Don't Hurry Mistakes

“Let’s not make our mistakes in a hurry.”

-Dwight D. Eisenhower


The 34th President of the United States was a process guy. He was also a world class Risk Manager. Getting the US out of Korea, averting the French invitation to Vietnam (1953), and avoiding the ongoing threat of engaging China or Russia in nuclear war is his legacy now. If you are a Portfolio Manager in this game, your legacy is your track record – and it’ll be the mistakes you don’t make that matter most.


But what kind of team culture should you foster to ensure you aren’t missing something? Do you accept the blame for your team’s mistakes, or do you point fingers? Is there an open forum for people who report to you to disagree with your position? If they do so and have sloppy reasoning, do they expect to be taken to task in front of their peers in kind?


I’m an athlete who believes in transparency, accountability, and trust. I have biases. But they are based on experience. There are a lot of great players – and even more good teams. But only few Championship Teams can repeat. To do that, your players can’t be scared to make a mistake. At the same time, they have to be disciplined so that their mistakes don’t blow up everything the team has worked for.


Back to the Global Macro Grind


Particularly when a market is in a Bullish Formation (Bullish on all 3 of our core risk management durations: TRADE, TREND, and TAIL), not getting squeezed (on the short side) can save the team from having a lot of losses.


If you accept that bullish and bearish formations (Gold is in a Bearish Formation, so is the Japanese Yen) can get immediate-term TRADE overbought and oversold, at a bare minimum you won’t be making the same mistakes over and over again in a hurry. You’ll wait.


It’s taken me at least 13-15 years to learn this the hard way. Getting squeezed is part of a short seller’s life. And guess what, I still have to re-learn the same lesson, weekly. This game isn’t easy. That’s why I try my best to make decisions on the signal now, instead of the noise.


To simplify what I mean by making high-probability decisions:


  1. Don’t be in a hurry to sell something until you get an immediate-term TRADE overbought signal
  2. Don’t be in a hurry to buy something until you get an immediate-term TRADE oversold signal
  3. Don’t eat yellow snow


Or, as President Eisenhower used to tell his brother Milton, “Never get in a pissing match with the skunk.” (Ike’s Bluff, pg 57)


Yes, I am sure there are some really smart people out there who have found a way to not have to deal with process, real-time decision making , etc. But I can almost guarantee you that what they do ends up having a higher realized level of volatility than what we do.


To put some meat on this bone, here are some immediate-term TRADE overbought signals in our models this morning:


  1. SP500 is immediate-term TRADE overbought at 1533
  2. Russell2000 is immediate-term TRADE overbought at 934
  3. Consumer Staples Sector ETF is immediate-term TRADE overbought at $38.06
  4. Kimberly Clark (KMB) is immediate-term TRADE overbought at $92.31
  5. Fedex (FDX) is immediate-term TRADE overbought at $107.39


First, note that I have no immediate-term TRADE overbought signals to act on in any of our long Asian Equities positions. Singapore (EWS) has immediate-term upside, and so does China (which we bought via CAF on an immediate-term TRADE oversold signal yesterday).


Second, I am agnostic on the direction of the signal. It works the same way for both my longs and shorts. Yes, we like and are long of Fedex (FDX), but A) that’s not new (we bought it when we went bullish on US Equities in late November) and B) what is new is that it gave me its first immediate-term TRADE overbought signal in at least the last few weeks.


Third, using immediate-term TRADE overbought signals is another way to hedge market (beta) risk. So, I can be bullish on US Equities on my intermediate-term TREND duration and A) realize I might get an overbought signal in SPY this morning but B) not force myself to short something consensus like SPY, and stock and sector pick on a better signal instead (shorting XLP and KMB into yesterday’s close).


I am certain that there are better ways to do this – and I assure you that before I retire, I will find better ways. But for now, this is how my team rolls because this process is both repeatable and helping us not hurry mistakes.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, and the SP500 are now $1 (Gold remains in a Bearish Formation but is immediate-term TRADE oversold), $116.51-118.71, $80.25-80.83, 92.63-94.49, 1.97-2.05% and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Don't Hurry Mistakes - Chart of the Day


Don't Hurry Mistakes - Virtual Portfolio

Happy Veggies

This note was originally published at 8am on February 06, 2013 for Hedgeye subscribers.

“Should I be turned into a vegetable or a happy imbecile?”

-Nassim Taleb


That’s a quote from Chapter 3 of Taleb’s book, Antifragility, where he discusses everything from “Crimes Against Children” to the misguided interpretation of “equilibrium” by social scientists.


