David and Goliath

“Even when you have three strikes, you’re still not out.  There is always something else you can do.”

-Tony La Russa


This weekend I read Malcolm Gladwell's most recent book, "David and Goliath - Underdogs, Misfits and the Art of Battling Giants." Now many of my academic friends are critical of Gladwell suggesting he cherry picks studies, but I sort of take his books for what they are: a compendium of interesting studies. Ultimately, it is up to the reader to accept or not accept his conclusions.  


As the title denotes, his most recent book is about perceived underdogs overcoming serious odds. He discusses why certain learning disorders may actually improve the chances of success of individuals (causes them to focus more intently), discusses the long term impact of California's three strikes laws (not positive for communities), analyzes how unconventional tactics in basketball can lead to outsized success (more full court pressing!), and a number of other interesting topics. 


One of the topics I found most interesting was the long run analysis of success in military conflicts.  As Gladwell writes, suppose you were to look at the conflicts that happened between very large countries and much smaller countries over the past 200 years.  In fact, let’s assume the size difference was 10x. How often would you assume the larger country wins?


Logically, and intuitively, it would seem likely that with that type of size advantage the larger country would dominate and likely win the conflicts close to 100% of the time. The reality is much different as the weaker countries have won almost 29% of the time. 


Even more insightful is the fact that the weaker side wins 64% of the time when employing unconventional, or guerrilla attacks.  Put another way, if the United States were to go to war with my home country of Canada (about 1/10 the population of the United States), you should put your money on Canada to win if the Canadians employed guerrilla tactics


Back to the global macro grind ...


We've had our own David and Goliath battle this year at Hedgeye as our Senior Energy Analyst Kevin Kaiser has taken on a couple of billionaire CEOs by making short calls on Linn Energy and the Kinder Morgan companies. As always, even though we believe our research supports a revaluation lower of both companies, time and Mr. Market will determine whether this call, versus the views of the energy Goliaths, is the right one. (Ping us at if you’d like to learn more about subscribing to the energy vertical.)


More practically, in investing, a bet against Goliath is often a bet against consensus.  Internally we run a number of screens to assess whether we are with or against consensus on any of our Best Ideas. As an example, is if company has 30 ratings from Wall Street and 29 of them are Buys that is likely more supportive of a short thesis, and conversely make us question whether we have differentiated enough insight to justify it as a stock to own.  Thinking unconventionally in investing is just as important as it is in warfare. 


The conventional thought according to the global macro pundits this morning is that some form of U.S. default is imminent.  This chatter has reached such an extreme that this morning Bloomberg was actually comparing the U.S. to the last major nation to completely stop paying back its debt – Nazi Germany.  Certainly, we have a good degree of respect for Bloomberg (in fact we all use their terminals), but a comparison like that seems erroneous, at best. 


In the Chart of the Day, we once again look at credit default swaps for 5-year U.S government debt.  Not only are CDS not at the same heightened levels of 2011 when they peaked at near 65 basis points, they are actually well off recently levels and currently trading at 34 basis points.  Given all of the fear mongering this weekend and headlines of discord in Washington D.C. perhaps they will spike again, but, certainly there is literally no chance that the U.S. government turns her back on the U.S. government debt obligations according to this market tell.


That all said, just because the probability of debt default is unlikely doesn’t mean you should be aggressively long of risk assets.  We trimmed the exposure in our real-time alerts products late last week going from a 3:1 long/ short ratio to 1:1.  Now most money managers can’t move this fast for reasons of scale, but the fact remains this is a market that will reward those who trade around positions. 


This is especially relevant broadly to the hedge fund industry this year.  According to Cambiar Investors LLC, shares that have been the most shorted are up 38% since the start of the year.  This is almost double the return of the SP500 in the same period.  Furthermore, according to the HFRI Equity Hedge Fund Index, hedge funds are up only 9.2% in the year-to-date. So far anyway, this has been a tough year for hedge funds to earn their 2 and 20.


In part it has been challenging for hedge funds and other active managers to out-perform because the variance between sectors has been abnormally low.  In our Q4 themes deck we show this graphically and the data indicated that this year is the second lowest year going back to 1990 for variance between sector returns at 0.50%.  The lowest was 2006 at 0.27%.  The historical mean since 1990 is 2.25%. So if there is one asset allocation bet you might want to consider, it is to #GetActive as sector variance is likely to only increase from these abnormally low levels.


