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All of Us

“There is no one left, none but all of us.”

-S.S. McClure


So I was in my homeland (Canada) yesterday meeting with some free-market capitalists and couldn’t help but think of what it felt like when I came to this country in the early 1990s  - liberating.


Other than the Chris Farley looking mayor dude who did crack, Toronto, Ontario seemed void of what dominates our market lives in today’s USA. There’s no “taper-talk.” There are no professional politicians and TV pundits gorging on the uninformed.


As I boarded the plane back to beautiful Newark, New Jersey, I sighed. Then I cracked open a new book, and felt better again. In the preface to Doris Kearns Goodwin’s The Bully PulpitTheodore Roosevelt, William Howard Taft, and The Golden Age of Journalism, she reminds us of what objective research and reporting used to be. I smiled again. This is our opportunity.


Back to the Global Macro Grind


As S.S. McClure well understood, the vitality of democracy depends on popular knowledge of complex questions” (The Bully Pulpit, pg XIV); not using complexity, policy, and demagoguery, as a political Trojan horse to obfuscate the truth.


Albeit I’m just a man with my team in a room, that’s my solemn commitment to you – providing you an objective research view of the truth. To be clear, this is not a position in life I always longed for – it’s simply the position I find myself in.


Even though he went to Harvard, for a long-time I’ve respected Teddy Roosevelt via a paper one of my freshman guidance counselors (who I was older than at the time!) put on my desk when I first got to Yale – The Strenuous Life. If you ever feel like you’ve lost your moral compass, re-read that – and read it again. It does the soul good.


Moving along…


Buying-the-damn-bubble #BTDB may not be chicken soup for your soul, but it has certainly paid the bills in 2013. From a behavioral market practitioner’s perspective, I have developed an affinity for doing precisely the opposite of how I think this ultimately ends. Weird, but it works.


To review, the multi-disciplinary triad of our Global Macro Research Process, there are 3 big parts:

  1. History
  2. Math
  3. Behavioral Psych

History provides us context (economic/market patterns, mean reversion risk, etc.); math (fractal dimensions and risk ranges) signals timing; and behavioral, well, that’s a learning process.


How else would you define what it is that you do? Other than Embracing Uncertainty and constantly re-evaluating your position relative to the information surprise (price, volume, volatility) of the day, is there an alternative to mental flexibility? There isn’t for me. I’m not smarter than the market. And it took me a good long while to accept that.


In terms of our current strategy, quite simply put in our Q413 Macro Theme of #GetActive, it’s to do just that. Unaccountable and un-elected @FederalReserve policy making means we need to engage in unconventional market strategies.


In practice, in our Hedgeye Asset Allocation Model, what does that mean?

  1. At the US stock market highs we moved to 58% Cash (last Friday)
  2. After a 4-day US stock market correction we moved back to 42% Cash

Don’t lose the message of mental flexibility in the absolute numbers. If you want to be in 90% cash or 10% cash makes no difference to the point I am trying to make. It’s how you move on the margin that counts. I call it Fading Beta.


Looking at it from a different perspective (different Hedgeye product  - #RealTimeAlerts):

  1. Last Friday (on green) we moved to 5 LONGS, 5 SHORTS
  2. Into yesterday’s close (on red) we moved to 11 LONGS, and 3 SHORTS

Again, the point here is about the process. My process is far from perfect. But at least I can explain, evaluate, and evolve it. Doing that in an open network of client feedback has made me a more responsible and accountable investor.


So why can’t we do that running America? Wasn’t the whole marketing pitch “Yes We Can”? Or, somewhere along the way towards truth, did we put political reputations and excuse making ahead of your country’s learning process?


How do you ever learn if you’re constantly on a quest to prove that you’re never wrong? If there’s one question I’d ask one of the most conflicted and compromised outcrops of Big US Government Intervention (the power of the Fed), that would be it.


