Kingly Government

This note was originally published at 8am on December 18, 2013 for Hedgeye subscribers.

“It will be said that we don’t propose to establish Kings.”

-Benjamin Franklin


But there is a natural inclination in mankind to Kingly Government. It sometimes relieves them from the Aristocratic domination. They had rather have one tyrant than five hundred.” –Benjamin Franklin (The Liberty Amendments, pg 25)


I just love that quote. And how appropriate for a fresh winter’s morning when our central planning overlords are going to speak down to us from upon high. It’s Federal Reserve day, baby! Just like your Founding Fathers planned it.


On tapering, our Kingly Government’s leaky-peaky-media-access-group seems a little confused as of late. Between the WSJ’s Hilsenrath and CNBC’s Liesman flip flopping on what the Fed is going to do today, at a bare minimum it makes for great TV, on mute.


Back to the Global Macro Grind


Did King Bernanke cut these poor peons off? What is up with that by the way? Forcing these dudes to think for themselves during the holiday season is just mean.


In all seriousness, trying to front-run the Fed without inside information isn’t easy. Reading the tea leaves on what Mr. Macro Market expects in real-time is the best we can do. If Bernanke tapers today, he’ll certainly shock me. But that’s not new.


What is new is US equity market volatility. What’s driving an intermediate-term TREND breakout in front-month stock market volatility (VIX) above our 14.91 signaling line is very simple – monetary policy confusion.


And in markets (which trade on expectations, not academic theories), confusion breeds contempt. If you follow the bouncing ball of expectations:


1. MONETARY POLICY: what the Fed should have done in SEP (taper) wasn’t done, so confusion rules

2. CURRENCIES: confusion drives Global FX volatility; most markets are keying off what the US Dollar does

3. EQUITIES: since spoos like no-taper (but worry that there should be a taper) they whip around (on no volume)


One of our biggest subscribers (he runs $18B in equity assets) nailed it in an email to me yesterday. Effectively, he thinks he knows what to do, but he’s not sure – and he definitely doesn’t like the process of discovery:


“I need to take the pulse of the patient everyday and I would really like to take the pulse without a pacemaker attached!”


#Pacemakers. That’s what the Fed should get us Canadian catholic boys for Christmas – we can attach them to a Demark dongle on our Bloomberg machines and any time Hilsy or Liesman whispers another flip to their flopping Fed leaks, we get a little jolt.


In other news…


Economic data in the United Kingdom continues to improve at an accelerating rate. On the heels of a #StrongPound, strengthening purchasing power, and falling consumer prices, the UK unemployment rate just dropped to 7.4% from 7.6%.


This, of course, has the former Keynesian kings of the Bank of England all squirreled up.


After all, they cannot allow the only thing that perpetuates economic recoveries for sustainable periods of time (#StrongCurrency) to threaten their un-elected political power.


Or is that “threatening the recovery”?


I couldn’t make this up if I tried, but after one of the best British runs of positive (think rate of change) economic data since the early Thatcher years (oh did she #timespank those British Keynesian boys publicly!), this is the headline in Europe this morning:




All the while, the Swiss reported an awesome confidence reading for DEC (ZEW index 39.4 vs 31.6 in NOV) after the Germans did yesterday (Germany’s ZEW accelerated to 62 in DEC vs 54.6 NOV).


Damn that #StrongEuro!


How dare economic gravity take hold and the most coincident indicators of economic health (a country’s currency) perpetuate confidence amongst The People?


But there is a natural inclination amongst group-thinkers towards “certainty” in economic forecasting and policy making. It sometimes relieves people who are trying to cover their political bottoms because they don’t have to be accountable to the policies themselves.


They had rather have one central planning god than a free market.


Our immediate-term Risk Ranges are (my Top 12 Daily Macro Risk Ranges are its own product now):


VIX 14.30-17.08

USD 79.79-80.44

Pound 1.63-1.65


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Kingly Government - Chart of the Day


Kingly Government - Virtual Portfolio

[replay] #RatesRising: Q3 Macro Theme #1

Takeaway: The Queen Mary of macro trends has turned.

