Becoming King

This note was originally published at 8am on March 25, 2014 for Hedgeye subscribers.

"Kings are not born, they are made by general hallucination."

-George Bernard Shaw


On this day more than 700 years ago, Robert the Bruce became the King of Scotland.  Robert was one of the most well known warriors of his generation and led the Scots in their wars of independence against Britain. 


Prior to successfully defeating the British, according to legend, Bruce was hiding in a cave on Rathlin Island off the north coast of Ireland. While in the cave Bruce purportedly watched a spider spinning a web in an attempt to connect one area of the cave's roof to another area.  (Clearly, Robert the Bruce had some spare time on his hands.)


 Becoming King - Battle of Bannockburn   Bruce addresses troops


The spider repeatedly failed but after each failed attempt kept turning back to the task at hand. Eventually the spider succeeded.  According to legend, Bruce is said to have used this as inspiration to continue his war against Britain where he eventually inflicted on them a number of critical defeats on the path to Scottish independence.


This story also supposedly inspired the maxim: "If at first you don't succeed, try try try again." 


Back to the Global Macro Grind ...


As the story of Robert the Bruce teaches us, becoming king is not an easy task.  As it relates to asset class performance this year, there aren't a lot of kings in the year-to-date. On a country basis, the top three decliners are as follows:

  • Russia -19.5%
  • Venezuela -14.8%
  • Czech Republic -12.6%

Japan is a close runner up to the top three and comes in fourth with a -11.5% decline on the Nikkei in the year-to-date. Incidentally, the Japanese Mothers Index (more small cap focused) is down a staggering -5.7% today. 


As the reigning King of Russia, Vladimir Putin is certainly learning the pain of trying to broaden his kingdom. On the back of Russia's literal annexation of Crimea, Russian equities are getting clobbered as noted above.


This morning the West is implementing more actions to further alienate Russia. The big symbolic one is that the G-8 summit, which was originally scheduled for Sochi this summer, has now been moved to Brussels and Russia has been uninvited.


In part, this and the myriad of sanctions that have been implemented against Russia are largely symbolic.  No doubt the most significant sanction is the one that has been implemented by the markets themselves as noted above by the almost -20% decline for Russian equities in the year-to-date. To the extent Russian equities continue to decline and Russian companies are challenged to tap the public markets to raise capital, Putin will certainly be wondering whether it is all worth it to become king.


The King of Fed watching, Jon Hilsenrath from the Wall Street Journal, wrote an interesting article yesterday highlighting the odd (for lack of a better word) nature of economic target setting by the Federal Reserve.  According to Hilsenrath, even though the Fed expects a 5.4% jobless rate in 2016, a normalized level, they are still likely to keep interest rates at a level that is well below normal (typically considered 4%-ish on the Fed funds rate).


To the extent this turns out to be accurate, it is likely that we continue to see inflationary assets (Gold) continue to front run this long term dovish policy.  The broader concern, of course, is the arbitrary nature of employment targets such as the jobless rate.  In the Chart of the Day, we highlight a chart we have shown many times in the past which is the labor force participation rate. 


As the chart shows, the U.S. is literally at generational lows in terms of participation in the labor market.   In fact, labor force participation peaked at just under 67.5% in 2000 and has been in relatively steady decline ever since.  Currently, the labor force participation rate is just over 62.5% and at an almost 35-year low.


This emphasizes the oddity of the Federal Reserve using an arbitrary data point such as the jobless rate to highlight the health, or lack of health of the economy, since the jobless rate doesn’t take in to account the people simply dropping out of the labor force.  For today, we’ll leave a discussion of whether the Fed’s extreme dovishness has helped the economy to the side, but certainly the arbitrariness of their targets has and continues to confuse the markets. This is likely why the 10-year treasury rates are down almost 10% on the year and down again this morning. Simply put: investors don’t believe what the Fed is saying.


To add to the confusion, this morning Philadelphia Fed chief Charles Plosser is indicating he believes that Fed Fund rates will hit “2-something” by the end of 2015 and 3% by the end of 2016.  This is more than a 300 basis point move in the next couple of years.  Plosser also indicated he finds the market’s reaction to Yellen’s press conference last week confusing.  Well, Mr. Plosser, confusion breeds contempt, as they say.


