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The Flows

This note was originally published at 8am on March 01, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The quality of the imagination is to flow and not to freeze.”

-Ralph Waldo Emerson


For those of you who dial into the Hedgeye Morning Macro Call every morning at 830AM EST, you know that the title and topic of this Early Look note is dear to my Canadian heart – The Flows.


In institutional investor speak, The Flows are where the fees are. For bulls, they foster the imagination. For bears, they focus the mind. The Flows represent your moneys. In a world “awash with liquidity” and sovereign debt, we don’t think you should trust. Bernanke Bubbles beware.


Last year, they flowed you into US Treasury Bonds and Emerging Markets. This year, outflow-you-go into the “safe havens” of US and Japanese stocks. Like the promise of Bernanke “buying bonds” in 2010, the promise of not “fighting the Fed” bears US stock market fruits from the heavens. Do not freeze men and women of the risk management gridiron. The chase for the last Dollar Debauched drop of equity returns is on.


The problem, of course, arises when The Flows run into these little critters called The Fundamentals. Understanding full well that our view of The Fundamentals is often 3-6 months ahead of Wall Street/Washington consensus (yes, sadly, they are now one and the same) is what it is – since October, our Global Macro view of the fundamentals remains Global Growth Slowing as Global Inflation Accelerates.


Thankfully, not every institutional investor understood the repercussions of Quantitative Guessing II (QG2) on Global Inflation Accelerating back then. Now those who bought US Treasury Bonds and Emerging Markets are being reminded that what flows into a said haven, flows out…


From EPFR Global, here’s the latest on The Flows (per their February 18th report):

  1. USA/Japan/Europe (Equities)  - “Investors pumped $47 billion into equity funds in the U.S., Europe and Japan this year after pulling $17 billion in 2010 and $28 billion in 2009.”
  2. Bonds Funds - “Investors added $2.44 billion to bond funds globally this year as of Feb. 16, down from $11.1 billion during the same period in 2010.”
  3. Emerging Markets - “Investors pulled $1.9 billion from developing nation stock mutual funds in the week to Feb. 23, the fifth week of outflows.”

Now, as we like to say at Hedgeye, what happens on the margin in Global Macro matters most. And on the margin, The Flows into the stock markets of Developed Economies have been huge. The most important risk management part of that last sentence is “have been.”


How long can The Flows trump The Fundamentals? How much risk gets entrenched into an asset class when the storytelling starts to follow the natural confirmation bias of positive price momentum? How many times do we need to see this movie before we learn the lesson?


These are all questions that have a much clearer answer now versus then. Whether you look at the opportunities to short US and Emerging Market Equities into the peaks of fund flows of 2007 or shorting the mountain tops of a bond market bubble in 2010, history writes itself as of last price.


As a risk manager who is shorting things almost every day, I need to be really sharp on timing and price. While many institutional marketing messages preface their buy-and-hold strategy with “you can’t time markets”, we should all be very thankful for that – many of them can’t. What we’re doing is preserving capital and making probability-weighted decisions, daily, with a fundamental Global Macro research overlay.


On the scoring of Growth and Inflation, this morning’s Global Macro Grind has some positives, but more negatives:



  1. Germany – unemployment fell to another new low of 7.4% and German Equities continued higher to +6% YTD (we’re long EWG)
  2. Canada – unlike US growth which was revised down again last week, Q4 GDP growth surprised to the upside (we’re long FXC)
  3. India – the government cut taxes and sent the stock market up +3.5% (we covered our short position in IFN at last week’s low)


  1. China – Producer Manufacturing Index (PMI) hit a new 6-month low of 52 last night (we’re long CYB as China continues to tighten)
  2. Mexico – Unemployment continued higher sequentially to +5.4% versus 4.9% last month (we’re short EWZ on Latin American inflation)
  3. Iran – Consumer price inflation (CPI) was up to +15.8% in JAN vs 12.8% in DEC (that’s before this massive oil spike and is instigating tensions)
  4. Japan – Industrial Production slowed again sequentially in JAN to +2.4% y/y vs 3.3% DEC (we covered our short position in EWJ last week)
  5. Spain – Consumer price inflation (CPI) was up again sequentially in FEB to +3.4% versus +3.0% in JAN (we have no position in Spain)
  6. USA – US Consumption in JAN, adjusted for inflation, was negative for the 1st month in a year (we’re short MCD, TGT, and XHB)

But there is no but in The Flows. They are what they are until they stop. All the while, I’m most certainly not going to freeze with a strategy to short-and-hold. For the last decade, that hasn’t worked inasmuch as buy-and-hold hasn’t . Not in a market where professional politicians are sponsoring a Burning Buck, The Inflation, and Price Volatility… We have America’s sad State of political leadership to thank for that.


