Moving America's Future Forward

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

“Sometimes you got to go back to actually move forward.”

-Matthew McConaughey in the new Lincoln MKC commercial



I thought Lincoln nailed it with this one-minute McConaughey spot (click here Lincoln’s newest commercial). Both our personal and collective histories have always provided great sources of leadership and inspiration in this country. “You just have to know where to look.”


Moving America's Future Forward - 4g7


As our firm moves forward, we’ll continue to be the change we’d like to see in America. We’ve created an outreach program called HedgeyeCares and tomorrow we’ll be hosting our inaugural golf tournament to support the area’s youth through the Bridgeport Caribe Youth Leaders, a 501(c)(3) organization. (Here’s a short video we put together with testimonials from current recipients:


We’re also extremely thankful to The Lincoln Motor Company for its title sponsorship.  Lincoln is a great American luxury brand that recognizes the importance of giving back to communities across the country.  With its test drive program  “Driven to Give”, it has raised more than $3.27 million dollars for schools and charities across the United States since it was created in 2011. That’s a great win!


Thanks again to all of our event sponsors and participants. Change doesn’t happen unless we make it happen, together.


Back to the Global Macro Grind


Change happened in macro markets last week. They went backwards! And it wasn’t just stocks that pulled back. They smoked pretty much everything from commodities to bonds to any stock that looked like a bond. That leaves us with a lot to think about ahead of the Fed this week.


Will the US Federal Reserve get more hawkish or dovish at its Wednesday meeting? With the US Dollar having had its biggest point to point ramp since 1997, and the 10yr bond yield ramping +15bps week-over-week to 2.61%, expectations for hawkishness are high.


Since I think this USD ramp has been largely driven by horrendous economic data in both Europe and Japan (weaker Euros and Yens), I think you fade the recent strength in US interest rates and buy what was down the most last week:


  1. Long end of the bond market (TLT and EDV) with no support for the 10 and 30 yr yields to 2.34% and 3.11%, respectively
  2. Gold (GLD) was down -2.8% last week (to +2.1% YTD), and has immediate-term upside to $1275
  3. Utilities (XLU) were down -3.1% last week (to +11.3% YTD), and has immediate-term upside to $44
  4. REITS (VNQ) were down -5.4% last week (to +13.2% YTD), and has immediate-term upside to $77
  5. Emerging Markets (VWO) got sacked last week (MSCI LATAM -6.7% on the wk) and have immediate-term upside to $46


That’s why you see me investing what was our largest Cash position of the year in the Hedgeye Asset Allocation Model, taking up our US Equity exposure from 0% to 6% (split the net long position between Utilities and REITS, and stay short the Russell, Housing, and Regional Banks).


The alternative to buying slow-growth #YieldChasing is, of course, chasing the #MoBros. You know, something like Argentina (ARGT) which was up another +6.1% last week to +105% YTD – even though you really can’t get your money in/out of the country.


With the Russell 2000 down for the 2nd straight week to -0.3% for 2014 YTD, that’s why I still like staying net short (for long onlys its called underweight) one of the most obvious bubbles in America right now – small cap stocks that trade at 50x trailing earnings, with no liquidity.


In other #bubble news, at 30x revenues and $220B in market cap, you’ll have plenty of liquidity in AliBubble (BABA) this week!


While I am sure BABA is a fantastic story… as I see it, the problem with Jack Ma’s company is that... I can’t see it. While the Old Wall is fist pumping this sucker to oblivion this week, that’s the bear case – #opacity. And that’s all I have to say about that.


The other big #bubble callout from last week was #deflation.


Unfortunately, your cost of living didn’t deflate much (CRB Food Index was up another +1.3% on the week to 18.3% YTD, Cattle prices were up another +0.7% to +33.4% YTD, etc.), but that was one of the most broad based selloffs across asset classes of the year.


Most of this #deflation was driven by the biggest currency move (in weekly rate of change terms) we’ve seen in 17 years. When stuff moves that fast, what you get is this thing called volatility.


In rate of change terms, the +10.1% week-over-week move in front month US Equity volatility (VIX) was peanuts compared to the % move in volatility in foreign currency and fixed income. That’s what happens when the Fed suppresses volatility to all time lows. The bubble peaks.


If we’re right and we’re set up for one of the most asymmetric moves in volatility ever (see our Q3 Macro Theme deck titled #VolatilityAsymmetry), Americans may be looking back at late 2007 a lot faster than they think.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.34-2.62%

SPX 1977-1998

RUT 1151-1169

VIX 11.84-14.04

EUR/USD 1.28-1.30

Gold 1229-1275


Best of luck out there today,



Keith McCullough


Moving America's Future Forward - Chart of the Day

China, USD and the Russell 2000

Client Talking Points


Hang Seng slammed for a -1.9% loss on the protest news being the Top Trending Story in macro this morning, but somehow the Chinese marked up the Shanghai Comp on the close +0.4% to a new year-to-date high of +15.1%!


