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TODAY’S S&P 500 SET-UP – December 16, 2013


As we look at today's setup for the S&P 500, the range is 24 points or 0.47% downside to 1767 and 0.88% upside to 1791.                                         










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.53 from 2.54
  • VIX  closed at 15.76 1 day percent change of 1.42

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Empire Manufacturing, Dec., est. 5 (prior -2.21)
  • 8:30am: Nonfarm Productivity, 3Q final, est. 2.80% (pr 1.9%)
  • 8:58am: Markit U.S. PMI Prelim., Dec., est. 54.8, pr 54.3
  • 9am: ECB’s Draghi speaks in Brussels
  • 9am: Total Net TIC Flows, Oct. (prior -$106.8b)
  • 9:15am: Industrial Production, Nov., est. 0.6% (pr -0.1%)
  • 2pm: Bernanke makes commemorative remarks at Fed Centennial


    • Senate in session, House not in session
    • U.S., EU negotiators hold 3rd round of negotiations on Transatlantic Trade and Investment Partnership


  • AIG said to near sale of plane unit to AerCap for cash, stk
  • J&J said to get 3 diagnostics bids of at least $4b each
  • Mitsubishi Heavy, GE settle wind patent infringement cases
  • China manufacturing index unexpectedly falls as output slows
  • Euro-area manufacturing expands more than forecast on Germany
  • Budget deal lauded by lawmakers belies fiscal rigors ahead
  • Credit-card Nov. charge-offs, delinquencies reports today
  • Yahoo CEO apologizes to users for e-mail service problems
  • Japan Tankan shows limits on spending as cos. get cautious
  • China to probe pricing in antitrust drive, regulator says
  • Merkel keeps Schaeuble at Finance; von der Leyen to Defense
  • Draghi ally Asmussen to leave ECB board for German govt
  • Ukraine demonstrations surge; fractures hurt opposition
  • Google buys robotics co. Boston Dynamics, NY Times reports
  • Berry Petroleum, Linn Energy holders vote on acquisition
  • Charter said to ready offer letter for Time Warner Cable
  • Facebook, Wal-Mart using face recognition help write U.S. code
  • Amazon German workers to take protest to Seattle HQ
  • Baidu made to add warnings as regulators focus on China stks
  • London 2014 house price growth to slow as property tax looms


    • ChinaEdu (CEDU) 4:30pm, $0.86
    • FuelCell Energy (FCEL) After-mkt, $(0.03)


  • Gold Funds See Unprecedented 31% Slump With World Losing Faith
  • Brent Crude Rises as Rebels Refuse to Open Libya’s Eastern Ports
  • Speculators Most Bullish Since October Before Drop: Commodities
  • Copper Reaches Six-Week High as Premium Signals Limited Supply
  • Gold Declines as Fed May Start Taper, ETP Holdings Seen Dropping
  • Wheat Extends Slump to 18-Month Low as Frost-Damage Risks Wane
  • Robusta Coffee Declines as Vietnam May Boost Sales Before Tet
  • Indonesia Ore Export Ban Seen Spurring Thousands of Job Cuts
  • Copper Market to Stay Broadly in Balance Next Year for Trafigura
  • Olam Survives Muddy Waters in Bond Comeback: Corporate Finance
  • Libya’s Oil Sales Constrained as Eastern Ports Remain Shut
  • Hedge Funds’ Natural Gas Bets Jump as Thermometer Drops: Energy
  • Utilities May Want Coal for Christmas as Gas Prices Surge 27%
  • Indonesia Ministers to Meet on Ore Export Ban Tomorrow: Hidayat


























The Hedgeye Macro Team














Professional Reading

“I look forward with the greatest pleasure to the use of my books at night at home.”

-William Taft


That’s a quote from Doris Kearns Goodwin’s The Bully Pulpit (pg 108) where she establishes one of the similarities that Presidents Teddy Roosevelt and William Taft shared from the very beginning. They both loved to read.


