Merry Xmas Bulls

Client Talking Points


The Burning Yen is making a fresh year-to-date low of 104.33. Naturally, the Nikkei is making a fresh 6-year closing high on that at 15,589. Nikkei is up over 55% year-to-date. Bottom line is get USD/YEN right, you get Japanese stocks right. What's that? The US Dollar is up another +20 basis points this morning? Exactly. 


It's a fresh 3-month high for #RatesRising up to 2.94%. We are testing the top-end of my immediate-term 2.88-2.95% risk range. Bond outflows (equity inflows) are going to be real tough to fight in January. We are short Pimco’s BOND.


With the S&P 500 up +401 points year-to-date, it’s a Merry Christmas Eve! Higher-lows and higher-all-time-highs are bullish, until they are not. While buying-the-damn-bubble #BTDB may not sound polite, it is what has been working. A stronger US Dollar and #RatesRising can very much perpetuate that further. SPX risk range is 1796-1835.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged.  If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.


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.


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


GOLD: pathetic bear mkt bounce of +0.1%, -28.3% YTD @KeithMcCullough


You really have to love yourself to get anything done in this world. -Lucille Ball


Nine-in-ten Americans say they celebrate Christmas, and three-quarters say they believe in the virgin birth of Jesus. But only about half see Christmas mostly as a religious holiday, while one-third view it as more of a cultural holiday. Virtually all Christians (96%) celebrate Christmas, and two-thirds see it as a religious holiday. In addition, fully eight-in-ten non-Christians in America also celebrate Christmas, but most view it as a cultural holiday rather than a religious occasion. (Pew)

Volatility Crasheth

Takeaway: Volatility is back into crash mode.

Volatility (VIX) was down -12.5% last week. It's back into crash mode for 2013 (down -23.5% year-to-date) alongside Gold.


Both of them hate the whole #RatesRising on growth surprising to the upside thing.


More importantly, the VIX is under our 14.91 Hedgeye TREND line again. That of course is bearish for the VIX.


Volatility Crasheth - drakevix

Editor's note: This is an excerpt from Hedgeye's Monday morning research. For more information on how you can join the revolution click here.

December 24, 2013

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Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


TODAY’S S&P 500 SET-UP – December 24, 2013

As we look at today's setup for the S&P 500, the range is 39 points or 1.75% downside to 1796 and 0.38% upside to 1835.                                           










THE HEDGEYE DAILY OUTLOOK - 10A                                                                                                                                                                  



  • YIELD CURVE: 2.56 from 2.54
  • VIX closed at 13.04 1 day percent change of -5.44%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Dec. 20 (prior -5.50%)
  • 7:45am: ICSC weekly sales
  • 8:30am: Durable Goods, Nov., est. 1.7% (pr -2%, rev -1.6%)
  • 8:55am: Johnson/Redbook weekly sales
  • 9am: FHFA House Price Index m/m, Oct., est. 0.4% (pr 0.3%)
  • 10am: New Home Sales, Nov., est. 444k (prior 444k)
  • 10am: Richmond Fed Manufacturing Index, Dec. (prior 13)
  • 4:30pm: API weekly oil inventories


    • Yday’s deadline extended to midnight today for Americans who want coverage effective Jan. 1 under ACA; hundreds of thousands whose health plans are being canceled as their coverage doesn’t meet rules are exempt next yr
    • Federal govt. offices close early


  • JPMorgan boosts banker pay as Morgan Stanley adds cash: WSJ
  • U.S. store traffic sinks 21% as last-ditch deals flop
  • KKR raises $1.5b for property in North America and Europe
  • Blackstone-backed La Quinta files confidentially for U.S. IPO
  • Hyundai, Kia paying as much as $395m to settle U.S. suits
  • China money rate tumbles most since 2011 as PBOC injects cash
  • JPMorgan boosts debit-card spending limits after Target breach
  • Time Warner Cable deal unlikely to hit barriers with regulators
  • Weinstein European bet said to spur 2nd losing yr for Saba
  • Apple-backed Rockstar said to hold discussions to sell patents
  • W.R. Grace bank settlement opens path to exit from bankruptcy
  • Tesla Model S keeps NHTSA 5-star rating amid U.S. safety review


    • No S&P 500 co. earnings scheduled today


  • Brent Crude Futures Rise on Escalating Violence in South Sudan
  • Rusal Claims LME Warehouse Rule Changes ‘Irrational’, HKEx Says
  • Metals Seen Rallying With Crops After Record Tumble: Commodities
  • Copper Rises a Third Day as China’s Central Bank Adds Liquidity
  • Cotton Gains After Report of Damage at Warehouse; Sugar Falls
  • Gold Swings as Investors Weigh Economy Against Physical Buying
  • Wheat Trades Near 19-Month Low as Investors Weigh Price, Supply
  • China Beef Imports Seen Doubling by Rabobank Over Five Years
  • Rebar Rises From Four-Week Low as China Vows to Curb Pollution
  • Rubber Surplus Seen Expanding as Production Outpaces Demand
  • Paris Wheat May Gain 1.7% as 50-Day MA Holds: Technical Analysis
  • Brazil’s BTG Pactual Said to Expand Commodities Hedging, Trading
  • Iran Oil Exports Slow to Rise Amid Sanctions, Insurance Limits
  • Brent Price Movements Partly Linked to Libyan Oil Supply Cuts


























The Hedgeye Macro Team















Ferocious Determination

This note was originally published at 8am on December 10, 2013 for Hedgeye subscribers.

