Great Failures

This note was originally published at 8am on June 24, 2013 for Hedgeye subscribers.

“It was not the common people who were to blame for these failures…”

-Jack Weatherford


“Rather, it is the great ones among you who have committed these sins. If you had not committed great sins, God would not have sent a punishment like me upon you.”


Don’t worry, I’m not going to go all religious on you this morning. That’s just what Genghis Kahn told the elite of Bukhara after conquering their centrally planned city. “He then gave each rich man into the control of one of his Mongol warriors who would go with him and collect his treasure.” (Genghis Kahn and The Making of The Modern World, pg 7)


Maybe Bernanke and his central planning ideologues around the world should do a little summer reading on my man Genghis and reflect upon how plundering the purchasing power of free peoples ends…


Back to the Global Macro Grind


And over the #Waterfall bonds go. No matter where you think we were last week, here we are – lots of Global Macro tourists who didn’t respect the VELOCITY + VOLUME of the water approaching our bifurcation point (2.41% = the dam) = soaking wet.


So, to start, Hedgeye Risk Management will, in #OldWall style, “reiterate” the following Global Macro positions:

  1. 0% asset allocation to Commodities
  2. 0% asset allocation to Fixed Income
  3. 0% asset allocation to Emerging Market Debt and Equity

As the US Treasury 10yr Yield rips through our critical intermediate-term breakout line of 2.41% to 2.60% this morning, everything starts to happen a lot faster. The aforementioned 0% asset allocations were already in motion. We affectionately called Commodities, Bonds, and Emerging Markets #BernankeBubbles for a reason. When they pop, there’s no more flow!


If you’ve ever tried suspending yourself in mid-air after living in a bubble that’s popped, it doesn’t end well. Neither does living a centrally planned life where everyone in a so called “free-market” is at the beck and call of an un-elected man named Bernanke.


That’s all history now. If you didn’t know that the anti-gravity “smoothing” experiment using the most debt leverage in world history has another side of the trade (deflating debt, commodities, emerging markets, etc.), now you know.


There are two big potential drivers of asset deflation:

  1. #StrongDollar (US Dollar Index) from her 40yr low (in 2011 when Commodities and Gold peaked)
  2. #RatesRising at an accelerating rate from the 0% bound

No, it’s not the common people who are to blame for deflation. It’s the conflicted and compromised politicians who have been cheered on by those who get paid by Commodity, Fixed Income, and Emerging Market inflations whose bar tab is up.


Deflation? If you inflate a bubble to its max, there will eventually be deflation. And, yes, there will be blood. Deflation is only a bad word if you are long the thing that is deflating.


But can our institutionalized world of short-term price performance chasing handle a stronger currency and rising interest rates? Can we handle this thing call a long-term cycle turning?


And what would more of the same do to our insecure world?

  1. #StrongDollar (+3.2% YTD) = #CommodityDeflation (CRB Index -5.7% YTD), so more of that would be cool #Consumption
  2. #RisingRates (+48% YTD move in UST 10yr Yield) = bad for anything bonds, and good for my hard earned Savings Account
  3. A massively asymmetric shift in the way we have all been paid to invest and allocate capital for the last decade

In chaos theory, we call a big macro cycle turning a Phase Transition. Leading towards this current point of entropy, there were a series of what we call Emergent Properties warning us of a pending phase transition.


Some investors get hurt during phase transitions; some prosper. I have a great deal of respect for Bill Gross and what he has built at @PIMCO, but if you read his last 3 tweets, you can get a sense of who doesn’t win if this keeps happening.


Stop whining.


It’s time to start winning. The USA has never achieved what all these vaunted elites of economics peddle to you as the desired outcome of all this central planning (real inflation-adjusted economic growth) without a #StrongDollar and #RisingRates.


To be clear, there will be pain before we all prosper (that’s why we have been cutting our US Equity exposure for 3 weeks). In the early 1980s and the early 1990s, Great Failures in asset allocation became as readily evident as they are this morning:

  1. Emerging Markets (MSCI EM Index) = -5.6% last week and are now -14.7% YTD
  2. Latin America (LATAM EM Index) = -8.1% last week and is now -20.5% YTD
  3. Silver = -9.1% last week and is now -34.2% YTD

Whether it’s the commodity bubble or the emerging market debt bubble, it’s all the same thing. US Central planners committed the great sin of devaluing the hard earned currency of the American people – and now some have to pay the price for that.  The punishment happens the faster rates rise. And I don’t think The People want to go back to the zero bound all over again.


Our immediate-term Risk Ranges are now (new format!):


UST 10yr Yield 2.41-2.61%

SPX 1566-1622

VIX 16.16-20.45

US Dollar Index 81.21-82.69

USD/YEN Yen 96.54-98.76

Oil (Brent) 100.23-103.73

Gold 1257-1357


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Great Failures - ww. cd. waterfall


Great Failures - ww. porto

CHART OF THE DAY: Lest Occasion Be Given


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Lest Occasion Be Given

“Idleness is the enemy of the soul.”

-Saint Benedict


There were some major contradictions in Benedict of Nursia’s “rules.” Monks not being able to openly debate what they were being told to read was one of them. I started reading Stephen Greenblatt’s Pulitzer Prize Winner, The Swerve – How The World Became Modern, this weekend. That’s what has me thinking about that.


Benedictine Rule provided the foundations for western monasticism. “Let there be complete silence. No whispering, no speaking – only the reader’s voice should be heard there… no one should presume to ask a question about the reading or about anything else, lest occasion be given.” (The Swerve, pg 27)


Reading and writing makes me think. Thinking requires what Einstein called for – constant questioning of premise. Some people don’t question either Keynesian Economics or the US Federal Reserve’s policies whatsoever. Markets, on the other hand, take occasion to debate policy makers all of the time. They front-run the next decision that will be imposed on us from upon high.


