2015 Predictions

“My prediction? Pain!”

-Mr. T


For those who are in the business of being paid to issue wire-to-wire-JAN-to-DEC annual predictions, that is…


I can also predict, with 100% certainty, that market and economic risks (often two very different things) will accelerate and decelerate throughout the year, in rate of change terms. So let’s embrace the dynamic and non-linear uncertainty of that.


On behalf of everyone on my team, I wanted to wish you, your families, and firms the best of luck and health in 2015. Working together, I know we can make this year every bit as successful as 2014 was.

2015 Predictions - Happy New Year 2015


Back to the Global Macro Grind


What defines a successful year in terms of professional growth is often different vs. the YTD performance that stares us in the face each and every day. Since I think of most things in rate of change terms, progression vs. regression is as important to me as anything.


Are we learning from our mistakes or are we making excuses? Are we challenging ourselves to evolve our processes or are we being complacent? Are we enjoying the path of progression or are we just trying to get paid?


For me personally last year was quite satisfying. It was the 1st year in my career that I was able to translate a bearish view on big Global Macro factors (rate of y/y change in growth and inflation) into an uber bullish position on the long side (the Long Bond).


To review the score:


  1. Depending on what version of the Long Bond Index you had on, you were +24-41% in 2014
  2. The SP500, Dow, and Russell 2000 were +11.4%, +7.5%, and +3.3% in 2014, respectively
  3. Commodities (CRB Index) were -18.4% YTD


Now if your job is to simply navel gaze at one of those US equity centric indexes (you can’t charge active manager fees for that), you’d probably say 2014 was a good year. And I don’t disagree with that. But being long the Long Bond was a great year.


How do you define “great” returns?


  1. Higher absolute returns?
  2. Higher relative returns?
  3. Lower-volatility adjusted returns?


Well, being long the long end of sovereign bond markets from Germany to France to the USA and back again beat their local equity market returns on all 3 of those factors.


That last point on volatility is the most important. It’s also the one that tends to tackle most momentum oriented fund managers, eventually. There is nothing that crushes levered-long beta faster than a breakout in the volatility of an asset class’ price.


If you’re a US equity only investor, the lower-volatility + higher-absolute-and-relative returns came in mostly slow-growth, lower-beta, #YieldChasing sectors:


  1. Number 1 (within the Top 9 S&P Sectors) for 2014 was Utilities (XLU) at +24.3% YTD
  2. Number 2 for 2014 was Healthcare (XLV) at +23.3% YTD


Yep, instead of being long #deflation (Energy stocks, XLE, DOWN -10.6% YTD), these slower-growth, lower-volatility sectors had similar returns to what? Yep – the Long Bond.


Tech (XLK) had a good year at +15.7%. But most of the outperformance in Tech came from the low-beta big cap names like AAPL and MSFT (+40% and +30%, respectively) where stock specific volatility got smashed inasmuch as small-cap social #bubble stocks did.


Then, of course, there was the rest of the world (no, it didn’t cease to exist) in Global Equities where you could have lost everything you made in your Russell or Dow allocations if your RIA’s pie chart had you “diversified” into:


  1. Russian stocks -42.6% for 2014
  2. Greek and Portuguese stocks -25-26% on the year
  3. South Korea’s KOSPI (heaviest weight in the EEM index) -3.7% in 2014
  4. Brazil’s Bovespa -2.6% YTD
  5. FTSE (UK index) down -2.1% for the year as well


And no, I won’t go into all of the #GrowthSlowing and #Deflation realities that train wrecked COMMODITIES as an asset class in 2014. I’m trying to be progressive this morning! “So” I’ll keep our net asset allocation to commodities right where it’s been, at 0%.


As far as my 2015 predictions go – I don’t have any. Or at least not on the JAN-DEC terms that the #OldWall and its media drives advertising revs. That said, I’ll tell you what wouldn’t surprise me in the next 6-10 months (because it’s already happening):


  1. Global #Deflation Risk becomes consensus, as central planning Policies to Inflate fail
  2. Interconnected risks, across asset classes, linked into global #GrowthSlowing + #Deflation continue to rise
  3. Late-cycle US growth indicators (like employment) slow, in rate of change terms
  4. Early cycle US growth indicators (like Housing and Restaurant traffic) accelerate, in rate of change terms
  5. I lose 5-10 pounds, because I need to


Yes, I predict pain (for myself) in cutting out my post Mite Hockey practice Mickey D’s meals on Tuesday nights too.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.13-2.25%

SPX 2017-2090


VIX 16.03-19.95

EUR/USD 1.20-1.22

Oil (WTI) 52.61-55.38

Gold 1167-1195


Best of luck out there this year,



Keith R. McCullough
Chief Executive Officer


2015 Predictions - 01.02.14 chart

January 2, 2015

January 2, 2015 - Slide01

Positioning for Fire

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

“From the elevation of retrospect we can see it all coming together more clearly and sooner than those who were there and running.”  - Norman Maclean, Young Men and Fire

On August 5, 1949 fifteen young men parachuted out of a C-47 transport plane to fight a wildfire in the remote forests of central Montana. 