My immediate-term lines of support and resistance for the SP500 are now 1311 and 1343, respectively. The US stock market should make another lower-high today – one that you should outflow from, provided that US Dollar Debauchery continues to sponsor Global Inflation.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Flows - flo1


The Flows - flo2

Enabling Success

“He is able who thinks he is able.”



When I started this firm, I had a simple goal – to democratize the risk management process of a hedge fund. What does that mean? That means showing the world exactly what it is we do, real-time, in a transparent and accountable way.


What does a hedge fund do? You’ll get a lot of different answers to that question – and as industry supply of hedge funds continues to expand, you’ll get more hedge funds who really don’t do what I do – hedge. Some strategies are simply levered-long versions of mutual funds that charge higher fees. Those hedge funds tend to blow up when markets stop going up.


Enabling Success in a hedge fund model is best achieved by having short positions that don’t hurt you when the market goes up. It’s a trivial exercise to buy something when everything is going up – that’s called beta. Managing losses is the key to this game – not chasing relative returns.


I don’t run money anymore, and a lot of people still ask me why. Three years ago, I thought I might eventually go back to doing it again – not anymore. I’m having too much fun building a real company with real cash flows. I absolutely love reading and researching so that I can put myself out there every morning. The challenge for me isn’t how much money I make, it’s how big of an arena I can play this game in.


I’m certainly not walking through these thoughts for any other reason than this is what I am thinking right now. I only have 45 minutes to write you these missives every morning – so I have to roll with what’s in my head. That requires a risk management process in and of itself – editors!


Enabling clients to look inside our risk management process seems to be the most empowering part of what we do. In order to Enable Success in this business, I think you need to let independent minds explain their research perspectives so that you can weigh them against your own. Whether our research is top-down, bottom-up, or quantitative – it seems to elicit plenty of feedback. Constant feedback enables success too.


How have we enabled this research platform to deliver an 81.6% batting average on the short ideas since inception in 2008? It certainly hasn’t been by sitting on my positions. Short-And-Hold isn’t a repeatable strategy across market cycles inasmuch as Buy-And-Hold isn’t. If you want to compound positive absolute returns on the short side over time, you have to keep moving.


Enabling Success on the short side of your portfolio is also driven by finding asymmetric opportunities. Since I attach the Hedgeye Portfolio at the bottom of this note every morning, you can monitor this real-time. But the upshot of it all is that you can witness a raging bull-run in US stocks and, at the same time, find ways to make money on the short side. If you broaden your scope, there’s always a short selling opportunity somewhere.


When I was younger, I was pigeon-holed into following US Retail and Restaurant stocks – so automatically, I was handcuffed to fishing in the creek that was in my area code. I was in the right place at the right time however, because 2000-2002 were bearish US stock market tapes, so there were plenty of names that were going down. Timing, like gravity, matters.


As I get older, I’ve simply broadened my horizons to fishing in oceans around the world across asset classes. At the same time, I’ve expanded my research team to 40 people (the largest team I managed at a hedge fund was 6).  


Enough about that. I just felt like writing about it this morning. I think it’s important to be transparent about what it is we do.


Since I only have 15 minutes left, here’s what I’ve been doing this week in the Hedgeye Asset Allocation Model:

  1. Reduced my cash position from 58% to 49%, taking advantage of some lower prices earlier in the week
  2. Expanded my invested position in International Currencies (Chinese Yuan and Canadian Dollars) as the Buck Burns
  3. Expanded my invested position in German Equities (EWG) where we remain bullish
  4. Bought back Gold on yesterday’s correction (GLD)
  5. Stayed long Oil and Grains (OIL and JJG)
  6. Stayed long US Healthcare (XLV) – my favorite US Sector alongside Energy

On the long/short side of the Hedgeye Portfolio, the main investment theme remains being long of The Inflation:

  1. Long Stocks with top line leverage to The Inflation (bought Petrobras (PBR) this week)
  2. Short stocks without pricing power whose margins get jammed with The Inflation (McDonalds (MCD), Target (TGT), etc.)
  3. Short Bonds and Emerging Markets – The Inflation is bad for them

Yes, there are some names in the Hedgeye Portfolio that aren’t working – there always are. There are also names that don’t always fit the top down and quantitative themes we’re focused on like a glove. These are names that my analysts like on either a turnaround or operating basis (SBUX, WEN, IGT, etc.).