Good luck out there today and feel free to ping us if you want to discuss how this week might play out from a catalyst perspective down in the nation’s capital.


Our immediate-term Risk Ranges are now:


UST 10yr Yield 2.61-2.71%


ShangHai Comp 2191-2247

VIX 15.19-18.98

USD 80.11-80.69

Brent 110.04-111.99


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


David and Goliath - U.S. CDS


David and Goliath - z. vp 10 14

Government's Sword

This note was originally published at 8am on September 30, 2013 for Hedgeye subscribers.

“The sword is victorious over money.”

-Oswald Spengler


If you want to get yourself right depressed this morning, just pick up a copy of Oswald Spengler’s The Decline of the West.


Otherwise, you can just think about what both Ben Bernanke and the US Congress have done to US growth expectations in the last few weeks, and go back to bed. Isn’t having Big Government Intervention in every aspect of our said “free-market” lives fantastic?


Karl Marx had one thing ½ right. There’s a class warfare amongst us in America this morning. It’s the well compensated (and non-Obamacare medicated) Political Class vs. The Rest of Us.


Back to the Global Macro Grind


While it may be convenient for the US Federal Reserve to attempt to blame all of this on Congress (again), the non-willfully-blind who are marked-to-market every day understand there’s a lot more to this story.


The US stock market will be down for the 7th out of the last 8 days since Bernanke arbitrarily decided to take both #StrongDollar and #RatesRising out of immediate-term market expectations.


This is the first “dip” (in US Equities) that I haven’t bought in 2013, and I probably won’t be buying this morning’s either. After seeing US GDP #GrowthAccelerate from +0.14% in Q412 to +2.48% in Q213, the government’s sword remains the greatest threat to growth’s slope.


To recap last week’s US #GrowthSlowing signals, they are precisely the same ones you will see this morning:

  1. Down Dollar
  2. Down Interest Rates
  3. Down US Stocks

Nope. Not that complicated folks. Why would I be bullish if Bernanke and Congress are reversing everything I liked?


The Fed doesn’t do the real-time market leading indicator thing, but here they are: 

  1. US 10yr Treasury Yield = -11 basis points to 2.62% last week = -13% off its early September 2013 high
  2. US Treasury Yield Spread (10yr minus 2yr yield) = -11bps last wk to 228 bps wide = -9% off its September 2013 high
  3. US Financial Stocks (XLF) = -1.9% last wk = -2.8% from its September 2013 high

Now if you ask Obama or Boehner what they think of the Yield Curve, you might get some interesting answers (or blank stares). But the reality of modern market life is that we don’t get paid to be partisan when it comes to explicit growth signals.


If you’re more of an equity and/or commodity signals person, last week’s #GrowthSlowing signals were the same: 

  1. Utilities (XLU), or the slowest growth but highest “yield chasing” sub-sector of the SP500, was last week’s top performer
  2. Natural Gas, which is one of the few domestically driven commodities (demand), was down -4.6% on the week
  3. US Equity Volatility (VIX) was +17.8% on the week to 15.46

That last point fits my bottom line on government intervention like a glove. Big government Intervention in our economies, markets, and lives do a few obvious things:


A)     They amplify market volatility

B)      They shorten economic cycles


Nothing slows the pace of confidence and decision making in markets faster than government sponsored volatility.


Friday’s US Consumer Confidence (University of Michigan survey) was a stiff reminder of that. As the US stocks market (and interest rates) stopped going up a few weeks ago, the September confidence reading dropped to 77.5 versus 82.1 in August.


As a small business owner in this country, throughout 2013 my confidence in the macro environment was as progressive as anyone who writes to you every morning. That’s changing now - and to have to call that like it is this morning is just plain sad.


