Client Talking Points


Consensus has been telling you over and over again that #RatesRising is going to kill the US stock market for about 9 months now. Well, it's certainly killing bonds, Emerging Markets, and slow-growth, low yielding, stocks maybe, but not US growth stocks. That style factor is why the QQQ and Russell outperformed the Dow again last week. It's 2.82% on the 10-year now with no resistance to 2.95%. This Hedgeye Q3 Macro Theme remains firmly intact.


The Doctor has been royally squeezed. After 24 consecutive weeks of holding a net short positions (CFTC futures/options contracts), Copper’s net position ripped +104% last week to a net long position of +14,356. Gold’s net long position expanded +29% week-over-week to +73,216. People love chasing price. Fade that.


If you want to be bearish on Equities, try the Asian (ex-Japan) trade. It was down -3.3% last week (down -8% year-to-date) vs QQQ +1.5%. Countries hostage to Burning Currency like Indonesia are moving -0.5% lower again this morning (now down -2.6% year-to-date). Let's call it what it is: #AsianContagion

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


Fear? US Equity Volatility (VIX) -2.7% last week, still crashing at -22.4% YTD @KeithMcCullough


"The fight is won or lost far away from witnesses - behind the lines, in the gym, and out there on the road, long before I dance under those lights." -Muhammad Ali 


Emerging-market stocks have lost more than $1 trillion since May. The MSCI Emerging Markets Index has fallen about 12 percent this year, compared with a 13 percent gain in the MSCI gauge of shares in advanced countries. (Bloomberg) #EmergingOutflows

Missing Something

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

“The market is smarter than you will ever be, with its combined knowledge of all participants. Pay attention to the signs. Be quick to admit that you’re wrong. Don’t be afraid to miss something.”

-Yra Harris, Praxis Trading


That quote comes from my “other” favorite book on markets, Inside the House of Money, which is a series of candid interviews with a number of highly-regarded Global Macro Risk Managers (Daniel Kahneman’s Thinking, Fast and Slow forms the other half of my 1A/1B compromise). Harris – a veteran of the trading floor pits at the CME for over three decades – had that to say about the merits of gleaning critical information from market prices.


I make it a point to pay as little attention as humanly possible to the #OldWall’s financial media outlets, so I don’t know much about Mr. Harris’ current views and biases on the markets. I do, however, know that we @Hedgeye subscribe to the same philosophy of recognizing that we’re not smarter than the market. Indeed, having been football or hockey jocks at an institution like Yale has taught us all we needed to learn about not being the “smartest guy in the room”.


Whether you’ve watched us compete in this game for the past five years or you’ve been trialing our research for five days, you’ll quickly arrive at the conclusion that last price tends to dictate our interpretation of the fundamentals. But, obviously, markets oscillate on a day-to-day and week-to-week basis, so we employ a three factor (i.e. price, volume and volatility) quant model to contextualize market trends across three distinct investment durations:

  1. TRADE: 3 weeks or less
  2. TREND: 3 months or more
  3. TAIL: 3 years or less

If a particular security or asset class is Bullish TRADE (i.e. last price is above the TRADE line), we’d argue that the market is in agreement with the positive fundamental view(s) emanating from the bull camp with respect to the most immediate-term of durations. The same can be said of Bullish TREND setups vis-à-vis the intermediate-term duration and Bullish TAIL setups vis-à-vis the long-term duration. The inverse of this interpretation (i.e. Bearish TRADE/TREND/TAIL) holds true as well.


We believe that it is our job as macro analysts to collect and piece together any relevant economic data with the intent of forming a fundamental view on a particular market or asset class. Often times, however, our biases don’t agree with said market’s risk management setup – i.e. the research is bullish when the market setup is bearish, or vice versa.


