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January 6, 2014

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Macro Tea Leaves

Client Talking Points


They finally opened the Japanese stock market and it got tagged on up Yen. The Nikkei starts the year -2.4% as the crowd leans very long of it (and short Yen – futures/options contracts show a massive net short position of -143,384 Yen contracts).


It's more #GrowthSlowing economic data out of China (Services PMI down to 50.9 in December versus 52.5 November). That took the Shanghai Composite down another -1.8% overnight to -3.3% to start 2014 year-to-date (versus -3.9% all in in 2013).


The biggest loser in Global Macro next to Thailand stocks last week was Oil (WTI -6.3%, Brent -4.7%). The US Dollar was +0.5%. That of course is a good thing for Consumption (US Consumer Discretionary was up +0.1% (XLY) on a down -0.5% S&P 500 week); Oil VIX ripped +31% on that over 20. Brent is back below our Hedgeye TAIL resistance of 108.89.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hedgeye's detailed and constructive view on the improving fundamentals in the M&A market with a longer term perspective is a contrarian idea at odds with the rest of the Street which is overly focused on short-term results. From an intermediate term perspective, M&A is poised to break out in 2014. We are witnessing record amounts of cash on corporate balance sheets, continued low borrowing costs and the first positive fund raising round for Private Equity in four years. Moreover, a VIX in secular decline (this has historically benefited M&A), recent incrementally positive data points from leading M&A firms that dialogue has improved, and an improving deal tally from Greenhill & Company (GHL) themselves coming out of the summer all bode favorably for GHL.  So is a budding European economic recovery that would assist a global M&A market that has been range bound over the past three years. GHL stands out as a leading beneficiary of these developments.


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.

Three for the Road


TREASURIES: 2.98% 10yr sitting right in the middle of a manageable 2.90-3.08% risk range @Hedgeye


"The greatest mistake you can make in life is to be continually fearing you will make one." - Elbert Hubbard


The world’s biggest economies will need to refinance $7.43 trillion of sovereign debt in 2014 as bond yields begin to climb from record lows, threatening to raise borrowing costs while nations struggle to bring down elevated budget deficits. Bloomberg






Rumor has it that Macau government may issue a 7th gaming license.  Secretary for Economy and Finance Tam earlier said the authority had no such plan at the current stage.  However, sources close to the Macau government said the authority is considering clarifying the roles of the concessions and the sub-concessions, indicating the existing three concessions and three sub-concessions may all be approved as concessions.  SJM Chief Executive Officer Ambrose So said the potential move of the government will make it hard for SJM to get a high spin-off fee.



BYI says it will to “vigorously defend” its right to sell electronic table games in Macau.  It was the first statement by BYI on SHFL Asia's patent claims here.   SHFL and LT Game are in dispute over the Macau patent for a multi-game electronic table game with a live dealer.  BYI alleged that Oriental Patron, a Hong Kong financial services firm, had issued last week factually incorrect statements about SHFL's live multi-game product in the Macau and the mainland.  Oriental Patron said Paradise Entertainment, the owner of LT Game, held the patent to sell the electronic games.



Wages could increase by between 5-10% in 2014.  Recruitment agencies told the newspaper that low unemployment and demand for staff would make it harder for small and medium enterprises to keep their employees.



The extension line of the Guangzhou-Zhuhai rail section, Gongbei to Hengqin section, is scheduled to commence construction this month, and due to finish in 2017.  Meanwhile, Macau LRT line extension project to Hengqin has also started inviting interested tenders for the project. This means that the Guangzhou-Zhuhai intercity rail extension line will seamlessly be connecting with Macau from Hengqin.

What's Going On?

“If you really don’t know what’s going on, you don’t even have to know what’s going on to know what’s going on.”

