• run with the bulls

    get your first month

    of hedgeye free


The Flow Show

“Neither a borrower or a lender be; For loan oft loses both itself and friend, and borrowing dulls the edge of husbandry.”

-William Shakespeare, “Hamlet”


Shakespeare taught us many lessons in his writings.  But the quote from Hamlet above is very apropos for those of us who are stock market operators. The lesson is simple: be careful with financial leverage.


Financial leverage is like the blue meth sold by Walter White and his colleagues in the acclaimed TV show Breaking Bad.  It is both very addictive and hard to get off the streets.  It can also make the sellers very rich in a short period of time.


In the last fifteen or so years, we’ve seen innumerable debt fueled bubbles.   The Asian debt crisis, the stock market bubble of the early 2000s, the housing bubble, the sovereign debt crisis, and the list goes on.  Shakespeare is correct: returns generated from borrowing dull our analytical focus. 


In the spirit of another quote from Shakespeare, “brevity is the soul of wit”, let’s get directly to the global macro grind . . .


Next Wednesday, with all of Wall Street well rested and back from the Hamptons, we are going to update our emerging market outflows theme.  Like most macro trends, emerging market outflows is unlikely to be a month or quarter long trend.  With the dollar and interest rates being key supporting factors, this one also has legs.


In fact, my colleague Darius Dale looked at the last strong dollar period, from 1995 – 2001, and the MSCI Emerging Market Index CAGR’ed at -5.3% versus the SP500 at +15.8%.  So, reasonably, if interest rates are just starting to turn, and the dollar is only in the early stages of a long term strengthening, then emerging markets can be expected to underperform for some time.


In the Chart of the Day, we’ve highlighted recent emerging market equity and bond outflows.  As the chart shows, the last four months have been staggering for outflows and emerging market asset classes have performed commensurately.  As they say, follow the flows (or at least the projected flows).


After the first big correction is when the “value” investors usually start to get interested in a stock or asset class.  No doubt that guy from Franklin Templeton who originally cut his teeth marketing Snoopy is licking his chops right now on emerging markets.  The problem is that cheap can get a lot cheaper.


Currently, on an EV/EBITDA basis emerging market equities are still trading at slight premium to the long run mean versus the MSCI World Index.   In times of crisis, like in the 1998/1999 period, emerging markets trade at a multiple that are closer to the 30% of the rest of the world (versus north of 70% now).  When the proverbial brown stuff hits the fan, emerging markets go no bid.


We will be sending out an update of our emerging market chart book later this morning (ping if you don’t get it) and will also be hosting a call on Wednesday, September 4th at 11:30am eastern.  Even if you aren’t invested in emerging markets, this will be an important call in helping to understand global asset allocation flows.  Or as we like to call it: The Flow Show.


Speaking of flows, EPFR Global came out with some date this week that highlighted some of the key fund flows in the year-to-date.  No surprise, emerging markets lead in outflows with almost $7.8 billion in outflows.   On the positive is the United States, which has seen $83 billion in inflows, but in the category of sneaky positive is Europe, which has $9.4 billion of YTD inflows mostly over the past nine weeks.   


Europe may only be bouncing on the bottom in terms of an economic recovery, but the money has to flow somewhere.   Even more sneaky has been the improvement of sovereign yields in the European periphery, with both Italy and Spain both solidly at 4.5% or below (some of the best levels in years).  If the sovereign debt issues in Europe are truly behind us, the flows into Europe will only continue.


It only helps the investment outlook in Europe to have more sane central bankers like Mark Carney, formerly head of the Bank of Canada, running things.  In his first newspaper interview since taking over the Bank of England, Carney directly acknowledged the risks of low interest rates when he said:


“We have the responsibility to assess emerging vulnerabilities in the economy such as housing, make those assessments and recommend action.  Interest rates are principally an instrument of monetary policy for achieving the inflation outcome and there are other tools that address risks."


Well said, Mr. Carney.  Well said.


Speaking of central bankers, this long weekend will give us all some time to consider what might happen at the Fed next if either of the two front runners, Janet Yellen or Larry Summers, take over.  Hawk or Dove? Shakespearean tragedy or comedy? To flow, or not to flow?

All joking aside, policy matters so this choice will be critical in contemplating asset allocation in coming years.  As Shakespeare said about vision and strategy:


“See first that the design is wise and just; that ascertained, pursue it resolutely.”

As it relates to the leadership change at the Federal Reserve, we can only hope this is the path that is pursued.


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


UST 10yr Yield 2.70-2.93% 

SPX 1 

VIX 14.59-17.44

USD 81.39-82.11 

Euro 1.32-.134 

Gold 1 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Flow Show - CHART

The Flow Show - vp





Static Fear

This note was originally published at 8am on August 16, 2013 for Hedgeye subscribers.

