Don't Lie To Me

This note was originally published at 8am on July 25, 2013 for Hedgeye subscribers.

“We have the ability to lie – not just to others, but also to ourselves.”

-Dan Ariely


As I was flying back from the Fortune Brainstorm Conference last night, I was grinding through the back half of Ariely’s The (Honest) Truth About Dishonesty thinking about his aforementioned quote. With Twitter policing the pundits in real-time, and the fun cops (SEC) taking some “smart money” guys down, do we really have the ability to lie in this profession like we used to?


I like Ariely’s book because I have my own self deceptions that we’ve been building a firm around this vision of unearthing the Old Wall’s storytelling for over half a decade now. But that’s hardly the total truth. Reality is that the tectonic industry plate-shift from opacity to transparency is much bigger than I’ll ever be. I’m just a Mucker on the front lines of it all.


Wall Street was a closed-network that paid a massive premium for inside information, front-running, etc. Now that is dying on opacity’s vine as an open-network (Twitter is The New Tape) transcends accountability. There are no more “grey areas” to compound returns in. The crowd can see most things now; it can quickly conclude what is black and white.


Back to the Global Macro Grind


“We want explanations for why we behave as we do and for the ways the world around us functions. Even when our feeble explanations have little to do with reality. We’re storytelling creatures by nature, and we tell ourselves story after story until we come up with an explanation we like…” –Dan Ariely (pg 165)


So, let me tell you a story this morning…


And allow me to start with the non-fictional parts, which are called market prices. Isn’t that where I should begin? Or should I begin with a thesis on where the last market price should be? Stylistically, there’s a critical difference.


The difference is where your storytelling starts…


There’s a clear divide between how we attempt to risk manage macro market moves and how some on the Old Wall do. Never mind starting with a macro theme or thesis, some just skip all of that and hire guys who gets told by other guys what Bernanke and Co. are going to say next (yes, almost the entire old boy network is still guys).


Do I think our Global Macro Themes are good lines of storytelling? Sure. So do our clients. Increasingly I’m hearing that’s really because we don’t start with an insider’s whisper or a theme at all – we start with the market’s last price.


To review, when I say we start with last price:

  1. I’m contextualizing the market’s last price within 3 core risk management durations (TRADE, TREND, and TAIL)
  2. TRADEs are 3 weeks or less; TRENDs are 3 months or more; TAILs are 3 years or less
  3. Context (TRADE/TREND/TAIL) is dynamic (i.e. it refreshes every 90 minutes of new price/volume/volatility data)

In other words, that’s where my storytelling starts – with my own pictures of the market’s message; not with where I want the market to be. Then my analyst team and I work backwards on things like long-cycle data, mean reversion risks, catalysts, etc. in order to probability weight whether or not there are any themes to discern.


Does this risk management process prevent me from making mistakes? Of course not. From a macro risk manager’s perspective though, I’d say that having the humility to start my every day with what Mr. Market thinks has prevented me from making the really big macro mistakes. But that’s just my version of the story.


In other news, #StrongDollar is still bad for Gold bulls:

  1. US Dollar Index = +0.4% yesterday; Gold -2%
  2. Immediate-term TRADE correlation between USD and Gold is still -0.91
  3. Long-term TAIL risk correlation between USD and Gold is still -0.87

I can tell you some great stories about #StrongDollar, Strong America – and I can remind you that the combination of #RatesRising and #StrongDollar is both the enemy of Gold and growth fears…


But I’ve already used up my best content on that.


The market’s 2013 macro message is trumping pretty much everything the Old Wall consensus wanted it to be. If you waited for the super secret insider whisper that Bernanke is going to taper, you were late. Mr. Market didn’t lie to me.


Our immediate-term Risk Ranges are now:


UST 10yr Yield 2.47-2.71%

SPX 1673-1699

VIX 11.89-13.46

USD 81.98-82.85

Gold 1251-1351

Copper 3.11-3.21


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Don't Lie To Me - Chart of the Day


Don't Lie To Me - Virtual Portfolio

She's Absurd

“So I hope you can accept nature as She is – absurd.”

-Richard Feynman


That’s what one of America’s great physicists, Richard Feynman, had to say about how quantum mechanics explains life. I think it describes markets well too. It “describes nature as absurd from the point of view of common sense. “ (American Prometheus, pg 79)


What Do You Care What Other People Think?” Good question. That was also the title of the book Feynman published in the year of his death (1988). It’s a question that I’d love to hear almost everyone in this profession answer out loud.