-George Goodman


Sadly, one of my favorite authors and financial writers, George Goodman, passed away this weekend. He was 83 years old. After graduating magna cum laude from Harvard and winning a Rhodes Scholarship, Goodman published his first novel, The Bubble Makers – then went onto to join the “US Army Special Forces in 1954 in the intelligence group known as Psywar.” (Wikipedia)


“Goodman’s first non-fiction book, The Money Game (1968), was a number one bestseller for over a year. In the book he memorably introduced the catchphrase “assume a can opener” to mock the tendency of economists to make unjustified assumptions.” (Wikipedia)


Over the years, I’ve cited The Money Game many times. Today’s quote comes from that book and my Early Look is dedicated to Goodman who taught me a great deal while he wasn’t watching. Taped on the insert of one of my notebooks is that “a man is really at his best, his most fulfilled, when he’s on his way to becoming what he is going to become…” I’m grateful for that opportunity, every day.


Back to the Global Macro Grind


If you really don’t know what’s going on in markets for 2014 YTD, now you know. It’s sitting right there in front of you on your screen. That is the score. That is Mr. Macro Market’s Game. And we’re all tasked with playing the game that’s in front of us.


On the heels of Asian Equity markets getting banged up last week, Japan opened 2014 for stock market trading overnight and got smoked for a -2.4% drop in the face of a barely up Japanese Yen. Get the Yen right, and you’ll get the Nikkei right – for now.


China reported yet another #GrowthSlowing data point last night as well. Its Services PMI print for DEC slowed to 50.9 versus 52.5 in NOV and Chinese stocks dropped another -1.8% on that. For 2014 YTD, the Shanghai Composite is already down -3.3%.


With Japan and China -2.4% and -3.3%, respectively, what other big Equity indices are down so far for the YTD?

  1. SP500 -0.9%
  2. MSCI World Index -0.9%
  3. MSCI Emerging Latin American Index -2.1%
  4. MSCI Emerging Market Index -2.3%
  5. MSCI Asia ex-Japan Index -2.4%

This shouldn’t be a huge conceptual surprise given that the US Dollar is +0.9% YTD. Emerging Markets in particular do not like #StrongDollar. But those of you who embraced that reality into the USD’s 2013 highs (July) know what’s going on there too.


Can the US Dollar continue higher? With Janet Yellen being confirmed tonight, I doubt it. But my doubts are often wrong, so we’ll deal with whatever Mr. Macro Market decides on this front. Is there any other way to accept what’s really going on?


From a long-term @Hedgeye TAIL risk perspective, where the US Dollar Index is at is significant in that it’s a principal and directional driver for other massively interconnected global macro risks. Check out the last price of the following Big 3 Macro levels vs. our TAIL lines:

  1. US Dollar Index long-term TAIL line = $81.12
  2. Copper’s long-term TAIL line = $3.33/lb
  3. WTIC and Brent Oil long-term TAIL lines =  $98.26 and $108.89, respectively

While Dollar UP, Oil DOWN doesn’t yet have the correlation risk in our model that we’d jump up and down about (30 day and 180 day USD/Brent Oil correlations are +0.21 and -0.45, respectively), that doesn’t mean the Mr. Macro Market won’t change that.


On last week’s +0.5% move in the US Dollar Index:

  1. WTIC Oil was down -6.3%
  2. Brent Oil was down -4.7%
  3. Oil Volatility (VIX) was +30.9%! to 20.60

As I am sure Goodman would agree, volatility in an “asset class” that everyone and their brother is net long of breeds contempt. A breakout towards 30-40 Oil VIX would most certainly wake up consensus – because consensus is big time long of oil.


Looking at last week’s closing CFTC Futures/Options consensus positioning, here’s what I mean by that:

  1. BULLS: Crude Oil is the biggest net long position in Global Macro right now at +381,392 contracts
  2. BEARS: Japanese Yen is the biggest net short position in Global Macro at -143,384 contracts

In other words, if you are long Oil and the Nikkei on Down Yen expectations, join the club.


I don’t feel like we need to make a call for the sake of making a call right here and now on things like Oil and Yen. Going into last week we weren’t short Oil, so I missed that – but won’t miss shorting it on the bounce if it fails at TAIL resistance again. If Brent or WTI crude oil recapture TAIL supports, so be it.


That’s what’s going on in macro. The game is constantly changing. And it’s our job to change alongside it.