And that’s all I have to say about that. It’s time to grind and get on with my day. It’s time for you to get on with yours. Thanks again for taking the time to read what I have to say. Teddy wrote it much more eloquently, but you’ll get the point:


“… our country calls not for the life of ease but for the life of strenuous endeavor. The twentieth century looms before us big with the fate of many nations. If we stand idly by, if we seek merely swollen, slothful ease and ignoble peace, if we shrink from the hard contests where men must win at hazard of their lives and at the risk of all they hold dear, then the bolder and stronger peoples will pass us by, and will win for themselves the domination of the world. Let us therefore boldly face the life of strife, resolute to do our duty well and manfully; resolute to uphold righteousness by deed and by word; resolute to be both honest and brave, to serve high ideals, yet to use practical methods. Above all, let us shrink from no strife, moral or physical, within or without the nation, provided we are certain that the strife is justified, for it is only through strife, through hard and dangerous endeavor, that we shall ultimately win the goal of true national greatness.”


Our immediate-term Global Macro Risk Ranges (see our Daily Trading Range product for all 12):


UST 10yr Yield 2.76-2.85%


DAX 9128-9411

USD 80.45-80.91

Pound 1.62-1.64

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


All of Us - Macro Process Triangles


All of Us - Virtual Portfolio

December 5, 2013

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TODAY’S S&P 500 SET-UP – December 5, 2013

As we look at today's setup for the S&P 500, the range is 23 points or 0.27% downside to 1788 and 1.01% upside to 1811.                      










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.53 from 2.55
  • VIX  closed at 14.7 1 day percent change of 1.03%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: BOE seen maintaining benchmark lending rate of 0.5%
  • 7:30am: Challenger Job Cuts y/y, Nov. (prior -4.2%)
  • 7:30am: RBC Consumer Outlook Index, Dec. (prior 47)
  • 7:45am: ECB seen holding benchmark interest rates at 0.25%
  • 8:15am: Fed’s Lockhart speaks in Fort Lauderdale, Fla.
  • 8:30am: ECB’s Draghi holds news conference on interest rates
  • 8:30am: Init. Jobless Claims, Nov. 30 est. 321k, (pr 316k)
  • 8:30am: Revised 3Q GDP q/q, est. 3.1% (prior 2.8%)
  • 9:45am: Bloomberg Consumer Comfort, Dec. 1 (prior -33.7)
  • 10am: Factory Orders, Oct., est. -1.0% (prior 1.7%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: U.S. to announce plans for sale of 3Y notes, 10Y notes and 30Y bonds
  • 11am: Fed to buy $1.25b-$1.75b in 2036-2043 sector
  • 12:15pm: Fed’s Fisher speaks in College Station, Texas


    • 8:30am: Treasury Sec. Jack Lew to speak on financial reform at Pew Charitable Trusts
    • 9am: EPA hearing on 2014 standards for Renewable Fuel Standard
    • 9:30am: SEC roundtable on proxy firms used by investment advisers


  • China Mobile moves closer to iPhone with 4G network license
  • GM to pull Chevrolet from Europe to focus on expanding Opel
  • Nov. comp. sales may gain on Y/y comparisons, holiday deals
  • Goldman Sachs sued by Singapore client Oei over trading loss
  • Volcker rule won’t allow portfolio hedging for banks: WSJ
  • China bans financial companies from Bitcoin transactions
  • Alibaba will probably prefer London listing over Nasdaq: Times
  • Microsoft to expand encryption to protect against spying
  • Icahn plans shareholder vote pushing Apple to boost buyback
  • Merck KGaA to acquire AZ Electronic Materials for $2.6b
  • BNP agrees to buy Rabobank’s Polish unit BGZ for $1.4b


    • Canadian Imp. Bank of Comm (CM CN) 5:30am, C$2.15 - Preview
    • Cantel Medical (CMN) 8am, $0.24
    • Conn’s (CONN) 7am, $0.64
    • Dollar General (DG) 7am, $0.70 - Preview
    • Dollarama (DOL CN) 7:30am, C$0.88
    • Francesca’s Holdings (FRAN) 7am, $0.20
    • Jos A Bank Clothiers (JOSB) 6am, $0.50
    • Kroger (KR) 8:30am, $0.53 - Preview
    • Methode Electronics (MEI) 6:30am, $0.35
    • Royal Bank of Canada (RY CN) 6am, C$1.40 - Preview
    • Toro (TTC) 8:30am, $0.03
    • Toronto-Dominion Bank (TD CN) 6:30am, C$1.99 - Preview
    • Transcontinental (TCL/A CN) After open, C$0.74
    • UTi Worldwide (UTIW) 8am, $0.08


