The Monster

“The monster is trying to kill me, but I will kill it.”

-Andrew Jackson


That sounds pretty hard core; especially coming from the President of the United States!


“The Monster, formally known as the Second Bank of The United States (and more commonly as the Bank), originated as the brain child of Alexander Hamilton… Jackson saw himself in arms against the dragon, an infernal, demonic entity that must be destroyed.” (The First Tycoon, pg 93)


The Monster - jackson bank monster


And you thought I was bearish on the un-elected and un-accountable US Federal Reserve. As I was flying from Indianapolis, IN to Minneapolis, MN last night reading this, I pulled the Delta Airlines polyester red blanket up to my chin and asked the flight attendant for cookies and milk.


Back to the Global Macro Grind


#ScaryMonster, this US Policy To Inflate has become. The more I travel and talk this through with investors, the less convinced most are that this ends well. There’s no irony in that. Unless it’s “different this time”, burning the credibility of a country’s currency has never worked, for any country.


If I’m right and 2014 US GDP growth (real, not nominal) is closer to 1-2% than the 3-4% consensus economists and perma bulls alike are expecting, I think the societal side to this risk starts to kick in. That’s because what gets us to 1-2% is #InflationAccelerating. And nothing kills The People’s confidence more than a government that they think is lying to them.


In 1832… so began the Bank War; the result of not merely Jackson’s obsessions, but the cultural crisis of the times. It broke out because two great waves now crashed into one another: the individualistic, anti-aristocratic, competitive impulse fostered by the Revolution, and the instinct to organize, amalgamate, develop, and bring order to the chaos of the marketplace.”


Sound familiar?


Indeed, out of this conflict would emerge a new American economic outlook; a culture that embraced equality of opportunity and fierce competition, as well as sophisticated business institutions.” (The First Tycoon, pg 95)


Sophisticated about applying chaos theory and non-linear risk analytics to their linear models, the Fed and Old Wall Street are not. I think they might be getting dumber (see Bank of America (BAC) yesterday, who had to report that they miscounted the moneys, again!).


That’s one of the reasons why the Financials (XLF) got tagged for a -0.6% loss yesterday (with the SP500 +0.3% on the day). What’s happening out there at both the sector and style factoring levels of the market is crystal clear – it’s called variance:

  1. Variance rises during market phase transitions (i.e. from US #GrowthAccelerating in 2013 to inflation slowing growth in 2014)
  2. Variance plummets when you can literally buy anything (because everything goes up)

For the US stock market, the so-easy-a-monkey-can-do-it (low-variance) environment ended on December 31, 2013. Here’s what I mean by that if you look at the variance in yesterday’s US stock market move:

  1. Financials (XLF) -0.6%
  2. Biotech (IBB) -0.4%
  3. Russell2000 (IWM) -0.4%


  1. #YieldChasing Consumer Staples (XLP) +1.1%
  2. Slow-growth-yield chasing Utilities (XLU) +0.5%
  3. Energy #InflationAccelerating (XLE) +0.2%

That’s why I said it in my investor meetings yesterday in Indy and I’ll say it again in Minneapolis to long-only risk managers today – if you want to be invested alongside our 2014 Macro Themes, you:

  1. Buy Inflation (XLE, DBA, COW, CAFÉ, TIP, etc.)
  2. Buy Slow-Growth Yield Chasing (XLU, TLT, BND, etc.)
  3. Buy late cycle companies that can jam customers with pricing (VNQ, XLI, etc.)

If you are a Global Investor, this gets a lot easier – mainly because you can not only be long US #InflationAccelerating but you can buy countries who are doing the right thing from a protecting-the-purchasing-power-of-the-people (read: #StrongCurrency) perspective.


At the top of that list is the UK:

  1. The British Pound continues to pound the pig that is the US Dollar (GBP +10% vs USD in the last 6 months)
  2. UK GDP Growth for Q114 was reported +3.1% y/y this morning – a fresh new #GrowthAccelerating high

The Monster - Chart of the Day


Newsflash: the UK had the “weather” too. They just don’t have to blame the weather in order to CTA (substitute T for Y) on why almost every one of them (consensus economists from Old Wall and Washington) had their Q114 US growth forecast dead wrong.