It was the dead of summer in the middle of an extreme heat wave.  On the day of the jump it was 97 degrees, then the hottest day on record in Helena, Montana.  The fire danger rating was 74 out of 100, which meant “explosive potential.”  It was so windy that the turbulence onboard the plane caused one of the men not to jump, return to the base, and immediately resign.  The men that did jump landed on a steep slope in Mann Gulch that was covered in dry, knee-high grass… 


Within two hours of landing all but three of the “smokejumpers” were dead. 


What happened in Mann Gulch that day was one of the greatest disasters in US forest-fire fighting history.  The lessons learned from the tragedy had a significant effect on how the US Forest Service fought wildfires for years to come.


Positioning for Fire - top pic for EL


I think of wildfires a lot like I do investment research, in that the identification and understanding of an unstable system is the primary goal.  A wildfire occurs because existing conditions allow it to: the forest is dry, it’s hot, it’s windy, and there hasn’t been a fire in a long time.  As conditions become more extreme, the probability of fire increases.  So, as a fundamental analyst, I try to figure out where the hot, dry forests are before everyone else does, and before they go up in flames.


The instantaneous cause of the wildfire – the “catalyst” – is a secondary concern, and often, unpredictable.  If the forest is dry and hot enough, any small spark can set it ablaze, at any moment.  Will it be an irresponsible campfire?  A bolt of lightning to a dead tree?  A cigarette butt thrown from a car window?  It doesn’t really matter because the result is the same, the forest burns down.


Didier Sornette, an expert on financial crises, summarizes the point:


“...a crash occurs because the market has entered an unstable phase and any small disturbance or process may have triggered the instability. The collapse is fundamentally due to the unstable position; the instantaneous cause of the collapse is secondary. Essentially, anything would work once the system is ripe… a crash has fundamentally endogenous, or internal origin.”


I don’t spend a lot of time trying to forecast what I’m ill-equipped to forecast with a high degree of confidence.  I don’t know when lightning will strike.  But I can put forth investment ideas that are based on sound data and reasoning, and are likely to work under various assumptions and scenarios.  And when the spark is set, I am prepared and well-positioned. 


I’ve written about no company more than LINN Energy (LINE, LNCO) over the past two years because I thought that the system was extremely unstable.  The basic story has always been the same – the company makes no real profit, but dividends out $1 billion per year, which it pays for via serial debt and equity issuance.  As I saw it, it was highly likely to end disastrously.  The pushback was consistent, “There’s no catalyst.”  This was not a good idea, I was told, because there wasn’t a lightning storm in sight…


…And then the price of crude oil tumbled from $100 to $55 per barrel, prompting more investors to doubt the sustainability of LINN’s business model, and sell.  The prices of LINN’s stocks and bonds plummeted quickly; in just three months LINE and LNCO fell 60%, and the unsecured bonds lost 25 points.  The “catalyst” is now clear, as it always is in retrospect.  It was the oil price collapse, though it easily could have been something else: a failed acquisition, an SEC enforcement action, a rise in interest rates, another leg down in the natural gas price, or something else I never even considered.…  It doesn’t matter – we were well positioned for any small disturbance to trigger the instability.


Our latest energy investment idea is an unstable situation of a different kind – and this one we like on the long side.  Natural gas pipeline MLP Boardwalk Pipeline Partners LP (BWP) trades at a 50% discount to its peer group because it doesn’t dividend out all of its cash flows.  Investors are still sour from the February 2014 distribution cut – which we called for in advance – and have not recognized the positive turn that BWP’s business took this year.  In our view, this is an unstable system waiting for a trigger to re-rate the stock higher...  (Ping us if you’re interested in learning more about our work on BWP.)


What else in the financial world is at risk of going up in flames?  Like the Mann Gulch disaster of 1949, it’s not always easy to recognize an unstable system for what it is…  Are you prepared and well positioned for the lightning strikes and errant campfires that will invariably come?