“Fear is static that prevents me from hearing myself.”

-Samuel Butler


Scared yet? For parts of yesterday, I certainly was. I was buying into some really red stuff. And I felt alone. But I wasn’t.


It took me a lot longer (10-15 years) to not live in complete terror of my investment process than it did putting on a pair of skates. Imagine suiting up for every game in complete distrust of everything you have prepared for; imagine every time you were down by a few goals and were getting yelled at, you just left the game altogether (or Twitter)…


I am far too human to explain how and why I make all the mistakes that I make throughout my business building and market timing day. All I can tell you is that when I can’t hear myself – and I mean my process and my principles – I have no business leading anyone into making game time decisions.


Back to the Global Macro Grind


In yesterday’s Hedgeye Poll I asked whether the SP500’s correction from its all-time closing high (1709) would be:


A)     1%

B)      2%

C)      4%


I chose B. #Wrong again. (No one chose 4% this time, just fyi).


The correction is marked to market now at -2.8%. So now it’s probably time to freak right out.


Since the most differentiated call Hedgeye has had on the US side of growth in 2013 is employment #GrowthAccelerating, I also ended yesterday’s rant by emphasizing the importance of yesterday’s US weekly jobless claims report (pre-open).


If you would have personally handed me the report (that’s illegal) 3 hours before game time, I would have chose option A) and, having perfect “fundamental” economic data in hand, I would have been dead wrong on the market outcome.


In an intraday jobs note, our Senior USA Macro Analyst, Christian Drake, dissected the difference between NSA (yes, we are watching you) and SA:


1.    NSA:  Non-seasonally adjusted claims, our preferred read on the underlying labor market trend, made a new absolute low for the cycle at 280K -  marking its third consecutive sub-300K reading in a row and the lowest since September 2007.  On a YoY basis, initial claims accelerated to -11.7% from -9.9% the week prior with the 4-week rolling average improving 50bps to -8% from -7.5% the week prior.


2.    SA:  The seasonally adjusted, headline claims number printed its best number of the year, and best number since October 2007, at 320K.  This week’s data represents an accelerating YoY rate of improvement of  -12.8% YoY (vs -9% the week prior) with 4-wk rolling average down 4K WoW.   

In other words, the latest bear market crash call has now been edited to “the US employment data is too good.” Alrighty then.


Obviously, if you’ve had this right for the last 9 months, the legitimate “market top” call (that approximately 116 pundits have now tried to make on the US stock market YTD) was to call the all-time top in bonds in November of 2012.


Top calling is not a risk management process. Markets that eventually top:

  1. Start putting in a series of lower-all-time highs
  2. Then snap their immediate-term TRADE lines of support
  3. And finally crash through their long-term TAIL lines of support on accelerating volume

If you haven’t read that in a book – that’s because I made that up myself. Cool, eh!


What isn’t cool is trying to sell advertising or “thoughtfulness” based on one-way fear. With Twitter, this bearish style is basically the upside down version of what has becomes formally known as perma-bull. Zero Hedge minces no words on this. Sharp guy. Dead wrong on the market this year because perma-bear on US stocks doesn’t work any better than the bullish version does.


Perma-uncertainty? I’ll roll with that instead.


This way we can buy red and sell green; fade fear and book hope. It’s not for everyone. I know. But being everyone’s everything is no way to live anyway.


What to do from here? I’ve already made my move. I put up an intraday note titled “Buyem” yesterday at 1104AM EST. I think the actions (#timestamps) alongside the word were straightforward. The most important new Macro moves I made were:

  1. Buying the Nasdaq (QQQ)
  2. Buying British Equities (EWU)
  3. Shorting Fear (VXX)

For better or worse, I’m one of those players in this game who is maybe dense enough to just make calls. But, make no mistake, there is a tested and tried process behind every move I make. And I didn’t learn how to shoot on the #OldWall either – a long time ago, Gretzky taught me that you’ll miss 100% of the shots you don’t take.


Our immediate-term Risk Ranges (we have 12 big Macro ranges in our Daily Trading Range product too) are now:


UST 10yr 2.66-2.79%

SPX 1654-1691

FTSE 6467-6578

VIX 12.95-15.22

USD 80.89-82.06

Gold 1315-1368


Best of luck out there today and enjoy your weekend,



Keith R. McCullough
Chief Executive Officer


Static Fear - COD


Static Fear - V. VP 816

August 30, 2013

August 30, 2013 - dtr



August 30, 2013 - ust10

August 30, 2013 - spx

August 30, 2013 - dax

August 30, 2013 - dxy

August 30, 2013 - euro

August 30, 2013 - oil



August 30, 2013 - eem

August 30, 2013 - vix

August 30, 2013 - yen

August 30, 2013 - natgas
August 30, 2013 - gold

August 30, 2013 - copper

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.






