Japan, Russia and Volatility

Client Talking Points


Abenomics is a centrally planned Policy To Inflate = higher cost of living, not real economic growth; Japanese Household spending -4.7% year-over-year in AUG as real wages fell -2.6% year-over-year. These are the facts.


Maybe Japan and Europe just aren’t being aggressive enough! Russian Rubles are -14% in the last 3 months, its stock market is crashing, and now they need to “defend” the currency? #History has seen this devaluation movie many times.


Most of this ultimately plays out in both volatility and liquidity space, so stay with our playbook = long Global Macro volatility and liquidity – short illiquidity (small caps) with impunity… and manage the risk of trading ranges.

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


Shares of Bloomin’ Brands have enormous potential upside says Hedgeye’s Howard Penney| $BLMN ...via @HedgeyeHWP



Laughter is wine for the soul - laughter soft, or loud and deep, tinged through with seriousness - the hilarious declaration made by man that life is worth living.

-Seán O'Casey


303, the number of yards that the New England Patriots gave up in the first half in last night’s 41-14 loss to the Kansas City Chiefs. 

Tech Bubble?

“This is the real world, homie, school finished.”

-Kanye West


That’s the opening quote to the latest business book I have cracked open, The Hard Thing About Hard Things, by Ben Horowitz (of Andreessen Horowitz fame).


Unlike most of the #behavioral and #history books I’ve been citing throughout the year, this one has a much more #bubbly feel to it. I’m only four chapters in but, suffice it to say, I don’t agree with some of Horowitz’ business building and leadership principles.


Maybe it’s because his parents were communists. Maybe it’s because I’m a knucklehead athlete. I’m not sure. I’m just certain that all of the techie “valley” culture and the Keynesian Economics school stuff isn’t playing out according to plan, in the real world.

Tech Bubble? - Bubble bear cartoon 09.26.2014


Back to the Global Macro Grind


Another one of the 2014 Tech Bubble’s “he’s got mad dough, bro” darlings who is selling his book these days (Peter Thiel) made headlines yesterday in telling Fox Business anchor Deidre Bolton that it wasn’t, well, a Tech Bubble.


Thiel, who blew up his hedge fund, multiple times (buying stocks in 2008, shorting them in 2009, etc.) is as academically intelligent as I can be hockey-head dumb, went on to say that it’s not a bubble in stocks because there is a bubble in bonds.


To be specific, Thiel said “I’m investing in Tech stocks to hide from the government bond bubble.” “So”, I replied (in tweet terms to @peterthiel) “I’m hiding in the Long Bond so that I can be short the Tech Bubble.” #timestamped


Got #Bubbles?


We do. On our Q4 Macro Themes Call we have a whole slide deck full of these suckers. If you’d like to be educated on some #history and #context of the current components of the US stock market bubble, please join us this Thursday at 1PM EST.


While there is plenty of low-quality junk debt in this world that we would consider #bubbly, the upside to fully understanding how all of this might end (Japanese style) is that the mother of all bubbles (Japanese Government Bonds) has been inflating for decades.


While I’m not sure if Thiel joined the ranks of the many who have a higher IQ than I and shorted Japan’s debt because the country’s Keynesian Abenomics experiment was going to fail, the only failure in the real world was not being long those bonds.


Homies, here’s the point:


  1. In the face of failing economic policies, Japan, Europe, and USA have only one option – moarrr #cowbell
  2. As these central planners attempt to artificially inflate economies, they simply inflate asset prices
  3. As asset prices (Tech Bubbles) inflate, so does the cost of living associated with those assets (CA real estate)
  4. As the cost of living rises to pain thresholds consumers cannot overcome, the economy surprises on the downside
  5. Then, central planners respond with moarrr #cowbell


I’m sure Kanye West can come up with a song that’s more clever than what this really is. But I’m pretty sure that the 60% of Americans who have negative real wage growth (read: falling purchasing power) since the Fed engaged with its Policy To Inflate get it.


So do the Japanese. Here’s the latest on that Eastern front:


  1. Japanese Real Wages -2.6% year-over-year in August (vs. -1.6% y/y in July)
  2. Japanese Household Spending -4.7% year-over-year in August (vs. -5.9% in July)


In Mucker rapper terms, that is called getting train wrecked.


Oh, and if you aren’t into Burning Yens and Euros, there’s this other devaluation story to update you on this morning – Russia:


  1. The Russian Ruble dropped -14% in the last 3 months (versus a basket of Dollars and Euros)
  2. The Russian Trading System Index (its stock market) is crashing, -19.1% YTD
  3. And the Ruskies are going to now “defend” their currency by raising interest rates!


As it has, across centuries, this is how the Keynesian School of QE and/or Currency Devaluation ends – epically. I’ll have no problem shorting Treasuries (our call for all of last year) when our research and risk management signals tell me to do so.


But, in the meantime, I’ll stay long of Long-Term Treasuries (via TLT, which has a total return of +17.1% YTD) and short of small cap illiquidity and social tech bubbles via anything that is getting smoked in TAM terms right now.