Clearly, Taleb doesn’t like social scientists. There’s a little bit more than a little anger in some of what he writes, but there’s also plenty of truth. Sometimes the truth makes some people angry.


Personally, I like socially oriented scientists. I just don’t want them running my money. For that, I don’t need a philosopher either. I need a real-time Risk Manager.


Back to the Global Macro Grind


The thing that non-market people generally don’t get about risk is that it works both ways. There is no such thing as risk “on” and “off” inasmuch as there is no Mr. Miyagi running the Bank of Japan (yet) either.


Risk is always on. It can squeeze you to the upside as fast as it can crash on you to the downside. There is no better example than that in the Land of The Rising Sun itself. Since Bernanke’s Top (September 2012) where he completed his US Dollar Debauchery, the Japanese Yen is down approximately -17%. Since US stocks stopped going down on #GrowthSlowing (mid November), the Nikkei is up +32.4%!


The Nikkei (for all the social scientists out there still trying to prove out their Ph.D in Keynesian Economics) isn’t something you can export. During today’s Currency War, it’s what squeezes (and pleases) politicians in the short-term (the stock market), while it impales their people’s purchasing power for the long-term.


Enough about that.


Why do I keep buying the damn dip?

  1. Fundamental Research: Macro Economic Data in Asia and in the USA continue to improve
  2. Quantitative Signals: my model continues to signal higher-lows of support and higher-highs of resistance

Why make it any more complicated than that?


I used to.


Then I started reading a lot of books and realized how much I do not know.


That’s why the best fundamental framework I can find right now is grounded in Chaos Theory. No, that doesn’t mean I am a philosopher. Neither does it mean I’m turning into a happy bullish imbecile. It simply means I fully Embrace Uncertainty.


What does the mean?

  1. I obey the signal, not the noise (Quantitative Signals)
  2. I then attempt to confirm or disprove the signal alongside my team (Fundamental Research)

I know, I keep saying the same thing, over and over and over again. I guess that might make me somewhat antifragile, for now. Then I’ll get clocked, and I will feel shame – then it will be time to evolve my process all over again.


As US and Asian Equity markets (our 2 largest allocations in the Hedgeye Asset Allocation Model) move back to immediate-term TRADE overbought, here are some mixed signals to consider amidst your daily noise from the #OldWall:

  1. SP500 immediate-term Risk Range remains tight and trade-able (for now) = 1502-1516
  2. US Equity Volatility remains bearish and breaking down relative to 5yr lows; TRADE support = 12.15
  3. US Equity Market Volumes are now trending bullish on up days and bullish (down volume) on down days
  4. US Dollar Index continues to make higher long-term lows, holding its TAIL of $78.11 support
  5. Chinese Equities (Shanghai Composite) are crashing to the upside into a Bullish Formation (2274 TAIL support)
  6. Both our Hong Kong (EWH) and Singapore (EWS) long ETF positions aren’t as overbought as the SPY at 1516
  7. Japan’s Nikkei flashed an immediate-term TRADE overbought signal overnight at the Yen signaled oversold
  8. KOSPI continued to diverge, like Brazil’s Bovespa has, breaking its TRADE and TREND lines of support
  9. EuroStoxx600 was down -0.5% last wk and is confirming an immediate-term TRADE breakdown again today
  10. France, Italy, and Spain have all seen their respective stock markets snap TRADE lines of support
  11. CRB Commodities Index failed, again, at its long-term TAIL risk line of 306 so far this week
  12. Gold continues to look like Treasury Bonds, awful relative to US and Asian stocks
  13. Oil remains the biggest NEW headwind to our Fundamental Research call on global #GrowthStabilizing
  14. US Treasury Yields (10yr) are now confirming a Bullish Formation (bullish TRADE, TREND, and TAIL)
  15. Yield Spread (10s minus 2s) is plenty wide at +174bps this morning; bullish for the Financials (XLF)

There is no “equilibrium” in a multi-factor, multi-duration, Global Macro risk management model. There is no happy place either. Like in any dynamic, non-linear ecosystem, what you want to embrace is the uncertainty of time and space.


So eat your veggies, buy red, sell green, and keep moving out there as risk factors do.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, and the SP500 are now $1651-1681, $114.96-117.41, $79.11-79.94, $1.34-1.36, 91.63-94.33, 1.91-2.10%, and 1502-1516, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Happy Veggies - Chart of the Day


Happy Veggies - Virtual Portfolio

CAGNY Day 1 - KRFT Wins

You wouldn't think that a VP of Breakthrough Innovation could steal the show, but KRFT takes day one with a management team that hit that right notes.  SYY was at the other end of the spectrum highlighting commercials targeted at consumers that don't even buy the company's products.