The Ministry of Commerce has pledged to rein in extravagance by local government delegations sent to Hong Kong and Macau to drum up investment, following a highly critical article about such trips in People's Daily.  Yao Jian, a ministry spokesman, said that Beijing was aware of the overblown nature of business delegations visiting Hong Kong and Macau, pointing out that some local governments had overstated the number of participants and the value of deals signed during their promotional activities.


"They were desperate to get a big number of foreign businesspeople attending the events and re-signed agreements which had previously been sealed to shore up the total transaction value," Yao said.  "The phenomenon reflects a severe level of artificiality and extravagance."


This was the first time that a Communist Party mouthpiece had fired a salvo at such investment-promotion practices.

People'sDaily also said anti-graft officials would investigate and punish those who outrageously wasted money on trips, because their behaviour tainted the government's image.


TODAY’S S&P 500 SET-UP – August 30, 2013

As we look at today's setup for the S&P 500, the range is 38 points or 0.80% downside to 1625 and 1.52% upside to 1663. 










  • YIELD CURVE: 2.38 from 2.37
  • VIX  closed at 16.81 1 day percent change of 1.94%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Personal Income, July, est. 0.2% (prior 0.3%)
  • 9am: Fed’s Bullard speaks in Memphis
  • 9:30am: ISM Milwaukee, Aug., est. 53 (prior 52.43)
  • 9:45am: Chicago Purchasing Mgrs Index, Aug., est. 53
  • 9:55am: UMich. Sentiment, Aug. final, est. 80.5 (prior 80)
  • 1pm: Baker Hughes rig count


    • President Obama meets with presidents of Estonia, Lithuania, Latvia, discussion will include NATO defense matters, cybersecurity, proposed Transatlantic Trade and Investment Partnership


  • Sinopec to acquire $3.1b stake in Apache’s Egypt assets
  • America Movil says it’s ready to drop $9.5b KPN bid
  • Carl Icahn increases stake in Nuance, may seek seat on board
  • Microsoft vying w/American Express for stake in Foursquare
  • ADM’s offer for GrainCorp needs more scrutiny, lawmakers say
  • Verizon-Vodafone seen yielding over $240m in fee bonanza
  • GE set to exit retail lending, prepares unit spin off: WSJ
  • Radian reaches accord w/Freddie Mac to cap claim expenses
  • Ackermann quit Zurich Insurance after mention in suicide note
  • AMR, US Airways clash w/U.S. on rush to trial in merger case
  • Jacobs Engineering close to deal for Sinclair Knight: AFR
  • China will fine Everbright $85m for legal violations: Xinhua
  • Japan’s prices rise most since 2008 in boost for Abe
  • Renault COO Tavares said to have asked CEO for wider role
  • G-20, U.S. Jobs, Australia Election: Wk Ahead Aug. 31-Sept. 7
  • U.S. markets closed Monday for Labor Day holiday


    • Alimentation Couche-Tard (ATD/B CN) 8:39am, $0.96
    • Big Lots (BIG) 6am, $0.24
    • Laurentian Bank (LB CN) 8:45am, C$1.33


  • Gold Cuts Monthly Advance on Speculation Fed Will Slow Stimulus         
  • Gold Trade Most Bullish Since March on Syria Crisis: Commodities
  • Sumitomo Sees Aluminum Glut Extending to 2014 as China Slows
  • WTI Drops for a Second Day as U.K Lawmakers Reject Syrian Action
  • Soybeans Drop as Rain Forecasts for Midwest Ease Yield Concern
  • Aluminum Reaches Three-Week Low on Prospects for Larger Surplus
  • Indonesia With Malaysia to Support Palm Prices by More Biodiesel
  • Saudi Arabian Crude Output Surges to 24-Year High in OPEC Survey
  • BullionVault Offers Storage at Toronto Vault on Demand From U.S.
  • Cotton Fibonacci Signaling Slump to June Low: Technical Analysis
  • Oil Patch Follows Smartphone Makers in Patent Defenses: Energy
  • Cocoa-Butter Ratio Rises to Highest Since 2008 as Demand Climbs
  • Iron Ore, Met Coal Buying From China May Soften in Short Term
  • Aluminum to Extend Slump on Moving Averages: Technical Analysis


























The Hedgeye Macro Team













Time to Taper!

Takeaway: We are at a critical crossroads in America right now.

“The physicists have known sin; and this is a knowledge which they cannot lose.” -Robert Oppenheimer


Do you have introspective accountability?


