Zero To Something

“Every moment in business only happens once.”

-Peter Thiel


I started reading Peter Thiel’s Zero To One on the treadmill yesterday. That’s the opening sentence of one of the better intros I’ve read in a while on independent thinking:


“… it’s easier to copy a model than to make something new. Doing what we already know how to do takes the world from 1 to n, adding more of something familiar. But every time we create something new, we go from 0 to 1.”


If I didn’t passionately believe in creating something new here @Hedgeye, I’d have just gone back to doing what I did before. While a lot of people have asked me about that over the years, a lot less have asked lately. That means building this only happens once.


Zero To Something - zero to one


Back to the Global Macro Grind


Whether it’s the birth of your children or an entrepreneurial business strategy that is unique to you and those around you, this is why you get up in the morning – to find special moments in your life that only happen when preparation meets opportunity.


This is one of the core problems I have with being centrally planned. There is no creativity or progression in that. To think that some room full of bureaucrats can smooth non-linear economic realities like growth and inflation is downright regressive.


But no matter how creatively destructive we are in building our businesses, we have to deal with these people, for now. What happens when the Fed goes from 0% to n? And what are the unintended consequences associated with moving preemptively?


Post a rainbows and puppy dogs jobs report, both US stocks and bonds have been down for 2 days… Why?


  1. Interest rates shot straight up from 1.64% on the UST 10yr to 1.99% this morning
  2. Rate sensitive (aka #YieldChasing) sectors of the SP500 went straight down on that


I’m not sure what got rates to go up more:


A)     The short-term alleviation of fear that the US jobs picture has hit its cycle-peak

B)      Legitimate fear that the Fed raises rates during global #GrowthSlowing + #Deflation


As I’ve said many times, what the Fed SHOULD do with a CPI trending towards (and below) 1% and COULD do are two very different things. Can you imagine they signal a rate hike into jobs reports that get as bad as the last 6 were good?


It isn’t just #deflation that the Fed should be concerned about – it’s their broken forecasting model. Janet Yellen is using a carbon copy of what Ben Bernanke used. In forecasting growth, they overweight the most lagging of late-cycle economic indicators.


For those of you that don’t know that Non-Farm Payrolls (Employment) are the latest of late-cycle, please see today’s Chart of The Day where Christian Drake reminds you of when the cycle of payrolls peak à AFTER the cycle is already slowing!


Back to the Global #deflation risk that blew up plenty of portfolios between late-September 2014 and January 2015’s lows:


  1. China just printed a PPI (producer price index) of -4.3% year-over-year for JAN (vs. -3.3% FEB)
  2. Norway reported, get this, -12.4% year-over-year #Deflation in their JAN PPI
  3. Switzerland reported a new low in CPI (Consumer Price Inflation) of -0.5% year-over-year in JAN


Sure, Oil (WTI) was +2.1% yesterday and is +9.5% for the month of February alone – but that’s just a counter-TREND move within a nasty deflationary risk. My immediate-term risk range can get you $43 oil as fast as this bounce can stop at $54-55/barrel.


Then what?


  1. The USA is going to report decelerating CPI and PPI reports next week (JAN reports)
  2. And there’s plenty of risk that the February employment report isn’t what January’s was


Then what?


Ahead of the March 18th Fed meeting, we could very well be sitting here in early March as concerned about Global #Deflation risk as we were at the beginning of January!


Is it easier for the Fed to keep using the same model that has rendered its growth and inflation forecasts inaccurate almost 70% of the time since 2007 than to create a new one?


That’s a rhetorical question. Sadly, they’re going to go from zero to something – and there will be loads of cross asset class volatility associated with their own flip-flopping internally about timing that.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.62-1.99%

VIX 16.06-21.44
USD 93.47-95.35

Oil (WTI) 43.07-54.88
Copper 2.42-2.62


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Zero To Something - Labor cycle table CoD

February 10, 2015

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Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Late-Cycle Slowdown

This note was originally published at 8am on January 27, 2015 for Hedgeye subscribers.

“Each thing is of like form from everlasting and comes round again in its cycle.”

-Marcus Aurelius


Until you’ve survived a few cycles in this business, you haven’t really lived. Cycles come in many styles and durations. Sometimes they’re cyclical. Sometimes they’re secular. Most of the time, you can front-run them – in rate of change terms.


