Alternative Market Medicine

“The traditional point of view doesn’t explain everything.”

-Deepak Chopra


Need some alternative Macro Market Medicine to get you through your risk management day? With the help of my man Deepak’s evolving professional experience, oh does the Mucker have something non-centrally-planned, for you!


“Deepak Chopra used to be firmly entrenched in a very traditional field of medicine: endocrinology. During the 1980s he worked as the Chief of Staff at New England Memorial Hospital… back then Chopra chugged coffee in the morning, smoked cigarettes, and drank whiskey in the evening to relax.” (The Medici Effect, pg 155)


No, I don’t drink whiskey to relax – neither am I recommending it as a medicine for the 100 point Dow swings you now have to deal with every day. I’m simply asking you to realize what Chopra did before he wrote 3 dozen books and decided to change his #process. He “started to notice things that could not be explained by theory.” In our profession’s case, those things are Old Wall theories.


Alternative Market Medicine - a. deepak


Back to the Global Macro Grind


Some of the Old Wall types still operate on a theory that if the stock market is going up, the economy must be going up. Then you have this other camp of quacks like me who’d remind you that if the bond market (Long Bond) is going up, the economy is slowing.


You also have all the poor bastards out there just chasing charts, who wouldn’t know the 2nd derivative of growth and inflation cycles from their next shot of Fireball. And, of course, you have mainstream media, who is left-leaning about everything economic anyway.


But that’s what makes a market. Mr. Macro Market doesn’t care about any of our individual strategies or stimulus preferences. He is naturally setting it up to provide the most amount of people, the most pain, at the most inopportune time.


Is today one of those days? Simple question – with a not so simple answer. Here’s the setup:


  1. STOCKS: One week ago today, after a bad US GDP report for Q4, the SP500 closed at 1995
  2. BONDS: as GDP growth slowed, the 10yr US Treasury Yield hit fresh new lows at 1.65%
  3. Then, zoom… stocks rallied +3.3% off those lows and the 10yr has popped back up to 1.81%


But what was it that drove the “stocks” up – and what kind of stocks really went up?


  1. US Dollar Down has driven a massive counter-TREND move in all of the Correlation Risk trades
  2. Both Oil and Energy stocks related to Oil’s counter-TREND move led the zoom…
  3. And crazy macro guys like me just day-traded my way around the pylons, trying to stay in the black


Soh-rry. In Canadian hockey speak we call them pylons. In USA Hockey, they call them “cones.”


However you play the game, you do need to zig and zag when macro markets move like this. After all, inclusive of this week’s no-volume ramp (total US Equity market volume was -22% vs. its 1yr avg yesterday) the SP500 summary for the YTD = 0.19%.


Yeah, I know you know. But just a friendly reminder to your friends that don’t (please forward this to them) if you’re long the Long Bond (TLT, EDV, ZROZ, etc.) you’re already up +7-8% YTD by just staying the global #GrowthSlowing course.


“So”, what will today’s US jobs report bring?


  1. Rocketing wage growth, booming capex hiring cycles in Oil & Gas, puppy dogs & rainbows?
  2. Or, blah…


Blah. As in what always happens in the latest of late-cycle economic indicators (employment)… what if there’s just nothing, blah?


I don’t predict stock and bond markets will do nothing on that. Fully loaded with Dollar Down, Rising Gas Prices, and 2014 #Bubbles (GPRO, YELP and Pandora) Imploding, I predict #fun!


And if you can’t have fun playing this game, I don’t have any alternative medicine for that anyway.


Our immediate-term Global Macro Risk Ranges are now (giving you all 12 Big Macros today with our intermediate-term TREND view in brackets):


UST 10yr Yield 1.64-1.89% (bearish)
SPX 1 (neutral)

Nikkei 179 (bullish)

DAX 102 (bullish)

VIX 16.06-21.76 (bullish)

USD 93.05-94.52 (bullish)
EUR/USD 1.11-1.14 (bearish)
YEN 116.27-117.99 (bearish)
Oil (WTI) 42.48-53.09 (bearish)
Natural Gas 2.54-2.74 (bearish)
Gold 1 (bullish)
Copper 2.40-2.63 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Alternative Market Medicine - 02.06.15 chart


This note was originally published at 8am on January 23, 2015 for Hedgeye subscribers.

