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Time to Redeploy Some Capital

Client Talking Points

VIX

The VIX is +32% in the 4 straight down days in the SPX from the 2090 no-volume-year-end-markup, and now that front month VIX is signaling immediate-term TRADE overbought (within its bullish TREND), we think you buy/cover U.S. equities this morning. The risk range for the VIX risk is 16.36-20.59.

UST 10YR

Registering the 1-handle this am at 1.99% and that’s not a Long Bond (TLT) buy signal – that’s a book some gains in your Long Bond core long positions and redeploy that capital into some oversold U.S. domestic consumption exposure (XLY, XLP, etc.); still our Best Macro Long idea, but we don’t buy at every price.

RUSSELL 2000

After another fast -3.1% correction, the Russell is signaling immediate-term TRADE oversold, so we’ll take it off our Best Ideas list on the short side (and review why on our Macro Themes call on Thursday); as opposed to 1 year ago when we loved it short side, now it’s a hedge fund consensus short (-25,000 net short position in futures/options contracts).

Asset Allocation

CASH 52% US EQUITIES 10%
INTL EQUITIES 2% COMMODITIES 0%
FIXED INCOME 28% INTL CURRENCIES 8%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). As our declining rates thesis proved out and picked up steam over the course of the year, we see this trend continuing into Q1.  Short of a Fed rate hike, there’s no force out there with the oomph to reverse this trend, particularly with global growth decelerating and disinflationary trends pushing capital flows into the one remaining unbreakable piggy bank, which is the U.S. Treasury debt market.

TLT

As growth and inflation expectations continue to slow, stay with low-volatility Long Bonds (TLT). We believe the TLT has plenty of room to run. We strongly believe the dynamics in the currency market are likely contribute to a “reflexive deflationary spiral” whereby continued global macro asset price deflation and reported disinflation both contribute to rising investor demand for long-term Treasuries, at the margins.

XLP

Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deflation. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative. Consumer Staples is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.

Three for the Road

TWEET OF THE DAY

Dr. KOSPI continues to signal global #GrowthSlowing -1.7% overnight; India tagged for a -2.9% drop

@KeithMcCullough

QUOTE OF THE DAY

In all likelihood world inflation is over

-Per Jacobbson, IMF, 1959

STAT OF THE DAY

Beijing removes tax rebate for steel-boron products which accounted for 31% of steel exports for 2014 through November.


CHART OF THE DAY: What My Macro Crystal Ball Says About the Russell | $IWM

CHART OF THE DAY: What My Macro Crystal Ball Says About the Russell | $IWM - 01.06.15 chart

 

Editor's note: This is an excerpt from today's Morning Newsletter by CEO Keith McCullough.

 

The other thing crystal ball is telling me this AM is don’t short the Russell 2000 today. #Pardon? Yes. You heard it from whatever this transparent ball is that I am rubbing this morning first! Do not short the IWM because:

 

  1. After another swift -3.1% correction, the Russell 2000 is signaling immediate-term TRADE oversold
  2. The inverse of that beta trade (VIX) is signaling immediate-term TRADE overbought at 20.59
  3. Hedge Fund Consensus is short the Russell (IWM) vs long SPY



My Crystal Ball

“It’s far better having an approximate answer to the right question, than an exact answer to the wrong question.”

-John Tukey

 

Tukey was one of the most important mathematicians of the 20th century. The probability man died in 2000 and the only knock on him is that he went to Princeton. Yes, he was a Bayesian. He was also a Bell Labs guy. That’s where they asked the right questions.

 

The Global Macro question remains: will global #GrowthSlowing + #Deflation matter to both the US economy and its stock, bond, currency, and commodity markets? If you thought yes, then how so? Oh, and how did you position for that?

 

After rubbing it this morning, my crystal ball (my wife got me one for my birthday – no joke, a real one) says A) yes, it mattered and B) it translated into both crashing global long-term bond yields and commodity prices. “So”, let’s keep re-positioning…

 

My Crystal Ball - 78

 

Back to the Global Macro Grind

 

Re-position? Yes, as in rotate. With the UST 10yr Yield tapping the 1%-handle this morning:

 

  1. Book some gains in those Long Bond (TLT, EDV, BND, MUB, etc.) holdings
  2. Re-position some of that capital into oversold US consumption equities
  3. And send your Old Wall broker an email that says your crystal ball guy said to :)

 

In Hedgeye Asset Allocation terms (re-positioning = rotation of the allocation!), that means:

 

  1. Taking net Fixed Income down from max allocation to an asset class (1/3 of my capital) to +28%
  2. Taking net US Equity asset allocation up from +3% on December 29th, 2014 to +10%
  3. Do nothing in International Equities and/or Commodities

 

No, I don’t want to chase Gold up here. I haven’t told you to engage in amateur knife catching crude oil contests for the last 6 months either. My net asset allocation to #deflation (Commodities) = 0% because the answer to THE question mattered.