As Hedgeye's Macro Team prepares to release its highly anticipated quarterly Macro Themes for Q1 in early January, we take a brief look back at #RatesRising as detailed by CEO Keith McCullough. This theme was one of our top macro calls of 2013. It seems only fitting as the 10-year note nestles in north of 3.00%.



As we wrote back in August, the "Queen Mary" analogy is appropriate for interest rates as they have literally been in decline for the last 30 years since peaking in the early 1980s.  This long term decline has enabled any business that depends on borrowing money to fund its business to have a steadily declining cost of capital.  In addition, this has made bonds a compelling asset class with a long term underlying bid to price.


In our models in Q2, yields inflected notably and broke out above our TRADE, TREND and TAIL levels.  In fact, 10-year yields had their largest percentage increase quarter-over-quarter in more than a decade.  Even though 10-year yields have broken out, they remain well below the mean yield since 1989 of 5.21%.


[replay] #RatesRising: Q3 Macro Theme #1 - qm


The seismic shift in interest rates will certainly be one of the most critical factors over the coming quarters and years.  As money flows from the bond market to avoid losses, equities will be awaiting with open arms.


After all, while gentleman may prefer bonds, they don’t prefer losses.


Join the Hedgeye Revolution.


Takeaway: So much for that whole #RatesRising is going to "kill the stock market" thing.

So... here we are at the end of 2013 with the 10-year Treasury yield closing up shop at its year-to-date highs. It's 3.01% for the 10-year and 1847 on the S&P 500. All-time high on the latter. 


So much for that whole #RatesRising is going to "kill the stock market" thing.


#AmericanBeauty - Treasury vs. SPX


Instead, the growth expectations embedded in a +4.12% GDP print perpetuated all-time highs for growth investing. It was an #AmericanBeauty of a set up for US growth stocks.


Gold and bonds? Not so much.


Join the Hedgeye Revolution.


the macro show

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Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

[video] Keith's Macro Notebook 12/31: CHINA UST10YR POUND

Flows: Bond Pain, Equity Gain

Takeaway: Tax loss selling continued in bonds with the biggest outflow in 3 months while the combination of equity ETFs and funds had strong inflow.

This unlocked research note was originally published December 27, 2013 at 08:25 in Financials. If you like what you see here and would like to learn more about the Hedgeye Revolution click here.


Flows: Bond Pain, Equity Gain - flows1


Investment Company Institute Mutual Fund Data and ETF Money Flow:


Total equity mutual funds experienced slight inflows for the week ending December 18th with a $433 million subscription, making it 9 of 10 weeks of total stock fund inflow. Within the total equity fund result, domestic equity mutual funds lost $2.6 billion with international equity funds posting a $3.1 billion inflow. Despite these mixed trends both categories of equity mutual funds have averaged positive flow in 2013 with an average weekly subscription of $3.0 billion weekly year-to-date, a complete reversal from 2012's $3.0 billion weekly outflow 


Fixed income mutual funds continued persistent outflows during the most recent 5 day period with another $8.1 billion withdrawn from bond funds, the worst outflow in 3 months. This week's draw down worsened sequentially from the $6.7 billion outflow the week prior and ongoing redemptions have now forced the 2013 weekly average for all fixed income funds to a $1.4 billion outflow, which compares to the strong weekly inflow of $5.8 billion throughout 2012


ETFs experienced positive trends in the most recent 5 day period, with equity products seeing heavy inflows and fixed income ETFs seeing slight inflows week-to-week. Passive equity products gained $9.9 billion for the 5 day period ending December 18th with bond ETFs experiencing a $293 million inflow. ETF products also reflect the 2013 asset allocation shift, with the weekly averages for equity products up year-over-year versus bond ETFs which are seeing weaker year-over-year results


Flows: Bond Pain, Equity Gain - caste1

Flows: Bond Pain, Equity Gain - ICI chart 2



For the week ending December 18th, the Investment Company Institute reported slight equity inflows into mutual funds with $433 million flowing into total stock funds. The breakout between domestic and world stock funds separated to a $2.6 billion outflow into domestic stock funds and a $3.1 billion inflow into international or world stock funds. These results for the most recent 5 day period compare to the year-to-date weekly averages of a $384 million inflow for U.S. funds and a running $2.6 billion weekly inflow for international funds. The aggregate inflow for all stock funds this year now sits at a $3.0 billion inflow, an average which has been getting progressively bigger each week and a complete reversal from the $3.0 billion outflow averaged per week in 2012.