Sadly, tomorrow the United States of America will report a GDP growth rate for the 1st quarter that is maybe 1/2 of what the United Kingdom just did. Sure, you’ll have month-end markups in the US stock market … and the Fed will release their 2nd or 3rd coming of Christ…


But once that storytelling is done with, Americans will go back to eating it – the Policy to Inflate, that is. And if we don’t have the courage to kill this broken and un-elected US economic policy, The Monster  of a devalued currency might just eat us too.


Our immediate-term Global Macro Risk Ranges are now as follows:


Nasdaq 4006-4143

USD 79.21-79.99

Pound 1.67-1.69

Natural Gas 4.55-4.81

Gold 1

Corn 5.05-5.19


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer

Animal Spirits

This note was originally published at 8am on April 15, 2014 for Hedgeye subscribers.

“In the long history of humankind (and animal kind, too) those who learned to collaborate most effectively have prevailed.”

-Charles Darwin


In his 1936 book, “The General Theory of Employment, Interest and Money”, John Maynard Keynes used the term animal spirits to “describe the instincts, proclivities and emotions that ostensibly influence and guide human behavior.”  He goes on to use consumer confidence as an example of how animal spirits can be measured economically. 


In our Q2 Themes presentation, we did a lot of work on the median consumer and took a detailed look at his / her income statement and balance sheet.  Currently, there are a number of major headwinds for the median consumer.  The obvious first one is the rampant acceleration in food costs in the year-to-date, the second is the anemic interest rate that they get on their savings, and, finally, the last headwind is the softening in the housing market.


For many average consumers, the house is in effect the balance sheet, so as home prices go up so too does net worth.  The two points that bode most negatively in our models for future home prices are the dual facts that pending home sales are down -14.5% from their peak and mortgage applications for purchase are down more than -20%.   Ultimately, home prices follow demand on a lag (as shown in the Chart of the Day), so we should expect that home price growth softens from here.


As it relates to the consumer, late last week the Bloomberg Consumer Confidence slipped to -31.9 from -30.0.  This is well below the long run average of -16.5 and normally a number above -30 is the level at which the economy is considered to be in recovery mode. More alarmingly was the personal finance sub-index which fell to -2.9, the worst level in five months. 


On a higher level, last week Michigan Consumer confidence came in at 82.6.  This was better than the expected 81.0 and an increase from the prior month.  So the animal spirits of consumer confidence appear to be intact . . . at least for now, but keep your eye on those home prices.


Back to the Global Macro Grind . . .


Yesterday was a slow grind in global macro land and today seems to be similar in tenor.  As it relates to the pin action of stock markets, the Shanghai Composite today is -1.36%.  The punditry is attributing this downward move as front running China’s GDP tomorrow, albeit the positive move in Chinese equities yesterday was considered a precursor to positive GDP, so the question of course is: which is it?


At a minimum, it seems that the government may be trying to talk down economic growth and the timing of the following report is suspect coming out one day ahead of GDP:


“Researcher with State Information Center said in Shanghai Securities News that efforts to address overcapacity, deleverage the economy and curb property bubbles could push GDP below 7%, something that would trigger massive unemployment.”


My colleague and our Asia Analyst Darius Dale had some detailed thoughts on the topic:


“In the 15 quarters since Chinese real GDP growth hit a cycle-peak of +11.9% YoY in 1Q10, Chinese economic growth has accelerated sequentially only three times. It’s basically been a straight leg down for four consecutive years – so much so that on a trailing 3Y basis, the current z-score for this series is (0.6x), which is actually up from trough of (1.6x) in 2Q12. In non-statistical speak, this implies that the “surprise factor” of Chinese #GrowthSlowing is burning off.


That isn’t to say that Chinese economic growth is not still slowing. In fact, the broad swath of high-frequency economic data points to a continued slowdown. The current risk range in our predictive tracking algorithm has probable downside to +7.3% YoY for Chinese real GDP growth here in 1Q14, which would: A) be the slowest growth rate since 1Q09; and B) imply that the Chinese economy is not taking advantage of extremely favorable base effect tailwinds – a sign that sequential momentum is indeed decelerating (as evidenced by the MAR PMI data).


One thing that investors should be aware of, however, is that Chinese policymakers are content to stand pat for now. Expectations for big stimulus has been dramatically tempered in recent weeks, most recently by Premier Li Keqiang’s prepared remarks at the Boao Forum for Asia Annual Conference. Perhaps they are storing up their fiscal and monetary “gun powder” to arrest any potential deceleration through the low +7% range in real GDP.