Big deflation signal continues as Draghi devalues (we only like US #GrowthAccelerating on USD up, when Rates are up – and they are falling); we don’t think the Japanese, European or American central plans ultimately work where it matters (i.e. in real economic growth terms).


Russell 2000 slammed for a -2.4% loss last week, making that its 4th consecutive weekly loss and taking its draw-down from its all-time #bubble high -7.4%. Liquidity traps out there are real. Respect them.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.


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.


Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road


Senate democrats pushing CFTC to investigate LME metal warehousing. LME-Midwest premium is 3x higher than  historical avg



I have been up against tough competition all my life. I wouldn’t know how to get along without it.

-Walt Disney


The Russian stock market slammed below its AUG closing lows, -1.1% this morning to -17.8% year-to-date.

CHART OF THE DAY: Legislating Deflation? (10YR Yield vs US Dollar Index)


CHART OF THE DAY: Legislating Deflation? (10YR Yield vs US Dollar Index) - 09.29.15 USD vs. 10 Yr

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Legislating Deflation?

“There are far too many great men in the world; there are too many legislators.”



Today in 1789, the 1st United States Congress adjourned. There were no political parties in Congress back then. Members of US Congress were grouped (informally) according to their voting records. There was at least some peer review and accountability in that.


As far as who was a “great” man back then, I personally can’t tell you for sure. My only certainty is that the more I try to understand #history through the lenses of different perspectives (books), the less I know.


I can tell you with 100% certainty that, of all the great men and women I know, not one is a legislator. The thing about great leaders is that they embrace their own imperfections and rarely feel certain about anything. Find me that in today’s political media and I will happily reconsider. Sadly, the deflation of my expectations continues to accelerate on that front.


Legislating Deflation? - founding fathers


Back to the Global Macro Grind


Deflation and depression aren’t cool feelings. I guess that’s why the Bush/Obama politicians who perpetuated the most recent decade of US economic growth surprising on the downside call the recession a #Great one.


There’s always spin from political incumbents who aren’t telling you the truth about economics.  The Federal Reserve is going to be spinning its wheels with a conflicted “World Economic Think Tank” from Germany called the Kiel Institute this week.


Their topic: “The Labor Market After The Great Recession.” Their problem: that both the US and Germany may very well be entering their next recessions. Yep. So let’s make sure US legislators get told what to do by left-leaning German states in preparation for that…


Deflated yet?


Back to real world leading economic indicators in Global Equity markets, here’s what happened last week:


  1. The illiquid small-cap #bubble component of the US stock market continued to deflate
  2. The Russell 2000 was down another -2.4% on the week and is now down for 4 consecutive weeks
  3. The more liquid (and “cheaper”) Dow and SP500 were down -1.0% and -1.4%, respectively
  4. US Industrial Stocks (XLI) led losers, falling -2.1% on the week and have lagged for the last 3 months
  5. REITS (MSCI Index) corrected another -1.9% as deflation in real estate prices continues in #Quad4
  6. Emerging Markets deflated another -2.7% and -4.2% on the wk for the MSCI EM and LATAM indexes, respectively


In what we call FICC (Fixed Income, Currencies, and Commodities), here’s what Mr. Macro Market said last week:


  1. Draghi’s (un-elected) Devalued Euro move continues with the EUR/USD down another -1.1% on the week
  2. US Dollar Index added to its most deflationary move since 1997, closing up the same that the Euro was down
  3. Canadian Dollars dropped -1.7% in kind, and the Japanese Yen fell another -0.2% on the week to $109.29 vs USD
  4. Commodities (CRB) Index held the 280 line (where it started 2014), closing +0.3% on the week
  5. Gold and Copper were +0.1% and -3.7% on the week, respectively (YTD: Gold +1% vs Copper -10%)
  6. UST 10yr Bond Yield dropped another -5 bps to 2.53%, down -17% YTD (or down 50bps)


That last thing (10yr yield falling) is one thing that the perma-US-growth-bulls have had a very hard time explaining (especially overlayed with the Russell). Since US #history tells you that falling bond yields are never a sign of accelerating growth, that’s for good reason.


Much like the politically partisan, perma-growth-bulls are very good at seeking data that confirms their bullish biases. Instead of talking about early cycle-stocks like Housing (ITB), Regional Banks (KRE), and Consumer Discretionary (XLY) being down for 2014 YTD, they’re now all experts on #Strong Dollar and “falling oil prices” (even though WTI crude was +2% last week to flat on the YTD).


