Underneath the Macro Hood

Client Talking Points


Newsflash: Chinese growth is slowing. Since virtually everyone already knows that, the reaction to the news is pretty much mute this morning (Hang Seng up +0.12%). China is doing her very best to massage the numbers while we all wait on the next leg down in industrial demand. Industrial Production in China down to +8.9% in June. There is no reason to believe that improves in July or August.


Since there’s really nothing else going on out there this morning, let’s go ahead and pick on Greece crashing again. It's yet another negative divergence for the Greek stock market this morning down -1.2%. But the more important point here is that it's down -31% since May 17. Just really ugly. Illiquid markets are becoming more enticing on the short side (weekly) at this point.


The Euro is backing off at our long-term TAIL risk line of $1.31 vs USD again this morning. This takes some of the bloom off Bernanke’s hopes to devalue the US Dollar. Look, if the EUR/USD fails here, and Ben Bernanke is less dovish during his testimony on Wednesday and Thursday, there is no downside support to $1.27. We're watching this one closely.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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


Both the US Dollar and 10yr Treasury Yields have stabilized at higher-lows again; Bernanke is back at it on Wednesday



The real truth of the matter is,as you and I know, that a financial
element in the large centers has owned the government ever since
the days of Andrew Jackson…

-Franklin D. Roosevelt (in a letter to Colonel House, dated November 21, 1933)


5.37%: The average yield on 10-year Treasuries over the past 25 years. (Bloomberg)

July 15, 2013

July 15, 2013 - dtr



July 15, 2013 - 10yr

July 15, 2013 - spx

July 15, 2013 - dax

July 15, 2013 - dxy

July 15, 2013 - oil



July 15, 2013 - HSI2

July 15, 2013 - VIX

July 15, 2013 - euro

July 15, 2013 - yen

July 15, 2013 - natgas

July 15, 2013 - gold
July 15, 2013 - copper


Looting The Aristocracy

This note was originally published at 8am on July 01, 2013 for Hedgeye subscribers.

“All looting would wait until after complete victory.”

-Jack Weatherford


Of all the successful wartime innovations of Genghis Kahn versus oppressive 13th century kingdoms, his looting policy was one of the most unique.


“He ordered that a soldier’s share be allocated to each widow and to each orphan of every soldier killed” … “this policy ensured him of the support of the poorest people in the tribe, but it also inspired loyalty among his soldiers.”


“By controlling the distribution of all the looted goods, he had again violated the traditional rights of the aristocratic lineages...” (Genghis Kahn and The Making of the Modern World, pages 50-51).  The trust of The People was his currency.


Back to the Global Macro Grind


You can study the last 80 years of economic history or the last 800 and you will come to the same basic conclusion: Politicians eventually plunder The People, until The People push back. The pattern of behavior is not that complicated really. Think it through.


On and off for the last 40 years or so, the United States of America has engaged in the same economic plundering that European Aristocratic regimes tried inasmuch as the Ming Dynasty of 14th century China did. It works, until it doesn’t.


Economic plundering occurs when people who get paid by their political ascent devalue the purchasing power of their people. Nixon started it in 1971 and Carter continued it; Reagan and Clinton got rid of it; then Bush II and Obama resuscitated it. The only sustainably strong periods of US economic growth (1983-89 and 1993-99) in the last 40 years occurred when the Dollar wasn’t being devalued.


But you already know that…


As a result, you also know why both real (inflation adjusted) US GDP growth and the US Consumption side of the US stock market has performed so well in the last 6 months. #StrongDollar = #CommodityDeflation.


To review the last 6 months:

  1. US Dollar Index = +4.3% YTD
  2. CRB Commodities Index = -6.6% YTD
  3. US Consumer Discretionary Stocks (XLY) = +18.9% YTD

No, this is not new – but last week was a friendly reminder to those who live in fear of #StrongDollar Commodity and Debt Deflation that there is indeed another side to this globally interconnected trade.


Last week’s absolute and relative performance of the same was pronounced:

  1. US Dollar Index = +1.1% wk-over-wk to $83.19
  2. CRB Commodities Index = -0.9% wk-over-wk to 275
  3. US Consumer Discretionary (XLY) = +2.5% wk-over-wk to $56.40

And, of course, after the worst month for US stocks in 2013 (SP500 -1.5% for the month of June), Consumer Discretionary (XLY) was the only S&P Sector to close up (+0.5%) for the month.


Can we handle a 3-6% stock market correction? Can we handle #RisingRates? Can we handle the truth?


Since most Commodities trade via the world’s reserve currency, pervasively bullish moves in that currency (US Dollar) can perpetuate a global consumption #TaxCut.


Guys who are marketing 2 and 20 on levered long Gold Funds and/or Super Sovereign Credit Bubble funds (whose base premise is that savers should earn 0% rates of return in perpetuity, and like it) don’t like this at all.


But I do. I think The People do too.


And why, by the way, should it be any other way? Why should we support aristocrat bond fund managers like Bill Gross begging for Bernanke to superimpose more slow-growth policies on the US Economy?


