Quantitative Guessing

“Time and persecution brings many wonderful things to pass.”

-George Washington


One of my thought partners here at Hedgeye is our head of everything compliance, Moshe Silver. In our final days of being paid by the establishment, we worked closely together at Carlyle. I’d manage daily P&L risk and he’d manage the risk surrounding how our hedge fund teams were driving that P&L.


Moshe writes a must-read Weekly Compliance Screed that we publish on Mondays to our exclusive network of clients. Yesterday’s was titled, “Qualitative Easing” and it was one of Moshe’s best. He provided the historical context for America’s present season of discontent by citing Ron Chernow’s new biography of George Washington.


This is as much a point about leadership than anything else. America’s markets are turning into the sort of soft and qualitative excuse making zones where losers find comfort and coddling. If you aren’t raising children you may not see this as clearly as the rest of us parents do, but this “no one loses” and “my little Johnny just wants to be happy” stuff is becoming pervasive in American culture.


What happens when little Johnny runs into a Chinese kid who crushes him like a bug? Should we call for a time-out and some quantitative easing? If Apple doesn’t beat on iPad sales, should we invoke the deflation Gods for QE3?


Moshe suggests that “today, the underlying issue is a total abdication of responsibility on the part of those invested with the Public Trust. The reason that it has become compelling as an ongoing policy matter to debauch the once-proud Dollar is that our society has established a pattern of behavior.”


“The rest of the world recognized US indebtedness as a nascent problem as far back as the early 1980s. Is it realistic for Washington (the DC kind) to push back on generations of excess? We search in vain for anyone in a position of Public Trust to take a stand against this madness.”


How about the Manic Media? Could its core competency in taking the sell-side’s word for missing virtually every crash until after it has occurred proactively protect Americans and their hard earned savings? Or does the financial media stand in awe of revisionist Big Broker analysts whose tongues lick the Greenspan grounds of taking academic dogma’s word for it?


This morning even one of the most admirable American media platforms fell into the trap of time and persecution. Bloomberg’s Ian Katz opened his review of Timmy Geithner’s currency remarks by suggesting that “a weak dollar may now be in the national interest.” Are you kidding me, man?


If you dig into the financial editorials this morning, Dartmouth’s David Blanchflower recaps his Groupthink Inc. sessions with the finger pointers of America. I couldn’t paraphrase this if I tried:


“I was at the Fed last week in Washington for one of its occasional meetings with academics. Half a dozen labor economists, including myself, met with Fed Board members to discuss the labor market. Of particular importance was a paper by John Haltiwanger, a professor of economics at the University of Maryland, who showed there has been a big decline in the job-creation rate over the past decade. The current obstacle is the lack of credit for small firms.”


Right, right guys. The “current obstacle”  couldn’t be staring you right in the mirror could it? It must be that banks aren’t lending. Right, right… back to debauching the currency then.


Who is going to stand against Quantitative Guessing during this political season? Who is going to stand up and lead? I think it might just be the Chinese. They are proactively RAISING interest rates this morning. Why? Take a wild and crazy guess. You got it Pontiac – QE2 is stoking the bonfires of global inflation.


Don’t ask Fed Chairman Bernanke to stand up for 43 MILLION Americans (the # of Americans on the Food Stamp program) have to put gas in their cars and, God forbid, eat. On Friday, Bernanke said that “we are still learning about the efficacy and appropriate management of non-standard policy tools that do not rely on interest rate deductions.”


In plain English, Americans need to know what that means. Like his predecessor at the Fed, Arthur Burns, who perpetuated Jobless Stagflation in the 1970’s by monetizing US Treasury Debt, Ben Bernanke has no idea how this is going to play out and he’s not allowed to say it could play out Japanese.