Our immediate-term TRADE Risk Ranges are now:


USD 80.52-81.12

Brent 106.99-109.40


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


What's Going On? - Chart of the Day


What's Going On? - Virtual Portfolio

Speaking of Growth

This note was originally published at 8am on December 23, 2013 for Hedgeye subscribers.

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

-Theodore Roosevelt


That’s what a 28-yr old Teddy Roosevelt said to a fear-mongering-class-warfare-guy when he ran for mayor of New York City in 1886. In one of the first debates of his career, he went on to pummel the parasitic politician with positivity and resolve:


“… the states-men and patriots of today are no more responsible for some people being poorer than they are for some people being shorter… if you had any conception of the true American spirit you would know we do not have “classes” at all on this side of the water…” (The Bully Pulpit, pg 126-127)


While a lot of people spent a lot of time whining about the #EOW (end of the world), government spending cuts, and #RatesRising in 2013, many of us went on doing what American Doers do – grow. Relative to where consensus was, this country hasn’t seen a growth surprise to the upside like this in a long-time. I’d like to thank all of you who grew your businesses for contributing to that.


Back to the Global Macro Grind


As 2013 comes to an end, the year’s growth score-card will be reported on a lag. Mr. Macro Market obviously didn’t miss making this call in real-time however. What a run US GDP growth went on into the highs of Q313. #Boom!


At +4.12% GDP growth in Q3, the 1st takeaway shouldn’t be someone who missed it whining about “inventories” (newsflash: businesses build inventories as growth in demand accelerates – it’s called a cycle); it should be that GDP of +4.12% was actually understated!


The US GDP Deflator (subtracts from nominal growth to get you real-inflation-adjusted GDP growth) for Q313 was overstated at +2% (that compares with the MIT billion prices project of +1.7% and the CRB Commodities Index which was tracking -6-7% year-over-year). Which means nominal US GDP growth was over +6%  in Q3 and the real print could have been 4.5-5%!




The US stock market didn’t miss this. Neither did the Bond market (#RatesRising), nor Gold (crashing -29% YTD). The people who really missed this were actually the politicians. Who, like in 1886, were busy trying to tell stories about the economy they need you to believe rather than the one you had.


When we write about “growth” we’re talking about investment “style factors.” Here’s how the market prices those YTD:

  1. LOW YIELD STOCKS (i.e. growth stocks) = +44.2% YTD (vs slow-growth High Dividend Yield stocks +16.8%)
  2. TOP 25% EPS GROWTH STOCKS (by S&P quartile) = +40.4% YTD
  3. HIGH BETA STOCKS = +37.6% YTD

In other words, being long these GROWTH styles even beat the high flying US stock market indices:

  1. SP500 = +27.5% YTD
  2. Russell2000 = +35.0% YTD
  3. Nasdaq = +35.9% YTD

And obviously the major US Equities indices smoked being long things like:

  1. Fear (VIX) = -23.5% YTD
  2. Gold and Silver = -29.1% and -36.5% YTD
  3. Utilities (XLU) = +8.3% YTD

Utilities, MLPs, REITs got crushed relative to any domestic growth and/or cyclical sector of the US Stock market too:

  1. Consumer Discretionary (XLY) = +38.4% YTD
  2. Healthcare (XLV) = +37.7% YTD
  3. Industrials (XLI) = +35.3% YTD

And sure, some might quibble with Healthcare being called a US domestic “growth” sector, but that’s what we’ve called it since making it one of our favorite sectors in our Q113 Global Macro Themes, so they can quibble away.


Quibbling and whining might win people on your respective teams a few arguments, but these kinds of players (and class warfare dudes) don’t help you win championships. Those with open, objective, and flexible minds do.


The hardest thing to do in this business is having the humility to embrace that Mr. Macro Market might know something you don’t know. And clearly, whether by +4.12% GDP growth (old news now) and/or growth style factor performance in the marketplace, as the great behavioral philosopher Notorious B.I.G wrote, “if you don’t know, now you know.”


Our immediate-term Global Macro Risk Ranges are now:


SPX 1793-1826

VIX 13.01-14.91

Gold 1184-1229


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Speaking of Growth - Chart of the Day


Speaking of Growth - Virtual Portfolio

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