    • Cooper (COO) 4:01pm, $1.80
    • Esterline Technologies (ESL) 4pm, $1.78
    • Finisar (FNSR) 4pm, $0.39
    • Five Below (FIVE) 4:01pm, $0.05
    • Ulta Salon (ULTA) 4pm, $0.74
    • Veeva Systems (VEEV) Aft-mkt, $0.05
    • Zumiez (ZUMZ) 4pm, $0.46


  • Brent Seen Over $100 for Fourth Year as OPEC Bets on Demand
  • Banks Cut Raw-Materials Staff to Fewest Since ’09: Commodities
  • Indonesia to Press Ahead With Ore-Export Ban in ’14, Wacik Says
  • Gold Drops in London on Speculation of Federal Reserve Tapering
  • Cocoa Drops as Ivorian Arrivals Signal More Supply; Coffee Rises
  • Eni’s Scaroni Says Had Long, Warm Meeting With Iranian Minister
  • Rebar Falls From 7-Week High on Ore Inventory, Freezing Weather
  • OPEC Maintains Output Quota; Will Member Countries Toe Line?
  • Coffee Cost Surge in Vietnam Seen Curbing Plantation Investment
  • Goldman Sachs Antitrust Suits Over Aluminum Set for Venue Debate
  • World Food Prices Little Changed in November, Oils Jump, UN Says
  • Glasenberg Raises Glencore’s Bet on Coal as BHP Pauses: Energy
  • Iran, Libya Have Capacity to Raise Oil Output If Tensions Ease
  • WTI-Brent Spread Shrinks to 10-Day Low as U.S. Supply Declines


























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.

Valuation Consternation

This note was originally published at 8am on November 21, 2013 for Hedgeye subscribers.

“I love everything about investing except maybe the fact that I’m actually in the investment industry.  If you see how sausage is made you probably wouldn’t eat it.”   Yours Truly, ~10 hours ago



One day back in high school my friend Michael decided to start referring to himself as “Mike Nice.”  Quoting yourself to jumpstart an investment missive is about as cool as trying to give yourself your own nickname....but the message fits the theme today, I can’t think of anything else and at 4am, questionable ideas have a sneaking ability to cloak themselves as appealing.


Anyway, back to the Global Macro Grind….


It has been difficult to escape the valuation discussion the last few weeks as bubble speculation has been ubiquitous alongside higher nominal, and real, highs for domestic equities.   We added our own speculative cogitations to the already teeming cauldron of valuation commentary yesterday (see BUBBLE MONGERING for more) in a note surveying a current cross-section of market valuation measures.  We reprise those below, but the takeaway was fairly straightforward -  across the balance of metrics, equities are, indeed, moving towards overvalued.


To recapitulate the selection of metrics we considered yesterday:


Shiller PE:   The Shiller PE ratio attempts to normalize the price to earnings ratio by adjusting for economic cyclicality.  It does so by dividing the price of the S&P500 by the 10Y average of inflation adjusted earnings.   At its current reading of 24.9X, the CAPE ratio is moving into the top decile of its historical range.   Mapping the Shiller PE by decile vs subsequent market performance suggests return expectations should move systematically lower alongside incremental increases in valuation. Historically, 1Y and 3Y returns progressively decline for each decile change in the Shiller PE (ie. average forward returns by decile decline as multiples move higher).   


Tobins Q-Ratio:  Longer-term valuation arguments center on the premise that returns on capital should equalize to cost of capital and  market values should normalize to economic value.  Tobin’s Q ratio is not a measure we use to tactically manage risk, but we can appreciate the intuition underneath its application – after all, why buy an asset when you can “re-create” it for less and compete away existing, excess profit.   Currently, the q-ratio sits just below the 1.0 level and approximately 1.0 standard deviation above the long-term mean value – a level that has generally not been a harbinger of positive forward returns historically.