“I consider that all that I have learned of any value to be self-taught.”



I disagree with Darwin on that. In both my formal Ivory Tower econ education and my Wall Street experiences, I’ve found tremendous value in learning what not to do. Believing gravity-bending-linear-economists and their forecasts tops the list.


In markets and economies there are plenty of theories, but there are also realities. My self-teachings come from both books and Mr. Macro Market – not what some un-elected ideologue is trying to jam down my throat.


Pardon the terseness of that. I’m sick and in no mood to pander to what most financial media did yesterday as Mario Draghi provided 2008 like “shock and awe” to currency and equity markets, but only perpetuated #deflation risk in doing so.

Self-Teachings - Sisyphus cartoon 01.22.2015

Back to the Global Macro Grind


As we learned in both 2008 and 2011, when central planners move into panic mode, they also perpetuate volatility, across asset classes. That’s mainly because they are trying to artificially inflate (centrally plan) asset prices higher.


In doing so, they open up what we call the risk of the market’s most probable range. What I’ve learned by doing over the course of the last 15yrs is that widening risk ranges tend to lead to rising volatility.  


The only way to tone down volatility is for the output of the central plan to actually be believed. So that’s really your #1 risk management question this morning: do you believe that Draghi devaluing the Euro is going to deliver “price stability”?


What does Mr. Macro Market think?


  1. On the “news”, Euro’s burned to $1.12 vs USD, taking the US Dollar Index to multi-yr highs
  2. European equities ripped higher, making them some of the best YTD returns in Global Equities at +7-8%
  3. US Equities had a big up day (SPX 6th + day in the last 15), taking SPX and Russell to +0.2% and -1.2% YTD
  4. Commodities (CRB Index) deflated -1.3% on the “news”, hitting multi-yr lows
  5. US Equity Volatility sold off to higher-lows but held both TRADE and TREND duration support


In other words, if you are long France because the economy sucks, you’re killing it! The CAC 40 (France) is now beating the beloved SP500 by +800bps for 2015 YTD. Oh, and #deflation expectations only rose yesterday in the face of Draghi smirking.


When one of the few reporters with a spine questioned the sly Italian jobber on the actual economic impact of his decision to float a number (50B) to the media that he could beat by 10B, he did everything but answer the question.


Do you think a ramp in Belgian stocks to +7% YTD is going to improve the youth unemployment situation in Southern Europe? Or is the story now that crushing the purchasing power of Europeans is the new consumer spending catalyst?


In other European news this morning:


  1. France’s services PMI for JAN (oui, c’est le service economie, stupide) 49.5 vs 50.6 in DEC
  2. Germany’s flash PMI slowed again to 51.0 from 51.2


Get used to nothing. Unless it’s different this time, I don’t see Draghi delivering inflation or real economic growth.


Does anything in our Global Macro playbook change post yesterday’s central plan? Not really:


  1. BEST IDEA: Our best way to play global #GrowthSlowing and #Deflation = long the Long Bond (TLT, EDV, ZROZ, etc.)
  2. COMMODITIES: while I’m getting interested in Gold, I’ll keep our net allocation to that asset class at 0%
  3. CENTRALLY PLANNED EQUITY MARKETS: from this time/price, I’d rather buy Weimar Nikkei than Europe
  4. US EQUITY LONGS: stick with the long early cycle-consumption and yield chasing sectors (XLP, XLV, XLU, VNQ)
  5. US EQUITY SHORTS: stick with the late-cycle economic and #Deflation ideas (XLE, XLB, KRE, XLI)


Notwithstanding the 2-day ramp in European, US, and Japanese equity beta, the best vs. worst returns (highest absolute, with the lowest volatility = best kind of #alpha people pay for) remain glaring:


  1. YTD Winners: Healthcare (XLV) +4.3%, Utilities (XLU) +3.8%, Consumer Staples (XLP) +3.6%
  2. YTD Losers: Financials (XLF) -2.8%, Energy (XLE) -2.5%, Consumer Discretionary (XLY) -1.6%


Put another way, Mr. Macro Market’s self-teachings have set up for one of the best Global Macro investing environments for active managers (long and shorts – over-weights and under-weights) that I can remember.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.75-1.93%

SPX 1989-2066

VIX 16.05-23.03
EUR/USD 1.12-1.15
Oil (WTI) 44.82-49.06

Gold 1260-1323

Copper 2.48-2.61


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Self-Teachings - 01.23.15 chart


Takeaway: The Strip’s recovery is not very deep or sustaining


It’s almost the anti-Macau play but not really:  Buy MGM because the company has less Macau exposure.  How about buying something without any Macau exposure? I suppose the best way to play the Strip would be to buy MGM and short 2882.HK.