General Mills (GIS)

Operating environment across key US categories is improving – much improved versus a year ago.  Trends are improving, inflation is moderating, and new product news is accelerating.  Advertising dollars are down in 2013?  Don’t like to see that.


So, in summary – losing share across categories, lower advertising spend and 2014 growth to be driven by acquisitions.


ConAgra (CAG)


Ralcorp will improve the long-term earnings algorithm.  Private label has been going through an evolution to private brands that offer a compelling value proposition to both retailers and consumers.  Private label and branded can synergize procurement.  Acquisition is beneficial to scale, makes CAG the clear leader in private brands.  Cost synergies will come from supply chain as well as SG&A - $225 million by year 4 post transaction.  Transaction will add $0.05 to FY 2013 EPS and $0.25 to FY 2014 EPS.


Kraft Foods (KRFT)


Company has iconic brands with near-perfect household penetration, focused on execution across the portfolio.  Company has made significant progress against a “bloated” overhead structure – targeting being the leanest company in packaged food.  New KRFT is about consistent, sustained, profitable growth with innovation at its core.  KRFT was worst – on just about any metric, aspires to be first.  Our favorite on the day, may be damning with faint praise, but the company hit all the right notes.




The company provided a solid overview of operating units, with generally positive business momentum across multiple regions.  Interesting comments regarding China, as the company is seeing a slowing industry and heightened competition.  Beer industry has structurally changed over the past ten years due to consolidation – beers are made to a much higher quality standard, bottles and labeling have improved as well.  Image has changed, as beer is now a beverage to which emerging market consumers aspire.   Graham Mackay remains one of the more impressive CEOs across all sectors.


Altria (MO)


The presentation began by highlighting the overall attractiveness of the U.S. tobacco manufacturers profit pool – note that management didn’t frame the discussion as cigarettes alone.  Cigarettes are plagued by the weakest recent and long-term volumes trades as adult smokers switch to alternative products.  Despite some promotional challenges in the cigarettes business, Altria’s business is in a position to grow profitably and in the process return cash to shareholders via dividends (primarily) and share repurchases.


Mondelez (MDLZ)


CEO Irene Rosenfeld was her usual bullish self, despite some recent EPS prints that would argue against a significant degree of optimism.  To Irene’s credit, she continued to speak candidly about some of the issues that have caused MDLZ’s top line to drag (lower coffee pricing, capacity constraints and some execution issues).  Some of those issues will mitigate over time, hence her confidence that the company can see a return to a more robust top line growth profile.


Sysco (SYY)


A less than inspiring presentation from SYY. The company outlines a number of cost savings initiatives through FY2015, however case volume is down and doesn’t look to inflect without further bolt-on acquisitions in a very competitive space.  The company sees a choppy (read negative) microenvironment ahead in which it expects restaurant traffic to be down (restaurants = 57% of its overall business). We expect its big share of food sales across the U.S., Canada, and Ireland to be challenged through this business transition.


Smucker’s (SJM)


The company is seeing improving trends across its focus areas of Coffee, Peanut Butter, and Fruit Spreads and will increase cap ex to over 3% of sales over the next couple years to support these areas. FY 2013 earnings outlook of $5.17 – 5.22, with top line of 6%, aided by lower commodity costs and integration of the SaraLee coffee business.  SJM is making a strong push in China with innovation and know-how with its minority interest in Seamild. Expects peanut butter sales to be resilient and follow on strength from K-cups with new users still coming into the category and existing increasing buying in 2013.



Call with questions.




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst



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After speaking with some contacts in Macau, we’ve got some more color on the softness.  It appears that Mass hold percentage may have been low in February.  We would attribute this in part to the smoking ban.  During busy periods such as Chinese New Year (CNY), it makes sense that table productivity would go down as players take breaks to smoke or smokers can’t get a seat at the table.  Velocity of play goes down which would reduce the hold percentage.  On the VIP side, we’re hearing that volumes were weak and hold was fairly normal.  This would suggest that the China corruption crackdown is having an impact although some disagree.  On a positive note, we’ve heard that non-gaming spend was quite high given the Mass crowds.


Going forward, there seems to be some opposing factors.  On the positive side, there is some speculation that some big VIP players stayed away during CNY because of the crowds.  If this is true, we may not see as much of the typical post CNY slowdown.  However, on the negative side, there is news of an important China central government figure visiting Macau this week which usually means some junkets and players will stay away.  Either way, we’ve had about 4 weeks of disappointing numbers.  We think the softness could continue, mainly due to the corruption crackdown, for a few months but we remain bullish on Macau over the intermediate (trend) and long-term (tail).