Or perhaps China’s intermediate-term growth trajectory isn’t really isn’t as dour as it has appeared in recent months and their superior visibility into the state-run Chinese economy leads them to believe that a large stimulus is simply not warranted. Time will tell; next up: tonight’s releases of 1Q GDP and MAR high-frequency growth data…”


The Hedgeye team will never be confused of being supportive of the interventionist nature of the world’s central bank.  A key critique we often held is that as a result of activist monetary policy, the markets tend to get manipulated.  We aren’t sure yet whether the Fed is more evil than those dastardly high frequency traders, but recent data on correlations emphasize our concern.


Specifically, according to ConvergEx, since 2009, the 10 industry sectors in the SP500 have averaged 85% correlation to the index.   In the past thirty days, correlations have dropped markedly to 77.5%.  Most interestingly though is the fact that long run correlations, before Fed intervention, have averaged 50%.  (Hint: Michael Lewis, there is a book here somewhere.)


The most challenging part of dealing with central banks may be in discerning whether they mean what they say.   The most recent example of course is the jawboning from ECB head Mario Draghi, who specifically indicated that the ECB was ready and willing to take monetary policy to an extreme level.  The Euro, despite a down move yesterday, has by and large shrugged Draghi off and is up 0.6% on the year-to-date.  Credibility anyone ?


Our immediate-term Global Macro Risk Ranges are now:


SPX 1804-1855

Nasdaq 3932-4147

Nikkei 13666-14445

USD 79.27-80.01

EUR/USD 1.37-1.39

Brent 107.34-109.41

NatGas 4.46-4.71


Daryl G. Jones

Director of Research


Animal Spirits - Chart of the Day


TODAY’S S&P 500 SET-UP – April 29, 2014

As we look at today's setup for the S&P 500, the range is 42 points or 1.25% downside to 1846 and 0.99% upside to 1888.                                                













  • YIELD CURVE: 2.28 from 2.27
  • VIX closed at 13.97 1 day percent change of -0.64%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am: ICSC weekly sales
  • 8:55am: Redbook weekly sales
  • 9am: S&P Case-Shiller 20 City Home Prices m/m, Feb., est. 0.8% (prior 0.85%)
  • 10am: Consumer Confidence Index, April, est. 83.2 (prior 82.3)
  • 10am: Senate Banking Committee to vote on Fed nominees Fischer, Powell and Brainard


    • President Obama at Manila’s Fort Bonifacio, returns to U.S.
    • 10am: Supreme Court may release opinions;
    • 10am: Senate Banking Committee to vote on Fed nominees Fischer, Powell and Brainard
    • 11am Supreme court  hears cellphone privacy case arguments
    • Budget hearings/panels/testimony 10am:
    • Treasury Sec Jack Lew, House Appropriations subcmte
    • Education Sec. Arne Duncan, House Education Cmte
    • SEC Chairwoman Mary Jo White, House Financial Services Cmte
    • 1pm: Deputy Treasury Sec. Sarah Bloom Raskin delivers first policy address, on economy, student loans, in Baltimore
    • U.S. ELECTION WRAP: Grimm Re-Election; Keystone Vote; NRA Battle


  • Shire rises after report Allergan is preparing takeover offer
  • French industry minister Montebourg meets Alstom unions today
  • France refers Alstom to AMF financial regulator: Le Monde
  • Netflix to pay Verizon for faster access to broadband network
  • IBM annual meeting; watch for buyback, div. announcements
  • U.S. targets Putin inner circle with new round of sanctions
  • Vevo owners said close to hiring Goldman to explore sale
  • Energy Future board said to vote for bankruptcy w/lender deal
  • Yahoo to debut two video shows to draw more viewers to website
  • TomTom boosts 2014 rev., profit targets; shrs jump
  • Northern Trust reports SEC subpoena over securities lending
  • Global swap regulators said to hold closed-door industry talks
  • Eurozone April Economic Confidence falls to 102; est. 102.9
  • U.K. 1Q GDP rises to 0.8%; est. 0.9%