Back to the Global Macro Grind


From the holy heights of Chaos Theory the globally interconnected ecosystem gives us this thing called economic gravity. As US employment #GrowthAccelerating continues to surprise on the upside, expectations for Fed tapering get pulled forward.


Last week’s market pricing of gravitational-risk was as closely aligned with what has been happening for 6 months as any week in 2013. Here were the big week-over-week moves, bundled within our core Hedgeye Global Macro Themes:

  1. #StrongDollar – US Dollar Index +1.6% on the week; up for 3 weeks in a row, and +5.9% for 2013 YTD
  2. #RatesRising – UST 10yr Yield +25 basis points on the week to a fresh weekly closing YTD high of 2.74%
  3. #EmergingOutflows – MSCI Emerging Markets and Latam Equity indexes -2.4% and -4.3% on the week, respectively

Yes, our Macro call for the last 6 months still has some serious flow to it:

  1. Dollar Up = Commodities Down
  2. Commodities Down = Commodity Linked Emerging Markets Down
  3. Emerging Markets Down = Emerging Outflows Up

Follow the flow. All that moulah has to, eventually, flow somewhere; especially as money’s prior flows start going the other way (at an accelerating rate).


So, you can either be long US Dollars and US Consumption Equities on the following fundamentals:

  1. Employment #GrowthAccelerating
  2. #HousingsHammer ripping a +12.2% y/y gain in US Home Prices (wealth effect)
  3. Consumption #GrowthAccelerating from 1.0-1.2% to 2.0-2.4% in the last 6 months

And/or, you can being long US Dollars and US Consumption Equities because you can’t be long anything else!


Lots of clients are asking us what we’re going to do with Gold, Treasuries, and Emerging Markets from here. And our answer is more of the same. We update our dynamic asset allocation model daily. Here’s the latest on that:

  1. Commodities = 0%
  2. Fixed Income = 0%
  3. Int’l Equities = 0%

Zero percent is about as clear a statement as we can make. And while we’ve had 0% in Commodities and Fixed Income for some time now, I don’t think last week’s combination of #StrongDollar + #RatesRising gets us less confident in that positioning.


Why would it? In macro there is this thing called momentum that trumps valuation. When negative PRICE MOMENTUM meets VOLATILITY and OUTFLOWS  (all at once), that’s uber bearish.


Having 0% asset allocation to International Equities is probably the position we’ll hold for the least amount of time. But, with Emerging Markets (MSCI EM) -13% and Latin American Equities (MSCI Index) -19.7% YTD, respectively, we’re in no rush.


For now, with both the Russell 2000 (IWM) and US Consumer Discretionary (XLY) US Equity market indexes hitting fresh all-time highs at +18.4% and +21.8%, respectively, occasion has been granted by the gods of our meritocracy to keep questioning consensus and reading more books.


Our immediate-term Risk Ranges are now:


UST 10yr 2.55-2.74%


VIX 14.14-16.49

USD 83.39-84.59

Yen 99.13-101.71

Gold 1179-1242


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Lest Occasion Be Given - Chart of the Day


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What an ugly start to the week in Asia. Asian Equities were led lower by Indonesia which fell -3.2%. Meanwhile, China was down -2.4% and Hang Seng down -1.3%. Get this: the Shanghai Compositie is down -11.7% year-to-date. No, that's not pretty. With the exception of Japan, every single Asian country is bearish TREND right now. (Nikkei TREND = 13,668)


Yes, European stocks are having an aggressive bounce. However, this is happening on A) no volume and B) not one of these markets is above any of my TREND lines of resistance. The most important TREND line to watch is DAX 8062. That is key. Meanwhile, EUR/USD couldn’t care less about the Troika “news.”


What's the biggest threat to the US Consumption investment theme? That would be Brent Oil closing and holding above the long-term TAIL risk line of $108.36. We're backing off -0.6% this morning toward $107. That is a good thing. We are watching this one very closely.

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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.


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. 


Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road. 

Three for the Road


Biggest thing consensus has missed in 2013 is #StrongDollar driving Commodities Down, and US Stocks up



"People who lose money always need someone to blame."
- Jim Chanos


On this day (July 8) in 1932 – The Dow Jones Industrial Average reaches its lowest level of the Great Depression, closing at 41.22.






The city’s gaming industry is safe from the mainland’s economic slowdown, SJM CEO Ambrose So said.  So believes gaming revenue can maintain “at least double-digit growth” in 2H 2013.



SJM CEO Ambrose So said that the company has found potential locations for relocating their slot parlors (Yat Yuen Canidrome Slot Lounge and Treasure Hunt Slot Lounge), and expected to relocate the parlors to the new location before November this year.  He added that SJM focuses more on traditional gaming models, slot business only take up 5% of its overall business, therefore, the relocation will not have much impact on the overall business.  Jai Alai casino is expected to be re-opened to public in the first quarter of 2014.



China’s Ministry of Finance recently issued an announcement requiring all departments in the central government to cut general expenditure for 2013 by 5%.  Some local scholars said that the central government’s move indicates that China may see a slowdown of economic growth in 2H 2013, and it may have a slight effect on Macau’s gaming industry.



Crown Group and Rank Holdings, Sri Lanka's biggest gaming corporation, will build a $350 million, 36-story entertainment complex, including a casino and a 400-bed hotel, on prime real estate in downtown Colombo. The casino is slated to open in 2016.


The complex will be exempt from paying corporate income tax for 10 years and will receive a hugely discounted rate for 12 years after that.  A spokesman for Crown said: “Negotiations on a proposed resort project in Colombo are still ongoing.”



The Economic Data calendar for the week of the 8th of July through the 12th 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.




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