Duration Neglect

“Duration neglect is normal in a story, and the ending often defines its character.”

-Daniel Kahneman


That’s one of my favorite risk management quotes from Kahneman’s Thinking, Fast and Slow. It comes from Chapter 36 titled “Life As a Story.” After this morning’s central planning event, take some time to think this weekend. Re-read the last 30 pages of one of the most important books of the year. If there ever was a time to embrace the uncertainty of Behavioral Economics, it’s now.


Storytelling is at the core of everything we do. Storytelling can be personal and political. Storytelling can be short or long-term. But no matter what your confirmation bias or duration, storytelling, at some point, meets a fork in the road between fact and fiction. Whether or not you are proactively prepared for that moment is purely up to you.


Two weeks ago, the Bailout Bull Storytelling was that “Bernanke and Draghi are going to provide a one-two punch in Jackson Hole.” Stock were higher and bonds were lower. Since then: 1. Draghi bagged the meeting, 2. Bernanke’s boys are waffling with “it’s too close to call”, and 3. US Equity Volatility (VIX) is up +34%.


As Ray Dalio likes to say, look in the mirror and ask yourself, “what is true?”


Back to the Global Macro Grind


The other thing Ray Dalio reminds us (from the Introduction of Ray Dalio’s Principles) is to “above all else, think for yourself.” That’s pretty important when considering what sources are credible in this profession. Many of them have not evolved since 2007.


Duration Neglect is one thing, but being unable to tell the difference between fact and fiction can bankrupt you at the poker table as fast as it can in your personal and professional life. From a Global Macro perspective, no matter what these broken sources tell you this weekend as they live large on your dime in Jackson Hole, Growth Is Slowing.


When I say Growth, I mean Global Growth Data – here it is in the last 48 hours:

  1. US Jobless Claims rose wk-over-wk to 374,000 vs 366,000 two weeks ago
  2. US Consumer Confidence fell -8% month-over-month in AUG to 60.6 vs 65.9 in JUL
  3. Japanese Retail Sales fell -0.8% year-over-year
  4. Hong Kong Retail Sales volumes dropped from +8.3% year-over-year to +1.3%
  5. Brazil cut interest rates as inflation ramped +100bps month-over-month to +7.7%
  6. Spain’s Retail Sales fell -7.3% in JULY (year-over-year) vs -5.2% JUN
  7. Italy’s unemployment rate ramped to 10.6% in Q2 vs 9.8% in Q1
  8. Italy’s inflation rate remains at +3.5% in AUG vs +3.6% in JULY (stagflation)
  9. US GDP Growth for Q212 slowed to 1.73% vs +1.97% in Q112

So, even if you’re still in the “growth is back and earnings are great camp” (Tom Lee, Ed Hyman, Laszlo Birinyi, etc.) from March of 2012 – at this point, if your storytelling is based on the USA alone – you’ve just gotta change your story to begging for bailouts.


To review, the call we made in March of 2012 was that Global Growth Slows As Inflation Accelerates. That, on the margin, is precisely what’s happened here in August versus July – primarily because of the inflation part of that statement. Food and Oil prices matter.


Now if you turn around and tell me that inflation fell in May versus where it was in March, I’ll agree with you. It did. That’s why we bought the SP500 at its long-term TAIL support line of 1283. But, to be consistent, don’t forget what central planning does: A) It Shortens Economic Cycles and B) Amplifies Market Volatility. So you have to keep moving.


Back to that US GDP Growth print this week of 1.73%:

  1. It implied a “Deflator” of 1.59% in Q2 versus +2.16% in Q1; therefore GDP, inflation adjusted, was overstated in Q2
  2. Assuming inflation is the same as the government says it was in Q1 here in Q3 (it’s higher), #GrowthSlowing continues
  3. Irrespective of the storytelling on what inflation rate you use, US GDP is down -57.8% from Q411 to Q2 of 2012

In this No Trust; No Volume market, one of the most neglected long-term issues remains confidence. Small business owners in America like me aren’t morons. We aren’t going to ramp Fixed Investment growth, Inventories, and Hiring into a central planning event.


