Shatteringly Simple

This note was originally published at 8am on September 04, 2013 for Hedgeye subscribers.

“Money is one of the shatteringly simplifying ideas of all time; it creates its own revolution.”

-Paul Bohannan


That’s the opening quote to an important book I started reading this week, The History of Money, by Jack Weatherford. The book’s first paragraph goes on to ring the Gold bull bell with “The Dollar is dying; so too are the Yen, the mark and the other national currencies…”


When it was published in 1997, Charles Schwab called this “the book to read.” And I agree, you should read every economic history book you can get your paws on – your hard earned money is too important to leave to the people opining on it from Washington.


The shatteringly simple observation about money is context. Its history is at least 3,000 years old. And when debating it, consensus tends to cram its craw into the moment in which it lives. The Dollar isn’t dead this year; it’s breaking out from a 40 year low. The Yen didn’t die after 1997 either (it ended up hitting a 40 year high by 2011). Everything, including the value of your moneys, is relative.


Back to the Global Macro Grind


After another shatteringly strong string of US economic data points (starting last Thursday with US roiling jobless claims hitting another YTD low and culminating with a blockbuster New Orders component of yesterday’s ISM report for August), yesterday’s US stock market ripped a +1% morning move to the upside and Treasury bonds continued to collapse.


Up for the 4th consecutive week, another #StrongDollar move was nipping on the heels of #RatesRising too. Consensus isn’t positioned for that, so I loved it. Then, all of a sudden, the most bearish catalyst of all hit the tape – a US politician’s opinion.


In the last year, there have been very few market risks that have scared me more than US central planners intervening during critical periods of market entropy. Going back to November of 2012 (when bond yields bottomed), Boehner’s voice was as market bearish as any you could find. He was the bearish factor yesterday too – the whole thing is just plain sad to watch.


Back to the economic gravity part…

  1. New Orders (in the ISM report for August) hit a monster shot of 63.2! yesterday (vs 58.3 in July)
  2. Go back to 2003 (see Chart or The Day) and look at how quickly economic gravity shocked growth bears to the upside
  3. Not unlike 2000-2002, consensus has become shatteringly bearish about growth; it’s a lagging indicator

To be clear, there’s a big difference between consensus being bearish and Mr. Market’s bullish opinion. While yesterday’s intraday gains in the SP500 were cut in half, the decliners were led by the slow-growth sectors (gainers were once again all about growth):

  1. Slow-Growth Utilities (XLU) got smoked again (after being down -5% for AUG), leading losers on the day at -1.2%
  2. Dividend Yield Chasing Consumer Staples (XLP) were down -0.1% in an up market as well (XLP -4.5% in AUG)
  3. Nasdaq (QQQ) +0.63% and Financials (XLF) +0.9% led gainers, as they have throughout 2013

In other words, if you are bummed out about Kimberly Clark (KMB) or Kinder Morgan (KMP) not getting you paid on the principal appreciation side of the equation, that’s just too bad. This Bernanke Yield Chaser style factor was as much a bubble as Gold was.


#RatesRising for the right reasons (growth expectations rising), is public enemy #1 for overvalued, slow-growth, securities. Whether it feels right or not, money chases positive returns. It flows away from draw-down risks.


Since I’m already out of everything Commodities, Fixed Income, and Emerging Markets (0% asset allocations), I have had relatively low stress on the draw-down risk side of big macro asset class moves in 2013 (Gold bounced, but is still -17% YTD and bonds are getting smoked), but that doesn’t mean I can afford to give up a lead for the sake of being beholden to this great growth data.


There are 3 big Macro things that would get me out of being long growth equities:

  1. If #StrongDollar snaps its long-term TAIL risk line of $79.11
  2. If #RatesRising stops and the 10 yr UST Yield breaks 2.44% @Hedgeye TREND support
  3. If #GrowthAccelerating Style Factors (like Nasdaq diverging from the Dow) reverse and break TREND

Johnny one-time Boehner’s intraday comments mattered because they kept the #1 risk to what’s been strong US consumption growth in play. It’s called an Oil tax at the pump. And Putin likes it.


The best way for Obama to pulverize Putin in St. Petersburg this week would be to stick a weapon of mass currency appreciation in his grill. If I was advising the President, I’d have him bring that #StrongDollar ace to the table – and maybe say something like this:


“Vlad, if you don’t tone this down, I am going to taper, then tighten – and if you don’t think I can get Summers to do it, try me – your little Petro-Dollar Putin power problem will look like Fukushima, and fast.”