On the idea of Professional Reading as a leadership and risk management tool, one of my good friends, Rory Green, sent me a note this weekend highlighting the thoughts of retired US Marine Corps General, James Mattis.


The problem with being too busy to read is that you learn by experience, i.e. the hard way. By reading, you learn through others’ experiences, generally a better way to do business; especially in our line of work where the consequences of incompetence are so final for young men.” #Truth


Back to the Global Macro Grind


A small but critical portion of my Professional Reading includes staying on top of consensus. Two of the most important sources of #OldWall Street and #KeynesianEconomics consensus are:

  1.  Barron’s
  2.  The Economist

That’s not to say that every once in a while these publications don’t crush it with a forward looking idea (like Barron’s highlighting our bearish work on McDonald’s (MCD) or MLPs Linn Energy and Kinder Morgan!). It’s just to say these are places where you’ll find consensus.


So what is consensus right now on the two most important drivers of our Global Macro Model – Growth and Inflation?

  1. US GROWTH: cover of Barron’s “Outlook 2014” this weekend = “Bullish On 2014
  2. INFLATION: mid-November cover of The Economist = “The Perils of Falling Inflation

And while we’ve been the US growth bulls (and inflation bears) for the last year, our model rolls into 2014 with the following views:

  1. US #GrowthSlowing from its Q313 highs (GDP to be reported on Friday around +3.6%)
  2. #InflationAccelerating from its Q413 lows (bottoming in OCTOBER at 1.0% y/y CPI)

On US growth, Darius Dale published a full research note to our Institutional subscribers on Thursday titled “#GrowthSlowing, Lots of Charts.” If you’d like a copy of that note and what’s embedded in our model’s expectations just ping . One of the baseline assumptions in our model is that inflation slows real (inflation adjusted) growth.


Q: What’s the leading indicator for inflation?

A: Central planners devaluing the purchasing power of The People via its currency


And, not to be confused with US #GrowthAccelerating (like it is in Germany this morning with a PMI of 54.2 for DEC vs 52.7 NOV = #StrongEuro), what’s been happening in the USA for DEC to-date is #InflationAccelerating:

  1. US Dollar = DOWN (for 5 weeks in a row ahead of the Fed not tapering as it should have)
  2. Commodities = UP (CRB Commodities Index = +0.4% last wk and +1.7% for DEC to-date)
  3. US Stocks = DOWN (SP500 = -1.6% last wk and -1.7% for DEC to-date)

I know, I know. What’s jamming the American people with a little food (coffee prices +8% last week) and gas (natural gas +6% last week) inflation ahead of the holidays if everyone @FederalReserve is taking car service to work and living large at holiday cocktailers?


Well, in our model it matters. It especially matters on the margin when:

  1. GROWTH’s slope is topping and
  2. INFLATION’s slope is bottoming

Perversely, a Fed no-taper for DEC will only perpetuate this. The US Dollar is down another -0.25% this morning as it tries to front-run the Fed’s conflicted and compromised political decision to not taper when it should have been tapering since September.


But, for now, asset inflation (especially commodities) loves that. So don’t worry about inflation slowing growth in 2014, because no one in the Barron’s survey other than Jeff Knight (buy-sider from Columbia Management) thinks it will either.


According to Barron’s, “Wall Street’s top strategists” (which include Morgan Stanley’s Adam Parker who had a 1434 SP500 “target” for 2013 at this time last year; the mean “target” was 1531)… “see a sense of normalcy returning to the financial markets next year.”


So we’ll roll with a call for accelerating volatility in the New Year too.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr yield 2.78-2.92%


VIX 14.21-16.35

USD 79.65-80.46

Brent 108.61-110.44

NatGas 4.21-4.51


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Professional Reading - Chart of the Day


Professional Reading - Virtual Portfolio

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The 14 gaming venues that failed a second round of air quality tests earlier this year have submitted plans to reduce the size of their smoking zones.  Secretary for Social Affairs and Culture Cheong U said the government would review the plans by the end of January.  There were six venues operating under the licence held by SJM that had not submitted revised plans by the December 10 deadline.



