanded a hefty 4.82% yield with investors biding 4.5x the offering = confidence rising or yield chasing.]
  • Idealism on the Line: the notion of a Eurozone member defaulting on its debt cuts to the core of the idea of the mutual benefit from a union of countries. Politicians in Brussels will take grave measures to insure the Eurozone remains whole.  [Hedgeye note: we believe the utility of the Eurozone is still in question, and for good reasons. As we’ve noted in previous work, member countries are not created equal, and therefore we see a flaw in unilateral monetary policy for all; as ever, measures to manipulate currency and trade are very important in this global world.]

Austerity and Longer Term Structural Issues

While we’re bullish on countries cutting balance sheet and income statement ‘fat’ now in such forms as trimming spending, government jobs, and wages over the next 1-4 years, we expect more moderate growth in lock step with these fiscal cuts.


A couple of pressing issues over the longer term for the Eurozone are:

  1. What’s to be done if the Eurozone’s weaker nations continue to pile on debt, especially when they can’t compete for trade?
  2. Will the Eurozone’s fiscally weaker countries be able to bend on such cultural norms as the obligation to pay taxes, the duration of the work week, and creation of alternate job offerings as government positions are pared back?

To the second point, unemployment remains a huge structural issue on our long term TAIL duration.  We see significant headwinds for countries like Spain, Ireland, and Greece where we don’t see their double-digit unemployment figures turning around materially in the next 1-2 years, which should hinder growth prospects out on the curve. 


The chart below displays Greece’s equity market (left axis, down -28.9 YTD) versus Greek 5YR sovereign CDS (in bps) and the Greek 10YR bond spread over the German 10YR bund (in bps, right axis).  What’s interesting to note here is that although we expect the EU to rescue Greece at all costs, which should boost equities and dampen yields and CDS, ‘fear’ since the EU’s bailout package in early May continues to heighten.  Obviously this is a negative read-through, which we’ll continue to monitor for an inflection.


We’re currently long Germany via the etf EWG in our virtual portfolio, and bullish on the Pound versus the USD, a play we continue to like as UK inflation remains elevated (currently at 3.1% in August Y/Y) and US fiscal policy continues to be politically compromised.


Matthew Hedrick



Musing on Europe, after a week off - mh2

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Day 1: Weblights

Yesterday we spent the day hopping from webcast to webcast focusing on unique callouts from a slew of company presentations.  Here are the notable takeaways:


  • A couple of interesting callouts from Kroger’s 2Q conference call:

The competitive environment remains largely a mixed bag, with some markets becoming more aggressive and others becoming less aggressive.  Net, net management described the environment as being slightly more rational, although inline with expectations.


Deflation and inflation co-exist within the store.  On the produce side, inflation has begun to creep into product costs although still at a slightly lower pace than originally expected at the beginning of the year.  On the flip side, the grocery area is seeing deflation which is largely the result of vendor driven promotions.  Management believes the CPG companies are now in the phase where they are focused on driving volume via promotional support.  Interestingly, this scenario is positive for KR gross margins while still a drag on topline performance.


For the first time in a while, management noted that sales strength was broad-based.  This includes positive idents in 17 of 18 regions.  All departments and customer segments showed increases.


Management noted that its seeing some gross margin benefits from positive mix, which has been skewing towards more discretionary products.  Starbucks, service counter deli, Boars Head, and natural foods were called out as showing improving sales trends.

