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It's Getting Dicey...

Client Talking Points

YEN

The most important correlation risk in my entire Global Macro matrix would be a sustained breakdown in the USD/YEN cross below 95.85. The market is testing those waters now, so I’d just as soon as get out of the way and let the market tell me what’s next. The flow to up/down Weimar Nikkei, then translation to S&P Futures is getting gnarly too.

CAC

La Belle Province? It doesn’t look so pretty anymore. Next to Russia, France is now the 1st major European Equity market to snap my intermediate-term TREND line of 3889. We did a 90-slide presentation on European Risks yesterday. Ping us if you missed it. Our research view is quite bearish on France, and now the signal confirms.

2YR UST

I spend most of the time talking about the breakout in the long-end of the curve, but the short-end (which Bernanke has marked to model) is starting to move now. At 0.32% this morning 2s are A) above my 0.27% TAIL risk line and B) Up +9bps in the last month. Yes, that’s a monster 39% move and while low nominally, in my model it's more about slope and the rate of change.

Asset Allocation

CASH 35% US EQUITIES 17%
INTL EQUITIES 17% COMMODITIES 0%
FIXED INCOME 6% INTL CURRENCIES 25%

Top Long Ideas

Company Ticker Sector Duration
NSM

Financials sector head Josh Steiner is the Street’s head bull on residential mortgage originator/servicer Nationstar, projecting $9 in earnings for the company in 2014.  This is well above the company’s own guidance range, which tops out at around $7.50. NSM had a successful start to the year as it won servicing bids on substantial mortgage portfolios.  They also reported significant increases in their profit margins on those portfolios, and double-digit increases in their own originations.  Housing prices are ramping significantly higher, as Steiner predicted, as demand continues to exceed supply in both new and existing homes.  Steiner says this quality mortgage company could ride the crest of a sustained wave of sector improvement.

MPEL

Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016.  

WWW

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. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

Three for the Road

TWEET OF THE DAY

I really do think @KeithMcCullough has some inside info on how thousands of other traders trade. No way he can call $SPY the way he does w/o

@DallasTexxxas

QUOTE OF THE DAY

"I am not remotely interested in just being good."

- Vince Lombardi

STAT OF THE DAY

According to the latest data published by Amazon, sales of George Orwell's '1984' have spiked 3,100% over the past 24 hours, following fresh reports about the NSA's surveillance programs and the 29-year-old Booz Allen Hamilton employee, Edward Snowden, who leaked them. (The Atlantic)


Materials & Dial-In: ARE YOU SHORT CHINA [AND OTHER EMERGING MARKETS] YET?

Materials & Dial-In: ARE YOU SHORT CHINA [AND OTHER EMERGING MARKETS] YET? - shortchinadial 06.12.13

 

REMINDER: Today, June 12th at 11AM EDT, we will be hosting a flash call titled Are You Short China [and Other Emerging Markets] Yet? The call will include 25 minutes of prepared remarks and 10-15 minutes of live Q&A.

 

 

CALL DETAILS

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 663556#
  • Materials: CLICK HERE

 

The recent volatility across Global Macro markets has provided us with a strategic opportunity to expand upon our #EmergingOutflows theme. To that tune, the $5.5B in EM equity fund outflows per the most recent week of data was the largest weekly withdrawal since AUG '11!

 

 

CALL OBJECTIVE

Analyze the current set-up in China and other Emerging Markets and discuss the best opportunities on the short side.    

 

 

In accordance with the call, we will add Short CHIX (Global X China Financials ETF) to our Best Ideas list and discuss in detail why on the call. HINT: it's a play on policy tightening, rising NPL exposure and a pending property market inflection in China.

 

In addition to CHIX, we'll also add the following securities to our "Watch List" and will look to add them on the short side of our Best Ideas list on any meaningful bounce(s); we'll outline the bear case for each on the call as well:

  • Short: FRN (Guggenheim Frontier Markets ETF) - A high beta play on LatAm and African commodity producers (FX un-hedged)
  • Short: EMLC (Market Vectors Emerging Markets Local Currency Bond ETF) - A non-consensus way to play on our #StrongDollar theme
  • Short: EMB (iShares Emerging Markets USD Bond ETF) - A high beta way to express our view that duration risk is accelerating globally

 

If you would like more details about this call please email .


Illuminating The Past

This note was originally published at 8am on May 29, 2013 for Hedgeye subscribers.

“This story illuminates, as only great history can, not only the past but also the present.”

-Richard Holbrooke

 

That’s how the late Richard Holbrooke (1941-2010) ended his foreword to the latest macro strategy book I started reading this weekend – Paris 1919: Six Months That Changed The World, by Margaret Macmillan (winner of the Samuel Johnson Prize).

 

With the US launching its first drone attack on Pakistan since the US election, I am certain that the likes of Holbrooke (former United States Special Envoy to Afghanistan and Pakistan) could illuminate the history of this US engagement for us. Maybe his sons will tell his stories. Maybe they won’t. Someone always knows something in this world. History teaches us that the herd tends to get the truth on delay.