But don’t worry, Paul Krugman agrees with Gross now – so we’ll have to deal with Bernanke being pressured by both “intellectual” and asset management aristocrats for the next 3 months as we try to handicap their tapering whispers.


Where to from here? I don’t know. I think I know what the two potential paths look like though:

  1. Fed tapers; the US Dollar continues to strengthen, and we buy back our US Consumption #GrowthAccelerating position
  2. Fed doesn’t taper; the US Dollar is devalued (again), Food, Gold, and Oil prices rip, and we’re back to US #GrowthSlowing (again)

Americans have a choice. But the scarier reality is that so do their politicians. So stand up and be heard, before it’s too late.


Our immediate-term Risk Ranges are now:


UST 10yr 2.47-2.74%

SPX 1558-1618

DAX 7613-8078

VIX 15.26-20.97

USD 82.46-84.04

Gold 1171-1278


Best of luck out there this week. And Happy Canada Day!



Keith R. McCullough
Chief Executive Officer


Looting The Aristocracy - DXY vs CRB   XLY


Looting The Aristocracy - vp71

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.

Gravity's Wisdom

“Wisdom is not wisdom when it is derived from books alone.”



Horace was the prominent Roman poet during Augustus’ reign. He died at the age of 56, in 8 BC. Despite his fear that his “books would eventually become food for vandal moths” (The Swerve, page 84), his wisdoms didn’t die alongside him.


History teaches those of us who care to study it more than we’ll ever be able to know. The more I read, the more I realize that I know very little. History also gives me a tremendous appreciation for both empathy and context.


If you can’t empathize with another person’s perspective, how can you criticize it? If you can’t contextualize today within yesterday, how can you handicap where we may be going next?


Back to the Global Macro Grind


Given that I have a degree in Keynesian economics, I feel relatively comfortable disagreeing with many of its assumptions. Admittedly, doing it with my own money instead of theorizing from a textbook helped expedite my learning process.


“Don’t think, just do” is something else that Horace wrote. But just doing isn’t enough. You have to be held accountable to what you are doing. Learning from your mistakes is an invaluable lesson. Doing it with other people’s money is called responsibility.


I suggest both the Fed and the President of the Unites States consider that when affecting either the value of our currency and/or the risk-free rate of return on our hard earned savings. On both major factors, there is responsibility in their policy recommendation.


How does this tie back to the US economy?

  1. Monetary and Fiscal Policy is causal to A) the value of a currency and B) the risk-free rate of return on that money
  2. Since WWII, there has never been a sustained US economic growth period without #StrongDollar and #Rising Rates

So why fight history? That’s what Bernanke is currently trying to do. If you are a Bernanke fan, at a bare minimum, you have to acknowledge that he is trying to “smooth” the pace of US Dollar gains and #RatesRising at this point. Why should we let him?


In the very immediate-term, we know what an acceleration in #StrongDollar and #RisingRates does:

  1. It smokes Gold and related #CommodityBubbles
  2. It beats down on Treasuries and related Bonds
  3. It eats into slow growth #YieldChasing investments (MLPs, Utilities, Junk Bonds, etc.)

And that’s all bad for who? Bingo – those who are long 1, 2, and 3. Meanwhile, who gets paid?

  1. Consumers - #CommodityDeflation = Tax Cut
  2. Savers – risk free rates of return on Savings accounts go up, finally
  3. Growth Investors – oh yes folks, this one is stealth

The first two compensation pools of people are obvious. Those populations, by the way, are much larger than the partnership group at PIMCO that gets paid in size if Bonds outperform growth stocks in perpetuity.


The third constituency is for crazy people like me. You know, people who don’t wake up every morning trying to scare the hell out of you, burn your currency, and hand your tax-dollars over to bankers who pay themselves. We are Growth Investors.


Whether I’m investing in a low-dividend yielding big cap growth stock like Starbucks (SBUX) or private growth company like Hedgeye, it’s all the same bet. We aren’t betting on the end of the world. We are betting on brands and people. We are betting they grow.


Put another way, here’s how the market has been scoring this for the last month:

  1. Consumer Discretionary (XLY) stocks +5.1% versus Basic Materials (XLB) stocks -0.8%
  2. Low Yield stocks (i.e. growth stocks) are +5.1% in the last month and +26.3% YTD
  3. Top 25% EPS growth stocks (SP500) are +4.9% in the last month and +23.7% YTD

Bernanke, you got a problem with that?


I didn’t read this in your Keynesian Econ 101 book, bro. It’s on the tape. This is not only consistent with the 1 (Reagan) and 1 (Clinton) bi-partisan periods of US growth investing (where US GDP averaged over +4% during each period), it’s been a consistent market message for the last 180 days. Read and respect its message.


For the last 6 months, here are the #StrongDollar correlations to major market moves:

  1. SP500 = +0.75
  2. Commodities (CRB Index) = -0.78
  3. Gold = -0.74

No, no, no. The Mucker is not considered a wise man in Washington. Nor does he want to be. But please, my friends, please - don’t let an un-elected body of perceived wisdom at the US Federal Reserve mess this one up again. The gravity of Mr. Market’s wisdoms have spoken. They are the most pro-growth signals we have seen in years. Only your government can mess this one up this time.