“… self assured, guided by his own ferocious determination.”

-Doris Kearns Goodwin


No matter what your views are on how this epic market move ends, you have to find it within yourself to find a way to win. This has nothing to do with what you’d like your former free-markets to be; it has everything to do with risk managing what they have become.


The aforementioned quote is one that defined President Teddy Roosevelt’s character at a very young age. “Teedie (his nickname) held a distinct place among his siblings; the asthma that had weakened his body seemed to have inordinately sharpened his mind and sensibilities… he was always reading or writing with a most unusual power of concentration.” (The Bully Pulpit, pg 37)


So, in the spirit of what America’s “Strenuous Life” used to stand for, sharpen your mind this morning. Challenge yourself to learn. Evolve your investment process. And, above all else, tone down your emotional market response to whatever you may or may not have missed.


Back to the Global Macro Grind


Are you ferociously determined to beat beta? I am. And I’m not going to apologize for that. Why else would you wake up to play this game every morning unless you wanted to win?


After 382 points of price appreciation, the SP500 clocked yet another all-time closing high yesterday of 1808. That’s a +26.8% gain for 2013 YTD. And once again, it came on a no-taper (in December) market expectation day.


Whether you or I think the Fed should have tapered in September doesn’t actually matter at this stage of the game. Been there, argued about that. What matters is what decisions you make next.


Risk is always changing. Up until September 18th, Mr. Macro Market scored growth as the most relevant stock market risk (to the upside). Sure, some people were bullish – but consensus wasn’t positioned bullish. Here’s what worked from JAN-SEP:

  1. #StrongDollar
  2. #RatesRising (Gold and Bonds weren’t working)
  3. #GrowthAccelerating (as an Equity Style Factor)

Then, post the Fed’s unaccountable decision not to taper (as Q313 US Growth was tracking +3.6%), from mid-SEP to mid-OCT:

  1. Down Dollar
  2. Rates Falling
  3. #GrowthSlowing outperformed growth  

Then, in November, growth as an Equity Style Factor started to recover again:

  1. Rates Rose
  2. Gold fell
  3. But the US Dollar remained no bid (in spite of an ECB rate cut!)

Now, look at what we have – the return of our old un-elected friend: @FederalReserve’s Policy To Inflate:

  1. Down Dollar (for 5 straight weeks)
  2. CRB Commodities Index inflation (and Gold) arrested their YTD lows
  3. Oil prices and inflation oriented equities inflating again

Instead of debating this, look at the trivial matter that is Correlation Risk between the US Dollar and everything else (using a 6 week duration – these are inverse correlations; i.e. Down Dollar = Up X):

  1. SP500 vs USD = -0.63
  2. Brent Oil vs USD = -0.66
  3. CRB Commodities Index vs USD = -0.73
  4. Nasdaq vs USD = -0.79
  5. Natural Gas = -0.85

#Cool, eh?


For whom? The small percentage of us in America who understands it? Or to those who are the recipient of inflated prices at the pump and accelerating costs to heat their homes during today’s CT snowstorm?


Yes We Can, baby. We can re-flate Bernanke’s Bubble in commodity prices. Why not? Who cares if it slows everything that we haven’t had during this entire monetary policy experiment (sustained real-consumption growth). It’s time to buy some coal!


To be clear, this will end in tears. But, in the meantime, I will trade this market’s all-time highs with ferocious determination. Yes, that means that on pullbacks I will buy-the-damn-bubble #BTDB.  Then I’ll sell on green too. Keep moving out there; risk does.


Our immediate-term Risk Ranges are now:


10yr UST Yield 2.80-2.91%

SPX 1800-1815

USD 80.03-80.55

Brent 109.07-111.19

NatGas 4.04-4.26

Gold 1216-1259


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Ferocious Determination - Chart of the Day


Ferocious Determination - Virtual Portfolio

Personal Income, Spending & Strategy Summary

Takeaway: Personal Income and Spending growth accelerated in November. Do equities still work if growth decelerates? Watch the $USD, VIX, & 10Y.

PERSONAL INCOME: Optically, personal income and personal disposable income growth decelerated in November. The reality is far more sanguine.  Collectively, November and December of 2012 were skewed significantly by individuals pulling compensation forward ahead of the impending fiscal cliff related tax law changes.  


On a 2Y basis, private sector salaries and wages are still accelerating and the drag on government sourced income stemming from federal austerity will improve against easy comps, the spending friendly budget deal, and the annualization of last year’ s tax increases.  