 

Markets teach us different versions of the truth. They also reflect upon history. Market prices build upon stories told. Whether those stories are fact or fiction is of less concern to me than what people will expect happens next. Holbrooke said his only regret about the 1919 Peace Conference story was that “it was not available a decade ago.” The book was published in 2003. The truth was now 86 years old.

 

Back to the Global Macro Grind

 

“What is the truth?” That’s the most important question to one of the best macro risk managers of our generation (Ray Dalio), so it’s definitely one of the most important ones to me. From a behavior economics perspective, I really care about the truth of expectations.

 

Is it true that rising US Treasury bond yields are a pro-growth signal? Is it true that rising yields (combined with a #StrongDollar) predicted the truth about both the 1982 and 1993 US economic growth recoveries? How do you know the truth if you haven’t studied history?

 

I started on Wall Street during an internship in 1997. The people have changed. But the game of expectations hasn’t. Some people try to game the game by front-running inside information. Apart from potentially going to jail and having history write about you as a cheater, what’s the downside in that? Inside information is, after all, the truth.

 

Then there’s the knucklehead hockey player approach to mapping expectations about the truth (I don’t like orange jump suit risk):

  1. First, have a quantitative process that signals what the truth about expectations are, across multiple-durations
  2. Then, overlay a multi-factor model of research that helps contextualize those market expectations (correlation and/or causality)
  3. And finally, either move – or choose to do nothing

With a multi-duration, multi-factor model contextualized by history in hand each morning, you can:

  1. Do nothing
  2. Do more of what you have been doing
  3. Unwind everything you were doing and do the opposite of that

Contextualizing yesterday’s newsy “breakout” in bond yields is a good working example of how people get whipped around:

  1. US Treasury yields have been breaking out on our TREND duration for almost 3 weeks (1.82% breakout signal)
  2. The causal factor in driving Treasury yields higher, faster, continues to be economic data (jobs, housing, confidence)
  3. Most who are clinging to getting inside info from Bernanke on when the Yield Chasing thing is over, are getting run-over

Again, as I wrote 3 weeks ago, Front-running The Fed is a legal and profitable business. All you have to do is have an accurate process that signals how wrong Bernanke’s forecasts on growth are going to be and then act accordingly. By the time he tells his boys and/or his boys tell their Washington “consultants” that he’s going to “taper”, Mr. Market will have already moved.


So, if you still think both Old Wall and Bernanke are too bearish on growth, how do you front-run the herd’s expectations changing?

  1. You don’t do nothing (especially if you are long Yield Chasing securities like Utilities, Treasuries, MLPs, etc.)
  2. You do more of what’s working – buy growth, which includes US Dollars, Consumer, Healthcare, and Financials

At a capitulation point (like yesterday) people who are still bearish on #GrowthSlowing (like we were until late November 2012) have to go with option #3 (unwind everything they were doing and do the opposite of that). That’s when you really get paid. #Flows!

 

When people said “sell in May and go away”, they must have meant selling the end of the world #GrowthSlowing trades and buying the living daylights out of #GrowthAccelerating. That’s not me pushing a progressive agenda; this is just the score May 2013 will record:

  1. Utilities (XLU) down -7.4% for May 2013 to-date
  2. Financials (XLF) up +6.6% for May 2013 to-date

That’s about as eye opening an equity sector level divergence (one the key risk factors in our multi-factor risk management model) as you will ever see on a 1-month duration. So is a +31% one-month rip (+52 basis points) in 10yr US Treasury yields in Bernanke’s face.

 

Unfortunately (for Bernanke’s legacy), I can’t tell you what history will tell you about all the unintended consequences associated with the US Federal Reserve and Bank of Japan seeing rates rip off of the zero-bound.

 

All I can tell you is that the present is already reflecting asymmetrically on the past – and May 2013 has been illuminating.

 

Our immediate-term Risk Range for Gold, Oil (Brent), Corn, US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1351-1404, $101.74-105.28, $6.36-6.71, $83.92-84.58, 101.23-103.67, 1.98-2.18%, 12.29-14.82, and 1644-1674, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Illuminating The Past - yy. the breakout

 

Illuminating The Past - Virtual Portfolio


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Being Good

“I am not remotely interested in just being good.”

-Vince Lombardi

 

If you can’t tell I like winning, you probably haven’t met me yet. I think I hate losing more than I love winning. The only way not to be average in this game is to play on a great team. I am not remotely interested in just playing on a good one.

 

What makes a good analyst? What makes a bad one? What makes an average PM? What makes a great one? After playing on 3 big buy-side teams, then building my own here while we collaborate with client teams, I can tell you that greatness in this profession comes down to one very basic thing – having a repeatable, but flexible, process.

