Hedgeye Risk Management CEO Keith McCullough delivers his latest market musings and insights during his morning conference call with investors. As usual, he pulls no punches on stocks, bonds and the economy.


Sell Bonds, Buy Stocks

Client Talking Points


One of the main reasons why it has been "less easy" to be bullish on the S&P 500 and the Nikkei was that the Yen was stabilizing versus the US Dollar. Not this week. And the Nikkei loved that Yen breakdown of 97.71 support overnight. It busted a big +2.2% move off the @Hedgeye TREND line of 13,330 support. Correlations matter. 


#RatesRising remains our top Global Macro Theme for Q3. The 10-year is yielding 2.89% this morning. That's up +6 basis points week-over-week and up +38 basis points year-to-date. Boom. This debate should be moving toward when we hit 4% on the 10-year instead of 3%. If the US Dollar joins this breakout in rates, it will continue to be very bullish for growth investors. Bearish for slow-growth positions like Utilities (XLU). Sell bonds, buy stocks.


One of the nice little perks to a #StrongDollar versus weak Yen is a consumption tax cut via #CommodityDeflation. Both the US Dollar and S&P 500 are up now on the week, but the CRB Index is down -1.7% after failing at our 293 TREND line of resistance. Again, correlations matter. Rinse and repeat.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.


Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016.


Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road.

Three for the Road


After a 1.5-3% correction from the YTD highs in the SPY, QQQ, and IWM, I’m seeing the least amount of bulls of the yr


"We should be dreaming. We grew up as kids having dreams, but now we're too sophisticated as adults, as a nation. We stopped dreaming. We should always have dreams." -Herb Brooks 


The Indian rupee hit a record low on Thursday at 65.56 per dollar and is down roughly 17% this year. It has overtaken the yen as the world's worst performing major currency this year. #AsianContagion anyone?


Grind It Out

This note was originally published at 8am on August 09, 2013 for Hedgeye subscribers.

“Success is stumbling from failure with no loss of enthusiasm.”

-Winston Churchill


Four years ago, Keith, myself and Todd Jordan, our Managing Director of our Gaming, Lodging & Leisure team, embarked on a journey in which many people predicted we had little chance of succeeding at. With the support of our colleagues at Hedgeye, we entered the process to purchase the Phoenix Coyotes, a bankrupt NHL franchise.  Our proposal to purchase the team was seemingly received well (as you might imagine Keith played the lead role in that meeting!) and enabled us to become the key contender to own the team.


Our analysis of the situation in Phoenix was vintage Hedgeye. We started with a macro perspective that it was likely the ideal time to buy a distressed asset in the Phoenix region as housing was literally in free fall.  Our view was that housing would ultimately revert to the mean, and thus home prices would see a strong recovery, which would then drive discretionary spending on things like sporting tickets.  In the Chart of the Day, we show the improvement in home prices in Phoenix since that period.


We then took a hard look at the financials of the team (hat tip to our colleague Anna Massion for some good work here), we found a business that was bloated on the cost side with some easy pro-forma cost reductions.  On the revenue side, we developed a plan for steady revenue growth with the unique idea of playing five games in another market (think the Buffalo Bills playing in Toronto).  Even though we came to agreement with the NHL on the parameters of a purchase via a letter of intent, the deal ultimately fell through as we were unable to agree to terms on an arena lease.


At that point, we chalked it up as a loss, but a win on the learning side, and watched over the last couple of years as various other groups attempted, yet failed, to purchase the franchise.  With the advent of the new collective bargaining agreement in 2013, which from our view created a very compelling economic situation for smaller market NHL teams, we decided to revisit the opportunity, almost three and half years after first looking at the team.


Over the course of the last few months, we and our partner Anthony LeBlanc were able to put together a very intriguing financing package with a major hedge fund as the lender. With Anthony’s guidance, an arena lease was negotiated that exemplifies a true public / private partnership.  And finally we found a lead equity investor in my friend George Gosbee from Calgary, who is now the Governor of the franchise, and closed the transaction earlier this week.


