Volatility Breeds Contempt

Client Talking Points


The implied volatility in both Japanese stocks and bonds is ripping now. Volatility breeds contempt. The Weimar Nikkei was hit hard overnight, down over -3% on what was supposed to be a burning currency speech by Prime Minister Shinzo Abe. Instead, the Yen (vs USD) holds it’s immediate-term TRADE overbought gains, despite 10yr JGBs holding above our TAIL risk line of 0.81% (0.85% last).


1.     Don’t blame me for highlighting more surprisingly bullish #GrowthAccelerating in another country’s economic data. The last week of data out of the British has been bullish. Following up on a solid Construction PMI print of 50.4 yesterday, UK Services PMI accelerated to 54.9 in May (vs 52.9 APR). On the other hand, France’s Services economy still stinks (44.3 in May vs the UK’s 54.9). Policy has consequences.


No, gold doesn’t like US Housing and Employment #GrowthAccelerating. We re-shorted the precious metal yesterday ahead of Friday's employment report where, not surprisingly, expectations remain relatively bearish. Gold is broken on all 3 of our core risk management durations after failing at immediate-term TRADE resistance of $1424/oz.


Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.  


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow.


With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

Three for the Road


@KeithMcCullough been with you on real time alerts just now getting into twitter, you have made more money this year than any broker I had



"Wherever you see a successful business, someone once made a courageous decision." - Peter Drucker


A 12-piece bucket of KFC chicken bought for $11.50 in Egypt and smuggled into Gaza City costs $27.

Your Opinion

This note was originally published at 8am on May 22, 2013 for Hedgeye subscribers.

“Look, I want to hear your opinion.”

-George F. Kennan


One of the hardest things to do in this profession is to check your position at the door and listen to the other side of the trade. Some opinions matter; some don’t. The market’s opinion always matters – so don’t just hear Mr. Market; listen to him very closely.


Our all-star energy analyst, Kevin Kaiser, and I had the opportunity to debate one of our best short ideas with the top holder of the stock yesterday. This wasn’t this 70 year old hedge fund manager’s first rodeo. Herniated disc in his back and all, he took the meeting with us during the market open. He had plenty of other things going on, but he really listened to our opinion. #Respect


At one point in the meeting, the debate between Kaiser and the analyst in the room got so intense that the PM decided to call the CEO of the company in question. He got the exec on the phone within a minute, told him what the bear case was (right in front of us), and asked for his opinion. Watching him listen to the CEO’s answers made me smile. Questioning and listening like that is not easy.


Back to the Global Macro Grind


This game isn’t easy. Laden with our individual confirmation biases, we are all hostage to being human while we play it. There is a real-time score on every decision we make. Our opinion is marked to market every day. If you don’t love that; you don’t love the game.


I’m not always sure if I am getting dumber or smarter each day. From a Global Macro Strategy perspective, that’s why I find it useful to study history – and not just market history – but the history of decision making. What was the process? Were they making decisions within an open network of information? What dogmas, agendas, and conflicts of interests impacted those decisions?


I just finished reading George F. Kennan’s brick of a biography. It’s thick because the man lived 101 years and kept strategizing until the very end. He never retired because he never stopped questioning, listening, and thinking. He was one of the most introspective and self-effacing strategists I have ever studied. If you had a seat at the table in a meeting with him, your opinion mattered.


“The thing you were planning for took place the day before yesterday, and everyone who wants you to know why in the hell you didn’t foresee it a long time ago.”George F. Kennan (pg 277)


Which brings me to today…


Mr. Macro Market’s opinion (#StrongDollar, Down Gold, Up Stocks) into Ben Bernanke’s testimony to Congress today is now old news. Why in the hell didn’t people foresee that there would ultimately be an end to these ridiculous expectations of endless QEs?


Why isn’t my opinion on expecting no more incremental easing equally ridiculous?


This is what makes a market. This is also why I spend so much time on both the road (seeing clients) and on Twitter (reviewing credible criticism of my positions). It’s not personal. Everyone’s goal in this game is to be right for the right reasons.


The aforementioned Kennan quotes came out of the US State Department policy planning meetings of 1947-1949. At the big turns in US policy history (post WWII in this case), respecting the pattern of decision making is critical.


Is Bernanke at the turn?


If you use the economic data for an opinion, he definitely should be. He’s been effectively easing monetary policy now since the day he took his seat as the head of the Fed in 2006. It’s been a long death march for conservative US Savers that needs to end.


What major macro markets have already front-run him making the turn?

  1. US Dollar Index = Bullish Formation (anything tighter, on the margin, is bullish for a currency that’s been devalued)
  2. Gold = Bearish Formation (up for 12 straight years with the last 6 of them becoming Bernanke’s bff, ending)
  3. US Treasury Yields = Bullish Formation (provided that our long-term TAIL risk line of 1.82% on the 10yr holds)

But will 1.82% on the 10yr hold? Will Bernanke acknowledge economic gravity? I don’t know. But neither my opinion nor yours will matter come 10AM EST. Pencils down – your central planning overlord will issue his un-elected opinion.


I think I know how our CYA State of The Union in this country got to this point. But the more history I read, the less I know about how politically conflicted and compromised it really was all along.