That’s not me telling my own story – the only inventory I have in oversupply are tweets. That’s the story within the latest US GDP report:

  1. US Fixed Investment Growth was basically cut in half, sequentially, from Q1 to Q2 (+0.63% vs +1.18%)
  2. US Inventory Growth went from +2.53% in Q411 (when Growth was solid) to -0.23% in Q212
  3. US Export-Import Growth (+0.3% in Q212) remains nowhere to be found as an offset to 1 and 2

Keynesian Quacks will tell you that if you debauch the currency of a nation, “exports will ramp” and a bunch of other stuff will multiply upon that as Ben Bernanke and Larry Summers raise the oceans to escape velocity.


Not true.


Not this time. No dear Sirs; this time is not different. This story will have an ending - and your Duration Neglect will be the cross of the families bearing your name for many years to come.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are now $1, $111.12-113.74, $81.11-82.18, $1.23-1.26, 1.56-1.65%, and 1, respectively.


Enjoy your long weekend,



Keith R. McCullough
Chief Executive Officer


Duration Neglect - Chart of the Day


Duration Neglect - Virtual Portfolio

The Election

This note was originally published at 8am on August 17, 2012 for Hedgeye subscribers.

“People can forsee the future only when it coincides with their own wishes, and the most grossly obvious facts can be ignored when they are unwelcome.”

-George Orwell


In life generally and life as stock market operators in particular, our biggest enemy is often ourselves.  As humans, we have mental biases.  As much as we do to train ourselves out of them, they still broadly exist.  In global macro analysis, an important area in which we see biases manifest themselves is political analysis.  Particularly in the United States, people are tied to a political party, so have a difficult time seeing the world outside of that specific lens.


Stepping back, as many of you perhaps already know, in analyzing the top down prospects for a country and in particular the currency, we focus on three key factors: growth, inflation, and policy.  In many instances, the policy and/or perception of future policy is the most critical factor.  In the United States, the President, and his or her party if they control Congress, have the power to set the economic agenda, especially related to fiscal outcomes.  Moreover, they appoint the Federal Reserve Board which has independent (in theory) control of monetary policy.


Understanding this, makes one realize that having a view of politics is important.  The negative thing about analyzing politics, as I noted above, is that most people have their partisan biases.  The positive aspect is that there is a lot of data to help us establish an unbiased view.  This morning I’m going to spend some time going through the relevant data.  That said, I’ll get to the punch line: Obama has the consistent edge.  That might not make everyone happy, but that is a fact for now. 

  1. National Polls – There have been six major national polls in August that look at Obama versus Romney in the general election.  In aggregate, Obama has won four of these polls and his average edge over Romney is +3.5 points.  Since the margin of error for these polls collectively is right around 3.0, this is a statistically significant edge.  On the positive side of the spectrum, in the last two major polls, Romney has a slight edge, which may be indicative of some positive momentum from the Ryan announcement.
  2. Electronic Predictive Markets – The most prominent electronic predictive markets that have a contract that enables people to “bet” on the outcome of the Presidential election are Intrade and the Iowa Electronic Markets.  On Intrade, Obama currently has a 56% to 43% edge over Romney.  On the Iowa Electronics Market, Obama has a slightly more superior edge at 60% to 39%.  Both of these markets measure the probability of either candidate getting elected.
  3. Economic Projections – Once again the key economic models that we look at, our own Hedgeye Election Indicator and Yale Professor Ray Fair’s model, both show a higher probability that Obama gets re-elected than Romney winning the Presidency.  Currently, on the Hedgeye Election Indicator, which uses real time market and economic data to predict an outcome for the election, we have a 59.5% probability of Obama getting re-elected.  Currently on Ray Fair’s model, a model that focuses on growth and growth surprises as the primary factors, the Democratic candidate is predicted to win 49.5% of the vote and the Republican candidate to get 46.3% of the vote. 

On these broad national indicators, Obama has an edge, even if a slight one.   The closeness of the aforementioned indicators suggests that this election will once again come down to the key battleground states and the overall electoral college map.


Based on the most recent polls, Obama has 237 electoral college votes and Romney has 191 electoral college votes.  This is based on state level polls that are outside the margin of error.  Even as Obama has an edge, 270 votes are needed to obtain the Presidency, so his edge is simply that, an edge.  The states that remain in the toss up category combine for 110 votes and include: Colorado, Florida, Iowa, Nevada, New Hampshire, North Carolina, Ohio, Virginia, and Wisconsin.   Ultimately, this election will be won or lost in those states.