For Hedgeye and our partners, the deal was a true lesson in perseverance and teamwork.  Quitting at any point would have been easy, but ultimately we persevered and put the puck in the net.  While we are quite excited about the prospects for NHL hockey in Phoenix, I will ease the minds of any NHL hockey fans out there . . .  despite owning a small piece of the team, you can be rest assured Keith and I won’t be getting on the ice any time soon!


Switching back to the global macro grind, we have a slew of data out this morning.  It was a big macro day in China, in particular with Chinese CPI coming in at +2.7%, PPI declining for the 17th straight month down -2.3% y-o-y, and retail sales up a solid +13.2% y-o-y.  That last data point continues to be supportive of our view that Chinese GDP is in a phase transition from an export led economy with a focus on infrastructure build out, to a consumption driven economy, with a lower aggregate growth rate.


This Sunday we will be getting preliminary GDP numbers from Japan and this will undoubtedly be the focus of many global macro investors. The main event in global macro this year has clearly been the rapid decline and volatility of the Yen.  In turn, this has supported strength in the U.S. dollar, which has implications across asset classes with varying degrees of correlations. 


We have a lot of things at Hedgeye, but a crystal ball is not one of them, so we aren’t going to attempt to tell you where the number will come in.  That said, we continue to have conviction that regardless of any short term data, the Japanese will have to continue to stimulate, and aggressively so, in order to get anywhere in the zip code of their long run inflation target of 2% and nominal growth of 3%. To get to these targets, the Japanese policy makers will require a whole lot of “Control P” (printing), which makes the long run bear case on the yen very compelling.


Back in the U.S., the ferocious bear raid in U.S. equities (to quote my colleague Christian Drake) took its toll with a cumulative decline of 71 basis points over the last four days (#SarcasmAlert). We’ve been harping on this all year, but as the U.S. economy continues to transition from stabilizing to accelerating with labor and confidence hitting levels not seen since 2007, U.S. equities will continue to find a bid on any sell off.


The longer term supporting bid in U.S. equities is, of course, the theme that our financials team has been focused with their recent launch on asset managers, which is the current, and we expect continued, outflows from fixed income assets as interest rates grind higher.  This will only accelerate if U.S. economic data continues to come in strong.


Our immediate-term Risk Ranges are now as follows:


UST 10yr Yield 2.57-2.73%

SPX 1676-1714

DAX 8233-8456

VIX 11.62-13.94

Yen 96.16-98.71

Copper 3.05-3.25


Have a great weekend with your friends and families!


Keep your head up and stick on the ice,


Daryl G. Jones


Grind It Out - Chart of the Day


Grind It Out - Virtual Portfolio

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.






Visitor arrivals increased by 4.9% YoY to 2,565,170 in July 2013.  Visitors from Mainland China increased by 14.0% YoY to 660,096, coming primarily from Guangdong Province (738,106) and Fujian Province (74,292).  Mainland visitors traveling under the Individual Visit Scheme was 730,405. Moreover, visitors from the Republic of Korea (38,416) and the Philippines (18,859)  increased by 6.6% and 0.9% respectively, while those from Hong Kong (598,200); Taiwan (91,226); and Japan (20,593) decreased by 6.5%, 18.7% and 41.4%. 
The average length of stay of visitors held stable from a year earlier, at 1.0 day in July 2013.



Faster Forecasting

“We are almost entirely incapable of predicting the future.”

-George Gilder


That’s the closing sentence to the opening paragraph to “The Need For A New Economics”, which  is Chapter 1 of George Gilder’s latest book, Knowledge And Power. 


The opening sentence is better: “Most human beings understand that their economic life is full of surprises.” And it’s better because it’s more in line with reality than an all-or-nothing statement about forecasting.