Yesterday, I asked you if the latest bear market correction was going to be 1%, 2%, or 5%. In case you care what consensus thinks, not one of you answered 1% (which means it’ll probably be 1%). Yesterday’s -0.4% drop in the SP500, put the 2-day correction from her all-time high at -1.1%. #Absurd


Back to the Global Macro Grind


I know, the absurdity of challenging perceived wisdoms in one of the last professions that has been forced to face the fiddle of accountability. If you don’t want to see any of it, turn Twitter off and watch the channel the rest of us have on mute.


To review reality (2013 YTD):

  1. Consensus came into 2013 long slow growth, Gold, and Bonds
  2. Consensus is now selling slow growth, Gold, and Bonds, but too scared to buy growth

But not just any kind of growth – our nature is to not buy “expensive” looking growth. Absurdly, in a growth investor’s market, expensive gets more expensive (Tesla, TSLA +18% pre-market).


“Oh, so you’re telling me growth is back Mucker? Ok, then I’m going to go buy an Emerging Market”




As you can see in Darius Dale’s Chart of The Day, Emerging Market Growth is SLOWING as the slope of US and Japanese Growth is ACCELERATING (and large components of European growth is STABILIZING).


Just model the slopes of lines. Simple is as simpleton does from Thunder Bay, Ontario. In our GIP (Growth, Inflation, Policy) model here @Hedgeye, the G and I (Growth and Inflation) are doing 1 of 3 things from a slope perspective:


And that’s just about it.


Markets pay a higher multiple for companies showing what?

  1. Revenue Growth Accelerating
  2. Margins Expanding

So why is my macro model considered so absurd? It’s the same thought, but for countries:

  1. GDP growth going from slowing to stabilizing to accelerating = LONG
  2. GDP growth going from accelerating to slowing (on the margin) = SHORT
  3. Inflation slowing (via strong currency) + GDP Growth accelerating = REALLY LONG

That’s 2013:

  1. US employment, housing, and consumption growth went from slowing (Q412) to stabilizing, to accelerating
  2. Emerging Market growth (China, Brazil, etc) went from slowing to slowing at an accelerating pace

All the while, July’s YTD high in #StrongDollar gave local inflation to “emerging markets” like India as the Rupee started to crash. Show me GDP Growth Slowing + Inflation Accelerating (India) and I’ll show you a stock market that is down YTD.


I’m not sure why I went off on all of this today. Probably just a function of the absurdity of me having to come up with something in 45 minutes or so at the top of the risk management morning. Thanks for reading my rant.


Our immediate-term Risk Ranges are now as follows:


UST 10yr Yield 2.57-2.73%



VIX 11.62-13.94

Yen 96.16-98.71

Copper 3.05-3.25


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


She's Absurd - Chart of the Day


She's Absurd - Virtual Portfolio

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In the plenary meeting held yesterday, lawmaker Chan Wai Chi accused the government of lacking transparency in allowing casino operators to grant sub-concessions, going even further to say: “The government didn’t see a penny of this money.”


In response, Secretary Tam said that WYNN, SJM, and Galaxy – the three existing casino concessionaires – had declared the money earned through the establishment of sub-concessions as profit.  “They paid taxes over that money, because they had to declare it as profit. Therefore, the government charged taxes over that income,” Tam reasoned.  Tam refuted the accusations of lawmakers on the irregularity of the casino sub-concession contracts and added that the government “had no intention of deceiving anyone”.  Moreover, he added that the government is planning to study the casino concessionaires’ contracts in 2015: ““We can renew the existent contracts for another five years or we terminate the contracts and launch a new public tender [to replace them],” he explained. 



The MGM Macau is to close an 18-table premium mass-market area on its main floor for refurbishment next month.  MGM China CEO Grant Bowie says his company will spend US$56 million (MOP448 million) on the MGM Macau this year.
The casino will also revamp a high-limit slot-machine room. 



According to Prime Minister Lee Hsien Loong, Singapore's economic growth forecast for this year is between 2.5%-3.5%.  This is higher than the previous official forecast of between 1-3%.  In the first half of 2013, Singapore's economy grew by 2%.

August 8, 2013

August 8, 2013 - 8 8 2013 7 34 31 AM

EM + Commodity Leverage = Crashing

#CommodityDeflation. It's bad news for commodity linked equity markets. Brazil has been the poster child of this and what we call #EmergingOutflows here at Hedgeye. The Bovespa was down -2.1% yesterday and continues to crash. It's down -22.2% year-to-date.


On a related note, the only country that’s worse off year-to-date than Brazil? Yet another mining tape. You guessed it. (Or not.) It's Peru which has gotten whacked -25% year-to-date. 


EM + Commodity Leverage = Crashing - Brazil Peru

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