Here are some other tidbits we picked up from our contacts:

  • Hainan Island casino – at least one sell side analyst highlighted this in a note as a potentially big competitor for Macau.  Well, we heard this morning that the government already closed it down.  The bear thesis of China allowing casinos outside of Macau will have to be shelved for now.
  • Taiwan – there is speculation that the Taiwanese investigation into an MPEL junket is the cause of MPEL’s market share dip in February.  While we will concede that it may have had an impact, we think it was slight and that low hold explains the majority of the market share decline.  We estimate that Taiwan generates 7-8% of Macau’s GGR. 

As the chart below shows, CNY 2013 ADTR has been disappointing.  Compared with CNY 2012 (Jan 16-29) ADTR and also YoY (Feb 1-19), CNY 2013 (Feb 1-17) ADTR only grew in the mid single digits.  We are currently projecting YoY growth of -2% to +4% for the full month of February.



#AngryBears: S&P 500 Levels, Refreshed

Takeaway: There is no long-term resistance in the SP500 to the prior closing all-time highs (1565).

This note was originally published February 19, 2013 at 13:04 in Macro



Overbought signals come and go. They are very short-term in nature. We’ll get another one > 1528 in the SP500. But Bullish Formations (bullish TRADE, TREND, and TAIL) that are making higher-highs are tough to sell until you get those signals.


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE overbought = 1528
  2. Immediate-term TRADE support = 1516
  3. Intermediate-term TREND support = 1458


In other words, higher-lows and higher-highs are bullish, until they are not – that’s why we are trying to dynamically measure exhaustion within this Bullish Formation. As volatility drops, exhaustion can get more exhausted than a classical technician thinks.


Long-term, as you can see in the 10yr chart there is no long-term resistance in the SP500 to the prior closing all-time highs (1565). The Russell2000 has been making higher-all-time-highs, every other day.


Keep moving out there,



Keith R. McCullough
Chief Executive Officer


#AngryBears: S&P 500 Levels, Refreshed - SPX


Takeaway: We’ve used the post-Lunar New Year weakness driven by property curb speculation to increase our allocation to Chinese equities.



  • All told, we’re using the weakness induced by rising speculation of incremental property curbs to increase our allocation to Chinese equities – one of our team’s top global macro investment ideas since DEC 10.
  • Specifically, we have been particularly keen on the outlook for the Chinese consumer and stocks that have exposure to that sector and the outperformance has been noteworthy: +12.7% for the MSCI China Consumer Discretionary Index since DEC 10 vs. +5.1% for the MSCI China Index over that same duration.
  • Based on our analysis of recent supply/demand/price trends in the Chinese property market and recent policy maneuvers, we think it is unlikely Chinese policymakers will pursue any draconian curbs at the current juncture. Moreover, we anticipate any developments in the way of incremental property market  curbs to be eventually overshadowed by the introduction of growth-friendly economic reforms at the 12th National People’s Congress (~MAR ’13).


Overnight, Chinese property stocks dropped -4.6% on speculation that the Chinese Communist Party leadership is considering additional property market curbs. That was the largest day/day % decline since early AUG and the speculation was driven by a recent trend of higher imposed LTV ratios and/or loan caps in the Zhejiang, Jiangsu and Guangdong provinces.




Weakness in the developers – which we consider a key leading indicator of Chinese economic activity (Real Estate Development is ~20% of China’s Fixed Capital Formation and Land Sales account for ~40% of local gov’t revenues) – dragged the broader index lower to our immediate-term TRADE line of support.




To some degree, recent weakness in the CNY has been foreshadowing this brief move lower in Chinese equities, though, to some degree, the PBOC has been combating appreciation pressures born out of Japan’s recent Currency War tactics.




The speculation on additional property curbs also came on the heels of weak Lunar New Year Retail Sales growth figures (+14.7% YoY vs. +16.2% in 2012 and the slowest since 2009’s +13.8% YoY advance). The fact that the Finance Ministry is developing incremental curbs to be applied on local gov’t debt also continues to weigh on Chinese growth expectations.


A subdued Chinese growth outlook is something we’ve been calling for many months now. Specifically, we continue to see directional improvement in the Chinese economy, but not to absolute levels previously associated with peak growth rates of Chinese demand. This view remains both accurate and supportive of our bearish TAIL-duration bias on commodities.