For me, risk management isn’t about predicting the future. It’s about probability weighting our decisions within a repeatable, but flexible, process. If you establish a multi-factor, multi-duration process, you’ll find yourself forecasting when you are about to be right and wrong, faster. Changing your mind is more important than anchoring on predictions.


Back to the Global Macro Grind


As I was flying back from Los Angeles last night, I was thinking about everything I always think about when I have time to think – my family, my firm, and the Fed.


What on God’s good earth is the Fed going to do to my family and firm next?


It’s sad, but this is what our said free-market life has become. I was on the road all week seeing clients in California and I couldn’t go through 20 minutes of long-cycle (40-60 years) macro research without having to debate how the Fed can interrupt our analysis of things like economic gravity.

Never mind predicting the future, some of these un-elected central planners think they can “smooth” it! That’s just dumb. And I can only thank progressive information innovations like Google and Twitter for expediting the world’s education on that.


Bernanke’s Fed thought they’d be able to smooth the long-end of the yield curve – nope. Bond Yields continue to rip a series of higher-lows and higher-highs on accelerating US employment growth data. I know, after seeing the Nasdaq and SP500 correct -1.5-3% from their YTD highs, that must be the new bear case for US Equities. The data is now too good.


Got good data? Here’s how the most important leading economic indicator for US bond yields did this week:

  1. Initial Jobless Claims rose 16,000 this week to 336,000
  2. The 4-week rolling avg of claims dropped 2,250 this week to 330,500
  3. The 4-week NSA rolling avg of claims was -10.3% y/y versus last week’s -7.8% y/y

In other words, the bond market has it right. The Fed and bond bulls are still fighting both the data and the market. NSA (non-seasonal adjusted claims) remain our preferred leading indicator, primarily because it fits the 10yr Yield like a glove.


BREAKING: the Fed’s new “forward guidance” model is called the market front-running them.


From our latest Hedgeye Jedi hire, Jonathan Casteleyn, check out this week’s fund flows (i.e. outflow data) in Fixed Income:

  1. Fixed Income outflows accelerated to -$3.9B this week versus -$2.0B last week
  2. Tax-free (municipal bonds) continued their sharp outflow trend, losing another -$2.0B last week
  3. The 2013 weekly avg of Fixed Income inflow has now declined to $469M (vs +$5.8B in weekly inflows in 2012)

That’s not a typo.


Since President Obama is, allegedly, saying “no more bubbles” now, let me write that one more time – this past week’s #RatesRising Fixed Income OUTFLOWS were -$3.9B versus the 2012 Bernanke Bond Bubble weekly avg INFLOW of +$5.8B in 2012.




Nah. This ain’t cool bro. This is what we call another disaster for Americans who got jammed into everything yield chasing from Gold, to MLPs, to anything that looked and/or acted like a low-beta bond used to.


But don’t worry, Bernanke didn’t have anything to do with that or growth oriented investments pulverizing the slow-growth Yield Chasers (like Utilities) since bonds went over The Hedgeye Waterfall in June.


We use the thermodynamic model of the volume and velocity of water approaching its point of entropy (The Waterfall) as an alternative to the broken economic and market forecasting models of the Federal Reserve.


Rather than a crystal ball model, it’s a real-time probability weighted model that embraces uncertainty. And it works. What doesn’t work is attempting to ban and/or smooth things like free-market gravity.


As a result, the only long-term future prediction I will hang my hat on is that American monetary policy will evolve. If I’m wrong on that, as their old boy Keynes would say, in the long-run we’ll all be dead anyway.


UST 10yr 2.78-2.97%


Nikkei 135

VIX 13.97-15.65

USD 80.91-81.90

Yen 97.71-99.09


Best of luck out there today and enjoy your weekend,



Keith R. McCullough
Chief Executive Officer


Faster Forecasting - Chart of the Day


Faster Forecasting - Virtual Portfolio

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.35%