Prior to putting any risk on, investors generally have the option of dismissing the aforementioned setup as “being early” – at least until they get tapped on the shoulder! When, however, the position is already on the tape and has positive P&L and it starts to trend counter to one’s preexisting and subsequently reconfirmed fundamental view, we’d argue that said investor is late – i.e. he or she is #MissingSomething with respect to the fundamental story.


To better illustrate this lesson in Global Macro Risk Management, let us turn to a discussion of our preexisting bullish bias on the dollar-yen cross with respect to the intermediate-term TREND and long-term TAIL durations and on the Japanese equity market with respect to the intermediate-term TREND duration.


We’ve been out front of consensus making these calls – very loudly in the yen’s case – since SEP and NOV of last year, respectively, but, for those of you who may be new to the thesis, our subsequently reconfirmed fundamental view is as follows:

  1. While enthusiasm for the Abenomics agenda may come and go in the immediate-term, we believe investors are broadly underestimating the structural impact of imposing a +2% inflation target and +3% nominal growth target in Japan. To put that in context, the trailing 10Y averages for these metrics are -0.1% and -0.5%, respectively. Japanese policymakers have a lot of hay to bale on the monetary easing front if they are to even sniff their lofty targets within the proposed 2Y time frame.
  2. Assuming Japanese policy stays the course and our view that the US economy has finally turned the corner from a growth perspective is ultimately proven prescient, a compressing real interest rate differential will also put pressure on Japan’s currency from a capital flows perspective. Consensus expects real 2Y JGB rates to hit -2.5% by EOY 2014 (down meaningfully from -0.4% by EOY 2013); this compares to a forecast of -1.3% for real UST 2Y rates by EOY 2014 (down slightly from -1.1% by EOY 2013). More importantly, this inflection is also being confirmed in the swaps market: 2Y swap rates in Japan are now trading at -1.57% on a real basis (subtracting the 2Y breakeven rate from the swap rate); that compares to -0.88% for the US. As recently as mid-MAR, those metrics were meaningfully inverted at -0.10% and -1.98%, respectively!
  3. In the context of intermittent spikes in volatility in the bond and forex markets, we have maintained that the risk-adjusted outlook for Japanese stocks is decidedly less sanguine than consensus assumes given the reflationary tailwind of currency debasement. The caveat here is that this headwind can be offset via absolute returns that are now likely to be increasingly predicated on economic and fiscal reforms (corporate tax cuts, labor market deregulation, fiscal consolidation, etc.), as well as large-scale portfolio rebalancing by Japanese households. To that tune, only 6.8% of Japanese household financial assets are held in equities vs. 14.4% for the Eurozone and 32.8% for the US.

In spite of what we’ve outlined as arguably the most credible and well-articulated bull case for both the USD/JPY cross and Japanese equities, both are broken from an immediate-term TRADE perspective and flirting with breakdowns on our intermediate-term TREND duration as well. The risk management levels to watch on that front are as follows:

  • USD/JPY (last price = 96.77): Bearish TRADE = 97.72 and Bearish TREND = 97.13 (a few days young; needs to hold below TREND for a few weeks to confirm the move… if confirmed, we would certainly alter our fundamental bias)
  • Nikkei 225 (last price = 13,519): Bearish TRADE = 14,091 and Bullish TREND = 13,336

Profit taking, generally disappointing 2Q earnings and waning international investor sentiment for Abenomics are all credible theses that support a Bearish TRADE setup in both markets. We haven’t come across anything credible that would fundamentally support a confirmed Bearish TREND setup in the USD/JPY cross, which we believe will continue to determine the direction of the Nikkei until it eventually becomes obvious to Japanese equity investors that inflation is not growth (the trailing 1Y and 3Y correlation coefficients between these two markets are +0.96 and +0.97, respectively).


But, as highlighted above, just because we haven’t formed a coherent fundamental story that supports the quantitative risk management setup in both markets does not mean the underlying fundamentals themselves cease to exist.  So either we’re #MissingSomething or this is all just one big head-fake as weak hands are shaken out of the trade.


Let us know what you think.


