Glacial Cascades

“The key to wealth preservation is to understand the complex processes and to seek shelter from the cascade.”

-James G. Rickards


If you’ve proactively prepared your portfolio for the phase transition of market expectations from inflation to #deflation, congrats. Not being long cascading things like Oil, Energy stocks, and Russian Rubles has been key to your wealth preservation in the last 3 months.


But how many people really think about their net wealth this way? How many people start with Warren Buffett’s 1st Rule of Investing: “Don’t Lose Money?” How many services that you pay for are equipped to monitor complex systems in a dynamic way so that your expectations of risk are constantly changing alongside analyzable factors?


I spent some time discussing these questions at the annual Hedgeye Company Meeting yesterday in Stamford, CT. In order to illustrate how risk manifests slowly, then all at once, I showed what I think was a fantastic 4 minute video on Glacial Calving ( I’d love to see how Draghi and Yellen would centrally plan smoothing that.


Glacial Cascades - 55


Back to the Global Macro Grind


Yesterday I used the snow-pack metaphor to discuss market risk factors that have a rising probability of cascading into asset class draw-downs. The idea was inspired by my friend Jim Rickards, who wrote an awesome chapter called “Maelstrom”:


“An avalanche is an apt metaphor of financial collapse. Indeed, it is more than a metaphor, because the systems analysis of an avalanche is identical … An avalanche starts with a snowflake that perturbs other snowflakes, which, as momentum builds, tumble out of control… The dynamics are the same, as are the recursive mathematical functions used in modeling the process.”

-The Death of Money, pg 265


Unless they are just looking at “charts”, I think almost everyone who gets paid real money to pick stocks, bonds, commodities, etc. has a bottom-up process to analyze securities. In fact, some are quite impressive. But how impressed are you with the systems of analysis our profession uses, from a top-down perspective?


Going on 16 years into this, my experience has been a learning one. The more I read, the less I know. But the more I observe how consensus thinks about top-down macro risks that are developing in this dynamic ecosystem of market expectations, the more opportunity I see in learning more of what not to do, out loud.


You see, while I certainly don’t make the same “money” I used to make on the buy-side, I am making a difference in my learning experience. When you open yourself up to the critique of the crowd (daily), you’re actually forced to learn faster.


In terms of big bang losses of wealth (draw-downs), the lessons, unfortunately, tend to be more expensive for the many, and profitable for the few. That’s why I think making money at the all-time highs in asset price inflation becomes next to impossible, without protecting for the downside risks associated with an avalanche (deflation) like the one we just saw in Energy markets.


Moving along…


Never mind snowflakes, there are two big snowballs that are going to hit you square in the forehead on Thursday and Friday:


  1. Thursday: European Central Bank (ECB) decision by Draghi
  2. Friday: US Jobs Report for November


In isolation, even for people who don’t do macro (but have a macro opinion on everything!) both of these events probably matter. From an interconnectedness perspective, fully loaded with time/price for both Euros and Yens relative to where European and Japanese equity markets are right here and now, these events matter as much as any we’ve seen in months.


Here’s the system’s setup:


  1. Japanese stocks (Nikkei) are signaling immediate-term TRADE overbought with a risk range of 16,945-17,741
  2. European Stocks (EuroStoxx 600 Index) are signaling immediate-term TRADE overbought with a risk range of 337-351
  3. Both the Euro and Yen are signaling immediate-term TRADE oversold vs. USD at $1.23 and $119.56, respectively


In other words, measuring the system’s risk within a “risk range” (where being at the top and/or bottom end of the range increases the probability of a short-term reversal), the probability is as high as it’s been of seeing a big macro reversal.


There’s that word again, probability…


If you’ve never gone heli-skiing on a mountain with identifiably risky snow-pack factors, try it and you’ll get my point. I’m not saying you are going to break your leg going down a certain path – I’m saying some paths/situations have higher probabilities of that happening than others!


Whether you are skiing, or risk managing your portfolio alongside already cascading asset class paths (like high-yield Energy stocks, Silver futures, Brazilian stocks, etc.), you should always be asking yourself a lot of questions:


  1. What if Draghi doesn’t deliver the drugs?
  2. What if Japanese election sentiment forces Abe to tone down the currency burning?
  3. What if the US Jobs reports misses, and the Dollar corrects from its overbought highs?