There’s nothing I can do about that history now. Neither can you. The best we can do each and every risk management morning isn’t playing the game we’d all like to play. It’s to play the game that history has put in front of us.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1341-1409, $102.16-105.13, $3.26-3.39, $83.57-84.69, 101.49-104.62, 1.82-2.01%, 12.18-13.79, and 1651-1682, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Your Opinion - Chart of the Day


Your Opinion - Virtual Portfolio


TODAY’S S&P 500 SET-UP – June 5, 2013

As we look at today's setup for the S&P 500, the range is 21 points or 0.64% downside to 1630 and 0.64% upside to 1651.                           










  • YIELD CURVE: 1.83 from 1.85
  • VIX closed at 16.27 1 day percent change of -0.06%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, May 31 (prior -8.8%)
  • 8:15am: ADP Employment Report, May, est. 165k (prior 119k)
  • 8:30am: Nonfarm Productivity, 1Q final, est. 0.6% (prior 0.7%)
  • 8:30am: Unit Labor Costs, 1Q final, est. 0.5% (prior 0.5%)
  • 10am: Factory Orders, April, est. 1.5% (prior rev to -4.9%)
  • 10am: ISM Non-Manuf Composite, May, est. 53.5 (prior 53.1)
  • 10:30am: DoE Energy Inventories
  • 11am: Fed to purchase $1.25b-$1.75b in 2036-2043 sector
  • 2pm: Fed releases Beige Book


    • House Armed Svcs Cmte may vote on plan to buy 4 additional Littoral Combat Ships in fiscal year starting Oct. 1
    • 10am: SEC votes on proposal to require floating-share value for riskiest type of money-market mutual funds; rule would apply only to funds that buy corporate debt and cater to institutional clients
    • 1pm: Senate Indian Affairs Cmte holds roundtable on energy development on American Indian lands
    • 2pm: Bloomberg Government webinar on “The Outlook for Corporate Tax Reform,” w/ Bob Litan, dir. of research; Loren Duggan, dir. of legislative analysis; Patrick Driessen, taxation policy analyst
    • Missouri Republican Jason Smith wins special U.S. House election, keeping district w/ same party


  • Samsung wins patent case against Apple at U.S. ITC
  • Goldman said to pledge $500m to Alibaba as IPO looms
  • Penn West Petroleum to cut jobs, div. as CEO steps down
  • Fed’s Fisher urges QE reduction seeing end to 30-yr bond rally
  • AIG casts doubt on completing ILFC sale to China investors
  • SEC to vote on money-market mutual fund rules
  • HSBC faces New York lawsuit over alleged foreclosure violations
  • AB InBev judge refuses to block Modelo buyout in antitrust case
  • CFO optimism in U.S. rises to Four-Yr High
  • Apple was ready to “take or Leave” e-books, Penguin CEO says
  • Abe pledges legislative campaign to loosen Japan business rules
  • Australia’s economy expanded less than forecast in 1Q
  • Sprint voters should abstain on SoftBank bid, Glass Lewis Says
  • Euro-area 1Q GDP unrevised at down 0.2% in qtr
  • U.K. May services growth rose to highest since March 2012
  • Eurozone April retail sales down 0.5% M/m; est. down 0.2% M/m


    • Jos A Bank Clothiers (JOSB) 6am, $0.34
    • Cyberonics (CYBX) 7am, $0.43
    • Brown-Forman (BF/B) 8am, $0.46
    • Laurentian Bank of Canada (LB CN) 8:54am, C$1.24 - Preview
    • Saputo (SAP CN) 12:38pm, $0.73
    • Ascena Retail Group (ASNA) 4pm, $0.30
    • VeriFone Systems (PAY) 4:01pm, $0.47
    • Francesca’s Holdings (FRAN) 4:01pm, $0.26
    • Greif (GEF) 4:07pm, $0.69
    • AMERCO (UHAL) 4:16pm, $1.23
    • Dominion Diamond (DDC CN) 5pm, $0.05


  • Taurus Shuts Gold Fund on Investor Redemptions After Price Slump
  • Alcoa Junk Downgrade Is Rare Trauma for Dow Stocks: Commodities
  • Copper Swings Between Advances and Declines Amid Supply Concern
  • WTI Trades Near Four-Day High on Signs of Reduced U.S. Supply
  • Counting on Gold to Navigate a Currency Crash? Don’t Delay
  • Czarnikow Sees Sugar Surplus Falling 62% as Beet Output Declines
  • Sugar Gains With Czarnikow Seeing Smaller Surplus; Cocoa Climbs
  • U.K. Natural Gas Rises From 5-Month Low as Exports Boost Demand
  • Port Hedland Ships Record Iron Ore as China Boosts Demand
  • BP’s Oil Spill Deal Sours as Claims Add Billions to Cost: Energy
  • Shanghai Gold Exchange Volume Falls 44% vs. April Peak: BI Chart
  • Asia Naphtha Crack Narrows; BP Buys Fuel Cargoes: Oil Products
  • Adnoc Narrows Murban Premium; Refinery Margins Climb: Asia Crude
  • Commodities Daybook: Taurus Shuts Gold Fund on Redemptions
  • LME to Start Clearing in 2014 After 25 Years With LCH.Clearnet























The Hedgeye Macro Team












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God's Hands

“You hold in your hands, the future of the world.”