S&P 500 Market Cap-to-GDP:  Assuming the collective output of SPX constituents credibly reflects aggregate national production (or serves as a credible proxy for it), the Market Capitalization-to-GDP ratio effectively represents a price-to-sales multiple for the economy.  On a historical basis, we are certainly entering “expensive” territory as we push towards breaching 100% to the upside.  At current levels we are approximately equal to the 2007 highs and well above the long-term average. 


FORWARD/TRAILING P/E:  On conventional P/E metrics, the market is moderately expensive currently at 17X trailing earnings and 15X forward earnings.  Valuing the market on a single year of (recurrently over-optimistic) forward earnings estimates has its myopic trappings and, additionally, any perceived cheapness in current multiples should be discounted to account for mean reversion downside off peak corporate profitability (more below). 


PEAK MARGINS:  In the Chart of the Day below we show after-tax corporate profits as a percentage of GDP.  The latest 2Q13 data marked another higher high in corporate profitability at 11% of GDP – this is some 85% above the long-term average.  Unless you think peak returns to capital provide a sustainable path to aggregate demand growth in the face of negative trend growth in real earnings, trough returns to labor, middling productivity growth and secularly depressed investment spending, then the mean reversion risk for operating margins remains asymmetrically to the downside.


ESTIMATES: Topline growth estimates for the SPX (market weighted) don’t look unreasonable at +4.8% YoY for 2014.   However, the slope on earnings growth (+10.9% for 2014) over the NTM continues to look overly aggressive given expectations for further, significant margin expansion (+100 to +250bps in incremental expansion over 2014) above already peak corporate profitability.  Of course, iteratively ratcheting down expectations and subsequently beating deflated growth estimates over the course of the year remains the prevailing (and hereto successful) playbook strategy for higher equity prices.


So, generally speaking, we are overvalued.  Practically, what do you do with that?


A chief problem for the bear camp is that that the overbought-overvalued market narrative has become a tired one as moderately elevated valuation has characterized most of 2013 and prices advancing at a premium to profits is not a new phenomenon.


Valuation-in-isolation narratives are some of the sell-sides finest sausage and sirenic when expertly crafted.  But Valuation isn’t a catalyst. 


At Hedgeye, we use a broad range of valuation and sentiment indicators when contemplating the direction of markets and where our view sits in the context of current prices, consensus estimates, and prevailing sentiment. From an Investment decision making perspective, valuation sits somewhere near the middle-bottom of the our consideration hierarchy.


We get that valuation matters in anchoring return expectations over the longer term.  Underneath the technicals, acute policy catalysts, and reflexivity that drives immediate and intermediate term price trends sits the steady drumbeat of fundamentals and an accordion-like tether to ‘fair value’. 


However, Price, not deviation from estimated intrinsic value, together with our view on marginal changes in macro fundamentals are the signals we use to risk manage immediate and intermediate term exposure.


With the Price signal bullish (SPX and all nine S&P sectors in Bullish Formation) and fund flows, decent domestic and global macro data, rising M&A activity, near universal acknowledgement of the existent ‘bubbliness’ (can you really be in the terminal stage of a bubble if everyone agrees it’s a bubble?), and the lack of a discrete negative catalyst all supporting equities in the immediate term, we’ll continue to lean long until the price signal changes. 


Tops are process and we have continued to Buy The Bubble on shallow corrections within our published risk ranges while taking down our gross and net equity exposure since the No-Taper announcement in September.  We’ll probably continue to run tight and #RemainActive as yesterday’s FOMC Minutes only extended the confused communication policy out of the Fed.


Raise some cash.  Embrace the uncertainty and volatility of it all.  Don’t eat the sausage.  Eat a snickers… Don't invest like a Diva


Our immediate-term Risk Ranges are now as follows:


UST 10yr Yield 2.67-2.83% 

SPX 1762-1802 

DAX 9139-9266 

Nikkei 14779-15388 

VIX 11.98-14.28 

USD 80.62-81.37 



Christian B. Drake



Valuation Consternation - drakeam


Valuation Consternation - 577


Holiday discounting, recovery, and Royal Caribbean outperformance.



