Relative Speak

This note was originally published at 8am on August 22, 2014 for Hedgeye subscribers.

“There’s a lot of cash on the sidelines!”

-Anonymous Pundit

Outspoken hedge fund manager Cliff Asness of AQR recently remarked “Every time someone says, ‘There’s a lot of cash on the sidelines’ a tiny part of my soul dies. There are no sidelines.”

Relative Speak - sidelines

Asness' pet peeve for this common saying implying “this is why the market still has room to run” based on absolute historical fund flows and equity valuations is based on a slightly different interpretation than we prefer to reference. Yet we absolutely agree with his disdain for this statement at face value (although maybe not as pointedly).


With all global market participants attempting to front-run the RELATIVE positioning of each monetary authority, finding the right RELATIVE positioning across asset classes is the key starting point for global macro risk management in today’s environment. We strongly believe that our implication of the POLICY metric into our quantitative model for pinning the convexity of growth and inflation is a key differentiator.  Sticking solely with a strategy that seeks fundamental value through historical, absolute metrics has been a difficult task during the second half of this 6-year bull market.


In an interview discussing his pet peeves and preferable investment strategy, Asness went on to say that in his opinion, two of the main strategies that have worked over the long-term, are value and momentum investing and that combining those works much better than either one.


Value with a catalyst as we prefer to call it?


Back to the Global Macro Grind...


This is only his high level opinion about what works, but when we look at our own process, we believe it’s plausible to back into our own process from this simple statement. We describe our process as “a multi-factor, multi-duration model that utilizes a fundamental and quantitative approach to global macro risk management.”  The quantitative sequence for buying or selling a single security is as follows:


  1. Is the slope of growth and inflation in those economies under the guise of central banks with the ability to print money accelerating or decelerating RELATIVE to consensus expectation as reflected in market prices?
  2. What is the fiscal and monetary response RELATIVE to the other central banks of the “reserve currencies” who, with the confidence of all global participants for now, tighten their credit spread by printing more money? What emerging market economies benefit or suffer?
  3. What do the effects of a stronger or weaker domestic currency mean for real domestic growth based on the componentry of its growth dynamics? How is this observed to confirm or discredit the tendencies in markets?
  4. Now with this overlay, what is fundamentally happening in a domestic economy to strengthen or weaken the outlook for growth?
  5. Which sectors perform better or worse under each scenario (see all four below)?
  6. With this sector bias, pick your long-short ideas
  7. MOST IMPORTANTLY, how do you execute this fundamental call (HINT: Some form of momentum?)
  8. By studying our intermediate-term duration, we can observe key levels of support and resistance to observe the overall TREND in the market.
  9. If in fact the fundamental and TREND signals match up we manage the risk of the range by buying on red and selling on green on the signals.                 


Generating alpha in a market that has gone straight up for the last two years is no easy task. Our best way to seek outperformance begins with #1 above. There are simply four main scenarios in our GIP model (GROWTH, INFLATION, POLICY) for real economic expansion, and front-running the inflection points allows us to pick SECTORS that outperform under each scenario:


  1. Growth accelerating, inflation decelerating
  2. Growth accelerating, inflation accelerating
  3. Growth decelerating, inflation accelerating 
  4. Growth decelerating, inflation decelerating


The monetary response to each scenario and the implications for the strength of an economy’s real purchasing power is predictable in our opinion, but in this never-before seen monetary experiment, front-running the RELATIVE policy response when the centrally-planned machines of different monetary authorities are confronted with the same scenario is difficult. We believe the best- way to front run the big turns is to take in the relevant economic and market data on a day-to-day basis, and position accordingly.


Janet Yellen’s commentary on Wednesday was perceived as more hawkish than the market expected. We weren’t “trading the speech” or hanging on every word, but we didn’t get any indication she is taking a hawkish turn.


Across the pond, Europe has turned severely weaker out of a strong first-half, and the market over the last month has indicated an expectation for a RELATIVELY more dovish Draghi. The tone in his most recent speech reflected his willingness to stand ready for an ABS purchase program. In fact, he more or less said that he would implement an asset-backed purchase program (QE without the government bond and public asset purchase program) immediately if given the authority.


Both the quant signals and our GIP model suggest Europe may slow for the next three consecutive quarters and the FX and gold markets are expecting a relatively more dovish Draghi.


  • The EUR/USD has backed off 1.5% bps over the last month
    • USD breakout vs. EURO breakdown in our model
    • Gold (USD and POLICY-denominated) is down 3% over the last month


CAN DRAGHI CONVINCE THE MARKET HE’LL BE MORE DOVISH FROM HERE? Unfortunately we don’t possess a crystal ball, but our domestic view on overly optimistic growth expectations for the full-year remains intact as it has for all of 2014.


Don’t be afraid to take up your USD exposure and put a little cash on the sidelines (When the USD is going up!)


