Buying Opium

“Opium is like Gold – I can sell it at any time.”

-Robert Taylor


Per British historian Julia Lovell, that’s what one of James Matheson’s first partners told him about selling opium to the Chinese in 1818. Matheson was one of the first Scottish traders to hit the ground running (selling drugs) in China in the early 19th century.


If you’re a market #history student, it’s a fascinating story to try to understand. I’m getting into it via a book all Global Macro investors should have on their shelf called The Opium WarDrugs, Dreams, and the Making of China, by Julia Lovell (pg 25).


The PRC’s state media works hard to convince readers and viewers that modern China is the story of the Chinese people’s heroic struggles against “imperialism” and its running dogs. In reality, the story of modern China could probably be told just as convincingly as a history of collusion with imperialism and its running dogs” (pg 13).


Back to the Global Macro Grind


Teddy Roosevelt wrote poignantly about the American “struggle.” You know, the alarm clock – the grind - the tireless hours we commit to whatever it is that we are committed to. And since most of us are human, we have a tendency to believe that what we are doing is “right”; especially if it gets us paid.


In America today, politicians are trying to pin us against one another using emotional weapons like class and gender. Leaders want the poor to think they are struggling against the rich. They want you to buy into “inequality” being someone else’s (your) fault. In reality, the 2011-2012 all-time highs in US consumer and producer price inflation is a history of US politicians perpetuating a Policy To Inflate.


Why is that?


Q: How do you have the all-time highs in prices for just about everything in your life… and both a Republican and Democrat government telling you there’s a “great recessionary risk of deflation”? A: Debt.


As John Allison simply puts it in The Financial Crisis and The Free Market Cure, “If you owe a great deal of debt (like the US Treasury) it is to your advantage to have inflation.” (pg 21)


In other news, Venezuela is considering defaulting on its debt.


That’s how this bubble story of government debt ends. And no, this isn’t a new story. Countries have been bankrupting their people via currency devaluation for centuries. There’s a 3-step default process – and it takes time:

  1. Politicians have to borrow from The People to meet spending promises (and get paid)
  2. Too much debt leads to deficits and slower growth, which fuels the need for more debt and cheaper money
  3. Inflation crushes real-growth; spending and liabilities run past the point of return, and the country defaults

Cool, eh?


But don’t worry, the stock markets in Argentina and Venezuela aren’t down YTD (in their burning currencies). So, in an effort to get their ratings off all-time lows, CNBC will be moving live broadcasts from NJ to Buenos Aires.


BREAKING: “stocks rally – things must be great”


Oh, and don’t forget to bring on the Top 100 Central-Planning Socialist Bureaucrats of the last 25 years for an “exclusive interview” on how they think Argentina’s Kirchners can keep it going!


Today’s morning missive was inspired by one of the best days of Institutional Investor meetings I’ve ever had in NYC. What’s fascinating about our #InflationAccelerating theme is that some buy siders really get how this ends – and some are just starting to put all of the pieces of the puzzle together.


I have a very privileged research position as I get to hear the best incremental research thoughts of some of the best investors in the world. Some are extremely well versed in the bottom-up analysis of inflation (i.e. the structural part that is born out of this government forcing companies to disinvest). It’s called constrained fixed capital formation, labor, and capacity.


No, I’m not talking about the overcapacity in things like asset managers, social media companies, and tulips. I’m talking about things like cement, fiberglass, and plumbers. Layer on the structural inflation that you’re already seeing due to capacity shortages with a cyclical rip in things like wage, rent, and commodity inflation – and voila, you find yourself approaching the aforementioned step #3.


But don’t worry, inflation that slows growth is like Gold - you can invest in it at anytime; it’s just that poor people (80% of the country) have to eat it.


Our immediate-term Macro Risk Ranges are now:


UST 10yr Yield 2.66-2.79%


VIX 13.06-15.55

USD 79.83-80.59

Brent 108.02-110.91

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Buying Opium - The Cycle


Buying Opium - virt

TODAY! Thought Leader Discussion: What’s the Matter with MLP Non-GAAP Metrics?