On the fixed income side, bond funds continued their weak trends for the 5 day period ended December 18th with outflows staying persistent within the asset class. The aggregate of taxable and tax-free bond funds booked a $8.1 billion outflow, a sequential decay from the $6.7 billion lost in the prior 5 day period and the worst weekly outflow in over 3 months since the $9.3 billion redemption in the final week of August. Both categories of fixed income contributed to outflows with taxable bonds having redemptions of $5.6 billion, which joined the $2.5 billion outflow in tax-free or municipal bonds. Taxable bonds have now had outflows in 25 of the past 29 weeks and municipal bonds having had 29 consecutive weeks of outflow. These redemptions late in the year are likely tax loss selling related with the Barclay's Aggregate Bond index down nearly 2% in 2013, the first annual loss in 14 years. The 2013 weekly average for fixed income fund flows is now a $1.4 billion weekly outflow, a sharp reversal from the $5.8 billion weekly inflow averaged last year.


Hybrid mutual funds, products which combine both equity and fixed income allocations, continue to be the most stable category within the ICI survey with another $483 million inflow in the most recent 5 day period, although the past 4 weeks have been below year-to-date averages. Hybrid funds have had inflow in 27 of the past 29 weeks with the 2013 weekly average inflow now at $1.5 billion, a strong advance versus the 2012 weekly average inflow of $911 million.



Flows: Bond Pain, Equity Gain - ICI chart 3

Flows: Bond Pain, Equity Gain - ICI chart 4

Flows: Bond Pain, Equity Gain - ICI chart 5

Flows: Bond Pain, Equity Gain - ICI chart 6

Flows: Bond Pain, Equity Gain - ICI chart 7



Passive Products:



Exchange traded funds had positive trends within the same 5 day period ending December 18th with equity ETFs posting a strong $9.9 billion inflow, the fifth consecutive week of positive equity ETF flow. The 2013 weekly average for stock ETFs is now a $3.4 billion weekly inflow, nearly a 50% improvement from last year's $2.2 billion weekly average inflow.


Bond ETFs experienced moderate inflow for the 5 day period ending December 18th with a $293 million subscription, a deceleration from the week prior which produced a $986 million inflow for passive bond products. Taking in consideration this most recent data however, 2013 averages for bond ETFs are flagging with just a $268 million average weekly inflow for bond ETFs, much lower than the $1.0 billion average weekly inflow for 2012.



Flows: Bond Pain, Equity Gain - ICI chart 10

Flows: Bond Pain, Equity Gain - ICI chart 9


Jonathan Casteleyn, CFA, CMT 



Joshua Steiner, CFA



Top Quotes from a Memorable Year

Takeaway: With our 1Q14 Macro Investment themes impending, we look back at a memorable year of uncertainty embraced via our favorite Early Look quotes

This note was originally published December 31, 2013 at 10:28 in Macro

For those that haven’t met me yet, my name is Josh Balch and I’m the newest member of the Hedgeye team.  As we look into the uncertainties of 2014, I find myself looking back at 2013 and reminiscing on the past.


At this time last year, I was playing hockey for Yale and never would have been able to predict with high conviction that we were going to win the school’s first Division 1 NCAA Men’s Hockey National Championship. While members of our team all had confidence and believed in each other, we also knew it was a daunting task which had not been completed by an Ivy League school since Harvard’s 1989 team.  