Conversely, the United Kingdom, despite losing Scotland to Robert the Bruce many years ago, appears to have a central bank that is at a minimum providing some confidence to the markets and allocators of capital.   The U.K. reported CPI this morning at +1.7%, which suggests an inflationary environment in the U.K. that is relatively benign. 


Certainly, we’d be somewhat hypocritical if we assumed the CPI was the best gauge of inflation in the U.K. (it is a government constructed number after all), but nonetheless the key economic indicators in the U.K. continue to trend the right way as evidenced by CPI coming in lower versus the +1.9% reading in January. 


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.62-2.81%

SPX 1840-1878

VIX 13.34-17.42

USD 79.11-80.39

Gold 1301-1351 


Best of luck out there today and long live the king!


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Becoming King - Chart of the Day


Becoming King - Virtual Portfolio


TODAY’S S&P 500 SET-UP – April 8, 2014

As we look at today's setup for the S&P 500, the range is 37 points or 0.82% downside to 1830 and 1.19% upside to 1867.                                                                                                                              









THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.30 from 2.31
  • VIX closed at 15.57 1 day percent change of 11.53%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Business, March, est. 92.5 (prior 91.4)
  • 7:45am ICSC weekly sales
  • 8:55am: Redbook weekly sales
  • 9am: IMF releases biannual world economic outlook
  • 10am: JOLTs Job Openings, Feb., est. 4.020m (prior 3.974m)
  • 1:30pm: Fed’s Kocherlakota speaks in Rochester, Minn.
  • 2:45pm: Fed’s Plosser speaks in Philadelphia
  • 4pm: Fed holds open board mtg in Washington on leverage ratios
  • 4pm: Fed’s Evans speaks in Washington
  • 4:30pm: API weekly oil inventories


    • 10am: House Ways & Means hearing on supporting economic growth through “a Fairer Tax Code”
    • 10am: House Armed Services Cmte hearing on Russia’s military developments, implications
    • 10am: Atty Gen. Holder testifies on Justice Dept. at House Judiciary Cmte
    • 10am: PPP hearing at House Transp. and Infrastructure Cmte
    • Senate leaders hold news conferences after party luncheons
    • FY15 budget panels/hearings:
    • 9:30am: NASA Admin. Charles Bolden, House Appropriations
    • 9:30am: Gen. Raymond Odierno, National Guard Bureau Chief Gen. Frank Grass, Army Reserve Chief Gen. Jeffrey Talley, Senate Armed Services Cmte
    • 10am: Secretary of State John Kerry, Senate Foreign Relations
    • 10:30am:Education Sec. Arne Duncan, House Appropriations
    • 2pm: GSA Admin Dan Tangherlini, House Appropriations
    • 2:30pm: Senate Judiciary marks up patent troll bill  S. 1720


  • Takeda, Lilly jury awards $9b over hiding Actos risks
  • Citigroup agrees to $1.13b settlement over mortgage bonds
  • Koch said to near deal for CVC’s Flint Group with Goldman Sachs
  • Fed holds open board meeting in Washington on leverage ratios
  • GM SUVs get top marks in insurance-industry front crash test
  • U.S. Court of Appeals hears Apple/Google patent arguments
  • Long-term jobless benefits stalled even with Senate passage
  • China approves Microsoft, Nokia deal with conditions
  • Express Scripts threatens to blackball Gilead’s Sovaldi
  • Barclays settles U.K. Libor case weeks before trial to start
  • BOJ refrains from boosting stimulus as recovery seen
  • U.K. industrial output rises more than forecast on factories
  • Weekly release of FDA warning letters
  • IMAX to sell 20% stake in China business for $80m: WSJ


    • Alcoa (AA) 4:03pm, $0.05 - Preview
    • International Speedway (ISCA) 7:30am, $0.34
    • Science Applications Intl (SAIC) 4:01pm, $0.65
    • WD-40 Co (WDFC) 4pm, $0.68