Apparently, CCL/ NCLH engaged in some aggressive promotional discounting through Thanksgiving weekend.  However, at least CCL recovered post weekend in the slow bookings period before Wave.  The Royal Caribbean brand was the standout in our latest survey but the picture is mixed for RCL’s other major brand, Celebrity.  In Europe, Summer 2014 looks encouraging.  Please read on for details.


Below are some observations from our proprietary pricing survey (>12,000 itineraries) for CCL, RCL, and NCLH.  We analyze YoY pricing, as well as sequential trends which is determined by comparing pricing relative to the last earnings/guidance date for a cruise operator i.e. CCL: 9/24; RCL: 10/24; NCLH: 10/28.   For a more in-depth and quantitative analysis, please contact sales at .



  • CCL:  Volatile pricing by Carnival brand due to Thanksgiving week promotions
  • RCL:  RC brand showing healthy pricing gains for FQ1 but mixed picture for Celebrity
  • NCLH:  Continues to discount Caribbean pricing due to increased competition





  • For their Thanksgiving Week promotion, Carnival brand lowered pricing for Summer 2014 double digits relative to early November for the Caribbean and Mexico
  • Pricing surged back post the weekend promotion with pricing for 2Q/3Q nicely higher
  • Alaska pricing is mostly steady

CCL North American Brands - FQ1 sequential chart:

F1Q sequential pricing remained higher relative to late September.  We saw a bearish pricing trend (red circle) in mid-July as pricing deteriorated significantly relative to pricing seen in late June. A bullish pricing trend (green circle) emerged in mid-October as pricing broke the downtrend seen in the past few months and was actually slightly positive relative to pricing seen in late September. 




CCL North American Brands - FQ2/FQ3 sequential chart:

For very early Summer 2014 itineraries, we saw weak sequential pricing in mid-October, which continued into Thanksgiving weekend.  Pricing strongly recovered immediately after Cyber Monday. It remains to be seen whether the higher pricing is sustainable heading into Wave Season.  We look for the next pricing survey for bullish confirmation.




Carnival Brand (Caribbean) - F1Q/2Q/3Q YoY change chart:

On a YoY basis, mainly due to difficult comps, F1Q pricing continued to be lower for the Carnival brand in the Caribbean.  However, in early December, F2Q/F3Q showed the strongest YoY pricing performance yet. 




  • Costa
    • Weak FQ1 2014 European pricing remains but FQ1 has the lowest capacity by quarter for the year
    • Modestly higher pricing for FQ2-FQ4
  • AIDA
    • Weakness in Eastern Med/Western Europe offset by better performance in Western Med
    • Overall 2014 sequential pricing is a tad lower
  • Cunard
    • Improvement in FQ2 pricing offset by weaker FQ3 pricing




  • RC brand
    • FQ1 pricing has reversed into positive territory
    • Flat pricing for FQ2/Q3, with sequential trend slightly positive
  • Celebrity
    • Modest discounting for FQ1 relative to early November
    • Modestly higher pricing for FQ2
  • Pullmantur
    • Pricing is mostly steady

Royal Caribbean Brand (Caribbean) - F1Q/F2Q/F3Q YoY pricing chart

F1Q pricing is now modestly higher while F2Q/F3Q pricing has flatlined. 





  • RC brand
    • Solid pricing for RC brand
  • Celebrity
    • Flat pricing for FQ2 but significant discounting for FQ3
  • Pullmantur
    • Pricing has finally stabilized


  • Alaska:  RC brand weakness offset by Celebrity (ex Millennium) strength
  • South America quite robust




  • Pricing lower during promotional period but not as aggressive as Carnival
  • Pricing remained lower following holiday week, particularly for FQ1 2014


  • Steady 2014 pricing


Our Top Q413 Global Macro Theme remains #EuroBulls. Long both the British Pound (which has broken out to new highs) and European Growth Equities is almost the same call we had on the US Dollar and US Growth a year ago.


It’s all born out of the same process.


On a related note, Lucerne’s Pieter Taselaar is one of the sharpest (and top performing) bottom-up European long/short equity managers we know. The video below augments some of our current views here at Hedgeye. The only downside to the video is that I’m in it. 


Have a great evening.



Keith R. McCullough
Chief Executive Officer



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