Our immediate-term Risk Ranges are now as follows:


UST 10yr Yield 2.57-2.73%

SPX 1679-1714

DAX 8226-8449

VIX 11.72-13.94

Yen 95.91-98.38

Copper 3.17-3.32


Keep your head on a swivel,



Darius Dale

Senior Analyst


Missing Something - Chart of the Day


Missing Something - Virtual Portfolio






Two Hong Kong-listed firms controlled by Lawrence Ho - Melco International Development and Summit Ascent - entered into an agreement to invest in 51% of Hong Kong company Oriental Regent, which owns a casino resort in Primorye, Russia.


The casino was under construction and had a planned total investment of US$130 million.  Summit Ascent will invest two billion roubles (HK$463.7 million) for a 46% stake in Oriental Regent, while Melco will pay 216.7 million roubles for a 5% interest.  The casino resort sits on a 90,455 square metre plot and will have a planned gross floor area of 31,630 sq metres.  It will have 119 hotel rooms, 800 slot machines, 25 VIP gaming tables and 40 mass market gaming tables, and is expected to open in September 2014.


"The casino resort has the advantage of being geographically close to the target feeder markets, the three Chinese provinces in northeastern China, namely Heilongjiang, Jilin and Liaoning," said Summit Ascent, which invests in property and supplies building equipment.  "Russia offers a favourable tax environment for gaming business compared to other jurisdictions. The investment will give the company a first mover advantage as the proposed casino resort will most likely be the first legal casino to start operating in the Far Eastern Region of Russia."


The casino will pay Summit Ascent a fee of 3% of its GGR and pay Melco a consultancy fee of 0.3% of its GGR.  Under this agreement, Oleg Drozdov, a Russian businessman engaged in the construction business in Primorye, will own 30% of the casino resort, and Firich Enterprise, a gaming supplier listed in Taiwan, will own a further 19%.



Macau Legend Development Ltd has signed a non-binding agreement with Japanese pachinko operator Dynam Japan Holdings Co Ltd to set up and operate at least 100 gaming machines at Macau Fisherman’s Wharf.  Friday’s agreement will also see Dynam market Macau Legend’s hotels and casinos to its customers in Japan and South Korea.  The five-year deal begins next year.

Macau Legend reported a 5.7% fall in its first-half net profit to HK$266.7 million (US$34.4 million).  It blamed the drop on one-off costs of listing on the Hong Kong Stock Exchange.

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Information Surprise

“Information itself is best defined as surprise.”

-George Gilder


The first four chapters of George Gilder’s Knowledge and Power are right up my alley: “The Signal In The Noise”, “The Science of Information”, “Entropy Economics” – yes, someone else is talking “entropy” in the same sentence as markets! #beauty


On #OldWall, Gilder nails it: “The war between the centrifuge of knowledge and the centripetal pull of power remains the prime conflict in all economics.” And on risk management: “It is an economics of surprise that distributes power as it extends knowledge.” (page 5)


Think that through. In our profession, new information is surprise. If it wasn’t, why did so many risk going to jail? There is no easier way to generate returns than having inside information. Perversely, the road less travelled is the legal one. That’s why the 2.0 processes are taking mind share. We win and lose in an open forum of transparent information flow. We thrive by Embracing Uncertainty.


Back to the Global Macro Grind


If many pieces of information aren’t surprising you throughout your risk management day, you probably don’t have enough factors in your model. Price is surprise. So is data. Information surprise is everywhere.


So how do you absorb it all and remain sober? The answer is it’s a grind. Multiple-factors, multiple-durations – the market waits for no one. Being proactively prepared to contextualize the most immediate-term of surprises is only the beginning.


Bucketing the big stuff into intermediate-term TREND macro themes helps, provided that your process is flexible enough to acknowledge that TRENDs can change. But what is change? In Chaos Theory speak, can a major macro phase transition be undone?