Altogether, Enabling Success in terms of asset allocation, security selection, or net exposure is really best achieved managing your mistakes so that they don’t suppress your ability to generate repeatable absolute returns across market cycles.


My sincerest thank you to all of you who have enabled this platform to thrive. We don’t have to wake up every morning looking for some central planner in government to help us employ people. In an industry that is in dire need of evolution, you’ve enabled us to be the change we want to see in the world.


My immediate term support and resistance levels for the SP500 are now 1318 and 1342, respectively.


Happy birthday to my baby girl, Callie.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Enabling Success - yy1


Enabling Success - yy2

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.51%
  • SHORT SIGNALS 78.32%

CHART OF THE DAY: Hedgeye Asset Allocation Model



CHART OF THE DAY: Hedgeye Asset Allocation Model -  chart


The Macau Metro Monitor, March 4, 2011



Mitsubishi Heavy Industries (MHI) and the Macau government yesterday signed the contract for MHI to supply the system for the 1st phase of Macau's light rail transit.  MHI must be able to deliver within just 47 months, plus two months for trials.  The LRT project will create 4,000 jobs.



According to Senior Minister of State for Trade and Industry S. Iswaran, Singapore is on track to receive S$2.7BN annually from each Integrated Resort.  However, Iswaran cautioned that the government should expect the novelty of the integrated resorts to "diminish even as the IRs continue to roll out new attractions."

Meanwhile, the government said it expects 12-13MM visitor arrivals this year with tourism receipts hitting between S$22 BN and S$24 BN.




TODAY’S S&P 500 SET-UP - March 4, 2011

Equity futures are trading above fair value in a follow-through from yesterday, which saw the Dow post its largest one-day gain since December 2010. Today's non-farm payroll number is the key catalyst, with consensus at +190K for February.  April crude futures climbed back above $102 a barrel overnight as tension in the Middle East remains heightened and hopes fade for negotiated peace deal in Libya.  As we look at today’s set up for the S&P 500, the range is 24 points or -0.97% downside to 1318 and 0.83% upside to 1342.



  • 8:30 a.m.: Nonfarm payrolls: est. +196k, prior 36k
  • 8:30 a.m.: Unemployment rate: est. 9.1%, prior 9.0%
  • 10 a.m.: Fed’s Yellen speaks on international system in Paris
  • 10 a.m.: Fed’s Nelson testifies on TALF liquidity facility
  • 10 a.m.: Factory orders, est. +2.0%, prior +0.2%
  • 1 p.m.: Baker Hughes Rig Count


  • Goldman Sachs CEO Blankfein said to agree to testify at Raj Rajaratnam’s trial, set to begin next week
  • NFL, union labor deadline extended by 24 hours to midnight
  • BP Pipelines North America may restart the Tri-States natural gas liquids pipeline
  • The U.S. DoJ is probing online video patent owner MPEG LA over antitrust concerns regarding claims against Google’s VP8: WSJ


We have 8 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.  XLF is the only sector broken on TRADE.

  • One day: Dow +1.59%, S&P +1.72%, Nasdaq +1.84%, Russell 2000 +2.22%
  • Month-to-date: Dow +0.26, S&P +0.28%, Nasdaq +0.59%, Russell +0.84%
  • Quarter/Year-to-date: Dow +5.88%, S&P +5.83%, Nasdaq +5.50%, Russell +5.77%
  • Sector Performance: - Industrials +2.4%, Financials +2.2%, Healthcare +2%, Materials +2%, Tech +1.7%, Consumer Disc +1.7%., Energy +1.5%, Consumer Spls. +1.1%, Utilities +1%


  • ADVANCE/DECLINE LINE: 1914 (+1111)  
  • VOLUME: NYSE 1074.11 (+4.79%)
  • VIX:  18.60 -10.14% YTD PERFORMANCE: +4.79%
  • SPX PUT/CALL RATIO: 1.60 from 2.02 (20.75%)


Treasuries were weaker with the better global risk backdrop, upbeat economic data, rally in stocks and lingering inflation concerns.