Have a great weekend.


Ben Ryan



Relative Speak - COD

What's Next?

Client Talking Points


One way to keep the USD up is to have an un-elected central planner burn the Euro as the elected ones in Japan do the same to the Yen. Don’t confuse these unprecedented and coordinated currency devaluations with the next global economic expansion, but DAX did recover our 9648 TREND line!


Tepper (David Tepper, founder of Appaloosa Management) talk gave those who haven’t been long the Long Bond one more chance to buy them on sale yesterday. The UST 10YR Yield backs off again this morning to 2.44% with no support to 2.32%. We’re one bad employment report away from Yellen looking like Draghi has for the last month.


Yes! It came back (sort of) on yesterday’s down move (that’s when we get volume accelerations, on the down moves) with Total U.S. Equity market volume up +29% and +21%, respectively, vs. its 1 and 3 month averages. Biggest risk to U.S. small and mid cap stocks remains liquidity (on the way down).

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


The level of activism in the restaurant industry has never been more rampant.  In the past year alone, we’ve seen CBRL, DAVE, DRI, BJRI and BOBE attract largely uninvited attention from these investors. BOBE has a long history of mismanagement, evidenced by flawed strategic rationale, an excessively bloated cost structure and severe underperformance relative to peers.  Fortunately, its poor operating performance presents a tremendous opportunity. After almost a year of pushing for change at Bob Evans, activist investor Sandell Asset Management is claiming a big victory. Activist investor Sandell won at least five seats on the board of the restaurant operator and food processor, based on preliminary results from the company’s annual shareholder meeting last month. This is precisely the sort of bullish catalyst that was central to our high conviction on BOBE.


Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.

Three for the Road


CHINA: in a down wk for US stocks, Chinese stocks ripped higher to +13.3% YTD (Russell is flat YTD)



While you’re sitting there thinking about it someone else is out there doing it.

-Rodger Halston


It only takes $10,400 to be richer than most millennials (Wall Street Journal).

September 5, 2014

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Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Gunning For Tepper

“Too close for missiles, I’m switching to guns.”

-Top Gun


As a Thunder Bay boy with a lot of testosterone growing up in the 80’s, there weren’t many movies that beat Top Gun. Admittedly, I’m a little competitive, so pardon my passion this morning – “Goose, it’s time to buzz the tower.”


“The son of a bitch cut me off!” in telling the world my call on the Long Bond (TLT) is wrong yesterday.  I don’t know the guy, so it’s not personal. I just flat out disagree. That guy, you know – the New Jersey Consensus TV folks love him. His name is Tepper.


Tweeters say that David Tepper A) has a lot more money than me and B) has killed it on the levered long side since 2009. He also flamed out in 2008 (down -29.61%), so on his rising rates call, I think he’s beatable. “I think I’ll go embarrass myself with Goose now.”


Gunning For Tepper - tg1


Back to the Global Macro Grind


What we need in this game is more head to head debate. Pro to pro. When someone flips me off with the other side of my position, I want to crush him. I don’t care how much he’s worth or what he’s wearing. I wear a $29.99 watch from WalMart, and I like it.


While I’d love to debate Tepper live on interest rate risk (which I still think is to the downside), the reality is that probably won’t happen. (if you know him and he’s game however, I have a nice little 2.0 studio in Stamford called @HedgeyeTV).


Debating big macro topics isn’t personal. It’s what those of us who want to be the Top Gun wake up thirsting for at the top of every risk management morning. Last year I was making the call that rates would rise alongside both US growth expectations and the Fed being forced to taper. This year I reversed the call saying that rates would fall as y/y #inflationAccelerating slowed real US growth.


Yeah, sweet call Mucker. “Take me to bed or lose me forever.”




God didn’t call me with the rates call. My team and I made this call the old fashioned way, using our own models and process. When it comes to what other players out there think, we respect their airspace, but when we get in tight in a dog fight like this, we aren’t going to back down.


Here are 10 things to think about in terms of why rates are going lower (bonds higher) from here:


  1. US GDP growth slowing sequentially in Q3 vs Q2 of 2014
  2. US GDP growth continuing to slow, year-over-year, in 2014 versus the Q3 2013 #GrowthAccelerating top
  3. US GDP entering an early cycle slowdown (bearish on Housing, Consumer, Regional Banks)
  4. US Housing demand not responding to the downside surprise in interest rates
  5. All of Europe slowing in 2H 2014
  6. Japan slowing Q4 2014
  7. Japanese and German 10yr yields of 0.53% and 0.96%, respectively
  8. Institutional Fund Flows reverting back to their slow-growth mean (into bonds, out of stocks)
  9. US 10yr Yield immediate-term TRADE resistance = 2.51%
  10. US 10yr Yield intermediate-term TREND resistance = 2.81%


The biggest differentiator in our models versus those who were bearish on rates in 2013 (and bullish on them in 2014) is our rate of change forecasts on both growth and inflation.


