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EARLY LOOK: Japan's Jugular

This note was originally published October 05, 2010 at 08:00 in  


“Great spirits have always encountered violent opposition from mediocre minds.“

-Albert Einstein


EARLY LOOK: Japan's Jugular - Einstein





I am currently in the middle of reading Walter Isaacson’s “Einstein: His Life and Universe.” For a young chaos theorist fighting the winds of Washington and Wall Street Groupthink, Einstein’s independence of thought is highly motivating.


Chaos and Complexity Theory are the most important mathematical discoveries since Einstein’s General Theory of Relativity. While we don’t give out our mathematical models here in New Haven, we distribute both their factors (inputs) and themes (outputs).


Like any other dynamic ecosystem in this universe, global markets are constantly changing. As a result, analyzing time, space, and gravity are seemingly rational places to start each and every risk management morning. Trivial points in time like a price-to-earnings ratio are what they are – of very little value to our research.


At 2PM EST today we’re going to introduce the 3 global macro risk management themes that we think will matter most to global investors in the 4th quarter of 2010 (if you are a qualified investor and would like to sign up for the call, please email sales@hedgeye.com).


For Q4 2010 our Hedgeye Macro Themes are as follows:


EARLY LOOK: Japan's Jugular - 0 q4 THEMES


In sharp contrast to other “top-down” or “global macro” oriented sell-side research that calls everything “long-term”, we focus acutely on time (duration) and space (price). It’s all good and fine to come up with a “long-term” investment thesis (been there, tried that), but if you get time and price wrong, you’re best advised to get a job in academia.


I don’t disrespect academia. I just don’t want my firm, family, or country’s risk management system overseen by academics. Einstein himself would be the first to call out the long-term career risk associated with academic dogma. As markets evolve, we need to evolve the risk management process alongside them.


Living in the violent opposition of mediocre industry standards is one of the tremendous investment opportunities in global finance today. Schumpeter called this creative destruction. God bless the learning opportunities that are born out of the failures of Fiat Fools.


Unfortunately, Washington and Wall Street Groupthink doesn’t get this yet. Neither do the Japanese Bureaucrats who continue to believe that the best way to solve for structurally impaired economic growth is to throw more failed government policy action at the problem.


We’ll go through the why on this with a 68 slide presentation this afternoon, but the bottom line is that what you are seeing from Japan this morning is ultimately an admission that QE (Quantitative Easing) didn’t work.


In fact, after cutting interest rates from ZERO POINT ONE percent (0.10) to ZERO POINT ZERO percent (0.00), the most recent edition of a Japanese Heli-Ben (BOJ Governor Shirakawa) dropped the QE acronym altogether for a new one – CME (Comprehensive Monetary Easing).



EARLY LOOK: Japan's Jugular - japanchart



The best part about CME versus the QE that is sponsored by “New Keynesian Economics” academic dogma (Bernanke, Krugman, Stiglitz, etc.), is that I can actually understand what CME means. It’s very “comprehensive” to see that the Japanese can’t cut interest rates (until they raise them) again.


I’m certain Einstein would be a fan of CME. When failed ideologies like QE meet their maker of gravitational force, the next best step for a failed academic is to stop what they are doing. Then either retire, or change as the facts have. After all, it was Keynes himself that would be asking “New Keynesians”, what do you do now Sirs?


My immediate term support and resistance lines for the SP500 are now 1126 and 1144, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


If the whisper number is to be believed, casual dining sales trends showed strength in September.


The optimistic tone being struck by management teams (PFCB, DRI, MRT) in the casual dining category over the past few weeks resonates with the trend in casual dining sales that began during the summer and is continuing into the fall months.  The whisper numbers for the first three weeks of September, combined with our estimate, leads us to an estimate of 1.5% for the Knapp Track September same-store sales number.  This would constitute an acceleration of 90 bps on a one-year basis and a two-year average trend improvement of 10 bps.  Incidentally, a 1.5% print for September would be the strongest Knapp Track casual dining same-store sales number since August 2007 when a +1.7% result was reported.


Hedgeye’s macro view does not support the thesis that overall consumption will remain robust as we progress over the immediate and intermediate term; however, it is worth noting that the restaurant industry’s share-of-wallet seems to be holding up versus other “discretionary” categories.  I will be posting specifically on share-of-wallet trends within consumer discretionary soon.