  • TED SPREAD: 19.08 +0.203 (1.075%)
  • 3-MONTH T-BILL YIELD: 0.13%
  • 10-Year: 3.58 from 3.46
  • YIELD CURVE: 2.79 from 2.77


  • CRB: 360.56 +0.40%; YTD: +8.34%  
  • Oil: 101.91 -0.31%; YTD: +10.40% (trading +0.67% in the AM)
  • COPPER: 449.00 -0.18%; YTD: +2.25% (trading +1.04% in the AM)  
  • GOLD: 1,417.69 -1.43%; YTD: -0.08% (trading +0.10% in the AM)  


  • Commodities Rise to Two-Year High as Cotton Jumps to Record, Cocoa Gains
  • Deere Courts Indian Farmers, South Korea Scouts Chicago Amid Price Rally
  • Bearish Bets on Soybeans, Cattle Surge to Two-Year High in Options Market
  • Cotton Gains to Record, Heads for Biggest Weekly Advance in Three Months
  • Coffee Rises on Speculation About Short Supply; Cocoa Reaches 32-Year High
  • Wheat Advances as Dry Weather Fans Concern About Possible U.S. Crop Damage
  • Copper Heads for First Weekly Climb in Four Before U.S. Employment Report
  • Gold May Extend Best Run of Weekly Gains Since October on Mideast Turmoil
  • Saudi Arabia May Raise Light Crude Oil Premium to Highest Since July 2008
  • Gillard Weighs Impact of Currency's Gains, Says Commodity Boom Will Endure
  • Container Shipping Shares Boom as Dry Bulk Carriers Wane: Freight Markets
  • High Food Prices May Persist as Economic Growth Boosts Demand, IMF Says
  • Ferrous Resources Said to Seek Funding for $4 Billion Iron Ore Expansion
  • Copper May Fall Next Week on Concern About Rising Inflation, Survey Shows 


  • EURO: 1.3935 +0.48% (trading +0.24% in the AM)
  • DOLLAR: 76.483 -0.25% (trading +0.01% in the AM) 


  • FTSE 100: +0.59%; DAX: +0.80%; CAC 40: +0.52% 
  • European markets advanced following strong markets in Asia and a constructive close on Wall Street on growing economic optimism and expectations for a favorable US payroll report after yesterday's better than expected jobless data.
  • Bonds continued to be pressured following ECB's Trichet hawkish comments yesterday and a growing expectation of a rate increase in the EuroZone as early as next month.
  • Hermes Reports 44% Jump in Earnings as Margins Exceed Increased Forecast
  • Daimler's Steel Headwind Saps Profit as Continental AG's Rubber Costs Soar
  • Salgado Favors Easing Greek Bailout Terms as EU Wrangles on Crisis Accord
  • Crude Heads for Fifth Weekly Gain In London on Libya Violence, U.S. Demand
  • Jet Fuel, Diesel Past $1,000 on Libya Fan Growth Concern: Energy Markets
  • Ferrous Resources Said to Seek Funding for $4 Billion Iron-Ore Expansion
  • U.K. House Prices Dropped Last Month, Erasing January Gain, Halifax Says


  • Nikkei +1.0%; Hang Seng +1.2%; Shanghai Composite +1.4%
  • Asian markets rose today in response to lower oil prices and lower-than-expected jobless claims in the US.
  • Gillard's Concern at Australia Dollar's Impact Shows 'Dutch Disease' Risk
  • Asian Stocks Advance for Fourth Day This Week on U.S. Employment Data, Oil
  • Dollar Yield Gap at 21-Month High as Prices May Spur Unrest: China Credit
  • China Forestry Ex-CEO Should Face Hong Kong Lawsuit, City's Watchdog Says
  • Korea Express Shareholders Said to Seek up to $1.8 Billion From Stake Sale
  • Record Food Prices May Persist as Economic Growth Boosts Demand, IMF Says
  • Singapore Court Rejects Former Standard Chartered Clients' Bid to Sue Bank
  • Singapore Exchange's ASX Takeover Offer Gets a Boost From Chi-X Approval
  • Chinese IPO Risk on U.S. Markets Tops American Corporations, Options Show

Howard Penney

Managing Director



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