Client Talking Points


The big move this week definitely caught me off guard. The question now becomes are we past the maximum, short-term "Yen short/Nikkei long" pain? At 96.16, Yen (vs USD) is 3.1 standard deviations oversold in my model. Rest assured, that doesn’t happen very often. In addition, the Nikkei is holding TREND support of 13,445. So yes, I am tempted to buy back the DXJ on that. Waiting on the signal.


European Equities are behaving quite well in the face of this 2-day -5.6% Nikkei drop. Both the FTSE and DAX are still looking healthy on both our TRADE and TREND durations. Russia? Not so much. It is leading the losers again down -0.4% (-12.5% year-to-date) as Brent breaks down below my $107.71 TAIL risk line again. 


Looks like someone overstayed their welcome on the short side of copper. It's ripping. The net short position out there is almost at its peak, so I’ll call most of this move short covering. But I could change my mind on that. Please go ahead and ping me if you have any ideas on why it should breakout above its $3.31 TREND line. 

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


BREAKING: the SP500 has corrected 1.1% from its all time high; time to freak @KeithMcCullough


"Mr Bernanke’s exit plan apparently is that he is going to leave his job. He doesn’t want to stick around for the hangover. He doesn’t want to be around for the consequences of what he’s doing." - Jimmy Rogers


Shares of Tesla Inc (TSLA) are surging over 15% in premarket trading this morning after the electric car-maker swung to a surprise profit in results released yesterday. The company posted an adjusted profit of 20 cents a share for Q2 and revenue that surged to $405.1M from $26.7M.

ICI Fund Flow Data Supports Bearish Fixed Income Thesis

Takeaway: The ICI has reported its fund flow survey for the week ending July 31 with money flow continuing to move aggressively out of bond funds

Key Takeaways:


The most recent release of the weekly ICI mutual fund survey data continues to be supportive of our thesis of a reallocation from fixed income into equities. For the week ending July 31st, both taxable and tax-free fixed income had substantial outflows for the week with the equity category experiencing a modest inflow. 



Weekly ICI Survey Reported:


The Investment Company Institute (ICI) has just reported its weekly mutual fund flow data for the week ended July 31st. The survey which encompasses 95% of all open ended mutual funds relayed a continuation of an emerging preference for equity funds which had another inflow during the week at the expense of fixed income mutual funds, which had outflows across the board. For the 7 days ending July 31st, all equity fund products took in $714 million, which was an aggregation of a $1.6 billion inflow into world equity funds, net of an outflow of $926 million in domestic stock funds. Conversely, the fixed income side of the ledger continues to be a slippery slope with outflows of $4.0 billion in the taxable bond category for the 7 day period and an accelerating outflow for tax-free or municipal bonds of $2.8 billion. The hybrid category, the 5th and last survey reported by the ICI, relayed another strong inflow for funds which combine both equity and fixed income products of $1.7 billion. The charts below reflect the data reported overnight by the ICI and also display the past 12 weeks of fund flow information for reference.


ICI Fund Flow Data Supports Bearish Fixed Income Thesis - New ICI 1

ICI Fund Flow Data Supports Bearish Fixed Income Thesis - New ICI 2

ICI Fund Flow Data Supports Bearish Fixed Income Thesis - New ICI 3

ICI Fund Flow Data Supports Bearish Fixed Income Thesis - New ICI 4

ICI Fund Flow Data Supports Bearish Fixed Income Thesis - New ICI 5



The most recent weekly trends are representative of the emerging trends that we are forecasting will accelerate and replace the most recent cycle of equity fund outflows sourcing fixed income related inflows. This was the pattern in the last rotation between asset classes in 2008 and 2009, where equity fund draw downs were first parked into money funds before a re-allocation into fixed income throughout '08 and '09.  To put into context the slow shift from out-sized stock fund flows into incremental equity fund demand, the running year-to-date weekly average money flow for equity products is now a $2.7 billion inflow, a reversal from the 2012 weekly average of a $2.8 billion outflow. Thus investors are slowly voting with their capital as to which asset class is becoming more appealing. Conversely, the all bond category outflow this week of $6.9 billion is an acceleration from the 2013 weekly average inflow of $696 million and a substantial drop from 2012's $5.8 billion weekly inflow average. As we continue to discount the relatively higher risks for fixed income versus equities, we expect these bond fund outflows to be persistent.


