Got Growth Right?

Client Talking Points


The Weimar Nikkei is really starting to underperform now. It doesn’t even go up on dead cat bounce days in China or Europe. The Nikkei was down another 1% overnight and is down -17.8% since May 22. It remains well below our 13,683 TREND line of resistance. #Ugly.


The crash in Gold continues after both US Durable Goods and New Home Sales showed that Bernanke needs to taper. That of course was the May data; our models suggest that April - June may be the top in sequential US #GrowthAccelerating. That said, we remain data dependent on this. Go ahead and ask Gold (down -4% this morning and a monster -27% YTD) how US growth is doing. I'm sure he'll tell you it's doing just fine. #Nasty


Can you spell R-I-P? 2.59% last on the 10-yr. Folks, there is no immediate-term TRADE resistance to 2.69%. Velocity and volume here matters. The simple speed of the move, combined with the most bond outflows since October 2008 is not a buy signal for bonds. That whining you're hearing in the distance is bond bulls begging for Bernanke.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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.


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 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


Who the hell signs off on a central planner telling you what he "intends" a market price to do? @federalreserve

@KeithMcCullough (responding to a Fed President's statement on CNBC that the bond market reaction was outsized versus the Fed's intentions).


“Many men go fishing all of their lives without knowing it is not fish they are after.” -Thoreau


About $60 billion has been wiped from the value of precious metals exchange-traded product holdings this year. (Bloomberg)

Are Staples Cheap Enough?

Valuation alone is never a catalyst in our investment process; however below we updated charts on forward P/Es of the consumer staples sector and its main sub sectors.


Needless to say, while valuations have come in over the last two months, they remain stretched, and cheap alone (think CPB or TAP) is not a signal for us to buy. At 17.5x, the consumer staples P/E is just under a two standard deviation move, and compares to an average of 14.5x over the last 5.5 years.


Of note is that sub sectors of HPC and Beverage have come in the most over the last ten days, yet all sub sectors are priced well over one standard deviation.


Our quantitative real-time set-up for consumer staples (etf: XLP) is bullish, trading above its intermediate term TREND line of $38.71, and we would buy it (cheaper) closer to this level. 


Are Staples Cheap Enough? - ww. 1


Are Staples Cheap Enough? - ww.2


Are Staples Cheap Enough? - ww. 3


Are Staples Cheap Enough? - ww. 4


Are Staples Cheap Enough? - ww. 5


Are Staples Cheap Enough? - ww. 6


Are Staples Cheap Enough? - ww. 7


Are Staples Cheap Enough? - ww. 8


Matthew Hedrick

Senior Analyst

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Uncertain China

“Nothing is certain but the unforeseen.”

-J.A. Froude


No stranger to intellectual debate, British author James Anthony Froude (1) was well-known for stirring the pot – perhaps even more so than @HedgeyeDJ (Daryl Jones, our no-holds-barred DoR) and @HedgeyeENERGY (Kevin Kaiser, our oft-controversial senior energy analyst).


Froude’s generally polemic works were often met with fierce debate and rejection among the British intellectual elite – perhaps none more so than his seminal work The Nemesis of Faith (1849), which was carefully crafted to call into question blind acceptance of the popular Christian doctrine of the time. Widespread public backlash in response to the novel ultimately cost Froude his fellowship at Oxford University.


Eventually Froude’s avoidance of institutionalized groupthink won out. Froude and his wildly contentious ideas ultimately found a permanent home when he was appointed Regius Professor of Modern History at Oxford (i.e. a really big deal) in 1892 – the very institution he was driven away from nearly a half-century prior.  During his regrettably brief stint at Oxford (he died in 1894), Froude quickly earned a reputation for being among the most popular lecturers of his time.


If nothing else, Froude’s journey from the top to the bottom and back again is a lesson for analysts young and old to avoid the safety and comfort of groupthink. Never is this advice more important than when a time-tested, comprehensive and repeatable research process leads one to hold a counter-consensus view. Hold the LINE [short], Kaiser!