  • Best Buy noted that it expects to see a slight acceleration in same store sales over the back half of the year, despite tougher comparisons.  This is largely due to new product introductions (3D and motion gaming, tablets, and e-books)  as well as an expectation that vendor supported promotions will pick up to spur TV demand. 
  • BBY is extremely bullish on its Best Buy Mobile business, as it was cited as the primary reason from gross margin upside in the quarter.  Interestingly, management sees a huge opportunity to gain additional share in the wireless business (only 5% now) as well as growth in other areas of connectivity.  Broadband, 3G, and  HD cable or satellite are all products for which BBY collects an incentive fee for new customer acquisition.
  • Office Depot noted that the company is not assuming any material improvement in the economy through 2011, and as such is planning conservatively.  Despite this view, the North American retail business did see a slightly positive comp through the August back to school period.  This marks a slight improvement from the prior quarter, which declined by 1%.
  • Kohl’s noted that the two most inflationary categories in the store, some home and footwear, are also the two best performing categories year to date.  Management went on to note that inflation is not necessarily a bad thing if managed properly, especially in the apparel category.
  • Kohl’s highlighted a recent social media (Facebook) campaign, which was centered on giving money to schools as part of a back to school marketing effort.  Prior the campaign, the company had 1 million fans.  In just over 2 months since the campaign began, Kohl’s now has over 2.6 million fans.
  • Aeropostale noted that is having to promote a little more aggressively than it has in the past, especially on key items.  Graphic tees have been the most heavily promoted category in the teen space (probably the most profitable as well). Management went on to note that a sustainable high teens operating margin would be largely dependent on an improving economy over time.
  • From a fashion standpoint, Aeropostale noted that they are seeing the beginnings of a resurgence in khakis and twills.  This coincides with some weakness in the denim category, which has been impacted by an over-distribution of skinny jeans, unseasonably warm weather, and lack of differentiation within the category.
  • JCP noted early enthusiasm for the company’s launch of Liz Claiborne, although it refrained from providing any details.  The company’s first circular highlighting the launch drops this weekend. 
  • Much like Kohl’s, JC Penney management noted that inflation would not be such a bad thing for the apparel category.  Management is only expecting modest 1-3% cost increases into the Spring as the company’s internal sourcing organization navigates rising costs out of Asia.
  • The future of the women’s business was a key topic of discussion for Under Armour. Highlighting the success of its partnership with Nordstrom, CEO Plank mentioned that it is in a testing phase at Bloomingdales and early indications are positive. Among the benefits of offering a more expansive assortment in women’s including more outerwear are the opportunities for distribution growth particularly at the higher-end, which is clearly underway.
  • Despite concerns over a dilutive competitive environment in Texas over the last 12-18-months, Dick’s Sporting Goods confirmed that dynamics have indeed improved with the market now comping at a faster rate than the company on a consolidated basis.
  • PSS confirmed that of the $28mm it can allocate to stock repurchase this quarter, it will indeed purchase every share possible with the stock at these levels.

Eric Levine


Are We Bearish Enough On the Democrats Heading Into The Midterms?

Last week we hosted a call with Karl Rove, former Deputy Chief of Staff at the White House, to discuss whether the midterm elections could be a major stock market catalyst.  Our basic premise heading into the discussion was that if the Republicans gain enough seats, it would be a strong repudiation of the Obama administration’s economic policies and, potentially, lead to an extension of the Bush Tax Cuts, both of which would be positive for the stock market in the short term.


The discussion with Mr. Rove was fascinating on many levels, but most importantly it gave us an opportunity to pick the brains of one of the more successful political strategist of the modern era.  Whether you like his politics or not, Rove has won many elections.  In fact, of the more than 40 races that he has been the primary strategist for, he has won more than 80% of them.  A key take way from our discussion with him was that trends matter in elections, and they are difficult to overcome in a short period of time.   Further, the direction of these trends is a leading indicator for the next electoral data point. (Sound a bit like the stock market?)


While polls on an individual basis can be wrong, in aggregate they typically provide compelling insight into the electoral landscape.  Currently, we are focused on four specific polls whose trends make us believe that we may not be bearish enough on the prospects for Democrats in the midterm elections.  Specifically, these polls are: Presidential job approval, the generic congressional ballot, approval of Congress, and enthusiasm for voting.


Presidential Job Approval


This poll is the best proxy for how the President has been doing, and while his approval may not be a function specifically of his policy (i.e. the economy which he can’t control could be the issue), it is a reflection of how he is being perceived.  The Real Clear Politics poll aggregate currently shows President Obama with a -2.5 spread on approval, which is the difference between Approve (46.6) and Disapprove (49.1).  While this isn’t quite the lowest rating of his Presidency, it is right near the bottom.  More importantly, he started his Presidency with a +44.2 spread and the trend since his election has been straight down.


The key implication of a negative approval rating for the President heading into the midterms is that Democrats will try to distance themselves from him, and in doing so won’t be able to use the natural fund raising and bully pulpit abilities that come along with the President campaigning on your behalf. 


Generic Congressional Ballot


The Generic Congressional Ballot measures which party those polled would vote for if the choices were generic.  According to the Real Clear Politics Aggregate, the Republicans have +7.8 advantage over the Democrats in this poll based on spread of 48.1 to 40.3.  This is noteworthy given that in Obama’s first week in office this same measure had the Republicans at 34 and the Democrats at 48 for a +14 point Democratic advantage.  This is an amazing reversal for the Republicans as we’ve seen an almost 22 point swing in preferences in just two years. 