Total Asset Flows including ETFs is also sporting better trends:


While the ICI survey is useful for the mutual fund complex only, a more comprehensive money flow view would have to incorporate the emerging exchange traded fund (ETF) vehicle. While ETFs are still only 13% of the mutual fund industry, their higher growth rate against funds continues to increase ETF market share and hence a comprehensive view of industry trends has to include this new asset management product.


Using publicly available information from ETF sponsors on creation units outstanding and net asset value (NAVs), we are able to also bolt on the money flow trends in exchange traded funds to the ICI weekly survey. We have aggregated this ETF fund flow data using the ICI date convention of Wednesday to Wednesday of the week prior and present this data as a more detailed information set than the ICI survey alone.


This "total" money flow information (both ICI fund survey and our customized ETF data collection) is projecting a similar asset allocation shift from fixed income to equities. For the week ending July 31st, total fund flow broke out to a $6.6 billion inflow for equities which disaggregated into the $714 million total equity fund inflow from ICI and $5.9 billion from equity based ETFs. On the fixed income side, the $6.8 billion mutual fund outflow was softened by $500 million in bond ETF inflows to net to a $6.3 billion outflow for fixed income. 


From a broader perspective, the months of June and July also paint a trend of re-allocation amongst stocks and fixed income. Again aggregating both mutual fund flow and ETF flows, June marked a massive $70 billion out of bond products. This has been followed by a $16 billion draw down in July. Equities fared relatively better than fixed income over the same time period experiencing just a $4.7 billion outflow in June which has been washed out by a large $55.1 billion subscription in July. While the cumulative trailing twelve month total flow aggregates still favor fixed income at $203 billion in new flow versus $151 billion to equity products, we estimate the more recent trends will be more reflective of the rest of '13 and also 2014.


ICI Fund Flow Data Supports Bearish Fixed Income Thesis - New ICI 6 redo

ICI Fund Flow Data Supports Bearish Fixed Income Thesis - New ICI 7


Slowly Turning the Aircraft Carrier...Long Term Trends Slowly Unwinding:


The aforementioned secular trends of equity outflows sourcing new fixed income subscriptions over the past 5 years are slowly reversing which can be seen in running year-to-date tallies. Within the ICI mutual fund landscape, all equity funds including domestic equity and world equity are now totaling over $92 billion in year-to-date inflows incorporating this most recent ICI survey. This is a substantial reversal from the $153 billion outflow in 2012 and this year threatens to be the first positive year for mutual fund flow since 2007. For fixed income, ICI mutual fund trends have slowed drastically year-to-date. For the first 7 months of '13, both taxable and tax free products are now totaling just $10 billion in year-to-date inflow, a far cry from the over $300 billion that the fund class took in last year in 2012. Bond fund flow peaked in 2009 with the $379 billion that was allocated by investors to the asset class coming out of the credit crisis. 


The year-to-date ETF trends are in a similar vein to year-to-date mutual fund trends. Equity ETFs are working on a record year for inflow with $113 billion having already been allocated to the asset class by investors. At this pace 2013 would vastly eclipse the record year of 2008 which drew in $127 billion in equity ETF subscriptions. On the bond ETF side, 2013 has generated $16 billion in new investor monies, a deceleration thus far in the $56 billion in fixed income ETFs taken in last year which appears at this point to be the high water mark for bond ETF flow.


ICI Fund Flow Data Supports Bearish Fixed Income Thesis - ICI 07.31 chart 5

ICI Fund Flow Data Supports Bearish Fixed Income Thesis - ICI 07.31 chart 6



The most recent weekly survey from the ICI is supportive of our recent asset management sector launch which outlined our estimate that significant risks are inherent in the U.S. bond market which will spur an invest-able asset allocation shift from fixed income into equities. Fixed income money flow has had an out-sized historical run with the past 8 years aggregating over $1 trillion in new money flow which we estimate has put in a top in U.S. bond returns assisted by the unprecedented fixed income liquidity programs from the U.S. central bank. Conversely, equity money flow has been decidedly negative for 5 years which has resulted in over a $500 billion redemption from the asset class. However, with stocks working on their 4th positive year of returns in 5, and with equities a healthier relative asset class to fixed income, we estimate a reversal in equity outflows which will benefit leading equity asset managers at the expense of managers more dependent on fixed income which is experiencing slowing fund flow subscriptions and eventual fund outflows.


Our Asset Management launch piece is enclosed here:


Our detailed Powerpoint presentation is enclosed here:


Jonathan Casteleyn, CFA, CMT


Joshua Steiner, CFA



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






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%.

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.