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

“Ah, summer, what power you have to make us suffer and like it.”

-Russell Baker

In more ways than one, summer ends this week. And, oh, what a summer it was. My wife, kids, and I spent our last summer Saturday up at West Point watching the Army vs Stanford football game. By Sunday morning I was back on the ice, coaching the kids.

With summer’s end I get football, hockey, and another US stock market rip. The SP500 is already +3.4% for September. We’ll test the 2013 YTD highs again this morning, right as consensus got too bearish (again).

Indeed. With American growth prospects trading at their highest premium to #EOW (end of the world) in half a decade, Larry Summer’s chances to run the Fed are over this morning too.

Back to the Global Macro Grind

While I was surprised to see Summer’s prospects end so quickly, I was more shocked to see Gold go down on that. In anticipation of ultra-dove, Janet Yellen, getting the nod as un-elected central-market-planner-in-Chief, we’re going to have a Dollar Down day.

Dollar Down equates to what? Well, that depends on what risk management duration you are using. If you are using a longer-term duration (say our TREND duration, 180 days) here’s what  the US Dollar’s correlation matrix looks like:

  1. SP500 = +0.49
  2. Gold = -0.54
  3. Oil = -0.60

In other words, from an intermediate-term TREND perspective, Summer’s End should = Dollar Down, Stocks Down, Gold/Oil Up. But the exact opposite of that is happening this morning. Why?

Well, let’s get all wild and multi-duration here, and see what USD correlations look like on a shorter term duration (30 days):

  1. SP500 = -0.16
  2. Gold = +0.26
  3. Oil = +0.63

In other words, from an immediate-term TRADE perspective, Summer’s End = Dollar Down, Stocks Up, Gold/Oil Down.


We call this Duration Mismatch – and I absolutely love it, because it drives the machines right squirrel. You see, nothing in Global Macro risk management happens in a linear 1-factor, 1-duration, box. That’s because markets are non-linear.

While what we call Correlation Risks can (and have) “blown out” across durations from time to time, assuming that’s going to trend as a constant is a really bad assumption. Correlations aren’t perpetual.

#OldWall’s media doesn’t completely get the Chaos Theory of it all, so they tend to write about markets that are correlating across durations as “risk on or off.” Whereas the only risk that’s really on here is assuming that risk trades that way.

Back to Yellen over Summers… I have more questions than answers this morning:

  1. What if Janet Yellen completely loses control of the bond market in 2014?
  2. What if Gold’s #bff (Bernanke) being gone for good is the point that matters most?
  3. What if Yellen doesn’t get the job altogether?

While the answer to that last question is improbable, with the US Dollar trading higher for 4 of the last 5 weeks I think the market would have considered Summer’s End improbable this morning too. Embrace the improbable.

While some apologists who have missed the entire rally in US growth stocks in 2013 would have you believe that the entire Global Macro market moves as a monolith, what Mr. Market is reminding you this morning is that that’s a dumb belief.

Alongside the Fed, there are plenty of major Global Macro risks moving Equities, Gold and Oil this morning - not the least of which are expectations in the Middle East being recalibrated.

Looking at last week’s drops in commodity prices, it’s also instructive to look at expectations in the futures and options market on a week over week basis:

  1. The total net long position in CFTC futures and options contracts declined -4.1% wk-over-wk
  2. Gold’s net long position dropped -16% wk-over-wk to +84,929 net longs (after hitting its highest net long position since JAN)
  3. Crude Oil’s net long position dropped another -5% wk-over-wk to +290,058 net longs after hitting an all-time high in AUG

All-time is a long time, and don’t forget to contextualize that point for the price of Oil as it’s making a lower-high versus one of the many Bernanke Bubble highs in asset classes (Oil’s all-time high = 2008).

Don’t get me wrong, Down Dollar probably gets me to take down our US Equity exposure again into this tidal wave of performance chasing this morning. But that would probably just mean selling more of what we bought when consensus pundits were telling you “this is it” for the umpteenth time in August as they were selling stocks 4% lower.

I say probably because I am not sure yet. I rarely am. How could you be if the President of the United States isn’t in the area code of certain on big decisions like Syria and Summers? As a result, my baseline strategy is to keep moving out there, because risk does.

Our immediate-term Risk Ranges are now:

UST 10yr Yield 2.80-2.99%

SPX 1669-1704

VIX 13.33-14.88

USD 81.05-81.81

Brent 110.33-113.96

Best of luck out there this week,


Keith R. McCullough
Chief Executive Officer

Summer's End - Chart of the Day

Summer's End - Virtual Portfolio