Managing Global Risk

Client Talking Points


After posting the best Japanese auto sales number in 14 months, the Yen continued its latest run and is finally signaling immediate-term TRADE overbought vs US Dollar. No, the Nikkei definitely does not like #StrongYen. It closed down -2.1%, leading the losers in Asia overnight. Japanese stocks are oversold right now. Yes - it's a good spot to buy. 


The critical confidence vote appears to be going the right way for Italy's Prime Minister Enrico Letta (not so good for Berlusconi). Italian stocks are up +0.9% in response to that development. Italy is diverging big time versus the rest of European Equities (Swiss -1.1%, France -0.9%, Russia -0.9%).


After a nice run-up on yesterday’s 56.2 ISM manufacturing print for September, the 10-year yield has pulled back to 2.62% this morning. US Equity futures? They do not like Down Dollar, Down Rates. Politicians (and bond fund managers) do. It's #OctTaper vs Bernanke now. More to be revealed.

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.


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.


Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road


TREASURIES: 10yr and Yield Spread backing off again this morning - US stock futures dont like that @KeithMcCullough


It's not that I am smart, it's just that I stay with problems longer

-Albert Einstein


According to MarketWatch, it was virtually impossible to sign up for Obamacare on it opening day yesterday. They went went 0-for-51 in trying to apply online for Obamacare in all 50 states and the District of Columbia. (MarketWatch)

Get High

This note was originally published at 8am on September 18, 2013 for Hedgeye subscribers.

“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%
SPX 1680-1714

USD 80.79-81.73

Brent 107.58-111.43

NatGas 3.59-3.73

Gold 1288-1349


Christian B. Drake

Senior Analyst 


Get High - z. cd


Get High - zz. vp 918

October 2, 2013

October 2, 2013 - dtr



October 2, 2013 - 10yr

October 2, 2013 - spx

October 2, 2013 - dax

October 2, 2013 - nik

October 2, 2013 - euro



October 2, 2013 - VIX

October 2, 2013 - dxy

October 2, 2013 - oil

October 2, 2013 - natgas

October 2, 2013 - gold
October 2, 2013 - copper


Hedgeye Statistics

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

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.70%


TODAY’S S&P 500 SET-UP – October 2, 2013

As we look at today's setup for the S&P 500, the range is 14 points or 0.59% downside to 1685 and 0.24% upside to 1699.                               













  • YIELD CURVE: 2.31 from 2.32
  • VIX closed at 15.54 1 day percent change of -6.39%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Sept. 27 (prior 5.5%)
  • 7:45am: ECB seen holding benchmark interest rate at 0.50%
  • 8:30am: ECB’s Draghi holds news conference on interest ra
  • 8:15am: ADP Employment Change, Sept., est. 180k (prior 176k)
  • 9:45am: ISM New York, Sept. (prior 60.5)
  • 10:30am: DOE energy inventories
  • 11:30am: U.S. to sell $20b cash management bills
  • 12pm: Fed’s Rosengren speaks on economy in Burlington, Vt.
  • 3:20pm: Fed’s Bullard speaks on community banks in St. Louis
  • 3:30pm: Fed’s Bernanke speaks on comm. banks in St. Louis


    • Second Day of federal govt shutdown, events may be canceled
    • Obama meets with CEOs of large banks, incl. Goldman Sachs CEO Lloyd Blankfein, to discuss stalemate on budget
    • House Armed Services Cmte hearing with Marine Corps logistics officials testifying on risks of sequestration, future force readiness, 2pm
    • SEC Chairman Mary Jo White speaks at Security Trader Association’s 80th annual Market Structure Conference, 2:45pm
    • House Transportation and Infrastructure Committee hears testimony on reauthorizing FEMA, 10am


  • U.S. government shuttered with no quick end seen amid discord
  • Overwhelming Obamacare demand signals potential success
  • Shutdown seen merging with debt-limit fight
  • Federal shutdown for a week seen shaving 0.1 point from growth
  • CEOs say shutdown poses risk to U.S. economic rebound
  • Microsoft board said to consider Mulally as Ford touts bench
  • Wells Fargo said to face New York action over accord compliance
  • ‘Candy Crush’ maker King said to file for U.S. public offering
  • BP wasn’t prepared for Deepwater blowout, professor testifies
  • Apple faces delay in producing new version of iPad Mini: Reuters
  • HTC, Qualcomm redesigning phone chip after patent ruling: WSJ
  • Cargill said to be close to buying ADM cocoa unit: Reuters
  • Bank credit-card fees face new scrutiny by U.S. consumer bureau
  • Tokyo Electron seeks deals after Applied Materials takeover
  • Facebook offers mobile promotions aimed at boosting app usage