So let’s look at what you’re getting if you could isolate Strip exposure. Solid RevPAR growth? Yes, but if you’re looking for that why not buy a hotel stock like HLT or HOT. Las Vegas RevPAR has actually lagged the rest of the country.  Gaming revenue growth?  Outside of Baccarat we’ve seen very little actually.  And the 2nd derivative in Baccarat went negative in August and the 1st derivative turned in November.


Unlike Macau, Las Vegas is at least stable.  Stability is hardly an investment thesis, though.


Please see our detailed note:

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.

Cartoon of the Day: Oil Bottom? Bueller? Bueller?

Cartoon of the Day: Oil Bottom? Bueller? Bueller? - Oil cartoon 02.05.2015

Investors are jockeying to find the bottom of an epic oil plunge that saw prices crash as much as 59% since June.

XLU: Adding Utilities to Investing Ideas

Takeaway: We are adding Utilities to Investing Ideas.

Please note that we are adding Utilities (XLU) to Investing Ideas today.

XLU: Adding Utilities to Investing Ideas - 4u

According to Hedgeye CEO Keith McCullough:


Keep playing my macro view forward... 


Bad jobs report could very well:


1. Weaken USD

2. Strengthen Oil

3. Ramp The Long Bond


And give a relative bid to any major US Equity Sector Style that looks like a bond.


Ah, the Utilities - hated, probably. Making people money, definitely.



Our macro team will further outline our bullish thesis in this weekend's edition. 

YUM: In Need of a Nudge

YUM remains on the Best Ideas list as a long.


YUM reported 4Q14 adjusted EPS of $0.61 (-29% y/y), well short of the $0.66 consensus estimate.  Despite this, strong relative topline trends appear to have saved the day.  China delivered a better than feared comp of -16% (-19% est), while Taco Bell (+6%) and KFC (+4%) also exceeded consensus estimates.  Pizza Hut (0%) fell short of feeble estimates, which is particularly disappointing considering the new menu and “flavor of now” launch.  Needless to say, this quarter did nothing to dismiss our view that the Pizza Hut business should be sold


China's Woes Persist

The majority of the earnings call was spent talking about the pace of the recovery in the China business.  Management hinted that things are progressing slower than they originally imagined and voiced at the December analyst day in NYC.  In our view, setbacks like this are what will push an activist to get involved in the name.  To be honest, management deserves a lot of credit for building a strong business in China that has proven to be very profitable in the past.  But it’s been two painful years and misjudging the pace of a recovery is not encouraging.  The perception that they don’t have a handle on this business, to whatever extent it may be, simply adds fuel to the activist fire.


Clearly, the top priority is getting China KFC back to 2012 form which, management estimates, would add $1.7 billion in incremental revenue.  KFC’s average unit volumes in 2014 were 20% off their peak levels, thanks in large part to back-to-back supplier incidents.  But consumer scores appear to be improving in the region, which should lead an acceleration in comps.  The team also has two menu revamps scheduled in 2015 and the rollout of premium coffee which will be in 2,000 restaurants by year-end.  Pizza Hut is much less of a concern and is trending in the right direction.


Estimates Need to Come Down

Despite a slower than projected recovery in the China business, management reiterated its FY15 EPS growth goal of “at least 10%.”  This, in and of itself, looks like a tough hurdle and is dependent on a strong second half recovery in China.  The street, modeling 15% growth, will need to bring their estimates down. 



We expect the stock to be range bound for the first half of 2015, until we see a material uptick in the business.  It won’t be smooth, but we continue to like the long setup here given limited downside and the potential for significant upside.  There are a number of levers management can pull to immediately create value, the easiest of which would consist of undergoing a leveraged recapitalization to bring its debt ratio in-line with peers.  Management may be getting the benefit of doubt for now, but if the anticipated second half snapback doesn’t materialize, they will face serious pressure to make a transformational transaction.


YUM: In Need of a Nudge - 1

Source: Company Filings



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