Tough Questions

“Computers are useless; they can only give you answers.”

-Pablo Picasso


Amen to that, Pablo. It’s amazing how much time and effort we all spent at school and currently spend at work learning strategies and techniques for finding the right answers compared to how little time we spend learning to ask the right questions.


Implicit in any commitment to discovering the truth is a commitment to systematically asking ourselves tough questions – the answers to which may not be derivable from reported data that is inherently backward-looking in nature.


Furthermore, such questions extend well beyond the typical, “Where can I be wrong?”, instead opting to traverse the realm of, “Where am I not even looking?”


With respect to the latter question, we are in a unique position to help. In meetings with clients, it’s clear that our commitment to remaining truly independent (no banking, trading or asset management) helps us foster a level of trust with our clients that does not appear to be abundant in this industry. Having a senior roster loaded with meaningful buyside experience doesn’t hurt either.


Getting right into it, Keith, Ryan Fodor and I spent much of this past week up-and-down the west coast visiting with clients and prospective clients from various strategies and disciplines.


As usual, the topics of discussion ranged far and wide, but if there was one central theme throughout all of the meetings it would’ve been the general lack of conviction and/or answers with respect to the three most important factors in macro risk management. Below we introduce the relevant debates and where we currently stand, recognizing that we need to and will do more work on certain topics:



  1. Where does domestic economic growth go from here? We think the trend in US growth data will be negative (2nd derivative) over at least the next 3-6M.
  2. What are the catalysts for #GrowthSlowing? Fundamentally speaking, we think monetary and fiscal policy uncertainty (mostly monetary policy uncertainty) will weigh on consumer and business confidence. Furthermore, GDP comps get difficult as CPI/GDP deflator comps get easier, at the margins.
  3. Regarding the equity market, will growth-related style factors continue to work? Not likely. We would sell/underweight over-exposed names.


  1. Where does inflation go from here? We think domestic disinflation is now a rear-view phenomenon as easy comps and a weak dollar provide upward pressure on CPI and PPI readings. We would expect both TIPS and Gold to make higher-lows (to all-time lower-highs) in this scenario.
  2. What about declining energy prices? That’s a major offset to our Growth Slowing as Inflation Accelerates (i.e. Quad #3) call and a primary reason we’re not more explicitly negative on so-called “risk assets” more broadly. We’re not wed to the aforementioned fundamental view and would happily change our minds if we saw material declines in the crude oil market – something we do not expect to see as long as the USD remains bearish from a TREND perspective.


  1. When does the Fed taper? Probably not one week before Christmas (the FOMC meets DEC 17-18). In fact, we are increasingly of the view that the Fed is aware of the systemic risk present in the bond market and is potentially setting up to never commence tapering. They will likely accomplish this by setting far-too-aggressive targets for GDP growth and shifting their focus to combating a perceived risk of deflation, at the margins.
  2. What happens if the Fed does taper? If Janet Yellen isn’t as smart as we’re giving her credit for and she thinks the bond market can withstand a shock to the system, we think tapering will be short-lived (think: $85B per month down to $75B per month back up to ~$100B per month). Credit markets need two-way flows to function property and QE is really the only source of meaningful liquidity amid bond mutual fund and ETF outflows (-$7.3B in the most recent week). The Street’s inability to take on meaningful inventory means: A) most of the risk has been transferred to buy-side balance sheets; and B) buy-siders are ultimately forced to sell to each other during market routs. That invariably leads to gaps down in prices when macro fundamentals (i.e. the flows) change. Think about what happens to bond prices when levered-long bond fund A tries to unwind its illiquid positions at the same time Bill Gross (MBS) and Michael Hasenstab (EM) are trying to unwind theirs…
  3. How will tapering – if any – affect the stock market? We continue to think the great rotation out of debt and back into stocks is: A) still on; and B) will provide a structural bid to the equity market. That said, however, we now think that bid could be from lower prices as proxy hedging activity from distressed fixed income investors (not to be confused with investors that invest in distressed debt) weighs on broader asset prices in the interim.
  4. What happens if the Fed is still engaged in LSAP when we slip into the next recession? To be clear, we aren’t calling for an “R-word” here, but that’s definitely something to think about. Implicit in the current prices of many so-called “risk assets” is the assumption that the Fed can “smooth” the economic cycle and/or do away with credit risk altogether. What happens to those asset prices when everyone figures out they (i.e. the Fed) can’t – all at the same time? Next year will mark the fifth year since our last recession ended; the average length of time between the 12 recessions since WWII has been just that.