Even though I’m opening our new office in Stamford, CT as the government is about to shut down theirs, I have to admit that their conflicted and compromised sword has once again left its mark on my mind.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.57-2.71%

SPX 1671-1705

VIX 14.48-16.74

USD 80.02-80.59

Euro 1.34-1.36

Natural Gas 3.45-3.63


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Government's Sword - ch

Government's Sword - 2

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Australia's Queensland state may issue as many as three new casino licenses as it seeks to spur tourism with integrated resorts modeled after Singapore’s Marina Bay Sands and Resorts World Sentosa.  The state will welcome applications for redevelopment of a riverfront site in central Brisbane that includes an existing casino operated by Echo Entertainment Group, and consider allowing two more licenses elsewhere in the state, Premier Campbell Newman said.

The move challenges Echo, which has three of Queensland’s four current licenses and accounted for 97% of casino spending in the state in the 12 months through June, according to data compiled by Bloomberg.  Neighboring New South Wales state agreed in July to examine plans by billionaire James Packer's Crown Ltd for a casino in Sydney that will challenge Echo’s monopoly in that city.



Singapore GDP grew 5.1% YoY, beating market expecations of 3.8%.  Looking ahead, the Monetary Authority of Singapore said it expects the economy to continue to expand for the rest of 2013 and into 2014, although some volatility in growth rates is likely.  It added that barring a significant deterioration in global demand conditions, the labour market will remain tight, and inflation could rise as firms pass on accumulated costs with the MAS.


October 14, 2013

October 14, 2013 - dtr



October 14, 2013 - 10yr

October 14, 2013 - spx

October 14, 2013 - dax

October 14, 2013 - SHCOMP

October 14, 2013 - euro

October 14, 2013 - oil

October 14, 2013 - natgas


October 14, 2013 - VIX

October 14, 2013 - yen

October 14, 2013 - gold
October 14, 2013 - copper



TODAY’S S&P 500 SET-UP – October 14, 2013

As we look at today's setup for the S&P 500, the range is 25 points or 1.19% downside to 1683 and 0.28% upside to 1708.                                      













  • YIELD CURVE: 2.34 from 2.34
  • VIX closed at 15.72 1 day percent change of -4.61%

MACRO DATA POINTS (Bloomberg Estimates):

  • No data scheduled, Columbus Day holiday
  • 9pm: Fed’s Bernanke speaks on Mexico’s central bank in Mexico City
  • U.S. Rates Weekly Agenda


    • Columbus Day federal holiday
    • Washington Weekly Agenda


  • Columbus Day holiday; equity markets open, domestic bond markets closed; federal govt is closed
  • Senate leaders struggle to end govt shutdown; default looms
  • China’s export drop underscores global demand threat
  • Facebook buys Israeli startup Onavo
  • Japan to outsource management of some forex reserves
  • Netflix in talks w/ Comcast, Suddenlink for box deals
  • St. Jude buys pacemaker co. Nanostim for $123.5m
  • TD Bank considers bid for RBS U.S. unit Citizens: Sunday Times
  • U.S. Debt Talks, China GDP, Google, GE: Wk Ahead Oct. 14-19


    • Brown & Brown (BRO) 4:15pm, $0.41
    • Packaging Corp of America (PKG) 5pm, $0.89
    • Wintrust Financial (WTFC) 4:01pm, $0.64


  • Copper Advances as China Imports the Most Metal in 18 Months
  • Copper Supply Glut Seen Tripling as Prices Sink 10%: Commodities
  • Gold Holds Above 3-Month Low on Physical Demand, U.S. Impasse
  • WTI Crude Extends Losses, Drops as Much as 53c to $101.49/Bbl
  • China Challenges CME to SGX With New Iron Ore Futures Contract
  • Soybeans Rebound From Two-Month Low as Rain May Delay U.S. Crop
  • Natural Gas Jumps to Three-Month High as Cooler Weather Forecast
  • Saudi Aramco Plans ‘Massive’ Spending to Extend Field Life
  • Palm Oil Declines Most in Week as Demand From India Decreases
  • Rebar Gains for Third Day in China on Signs of Stronger Demand
  • Shemen Drops Most on Record on ‘Dry Hole’ Report: Tel Aviv Mover
  • Record Evacuation Limits India Storm Deaths as Rice Crop Ruined
  • China Dairy Demand Drives Warrnambool Bids Down Under: Real M&A
  • WTI Premium Ebbs as Cushing Supplies Recover: Energy Markets
  • Palm Exports From Indonesia Climb for First Month Since May


























The Hedgeye Macro Team














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.