***CALL/WEBINAR IS TODAY at 11:00am EST***

***Updated Call/Webinar Details Below***



Julie Hilt Hannink, CFA, Head of Energy Research, CFRA Research

Kevin Kaiser, Managing Director, Energy Sector, Hedgeye Risk Management


Call/Webinar Details (*UPDATED*): 

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  • Conference code: 198965#
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For anonymous Q&A at the end of the call, send questions to  and 


About the Call:

Julie Hilt Hannink, CFA, of CFRA Research will join Kevin Kaiser of Hedgeye Risk Management for an in-depth discussion of key accounting and regulatory topics in the Master Limited Partnership (MLP) sector: the use and purpose of common non-GAAP metrics (for example, “distributable cash flow” and “maintenance CapEx”); the focus of the SEC’s new Financial Reporting and Audit Task Force, and how it might impact MLPs; the Incentive Distribution Right (IDR) and IDR “forgiveness”; corporate governance issues; and more… 


About Julie Hilt Hannink:

Ms. Julie Hilt Hannink is the Head of Energy Research for CFRA. In this capacity, she is responsible for CFRA’s research and screening on independent oil and gas producers, master limited partnerships, integrated oil companies, refiners and oil services. Ms. Hannink brings more than 25 years of experience in financial and fundamental research and analysis to CFRA. Prior to her tenure at CFRA she was the Director-Oil and Gas at Medley Global Advisors and a Managing Director at J.P. Morgan Asset Management where she was the senior North American oil & gas analyst.  Ms. Hannink holds a BS in Commerce (concentration Accounting) from the University of Virginia.


Special Conference Call Disclaimer:

CFRA Research is co-hosting this conference call at the invitation of Hedgeye Risk Management.  Both CFRA and Hedgeye are individually responsible for their respective contributions to this conference call; neither CFRA nor Hedgeye has verified the accuracy or completeness of the other’s information.  Opinions expressed by Hedgeye and its employees do not necessarily reflect the opinions of CFRA and its employees, and vice versa.


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CFRA Research Disclaimer:

The content and opinions expressed by CFRA are those of CFRA. Analysis provided by CFRA has not been submitted to, nor  received approval from, the United States Securities and Exchange Commission or any other regulatory body. While CFRA exercised due care in compiling its analysis, CFRA AND ALL RELATED ENTITIES SPECIFICALLY  DISCLAIM  ALL WARRANTIES, EXPRESS OR IMPLIED, regarding the accuracy, completeness or usefulness of this information. and assumes no  liability with respect to the consequences of relying  on this information for investment or other purposes. In particular, the research provided is not intended to constitute an offer, solicitation or advice to buy or sell securities. CFRA, CFRA Accounting Lens, CFRA Legal Edge, CFRA Score, and all other CFRA product names are the trademarks, registered trademarks, or service marks of CFRA or its affiliates in  the United States and other jurisdictions

February 26, 2014

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February 26, 2014 - 10

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the macro show

what smart investors watch to win

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.


TODAY’S S&P 500 SET-UP – February 25, 2014

As we look at today's setup for the S&P 500, the range is 35 points or 1.47% downside to 1818 and 0.43% upside to 1853.                










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.38 from 2.39
  • VIX closed at 13.67 1 day percent change of -3.94%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Feb. 21 (prior -4.1%)
  • 10am: New Home Sales, Jan., est. 400k (prior 414k)
  • 10:30am: DOE Energy Inventories
  • 12pm: Fed’s Rosengren speaks in Boston
  • 7:30pm: Fed’s Pianalto speaks in Wooster, Ohio


    • 9:30am: Senate Homeland Security panel holds hearing on offshore tax evasion by multinational cos.
    • 10am: FDIC releases Q4 report for insured institutions
    • 10am: House Financial Svcs panel meets on allegations of improper lobbying and obstruction at HUD
    • 10am: House Homeland Security Cmte hears from Homeland Security Secretary Jeh Johnson on agency priorities
    • 10am: House Oversight Cmte holds hearing on surveillance at FDA
    • 2pm: President Obama speaks on economy in St. Paul, Minn.
    • 2:30pm: Senate Armed Svcs panel hears testimony on Defense Dept IT acquisition process
    • Reid opposes wage below $10.10 as some Democrats ready to talk