Six decades or so ago, shortly after he began to fully grasp the unspeakably fearsome reality of the nuclear weapons he helped unleash, Robert Oppenheimer—“The Father of the Atomic Bomb”—became a rather unpopular man with the U.S. government.


Time to Taper! - atomb1


After provoking the ire of politicians with his outspoken opinions during the Second Red Scare, Oppenheimer’s security clearance was revoked in a much-publicized hearing in 1954, and he was effectively stripped of his direct political influence.


Oppenheimer once remarked that his creation brought to mind words from the Bhagavad Gita: "Now I am become Death, the destroyer of worlds." In essence, Oppenheimer ultimately held both himself and the government to account.


Now stop for a moment and ask yourself: Can you imagine a central planner of the Bernanke epoch holding themselves accountable for the highest levels of food, energy, education, etc. inflation in world history?


Most likely, the answer is no. That would require an incredibly uncomfortable un-spinning of the truth.


And the truth is that American “political scientists” who systematically engaged in devaluing the purchasing power of the American people to four-decade year lows in 2011 know that sin. It is market knowledge that history will not soon forget. Facts don’t lie, politicians do.


If you’ve ever sat across the table from me and my macro research team during the monetary mayhem and tumult of these last few years, you’ll know that I refuse to have a debate about mean reversion risks without contextualizing the post-Nixon low in the world’s reserve currency.


Time to Taper! - km1


  1. Got Causality? Of course, when a country cuts rates to zero then whispers to everyone front-running their next move that zero really isn’t zero (for Bernanke 0 = 0 minus 1, 2, 3, 4? QE5?), its currency goes down, hard.
  2. Post Nixon (i.e. post his devaluing the Dollar by abandoning the Gold Standard in 1971, purely for political gain), the US Dollar Index has never seen a lower-low versus the 2011 low. Surprise, surprise. That’s also when gold hit its all-time high.

Since most global commodities settle in Dollars, why there’s been raging inverse correlation (Dollar Down = Commodities Inflation Up) alongside causality in this relationship is trivial to everyone other than the people who should be held responsible for it.


What is less trivial is all of the unintended consequences associated with the ultimate central planning sin (an un-elected overlord confiscating the purchasing power of The People). Here are some of the big ones:

  1. Commodity Bubble
  2. Bond Bubble
  3. Emerging Market Bubble

Yep, that’s going to be a lot for Bernanke’s children (and theirs) to noodle over for the next century. That is, of course, unless the next guy or gal running the un-elected agency does what no modern Federal Reserve Chairman has ever not done – raise rates.


For the last year or so, I’ve spent a considerable amount of time ranting about these Global Macro Themes:


  1. Commodity Deflation
  2. Rising Interest Rates
  3. Emerging Market Outflows

These are relatively easy long-term risk calls to make because all three of them are basically about unwinding all three of the aforementioned bubbles.


Once prices stop making all-time highs (commodities, bonds, or currencies), there’s this big little risk management critter Ben Bernanke has never mentioned under oath called asymmetry.


Time to Taper! - ben1


So, at this stage of the cycle this is what you get:


  1. US Dollar making a series of intermediate-term TREND higher-lows (off her all-time lows in 2011)
  2. US Interest Rates making a series of intermediate-term TREND higher-lows (off their all-time lows in 2012)
  3. Gold and food prices making a series of intermediate-term TREND lower-highs (off their all-time highs of 2011-2012)

All the while, what we still get from the consensus TV circus that is “Government Access Media” is a bunch of uninformed people begging for more of the drugs that the political scientists got rich selling us.


If I am not clear on my long-term policy view, let me state it plainly – stop devaluing the Dollar. Stop trying to smooth economic gravity. Stop the monetary madness. Start tapering. Now.


If you ever want to see US growth expectations come back (yes, markets and business run on expectations, fyi), you have to let the US Dollar come back and let rates rise right alongside her.


Just this morning, we received additional support that the economy doesn’t need any more of the Fed’s monetary amphetamines. In case you missed it, the US jobless claims trend is near a six-year low. Meanwhile, Q2 US economic growth was revised up to a 2.5% annualized rate.


What will it take to get the Fed out of the way once and for all?


We are at a critical crossroads in America right now. Unwinding the monetary sin embedded in Bernanke’s post 2012 Jackson Hole policy is what markets have been doing for 10 months.


Collectively, we either have the responsibility within all of us to rise up against the tyranny of easy money and currency debauchery, or we do not. At this point, I can only hope the people who voted for this government hold it to account.


Robert Oppenheimer eventually got it. He had introspective accountability. The $3,600,000,000,000 question is whether Ben Bernanke ever will.

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.