Approval of Congress


As we’ve been writing for months to our clients, the anti-Washington sentiment is as high as it has ever been in this country.  The best measure for this is approval for Congress.  Currently, and once again according to the Real Clear Politics Aggregate, almost 72% of those polled disapprove of Congress, while only 23% approve.   This is a clear and strong statement against incumbency and since the Democrats current control the Presidency, the Senate, and the House, they are overwhelmingly viewed as the incumbents.


Voting Enthusiasm


One of the best polls we’ve seen for evaluating voter enthusiasm is the Gallup Poll that measures the “thought given to the election” by those polled.  In the most recent results from this poll on September 2nd 2010, 54% of Republicans indicated they had given some thought to the election, compared to only 30% of Democrats and 32% of Independents.  This is in stark contrast to this poll during the last midterm, which showed Republicans slightly lower at 53%, but the Democrats at 52%.  Amazingly, the current spread between Republicans and Democrats on the measure is 24 points, which is the widest Gallup has ever measured in this poll going back to 1994.


While some Republican Party officials have recently been talking down their chances in the midterms, the numbers in the polls outlined above and in the table suggest just the opposite.  In aggregate, Republicans are motivated, are being clearly favored by registered voters, and do not have the disadvantage of being led by an unpopular President.  Moreover, these measures have all been trending in the favor of the Republicans for the last two years and will, absent an October surprise, likely continue to do so through the midterms.


There is a consensus view, which was shared by Mr. Rove in our discussions, is that the Republicans will take back the House of Representatives and likely not wrest control of the Senate.  The question in our minds after reviewing the data and trends is: are we bearish enough on the Democrats heading into the midterms?  We think not.  In fact, the real October Surprise will likely be a historic win for the Republicans in which they have a strong majority in the House and take back the Senate. 


That being said the wild card remains the Tea Party and their influence on the primaries as we are seeing today in Delaware with the success of radical candidate Christine O’Donnell who won the Republican nomination.  As our friend Mr. Rove said last night about this victory:


“It does conservatives little good to support candidates who, … while they may be conservative in their public statements, do not evince the characteristics of rectitude and sincerity and character that the voters are looking for. … There’s just a lot of nutty things she’s been saying. …”



Are We Bearish Enough On the Democrats Heading Into The Midterms? - 1


Daryl G. Jones
Managing Director


This morning has brought some striking commodity market headlines.  Restaurant stocks have been rallying on the back of M&A and slightly better sales trends in the casual dining space, but we can’t lose sight of the fact that commodities are trending higher.


Corn could see more gains today, with nearby futures taking aim at the $5 level after making new 23-month highs yesterday.  Harvest delays and worries about falling yields are attracting more outside money willing to bet on the bullish trend.


Below is a selection of some interesting headlines in the commodity markets today:


GOLD:  Gold futures rose to a record $1,276.50 an ounce on demand for a haven against turmoil in the global economy and financial markets.


CORN:  Corn futures rose, extending a rally to the highest price since October 2008, on speculation that the U.S. crop will be smaller than the government forecast after hot, dry weather reduced yields.


COTTON:  Cotton extended a rally to the highest price in 15 years amid tightening global supplies.  India, the world’s second - biggest cotton grower, plans to delay registration of export contracts by two weeks until October 1.  The condition of the crop in China, the largest producer, has deteriorated compared with a year earlier after low temperatures and prolonged rains delayed planting.


SOYBEANS:  Soybeans rose for a second straight session on speculation that the dollar’s decline will increase demand for commodities as an alternative investment and hedge against inflation.


SUGAR:  Sugar futures surged to a six-month high on speculation that producers will struggle to meet demand after

unusual weather damaged crops and disrupted shipments.  Russia’s sugar-beet crop will total 2.65 million metric tons this year, the country’s Institute for Agricultural Markets Studies said September 9th, lowering its August 28th estimate by 5% because of the worst drought in half a century.


HOGS:  Hog futures had the biggest gain in almost four weeks as a rebound in U.S. pork prices may boost profit for meatpackers and encourage higher bids on animals for slaughter. Wholesale pork jumped 1.6% to 91.27 cents a pound yesterday.


COFFEE:  Coffee output in Brazil, the world’s biggest producer, may be hurt by the driest weather in four years as trees start flowering for next year’s crop, a growers group said. The dryness may pare the amount of beans that trees will yield next year.


The CRB Foodstuffs index has been a moonshot since the beginning of July.


COMMODITY HEADLINES - foodstuffs chart




Howard Penney

Managing Director

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