  • JPMorgan, Goldman, 16 others to end some analyst surveys
  • Credit Suisse said to face SEC probe over accounting moves
  • Credit Suisse helped clients hide billions, U.S. Senate says
  • GE takes $1.7b charge in accord to end Shinsei liability
  • Morgan Stanley agrees to pay $275m to resolve SEC probe
  • BofA cuts deal with Buffett on preferred stake to boost capital
  • J. Crew said to be talking with banks about IPO later this yr
  • Facebook-WhatsApp deal risks sparking privacy probes across EU
  • AB InBev sees improving beer market trends in U.S., Brazil
  • Airbus predicts profit gain as it boosts A320 jet production
  • Mt. Gox shutdown triggers Bitcoin industry damage control
  • Trade leads U.K. economy to growth as recovery broadens
  • DreamWorks Animation tumbles as "Turbo" leads to rev. drop
  • Honda to end production of Insight hybrid as sales trail Prius
  • Delta plans major rewrite of frequent-flier rules: WSJ


    • Abercrombie & Fitch (ANF) 7am, $1.04 - Preview
    • AES (AES) 6am, $0.29
    • Ares Capital (ARCC) 8am, $0.41
    • Barnes & Noble (BKS) 8:30am, $0.51
    • Cablevision Systems (CVC) 8:30am, $0.09 - Preview
    • CenterPoint Energy (CNP) 8:15am, $0.28
    • Chesapeake Energy (CHK) 7:01am, $0.40 - Preview
    • Dollar Tree (DLTR) 7:31am, $1.05 - Preview
    • First Majestic Silver (FR CN) 7am, $0.11
    • Lowe’s (LOW) 6am, $0.31 - Preview
    • Royal Bank of Canada (RY CN) 6am, C$1.45 - Preview
    • Target (TGT) 7:30am, $1.24 - Preview
    • Taser Intl (TASR) 7:30am, $0.08
    • TJX (TJX) 8:28am, $0.83 - Preview


    • American Water Works (AWK) 4:05pm, $0.46
    • Antero Resources (AR) 4:05pm, $0.25
    • Assured Guaranty (AGO) 5:26pm, $0.65
    • Autodesk (ADSK) 4:01pm, $0.34
    • Continental Resources (CLR) 6:12pm, $1.31
    • Darling Intl (DAR) 4:30pm, $0.28
    • Gulfport Energy (GPOR) 4:05pm, $0.18
    • Halcon Resources (HK) 4:15pm, $0.05
    • Infoblox (BLOX) 4:05pm, $0.11
    • J.C. Penney (JCP) 4pm, $(0.86) - Preview
    • L Brands (LB) 4pm, $1.61
    • Nektar Therapeutics (NKTR) 4:15pm, $(0.37)
    • Pembina Pipeline (PPL CN) 4:05pm, C$0.30
    • TiVo (TIVO) 4:01pm, $0.04
    • Transocean (RIG) 4:39pm, $0.72
    • Whiting Petroleum (WLL) 4pm, $0.88
    • Workday (WDAY) 4:02pm, $(0.16)


  • WTI Crude Trades Near Week Low on U.S. Stockpiles; Brent Stable
  • Bird Flu Brings More Pain for Feed Sellers in China Hurt by Hogs
  • Soybeans Drop From Five-Month High as Global Supply Seen Ample
  • Credit Agricole Says Easy Money Shorting Gold Over as China Buys
  • Tin Reaches Four-Month High as Indonesian Exchange Sets Minimum
  • Sugar Falls as Traders Take Profit on Rain Return; Coffee Slides
  • Tin Floor Price Set by Indonesia Bourse to Help Mining Companies
  • U.S. Natural Gas Poised for Biggest Three-Day Loss Since 2007
  • Winter Warmth Seen Flooding Asia With Japanese Kerosene: Energy
  • Oil-by-Rail Disasters Prompt U.S. Crackdown on Risky Shipments
  • Investors Mount Attack on Norway in $20 Billion Oil, Gas Row
  • Singapore Bids for Asia’s LNG Hub Role With Second Terminal
  • Agrium Forecasts Higher U.S. Corn Cash Margin, Lower Soy in 2014
  • Gold Reaches 17-Week High on U.S. Data as SPDR Holdings Expand


























The Hedgeye Macro Team














We Are Short US Growth

This note was originally published at 8am on February 12, 2014 for Hedgeye subscribers.