Of course, in the intermediate-term, everything and anything can be undone – this is the fulcrum principle of central planning! In the long-run, gravity takes hold of anti-dog-eat-dog-cycle-smoothing though. So you want to be on the lookout for that!


There is a massive phase transition that is being baked into market expectations right now. The causal driver of that expectation shift is whether or not the US Federal Reserve is done with its anti-gravity policy to devalue the US Dollar and monetize the USA’s debt.


The main regime changes in a #RatesRising environment (versus one discounting 0% rates in perpetuity) are as follows: 

  1. Growth (as an investing style) outperforms slow-growth Yield Chasing
  2. Strong Currency countries outperform Currency Crisis countries 

That’s basically what happened again last week:

  1. Nasdaq and Russell2000 (growth indices) were +1.5% and +1.4%, respectively
  2. US Consumer Staples Stocks (XLP) were -0.2% on the wk (-2.85% for the AUG to-date)
  3. Asian (ex-Japan) Equities were -3.3% (down -8% for the YTD)

Parts 1 and 2 of that are pretty straightforward – unlevered US domestic innovation (growth stocks) are absolutely ripping this year versus a basket of pretty much anything slow-growth. That’s not new as of last week either. That’s been the TREND since June.


In June, #RatesRising ripped a massive amount of entropy into markets. Most people get that by now. What less people have realized is how powerful a combination A) #RatesRising  and B) #StrongDollar can be versus Emerging Markets (both equity and debt).


USD didn’t go down for the 2nd week in a row last week, here’s how that new information flowed to Indonesia, Chile, etc.:

  1. Emerging Markets (MSCI Index) = -2.6% on the wk to -11.6% YTD
  2. Emerging Markets Latin American Index (MSCI) = -1.5% on the wk to -17.2% YTD

Now, to be fair to the Chileans, they are also right levered to another major macro risk factor that comes into play during #StrongDollar and #RatesRising regimes – we call it #CommodityDeflation (the CRB Commodities Index = -0.6% last wk = -1.4% YTD).


Since #StrongDollar was more of a 1st six months of 2013 story doesn’t mean that the #CommodityDeflation risk ceases to exist (Coffee prices were -5.3% last wk to -25.2% YTD). Again, looking at the YTD scoreboard:

  1. Peru (metals/mining represents over 1/3 of the index) is the worst country in Global Equities at -19% YTD
  2. Chile and Brazil (both resource heavy indices) are 3rd and 4th worst in the world at -15% and -14% YTD, respectively
  3. Gold: despite its +4.5% month-over-month bounce off the lows, it is still -17.2% YTD

Ostensibly, there is new immediate-term TRADE information here to consider. If the US Dollar continues to weaken like it has from its July 2013 YTD highs, why can’t commodities and their related country stock market indices continue to re-flate?


Alternatively, the USD could be doing more of the same (building a gigantic base of higher-40yr-lows that were caused by the US cutting rates to zero), and this bullish Consumption (Growth) vs. bearish Commodities (Absolute Return Yield Chasing) theme remains intact.


The beauty of modeling macro the way that we do is that we don’t have to be certain about any of the answers to these questions. We simply have to absorb all of the information surprises we receive within the context of multiple durations, factors, and cycles – and make the highest probability call we can from there.


Our immediate-term Macro Risk Ranges are now as follows:


UST 10yr Yield 2.72-2.95%


VIX 12.17-14.98

USD 80.89-81.76

Euro 1.32-1.34

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Information Surprise - chart

Information Surprise - positions

August 26, 2013

August 26, 2013 - dtr



August 26, 2013 - 10yr

August 26, 2013 - spx

August 26, 2013 - nik

August 26, 2013 - dax

August 26, 2013 - dxy

August 26, 2013 - euro

August 26, 2013 - oil



August 26, 2013 - VIX

August 26, 2013 - yen

August 26, 2013 - natgas
August 26, 2013 - gold

August 26, 2013 - copper

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The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.47%
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