Howard Penney

Managing Director



Black Swan Management Call at 2pm today.  Email sales@hedgeye.com if you are interested in trialing.







For Q4 2010 our Hedgeye Macro Themes are as follows:



the macro show

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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.



Today, October 5th, 2PM EDT


5-10 minutes prior to the 2 PM EDT start time please dial:

(Toll Free) or (Direct)
Conference Code: 724674#

To access the 4Q Key Macro Themes materials please click here.

To submit questions for the Q&A, please email .




The Hedgeye Macro Team, led by CEO Keith McCullough, will detail Hedgeye's 4Q Key Macro Themes, which are as follows:

  • Japan's Jugular - The Keynesian experiment that is Japan will continue to implode in Q4. The Yen, JGBs, and Nikkei all remain at risk.
  • Krugman Kryptonite - As the Fed signals its intent to use more Krugman Kryptonite (printing dollars/ quantitative easing) we look at both the short and long term implications behind the faulty math of Dr. Krugman.
  • Consumption Cannonball - U.S. consumption will roll over sequentially in Q4 based on our bottom-up consumption model. This is a negative catalyst for our below consensus Q4 GDP domestic growth projections.



Hedgeye Macro Team

Bear/Bull Battle: SP500 Levels, Refreshed

You can take everything I wrote in yesterday’s SP500 refresh and reverse it – because prices have reversed to the upside benefit of stocks.



  1. US Dollar was UP for once
  2. VIX was UP, breaking out above its immediate term TRADE line of 23.11
  3. SP500 was DOWN, breaking both TRADE and TREND lines of 1141 and 1144, respectively 

Today (so far): 

  1. USD is getting smoked again to lower-intermediate-term lows (the inverse correlation USD/SPY is 0.88!)
  2. VIX is DOWN, breaking back down through the immediate term TRADE line of 23.11 (no support to 21.48)
  3. SP500 is UP, breaking out above both aforementioned TRADE and TREND lines w/ no immediate term resistance until 1157 

This, of course, puts the heightening probability of a crash call back in play. The only way we have a heightened probability of an October crash is if the shorts keep getting squeezed and the perma-bulls suspend disbelief (chase performance).


As a reminder, I need to see 2 things before I re-short the SP500 (SPY): 

  1. SP500 at or higher than 1164
  2. VIX depressed down towards 20 

Heli-Ben is hell bent on taking us there. Buckle up.



Keith R. McCullough
Chief Executive Officer


Bear/Bull Battle: SP500 Levels, Refreshed - 1

European PMI Services Slow in September

Hedgeye Position: Long Germany (EWG), Long British Pound (FXB), bullish on EUR-USD; Short Italy (EWI)


Today, the final September figures for European Services PMI were released– and much like the European Manufacturing PMI figures issued last week, in aggregate there is a slowdown in the September numbers for the major economies, which is in line with our forecast for weaker European economic data in the back half of 2010 (see chart below). It’s important to note that both Spain and Ireland fell comfortably below the 50 mark, the line dividing contraction (below 50) and expansion (above 50).


European PMI Services Slow in September - p1


This data is in line with our call for divergences among European countries, similar to our Sovereign Debt Dichotomy theme in 2Q10. Currently we are bullish on Germany and continue to warn of further deterioration in the capital markets of countries like Portugal, Ireland, Italy, Greece, and Spain. [Greece leads global equity markets on the downside, currently at -31.5% YTD. 


The data also suggests that Services were slightly more resilient than Manufacturing.  Concurrently, as austerity measures and civil unrest weigh on confidence and consumption, a separate survey shows today that Eurozone retail sales fell 40bps in August versus the previous month, and have been trending lower over the last months (see chart). We think this downturn in the data is being reflected in Europe’s equity markets, with today only the first day in seven that most are up.


European PMI Services Slow in September - p2


We are still bullish on the EUR-USD, despite the ongoing sovereign debt contagion threats across the Eurozone, with a TRADE (3 weeks or less) range of $1.35-$1.38. The EUR-USD is on a tear intraday, up 1% at $1.3827. Stay tuned for our positioning as the level violates our TRADE level of resistance.   


Our TRADE levels on the British Pound-USD are $1.56-$1.59 with TREND line support (3 months or more) at $1.54, and outlined in the chart below.


Matthew Hedrick



European PMI Services Slow in September - p3

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