But that’s just me – I’m a doer type of a guy who likes to make decisions without asking the bureaucracy of the world for its opinion. I’d like to see a US President build a #StrongDollar, Strong America revolution on the back of your hard earned currency.


Our immediate-term Macro Risk Ranges are now:


UST 10yr Yield 2.73-2.93%

SPX 1630-1658

Nikkei  13362-14093

VIX 15.93-17.98

USD 81.78-82.65

Brent 113.12-117.98


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Shatteringly Simple - ISM new Orders


Shatteringly Simple - vp94

Get High

“If you want to get open under the basket, don’t just run towards the hoop – run to the free throw line first, then cut to the baseline to get open.  Get High to Get Low. “

-Coach Ken Smith, Windsor CT basketball   


Standing on stage in a Speedo with a freshly shaven body while a bunch of guys cheer for you elicits kind of an odd feeling.


The whole competitive bodybuilding scene is a singularly peculiar, multifarious mix of culture and personality and I do miss parts of it…kinda. 


For the un-indoctrinated, the canonical approach to (natural) bodybuilding contest preparation, from the nutritional side, goes something like this: 


In the 3 months leading up to contest day, you progressively tighten up the diet by concomitantly lowering total consumption and shifting your macronutrient profile increasingly towards protein and polyunsaturated fats (think olive oil, fish oil, mixed nuts, etc). 


At some point, as caloric intake declines, you initiate or increase caffeine consumption for its beneficial thermogenic and appetite suppression effects.  Nearer the end, if you need to further accelerate progress (and it’s the mid-2000’s when it was still legal) you may add in some measured amount of additional stimulant (via ephedrine) to help augment fat loss. 


In general, the diet-stimulant combo works exceptionally well - for a while.  Continue the regiment too long and the impact starts to diminish and ultimately reverse. 


While there is some definite science underpinning the contest preparation process, there’s an undeniable element of art in manipulating all the diet and exercise dynamics so that your physique peaks exactly on contest day. 


There is also the invariable, post-contest frustration.  Inevitably, following the aesthetic ‘peak’ on contest day, the veins start to disappear, muscle definition fades, and you begin to smooth out as both diet and fluid balance renormalize to sustainable levels.  After a week or two of physiological adjustment, you’re back to feeling (and looking) normal. 


Does that over-consume à diet à stimulate à adjustment cycle look familiar?


Bodybuilding contest preparation is not dissimilar to monetary stimulus in the aftermath of a multi-decade credit binge.   After the fun time (pizza eating/credit amplified consumption to offer both sides of the analogy) comes the diet/deleveraging and the stimulants/monetary stimulus to help things along - followed by the inevitable, but necessary, let down on the back end of the whole process. 


Consensus continues to believe we’ll start the QE reversal adjustment process today with something on the order of a $5-10B reduction in monthly purchasing.  Maybe it’s fully priced in, maybe not.  Ultimately, measured policy normalization is a healthy and necessary adjustment and one we think justified given the positive breadth of the data YTD. 


Back to the Global Macro Grind…..


There are three primary fiscal policy catalysts on the calendar in the near term:

  1. Oct 1st – Government Funding: the current Continuing Resolution, which provides funding for government operations in the (now all too familiar) event there is no official budget, ends on September 30th.
  2. Late October - Debt Ceiling:   The latest statements from Treasury Secretary Lew, place the breach date between the end of October and mid-November.
  3. Year End - Sequestration/Fiscal 2014 Budget – Spending levels decline in accordance with sequestration if Congress fails to reach an agreement on an alternative. 

Government funding, the Debt Ceiling, and the fiscal 2014 budget are three discrete events that have coalesced into a single, policy amorphism as each political side threatens standoff or promises compromise/concessions on one as a condition for an accord on another.  


The majority of recent reports suggest the appetite of Republicans to present a united front in tying a delay in Obamacare implementation and other spending and tax initiatives to the Sept 30th government funding deadline is fading – which leaves the debt ceiling as the brinksmanship event of choice.


So, does the Debt Ceiling matter?  


In large part, the debt ceiling matters as a political issue only in so much as the debt level exists as a partisan point of contention and a pervasive populous concern.   For both the politico and the populous, the precedent appears to be that debt generally only matters when the slope is going the wrong way. 


Consider the broader realities existent in 2011 vs. those prevailing today.  The contrast is both illustrative and stark.  