Yes, the ole rate of change. As in the thing that helps you analyze time/speed – accelerations vs. decelerations. No, it’s not what most traditionally-trained-linear-economists use. That’s why what you read here every morning is different.


What is not different this time is that there will be an economic cycle. While central planners will try their damndest to “smooth” and “stabilize” it… in the end, the gravitational force of the cycle will prevail.

Late-Cycle Slowdown - cycle arrows small 

Back to the Global Macro Grind

It’s a lot easier to make bold statements like that about the economic cycle when:


A)     The cycle is already slowing

B)      The Bond Market is already pricing it in


“So”, while our call on global #GrowthSlowing + #Deflation isn’t yet consensus on the sell side, the buy-siders (and self directed individuals) who are set up for it are the ones who are getting paid.


To review the #process of measuring markets and economies in rate of change terms, I always try to contextualize the rate of change in indicators as either EARLY-cycle, or LATE.


For the purpose of this morning’s discussion, I’ll focus on a USA trifecta of LATE-cycle macro factors slowing. Oh, and by the way, they started slowing in the following order (not all at once):


  1. INFLATION (classic late-cycle) has undergone a full phase transition to #deflation in the last 6-8 months
  2. JOBS (as late-cycle as late-cycle gets) peaked in the back half of 2014, and Jobless Claims are breaking out now
  3. EARNINGS (yes, they are cyclical) peaked, in rate of change terms, when pricing and FX impact did (2014)


That last one (EARNINGS) is going to drive the people who are pitching “SP500 isn’t expensive” (if you use peak sales growth and margins to derive SPX earnings) right batty. The rate of change slowing in cyclical data generally does.


With US Earnings Season underway, here are some early highlights (with ~20% of SPX constituents having reported – see Chart of The Day for color coded rate of change breakdown):


  1. From an operating momentum perspective this is about as ugly as it’s been in recent memory
  2. Only 33% of companies are registering sequential acceleration in sales growth thus far
  3. Only 40% registering sequential margin expansion, and 50% seeing sequential acceleration in EPS growth


Now if all you do is look at absolutes vs. Old Wall “expectations”, I lost you at rate of change. But, since most of you reading this pay for it, I’m highly confident that you get it. Calculus was a 12th grade pre-req to the Early Look.


For your stock picking friends who don’t do macro math and don’t get rate of change, ask them the following questions:


  1. If a company’s growth rate is about to slow, will the stock go up or down until the slow-down is priced in?
  2. What if a company’s margins are about to compress from an all-time peak?


Seriously. It’s not rocket science. You just have to doggedly track the second derivatives and #grind.


You also have to do the required #history reading to respect that #Deflation hasn’t been a sustained reality for nearly a decade now. If you expand your analytical horizons to past cycles, you’ll find ones like the 1927-1933 #Deflation (i.e. the ugly kind) and the more beautiful ones like 1983-1989 (even though America had to go through the ugly to get there).


Delaying the ugly (btw, Dalio coined the “ugly vs the beautiful deleveraging”, not me) via some cochamamy central plan only postpones the inevitable. Draghi and Yellen know that. They’ve been trying to delay the mismatch between falling demand and inflated prices with the illusion of growth (Policies to Inflate via currency devaluation), for what, 6 years?


Thankfully, not everyone shares our view of holding both large cash and long-dated Treasury positions (see Asset Allocation Model) so that we can buy the riskier things we like when they really deflate. Our current strategy doesn’t hold us hostage to an inevitable late-cycle slowdown, and makes us a nice, low-volatility absolute return, while we wait…


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.75-1.84%

SPX 1987-2074

VIX 14.64-23.04

Oil (WTI) 44.03-46.85

Gold 1240-1325

Copper 2.48-2.58


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Late-Cycle Slowdown - chart

McCullough: 3 Reasons the Russell Looks Better Than S&P 500


In this excerpt from today's RTA Live, Hedgeye CEO Keith McCullough responds to a subscriber question with the three reasons why he favors the Russell 2000 over the S&P 500 right now. 

YUM: Adding Yum! Brands to Investing Ideas

Takeaway: We are adding Yum! Brands to Investing Ideas.

As a reminder, we took YUM off for the quarter.


Now that that’s out of the way, it's back to Hedgeye Restaurants analyst Howard Penney's breakup "sum of the parts" thesis and analysis.

YUM: Adding Yum! Brands to Investing Ideas - 11

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