“We don’t see things as they are, we see them as we are.”

-Anais Nin


We are short the consumption growth components of the US stock market. And that means we were wrong yesterday. It’s ok to say it that way – we see the real-time score for what it is, not what we want it to be.


Ellen Langer uses the aforementioned quote in a #behavioral psych book I just finished called Counterclockwise. Her concept of “mindfulness” fits how I see things in macro (on the margin). “Noticing differences is the essence of mindfulness. Don’t imagine, however, that all this needs to be exhausting… mindfulness is actually energizing, not enervating.” (pg 52)


Being wrong for a few days is a little different than being wrong for a few months (or years). When I was younger and wrong, I’d get mad. Now that I am less young, being wrong energizes me – especially when I notice something that isn’t consensus.


Back to the Global Macro Grind


To be clear, I’m not the only one who has noticed that Janet Yellen is re-opening Pandora’s real-world inflation box with another Federal Reserve ideological “innovation” (the #untapering). Mr. Macro Market has been front-running her for 6 weeks:

  1. Dollar Down
  2. Rates Down
  3. Inflation Expectations Up

That, of course, is fantastic for slow-growth-yield-chasing asset prices like:

  1. Gold +7.1% YTD
  2. MSCI REIT Index +6.3% YTD
  3. Utilities (XLU) +3.5% YTD

Not to be confused with US #GrowthAccelerating asset prices like:

  1. Consumer Discretionary (XLY) -4.1% YTD
  2. Consumer Staples (XLP) -3.3% YTD
  3. Russell2000 -3.0% YTD

Alongside Boehner waiving the debt limit last night (without conditions!), what we have here is another Big Government policy investing-style shift towards #InflationAccelerating. This isn’t new. It’s what happened to the Dollar in both Q1 of 2008 and 2011. Inflation is a tax.


The inflationary concept that zero isn’t zero is what the Fed calls “policy innovation.” Happy #Darwin Day! #1806


In Q1 of 2008, Bernanke whispered to his boys that he was going to do the “shock and awe” thing and cut to zero; so, while demand was slowing, Oil prices ripped humanity a new one by the summer time ($150/barrel), perpetuating US #GrowthSlowing.


In Q1 of 2011, Bernanke continued to send sweet nothings down his communication pipes that zero really wasn’t zero – it was zero minus whatever # of QE’s he damn well wanted. The CRB Commodities Index, Gold, etc. ripped to all-time highs, US consumption growth slowed, and Utilities (XLU) closed the year +14.8%.


In Q1 of now, zero still really isn’t zero because you have to:

  1. Subtract 2 tapers from the 0 minus 3-4 QE’s
  2. Then add expectations of un-tapering to the 2 tapers…
  3. And add a minus taper to a real-rates # … and you get a dovish Dollar

Or something like that.


The Fed, of course, doesn’t see it this way. But no matter how they want to see their theoretical world, market expectations and prices see them the way the real-world is.


While I am sure this will all end well, can the US stock market continue higher? Obviously the answer to that is yes. But what parts of the market will lead? Will they be food/energy inflations, real-estate inflations, and/or some of those beauty MLPs?


I don’t know anything about nothing, but I am certain that everything that you eat, put in your car, and pay for from a housing perspective has nothing to do with inflation or your cost of living.


In other news, as both the British Pound and Euro gain strength versus Yellen’s Burning Buck, both the UK and German governments are taking up their GDP growth estimates for 2014 (British Pound remains our favorite currency vs USD).


How that #StrongCurrency correlation to growth thing works is cool. It’s too bad that un-elected and unaccountable US central planners aren’t paid to see the history of currency appreciation, real-purchasing power, and consumption growth for what it is.


Our immediate-term Macro Risk Ranges are now (all 12 macro ranges are in our Daily Trading Range product):


SPX 1730-1828

VIX 13.21-17.61

Pound 1.63-1.65

Brent 107.84-110.03

Nat Gas 4.57-5.34

Gold 1260-1291


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


We Are Short US Growth - Chart of the Day


We Are Short US Growth - Virtual Portfolio

[video] 3 Stocks Set to Gain from M&A Breakout

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