Watch That Strong Dollar

Client Talking Points


What's going on with the US dollar is of paramount importance. This could be the 1st, 2nd and 3rd most important thing in my notebook. It is up for the thirdconsecutive week now. It's holding its higher-lows vs June and knocking the Yen solidly back into a Bearish Formation. Here's the Hedgeye formula: #StrongDollar + #RatesRising = good things for the TREND that is growth stocks rising in the USA.


You visit Dr. Copper lately? Because the Doctor no likey the #StrongDollar bounce. Copper is down -3.3% for the week after failing, big time at Hedgeye's TREND resistance of $3.39/lb. It banged the top of of the range and failed miserably.


This has to be the surprise gainer of the week. It broke out from our Hedgeye TREND resistance line of 1890 yesterday and had a full +1% of follow through again last night to 1926. South Korean economic data supported that move this week too. Look, Asia needed a bone. It's a potentially a bullish signal for tech and industrials. 

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


When whining about Syria ends, what's the next End of the World #EOW bear call? @KeithMcCullough


“Everybody has a plan until they get punched in the face.” - Mike Tyson


Despite the recent rip in oil prices, Russian stocks are still getting crushed down over -12% year-to-date. Sorry Putin.

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





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.

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






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.

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.