February 3, 2015

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CHART OF THE DAY: The Dominating USD Correlation Matrix

CHART OF THE DAY: The Dominating USD Correlation Matrix - 02.03.15 chart


Editor's note: This is a brief excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough.


But you already know that since the flexible and prepared player knows this USD correlation matrix is dominating:


  1. Inverse correlation between USD and the CRB Index (19 commodities) on a 90-day duration is -0.97
  2. Inverse correlation between USD and Oil on a 90-day duration is -0.95


In other words, if you got the rate of change in the USD right, you’ve gotten both the commodities and Oil crash right. Oh, and you played the counter-TREND reversal beautifully too!


The Idea Generation Game

“It constipates the whole process.”

-Stephen King


While I am sure he has plenty of it, that’s what the King pin of American supernatural fiction had to say about cash. “Money is great stuff to have, but when it comes to the act of creation, the best thing is to not think of it too much.”


Sadly, that is not how some think about what they call their “dough.” On the independent research battle front, I can’t count how many people told me we’d be wrong on interest rates falling because guys with a lot more money than me thought otherwise.


Who raised these people to think that way? America was built on a meritocracy of new ideas replacing broken ones. The day we wake up thinking that only the people with money are “smart” is the day we start losing. Anyone can win the idea generation game.


The Idea Generation Game - 2 it


Back to the Global Macro Grind


Fast or slow, you probably can’t win this year’s game. Not with our July 2014 call for a breakout in cross asset class volatility in play. Just watch Greece go from -13% to -2% YTD on a floater headline that their “new” Finance Minister is “creative”, and you’ll get my point.


Don’t confuse moving slowly with moving patiently either. There’s a big difference. #Patient players can move both fast, and slow. That’s the point. There’s a time to risk manage your active portfolio – and there are times to wait and watch.


Risk manage your portfolio? Yes. It’s commonly called trading – and while you can feel really “smart” buying and holding stocks at 10 VIX, at VIX 15-25… not so much. Look what led yesterday’s v-bottom rally off the terrible January ISM report’s lows:


  1. US listed Oil & Gas Stocks (XOP) = +6.1%
  2. US listed Energy Stocks (XLE) = +3.1%
  3. US listed Financials (XLF) +1.6%


Yes, 2015’s biggest losers led yesterday’s gains. Unless you made some counter-TREND moves (i.e. booked gains in shorts that were working and went long some of the inversely correlated sectors and asset classes linked to a Down Dollar move), you lost ground yesterday.


While generating both absolute and relative returns, every day, would be nice – that only happens on either Twitter or in fictional novels about rainbows and puppy dogs. Real world risk management is far closer to Stephen King’s “It!”


What is it? What is that thing that helps Portfolio Managers and Self Directed Investors alike beat the market year-in and year-out? I’d say it has a lot do with having a more flexible #process than a constipated one.


Did consensus really think the US Dollar was going to go up, every day?


  1. Friday’s GDP miss/slowing was a clean cut negative for the US Dollar
  2. So was yesterday’s ISM slowdown from an already slowing 55.5 in DEC to 53.5 in JAN
  3. And so would be a bad jobs report on Friday…


But you already know that since the flexible and prepared player knows this USD correlation matrix is dominating:


  1. Inverse correlation between USD and the CRB Index (19 commodities) on a 90-day duration is -0.97
  2. Inverse correlation between USD and Oil on a 90-day duration is -0.95


In other words, if you got the rate of change in the USD right, you’ve gotten both the commodities and Oil crash right. Oh, and you played the counter-TREND reversal beautifully too!


Seriously. Getting that right is not that easy.


But not being Consensus Macro is easier than thinking it’s “smart.” Here’s where the “smart” hedge fund futures and options bets were (non-commercial CFTC net futures/options positioning) going into yesterday’s counter-TREND macro move:


  1. Peak multi-year net LONG position in US Dollars of +70,456 contracts (vs. the 1yr avg of +24,739)
  2. Peak multi-year net SHORT position in the Euro of -177,296 contracts (vs. the 1yr avg of -83,603)
  3. Net SHORT the Russell 2000 at its peak net short position of the year (-30,174 net short contracts)


That’s right, after all of these things have worked, big time, for 6 months – all of the “smart” money has crowded into them.