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.03-2.23%

SPX 1963-2075

RUT 1130-1199

VIX 15.21-24.58

Yen 116.97-121.38

Oil (WTI) 52.02-58.32 


Kevin Kaiser

Managing Director


Positioning for Fire - chartofday


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Great Moments in #TimeStamping

This note was originally published December 30, 2014 at 08:08 in Early Look

“You only have a full-year target if someone pays you a lot to have a full-year target”

-Keith McCullough on market dynamism & quixotic sell-side pursuits



We start every morning missive with a quote.  Sometimes it’s inspirational, sometimes it’s intentionally flippant but, hopefully, it always carries real-time relevance and helps distill some signal from the global macro noise.  


Alpha is Early Look modus operandi number one, but if it makes you laugh or re-think or get angry, it’s served its purpose.


Anyhow, with the 2015 market prognostications piling up into year end, we thought we’d lighten the tenor in today’s note and look back a bit as we look forward to the new year. 


Neils Bohr famously quipped that, “Prediction is very difficult, especially if it’s about the future”.    


The short selection of some of our favorite misadventures in #TimeStamping below bears witness to that reality and provides a potent reminder that imagination remains a scarce resource, conventionalisms box can be hermetic  and humility oft follows hubris.


If you have favorites of your own, feel free to pass them along.  They will, at the least, be tweeted. 





“We see no serious broader spillover to banks or thrift institutions from the problems in the subprime market…We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”    - Ben Bernanke,  May 17, 2007


“We don’t know what we’ll be doing a year from now. It’s a mistake to try and get too precise…you can’t expect the Fed to spell out what it’s going to do...because it doesn’t know…Year after year we have had to explain why the global growth rate has been lower than predicted.”  - Stanley Fischer providing a little 2014 FOMC truth serum


“In all likelihood world inflation is over” - Per Jacobbson, IMF, 1959


“I believe the fundamentals of our economy are strong. Very Strong” - John McCain during run for President, 6/5/2008


“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies”  - Senator Barack Obama, 3/16/2006


“There is no doubt that the regime of Saddam Hussein possesses weapons of mass destruction. As this operation continues, those weapons will be identified, found, along with the people who have produced them and who guard them.”  - General Tommy Franks


“Everything that can be invented has been invented”  - Charles H. Duell, US patent office, 1899


“Who would want to use it anyway?” - President Rutherford B Hayes on the telephone, 1876


"The world only needs five computers"  - Thomas J. Watson Sr, President of IBM


“They couldn’t hit an elephant at this distance” - General John Sedgwick moments before being killed by enemy fire. 


"I will say that I cannot imagine any condition which could cause a ship to founder. I cannot conceive of any vital disaster happening to this vessel. Modern shipbuilding has gone beyond that." -  Capt. E. J. Smith of the Titanic, a few days before it sank.


“If I had asked people what they wanted, they would have said faster horses.” - Henry Ford


And, of course, perhaps the pithiest prediction from one of the Great Moderation’s foremost prognosticator’s…..


My Prediction?...PAIN! - Mr. T, 1982





We’ve #TimeStamped 2,969 signals in Real-Time Alerts since 2008.  The historical data is there to see and download on our website and in the Chart of the Day below we show the return distribution across RTA’s 6+ year history.  In our attempt to further the evolution towards an investing meritocracy, we feel we’ve built a better Risk Management mousetrap. 


As always, you are free to disagree.  We happily accept and consider all (thoughtful) criticism as we work to continually evolve the process. 


”You have two ears and one mouth, use them in that proportion”.   I’m not sure to whom that’s attributable, but Hedgeye would sign off on its sageness.     


Our immediate-term Global Macro Risk Ranges are now :


UST 10yr Yield 2.06-2.23%

SPX 1981-2122

RUT 1145-1240

KOSPI 1888-1937

Oil (WTI) 52.56-55.79

Gold 1168-1196


Happy Birthday Lebron James & Tiger Woods and Happy Tuesday - the humpday between Monday and humpday


Christian B. Drake 

Macro Analyst


Great Moments in #TimeStamping - RTA 2008 Present

Cartoon of the Day: Happy New Year!

Cartoon of the Day: Happy New Year! - Happy New Year 2015

We wish you a wonderful and prosperous new year filled with abundance, joy, and success. May 2015 be your best year yet!

#Patient Risk Managers

This note was originally published at 8am on December 18, 2014 for Hedgeye subscribers.