Macau CEO Chui wants Beijing to open the border crossings for more hours each day.  Government spokesman Alexis Tam Chong Weng said Chui would discuss this and immigration and customs arrangements on Hengqin Island during a three-day visit to Beijing, which starts today.  Tam said the mainland’s staffing requirements were the main obstacle to having the border crossings open longer by the Lunar New Year holidays.

What Do You Care?

This note was originally published at 8am on December 02, 2013 for Hedgeye subscribers.

“If a science has an adjective, it probably isn’t a science.”

-Richard Feynman


As far as American physics goes, California’s Richard Feynman was as cool as cool gets. Above and beyond his brilliant contributions to the field, Feynman was a great communicator. His ability to teach reminded us how well he understood the subject matter.


Just before he passed away in 1988, Feynman left us with some behavioral thoughts and life lessons. One of the two books he published during the year of his death was titled What Do You Care What Other People Think?


“The book’s title is taken from a question his first wife, Arline, often put to him when he seemed preoccupied with his colleague’s opinions about his work.” (Wikipedia) Is there a better question for how your portfolio is positioned, every day?


Back to the Global Macro Grind


I certainly hope you don’t care what most “economists”  think about your portfolio. But I highly suggest you respect what Mr. Macro Market thinks. He can save you from missing the big obvious stuff.


One of the glaringly obvious things you should have cared about in 2013 was Mr. Macro Market’s phase transition to bucking up for GROWTH as an investment Style Factor. With the SP500 closing up another +2.8% in November, here are the YTD growth scores:

  1. LOW YIELD (Higher Growth) Stocks +41.3% YTD (vs High Yield, Slower Growth, Stocks +15.8%)
  2. TOP 25% EPS GROWTH Stocks (by SP500 quartile) +39.2% YTD
  3. HIGH BETA Stocks +37.9% YTD (vs Low Beta +23.3%)
  4. NASDAQ and Russell2000 +34.5% and +34.6%, respectively, YTD
  5. GOLD -25.9% YTD

In other words, being long the Gold Bond thing didn’t work like it did during the pervasively SLOW GROWTH 2010-2012 period of A) Interest Rate Repression B) Dollar Debauchery and C) Bernanke’s Policy To Inflate.


All it took to get growth expectations up (i.e. priced by Mr. Macro Market) were: 

  1. US Dollar that didn’t go down (US Dollar Index peaked at +6% YTD in July)
  2. Tapering Expectations = #RatesRising
  3. US GDP #GrowthAccelerating 

Oh, and you needed all 3 of those things to happen, all at the same time. In the absence of central planners trying to get in gravity’s way, even Keynesian “economists” call these pro-growth cycle moves “coincident” indicators.


No matter what the #EOW (end of the world) consensus view on US growth was 1 year ago today (when consensus “economists” expected +1.6% US GDP Growth and SP500 of 1528 for 2013), here we are – tracking closer to +3% US GDP growth and SP500 = 1800.


What did you care if #OldWall was off on GDP by almost 50% and the SP500 by 272 points? And what do you care about where consensus is today? Do you all of a sudden “buy growth”? Or is now precisely the time you should start to get out?


Using the same Hedgeye playbook (our GIP Model: Growth, Inflation, Policy):

  1. US GROWTH: odds that the slope of US Growth’s acceleration peaking in Q313 are rising
  2. US DOLLAR: whatever was left of USD strength continues to erode (down for 3 consecutive weeks)
  3. US RATES: 10yr Yield is signaling a lower-high vs the YTD high in US growth expectations (SEP 10yr of 2.97%)

All the while, from a purely quantitative modeling perspective, the SP500:

  1. PRICE is making higher-highs now on decelerating VOLUME (not good)
  2. VOLUME is trending down -9-14% versus our TREND based average into the “all-time highs” (not good)
  3. VOLATILITY (VIX) front month VIX continues to make a series of higher-lows (not good)

Up PRICE on down VOLUME and rising implied VOLATILITY as lagging GDP and employment data jams people into chasing the highs? Isn’t that just peachy.