I like #StrongDollar, but only as a leading indicator of US economic #GrowthAccelerating when long-term interest rates are RISING at the same time. Let me write that one more time in these terms: Dollar Up, Rates Up = Hedgeye Bullish On Growth!


That, of course, was why we loved US growth stocks in 2013 and had an equal amount of joy shorting the US bond market. This year, being the only decisively bi-partisan bull/bear risk managers you pay, we have had precisely the opposite position.


I’ll go through the why on Dollar Up, Rates Down (it’s called #Quad4 deflation) on our Q4 Global Macro Themes call this Thursday afternoon at 1PM EST. Institutional Investors, please ping for access.


I’d like to extend an invite to any Member of The 113th US Congress who would like to learn something about where economic risks are going (rather than where they’ve been). I don’t hang with them, so I’d appreciate it if you passed it along to your local central planner.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.48-2.58%


RUT 1100-1136

VIX 13.53-16.13

EUR/USD 1.26-1.29

Gold 1


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Legislating Deflation? - 09.29.15 USD vs. 10 Yr

September 29, 2014

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

As we look at today's setup for the S&P 500, the range is 32 points or 1.05% downside to 1962 and 0.56% upside to 1994.                                     













  • YIELD CURVE: 1.93 from 1.95
  • VIX closed at 14.85 1 day percent change of -5.05%


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Personal Income, Aug., est. 0.3% (prior 0.2%)
  • 9am: Fed’s Evans speaks in Chicago
  • 10am: Pending Home Sales m/m, Aug., est. -0.5% (prior 3.3%)
  • 10:30am: Dallas Fed Mfg Activity, Sept. est. 10.5 (prior 7.1)
  • 11am: U.S. to announce plans for auction of 4W bills
  • 11:30am: U.S. to sell $24b 3M, $24b 6M bills



    • Senate, House out of session
    • President Obama attends DNC event, India’s Prime Minister Modi attends dinner at White House
    • Sen. Ted Cruz addresses National Security Action Summit
    • U.S. ELECTION WRAP: Nunn Calls Perdue Ad ‘Lie’; Cotton Donors



  • Yahoo’s Mayer Says Will Review Starboard Letter Carefully
  • Pimco Suffers $10b of Outflows After Gross’s Departure: WSJ
  • Allianz Won’t Sell Pimco After Gross Departure: FT
  • Encana Schedules Conference Call Before U.S. Market Open
  • Stock Exchanges Plan to Meet Deadline for SEC Audit System
  • U.S. Judge Rules U.S. Bank Must Face Some Peregrine Claims
  • DreamWorks Animation Studio Said Weighing Sale to SoftBank
  • Family Dollar: State AGs to Probe Dollar General Share Deals
  • Ex-Apple CEO Sculley Says IPhone Rollout Drama Overstated
  • Russia Oil Chief Says Sanctions No Bar to Work in Arctic
  • Greenberg Team to Grill Bernanke, Paulson, Geithner on AIG
  • Commerzbank Said to Face Probe of Money-Laundering Controls
  • Oracle Cloud Product to Match’s Pricing: Ellison
  • Alibaba Said to Pay Credit Suisse, Morgan Stanley Top IPO Fees
  • U.S. Iraq Strikes are ‘Not America Against ISIL’: Obama
  • ‘Equalizer’ Tops Box Office; Washington Shows His Worth



    • Cal-Maine Foods (CALM) 6:30am, $1.17
    • Cantel Medical (CMN) 8am, $0.27
    • Cintas (CTAS) 4:15pm, $0.75
    • Ferrellgas (FGP) 7am, $(0.28)
    • Synnex (SNX) 4:05pm, $1.48



  • WTI Crude Set for Biggest Loss in a Week With Brent Before Data
  • ICE Europe Takes Liffe Commodities Markets After 18 Years
  • Hedge Funds Raise Bullish Cocoa Bets on Ebola Risk: Commodities
  • Nickel Heads for Bear Market on Record Inventories Even With Ban
  • Gold Rises on Demand for Alternative Investment as Stocks Drop
  • LME Introducing One-Off Membership Application Fee as of Jan. 1
  • Iron Ore’s ‘Credible Guy’ Albanese Says Weak Prices Will Endure
  • Singapore Bourse to Start Kilobar Gold Trading to Lure Investors
  • Soybeans Drop to Four-Year Low as China Suspends Import Approval
  • Raw Sugar Rises for Fifth Session Before Expiry; Cocoa Advances
  • ABN Amro Commits to China Commodity Finance Growth Post Qingdao
  • Peanut Butter in Maple-Bacon Sandwiches as Prices Tumble: Retail
  • Rebar in Shanghai Falls to Record Low as Iron Ore Price Plunges
  • LME Raises Average Transaction Fees by 34% to Cover Investment


























The Hedgeye Macro Team

















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