In 2011, when the Debt Ceiling clash roiled equities, we were still well north of $1T in deficit spending, the US credit rating hung in the balance, Europe was still on the brink, confidence remained near trough, QE was only midstream, and fixed income remained fully bid.


Presently, deficit spending is in retreat, the US credit rating isn’t a headline concern, confidence has inflected, Europe is stable-to-improving, policy is re-normalizing, and fund flows have begun a secular reversal.     


Clearly, both the macro and sentiment dynamics have changed materially since Debt Ceiling 1.0.  So has the trajectory of debt spending.  


In the Chart of the Day below, we show the Trend in the deficit-to-GDP ratio.   As can be seen, after reaching a peak of ~10% in 2009, the ratio has showed steady decline with accelerating improvement over the last year alongside stronger economic growth, higher taxes, a retreat in stabilizer payments, and a number of non-recurrent inflows.   


We expect the ratio to retreat further as the domestic macro data continues to reflect ongoing, albeit modest, improvement. 


Indeed, yesterday, in its latest update to the long-term budget outlook (Here), the CBO projected deficit spending would continue to drop over the next few years, falling to 2% of GDP by 2015 with the Debt-to-GDP ratio declining to 68% from its current level of ~73%. 


Yes, the long-term budget outlook, saddled with unsustainable growth in entitlement obligations, remains dire. We’ll break down the budget outlook in detail, by duration, in subsequent notes, but the key takeaway here is that the outlook for both growth and debt spending over the intermediate term remains positive.   


Markets and political strategy move on the slope of the line (better/worse, not good/bad) not on a highly uncertain, 12 year forward projection. 


At present, the Trend slope of improvement in domestic growth, credit, confidence, and deficit spending are all positive and both Treasury Yields and the $USD (our key price signals as it relates to concern over the debt ceiling) remain Bullish from a price perspective.


#RatesRising has been reflecting that positive fundamental reality as have market prices as pro-growth exposure continues to get marked higher (new YTD high yesterday for the QQQ’s and another new all-time high for the R2K) while the underperformance spread for slow growth, yield chase assets (Utilities, MLP’s) continues to expand.   


Notably, policy normalization and #RatesRising alongside Trend improvement in debt and deficit levels also holds important implications for future fiscal policy initiatives.  


If we actually allow rates to go higher over the next couple of years – monetary policy can again be used as a tool to help offset employment and output drags stemming from fiscal policy decisions aimed at putting the budget on a sustainable long-term course.


If we stay at zero percent until projected debt/deficit ratios trough in 2015/16 we lose that optionality.  To reiterate the basketball strategy quote from my AAU coach above:  “Go High to Get Low”.


Perhaps the journey starts today. 


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


UST 10yr Yield 2.82-2.99%

USD 80.79-81.73

Brent 107.58-111.43

NatGas 3.59-3.73

Gold 1


Christian B. Drake

Senior Analyst 


Get High - z. cd


Get High - zz. vp 918

September 18, 2013

September 18, 2013 - dtr



September 18, 2013 - 10yr

September 18, 2013 - spx

September 18, 2013 - dax

September 18, 2013 - nik

September 18, 2013 - dxy

September 18, 2013 - euro

September 18, 2013 - oil

September 18, 2013 - natgas



September 18, 2013 - VIX

September 18, 2013 - yen
September 18, 2013 - gold

September 18, 2013 - copper






Gaming operators projected that visitor arrival in the coming National Day holiday will stay flat compared with last year while gaming revenue will go up about one-third compared to normal days.  VIP business operators are holding over a hundred rooms for their clients for the long holiday.  Wednesday is normally the quietest day in a week; gaming operators tend to provide privileges such as hotel accommodation and coupons for high-end guests in the mass market in order to maintain a steady number of guests across the week.



Macau Legend Development Ltd plans to raise about $300 million by selling new shares next year to fund a redevelopment of Fisherman's Wharf.  It expects to spend about $1 billion to revamp its Fisherman’s Wharf and plans to fund that The casino operator expects to spend about $1 billion to revamp its Fisherman’s Wharf gaming complex in the world’s biggest gambling hub. It plans to fund that through the share sale and by raising debt, according to co-chairman Carl Tong. 


The proposed share sale may take place as soon as early 2014 and will raise Macau Legend’s public float to about 25-26% from the current 15-16%, Tong said.  The company is also looking to refinance existing syndicated loans through debt issuance.