But what do the central planners perpetuating Down Dollar and Rate Repression from here care? What do you care? Sadly, US currency and rate markets were only allowed to trade “freely” until the said “scientists” at the Fed said no-taper (SEP 18th), after all.


Our immediate-term Risk Ranges are now:


UST 10yr Yield 2.70-2.81%

SPX 1797-1815

VIX 13.01-14.19

USD 80.46-80.91

Pound 1.62-1.64

Gold 1223-1276


Best of luck out there today,



What Do You Care? - Chart of the Day


What Do You Care? - Virtual Portfolio

Book Review: Knowledge and Power

Takeaway: Buy it. Read it.

Hedgeye Risk Management CEO Keith McCullough shares some of his thoughts on Knowledge and Power: The Information Theory of Capitalism and How it is Revolutionizing Our World, by George Gilder (2013). 


"This is a thought leader’s book," according to McCullough. "With so many people whining about not having a 'solution' to Washington’s economic policies, ask yourself if we’re asking the right leaders for new ideas."


Bottom line according to Keith?


"This book is the Antichrist of broken Western-academic-economic-policy groupthink."


Book Review: Knowledge and Power - gild2


Summary Thoughts

  1. One of the few books that attempts to link non-linearity and information/chaos theory to today’s markets/economies
  2. Using economic history and market practitioners, Gilder effectively crushes the perceived wisdoms of broken sources
  3. Juxtaposed vs government intervention, a refreshing reminder of the role of the capitalistic entrepreneur in America