For those of you who haven’t stopped reading and gotten bored because of my political meanderings this morning, you probably think that I’m painting a negative picture for Romney.  And on some level you are correct, although I’m not painting but rather just relaying the facts.  In that vein, there are a couple of facts that also auger positively for Romney – Obama’s approval rating and voter engagement.


In terms of approval rating, Obama’s approval rating is low for a President that hopes to get re-elected.  According to Gallup, the most long running pollster in this category, Obama’s approval rating is currently 45 and his term average is 49.  The only Presidents with lower approval ratings were Truman, Carter, and Nixon.  Obviously, this not an enviable bunch and an approval rating that is broadly indicative of dissatisfaction with the Obama administration.


The more interesting wild card in this election will be voter engagement.  This is the factor that led to the Republicans doing much better than expected in the midterm elections.  As well, this is likely a key reason that Romney selected Paul Ryan, a conservative and Tea Party favorite, to motivate the base.  Getting out to your base is from Karl Rove’s electoral strategy 101 and is a fundamental reason why George W. Bush won two elections.


So, not to pour cold water on the positive picture I’ve just painted above for partisan Democrats, but early indicators suggest that Republicans may be much more engaged that Democrats this electoral cycle.  The most recent evidence  comes from a USA Today / Gallup poll earlier this week which showed that 74% of Republicans are thinking “quite a lot” about the election, while only 61% of Democrats are doing the same.  This may be a meaningful and relevant edge for the election.


This election is likely to be tight, with Obama having a slight edge currently, but Romney has a number of factors that could swing his way, especially as he begins to outspend Obama this fall.  Some suggest he may be able to outspend Obama almost 2:1 in key states.  Regardless of your political affiliation, as a stock market operator if you get policy right, you will get a lot of other things right.  And policy starts with politics.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Election - Chart of the Day


The Election - Virtual Portfolio


The Macau Metro Monitor, August 31, 2012




Upon the merger of Macau Legend Development Ltd (MLD) with Macau Fisherman's Wharf International Investment Ltd (MFW), a series of redevelopment projects will be launched with a total of HK$5 billion in investment.  Hotel and casino operator Macau Legend announced that the merger attracted HKD 480 million (USD62 million), a 4% stake of the total investment from SJM.


David Chow Kam Fai, MLD’s Co-Chairman and CEO, plans to redecorate existing buildings in the Macau Fisherman's Wharf entertainment complex and build new facilities, namely a dinosaur museum, a yacht club and two hotels, besides others.  The project is scheduled to be completed by the end of 2015.  By then, Macau Legend will have 1,200 hotel rooms.


Chow said he was confident in gaining government approval since the plan meets the region’s goal of becoming a “leisure attraction". 



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 TODAY’S S&P 500 SET-UP – August 31, 2012

As we look at today’s set up for the S&P 500, the range is 12 points or -0.18% downside to 1397 and 0.68% upside to 1409. 











  • ADVANCE/DECLINE LINE: on 08/30 NYSE -1294
    • Decrease versus the prior day’s trading of 526
  • VOLUME: on 08/30 NYSE 511.72
    • Increase versus prior day’s trading of 0.48%
  • VIX:  as of 08/30 was at 17.83
    • Increase versus most recent day’s trading of 4.51%
    • Year-to-date decrease of -23.80%
  • SPX PUT/CALL RATIO: as of 08/30 closed at 1.42
    • Down from the day prior at 1.69 


  • TED SPREAD: as of this morning 32.94
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.65%
    • Increase from prior day’s trading of 1.62%
  • YIELD CURVE: as of this morning 1.39
    • Up from prior day’s trading at 1.37

MACRO DATA POINTS (Bloomberg Estimates)

  • 9:45am: Chicago Purch. Mgrs, Aug., est. 53.5 (prior 53.7)
  • 9:55am: UMich Sentiment, Aug. final, est. 73.6 (prior 73.6)
  • 10am: Factory Orders, July, est. 2.0% (prior -0.5%)
  • 10am: Fed’s Bernanke speaks at Jackson Hole conference
  • 11:55am: BOE’s Haldane on finl stability at Jackson Hole
  • 1pm: Baker Hughes rig count
  • 1:15pm: BOE’s Posen on monetary policy at Jackson Hole
  • TBA: NAPM-Milwaukee, Aug. (prior 46.7)