 

Once you have that – you have to do what Lombardi did. You have to find it within you to lead your teammates to believe in both the process and themselves. I’ve had the privilege of playing on a championship team on the ice. When individuals find a way to put the collective goal above themselves, you have an opportunity to drink from the cup.

 

Back to the Global Macro Grind

 

It’s not cocky, arrogant, or whatever else someone who just wants to be good thinks you are when you get up every morning and tell them you are going to beat them. For some of us, that’s just the goal. Expecting to win is a culture – don’t apologize for it.

 

I was on the New York CFA Society’s Big Data panel for a 2 hour debate last night in NYC. The panel was a typical mix between academia, industry, and market practitioners. One academic guy was from Morgan Stanley. One industry guy was from IBM.

 

Harry Blount (CEO of Discern) was moderating the panel. He’s a former sell-side analyst building an independent research firm and he gets the game. He asked us to A) define Big Data and B) explain how we use it.

 

For me, this was a relatively easy exercise. Building, evolving, and explaining my multi-factor, multi-duration approach to real-time risk management is what I do. For some of the academic guys in the room, it was very difficult to understand what I was saying – primarily because they don’t do what I do.

 

What is it that you do?

 

That’s how I ended the book Rich Blake and I wrote about the early stages of my hedge fund career. For those of you who have read the book, you know that I have a lot of issues. Most humans do. It’s just hard to put those flaws on paper.

 

My career has been good, not great. And I don’t want it to end that way. That’s why I ended the book with what I go to bed with and wake up to every morning of my market life – questions...

 

And, oh do I have a lot of big ones in my notebook this morning:

  1. What if the US Dollar snaps my intermediate-term TREND line of $81.21?
  2. What if the USD/YEN cross breaks down through 95.85 TREND support?
  3. What if the SP500 continues to signal a series of lower-highs versus her all-time high of 1669?
  4. What if the VIX continues to signal a series of intermediate-term higher-lows?
  5. What if Tim Tebow wins a Championship with Belichick?

That last question found its way into my notebook after I saw the headline in the New York Daily News this morning “God Help Us!” Losers question champions. That’s fine. That is what they do. And what we want to do is answer the bell come game time.

 

I am not interested in being labeled a perma bull or perma bear. I am not interested in what the tired aristocracy of the Old Wall thinks about my style either. To win championships as a Global Macro Strategy team, we need to focus on results.

 

Being right requires being flexible. When the quantitative TREND signals change, we need to start questioning our positions. When the signals are head-fakes, we need to remove all confirmation bias from the research and make a call on that and timestamp it too.

 

This will change, but for now, if you want to get Global Equities right, you have to get the US Dollar right:

  1. Intermediate-term TREND correlation between USD and SPY on a 6 month duration = +0.84
  2. Intermediate-term TREND correlation between USD and EuroStoxx600 (6mths) = +0.81
  3. Intermediate-term TREND correlation between USD and Emerging Markets (6mths) = -0.54

Fortunately, this has been the upshot of our Global Macro Themes for the last 6 months. As the US Dollar A) stabilized then strengthened from its 40 year low and then B) broke out across longer-term durations = good for US and European stocks = bad for Emerging Market stocks (the aforementioned inverse correlation is to the MSCI EM Index).

 

So, what if the US Dollar starts to break-down from a TREND perspective? What happens if Bernanke doesn’t “taper” as the bond market now expects him to in September? What happens if the Japanese completely screw this up faster, instead of slower?

 

Anything can happen out there. That’s why I think Belichick likes Tebow inasmuch as I like hiring players who have the intangibles that I cannot teach. To be the change in strategy, I need players who are disciplined but flexible – and who expect to win.

 

What am I going to do with this leadership rant and all these questions today?

  1. Let Mr Market answer them for me
  2. If he answers the questions faster, I’ll move faster
  3. If he answers the questions slowly, I’ll take my time

Managing risk, slow and fast – that’s what great players in this game do. If you just want to be good at this, don’t be flexible. It’s a lot less work and your day will be a heck of a lot less introspective. I am not remotely interested in promising you certainty.

 

Our immediate-term Risk Ranges for Gold, Oil, US Dollar, USD/YEN, UST 10yr Yield, VIX, Nikkei, and the SP500 are now $1, $100.28-105.09, 80.79-82.36, 95.85-99.53, 2.14-2.23%, 14.84-17.98, 12,603-13,815, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Being Good - DXY

 

Being Good - vp 12


June 12, 2013

June 12, 2013 - dtr

 

BULLISH TRENDS

June 12, 2013 - 10yr

June 12, 2013 - spx

June 12, 2013 - dax

June 12, 2013 - dxy

June 12, 2013 - euro

 

BEARISH TRENDS

June 12, 2013 - VIX

June 12, 2013 - yen

June 12, 2013 - oil

June 12, 2013 - natgas

June 12, 2013 - gold

June 12, 2013 - copper


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