Sure, there was a net LONG position of +324,181 in Crude Oil going into yesterday’s rip, but don’t forget that Wall Street was been levered long Oil the entire way down too (the 1yr avg net LONG position in Crude is +366,487 contracts!).


“So”, don’t constipate yourself with consensus. Motivate yourself to open your mind and move aggressively when the big things moving macro markets move. That sure beats counting your moneys. “There’ll be time enough for countin’, then the dealing’s done.”


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.64-1.78%


VIX 18.25-21.92
USD 93.41-95.82
WTI Oil 42.84-51.31
Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Idea Generation Game - 02.03.15 chart

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Takeaway: We expect a miss and sobering commentary from Macau and Vegas.




  • $1.18 billion (Hedgeye) vs $1.19 billion (Street)


  • $373 million (Hedgeye) vs $385 million (Street)


  1. Latest on Wynn Palace budget/opening date.
  2. Update on the construction labor situation?
  3. Wynn Palace table numbers
  4. More color on the 2 VIP rooms opening in Jan/Feb
  5. How much cost cutting is available in OpEx other than labor?
  6. How are junket commissions trending in a declining revenue environment?
  7. Mass promotional environment
  8. Thoughts on reinstating proxy phone betting
  9. What's behind the recent improvement in Wynn's Mass business?




  • The new regulations in smoking, the turmoil in Hong Kong late in the month of October and, of course, the policy of the central government in being very, very aggressive about what appeared to be a misconduct and corruption of the government has put a lot of the wealthy businessmen in the foxholes.
  • The smoking rooms established at Wynn Macau have been successful. Wynn’s in the process of establishing an additional smoking room based on location. But overall, they don’t believe that that’s had a huge effect on business. There’s been some effect but it’s been marginal.


Wynn Cotai

  • As far as construction goes, Wynn states they are, on target, on budget and on time.
  • Cotai’s budget remains within 1% of expectations.
  • The Wynn Palace is very luckily set up for the smoking ban due to deciding to build balconies for all of the VIP and Mass rooms. This will allow players to gamble and then step outside to smoke.


Mass competition

  • Increased margin pressure in Macau. Competition is viewed as extremely intense.
  • Mass market area margins have been fairly constant over the last three quarters.  Wynn has seen its mass area and premium mass area margins stabilize.
  • Wynn remains confident he can secure 550 gaming tables from the government  


New junket rooms

  • Junkets conservative
  • Building junket rooms in 2 gorgeous VIP areas
    • We believe it could be 36 tables in total, opening in mid-Feb.

Predicting Age

This note was originally published at 8am on January 20, 2015 for Hedgeye subscribers.

“People do predictable things as they age.”

-Harry Dent


People also do unpredictable things. Give them more than a few cocktails and you’ll see that prediction in motion! While simple, the aforementioned quote is true too. It comes from a macro research book I just finished reviewing called The Demographic Cliff:


“The average family borrows the most when parents are age 41, typically the time of their largest home purchase. They spend the most at age 46, although more affluent households reach that peak later… People save the most at age 54 and have their highest net worth at age 64…” (pg 11). These are obviously generalizations, but they are about the most important spending generation in American #history (Baby Boomers).  


Interestingly, but not surprisingly, Life-Cycle Economics was one of the most talked about macro topics when Darius Dale and I were on the road seeing Institutional Investors in NYC last week where I’d ask everyone the question we have on slide 22 of our Q1 Macro Themes Deck: “What Matters Most: Gas Prices, Jobs, or Demographics?”


Predicting Age - 90


Back to the Global Macro Grind


While many like to call themselves “long-term investors”, when it comes to answering the question in our Chart of The Day thoroughly, I think you should call yourselves multi-duration, multi-factor, risk managers. That’s my new marketing pitch!