Ask a man you can trust – Moshe: “Bernanke is effectively saying we haven’t quite gotten the knack of handling your money, but we are making progress. Another few TRILLION and we should really have it down to a science.” Like journeymen stock brokers and money managers who learn this craft by losing large quantities of other people’s money, those charged with managing the economy have resorted to Quantitatively Guessing…


As George Washington observed, if people are persecuted long enough by their government, they will change their behavior. And change is not a “crisis” until someone gets fed up with it all and punches your little Johnny’s qualitative whining in the face.


My immediate term support and resistance levels for the SP500 are now 1170 and 1186, respectively. On September 19th the cash position in the Hedgeye Asset Allocation model was 46%. A month later, on this fine day of defending ourselves (October 19th), we’ve raised that cash position to 64%.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Quantitative Guessing - QG


The Macau Metro Monitor, October 19th 2010



Industry observers noted that a severe shortage of construction labor in Macau has pushed wages higher.  In the past two weeks, the average daily wage for a steel fixer climbed to a record MOP 1,200 from MOP 800 and the average daily wage for a plasterer also hit a new high at MOP 800 from MOP 600.



As expected,  Xi Jinping took over the deputy chairman position of the Central Military Commission. His pro-business connections should be positive for Macau.


The benchmark deposit lending rate is increased by 25bp to 2.50%.  The one-year benchmark lending rate is also increased by 25bp to 5.56%.  Rates become effective tomorrow.


TODAY’S S&P 500 SET-UP - October 19, 2010

As we look at today’s set up for the S&P 500, the range is 16 points or -1.24% downside to 1170 and 0.11% upside to 1186. Equity futures are trading below fair value after the S&P failed to hold on to gains on Monday as hawkish comments from Treasury Secretary Geithner on the dollar, and results from IBM and Apple hit sentiment. Although both IBM and AAPL reported better than expected headline numbers, AAPL's EPS guidance of $4.80, was below consensus of $5.07 sending the stock down as much as (7%) in after-hours trading, while IBM dipped over (3.5%) weaker service signings.


Today sees a further slew of S&P 500 companies reporting with Goldman Sachs (GS), Bank of America (BAC) and Johnson & Johnson (JNJ) in focus before the open.

  • Apple (AAPL) sees 1Q EPS ~$4.80 vs est. $5.03
  • Infinera (INFN) 3Q adj. EPS 18c vs est. 9c
  • IBM (IBM) said service contracts down 7%
  • Microsoft (MSFT) said chief software architect Ray Ozzie is leaving the company
  • VMware (VMW) 3Q deferred rev. missed est., GS said 
  • Zions Bancorporation (ZION) 3Q loss-shr 47c vs est. 50c


  • One day: Dow +0.73%, S&P +0.72%, Nasdaq +0.48%, Russell +0.99%
  • Month-to-date: Dow +3.3%, S&P +3.81%, Nasdaq +4.73%, Russell +5.03%
  • Quarter-to-date: Dow +3.3%, S&P +3.81%, Nasdaq +4.73%, Russell +5.03%
  • Year-to-date: Dow +6.86%, S&P +6.24%, Nasdaq +9.32%, Russell +13.55%
  • Sector Performance: Financials +2.34%, Utilities +0.86%, Healthcare +0.85%, Energy +0.81%, Telecom +0.65%, Tech +0.48%, Materials +0.27%, Consumer Staples +0.25%, Industrials +0.14%, and Consumer Discretionary (0.16%).


  • ADVANCE/DECLINE LINE: 984 (+1613)
  • VOLUME: NYSE - 996.21 (-29.66%)
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Citi +5.57%, Allergan +5.45% and Wells Fargo +5.43%/H&R Block -11.49%, Fluor -5.09% and Halliburton -4.83%.
  • VIX: 19.09 +0.32% - YTD PERFORMANCE: (-11.95%)
  • SPX PUT/CALL RATIO: 1.45 from 2.85 -49.35%


