Emotion Sellers

This note was originally published at 8am on February 25, 2013 for Hedgeye subscribers.

“We live by emotion, prejudice, and pride.”

-Dwight D. Eisenhower


That’s what President Eisenhower wrote in a letter to Winston Churchill in the early 1950s after the Korean War. He added: “It is remarkable how little concern men seem to have for logic, statistics, and even, indeed, survival.” (Ike’s Bluff, pg 105)


Sounds a lot like risk managing the 2013 Global Macro market to me. So far, with the underpinnings of real (inflation adjusted) global economic growth stabilizing (instead of slowing), the best way to survive the game has been to be long growth, not gold.


We all have our investment-style prejudices. We all have plenty of emotion too. The hardest thing to do is keep that all checked at the door before we turn on our screens every morning. The Behavioral side of this game has never been so important.


Back to the Global Macro Grind


Admittedly, I was all fired-up covering shorts and getting longer (equities) during last week’s 2-day correction. Was I being emotional? Or were the sellers? Now I’m questioning whether I got Bullish Enough?


At Augusta in 1954 the legendary Sam Sneed told Ike, “you’ve got to stick your butt out more, Mr. President” (Ike’s Bluff, pg 115). While Eisenhower didn’t like having other people tell him what to do, he listened. Sneed’s advice wasn’t from some local pro.


When I stick my old hockey bubble-butt out and make a market call, I don’t ask a local pundit for permission. It’s always based on two very important things that we are trying to hammer home with clients – they are both critical to our process:


1.       The Risk Management Signal

2.       The Team’s Research Views

Note which one of the two comes first. Indeed, it is the signal I prioritize over what can often become research noise. All that said, when both are aligned, I’m learning to get over how I look - and I just do it (stick out my butt).


When you boil down the difference between our bullish Research View on growth versus competitor views, it’s quite simple:

  1. Our view is Dollar centric: Strong Dollar = Down Commodities (deflation) = Stronger Consumption
  2. Their view is Commodity centric: they are either calling for inflation OR thinking deflation is a bearish leading indicator

Irrespective of your research team’s view, this is what Mr. Market’s signals think:

  1. Strong Dollar = up another +1.1% last week; up for 3 consecutive weeks on a +3% run
  2. Commodity Deflation = down another -1.7% last week; down for 3 consecutive weeks (-3.9% all in)

No, the world’s economies and stock markets didn’t end on that. In fact, despite Oil prices reacting late relative to Gold (Brent Oil finally down -2.9% last wk), the two key US consumption demand points we care on (US employment growth and housing) held up quite well. The question now is how well do they react to prices at the pump falling, instead of rising?


If you Embrace Uncertainty at the core of your process, the simple answer is usually going to be ‘I don’t know.’ You’ll know when market prices and high-frequency economic data either refute or support your thesis. Advice: don’t marry your thesis.


If you were buying commodities futures and options contracts since the Bernanke Top (September 2012), the CRB Commodities Index is one of the worst places you could have been invested (down -9% from there to here). And finally, in the last few weeks of Commodity Deflation, the net long (CFTC futures/options position) has capitulated to its lowest level since DEC 2011:

  1. Copper contracts crashed last week, down -51%! to +11,413 (lowest since NOV 2012)
  2. Gold contracts crashed (again) last week, down another -40% to 42,318 (lowest since JUL 2007)
  3. Farm Goods contracts capitulated too, down -44% last week to 190,892 (lowest since March 2009)

Farm Goods still has the biggest net long position because food prices were the last of the commodities to put in their all-time tops. Corn’s all-time high was in August of 2012. Corn prices are now on the verge of crashing (greater than 20% peak-to-trough decline) from that all-time top and net long contracts in corn were down -48% last week to +65,303.


Are falling food prices good for you? Do you eat? If you don’t (or someone in Washington buys all your meals with our tax “revenues”), you can safely assume, with no emotion or prejudice, that the rest of the world does.