 

“Net” – what does that mean, net?

 

Net (and in rate of change terms) is how I think. Not because my crystal ball told me so (remember, I didn’t have one until today!), but because that’s how I learned, at a young age in the hedge fund business, to manage risk.

 

I know having longs and shorts isn’t for everyone. And it really shouldn’t be. On the short side in particular, at least 2/3 of hedge funds don’t do the hedging thing very well, don’t forget.

 

We are better than bad at that – and we also don’t tell our long only investors to chase tops. That’s why I referenced December 29th, specifically. If you are in the business of compounding returns and dynamically allocating assets, that day mattered because:

 

  1. The SP500 was 70 handles higher than yesterday’s 2020 close, at an all-time closing high of 2090
  2. The yield on the 10yr US Treasury was 2.25%

 

If you are a portfolio manager of anything Fixed Income or US Equities, THE question that day was:

 

  1. BUY
  2. SELL
  3. Or DO NOTHING?

 

As all of you veterans of the risk management gridiron know, sometimes doing nothing is the best answer. But, unless you are in the business of low-fee generating-passive-asset-management, sometimes you do need to BUY or SELL!

 

“So”, as the Old Wall analysts like to say, on December 29th:

 

  1. If you bought more Long Bond (TLT) exposure, the 10yr Yield just had a 12% move from there (1.98% last)
  2. If you bought more SPY (there was a big fund flow into it that week), you just lost -3.3%

 

“So”, crystal ball says you wanted to have done 1. And not 2.

 

The other thing crystal ball is telling me this AM is don’t short the Russell 2000 today. #Pardon? Yes. You heard it from whatever this transparent ball is that I am rubbing this morning first! Do not short the IWM because:

 

  1. After another swift -3.1% correction, the Russell 2000 is signaling immediate-term TRADE oversold
  2. The inverse of that beta trade (VIX) is signaling immediate-term TRADE overbought at 20.59
  3. Hedge Fund Consensus is short the Russell (IWM) vs long SPY

 

Back to the “net” concept. If you want to earn your keep in 2 and 20 land, it’s usually best to not be pressing the lows on the short side of your net exposure in a crowded macro short.

 

Rather than rant any further this morning, here’s a 2 minute video explaining why “I Would Not Do What Hedge Funds Are Doing” in what was one of our best Global Macro short ideas 1-year ago today: https://www.youtube.com/watch?v=hrl7J_HVKZw

 

Crystal Ball just told me to stop there. #Cool. I’m already starting to like this thing.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.97-2.16%

SPX 2017-2051

VIX 16.26-20.59
Oil (WTI) 48.45-54.15

Gold 1166-1217

Copper 2.73-2.84

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

My Crystal Ball - 01.06.15 chart


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MACAU: EARLY JANUARY COLOR

CALL TO ACTION


Four days is not enough to call a trend but January started off better than December finished, but still down 16% YoY. With the easiest comp in some time, January should fare better than recent months, optically. However,  February could rival December as the worst month ever in terms of YoY performance.

 

Please see our detailed note:  http://docs.hedgeye.com/HE_Macau_1.6.15.pdf



Who Is The Author?

This note was originally published at 8am on December 23, 2014 for Hedgeye subscribers.

“And who is the author of all this?”

-Napoleon Bonaparte

 

While it’s getting difficult to pin down who, specifically, nailed the narrative of worldwide #deflation, crashing long-term bond yields, and flattening yield curves as the driver of the all-time high in the SP500… that’s what makes a market!

 

The aforementioned quote comes from a section in The Theory That Would Not Die titled “Enlightenment and the Anti-Bayesian Reaction” (page 30) where Napoleon realizes that Pierre-Simon Laplace wasn’t as full of it as those who weren’t yet enlightened.

 

Much unlike the perma bulls, bears, and partisan hacks in our profession, Laplace was a math, stats, and probability guy. In forecasting terms, he didn’t cling to religion or failed academic dogmas. As the facts changed, he did – or at least he had a framework (Bayes Rule) to try.

Who Is The Author? - Crazy bull cartoon 08.19.2014

 

Back to the Global Macro Grind

 

While I can try to explain why the SP500 can drop 103 points in a straight line (in 7 days), then ramp 106 points in 4 days, I don’t think that’s where I add value. There are legions of pundits on the #OldWall that use 1-factor moving averages than can help you with that.