    • House, Senate not in session
    • CFTC holds closed meeting on enforcement matters, 10am
    • Transportation Dept., Mazda Motorsports, Ad Council hold news conference on public campaign against distracted driving among teenagers, coinciding with 2012 Grand Prix of Baltimore, 11am
    • Romney, Ryan attend campaign events in Fla., Va.; Obama attends campaign event in Texas, Biden an event in Ohio


  • Fed’s Bernanke to speak at Jackson Hole conference
  • Nomura plans $1b cost savings, job cuts outside Japan
  • Apple loses Japan patent claim against Samsung over devices
  • Japan industrial output unexpectedly falls on global weakness
  • Japan consumer prices fall, jobless rate stays at 4.3%
  • SAIC to split into two companies through spinoff
  • SAIC calls active Mon., yday before split announced
  • Euro-area unemployment rises to record 11.3%
  • Spain said to consider Bankia re-capitalization without EU money
  • Farm exports seen rising as drought pushes up U.S. crop prices
  • U.K. house prices rise most in more than 2 1/2 yrs
  • Indian growth expands at the slowest pace in 3 yrs
  • Employee operations manager Workday files for $400m IPO
  • U.S. Jobs, Obama, Draghi, JAL, Glencore: Week Ahead


    • Laurentian Bank of Canada (LB CN) pre-mkt, C$1.24



OIL – the only way to get some level of marginal consumption growth back in the global economy is to knock this oil price down, hard (like Q411). The only way to do that is to get the USD Index back up to $84-85, fast. Obama is 1 phone call away from telling The Bernank to raise rates and crash the Gold/Oil market – he’ll never do that; the polls are addicted to this stock market up on no-volume/no-trust thing.

  • Crop Traders Extend Bull Run as Rain Comes Too Late: Commodities
  • Oil Heads for Second Monthly Gain Before Fed Chairman’s Speech
  • Gold Set to Extend Best Month in Seven Before Bernanke Speech
  • Coffee Harvest in Vietnam Set to Drop From Record on Weather
  • Wheat Slides as Russia Says It Won’t Curb Exports; Soybeans Drop
  • Copper Seen Rising as Bernanke May Hint at Stimulus in Speech
  • Cocoa May Rise on Dry Weather and Disruptions; Sugar Advances
  • Commodities Holdings Advance Most Since March as Soy, Oil Rally
  • Russia Reduces Grain Crop Estimate as Exports Will Continue
  • Isaac Drenches Louisiana as Storm Moves North From Gulf Coast
  • Russian Oil Beats Iran as China Credit Pays Off: Energy Markets
  • Oil May Fall on Speculation Gulf Output to Resume, Survey Shows
  • Cocoa Butter Rally Said to Stall as Rising Prices Curb Demand
  • Paris Wheat Set to Gain on Resistance Breach: Technical Analysis
  • Demand From China Set to Shrink Soybean Supply, Boosting Prices
  • Farm Exports Seen Rising as Drought Pushes Up Crop Prices









EUROPE – lower-highs on lower volumes for Equities as every single European index we model is now back to bearish on my immediate-term TRADE duration; economic gravity (the data) supports that this morning; Italy ripped a +3.5% inflation rpt for AUG (vs +2.2% JUL); that’s what you get with $114 Brent Oil #stagflation.






JAPAN – in other news, one of the top3 economies in the world continues to show you the end results of doing more of that (Qe); Japanese stocks have been making lower-highs for 20 yrs since Krugman told them to “PRINT LOTS OF MONEY”; Nikkei pancaked into mth-end, down -1.6% (down -3.7% since Aug23, and down -13.8% since the March global #GrowthSLowing top).










The Hedgeye Macro Team

Waiting For Bernanke’s Next Move


Hedgeye CEO Keith McCullough appeared on CNBC’s The Kudlow Report tonight to chime in on today's market activity and expectations for Ben Bernanke’s meeting at Jackson Hole tomorrow.


The fact of the matter is that the general public is a proponent of a stronger US dollar and will continue to be bullish going forward. Mitt Romney and Paul Ryan are both advocates of a stronger US dollar; this is clearly something people can get behind.


Should Romney win the election, he’ll need to give Bernanke the boot. He’s got no growth, no employment gains and consumer confidence is down. Obama and Bernanke’s strategy is to keep the stock market up and today the Dow dropped 100 points. As far as our strategy goes, we’re basically on the sidelines playing it safe until Jackson Hole is over and done with. It’s sad that we need to wait for central planners to speak before making moves, but that’s life. Deal with it.