I’ll be hosting our Q312 Global Macro Themes call at 11AM EST this morning. Ping if you’d like access.


Our immediate-term Risk Ranges are now:


UST 10yr 2.44-2.77%


VIX 13.01-15.04

USD 82.45-83.88

Oil 106.48-110.29

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Gravity's Wisdom - Chartoftheday

Gravity's Wisdom - vp 7 15


TODAY’S S&P 500 SET-UP – July 15, 2013

As we look at today's setup for the S&P 500, the range is 48 points or 2.27% downside to 1642 and 0.58% upside to 1690.     










  • YIELD CURVE: 2.25 from 2.24
  • VIX closed at 13.84 1 day percent change of -1.21%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8am: Fed’s Tarullo speaks on banking regulation in D.C.
  • 8:30am: Empire Manufacturing, July, est. 5 (prior 7.84)
  • 8:30am: Advance Retail Sales, June, est. 0.7% (prior 0.6%)
  • 10am: Business Inventories, May, est. 0.2% (prior 0.3%)
  • 11am: Fed to purchase $750m-$1b in 2023-2031 sector
  • 11:30am: U.S. to sell $30b 3M bills, $25b 6M bills
  • U.S. Weekly Rates Agenda


    • Fed Governor Tarullo speaks on Dodd-Frank law’s implementation, Basel III rules and possible further measures to bolster requirements for largest U.S. banks, 8am
    • House will likely vote this week on bill that would let states implement minimum federal standards for disposing coal ash generated by power plants, giving EPA a secondary regulatory role
    • Senate Homeland Security and Governmental Affairs Cmte holds hearing on “Strategic Sourcing: Leveraging the Government’s Buying Power to Save Billions,” 3pm
    • FHFA deadline for comments on proposed rule on Golden Parachute and Indemnification payments
    • President George W. Bush, with his wife Laura Bush, returns to White House for Point of Light award
    • Under Secretary for Intl Affairs Lael Brainard will preview meeting of G20 finance ministers, central bank governors in Russia and discuss the U.S.-China Strategic and Economic Dialogue, 4pm


  • AT&T’s $1.2b Leap deal puts pressure on smaller rivals to pair up
  • MB Financial agrees to acquire Taylor Capital for $22/share
  • Boeing 787 fire in London unrelated to battery, U.K. says
  • China’s economy slowed to up 7.5% in 2Q, matching ests.
  • China almost doubles foreign funds’ access to capital markets
  • Vivus invites First Manhattan to have 3 nominees join board
  • Citigroup, BofA, others report charge-offs, delinquencies
  • Microsoft cuts Surface tablet prices by as much as 30%
  • GE weighs Invensys bid after Schneider offer, Times reports
  • “Despicable Me 2” edges out Sandler comedy in weekend
  • Goldman’s Fabrice Tourre set to face SEC fraud trial today
  • Health-care spending in U.S. seen as starting to flatten: WSJ
  • U.S. Weekly Agendas: Finance, Industrials, Energy, Health, Consumer, Tech, Media/Ent, Real Estate, Transports
  • North American M&A Agenda
  • Canada Weekly Agendas: Energy, Mining
  • Retail sales probably climbed: U.S. Economy Weekly Preview
  • Bernanke, G-20, Dell, China GDP, Google: Wk Ahead July 13-20


    • Citigroup (C) 8am, $1.18 - Preview
    • JB Hunt Transport (JBHT) 4pm, $0.74
    • Brown & Brown (BRO) 4:15pm, $0.35
    • Healthcare Services (HCSG) 4:15pm, $0.19
    • Cintas (CTAS) 4:15pm, $0.70       


  • WTI Crude Falls After Third Weekly Gain as Chinese Growth Slows
  • Hedge Funds Bought Gold in Biggest Rally Since 2011: Commodities
  • Refined Palm Imports by India Seen at Record High on Lower Taxes
  • Gold Is Little Changed After Best Week Since 2011 on Stimulus
  • Copper Falls as Weakening Chinese Economy Fuels Demand Concern
  • Corn Extends July’s Biggest Slump on Improving Outlook in U.S.
  • Cocoa Rebounds After European Processing Data; Coffee Retreats
  • China June Crude Steel Output Falls to Four-Month Low on Prices
  • Shale Skeptics Take On Pickens as Gas Fuels Policies: Energy
  • Zinc 15% Capacity Loss Has Miners Struggling to Fill Supply Gap
  • Crude Bets Jump to Two-Year High as Demand Soars: Energy Markets
  • Citigroup Says Not Yet Time for ‘Bottom-Fishing’ in Commodities
  • Milk Price War Pits California Dairy Farms Against Cheesemakers
  • Palm Oil Drops to Two-Month Low as Chinese Demand Seen Falling


























The Hedgeye Macro Team












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