Back to the Global Macro Grind


Incorporating another one of Froude’s lessons, we call attention to the aforementioned quote in the context of China’s banking system woes – which, thanks to the recent spate of legacy media coverage, are now as obviously present as a 6’3”, 325lb left tackle in one of Froude’s 19th century lectures.


Specifically, anyone even tangentially following recent press will arrive at the conclusion that a growing consensus among analysts across both the buy and sell sides believes with a fair amount of certainty that China’s credit binge and alleged housing bubble are sure to cause a Western-style financial crisis.


We aren’t so sure. With less than 2% of all financial assets held by foreigners, strict capital controls have, thus far, prevented a mass exodus of liquidity through the capital account. Domestically speaking, the PBoC’s own words from yesterday should douse any hopes of a crisis:


“Financial institutions’ cash reserves stood at about 1.5 trillion yuan ($244 billion) as of June 21, compared with the 600 billion yuan or 700 billion yuan sufficient under normal circumstances to cover payment and clearing needs. The present liquidity is not insufficient.”


Indeed, by comparing China’s present-day banking woes to the early tremors of Bears Sterns or juxtaposing China’s property market – rife with “ghost cities” – with our own pre-crisis froth, consensus has undeniably fallen victim to the availability heuristic. We don’t think that’s a prudent call to make at the current juncture; the Chinese sovereign has the resources, political will and mobility to prevent any Western-style financial crisis.


We’ve become a broken record on this, but it’s critical to remember that China’s present day economic woes are actually a function of very deliberate macroprudential policies. While highly unlikely, at any given time, Chinese officials can reverse course and keep the credit bubble inflating longer than any of us short-sellers can remain solvent.


On the contrary [to consensus], we think the outlook for China’s banking sector is likely to resemble that of a slow bleed, rather than sudden cardiac death. We’ve published a ton of work recently backing our conclusions with detailed analyses, but for those of you who weren’t able to tune in until now, we’ll take this opportunity to rehash our views:

  • Alas, it remains our view that the headwinds facing China’s banking system are structural (i.e. NOT cyclical) in nature.

Please email us if you’re interested in reviewing the full compendium presentation materials and research notes backing these conclusions, and we’ll get them right over to you. We also have a list of ancillary securities and asset classes to underweight/sell/short if you’re interested in those as well.


At any rate, we urge you to embrace the uncertainty of this situation by running full speed away from anyone who tells you they know how this all ends.


In fact, the only certainly anyone can promise you regarding these risks is that the outcome is presently unforeseen and, quite possibly, hidden deep within the “shadows” of China’s financial sector.


Our immediate-term TRADE Risk Ranges are now (TREND bullish or bearish in brackets):


UST 10yr Yield 2.35-2.69% (bullish)

SPX 1 (bearish)

DAX 7 (bearish)

Nikkei 12,406-13,449 (bearish)


VIX 16.59-20.98 (bullish)

USD 82.21-83.39 (bullish)

Euro 1.30-1.32 (neutral)

Yen 96.25-99.17 (bearish)


Oil 99.18-103.39 (bearish)

NatGas 3.64-3.82 (bearish)

Gold 1 (bearish)

Copper 2.98-3.12 (bearish)


Keep your head on a swivel,



Darius Dale

Senior Analyst


Uncertain China - Chart of the Day


Uncertain China - Virtual Portfolio

Being Good

This note was originally published at 8am on June 12, 2013 for Hedgeye subscribers.

“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 $1362-1411, $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 1607-1658, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Being Good - DXY


Being Good - vp 12

June 26, 2013

June 26, 2013 - DTR



June 26, 2013 - 10yr

June 26, 2013 - VIX

June 26, 2013 - dxy



June 26, 2013 - spx

June 26, 2013 - dax

June 26, 2013 - nik

June 26, 2013 - yen

June 26, 2013 - oil

June 26, 2013 - natgas

June 26, 2013 - gold

June 26, 2013 - copper


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