The Outlaw Josie Wales is Riding into the RNC

Takeaway: The Presidential race is leaning to Obama, but he is on the ropes in terms of his approval rating.

The Republican nominee for President Mitt Romney will make his case to the American people as to why he should be the next President of the United States tonight in Tampa.  Preceding Romney will be none other than Hollywood legend Clint Eastwood.  Not to devolve our research into movie reviews, but one of my favorite Client Eastwood movies is “The Outlaw Josie Wales”.  In the clip below, Josie Wales tarnishes a gentleman’s nice suit by spitting tobacco on it:


Aside from self aggrandizing commentary from the likes of Rick Santorum, the clip above is a pretty good analogy for the strategy at the RNC – to tarnish the track record of President Obama.  In fact, the only prime time speaker who did not mention Obama specifically was former Secretary of State Condi Rice.


The problem with attacking Obama is that his numbers really can’t get much worse from here.  The most recent Presidential approval rating for Obama from Gallup, the polling firm that has data on approval going back the furthest, has the President’s approval rating at 44.  This is literally his lowest approval rating of the year and akin to the worst approval rating of his Presidency, which occurred during the debt ceiling standoff in August of 2011.


In looking at other President’s approval ratings at this juncture in their term, Obama compares very unfavorably and based on the single factor of approval he’s at serious risk of not getting elected.  We’ve outlined these numbers below:

  • Obama Approval – 44% (?)
  • Bush 2 Approval – 49% (re-elected)
  • Clinton Approval – 53% (re-elected)
  • Bush 1 Approval – 42% (not re-elected)
  • Reagan Approval – 57% (re-elected); and
  • Carter Approval – 37% (not re-elected)

Only Carter and the first President Bush had lower approval ratings and they both failed in their bids to get re-elected.


The positive for Obama, though, is that despite his low approval ratings and the Republican focus on branding him a failed Presidency, Romney has not been able to establish a meaningful lead in any of the key indicators we review.


1.   National Polls – Based on the Hedgeye Aggregate of national polls, Obama has a +1.1 edge over Romney and has led in 3 of the last 4 polls.  Admittedly, this is within the margin of error, but the edge still goes to Obama.


2.   Electronic Markets – On Intrade, Obama has a 56.2% probability of getting re-elected. This is consistent with the Iowa electronic market that shows a 58.6% probability for Obama.


3.   Electoral Map – Based on state level polls, Obama currently has 221 electoral votes locked and Romney has 191.  That puts 126 electoral votes in the toss up category as the polls are within the margin of error.   Obama only needs 39% of the tossups to get to the 270 needed to become President.


4.   Economic Indicators – Our own Hedgeye Election Indicator (HEI) currently shows a 60% probability of Obama getting elected.  In addition, Yale Professor Ray Fair’s economic model currently shows the two party vote split 49.5% for Obama and 46.3% for Romney. (Although Fair does consider this too close to call.)


So, in aggregate, Obama still has a slight edge despite his low approval ratings and the overt Republican focus on him.


The wild card will ultimately be turnout, so in effect getting the political base energized.  Clearly, the choice of Paul Ryan as Vice President was at least partially done for that reason alone. Already there is some evidence that Republicans are more energized than Democrats.  A mid-July poll from CBS / New York Times indicated that 49% percent of Republicans showed increased enthusiasm for this election and only 27% of Democrats said the same thing.


Along the same vein is a Gallup poll from July 25th that asks those polled whether there are more or less enthusiastic versus the prior election.  According to this poll, 51% of Republicans are more enthusiastic and only 39% of Democrats are more enthusiastic.  In comparison, back in 2008 61% of Democrats were more enthusiastic.


So, clearly the enthusiasm gap favors the Republicans and may not be totally reflected in many polls.  From a strategic perspective, though, the Republicans seemingly have Obama where they want him - at a place with a very vulnerable approval rating.  Conversely, Romney is not in a good position either.  According to a poll today from Gallup, only 48% of those polled have a favorable view of Romney.


Strategically, bringing Clint Eastwood to Tampa tonight may be the first step in a strategy shift to improve Romney’s favorability ratings.  Ultimately, even improving Romney’s likeability and favorability marginally may be the key to victory in a race that is leaning to Obama, but in which the President is highly vulnerable.


Daryl G. Jones

Director of Research

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