Top Quotes from a Memorable Year - yale1


While there is no way that we could have predicted Yale’s 1st NCAA hockey title or other even more unpredictable events from 2013, we can look forward to waking up every morning and working our butts off in order to help risk manage what Mr. Market has awaiting us in the New Year. At this time last year we were one of few research firms walking into 1Q13 as US Growth bulls and Inflation bears. This came to fruition as investors who were long growth (equities) and short gold, bonds, and MLPs found themselves having a very successful year with LOW YIELD STOCKS (up +46.9% YTD) outpacing HIGH DIVIDEND YIELD STOCKS (up +18.2% YTD) by >2.5X.


So, what will happen in 2014 to drive global markets?  


As our CEO Keith McCullough wrote in a recent Early Look, “The best prediction we can make is to proactively prepare ourselves to ‘Embrace the Uncertainty of the Game.”  In the spirit of preparation for 2014’s market game, we will be presenting our new 1Q14 Macro Themes in early January to ensure that you are proactively prepared.


In light of reminiscing on 2013, here are some of my favorite Early Look quotes from this year. Thank you for your service and we look forward to another memorable year.


Josh Balch

Hedgeye Risk Management



“If money is your hope for independence you will never have it.  The only real security that a man will have in this is a reserve of knowledge, experience, and ability.” -Henry Ford


“The mass of the American people are most emphatically not in the deplorable condition of which you speak.” -Theodore Roosevelt


“Time destroys the speculation of men, but it confirms nature.” -Cicero


“History tells us that the threat to prosperity is not debt but socialism.” -George Gilder


“All progress comes from the creative minority.” -George Gilder


“My reading of history convinces me that most bad government results from too much government.” -Thomas Jefferson


“We had invested very heavily over a very long period of time in the education of quality leaders.” -John Allison


“Anyone who isn’t confused doesn’t really understand the situation.” -Edward R. Murrow


“Unlike an inexorable, Newtonian “great machine”, the economy is not a closed system.” -Geoger Gilder


“Much of the profession is empirically bankrupt because it is no longer taught economic history.” -Charles Kindleberger


“The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital . . . the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth in the economy.” -President John F. Kennedy


“Ignorance more frequently begets confidence than does knowledge; it is those who know little, not those who know much, who so positively assert that this or that…”-Charles Darwin


“It’s imperative that the Fed begins to taper.”-Larry Fink


“If making money is a slow process, losing it is quickly done.”-Saikaku Ihara


“The great thing in the world is not so much where we stand, as in what direction we are moving.”-Oliver Wendell Holmes


“The Fed is the greatest hedge fund in history.” -Warren Buffett


“Insanity: doing the same thing over and over again, and expecting different results.” -Albert Einstein


“The great thing about fact based decision is that they over rule the hierarchy.” -Jeff Bezos


“To others, being wrong is a source of shame; to me, recognizing my mistakes is a source of pride.” -George Soros


“Money is one of the shatteringly simplifying ideas of all time; it creates its own revolution.” -Paul Bohannan


“Before I went to jail, I was active in politics as a member of South Africa’s leading organization – and I was generally busy from 7 A.M. to midnight. I never had time to sit and think.” -Nelson Mandela


“The market is smarter than you will ever be, with its combined knowledge of all participants. Pay attention to the signs. Be quick to admit that you’re wrong. Don’t be afraid to miss something.” -Yra Harris, Praxis Trading


“Success is stumbling from failure with no loss of enthusiasm.” -Winston Churchill


“The greatest barrier to success is the fear of failure.” -Sven Goran Eriksson


“The greatest obstacle to pleasure is not pain; it is delusion.” -Lucretius


“Any society that would give up a little liberty to gain a little security will deserve neither and lose both.” -Benjamin Franklin


“A government’s first job should be to protect its citizens. But that should be based on informed consent, not blind trust.” -The Economist


“This story illuminates, as only great history can, not only the past but also the present.” -Richard Holbrooke


“One main factor in the upward trend of animal life has been the power of wandering.” -Alfred North Whitehead


“You hold in your hands, the future of the world.” -Raymond Poincare


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.35%