    • CalAmp (CAMP) 4:01pm, $0.16
    • Monsanto (MON) 8am, $(0.43) - Preview


  • Iron Ore Forecasts Raised by Australia as Chinese Demand Surges
  • Corn Reaches Three-Year Low as U.S. Production Outlook Improves
  • WTI Drops Ninth Time in 10 Days as U.S. Crude Stockpiles Advance
  • Gold Rebounds From 8-Week Low as Investors Weigh U.S. Shutdown
  • Sugar Rises to 5-Month High After Brazil Output Cut; Cocoa Falls
  • Copper Swings Between Gains and Drops Amid Shutdown in U.S.
  • Sugar Trade Spurs Land Grabs in Developing Countries, Oxfam Says
  • Yoshinoya to Grow Rice in Fukushima to Expand Farming Business
  • Falklands Tax Dispute Clouding Oil Dream for Investors: Energy
  • Aluminum Financing Threatened as Interest Rates Rise: Bear Case
  • Maersk Four Rate Rises Fail to Spread as Demand Falls: Freight
  • German Power’s Rebound Seen Ending on Coal Slide: Energy Markets
  • Barclays Hires Four Commodities Staff From JPMorgan, Citadel
  • Rubber Reaches 7-Week Low as U.S. Auto Data Raise Demand Concern


























The Hedgeye Macro Team













Moving Day

“The great thing in the world is not so much where we stand, as in what direction we are moving.”

-Oliver Wendell Holmes


Yesterday was one of the most humbling days of my professional life. It was Moving Day @Hedgeye. It was our first full day working as a team in our new Stamford, CT studio office space. We had all hands on deck.


I say studio because that’s what we are building – the next evolution of independent research coming out of our firm will include more simplifying communication tools like visualization and video-streaming. As Albert Einstein said about ideas, “if you can’t explain it simply, you don’t understand it well enough.” More on that as we move forward.


On the humbling part, externally at least, that’s not the first word that tends to come to mind beside my name. I don’t care about that as much as how my teammates and I feel when we are grinding it out together. Alongside my two beautiful children, I’ve never been so proud to see my family and firm move forward so selflessly. Thank you, to all of you, who have been a part of it.


Back to the Global Macro Grind


Selfless, objective, flexible – these aren’t the words you’d use to describe the US government this morning. That means we have to overcompensate for their lack of resolve and prepare for whatever direction they try to take our said free-markets next.


Yesterday was a fascinating day on that score because, after the media monetized all the ad sales associated with “shut-down” drama, markets actually traded on the economic data. As Christian Drake pointed out to me just after 11AM EST on our desk, it’s #OctTaper versus Bernanke.


Put another way, it’s economic gravity (the data) vs. he who promises to bend it (Bernanke). And it’s not just the US stock market that is handicapping this battle of data versus un-elected opinion in real-time. Immediately after the USA posted another “surprisingly” bullish US #GrowthAccelerating ISM report for September (56.2 vs 55.7 in AUG), this is what happened:

  1. Gold got tapered
  2. Oil got tapered
  3. Bonds got tapered

This was kind of cool (for us) because we haven’t liked the Gold Bond thing for all of 2013 (we still have 0% asset allocations to both Fixed Income and Commodities; both are down YTD).


But it was also cool for the one thing that consensus missed alongside US #GrowthAccelerating for the past 10 months which is, of course, growth expectations embedded in the US stock market.


That’s right anti-Bernanke-policy-to-try-to-bend-gravity-fans:

  1. US Dollar Stabilizing
  2. And #RatesRising
  3. = all-time highs in US growth expectations (growth stocks)

As The Champ used to say “Pardon?”


Indeed, Sir Champ. All-time is a long time, bro – and the proxy for US growth stocks (the Russell 2000) closed at an all-time high yesterday of 1087. That’s +28.0% for 2013 YTD!


Yes, I’m sure whatever partisan #OldMedia channel you were watching nailed that.


I’m sure every fear-mongering and end #EOW (end of the world) idle threat thrown at The Rest of Us by the #PoliticalClass was a risk managed one based on selfless, objective, and flexible analysis too. Up next on cable, “the sun no longer rises in the East.”


Where to from here?


As I wrote in yesterday’s rant, I have no idea. I’m just saying that it was nice to see Mr. Market rub it in Washington’s nose for a few more hours. Today is simply another day to embrace the uncertainty and volatility of it all.


Key intermediate and long-term (TREND and TAIL lines) to keep front and center into Friday’s jobs report:

  1. CURRENCY: US Dollar Index long-term TAIL support = $79.21
  2. BONDS: US 10yr Treasury Yield intermediate-term TREND support = 2.55%
  3. STOCKS: US Stock Market (SP500) TREND support = 1660

To be clear, while US #GrowthAccelerating has been the surprise of 2013, A) that’s now old news and B) the slope of US growth’s line can go anywhere from here.


That’s what Big Government Intervention does – it shortens economic cycles, and amplifies market volatility. There’s a deep simplicity in understanding that too. So keep moving out there.


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


UST 10yr Yield 2.58-2.68%


VIX 14.71-16.69

USD 80.02-80.75

Yen 97.04-98.76

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Moving Day - Chart of the Day


Moving Day - Virtual Portfolio

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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.