Content Highlights

  1. “Most human beings understand that their life is full of surprises.” (pg 1) #intro chapter – The Need for a New Economics
  2. “We are almost entirely incapable of predicting the future. Yet economics purports to be strangely exempt from this fact” (pg 1)
  3. “It is an economics of surprise that distributes power as it extends knowledge” (pg 5) #truth about innovation and evolution
  4. “All information is surprise; only surprise qualifies as information. This is the fundamental axiom of information theory” (pg 15)
  5. “From Adam Smith’s days to ours, economics has focused on the nature of economic order” (pg 16) promising #certainty?
  6. “Interest rates are critical for information-theory economic analysis because they are an index of real economic conditions” (pg 24)
  7. “Profits differentiate between the normally predictable yield of commodities and the unexpected returns of creativity” (pg 25)
  8. #EntropyEconomics (Chapter 4) = one of the best named chapters of the last 3 yrs #study
  9. “economists everywhere have counseled governments… to attend everything except what matters most: innovation” (pg 27)
  10. “The most important feature of an information economy… is the overthrow, not the attainment, of equilibrium” (pg 30) #nonlinear
  11. “Entropy is a measure of surprise, disorder, randomness… its opposites are predictability, order, tyranny…” (pg 34)
  12. “Republicans… both Bushes through McCain… all cherish the illusion that leading economists possess vital wisdom” (pg 38) #joke
  13. “Believing that a weaker Dollar is just the thing to spur a sluggish economy… they miss the devaluation of all the assets” (pg 38)
  14. “George Romney capitulated to these forces” (pg 38) and being advised by Glenn Hubbard, ultimately Mitt did too #BigMiss
  15. “Wealth actually springs from the expansion of information and learning” (pg 46) #capitalism #freedom #liberty
  16. “Smith’s vision of the entrepreneur as a tool of the market… rather than its creator constitutes the original sin” (pg 47) #AdamSmith
  17. The Light Dawns (chapter 7 concludes that Smith, Keynes, Hayek, and Samuelson have all been proven wrong) (pg 63) #true
  18. “Looking for disequilibria to reconcile into equilibrium, economists suppress multifarious complexities” (pg 71) #yep
  19. “Savings reflect the profitability – the upside entropy – in an economy” (pg 72) excess cash flows born out of positive info surprise
  20. “The entrepreneur is the savior of the system because he capitalizes himself” (pg 77) #evolution
  21. Fallacies of Entropy and Order (chapter 9) (pg 79)
  22. “Most of the history of economics revolves around the issues of how order and equilibrium can be maintained” (pg 85) #Krugman
  23. “None of these economists of equilibrium was comfortable with a dynamic economics” (pg 85) #Growth #Change #Surprise
  24. “Order is not spontaneous, but it is a necessary condition for all the surprises of freedom and opportunity” (pg 87)
  25. “Everyone thinks he knows what information is… information is change in what we know” (pg 101) great quote
  26. “They had no heads. The frenzy was all they had… the urge was all they felt” –Tom Wolfe (pg 104) #behavioral econ
  27. On Austin Goolsbee: “chairman of the President’s council of economic advisors exhibited as little understanding…” (pg 114)
  28. “… much of the profession is empirically bankrupt because it is no longer taught economic history” –Charles Kindleberger (pg 115)
  29. “The successful executive pursues not efficiency but effectiveness” –Peter Drucker (pg 126)
  30. “The goal of financial reform should be to end this divorce between knowledge and power” (pg 132) secular #theme of book
  31. “Unlike an inexorable, Newtonian “great machine”, the economy is not a closed system” (pg 133) don’t tell #Keynesians that
  32. “High entropy regulation destroys the environment that it seeks to enhance” (pg 150) #BigGovernmentIntervention #Fed
  33. “If a science has an adjective, it probably isn’t a science” –Richard Feynman (pg 159), Ivy League “economics” is no science
  34. “Pursue opportunities is the counsel of the capitalist” (pg 161) #bingo
  35. “It has become a virtual casino” –Bob Wilmers (CEO of M&T Bank) (pg 168)
  36. “Paulson/Bernanke in constant conversation with unhealthy institutions; wouldn’t talk to leaders of healthy banks” –Allison (pg 170)
  37. “In my career, the Fed has a 100% error rate in predicting and reacting to important economic turns” –John Allison (pg 175)
  38. “wealth is only valuable if combined with information” (pg 178) #perspective
  39. “America’s leading entrepreneurs, with some exception, display discipline and self control, hard work and austerity” (pg 183)
  40. “Greed is an appetite for unneeded and unearned wealth and power” (pg 184) beauty quote about #politicians
  41. “All progress comes from the creative minority” (pg 192) otherwise why would society glorify their stories?
  42. “Taleb, in all likelihood, deems you a turkey” (pg 197) in Chapter 18, The Black Swans of Investment, criticizing Taleb
  43. “I believe, however, that the fool of randomness is Taleb” (pg 200) #aggressive!
  44. “21st century intellectuals have looked to information theory for a solution” (pg 201) maybe, sort of, but hardly consensus
  45. “Great books, great ideas, and great thinkers” (pg 207) on Mark Skousen’s Freedom Fest annual conference
  46. “No one in your company knows less about your business than your see eff oh” –Peter Drucker (pg 218) CEOs need vision
  47. “Stockman ended up capitulating to his critics” (pg 219) appropriately critical of David Stockman’s “CFO” myopia
  48. “0% interest rate policy of the Federal Reserve diverts the wealth of savers to governments, crony capitalists, etc” (pg 224)
  49. “History tells us that the threat to prosperity is not debt but socialism” (pg 225) great focus pt quote
  50. “Just as the post war recovery of the 1950s confounded Paul Samuelson’s gloomy predictions” (pg 234) #Keynesian failures
  51. “fragmented, the academic sciences are turning to politics, panics, and cartels to preserve their old privileges” (pg 270)
  52. “Most of the courses they took were either self-evident or wrong, ideological, or tautological, twisted, or trivial” (pg 270)
  53. “Now an abstruse and occasionally revealing discipline has emerged called quantum information theory” (pg 271)
  54. “Governed by entropy (measuring freedom of choice), it is a science of human liberty” (pg 271)
  55. “Just as the bureaucrat needs arbitrary power, the capitalist needs capital” (pg 275) #excellent conclusion



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