Personal Income, Spending & Strategy Summary - PI


PERSONAL SPENDING:  Real personal consumption growth saw its largest MoM acceleration since February of last year as service consumption (the recent laggard) was resurgent, growth in durables was flat with trend, and Durables accelerated on a MoM, 1Y and 2Y basis.  Spending grew at a premium to incomes for a second months as the savings rate dipped another 30bps to 4.2%.  


While the spending numbers were strong, the MoM and YoY growth figures for November may be modestly overstated given the noisy comp dynamics – namely, any government shutdown related impact depressing October consumption and the Hurricane Sandy distortion in November of 2012.


Personal Income, Spending & Strategy Summary - Personal Income   Spending Table Nov



INFLATION: Core PCE inflation came in at +1.1% YoY, still well below target.  Incremental central bank hawkishness may be mildly deflationary and both food & energy cost growth is running negative in the latest CPI reading (we’d argue that’s a good thing), but labor market trends are strong, wage inflation is beginning to percolate, household credit growth went positive for the 1st time in 18 quarters in 3Q13, corporate productivity is flagging and business investment/capex spending is somewhat of a ball under water here.  


Personal Income, Spending & Strategy Summary - Net invesment


Personal Income, Spending & Strategy Summary - HH Debt QoQ   YoY


SEASONALITY REMINDER:  Seasonal adjustments act as a tailwind from September – February, then reverse to a headwind over the March-August period. 


Shifting seasonality is perhaps most visible in the initial claims and NFP numbers but the impacts have been pervasive with the reported macro data, equity market performance, investor sentiment and analyst estimates all following a similar annual, temporal pattern. Seasonality will continue to build as a positive support through 1Q14.


Personal Income, Spending & Strategy Summary - JS 1


Personal Income, Spending & Strategy Summary - NFP Seasonality Nov


FLOWS:  “Great Rotation” talk is annoyingly trite but the year-to-date tallies are hard to dismiss and existent trends look set to continue.  Below we highlight the latest fund flow analysis from Jonathan Casteleyn and the Hedgeye Financials team: 

  • Bonds:  Within mutual funds, the $1 trillion that has come into bond funds since 2008 (or the start of the Fed's quantitative easing program) has started to unwind with the first outflow in fixed income funds within the ICI data since 2007. The fixed income outflow of $63 billion through the first 49 weeks of 2013 still pales in comparison to the $303 billion inflow that came into fixed income last year in 2012 (can you say blow off top?) and also the record year of 2009 when the Great Rotation from stocks into bonds started and $379 billion came into fixed income funds. While the over $155 billion outflow in the back half of 2013 has been the sharpest bond outflow in history (most significant 27 week ouflow sequence), the first half of 2013 experienced nearly $100 billion of inflow into fixed income to net to the fairly insignificant outflow year-to-date of $63 billion so there is a case to be made that bond outflows have only just started. 
  • Stocks: Conversely, the nascent production in stock funds (while consistently dismissed) has been historically quite impressive being double that of the $74 billion that came into equity mutual funds in 2007. While the $159 billion running inflow into stock funds thus far in 2013 has had an international fund bend ($131 billion has gone into international stock funds versus just $28 billion into domestic equity funds), there is still ample reason to think that U.S. stocks can continue this turn in redemptions that has plagued them for all 6 years of ICI data before '13 (still record amount of cash on U.S. corporate balance sheets, generally low yields can allow stocks higher multiples, and the unwinding of the commodity super cycle and U.S. bond fund outflows needing to be invested somewhere).

(Source: Hedgeye Financials)

Personal Income, Spending & Strategy Summary - ICI chart 10 normal 



$USD/Yields/VIX/Equities:  The Hedgeye Macro Manifesto (if there was one) posits that everything that matters in macro happens on the margin.  In other words, the forecasting goal centers on divining better/worse not good/bad.   In other other words, it’s all about the slope of the line. 


From a GDP accounting and slope-of-the-line perspective, 3Q13 should mark the short-cycle peak in reported domestic growth.  The recurrent question we’ve received over the last few weeks has been some form of “can domestic equities still work if growth slows from great to good”


As always, our immediate/intermediate term allocation strategy will anchor on the price signal.


In short, if the dollar can break out above Trend Resistance at 81.13, the VIX holds below TREND resistance at 14.91, and 10Y yields can breach 2.99% (September highs) on the upside, on balance, we’ll stay on the long side of both U.S. equities and pro-growth style factor exposure. 


The bond market has been been front-running the Fed all year, as have flows, and while the reallocation from credit to equities may oscillate between trickle and deluge, the broader bond outflow trend should continue alongside the northward march in rates.  Further, with china stable, the  Abenomics trade in full effect, and  Europe following our growth path on a lag, developed markets/economies broadly should remain supportive of risk appetite in the near term.  


Personal Income, Spending & Strategy Summary - VIX


Personal Income, Spending & Strategy Summary -  USD Levels


Higher highs in equities on accelerating volume – with “flows” support, domestic and global macro fundamental support, and the lack of discrete negative, near-term catalyst - are bullish until they aren’t.


To enjoying the holiday and (still) buying the bubble,


Christian Drake



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