Crushed Spirits

“A cheerful heart is good medicine, but a crushed spirit dries up the bones.”

-Proverbs 17:22


Four goals in 400 seconds for Germany, and all of Brazil was #crushed. Sometimes risk happens slowly, then all at once.




Back to the Global Macro Grind


Whether it was the Russell 2000 (-3% in 2 days) or Biotech (IBB) stocks (-5% in 2 days) … or whatever all-time-bubble-high mo mo stock that started blowing up in March that’s re-blowing-itself-up this week, you do not want to be the guy in this game who got crushed.


Been there, done that. If you’ve never been crushed, you will be. This is what people on the buy-side actually talk about. The not so subtle secret about this profession is that almost everyone I know on the buy-side talks about everyone else’s performance.


I had a fair amount of feedback by simply citing AQR’s contention that hedge fund correlation is high right now. To be fair, calling it high isn’t fair though. It’s at all-time highs!


In our Q3 Macro Themes presentation on Friday (11AM EST, ping for access), we’ll show you a lot more than just hedge fund historical performance correlations – we’ll show you Volatility’s Asymmetry, across all of Global Macro including:


  1. Fixed Income Volatility at generational lows
  2. Foreign Currency Volatility at all-time lows
  3. Commodity Volatility at cycle-lows


Yep. Somewhere in between the generational low and the all-time low, I think we’ll all agree is pretty low. But not everyone will agree that it’s not different this time (that’s where we differ!).


Not surprisingly, as volatility dries up so does volume. You can ask you friends who work on the Old Wall what trading volumes are like in either FICC or Equities right now. I’m sure their day-to-day flow isn’t going to make you want to run out and build a broker dealer.


The Fed, of course, is who you can blame for this. The Policy to Inflate asset bubbles to all-time-highs (and never call them bubbles) is in and of itself a bubble. At the same time that they’re trying to ban economic gravity, they’ve all but eviscerated volatility (for now).


In an interview Cliff Asness (he runs AQR Capital Management and did the hedge fund beta piece) had with Morningstar a few weeks ago, he made a very simple summary point about all of this: “The average still can’t beat the average.”


So, don’t be average. Fade beta.


#FadingBeta is a very profitable risk management strategy, especially at the immediate-term momentum turns.


We’ve built our own models to signal when those phase transitions are most likely to take place. And I think, across big macro asset classes, we have done a better than bad job at calling lots of big macro turns since 2008.


What is the turn?


  1. When our immediate-term TRADE momentum signal exhausts itself to the upside…
  2. Then you get a sharp move off that high, on accelerating volume and rising volatility…
  3. Then the asset price makes a series of lower-highs, and snaps its intermediate-term TREND


Metaphorically, I call this the #waterfall. In my risk management model, when something does all 3 of the aforementioned things AND I have the research team support the why (as in why it can continue, with catalysts), we have ourselves what we call a short idea.


You can call it #FadingBeta, short selling momentum, or just not being the guy who bought Go-Pro (GPRO) at $48 last week. There are many ways to use this weaponry so that you don’t get crushed.


I’m not saying that being a levered long momentum investor doesn’t work. I’m just reminding you that A) it’s not a new strategy B) lots of funds are using it and C) when it unwinds from it’s all time high in AUM, it gets crushed (see March-May 2014 for details).


Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signal in brackets) are now:


UST 10yr Yield 2.49-2.60% (bearish = bullish on bonds)

SPX 1 (bullish)

RUT 1167-1190 (bearish)

BSE Sensex 259 (bullish)

VIX 10.32-12.69 (neutral)

USD 79.73-80.37 (bearish)

Pound 1.70-1.72 (bullish)

WTIC Oil 102.63-104.99 (bullish)

Natural Gas 4.17-4.39 (bearish)

Gold 1 (bullish)

Copper 3.20-3.30 (bullish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Crushed Spirits - Chart of the Day