“The two most powerful warriors are patience and time.”



In case you didn’t know that I’m not a fan of centrally planned markets and economies, now you know. My long-term risk management call remains that any asset price inflation that is based on perma-planning will end in some form of a deflationary shock.


And while I know everything is rainbows and puppy dogs these days in the US economy (it’s going to “de-couple” from all of Global Macro markets, but bounce when they do!)… even the most avid perma bull on global growth should note that the Top 5 Stories on Bloomberg this morning have everything to do with central planners bailing markets out of the “everything is awesome” narrative.


Janet Yellen leads headlines this morning, followed by Mario Draghi (Europe), Shinzo Abe (Japan), a Swiss dude you probably don’t know (Switzerland cut interest rates to negative), and, of course, Vlad – as in Putin. Other than what went violently wrong in markets in the 1st two weeks of both October and December, what could possibly go wrong? #Patience, Risk Managers. Patience.

#Patient Risk Managers  - Card house cartoon 12.03.2014


Back to the Global Macro Grind


Away from her ridiculous comment that the crash in Oil is “transitory” (she can’t call bubbles, but she can call crashes… boil the oceans, part the heavens, etc.), I must give Janet Yellen props for having the #patience to wait until year-end to cut her forecasts (again).


This is big news for Hedgeye as the Fed, once again, effectively agrees with our core macro call that:


  1. Growth is slowing
  2. Inflation is slowing


I recapped the sell-side forecasts for you on Tuesday. Here are the Fed’s for 2015:


  1. GDP Growth cut from 3.5% to 3.0%, lowering the range to 2.6-3.0%
  2. Inflation cut from 2.2% to 1.9%, lowering the range to 1.0-1.6%


Notwithstanding that the Fed’s forecasts on growth and inflation have been wrong 60-70% of the time since Bernanke/Yellen took over the central planning bureau, the point here isn’t about good or bad – it’s about better or worse.


One of my Partners here @Hedgeye (Josh Steiner) coined that one-liner… and since I’m a rate of change guy, I like it. It’s simply another way to say the same thing. I don’t care much about absolutes – I care about the slope of the line. Is it slowing or accelerating?


Clearly, both locally and globally, the rate of change in both growth and inflation expectations are slowing. That’s why US, German, and Japanese bond yields continue to fall. That’s also why FX, High Yield, Commodity, and Equity Volatilities continue to accelerate.


“So” (Janet said that every other sentence yesterday, proving she’s in the tank with #OldWall groupthink), now that most things Global Macro have corrected (and bounced) again, what do we do next?


  1. As Long-term Risk Managers (Long-term Investors, I know you like that term!) we want to have #patience
  2. From Oil to Energy stocks, to EM and High Yield, we want you to recognize that #Deflation’s Dominoes take time


What we don’t want you to do is very straightforward:


  1. Don’t chase high, and freak out low
  2. Don’t believe the Fed’s forecasts (front-run them)


That’s it – just #FadeBeta (when the non-consensus view on growth and/or inflation is the most probable one).


Don’t be a Consensus Macro perf chaser who gets stimulated above the 50-day moving monkey and depressed below it. That is not going to make you a warrior of the alpha generating gridiron. No Sirs and Madames. That is going to make you mentally weak.


I don’t do weak. And I don’t do drawdown risk either. If I can proactively prepare you for it, that is…


If you nailed every 50 handle whip-around in spooz perfectly for the last 2 weeks, congratulations. We had a great year here, so send me your docs and I might give you some of my money to manage. If you did not, and stayed the course of patient, dynamic asset allocation:


  1. You sold some of your long duration bonds at 2.03% on the 10yr
  2. You bought some #Quad4 US Equity Exposure (Healthcare or Utilities were 1-2 for us this week)
  3. You shorted more Burning Yens and Euros high, against a net long US Dollar FX asset allocation


I didn’t have to nail every US stock market move to get that right in our asset allocation model. I just had to have the patience to not buy the November highs in US stocks and/or get shaken out of my Long Bond and US Dollar allocations on the recent November pullbacks.


Patience and time. They work in risk management as well as your best long term ideas do. Be a powerful warrior versus the tyranny of centrally planned momentum chasing consensus.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.03-2.19%

SPX 1960-2030

VIX 16.33-25.27

USD 88.15-89.67

Yen 116.16-121.11

WTI Oil 52.49-59.91


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


#Patient Risk Managers  - 12.18.14 EL Chart

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