    • 3D Systems (DDD) 8am, $0.15
    • Affiliated Managers Group (AMG) 7:10am, $2.38
    • AGCO (AGCO) 8am, $0.74
    • AGL Resources (GAS) 8am, $1.82
    • Archer-Daniels-Midland Co (ADM) 7am, $0.74
    • Boston Scientific (BSX) 7am, $0.18 - Preview
    • Bristol-Myers Squibb (BMY) 7:30am, $0.43 - Preview
    • Cameco (CCO CN) 8:30am, C$0.11 - Preview
    • CIT Group (CIT) 6am, $0.88
    • Coach (COH) 7am, $0.61 - Preview
    • Consol Energy (CNX) 7am, $0.19
    • Cummins (CMI) 7:30am, $1.67 - Preview
    • Cumulus Media (CMLS) 9am, ($0.01)
    • Diebold (DBD) 8am, $0.24
    • Eaton (ETN) 6:30am, $1.00
    • Forest Laboratories (FRX) 7am, $0.43 - Preview
    • Goodyear Tire & Rubber (GT) 7:30am, $0.60 - Preview
    • Harris (HRS) 6:30am, $1.19
    • HCA Holdings (HCA) 8:29am, $0.85 - Preview
    • Hudson City Bancorp (HCBK) 8am, $0.07
    • Huntsman (HUN) 6am, $0.39
    • Ironwood Pharmaceuticals (IRWD) 7:05am, ($0.44)
    • LKQ (LKQ) 7am, $0.34
    • LyondellBasell Industries (LYB) 7am, $1.74
    • Marriott Vacations Worldwide (VAC) 8am, $0.56
    • Martin Marietta Materials (MLM) 7:01am, ($0.34)
    • McGraw Hill Financial (MHFI) 7:10am, $0.87
    • Merck & Co (MRK) 7am, $0.79 - Preview
    • MGM Resorts (MGM) 8am, $0.09
    • Oshkosh (OSK) 7am, $0.83
    • Paccar (PCAR) 8am, $0.76 - Preview
    • Parker Hannifin (PH) 7:30am, $1.63
    • Rayonier (RYN) 8am, $0.46
    • Rockwell Automation (ROK) 7am, $1.44
    • Sensata (ST) 6am, $0.56
    • Sprint (S) 7am, ($0.08)
    • TransAlta (TA CN) 7:45am, C$0.12
    • TRW Automotive Holdings (TRW) 7am, $1.65
    • UDR (UDR) 8am, $0.00
    • United Therapeutics (UTHR) 6am, $1.60
    • Valero Energy (VLO) 7:49am, $1.39 - Preview
    • Waddell & Reed (WDR) 6:59am, $0.86
    • Xylem (XYL) 7am, $0.32


    • ACE (ACE) 4:01pm, $2.15
    • Aflac (AFL) 4:12pm, $1.58
    • Axis Capital Holdings (AXS) 4:05pm, $1.33
    • CH Robinson Worldwide (CHRW) 4:15pm, $0.61
    • Cloud Peak Energy (CLD) 4:10pm, ($0.04)
    • Concur Technologies (CNQR) 4:10pm, $0.09
    • DreamWorks Animation (DWA) 4:02pm, ($0.14)
    • Dun & Bradstreet (DNB) 4:15pm, $1.31
    • eBay (EBAY) 4:15pm, $0.67 - Preview
    • Edison International (EIX) 4pm, $0.82
    • EXCO Resources (XCO) 4:01pm, $0.03
    • Express Scripts (ESRX) 4:01pm, $1.01 - Preview
    • Fiserv (FISV) 4:01pm, $0.74
    • Genworth Financial (GNW) 4:30pm, $0.36
    • Macerich (MAC) 4:30pm, $0.13
    • Marriott International (MAR) 4:30pm, $0.51
    • MB Financial (MBFI) Aft-Mkt, $0.41
    • Methanex (MX CN) 10pm, $1.90
    • Mueller Water Products (MWA) 4:20pm, $0.07
    • NCR (NCR) 4:02pm, $0.48
    • Owens-Illinois (OI) 4:04pm, $0.61
    • Panera Bread (PNRA) 4:05pm, $1.52
    • Questar (STR) 4:24pm, $0.47
    • RenaissanceRe Holdings (RNR) 4:23pm, $2.91
    • RF Micro Devices (RFMD) 4pm, $0.09
    • Riverbed Technology (RVBD) 4:05pm, $0.23
    • Seagate Technology PLC (STX) 4:01pm, $1.25
    • SolarWinds (SWI) 4pm, $0.36
    • TECO Energy (TE) 4:15pm, $0.23
    • Trulia (TRLA) 4:24pm, ($0.13) - Preview
    • Twitter (TWTR) 4:12pm, ($0.03)
    • United States Steel (X) 6:29pm, $0.30
    • US Silica Holdings (SLCA) 4:30pm, $0.35
    • Verisk Analytics (VRSK) 4:10pm, $0.55
    • Yamana Gold (YRI CN) Aft-Mkt, $0.04