Hedgeye reiterates our 0% asset allocations to both Commodities and Fixed Income this morning. Sure, we will take down these equity asset allocations when the signals tell us too. But we didn’t get those signals at Thursday’s lows. Emotional sellers did.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST 10yr Yield, and the SP500 are now $1548-1611, $112.61-115.15 (Oil is bearish TRADE now), $3.51-3.65 (Copper is back in a Bearish Formation), $80.57-81.71 (USD = Bullish Formation), 92.72-94.41 (we re-shorted Yen last wk), 1.96-2.05% (Bond Yields = Bullish Formation), and 1502-1530, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Emotion Sellers - Chart of the Day


Emotion Sellers - Virtual Portfolio

CHART OF THE DAY: Strong Dollar Knowledge


CHART OF THE DAY: Strong Dollar Knowledge - Strong Dollar   Strong America

Strong Dollar Knowledge

“Knowledge, indeed is a desirable, a lovely possession.”

-Thomas Jefferson


Part I of John Meacham’s Thomas Jefferson – The Art of Power is called “The Scion” (Beginnings to 1774). I absolutely loved it. It brought me back to Jefferson’s formative years. Like Einstein, he was very much self-taught and self-motivated to challenge perceived wisdoms.


Jefferson studied fifteen hours a day, rising at dawn and reading until two o’clock each morning… for Jefferson laziness was a sin.” He’d say “of all the cankers of human happiness, none corrodes it with so silent, yet so baneful, a tooth, as indolence.” (pg 19)


To a degree, this is how I think about doing Global Macro Research. There is absolutely no other way to contextualize short to intermediate-term market risks without studying the longest of long-term histories. Knowledge isn’t allocated – it’s hard work.


Back to the Global Macro Grind


Having been on the road talking to clients about our Commodity Bubble theme for the better part of the last 3 months, I still don’t think the long-term investment implications of  #StrongDollar Knowledge is as pervasive as the US Dollar’s strength has been for 2013 YTD.


That’s not to say everyone doesn’t get it. Some clients know this cold. It’s just a friendly reminder that the fulcrum piece of our bullish view of the US stock market isn’t what consensus bulls consider bullish, yet.


As you can see from Darius Dale’s Chart of The Day, #StrongDollar = Strong America:

  1. Reagan: Avg price of USD during Presidency = $115.25; avg price of Oil = $16.53/barrel
  2. Clinton: Avg price of USD during Presidency = $97.89; avg price of Oil = $19.69/barrel
  3. Obama: Avg price of USD during Presidency = $79.52; avg price of Oil = $102/barrel

In other words, if President Obama figures this out (like Clinton did, getting fiscally responsible under a Republican House in his 2nd term), this could be the biggest economic opportunity he has seen yet. Barry, think legacy my man.


Really? Why? How?

  1. Fiscal and Monetary Policy are causal to currency moves
  2. Fiscal opportunity = Sequestration (tighter, and more conservative on spending, is bullish for the US Dollar)
  3. Monetary opportunity = get Bernanke’s Policy To Inflate out of the way (i.e. out of market expectations)

The first (fiscal) step is A) trivial and B) already in motion. The second (monetary policy) step is A) nuanced and B) being handicapped by market participants, daily. Do you think the currency, commodity, stock, and bond markets are going to wait for Bernanke’s permission to sell their over-indexed position to US Treasuries? C’mon.


Market players are data dependent. And the risk to Bernanke’s ZIRP (zero percent rate policy) has always been his forecast. His 6.5% unemployment rate target was based on his own expectation that labor market conditions wouldn’t improve until he is long gone from his seat (2016-2017). With the unemployment rate now at 7.7%, our call for a “6-handle” on the US unemployment rate by Q413 remains intact.


There is nothing more dangerous in this game than someone’s forecast – so don’t take our word for it on this. Ask Mr Market:

  1. US Dollar Index just closed up for the 5th consecutive week at a 3.5 year high of $$82.71 (+4.6% in 5wks)
  2. US 10yr Treasury Yield was up big (+20bps) last week; now trading at a 6-mth high of 2.05% this morning
  3. US Stocks (SP500 and Russell2000) are trading at their YTD highs and all-time highs (Russell = 942), respectively

Sure, 6 month and 3.5 year highs might not get the long-term investors knowledge on #StrongDollar impact triggered, yet – but all-time highs (a long-time) in stocks has them asking themselves the questions: “what am I missing? what’s next?”