There are obviously a lot of questions to ask yourself, all of the time – and maybe that’s why some people don’t “do macro” the way we do. It requires a ton of rinse/repeat systems analysis, yes. But, more importantly, it always puts you at the epicenter of the uncertainty of the system… and stock picking tends to “feel” more certain than that.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.16-2.30%

SPX 2032-2078

Nikkei 161

EUR/USD 1.23-1.25

Yen 117.41-119.56

WTI Oil 64.55-70.36


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Glacial Cascades - 12.03.14 Chart

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The Athletic Black Book

Takeaway: The Athletic Black Book. Tuesday, 12/16 at 11:00am ET.

On Tuesday, December 16, we’ll be hosting a call to review our next Black Book, which will be focused on the Athletic footwear and apparel space. Specific names include Nike, Adidas, UnderArmour, Foot Locker, Hibbett, Dick’s, and Finish Line – which collectively offer up a good mix of longs and shorts. We’ll follow up closer to the date (which is two days before when Nike will likely print it’s 2Q earnings) with a full agenda of the issues we’ll cover.


Key Topics Will Include:

  1. Nike’s innovation timeline – and why the next two years will be far different than most people think.
  2. The results of our latest consumer survey on how safe/at risk the Athletic category is relative to others vis-à-vis online cannibalization.
  3. Nike’s willingness (or lack thereof) to grow around its wholesale distribution – as it has historically protected this model at all costs.
  4. The sustainability of Nike’s revenue engine.
  5. The competitive landscape in Athletic product creation – most notably, quantifying the rise of UnderArmour and the malaise we’re seeing at Adidas.
  6. What retailers can do to play their cards right and continue to win as Nike grows.
  7. Which retailers in the US face the biggest business risk, whether through lower revenue, higher costs, or both, to compete in the new reality of Athletic retail.  

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Takeaway: Looking for a positive pivot to our year long short thesis but with numbers and sentiment heading south, we're definitely not there yet

Explaining the big move lower in the HK listed Macau stocks


The HKSE-listed Macau gaming operator stocks were down big in HKSE trading today, possibly for a variety reasons. We're not sure how well circulated among the investment community, but we've just learned of a government immigration sweep taking place earlier this week in Macau. We remain negative overall on the stocks at least until Q4 and 2015 estimates are reduced dramatically.

the big move

While the Hang Seng Index fell almost 1% today, the HKSE-listed Macau gaming operators were down significantly more:

  • Wynn Macau (1128.HK) -6%
  • SJM (0880.HK) -6%
  • Macau Legend (1680.HK) -6%
  • Sands China (1928.HK) -5%
  • Galaxy (0027.HK) -5%
  • Louis XIII (0577.HK) -4%
  • Melco-Crown (6683.HK) -3%
  • MGM China (2282.HK) -2%

Immigration sweep

While there may have been multiple reasons for such a large move downward, we're most concerned with news of the immigration sweep. We haven't seen any news articles - we heard about it this am from a contact in Macau last night - so we're not sure how much it contributed to the stock move.  


Apparently, mainland Chinese immigration officials conducted an immigration sweep through Macau casinos, bars, and restaurants a few nights ago and took several thousand Chinese visitors into custody for overstaying their transit visas. These detainees where then relocated back into Mainland China.


Combined with yesterday's news of the new Transit Visa scheme, the sweep indicates that Macau/China are serious about the cleaning up Macau before the China President's visit in a few weeks.  VIPs are likely to stay away this month which could dampen GGR even more than the 20-25% YoY decline we're forecasting.


Aside from the overall drop in the Hang Seng and the immigration sweep, other factors likely impacted the HK Macau stocks overnight:

  • An Australia-based investment bank re-initiated coverage of the Macau gaming sector after the close of the HKSE on Tuesday evening, Tuesday morning New York time, with a downgrade of the sector and several operators including Sand China to underperform.
  • Yesterday morning New York time and after the close of the HKSE, we learned of additional Mainland China initiated travel crackdowns on Mainland Chinese attempting to visit Macau on 5-day transit visas - and how Mainland Chinese were being turned back on the China side when attempting to exit China with non-matching travel documents.
  • The release of the GGR detail, while in line with recently reduced expectations in the aggregate, revealed worse than expected Mass revenues and likely lower VIP volumes than expected.