We’ll obviously be focused on answering these questions in greater detail in our research notes and presentations in the coming weeks and months; please feel free reach out to us in the interim if you’d like to discuss anything in real-time.


Going back to our opening discussion, there’s really only two ways we can add value with a business model like ours:

  1. Making you money
  2. Making you think

Hopefully today we did our job with respect to the latter category.


On an unrelated note, if any of you plan to be in New Haven this Saturday for The Game, shoot us a quick email and we can meet up for a beer at the tailgate.


Our immediate-term Risk Ranges are now as follows:


UST 10yr Yield 2.63-2.83%


VIX 11.85-13.61

USD 80.42-81.39

Brent 105.88-110.29

Gold 1


Keep your head on a swivel,



Darius Dale

Associate: Macro Team


Tough Questions - Chart of the Day


Tough Questions - Virtual Portfolio

Sick and Tired

This note was originally published at 8am on November 08, 2013 for Hedgeye subscribers.

“I’m getting sick and tired of doing anything half-way.”

-Knute Rockne


Forget about these unaccountable bureaucrats that bombard your #OldMedia channels every day and take some real advice from one of America’s real legends. Got growth and progress? Rockne gave American football the forward pass. God bless his soul.


I’m not sure what I am going to write about this morning. So I guess I’ll just keep writing and see what happens. As you know, I’m sick and tired of these half-baked econ PhDs trying to centrally plan our lives.


The ECB cutting rates and devaluing The People’s currency as European growth is accelerating (not a typo) took my level of disgust up another notch yesterday. I didn’t think that was possible. I guess I thought wrong.


Back to the Global Macro Grind


Like the Fed, the European central planners thought that cutting rates was going to “stimulate growth”, or something like that. Meanwhile, the market’s reaction to yesterday’s European rate cut “news” was global #GrowthSlowing.




Yes. Much like the “growth” style factor being for sale in US Equities ever since the Fed’s unaccountable decision not to taper (Financials down, Staples/Telcos straight up), that’s precisely how Mr. Market voted, worldwide, after the ECB rate cut:

  1. US Growth Stocks got killed yesterday (Nasdaq -1.9%); Russell2000 now -3.7% from its YTD high
  2. European Growth Stocks stopped going up (yes, we sold everything on the ECB “news”)
  3. Asian Stocks continued lower overnight – China and Japan down another -1.1% and -1.0%, respectively

Actually, since the Fed’s slow-growth-no-taper decision and ECB rate cut, from their recent highs:

  1. China’s Shanghai Composite Index is -6.7%
  2. Japan’s Nikkei is -4.7%
  3. US Growth Stocks like Facebook (FB) and Tesla (TSLA) are -12% and -27%, respectively

But don’t tell any of these academic wonks of the Keynesian empire that. They fundamentally believe that Deflating The Inflation (from the world record inflation they perpetuated via currency devaluation in 2011-2012) is now the world’s greatest threat.


No. To be clear, their most recent policy moves are the new threat. Deflating The Inflation is not “DEFLATION!” The 2-stroke engine of 1. #StrongCurrency and 2. #RatesRising stimulates consumption growth via a consumption TAX CUT.