  • TED SPREAD: 15.92, 0.507 (3.289%)
  • 3-MONTH T-BILL YIELD: 0.15% +0.01%  
  • YIELD CURVE:- 2.14 from 2.14


  • CRB: 298.74 +0.91%
  • Oil: 83.08 +2.25% - BULLISH
  • COPPER: 385.50 +0.42% - OVERBOUGHT
  • GOLD: 1,371.30 +0.02% - BULLISH


  • EURO: 1.3989 +0.09% - BULLISH
  • DOLLAR: 76.934 -0.14%  - BEARISH


European markets:

  • FTSE 100: 0.04%; DAX +0.14%; CAC 40 0.07%
  • Major indices are trading flat as strength in financials is offset by weakness in commodity stocks.
  • Strikes in France are becoming more violent as unrest spreads
  • Germany Oct ZEW survey 72.6 vs cons 63.5 and prior 59.9

Asian markets:

  • Nikkei +0.43%; Hang Seng +1.25%; Shanghai Composite +1.58%
  • Markets closed broadly firmer.
  • Banking stocks rose after strong earnings from Citi
  •  Banking and commodity stocks led Hong Kong to its first rise in three trading days.
  • Japan rebounded as the yen stopped its march to greater strength. Blue chips were hurt by falls in AAPL and IBM in after-hours trading in the US. Shanghai reversed an early loss into a 1.6% gain, as energy shares took the Composite Index to a near six month high, closing just above the 3,000 level. 
Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends














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Blind Belief

This note was originally published at 8am this morning, October 18, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

"Blind belief in authority is the greatest enemy of truth."
— Albert Einstein


If you need a solid dose of anti-academic dogma, read “Einstein: His Life and Universe” by Walter Isaacson. Never again will you accept the Blind Beliefs of modern day academics who purport to know exactly what is going on in your life and the global economy.


In addition to an ominously timed story titled “The Return of the LBO”, Barron’s ran an interview with Vincent Reinhart this weekend titled “The Case for Quantitative Easing.” If you haven’t read it yet, you should. It will cost you 5 debauched bucks to get a consensus opinion that’s worth about that much.


Vincent Reinhart shouldn’t be confused with his wife, Carmen Reinhart, who co-authored one of the most important empirical works in modern economic times (“This Time Is Different” with Ken Rogoff). Carmen is a self-taught Cuban-American who came to America with her family and 3 suitcases in 1966, whereas Vincent spent almost his entire career as a yes-man at the Federal Reserve.


If you don’t want to waste 5 Burning Bucks (the US Dollar closed down again on a week-over-week basis last week for the 17th out of the last 20 weeks), here’s a recap of some fairly shocking one-liners in the Reinhart interview (*reminder – Reinhart was a Greenspan “consigliore”):


1.  Barron’s: “You must feel some vindication that the very policy you have been pushing for several years is now being embraced”

Reinhart: “It’s too early to take credit until they actually do something meaningful.”


2.  Barron’s: “Quantitative easing has very little history in economics.”

Reinhart: “There was one other important case study, the 1930s, when short term rates were about zero from 1932 onward.”


3.  Barron’s: “Is that a good or a bad thing?”

Reinhart: “That depends on your outlook. Certainly you can’t expect the Chairman of the Fed to go around making speeches saying ‘hooray, we are depreciating the currency. Yet dollar weakness is a good thing as long as it is limited, controlled and gradual.”


Maybe a better acronym for QE is government sponsored BS.


While we do applaud the Barron’s interviewer for giving Hedgeye some knucks calling QE “financial kryptonite” (in our Q4 Macro Themes presentation from 3 weeks ago we coined QE “Krugman’s Kryptonite”), we’re hardly going to support another professional politician with no market practitioner background for pandering to the academic dogma of a Fed Chairman who is still lost in his historical studies of the Great Depression.


I think the groupthink embedded in these quotes is pretty obvious, so I won’t dissect it in detail, but I will summarize the risk in what both Reinhart and Ben Bernanke aren’t telling you.