How about more of the same? Look at expectations for commodity inflation (weekly CFTC futures and options contract data):

  1. Total Commodity Net Long Positions = down another -9% last wk to 405,885 (down 70% from the Bernanke Top in SEP12!)
  2. Gold net long contracts = down another -27% last wk to 39,631 (down -61% YTD!)
  3. Oil net long contracts = down only -4% last wk to 167,498

Again, because we know Obama calls them “middle class folks”, we know this is a huge opportunity for him. Imagine seeing him get on TV, weekly, championing what Reagan and Clinton did – Strong Dollar, Down Oil! It’s a Tax Cut!


With the immediate-term TRADE correlation between Brent Oil and the US Dollar now at -0.97, that Presidential leadership message (and getting the Bernanke put out of the way), would eviscerate what’s left of the net long position in Oil, fast. And, to borrow from Jefferson’s knowledge, oh what a “lovely possession” that would be for most of us, indeed.


Our immediate-term Risk Range for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1, $109.35-111.34, $82.07-82.91, 93.46-96.15, 1.94-2.06%, 11.68-14.34, 921-949, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Strong Dollar Knowledge - Strong Dollar   Strong America


Strong Dollar Knowledge - Virtual Portfolio

the macro show

what smart investors watch to win

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.

DRI: The Unthinkable Long Case!

Takeaway: DRI: The Unthinkable Long Case

We will be hosting a black book conference call entitled "DRI: The Unthinkable Long Case" on Thursday, March 14th, at 1:00pm EST. to talk through our reasoning why we want to be Long DRI.  



  • Our previously "unthinkable" short case came to fruition, now widely known
  • Fundamentals of the core concepts
  • Limited downside in the share price  
  • A "win-win" scenario emerging for investors


Please email  or me to obtain the dial-in information for this call and a copy of the presentation.




Howard Penney

Rory Green

Talks Between the DOJ and Anheuser-Busch InBev "Progressing Smoothly"

It isn’t our habit to respond to Bloomberg articles, but we received some questions so we thought it might make sense to respond more broadly.  Just prior to the close, Bloomberg reported that talks between the Department of Justice and Anheuser-Busch InBev regarding the proposed transaction involving Grupo Modelo were “progressing smoothly”.  The article further suggested that the DOJ’s focus was on Constellation Brands’ plans to expand Piedras Negras (brewery in Northern Mexico).


The article went on to suggest that it was unlikely an agreement would be reached prior to March 19th (the date both parties agreed the pending litigation should be stayed until).

Three quick points:

  1. It appears to us that the DOJ wants to make certain that ABI will be removed from the business of brewing the beer that comes into the US.  This is unsurprising as the DOJ, in the original complaint, equated controlling the supply with de facto market share control.  Absurd? Yup, but the current deal structure should satisfy the DOJ on this count.
  2. It would also seem that the DOJ is comfortable with STZ being involved in the transaction (another frequent question) – in fact, it is unlikely that ABI would have reworked the deal in the fashion it did without at least a wink from the Justice Department that it could live with STZ as the owner of the Corona brand.
  3. The March 19th date isn’t a drop dead date – both parties agreed to the date, and both parties can agree to extend the date.  We are fairly certain any Judge would be happy to keep the negotiations going, particularly if progress is being made.  Most courts have better things to do.

So, to the extent that the facts contained in Friday’s article are correct, they are wholly consistent with our view of a high probability of the new deal structure gaining regulatory approval.  Having said that, we prefer the risk/reward profile on BUD (versus STZ), and think BUD can work toward $110 per share.  STZ has upside toward $50 per share, in our view, but more significant downside risk in the event the DOJ elects to revert to some of its prior irrationality.

Call with questions,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst


The Economic Data calendar for the week of the 11th of March through the 15th of March is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.



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 80.43%
  • SHORT SIGNALS 78.35%