And the hits just keep coming. US listed Macau stocks should be heading lower this morning and over the near-term. We're looking for a positive pivot to our almost year long short thesis but with numbers and sentiment heading south, we're definitely not there yet.


TODAY’S S&P 500 SET-UP – December 3, 2014

As we look at today's setup for the S&P 500, the range is 46 points or 1.67% downside to 2032 and 0.55% upside to 2078.                                   













  • YIELD CURVE: 1.75 from 1.76
  • VIX closed at 12.85 1 day percent change of -10.08%


MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Nov. 28 (prior -4.3%)
  • 8:15am: ADP Employment Change, Nov., est. 222k (prior 230k)
  • 8:30am: Nonfarm Productivity, 3Q final, est. 2.4% (prior 2%)
  • 9:45am: Markit US Svcs PMI, Nov. final est. 56.5 (prior 56.3)
  • 10am: ISM Non-Manf. Composite, Nov., est. 57.5 (prior 57.1)
  • 10am: Bank of Canada seen maintaining 1% overnight lending rate
  • 10:30am: DOE Energy Inventories
  • 12:30pm: Fed’s Plosser speaks in Charlotte, N.C.
  • 2pm: Federal Reserve releases Beige Book
  • 2pm: Fed’s Brainard speaks in Washington
  • 7:30pm: Fed’s Fisher speaks in Dallas



    • President Obama to address Business Roundtable Forum
    • 2:30pm: JPMorgan CEO Dimon, Exxon CEO Tillerson speak
    • 9am: U.S. Chamber of Commerce event on future of financial reporting, auditing profession, w/ PCAOB Chairman James Doty; James Schnurr, SEC chief accountant
    • 10am: House Energy and Commerce Cmte hearing on Takata airbag recalls, with testimony from Hiroshi Shimizu, Takata SVP of global quality assurance
    • 10am: Supreme Court considers arguments in case over right of pregnant workers to be temporarily given new job duties
    • 10am: Senate Environment and Public Works Cmte hearing on Nuclear Regulatory Commission’s implementation of Fukushima task force recommendations



  • Fed Officials Stress Data Over Dates as Rate Rise Case Builds
  • China Services Gauges Climb in Nov. in Support to Growth
  • Euro-Area Economy Weakens as ECB Considers Stimulus Options
  • Apple Pay Partner Stripe Valued at $3.5b in New Funding
  • Cyber Monday Online Sales Rose 17% to $2b, ComScore Says
  • Takata Poised for Clash in Congress After Rejecting U.S. Recall
  • Chrysler-Led U.S. Auto Industry Gains to 17.2m Annual Pace
  • Huntington Poised for $4b U.S. Aircraft Carrier Award in 2015
  • Prudential Financial to Take $494m Charge, Buy Back Debt
  • Sony’s Unreleased ‘Annie’ Said Pulled From Sharing Websites
  • KKR, CJ Korea, XPO Said Shortlisted for NOL Logistics Unit
  • N. Korea’s Fingerprints Said Found in Malware Crippling Sony



    • Abercrombie & Fitch (ANF) 7am, $0.41
    • Brown-Forman (BF/B) 8am, $1.04
    • Leidos (LDOS) 6am, $0.53
    • Royal Bank of Canada (RY CN) 6am, C$1.59 - Preview



    • Aeropostale (ARO) 4:01pm, ($0.45)
    • Avago Technologies (AVGO) 4:02pm, $1.70
    • Canadian Western Bank (CWB CN) 7:30pm, C$0.68
    • Guess? (GES) 4:03pm, $0.18
    • Pacific Sunwear (PSUN) 4pm, ($0.04)
    • PVH (PVH) 4:02pm, $2.48
    • Seachange (SEAC) 4:01pm, ($0.08)
    • Synopsys (SNPS) 4:05pm, $0.61