Here’s one way to think about all 3 factors, across durations:


  1. GAS PRICES – immediate-to-intermediate-term (bullish TRADE and TREND duration impact to consumers)
  2. JOBS – intermediate-term (making a bearish turn? The cycle tends to be less lumpy and cyclical, or TRENDING)
  3. DEMOGRAPHICS – long-term (what was a long-term tailwind in the USA, Japan, and Europe is now a headwind)


Yep, after a long weekend, that’s a lot to think about – and I’m thinking that the immediate-term positioning of Consensus Macro futures/options in both the Spooz and Long Bond doesn’t quite agree with me yet on JOBS and DEMOGRAPHICS:


  1. SP500 (Index + Emini) = +110,971 net LONG position (-59,269 last wk but up big vs the 1yr avg of -11,681)
  2. US 10yr Treasury = -(187,997) net SHORT position (+62,166 last wk but a lot shorter than 1yr avg of -62,100)
  3. Crude Oil = +326,134 net LONG position (+11,230 last wk vs. 1yr avg of +368,447 net LONG contracts)


What consensus continues to think about is perpetually being long Macro Style Factors (growth and inflation) that have worked in the past. This implies nothing but volatility around these changing expectations in the future.


Let’s go through these (SPX, 10yr, Oil) one by one. First on US equity beta (SPX):


  1. SP500 (SPX) had its highest net LONG position since 2007 only 2 weeks ago at +170,240
  2. But the SPX didn’t pay the bulls, closing down for the 3rd straight week last week during its -3.5% correction
  3. Within the SP500’s -1.9% YTD return, the Top 2 Sectors are #GrowthSlowing + #Deflation winners
  4. Top 3 YTD = Utilities +2.6% last wk to +3.0% YTD, Healthcare (XLV) +2.9% YTD, Consumer Staples (XLP) +1.6% YTD
  5. Bottom 3 YTD = Financials -2.6% last wk to -5.0% YTD, Energy (XLE) -5.0% YTD, Consumer Discretionary (XLY) -3.4% YTD


Then on the best way to be long our global #GrowthSlowing + #Deflation view:


  1. UST 10yr Yield was down another -11bps last week to -33bps (-15% YTD) to 1.84%
  2. Yield Spread (10yr minus 2yr) was down another -3bps last wk to -15bps YTD
  3. Long-term Treasury (TLT) is already smoking everything US stocks at +6% YTD (pre-int payments!)


Finally, on the beloved Oil “space”:


  1. WTI Crude has its 1st up week in the last 8, closing up a whopping +0.7% last week
  2. WTI Crude has already given up another -3.1% to start this week and is already -11.4% YTD
  3. Whoever bought me the falling steak knives catching set for my birthday isn’t invited to next year’s party


In other words, you and I are having a great time to start 2015. Consensus Macro is not. And that’s mainly because consensus does predictable things as a global growth, inflation, and demographic cycle ages past a long-term cyclical peak.


Before I leave the keyboard this morning, here are some other big movers in Global Macro from last week that you need to keep front and center ahead of the BOJ and ECB central planning decisions this week:


  1. The Euro (vs. USD) was -2.3% last wk and signaled immediate-term TRADE oversold at $1.15
  2. Gold ripped +5% last week and is showing follow-through, up another +1.3% this a.m. to $1291
  3. Dr. Copper got blasted for another -5% #deflation last week and is down again this morning to $2.56


Of all that, what matters most?


All of it does. It’s interconnected. And I think it’s suggesting that Mario Draghi might not be able to deliver the Policy To Inflate drugs that central planning fans are begging for on Thursday.


Any short-term bottom in Euros = Down Dollar (from overbought highs) – and Gold loves nothing more than Down Dollar + Down Rates, at the same time.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.76-1.90%

SPX 1984-2037
USD 91.94-93.11

EUR/USD 1.15-1.19

Gold 1235-1297

Copper 2.48-2.65


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Predicting Age - 01.20.15 Chart

Cartoon of the Day: Groundhog Day for the Fed

Cartoon of the Day: Groundhog Day for the Fed - Groundhog cartoon 02.02.2015


Expect more of the same from the world’s unelected central planners including America’s own Fed chief Janet Yellen.


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