1.  With 43 MILLION Americans in line for the Food Stamp program and a 9.6% unemployment rate there should be no credit given to the charlatans of the broken promises associated with ZERO percent rates and Big US Government Market Intervention.


2.  Quantitative Easing has plenty of history – it’s just not the history that fits the storytelling of those who perpetuated Jobless Stagflation in both the mid-1930s (Germany and USA) and Japan since 1997.


3.  Debauching a country’s currency and attempting to fear-monger its citizenry into believing that the rate-of-return on their hard earned savings accounts should be ZERO as the government implodes itself with debt is something the Fed Chairman should be protecting Americans from rather than perpetuating via its politicized policy making.


As Washington fat cats take pictures petting their pooches in front of some inflated art like Vincent Reinhart did for his interview, remember this … and remember it well… Americans aren’t paid off to have Blind Belief in short-term dollar depreciation oriented stock market rallies. They know who is getting paid by the Piggy Banker Spread in 2010 – and it’s not them.


Americans want someone in government to tell them the truth. The enemy of truth is the posturing of truth itself.


My immediate term support and resistance lines for the SP500 are now 1167 and 1181, respectively. As the bulls were Snorting QE on Wednesday, I finally re-shorted the SP500 (SPY) near its intra-week high. I titled an EL note last Monday “Defend Yourself” and I am currently living that strategy out loud.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Blind Belief - blind

Bear/Bull Battle: SP500 Levels, Refreshed...

POSITION: Short the SP500 (SPY)


Apple earnings are going to fly the Nasdaq to the moon and everyone is going to buy everyone (oh, and we need QE3 until bonus season because this is all really deflationary). It’s just another day in the risk management life as the US stock market scales the heights of dangerous October price levels.


We’re short the SP500 (SPY) as of last Wednesday right around this price. Our refreshed immediate term TRADE line of resistance is now 1185 and there’s plenty of resistance all the way up to the YTD highs established in April, when APPL’s Q1 earnings took the stock to pre-September highs.


There’s -1.4% of immediate term downside risk to the TRADE line of 1169. If that line were to break, there’s no support until 1144. Assuming a 40 point drop or (-3.5%) gets people’s attention, we’ll plan on it as a probable event as we head toward nasty US Housing data that will be reported next week.


Keith R. McCullough
Chief Executive Officer


Bear/Bull Battle: SP500 Levels, Refreshed...  - 1

Eye On Asia: The Good, The Bad, and The Ugly

Conclusion: The bevy of economic data out of Asia over the last few days adds to our conviction that the bullish rally in many Asian equity markets is likely to run out of legs, provided the U.S. dollar catches a bid. In addition, the data grows increasingly supportive of the relative underperformance of Japanese equities.


Positions: Long Chinese Yuan (CYB); Short Japanese Equities (EWJ); Short the Japanese yen (FXY); Short Emerging Market Equities (FFD)


There has been a slew of economic data coming out of Asia over the last few days – some good, some bad, and some ugly. Rather than belabor the point(s) with excessive prose, we’ll just highlight the meaningful deltas and inflection points in the call-outs and charts below.


The Good 

  • Singapore’s Retail Sales ex Motor Vehicles accelerated in August to +6.2 YoY from +6% in July. We have remained bullish on the Singapore consumer over the last several months due to structural employment tailwinds.
  • In line with our call from early July, the Singapore central bank signaled that it will widen the Singapore Dollar’s trading band to allow faster appreciation to combat rising inflation.
  • China is considering allowing companies to use yuan for cross-border investment in an effort to expand international trade settlement in the currency and reduce reliance on the dollar. The People’s Bank of China is researching means to permit the use of the yuan by overseas companies for foreign direct investment and to allow Chinese companies to invest yuan internationally.
  • Japan’s PPI decelerated in September to (-0.1%) YoY from flat in August, due to the strong yen driving down the cost of imports.
  • China’s Foreign Direct Investment accelerated in September to +6.1% YoY from +1.4% in August. 