TODAY’S S&P 500 SET-UP – September 18, 2013

As we look at today's setup for the S&P 500, the range is 34 points or 1.45% downside to 1680 and 0.54% upside to 1714.                                        










  • YIELD CURVE: 2.47 from 2.48
  • VIX  closed at 14.53 1 day percent change of 1.04%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Sept. 13 (prior -13.5%)
  • 8:30am: Housing Starts, Aug., est. 920k (prior 896k)
  • 10:30am: DOE Energy Inventories
  • 2pm: FOMC Rate Decision, Sept., est. 0%-0.25% (pr 0%-0.25%)
  • 2:30pm: Fed’s Bernanke holds news conference on FOMC meeting
  • 9:30pm: BoJ’s Kiuchi speech and press conference
  • BoJ’s Kuroda speaks in Tokyo


    • President Barack Obama speaks to Business Roundtable on economic proposals aimed at job creation
    • Financial Accounting Standards Board, Intl Accounting Standards Board joint public roundtable meeting in London
    • 10am: House Armed Svcs Cmte hears from military heads on 2014 defense budget
    • 10:15am: Energy Sec. Ernest Moniz, EPA Admin. Gina McCarthy testify before House Energy and Commerce Cmte on combatting global warming
    • 2pm: House Ways and Means panel hearing on IRS’s exempt organizations division
    • 2pm: Cary Sherman, CEO of Recording Industry Assn of America; Randall Rothenberg, CEO of Interactive Advertising Bureau, testify before House Judiciary hearing on voluntary agreements in intellectual property


  • JPMorgan said to agree to pay $200m to SEC over London Whale
  • Drop in home loans keeps Fed from tapering MBS purchases
  • Starwood property said to plan deal for Waypoint Management
  • Dow Chemical suspends sale of plastics additives on low bids
  • Sega said to win auction to buy bankrupt game co. Index
  • Electronic Arts elevates sports video unit head to CEO: WSJ
  • Boeing’s larger 787 completes test flight
  • Auto-parts co. Visteon may move to Hong Kong listing: CEO
  • Sharp to raise as much as JPY166b through share sale
  • Apache to sell $112m in Canadian assets in 2 separate deals
  • Dollar Tree takes up $2b share buyback; enters JPM agreements
  • Volkswagen may build small SUV in Tennessee
  • Tesla CEO Musk sees driverless cars road-ready in 3 years: FT
  • Walgreen moves workers to private health care exchange
  • AT&T to expand in Latin America with America Movil: Reuters
  • Pandora wins licensing dispute against songwriters, publishers
  • Blackberry introduces new Z30 handset with 5-inch screen


    • Apogee Enterprises (APOG) 4:30pm, $0.25
    • Clarcor (CLC) 6:26pm, $0.66
    • Cracker Barrel Old Country Store (CBRL) 7am, $1.35
    • FedEx (FDX) 7:30am, $1.50 - Preview
    • General Mills (GIS) 6:56am, $0.70 - Preview
    • Herman Miller (MLHR) 4pm, $0.38
    • Manchester United (MANU) 6am, $(0.03)
    • Oracle (ORCL) 4:01pm, $0.56 - Preview
    • Steelcase (SCS) 4:01pm, $0.26


  • Gold Declines a Third Day to Six-Week Low Before Fed Statement
  • China’s Choking Cities Means Job Cuts at Steel Town: Commodities
  • WTI Crude Rises for First Time in Four Days Before Fed Decision
  • Copper Climbs Before Federal Reserve Concludes Policy Meeting
  • Corn Rebounds From One-Month Low as U.S. Insurance Claims Rise
  • Coffee Rebounds in London Before Vietnam Crop; Sugar Declines
  • Aluminum Cuts Seen by Wood Mackenzie Too Small to Reduce Glut
  • German Power Premium Most Since ’98 Tests Voters: Energy Markets
  • Rebar Falls to Seven-Week Low as Purchases Slow, Iron Ore Drops
  • U.K. Millers Poised to Buy British as Sun Boosts Wheat Quality
  • Australia Sugar Cane Crop Seen Curbed in 2014 If Drought Spreads
  • Goldman Sees Commodity Consumption Signs of Life Outside China
  • Coffee Supply Gains Spur Bearish Price Outlook: Chart of the Day
  • Iron Ore Seen Extending Slump by UBS as Global Supplies Increase


























The Hedgeye Macro Team













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