  • Norilsk CEO Says Nickel Supply Concerns on Sanctions Overstated
  • Brent Rebounds on Ukraine After Biggest Loss in Month; WTI Gains
  • Oil Used in Twix Threatened by Drought on Palm Crop: Commodities
  • Corn Rises for Third Day as U.S. Planting Behind Five-Year Pace
  • Gold Declines Before Fed’s Meeting as Ukraine Crisis Assessed
  • Copper Trades Near Seven-Week High Before Fed Meeting Starts
  • Coffee Gains While Sugar Drops as Soft Traders Await Fed Meeting
  • Kansas Wheat Turning Brown Shows Drought Damage for Winter Crops
  • Copper Deficit May Come Early If Price Plunge Sticks: Bull Case
  • Indian Imports, Currency Crises, Fed Taper Drive Demand For Gold
  • Gunvor Opens Unit in Shanghai Zone to Target Commodities Growth
  • Exxon’s $900 Billion Arctic Prize at Risk After Ukraine: Energy
  • Crops to Livestock Outpace MOO ETF on Drought: Chart of the Day
  • Iron Ore Drops to Seven-Week Low Amid China-Financing Concern

























The Hedgeye Macro Team














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.

April 29, 2014

April 29, 2014 - Slide1


April 29, 2014 - Slide2

April 29, 2014 - Slide3

April 29, 2014 - Slide4

April 29, 2014 - Slide5

April 29, 2014 - Slide6

April 29, 2014 - Slide7

April 29, 2014 - Slide8



April 29, 2014 - Slide9

April 29, 2014 - Slide10

April 29, 2014 - Slide11
April 29, 2014 - Slide12

VIDEO | Real Conversations: McCullough Talks with Top Private Investor

Takeaway: Here are the first two parts of a four part interview between private investor Buddy Carter and Hedgeye CEO Keith McCullough.

In the first of four parts of a wide-ranging interview with Buddy Carter, a private investor and former proprietary trader at Goldman Sachs, Carter discusses how to find the best resources in a radically changing global information landscape with Hedgeye CEO Keith McCullough.



In the second of four parts in a wide-ranging interview with CEO Keith McCullough, private investor Buddy Carter, a former proprietary trader at Goldman Sachs, talks how about technology has changed the pace and the way we consume financial information.



Takeaway: We think the BoK is gearing up to ease monetary policy and/or intervene in the FX market to arrest KRW appreciation.



  1. Our GIP model sees the South Korean economy in Quad #3 (i.e. Growth Slowing as Inflation Accelerates) over the next few quarters, a catalyst that should weigh on inflows into the nation’s capital markets.
  2. Moreover, we see both growth and inflation undershooting official and consensus targets over the intermediate term. Slowing growth in the US, Japan and “Old China” should cap exports gains (i.e. the primary driver of Korea’s 1Q14 GDP growth acceleration) going forward and annualized FX strength – particularly in 2Q and 3Q – should limit the impact of global cost-push inflation from the commodities markets.  
  3. To the extent our models are proven correct, we would anticipate a dovish/interventionist policy response out of the BoK in the currency market at some point over the intermediate term. That would be an easy “sell”, given the KRW’s material outperformance on a 1D, 1W, 1M, 3M, 6M, 1Y, 18M and 3Y basis.
  4. Our FX valuation models see downside in the KRW vis-à-vis the USD on the order of 5-6% on a REER basis and 7-9% on a carry basis. Historical correlations suggest deltas of this magnitude in the currency market are likely to weigh on the Korean equity market as well as the country’s USD debt.
  5. That being said, however, we’re not raging bears on either asset class. South Korea has proven unsurprisingly resilient to changes in foreign portfolio flows into EM economies in recent years, which is very much in line with our proprietary EM crisis risk modeling work. Additionally, what the KOSPI lacks in dividend yield support, it makes up for in sheer [perceived] cheapness that may continue to perpetuate a fairly consensus intuitional bid into the nation’s stock market.

















Source: Bloomberg


 Source: Bloomberg



Source: IMF








Feel free to ping us with any follow-up questions. Have a great evening,




Darius Dale

Associate: Macro Team

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.