 

Using my #waterfall metaphor for multi-factor, multi-duration risk management, I’m much more comfortable trying to explain market moves in terms of what is happening beneath the headline US stock market index price.

 

What’s interesting, but not surprising, is that some of the big Global Macro factors that concerned consensus on December 16th (when the SP500 closed -5.1% lower at 1972) are actually worse today than they were then.

 

No, I’m not talking about where Russia is trading (-41% YTD). I’m talking about really big US economic risk indicators like:

 

  1. #Deflation Expectations Accelerating
  2. Yield Spread Compression
  3. Risk Ranges Widening

 

“So”, now that I am in the holiday cheer spirit, allow me to knock those pins down, one by one:

  1. #DEFLATION – with Oil reversing intraday and Gold dropping -1.7%, the CRB Commodities Index (19 commodities) dropped another -1.5% yesterday to a fresh YTD low of 237 (that’s -15.4% YTD, crashing -25% since June)
  2. YIELD SPREAD – the belly of the curve is even flatter, but the big one almost every objective strategist monitors (10s/2s spread) has compressed another 7bps this morning to a fresh YTD low of +146bps wide (-38% YTD)
  3. RISK RANGES – for the SP500 and her inverse brother (VIX), immediate-term risk ranges are as wide as they have been in almost 3 years (SPX = 1958-2084, VIX 14.28-23.87)

But #NoWorries, “the market is up”…

 

Not clear what that means, but if the “market” includes things like global bond markets, international equity markets, commodities, currencies, etc., that CNBC type statement would make a 16th century dude who called the world “flat” look smart.

 

Asia (ex-Japan, which we’re actually net long for now via the DXJ) continues to trade much more in line with global #GrowthSlowing than the Dow does. Dr. KOSPI (South Korea) was down another -0.3% overnight to -3.5% YTD. Australia (struggling alongside Canada, Brazil, etc. with #deflation expectations) was -1.1%, and both the Hang Seng and Thailand failed @Hedgeye TREND resistances too.

 

All the while, High Yield and Junk started going down again yesterday. Remember that part of the December 16th #Deflation Dominoes? I do. Down Yen and Euro à Up Dollar à Down Oil, Commodities, etc. (#deflation) à Down High Yield Energy Bonds.

 

In other words:

 

  1. Don’t be levered long Commodities, Energy Stocks/Bonds, Russia, etc.
  2. Stay with #StrongDollar, but don’t confuse that with US growth accelerating in Q4 vs Q3
  3. As growth and inflation expectations continue to slow, stay with low-volatility Long Bonds (TLT)

 

After the 2000 and 2008 crashes, who is the author of all this risk management speak?

 

Don’t blame me. It’s Mr. Macro Market’s message. And, at a bare minimum this morning, I wanted to remind you of it as those who are in the business of being willfully blind into year-end won’t.

 

Our Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.05-2.22%

SPX 1958-2084

VIX 14.28-23.87
USD 88.91-90.36

Oil (WTI) 52.05-56.99

Gold 1167-1199

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Who Is The Author? - 12.23.14 chart


MDSO: Adding Medidata Solutions to Investing Ideas

Takeaway: We are adding Medidata Solutions to Investing Ideas.

NoteThe excerpt below was written earlier today by Hedgeye CEO Keith McCullough. Stay tuned for further updates from our Healthcare sector head Tom Tobin.

 

MDSO: Adding Medidata Solutions to Investing Ideas - 45

 

Having not been the firm that told you to chase those "Dow Bro 18,000" highs...

 

Now we're in a position to signal buy on some of our Best Research Ideas. In addition to HOLX, Medidata (MDSO) is on Tom Tobin's Institutional Healthcare Team's Research list.

 

Medidata Solutions (MDSO) is a cloud-based provider of electronic data capture (EDC) and clinical trial management solutions to the Life Sciences industry.

 

Our screening process positions MDSO based on a composite ranking of under-performance, low sellside rating, and high short interest.  While we continue to hammer out the details of the tail thesis, on a trend duration, we expect revenue and earnings upside.

 

We have identified several Key Drivers that point to a material acceleration in application services revenue growth through 1Q15 (0.95 R^2).  

 

We believe the stock will trade above $65 versus the current price of $47 under our base case scenario, with the potential for higher prices over the next 12-18 months.

 

We will outline the details in a BlackBook presentation on 1/16 at 1 PM ET.

 

Buy red, at the low-end of the risk range - sell green, at the high.

 

KM 


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 80.64%
  • SHORT SIGNALS 78.61%
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