TODAY’S S&P 500 SET-UP – July 9, 2014

As we look at today's setup for the S&P 500, the range is 36 points or 0.75% downside to 1949 and 1.08% upside to 1985.                           













  • YIELD CURVE: 2.06 from 2.05
  • VIX closed at 11.98 1 day percent change of 5.74%


MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, July 4 (prior -0.2%)
  • 10:30am: DOE Energy Inventories
  • 2pm: Fed releases minutes from June 17-18 FOMC meeting
  • 2:30pm: ECB’s Draghi speaks in London



    • President Obama delivers remarks on the economy in Denver’s Cheesman Park; meets with Texas Gov. Rick Perry to discuss crisis on border
    • Treasury Sec. Jack Lew, Sec. of State John Kerry participate in sixth round of U.S.-China Strategic and Economic Dialogue in Beijing
    • 9:45am: Senate Foreign Relations Cmte hearing on Russia and developments in Ukraine
    • 10am: Senate Homeland Security Cmte hearing on issues at Mexico border, including unaccompanied children arriving from Central America
    • 2:30pm: Senate Commerce Cmte hearing on student athletes



  • AbbVie seen raising Shire offer fifth time to win tax break
  • AbbVie says it hasn’t got written support for Shire offer
  • Salix to move to Ireland in Cosmo Pharma tax inversion deal
  • Citigroup said near mortgage accord as NYT cites $7b deal
  • Citigroup distressed-debt head Balkan said to join Silver Point
  • Alcoa profit beats estimates as aluminum smelting unit recovers
  • SEC’s high-speed trader plan embraced by funds incl. Invesco
  • Allergan said to plan expanded cost cuts amid Valeant defense
  • American Airlines said to near $2.6b CFM jet-engine order
  • Amazon offers authors all e-book proceeds amid Hachette dispute
  • Calpers may not get special protection in bankruptcy: judge
  • America Movil to break up Mexico unit amid regulator demands
  • Big question for Brazil mkts post-cup concerns protests: SocGen
  • Media moguls gather at Allen & Co. conference in Sun Valley
  • Wallenberg family’s EQT in hunt for Swedish fiber riches
  • Pfizer wins bid to have Celebrex investor suits dismissed
  • Short selling falls to lowest point since before crisis: FT
  • Finra sending “sweep letters” on retail broker routing: WSJ
  • China producer prices fall at slowest pace in 2 years
  • Gaza rockets reach Tel Aviv, Jerusalem amid troops build-up
  • Fed watcher’s guide to minutes: rate increase date, jobs outlook



    • Cogeco Cable (CCA CN) Aft-mkt, C$1.23 - Preview
    • Helen of Troy (HELE) 4:01pm, $0.93
    • MSC Industrial (MSM) 7:30am, $1.07
    • WD-40 (WDFC) 4pm, $0.72



  • Corn Falls Near Four-Year Low on Outlook for Record U.S. Harvest
  • Gold Gains in London as Palladium Trades Near 13-Year High
  • Russia Loans Shrink as Sanctions Spur Bank Retreat: Commodities
  • Brent Crude Trades Near One-Month Low With WTI Oil on Supplies
  • Ukraine Risk Premium Fading for EU Gas on Ballooning Inventories
  • Gold Bulls Run as Holdings in Biggest ETP Erase Decline in 2014
  • Aluminum Touches One-Year High as Alcoa Projects Larger Deficit
  • Libya Plans Gradual Oil Exports Increase to Avoid Disrupting Mkt
  • Steel Rebar in Shanghai Falls as China Factory-Gate Prices Drop
  • Rubber Falls to 3-Week Low Amid Concerns China May Cut Imports
  • Copper Bulls Returned on LME in Marex Spectron Analysis
  • Japan Buys 33,395 Tons of Feed Barley in Tender Today
  • Copper Seen by Goldman Grinding Lower as Demand in China Wanes
  • Buzzard Share in Forties Crude Drops to 5-Mth low Last Week: BP


























The Hedgeye Macro Team
















Poll of the Day Recap: 63% Voted The 10-Year Treasury Yield is Headed Lower

All year long, consensus has been consistently wrong on bonds, arguing that rates were headed higher. Hedgeye has been on the other side of that trade. We have been advising our subscribers to buy bonds, that U.S. growth was slowing, and that yields were going to continue falling as a result.