You can see evidence of this real-time in the forex market having priced out expectations for structural yuan appreciation amid China’s drive to rebalance its economy away from investment, manufacturing and exports towards increased household consumption. That will obviously weigh on China’s trade and current account balances going forward.






With respect to this  ongoing theme of Chinese economic rebalancing, the next major catalyst to come down the pike on the policy front is the 12th National People’s Congress, which will likely convene in MAR. There, members of the new seven-man Politburo will assume their formal roles as leaders of the Chinese state and formally outline their strategies to promote domestic demand.


We’re hoping for meaningful advancement of social security expenditures and perhaps some degree of early hukou reform(s) that may help advance China up the urbanization curve, but we’d settle for a continued focus on tax incentives (such as expanding the VAT reform to more regions and/or industries or incremental tax cuts for SMEs) and subsidies for now. Rome wasn’t built in a day and the Chinese consumer won’t be either.


With respect to the aforementioned property curb speculation, we do expect the CCP to announce additional measures in line with what various officials have been hinting at for weeks. As such, we don’t think any new curbs will be as punitive as the market anticipated this morning. The recent indefinite postponement of the nationwide property tax trial is but one piece of evidence the CCP isn’t looking to get too aggressive just yet.


And there’s little reason for them to be aggressive right now. Per our latest monthly data (Hedgeye China 20-City Nominal Price Index), we have Chinese nationwide property prices growing at only +2.3% YoY (from +0.5% in NOV). The MoM gain of +0.5% in DEC actually slowed -10bps from NOV’s +0.6% reading. By our count – which is as good as any we can find – Chinese property prices are down -10.2% from their JAN ’10 all-time peak.




Looking to data from Soufun Holdings Ltd., Chinese property prices rose +1% MoM in JAN – the largest gain in two years according to their index. Inclusive of the aforementioned peak-to-present decline, average square meter prices in the 100 cities tracked by SouFun are roughly five times the average Chinese consumer’s disposable income. Obviously, prices remain somewhat frothy with respect to incomes, but certainly not to the extent they once were or will be amid the CCP’s structural consumer income growth agenda. Hence, we don’t find it prudent for the CCP to authorize draconian curbs (such as meaningfully tightening credit policies for 2nd and 3rd homes or raising/implementing punitive taxes) at the current juncture.


As the following chart highlights, overall activity in China’s real estate sector remains incredibly subdued. Sure, it’s improving from an intermediate-term perspective, but we’d have to see a lot more activity here for us to get worried about another round of major, growth threatening curbs. There’s likely a fair amount of equity market upside between now and then – particular when factoring in China’s TREND-duration GIP outlook.






On balance, trends across the supply/demand/price dynamics of China’s property market continue to suggest little in the way of curb-requiring exhaustion:


  • YTD Land Areas Purchased: -13% YoY in DEC from -14.8% in NOV
  • YTD Starts: -6.7% YoY in DEC from -7.2% in NOV
  • YTD Construction: +12.9% YoY in DEC from +13.3% in NOV
  • YTD Completions: +11.4% YoY in DEC from +14.1% in NOV
  • YTD Floor Space of Buildings Sold: +1.2% YoY in DEC from +2.4% in NOV
  • YTD Total Sales of Buildings: +9% YoY in DEC from +9.1 in NOV
  • YTD Funds Earmarked for Real Estate Development: +16% YoY in DEC from 14.1% in NOV
  • Outstanding residential mortgage loans grew +12.9% in 2012 – the slowest pace of growth in four years
  • DEC Steel Products Production: +14.5% YoY from 15.9% in NOV
  • DEC Copper Products Production: +8.6% YoY from +0.5% in NOV
  • DEC Cement Production: +3.8% YoY from +6.9% in NOV


















All told, we’re using the weakness induced by rising speculation of incremental property curbs to increase our allocation to Chinese equities – one of our team’s top global macro investment ideas since DEC 10.


Specifically, we have been particularly keen on the outlook for the Chinese consumer and stocks that have exposure to that sector and the outperformance has been noteworthy: +12.7% for the MSCI China Consumer Discretionary Index since DEC 10 vs. +5.1% for the MSCI China Index over that same duration.


Based on our analysis of recent supply/demand/price trends in the Chinese property market and recent policy maneuvers, we think it is unlikely Chinese policymakers will pursue any draconian curbs at the current juncture. Moreover, we anticipate any developments in the way of incremental property market  curbs to be eventually overshadowed by the introduction of growth-friendly economic reforms at the 12th National People’s Congress (~MAR ’13).


Darius Dale

Senior Analyst

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