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My Top 13 Books of 2013

Takeaway: Hedgeye CEO Keith McCullough offers up his 13 favorite reads over the past year.

Here are (in no particular order) the baker's dozen books that the Hedgeye CEO/puckhead/nerd/market guru read this past year and highly recommends. Click on the book link to see more on Amazon.

My Top 13 Books of 2013 - book9

Knowledge and Power: The Information Theory of Capitalism and How it is Revolutionizing our World

By George Gilder

This is a thought leader’s book. 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. This book is the antichrist of broken western-academic-economic-policy group-think. -KM

 

Volcker: : The Triumph of Persistence

By William L. Silber

An easy read that will educate people on how central planning has become so causal to American Purchasing Power (US Dollar) and inflation/growth expectations. -KM

 

Antifragile: Things That Gain from Disorder

By Nassim Nicholas Taleb

Buy the book. A must read as we continue to narrow the gap between Chaos Theory and Behavioral Finance. -KM

 

David and Goliath: Underdogs, Misfits, and the Art of Battling Giants

By Malcolm Gladwell

"The bestselling author behind the inventive Outliers, Blink, and The Tipping Point is back with another thought provoking theory that fascinates, entertains, and informs. He gives underdogs their due this time, challenging everything readers believe about facing-and conquering-life's stumbling blocks, using the 'real' story of David and Goliath and more to make his point." -Celeste Williams, Fort Worth Star-Telegram

 

The Bully Pulpit: Theodore Roosevelt, William Howard Taft, and the Golden Age of Journalism

By Doris Kearns Goodwin

“If you find the grubby spectacle of today’s Washington cause for shame and despair—and really, how could you not?—then I suggest you turn off the TV and board Doris Kearns Goodwin’s latest time machine. … [Goodwin puts] political intrigues and moral dilemmas and daily lives into rich and elegant language. Imagine ‘The West Wing’ scripted by Henry James.” –Bill Keller, NYT

 

Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics

By Henry Hazlitt

A million copy seller, Henry Hazlitt’s Economics in One Lesson is a classic economic primer.

 

My Top 13 Books of 2013 - books460

 

Manias, Panics and Crashes: A History of Financial Crises

By Charles P. Kindleberger

"Underneath the hilarious anecdotes, the elegant epigrams, and the graceful turns of phrase, Kindleberger is deadly serious. The manner in which humans beings earn their livings is no laughing matter to him, especially when they attempt to do so at the expense of one another. As he so effectively demonstrates, manias, panics, and crashes are the consequence of an economic environment that cultivates cupidity, chicanery, and rapaciousness rather than a devout belief in the Golden Rule." -Peter L. Bernstein

 

The Honest Truth About Dishonesty: How We Lie to Everyone--Especially Ourselves

By Dan Ariely

“Through a remarkable series of experiments, Ariely presents a convincing case. . . . Required reading for politicians and Wall Street executives.” (Booklist)

 

Indian Givers: How Native Americans Transformed the World

By Jack Weatherford

"As entertaining as it is thoughtful....Few contemporary writers have Weatherford's talent for making the deep sweep of history seem vital and immediate." –The Washington Post

 

Cosmic Evolution : The Rise of Complexity in Nature

By Eric J. Chaisson

“Chaisson conducts an intriguing tour over vast realms of time and space. A lucid and sprightly guide, he brings forth original and provocative observations, while gathering a host of wonders in his cosmic embrace.” -Dudley Herschbach, 1986 Nobel Laureate in Chemistry

 

The Swerve: How the World Became Modern

By Stephen Greenblatt

The Swerve is one of those brilliant works of non-fiction that's so jam-packed with ideas and stories it literally boggles the mind.” -Maureen Corrigan - NPR/Fresh Air

 

The History of Money

By Jack Weatherford

“Weatherford brings a cultural anthropologist's wide-angled perspective to this illuminating investigation of money's role in shaping human affairs…Full of forgotten lore and provocative opinions (e.g., harmful inflation is identified as the dominant monetary theme of our century), and sprinkled with allusions to Voltaire, Goethe, L. Frank Baum and Gertrude Stein, this intriguing selective survey will captivate even readers with no particular yen for financial knowledge.” –Publisher’s Weekly

 

Thinking, Fast and Slow

By Daniel Kahneman

“A tour de force. . . Kahneman’s book is a must read for anyone interested in either human behavior or investing. He clearly shows that while we like to think of ourselves as rational in our decision making, the truth is we are subject to many biases. At least being aware of them will give you a better chance of avoiding them, or at least making fewer of them.”—Larry Swedroe, CBS News

 

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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:

 

“BOE WARNS FURTHER POUND APPRECIATION THREATENS THE RECOVERY”

 

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,

KM

 

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.

 

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#AmericanBeauty

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.

 

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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 

203-562-6500 

jcasteleyn@hedgeye.com 

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com

 


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 80.64%
  • SHORT SIGNALS 78.61%
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