Eye On Asia: The Good, The Bad, and The Ugly - 1


The Bad 

  • Singapore‘s GDP growth decelerated in 3Q10 to +10.3% YoY from +18.8% YoY in 2Q10. While consumer trends remain strong in Singapore, we are increasingly cognizant of Singapore’s reliance on exports as a driver of growth, particularly in the volatile pharmaceutical and electronics sectors. As global trade slows due to decelerating demand from the U.S. and W. Europe, countries like Singapore that are overly reliant on exports could see their growth come under increased pressure. Exports account for roughly 200% of Singapore’s GDP.
  • Singapore’s Non-Oil Domestic Exports decelerated in September to +22.7% YoY from a revised +30.8% in August. While +23% YoY export growth is nothing to scoff at, an (-810bps) second-derivative slowdown is noteworthy and speaks to the broader slowdown within the Singapore economy from white-hot levels of growth in 1H10.
  • Japan revised down its August Industrial Production to (-50bps) MoM from (-30bps). 

Eye On Asia: The Good, The Bad, and The Ugly - 2


The Ugly 

  • China’s Property Prices (70 Cities) rose in September by +0.5% MoM, marking the first sequential uptick on a monthly basis since May. While prices decelerated on a YoY basis in September (+9.1% vs. +9.3% in Aug.), the +56% MoM gain in property sales value and +52% MoM gain in property sales volume exacerbate the slight monthly increase in prices in September and will likely overshadow September’s  marginal YoY deceleration. This latest reading may serve to speed up China’s implementation of a nationwide property tax trial.
  • India’s Inflation (WPI) accelerated in September to +8.6% YoY from +8.5% in August. This is yet another example of Fed-sponsored inflation that has been accelerating globally. Food inflation accelerated to +16.4% YoY (food is the largest expense line item for 75.6% of Indian households). This latest inflation reading highlights the Indian central bank’s struggles with containing inflation, which may get tougher as they’ve recently signaled that they will intervene in the currency market should the rupee rally pas 43 per dollar. Weaken the rupee and starve your citizenry with inflation or allow it to continue appreciating and reduce your country’s export competiveness is not a catch-22 we’d like to be invested in,  despite India’s one billion-plus people and high-single digit GDP growth (both of which are as widely understood by consensus as it gets). 

Eye On Asia: The Good, The Bad, and The Ugly - 3


Eye On Asia: The Good, The Bad, and The Ugly - 4


The Murky 

  • The number of new hedge funds in Japan is set to reach the highest level since 2006. As many as 27 Japan-focused funds are scheduled to launch this year, with 15 already in operation. While we typically consider fund flows and start-ups as contrarian indicators, we do think the number of Japan-focused hedge funds going up may actually provide incremental selling pressure on the Nikkei, as more investors arrive at the conclusions we reached from our Japan’s Jugular thesis outlined in our 4Q10 Macro Themes call.
  • In classic contra-indicator form, the number of hedge funds’ net speculative positions that the yen will rise against the dollar stood at an elevated 48,285 contracts on October 12th. In May, when the yen bottomed at 94.5 per U.S. dollar, there were a net 65,612 contracts forecasting a yen decline. If you don’t know now you know that portfolio managers chase performance and price. 

All told, the bevy of economic data out of Asia over the last few days adds to our conviction that the bullish rally in many Asian equity markets is likely to run out of legs, provided the U.S. dollar holds a bid. In addition, the data grows increasingly supportive of the relative underperformance of Japanese equities on both an intermediate term TREND basis and from a long term TAIL perspective. We continue to stand counter to the Blind Belief that QE2 will be a panacea for U.S. economic growth and once consensus understands that or QE2 becomes fully priced in, emerging market equities could come under selling pressure as the gravitational force that is slowing growth in the U.S., Japan, and Europe weigh on markets globally.


Darius Dale


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