While the over 40% of IPO’s that are crashing (down 20% or more from peak) aren’t all techie related, both in # of issues and in market cap terms, the froth of this #Bubble in US growth expectations is as big as when Horowitz’s first company almost went bankrupt.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.46-2.56%


RUT 1097-1132

VIX 13.81-16.75

EUR/USD 1.26-1.29

WTI Oil 91.69-94.98


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Tech Bubble? - 09.30.14 10Yr vs. case shiller san fran

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Barking Cats

This note was originally published at 8am on September 16, 2014 for Hedgeye subscribers.

“A government institution that is not dominated by politics is as likely as a barking cat.”

-Milton Friedman


To be balanced, I like to fact check what high profile economists have stated as fact. And while Friedman’s statement was more of a probability-based one, there’s a YouTube video (click here to watch) that shows a cat that was (allegedly) barking, but resumed meowing. There are 19,624,067 views of this thing. #Riveting


There was an article in the Wall Street Journal yesterday that suggested that the Mother of All Doves (Janet Yellen) attacks like a hawk. While everything in the Currency War is relative (when Draghi devalued the EUR/USD, she looked relatively hawkish), in the face of slowing US and European economies, Yellen raising rates is as likely as my dog purring.


Oh, and I don’t have a dog.


Barking Cats - cat1


Back to the Global Macro Grind…


So what do you do if Janet reverts to meowing like a dove?


1. Buy the Long Bond (TLT)

2. Buy stocks that look like bonds (XLU)

3. Buy Gold (GLD)


That’s what Mr. Market told you to do yesterday. That’s what he told you to do in 2011 (when Europe slowed last time) too. Here are your timestamps in what was a big time diverging US equity tape yesterday:


1. Utilities (XLU) up +0.3%

2. US IPO Bubble (IPO) -2.1%

3. Russell 2000 (IWM) -1.1%


To be fair, away from the 40% of IPOs that have blown up already (-20% from peak in the last 12 months), 60% of these puppies have been barking alpha to the upside. If you’ve played lucky on that front (or are just a supreme stock picker), congrats!


The Nasdaq got tagged for a -1.1% drop yesterday too. The beta-chasing there (and in small/mid cap stocks) has been epic this year, if only because you could have been neutered (dogs don’t like that either) on the long side 40-50% of the time.


Pardon? Mucker, I thought the “market doesn’t go down.” If you call the SP500 (+7% YTD) or the long end of the Bond market (TLT is +12% YTD), the “market”, I guess that is accurate. Unfortunately, most of us don’t get paid to buy the index.


Here are some more US stock market #bubble stats for you:


1. 47% of stocks in the Nasdaq are crashing from their 12-month peak

2. 41% of stocks in the Russell 2000 are crashing from their 12-month peak

3. 6% of stocks in the SP500 are crashing from their 12 month-peak


*note: crash = a decline in price of -20% or more


That’s why I am overly comfortable calling the momentum and small cap side of the US stock market a #bubble these days – it’s easier to do when they are already popping!


It’s also why this year you will see who can really pick stocks. There’s a huge difference between a PM who is up +10-15% YTD with 5-10 positions that have been really right than ones who are -10% to +5%, with 50-100 positions that are trying to not blow up.


As all of you who run money and/or manage your own know, the key to compounding your net wealth is not losing money. Warren Buffett called it rule #1. Believe him. He’ll do anything these days to make his preferred investment a guaranteed win.


In other IPO #bubble news (in both market cap and names that have come public, we are beyond 1999-2000 now):


1. The Ali-bubble (BABA) has raised the top-end of its IPO price range to $68

2. Dave and Buster’s is trying to come back from the dead with a $100M IPO

3. Freshpet is going to try to get $100M of other people’s money through GS and Credit Suisse


Don’t get me wrong. If you are long all of this stuff at a lower-cost basis (pre-IPO) before the Old Wall jams it into the indexes, you are crushing it. That is capitalism and I am a big fan of your being early.


But as I watch this damn Freshpet website shuffle between slides this morning (“Healthy meals, so tasty, dogs and cats might just beg for more!” – is that a CS line for eat this IPO and I’ll give you more BABA?), I can’t say I support coming to this IPO bubble late.


While I am sure there’s another dog you can find purring somewhere on YouTube, I’m not in the risk management business of telling you that everything I learned during the 2000 and 2007 stock market bubbles is different this time.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.34-2.62%

SPX 1977-1995

RUT 1144-1161

VIX 12.86-14.69

EUR/USD 1.28-1.30

Gold 1224-1276


Best of luck out there today,



Keith R. McCullough

Chief Executive Officer


Barking Cats - Chart of the Day


Takeaway: The Hedgeye Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes and noteworthy quantitative signals.

CLICK HERE to view the document. In today’s edition, we highlight:


  1.  Why investors should be raising cash
  2. The risk of broad-based weakness across global macro spilling over into US equity performance
  3. Our preference for shorting domestic small-cap stocks (IWM) over the euro (FXE) going forward


Best of luck out there,


Darius Dale

Associate: Macro Team

September 30, 2014

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Early Look

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