  • Brent Crude Trades Near $70 as Traders Assess OPEC Decision
  • ICE Targets Asia With Yuan, Crude Futures Set for Singapore
  • Gold Volatility Reaches 9-Month High on Oil Whipsaw: Commodities
  • Gold Climbs as Oil Gains and Physical Demand Picks Up in Asia
  • Zinc Swings as Investors Weigh Dollar Against U.S. Auto Sales
  • Citigroup Panicked Over Fraud at Chinese Ports, Mercuria Says
  • Oil Price Plunge Lends Unexpected Hand to Ailing Southern Europe
  • CME Delays Hong Kong Gold Futures Start to First Quarter of 2015
  • Palm Oil Advances for Second Day as Crude Oil, Soybeans Rebound
  • Rubber Declines as Lower Oil Reduces Costs for Synthetic Product
  • Western Canadian Energy Regulators Unite Amid Pipeline Delays
  • Cliffs Agrees to Sell West Virginia Coal Mines for $175 Million
  • White Sugar Falls to 5-Year Low After Oil’s Drop; Coffee Rises
  • Constitutional Court in Indonesia Upholds Mineral Ore Export Ban


























The Hedgeye Macro Team



















Cut To Pieces

This note was originally published at 8am on November 19, 2014 for Hedgeye subscribers.

“Believe on this day that I will have been cut to pieces, and you not much later than I…”



That’s a quote from the latest leadership, strategy, and #history book I have started to read. It’s one of the Greek classics that I’ve been wanting to study for a long time – Xenophon, The Anabasis of Cyrus.


It’s been a classic year of #divergences in Global Macro risk management (Long Bond TLT +18% vs Russell 2000 flat YTD). So ending it any other way than putting myself on the front line, willing to be cut to pieces by SP500 (SPY) bulls, is right where I want to be.


The SPY is the most widely shorted equity security in US history. In all of her manifestations you’ll find hedge fund victories and defeats. While I’ve been on the “short the Russell” road for most of this year, now I’m here, saying sell it. That is #timestamped.

Cut To Pieces - Crazy bull cartoon 08.19.2014


Back to the Global Macro Grind


I’ll get to the fundamental research view in a minute (both growth and inflation slowing, at the same time), but first I will draw my price, volume, and volatility sword on this matter:


  1. PRICE – SP500 signaled immediate-term TRADE overbought yesterday with no support to 2002
  2. VOLUME – Total US Equity Market Volume was -5% and -26% vs its 1-month and YTD averages yesterday
  3. VOLATILITY – front-month VIX closed at 13.86, well above my bullish TREND line of 11.34 support


In other words, even if I was a raging bull on US growth equity fundamentals (like I was in 2009 and 2013), I’d still have signaled sell into yesterday’s no-volume-short-covering-capitulation-overbought highs.


Back to the fundamentals – here are the Top 3 things confirming our bearish view on US domestic GROWTH:


  1. US GDP growth 2.3% (we model it year-over-year, not sequentially) continues to slow from Q413’s peak
  2. US 10yr Bond Yield = 2.32%, continues to crash (-23% YTD) alongside growth expectations
  3. Russell 2000 = 1170, still -3.1% from its all-time #bubble high (July 7th) and signaling bearish TREND


And here are the Top 3 things confirming our bearish view of INFLATION expectations:


  1. Oil continues to crash this morning, -31% since June
  2. CRB Commodities Index (19 commodities) down another -0.6% to 266 is -5% YTD now and making lower-lows
  3. Both TIPS (5Y Breakeven Rate) and Fed 5Y-5Y Forward Breakeven Rates are breaking down to fresh YTD lows


Then there’s sentiment (which I could give you a hocus pocus “survey” on) or use the only one that back-tests as a legitimate contrarian indicator in my 15 years of notebooks (the II Bull/Bear Spread):


  1. Bull’s ramped to 56.4% (from 55.5%) this morning
  2. Bear’s remain at 14.9% (just off their all-time lows)
  3. Bulls minus Bears = Bull/Bear Spread of +4160 basis pts, to the bullish side!


To put that Bull/Bear Spread in context:


A)     That’s +103% from where it was when perma equity bulls were in the fetal position on October 13th

B)      That’s just inside of the all-time wide to the bullish side


#Agreed. All-time is a long time. And that’s precisely why I’m willing to be cut to pieces by anyone who wants to put their own money (not other people’s) on the naked long side of SPY, from here until I say stop.


I’d be happy to publish your bull case to all readers of the Early Look. Remember though, your cost basis is going to be yesterday’s SPX close of 2051. This is the arena of accountability. My timing may prove to be fatal, but there’s no place I’d rather be.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr yield 2.28-2.35%
SPX 2002-2055

RUT 1151-1187

Yen 115.72-117.61

WTI Oil 73.34-76.62

Gold 1130-1205


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Cut To Pieces - SPX Levels refreshed