I have stopped calling it our Growth, Inflation, Policy Model and renamed it our PIG model (same factors, in reverse). Why? Because un-elected central planners are pigs when it comes to devaluing the purchasing power of The People in exchange for asset inflation.


To review how all 3 (Fed, ECB, BOJ) of these central planning committees think:


  1. When growth slows, they get easier (print money, or threaten to do “whatever it takes”)
  2. As they get easier, their currencies fall, and the real cost of living in their countries rises
  3. As cost of living rises, real consumption growth falls faster, and they ease again


Sound familiar?


Top 2 headlines on Bloomberg (Economy Go!):


  1. “Draghi Sees Almost 1 Trillion in Stimulus”
  2. “Aso Signals Japan Prepared To Boost Stimulus”


Aso, as in the one who tore the Japanese people a new one via the Abenomics Policy To Inflate that took Japanese Real Wages to -4-5% year-over-year. Then they blamed the weather. #Nice


If the USA shows as much as a sniffle in this morning’s jobs report, what do you think Yellen’s response is going to be? Tighter or easier? We’re one or two bad labor headlines away from the US doing exactly what Draghi just did.


Unlike Tepper, I fly commercial. But I can still change my position whenever I want. For now, if I am right on growth slowing and the Fed’s proactively predictable reaction to it, Janet is going to be my Japanese wing-woman on bonds.


Out immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.32-2.46%


RUT 1151-1181

VIX 11.34-13.65

EUR/USD 1.29-1.32

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Gunning For Tepper - Chart of the Day


TODAY’S S&P 500 SET-UP – September 5, 2014

As we look at today's setup for the S&P 500, the range is 29 points or 1.03% downside to 1977 and 0.42% upside to 2006.                                                   













  • YIELD CURVE: 1.91 from 1.92
  • VIX closed at 12.64 1 day percent change of 2.27%


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Change in Nonfarm Payrolls, Aug., est. 230k (pr 209k)
  • Unemployment Rate, Aug., est. 6.1% (prior 6.2%)
  • 1pm: Baker Hughes rig count
  • 3:45pm: Fed’s Rosengren speaks in Boston



    • Senate, House out on final week of summer recess
    • President Obama views fly-over ceremony, attends NATO summit in Wales, holds press conference, returns to Washington
    • 10am: Nebraska Supreme Court hears constitutionality arguments on Keystone XL pipeline route through state
    • U.S. ELECTION WRAP: Kansas Senate Race; Koch-Backed Ads



  • Jobs-Day guide: U.S. payrolls, participation, wages and hours
  • Barclays, Citigroup accused in suit of manipulating ISDAfix
  • Apple plans new security features after hack of celebrity photos
  • Ukraine ready for truce as NATO cautions on Russian peace offer
  • Gap falls as August same-store sales trail analysts’ estimates
  • Keryx has 82% chance of winning FDA Zerenex approval: analysts
  • Nvidia sues Samsung, Qualcomm after patent deal talks fail
  • German industrial production expands in sign of eco. rebound
  • Eurozone GDP stagnates in 2Q; flash reading unchanged q/q
  • Median incomes fell for all but richest in 2010-13, Fed says
  • Swaps rule requires $644b in collateral, regulator says
  • Autonomy CFO told Lynch of "imaginary deals’’ before HP sale
  • Dollar General’s Family Dollar bid may not be enough: Reuters
  • Bain Capital’s Atento may start U.S. IPO next week: Reuters
  • Apple files reality navigation patents: AppleInsider



  • Long-Term Oil Demand to Slow Even With Higher China Consumption
  • Copper Rises in London Before U.S. Jobs as Surplus Seen Elusive
  • Chemical Boom at Risk as U.S. Ethane Heads Abroad: Commodities
  • WTI Heads for Weekly Drop as Refiners Slow Rates; Brent Steady
  • Raw Sugar Extends Drop to 7-Month Low While Arabica Coffee Falls
  • Gold Is Little Changed Near 12-Week Low Before U.S. Jobs Data
  • Sugar Output in India’s Biggest Producer Seen at Three-Year High
  • Corn Rebounds as Cooler U.S. Temperatures Raise Frost Concern
  • Russia Reports Outbreak of Classical Swine Fever in Southwest
  • Rebar Posts Biggest Weekly Loss in 15 Months as Demand Wanes
  • Palm Trims Biggest Weekly Gain Since November as Reserves Climb
  • Pears Rot in Europe as Putin’s Retaliation Pushes Price Down 70%
  • Copper Traders Most Bearish in Month as Demand Seen Stalling
  • One Putin Ally Sells Stake in Chemical Maker to Son of Another

























The Hedgeye Macro Team
















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