In the video below CEO Keith McCullough discusses the positive correlation between the 10-Year Treasury yield and the direction of U.S. growth and how it is one of the key influences which will cause the 10-Year Treasury yield to surprise to the downside in Q3.



We wanted to know what you thought. Is the 10-Year Treasury yield heading higher or lower in Q3?


At the time of this post, 63% voted LOWER, 37% voted HIGHER.


Those who voted the 10-Year Treasury yield is headed LOWER reasoned:

  • U.S. economy's growth stocks have peaked.  2014 has been and continues to be strong for slow-growth stocks/entities/bonds for the foreseeable future.  Given the lack of substantive U.S. growth (sustained 3.5%+), monetary policy will continue to produce inflating costs in stuff and asset prices until it can't.  Currently, the Fed still can, so bonds, commodities, and slow-growth entities is where the market is positioning in this environment.
  • The world still sees the U.S. treasury’s market as the "best house in a bad neighborhood" and they believe the Fed will ultimately give in on the Taper.
  • That is what the bond market is telling us currently.  So unless, the Fed changes course in the next 90 days, the yield should remain flat to lower.
  • If last Thursday's job number can't get the 10 yr yield excited, I don't know what will.


Voters who said the 10-Year Treasury yield is headed HIGHER had this to say:

  • Inflation 

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Cartoon of the Day: It's Different This Time

Takeaway: We'll say it again: At first risk happens slowly, then all at once.

Cartoon of the Day: It's Different This Time - Bull and bear cartoon 7.08.2014

VIDEO | McCullough: 3 Reasons Why Stocks Are Getting Whacked

Hedgeye CEO Keith McCullough explains the reasons why stocks have fallen during the last two sessions and why most hedge funds were not positioned for this decline.

Wal-Mart CEO's Not-So-Good News for U.S. Consumers: 'It's Not Getting Any Better'

Takeaway: When Wal-Mart's CEO talks about the US consumer, we listen.

Editor's note: This is a brief excerpt from Hedgeye retail sector head Brian McGough's morning research. Click here for more information on subscribing to Hedgeye.


U.S. job rebound not spurring spending, Wal-Mart's Simon says


Wal-Mart CEO's Not-So-Good News for U.S. Consumers: 'It's Not Getting Any Better' - walmart

  • "In an interview with Reuters, Bill Simon, the president and chief executive officer of Wal-Mart U.S., said the improving employment picture had so far failed to raise cash register receipts at the retailer's U.S. stores. 'It's really hard to see in our business today … that it's gotten any better,' he said."
  • “'We’ve reached a point where it’s not getting any better but it’s not getting any worse – at least for the middle (class) and down.'"
  • "Simon said Wal-Mart's lower- and middle-income customers appeared to have made a number of changes to their shopping habits that were 'not the best thing in the world for a retailer,' splurging on events like back to school and holidays like the Fourth of July, but pulling back spending in between. 'They’re adapting to what has been a difficult macroeconomic situation,' he said."

Read the whole article at Reuters.


Takeaway: Nothing earth shattering here, but when Wal-Mart (WMT) talks about the US consumer we listen. The company has over 30 petabytes of shopper data to draw conclusions from. All in, this is not a ringing endorsement for the median American consumer. And it doesn’t bode well for our two least liked names in this space - Target (TGT) and Kohl's (KSS).


When we looked at shopping intent over the last 3 quarters, WMT was the only retailer in the space with positive readings, so if it is still feeling the macro heat then that pain is being felt across the rest of the industry.

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