How else do you want to explain the recent Q313 rip in US #GrowthAccelerating from 0.14% in Q412 to +2.84%? Up until Bernanke decided to interrupt the 2-stroke engine (also known as economic gravity) with a no-taper, Down Dollar, Down Rates move, the US economy had its best sequential (3 quarter, 9 month) move in half a decade!


And now guess what the market thinks might happen next?

  1. US Growth’s GDP slope slows from 2.84%!

Do you need another exclamation mark? Are you sick and tired of reading this yet? Or are you Fed Up with waking up in the morning to these politicians trying to fear-monger you about “default risk” and “deflation”?


Now I know what I am writing about.


I’m writing about what real people in the real world are talking about – not this Keynesian/Marxist central-planning-anti-dog-eat-dog-gravity-smoothing crap.


As Ben Stiller recently said, “there’s always an element of fear that you need to work until people get sick and tired of you … or that you finally figure out that you are a fraud after all.”


Are these un-elected people at the Fed and ECB frauds? Or are they just completely bought and paid for by the Bond Bull Lobby and currency debauchery camps?


I don’t know. But I do know that Draghi worked at Goldman. And I also noticed that Goldman just had the worst FICC (Fixed Income, Currency, Commodity) quarter in the Federal League…


Was Goldman’s prop and/or FICC team choking on too much illiquid bond and currency bubble paper that they finally had to start taking some marks?


Why is Goldman’s Hatzius such a raging dove? Why is he trying to scare the hell out of the Fed on #RatesRising when his own desk is saying the opposite? Why is he all of a sudden lobbying for the Fed to change the goal posts on a lower “unemployment” target?


Who can really get out of any of these bubbles (MBS, REITS, etc.) that Bernanke backstopped? How will it end? Or are they trying to convince you, like they did in late 2007, that nothing could possibly go wrong?


I’ll stop writing and end with a message sponsored by both Republicans and Democrats who have empowered the Fed (and encouraged the BOJ and ECB) to devalue your hard earned currency:


“If you’re sick and tired of the politics of cynicism… come and join this campaign.”

-George W. Bush


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


UST 10yr Yield 2.49-2.70%

SPX 1737-1763

DAX 8970-9079

USD 80.32-81.36

Euro 1.33-1.35

Pound 1.60-1.62


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Sick and Tired - Chart of the Day


Sick and Tired - Virtual Portfolio

Stock Report: Greenhill & Company (GHL)

Stock Report: Greenhill & Company (GHL) - HE GHL table 11 21 13


The Hedgeye Financial Sector team’s detailed and constructive view on the improving fundamentals in the mergers and acquisition market (M&A) with a longer term perspective is a contrarian idea at odds with the rest of the Street which is overly focused on short-term results. That is clear.


From an intermediate term perspective, M&A is poised to break out in 2014. We are witnessing record amounts of cash on corporate balance sheets, continued low borrowing costs and the first positive fund raising round for Private Equity in four years. These are positive trends for companies in the M&A space.


Moreover, a VIX in secular decline (this has historically benefited M&A), recent incrementally positive data points from leading M&A firms that dialogue has improved, and an improving deal tally from Greenhill & Company (GHL) themselves coming out of the summer all bode favorably for GHL going forward.  So would a budding European economic recovery that would assist a global M&A market that has been range bound over the past three years.


GHL stands out as a leading beneficiary of these developments.



INTERMEDIATE TERM (TREND) (the next 3 months or more)

This idea will best be played out by the middle of 2014. We will know then whether our research and investment thesis has been accurate. To be sure, there have been multiple “fits and starts” on a short term basis in M&A activity. But by the middle of next year, investors will have a better idea if our bullish call here has actually held water.


LONG-TERM (TAIL) (the next 3 years or less)

The tail for an M&A shop like Greenhill is not overly exciting unless there is a massive upsweep to new highs in M&A activity (which we are not forecasting). These M&A stocks are hyper-cyclical and need to be “rented.” Why? Because every time they execute a deal, that decreases forward demand for incremental activity. In addition, M&A is also a “relationship business” and management changes can change advisory pipelines.