  • Gold Climbs to Two-Week High as Dollar to Ukraine Spur Demand
  • EU Pig Farmers Miss Out on Boom as Russian Ban Spurs WTO Case
  • WTI Rebounds as Gasoline Stockpiles Seen Shrinking; Brent Gains
  • China Corn Glut No Barrier to Farmers as State Buys: Commodities
  • Copper Falls 0.4% to $6,648 a Ton in London; Nickel, Tin Drop
  • Coffee Extends Gains in London as Arabica Climbs for 4th Day
  • Soybeans Snap Two-Day Drop as USDA May Report Reduced Stockpiles
  • Rebar in Shanghai Climbs to One-Month High as Stockpiles Decline
  • U.S. Beef to Japan May Decline on Australia Deal, Ministry Says
  • Age of Gas Seen as Sideshow to U.S. Producers Preoccupied by Oil
  • Copper Producers Keep Faith in China as Rout Belies Demand
  • Gold’s Open-Interest Drop Signals Rally Ending: Chart of the Day
  • Ending Iran Oil Ban May Cut Refiners’ Supply Cost: Bull Case
  • Turkey’s Fracking Push Won’t Be Stalled by Bribery Probe: Energy

























The Hedgeye Macro Team















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Penney: Why We're Short These 4 Restaurant Stocks


Veteran restaurants analyst Howard Penney highlights two major headwinds making him bearish on four stocks.

Poll of the Day Recap: Do You Hear That, Social Media? Pop, Pop, Pop!

Hedgeye CEO Keith McCullough wrote in today’s Morning Newsletter: “Risk happens fast. With the social media stock bubble crashing (single stock moves have been down -20% to -45% from their all-time peak), the Nasdaq is already -5.3% off its YTD high.”

Yikes. We went from “Bubble Overbought” (another note from Keith last week) to bubble popping, fast.


So, we asked you in today’s poll: Is the Social Media Bubble bursting the beginning of a broader market decline?

At the time of this post, 57% responded YES; 43% said NO.

Of those that voted YES, they said that the economy is slowing; people are running out of money.


One specifically noted that, “Inflation will reduce purchasing power for citizens and reduce top line revenue for consumer staple names. People on [government] assistance and fixed incomes won't be able to keep up with food prices and energy. GDP will fall precipitously.”


A few humorously explained, “This time, everyone will be able to tweet their dismay and Instagram their monthly statement.”


And: “The decline in the S&P will start in the next couple months, then Yellen will pump it back up, singing: ‘That's why I’m eaaaasing, I’m easing like Sunday morning.’”


Conversely, one NO voter felt that the Fed wouldn't “let the market fall too far.”


Hedgeye Managing Director Moshe Silver also argued NO, summing up that “In the short term, the social media froth will probably lead lots of frothy sectors lower; for the longer term, the next 12 months-plus, we are not on the brink of a broad bear market. There’s too much fear and uncertainty in the air to get outright bearish, plus the presidential campaigns will start this year, [which is] good for stocks.”


But, as Keith says, “I have no love for the bubbles - social or otherwise…Not buying this pullback was a risk managed choice.”


European Banking Monitor: CDS Tightens Broadly Across Europe

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .




European Financial CDS - Swaps tightened sharply across the European Financials complex last week. The biggest movers were in Greece, Italy, Germany and Spain. The Greek banks have posted impressive M/M moves, dropping by an average of 238 bps in just the last four weeks. Outside of Greece, the only EU bank that is still trading above our so-called "Lehman line" (+300 bps) is Sberbank of Russia.


European Banking Monitor: CDS Tightens Broadly Across Europe  - bank cds.1


Sovereign CDS – Sovereign swaps were tighter around the world last week. Italy, Spain and Portugal lead the charge lower, dropping by 24, 19 and 26 bps, respectively.


European Banking Monitor: CDS Tightens Broadly Across Europe  - sovereign cds. 2


European Banking Monitor: CDS Tightens Broadly Across Europe  - sovereign cds.3


European Banking Monitor: CDS Tightens Broadly Across Europe  - sovereign cds.4


Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 2 bps to 13 bps. 


European Banking Monitor: CDS Tightens Broadly Across Europe  - euribor OIS spread.5


Matthew Hedrick


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