-Raymond Poincare


Not to be confused with someone who does math (his famous cousin and mathematical genius Henri Poincare), Raymond was a lawyer turned politician. In France, that’s a potent mix. Poincare was President of France from 1.


The aforementioned quote is a friendly reminder that politicians have always thought that they can control your life. It was part of Poincare’s speech that officially opened the Paris Peace Conference in 1919. (Paris 1919: Six Months That Changed The World, pg 62)


Setting aside the fact that the Russians weren’t even at the conference, the comment reeks of the kind of political hubris that scares people. Today’s French President doesn’t scare me, but the people advising him and the President of the United States on economic and monetary policy do.


Back to the Global Macro Grind


I was spending time with clients in Pittsburgh yesterday and throughout the day I kept coming back to the conclusion that the biggest risk to the rally in US stocks is an un-elected central planner who has built a series of unintended consequences into our risk matrix.


Un-elected and un-accountable – his name, by the way, is Ben Bernanke. He isn’t a chaos theorist or mathematician either. Bernanke, like most Keynesian central planners who have never traded Global Macro risk in their life (actually Keynes did and lost 90% of his capital speculating on commodities in the late 1920s), fundamentally believes that he can bend and smooth gravity.


Markets obviously couldn’t care less what he thinks about defying the laws of physics. We’ve often used the thermodynamic metaphor of The Waterfall. Funds that have flowed into what appeared to be a calm and steady river of yield chasing and fixed income oriented securities are now approaching the point of entropy. A breakout in Treasury yields looks like Niagra Falls to me.


Most free market clients agree with me on this: A) we like gravity but B) we’re leerier when it happens to the anti-dog-eat-dog, anti-economic gravity, crowd fast! It’s all about the speed of the water (yields rising) now and there are a series of real-time risk management signals we are monitoring for velocity:


1.   US Dollar - #StrongDollar breakouts across intermediate and long-term durations have always front-run central planners and growth bears alike in this country. There has never been a sustainable US economic recovery (think 1 and/or 1) when the US Dollar didn’t rip alongside economic growth ripping. Treasury Bond yields rose, in kind.


2.   Gold and Oil – these are coincident and highly correlated (on an inverse basis to the US Dollar) real-time signals that anyone with macro historical context (that goes beyond a 5-10yr chart) will acknowledge as pro-growth signals. Gold hates growth. Falling Oil prices perpetuate US #GrowthAccelerating. So think about falling oil as entropy. #Speed


3.   US Treasury Yields – since Bernanke has opted to attempt to suspend economic gravity by marking the US Yield curve to model (not clear if he learned this from Tricky Dick Fuld or not), his decision to “taper” (whatever that means) is the equivalent of trying to smooth the flow of the Teton Dam on this day in 1976.


Huh? Yep, today in 1976, the Teton Dam collapsed. Big man-made structure built on false premise, evidently, too. Sound familiar? Engineers started to notice the dam was leaking ahead of time (the pool of “steady state” water was rising – real subtle hint!). And then boom! #Waterfall


To stay with the metaphor, the leaks are both economic data points and real-time market reactions to them. As US employment, housing and consumption data build the water level of, god forbid, rising growth expectations – both the dam and the government itself starts to leak.


Bernanke calls his leaks “communication tools”, or something like that. Since I don’t do the inside information thing from “consultants” in Washington, I depend on my engineers (analysts) who spend their time measuring crazy things like velocity, convexity, etc. at the proverbial dam’s bifurcation point.


Just to give you some key water levels on that:

  1. 2yr US Treasury Yield TAIL risk line = 0.27%
  2. 10yr US Treasury Yield TAIL risk line = 1.85%
  3. 10yr Japanese Government Bond TAIL risk line = 0.89%

So, you don’t have to be Raymond Poincare’s cousin or Albert Einstein to understand what is already happening here. And that’s the point – it’s already in motion folks – and if you want to try to arrest the speed of the decline of a waterfall (one that’s been bubbled up for say, 30 years, in this case) with your hands, you might want to dial up God himself for this one.


Because Bernanke’s political hands aren’t going to work.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST10yr Yield, VIX and the SP500 are now $1, $100.35-104.29, $82.46-83.51, 98.76-103.06, 2.08-2.22%, 14.17-16.93, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


God's Hands - Chart of the Day


God's Hands - Virtual Portfolio

Trades of the Day: OIL & GLD

Takeaway: We shorted oil (OIL) at 12:00PM at $21.86. We also shorted gold (GLD) at 2:33PM at $135.09.

We've been waiting patiently for an immediate-term TRADE overbought signal to re-short oil on - here it is. Oil’s bearish TREND remains courtesy of #StrongDollar. As for gold, it remains mired in a Bearish Formation after failing at $1424 immediate-term TRADE resistance yesterday. We remain The Gold Bears. Bullish on Growth. 


Trades of the Day: OIL & GLD - oil.gld


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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.