Moreover, these companies are not overly shareholder friendly with no “book value” build per se. The companies award a lot of RSUs for employees, but don’t really build NAV for shareholders so hence these are trading vehicles or “rented” stocks.



Stock Report: Greenhill & Company (GHL) - HE GHL chart 11 21 13

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

Oil & Natural Gas: Supply, Demand, Prices and Trends - Expert Call

Oil & Natural Gas: Supply, Demand, Prices and Trends - Expert Call  - oildialin


"I often wonder how far I'd go for love. I guess it all depends on the price of gas." 

-Jarod Kintz 


We will be hosting an Expert Call featuring Tancred Lidderdale from the Energy Information Administration (EIA) for an in-depth discussion on the outlook of oil and natural gas.


The call titled "Oil & Natural Gas: Supply, Demand, Prices and Trends" will be held on Tuesday, November 26th at 11:00am EST


  • Oil
    • Key variables that drive the price of oil
    • Expectations for 2014 supply and demand
    • OPEC's ability to impact price
    • Why OPEC's surplus capacity is growing
    • Declining U.S. oil demand
  • Natural Gas
    • Intermediate supply outlook for natural gas
    • Current natural gas supply versus historical level
    • Drilling and drilling productivity
    • Outlook for the renaissance in U.S. natural gas
    • Current and future natural gas demand
  • Gasoline
    • Expectations heading into 2014 for demand and supply
    • Longer term trends
    • Price set versus the price of crude
    • Price implications from the spread on WTI/Brent


  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 658898#
  • Materials: CLICK HERE (Slides will download one hour prior to the start of the call.)


Tancred Lidderdale is the supervisor of the team that produces the Short-Term Energy Outlook for the Energy Information Administration (EIA). Before joining the EIA in 1991, he worked for 12 years with Atlantic Richfield Company in their petrochemical and refinery operations, and foreign crude oil trading. He received his B.S. degree in Chemical Engineering from Georgia Tech, his MBA from the University of Houston, and his Ph.D. in Economics from George Mason University.



For more information please email .

[video] Hedge to Hedge: Keith Talks to Lucerne Capital

Hedge to Hedge, a new series on HedgeyeTV where CEO Keith McCullough interviews a top hedge fund manager, debuts with Pieter Taselaar, founder of European long/short equity fund Lucerne Capital.


Takeaway: Our labor market compass is currently impaired due to multiple distortions in our preferred labor market data series.


Tea Leaves Tough To Read At the Moment

The initial jobless claims data this morning was good from a reported standpoint. Normally, we like to see through the reported seasonally adjusted (SA) numbers by looking at the year-over-year (Y/Y) trend in non seasonally adjusted (NSA) claims. Unfortunately, the distortions caused by Hurricane Sandy last year are reducing our precision in doing so.


Our best estimate is that the Y/Y trend is down -7.7%, which is a modest deceleration from our estimate of -8.9% improvement in the prior week, but still in line with the longer-term trend of accelerating improvement. The SA data is likely the more informative measure here, in spite of the known distortions. The data showed a significant week-over-week improvement, but here again that number was likely clouded by the Veteran's Day holiday last week, which has distorted the data series in the past.


Regrettably, it's hard to say with any good certainty whether the labor market inflected positively or negatively last week, though the SA numbers and our interpolated (Sandy-adjusted) NSA numbers suggest the trend of improvement that's been in place largely remained in place. The Sandy distortion should persist for another 2-3 weeks.

The Nuts & Bolts

Prior to revision, initial jobless claims fell 16,000 to 323,000 from 339K WoW, as the prior week's number was revised up by 5K to 344K.


The headline (unrevised) number shows claims were lower by 21k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -6.75k WoW to 338.25k.


The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -15.3% lower YoY, which is a sequential improvement versus the previous week's YoY change of -12.9%






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