Rocking Returns!

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

“You are what your record says you are.”

-Bill Parcells


That’s how William Thorndike kicks off a solid history/investing book that one of my friends recommended to me titled The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success.


Chapter 1 of the book, “An Intelligent Iconoclasm”, starts with another great quote from John Templeton: “It is impossible to produce superior performance unless you do something different.


In other words, if being long Europe with a concentrated position in Italian stocks was your big idea for 2015, you definitely did something different. And you’re getting paid for it. Italy’s stock market is +15.4% YTD!


Rocking Returns! - parx


Back to the Global Macro Grind


Yep, after 3 straight up weeks (on decelerating volume), never mind a +2.5% YTD return for the SP500, being long something like Germany’s DAX (+13.1% YTD) is where the rocking returns are at, baby!


After taking a -0.6% breather in the week prior, the US Dollar stabilized at higher-lows again last week and is ramping versus Burning Euros and Yens again this morning, +0.6% to $94.84 on the US Dollar Index.


Inverse correlations between commodity markets and USD remains surreal. Going back to when #Deflation’s Dominoes started to become readily apparent (let’s use 180-days ago) here are 4 big correlations to keep in mind:


  1. USD vs CRB Commodities Index -0.98
  2. USD vs WTI Oil -0.96
  3. USD vs. Gold -0.55
  4. USD vs SP500 +0.69


In other words, #StrongDollar has perpetuated both Oil and Commodity #Deflation. And now the US stock market is looking for some love from the bond market (or the lack thereof), because both USD + #RatesRising would force funds out of Treasuries.


That was our call in 2013 (#StrongDollar + #RatesRising) would force the Fed’s hand – and that would shake Fixed Income markets. Today is not 2013. It’s 2015, and this week USA’s un-elected-central-planner-in-Chief has 2-days of “testimony” to talk about that.


Will Yellen be hawkish or dovish on rates? I can tell you what I think she should do, but what she actually does is entirely another matter. Immediately following her lagging forecasts will be slowing inflation (CPI Thursday) and growth (GDP Friday) data…


“Hawkish” in currency terms = #StrongDollar, Commodity #Deflation.


On a mere +0.1% USD gain last week, here’s how that looked, in Global Macro terms:


  1. The Euro (EUR/USD) -0.1% to -5.9% YTD
  2. Canadian Dollar -0.7% to -7.3% YTD
  3. CRB Commodities index -1.9% to -2.3% YTD
  4. WTI Oil -5.3% to -6.4% YTD
  5. Gold -1.8% to +1.7% YTD
  6. Copper -0.6% to -8.2% YTD
  7. Coffee -8.2% to -9.7% YTD
  8. Wheat -4.2% to -14.7% YTD
  9. US Energy Stocks (XLE) -1.8% to +1.7% YTD
  10.  Latin American Stocks (MSCI LATAM) -0.8% to -3.7% YTD


Exactly! There are a lot of places (primarily USD/Commodity correlating) that you do not want your assets allocated during Global #Deflation. But you already know that. We’re well over 180 days into this, don’t forget.


Away from being long Italy, what else is rocking on the other side of this FX flow trade?


  1. European Stocks (EuroStoxx600 Index) +1.4% last wk to +11.6% YTD
  2. Japanese Stocks (Weimar Nikkei) +2.3% last wk to +5.1% YTD
  3. US Healthcare Stocks (XLV) +2.1% last wk to +5.6% YTD


Yep, in relative equity terms, US equity returns aren’t exactly rocking (Dow Bro 18,000 got you +0.7% last week to +1.8% YTD) this year. But they aren’t getting rocked like pie charts over-indexed to commodity inflation expectations either!


Seriously, who needs details about Greece when you can just look up YTD returns and see what your record is? Beating the market is the goal of the game, after all.


While I didn’t get beat telling you to be long commodities last week, I continued to get slapped around on the long-end of the Treasury bond curve. The Long Bond weakened (yield strengthened) with the UST 10yr Yield +6 basis points to -6 basis point YTD.


Consensus Macro (non-commercial CFTC futures/options net positioning) dog-piled me on that:


  1. Long Bond (10yr Treasury) net SHORT position ramped another 41,164 contracts last wk to -124,964
  2. Gold’s net LONG position dropped -23,800 contracts last wk to +110,164
  3. Oil’s net LONG position remained nauseatingly high at +328,656 contracts


#Dog-Piled. As in they bullied me, telling me what they’ve been telling me for 15 months (“rates are going higher, not lower, Keith”).


I don’t like (but I don’t mind) being knocked around. Especially when my team isn’t winning. We are what our record says we are. And there’s no better way to learn from that than by absorbing and learning from every mistake.


UST 10yr Yield 1.82-2.16%

SPX 2085-2125
RUT 1216-1243
USD 93.69-95.16
Oil (WTI) 49.02-53.70
Gold 1185-1220


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Rocking Returns! - USD correls

CHART OF THE DAY: Lagging, Late-Cycle Payroll Numbers

CHART OF THE DAY: Lagging, Late-Cycle Payroll Numbers - drake1


Editor's note: This is an excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here for more information and to become a subscriber.


And, most importantly, as you can see in the Chart of The Day, the payroll numbers are the most lagging of late-cycle employment numbers there are. Most of the time they peak, AFTER the economic cycle does.


Touchdown Deflation

“When Gronk scores, he spikes the ball and deflates the ball.”

-Tom Brady


That’s what Brady said about his tight-end, Ron Gronkowski, in a now infamous interview from 2011. He went on to explain that he loves that “because I like the deflated ball, but I feel bad for that football.”


That’s an appropriate metaphor for how the masters of the central planning universe must have felt after Friday’s strong US jobs report. Touchdown! Bloomberg/CNBC celebrated - and markets got smoked. I feel bad for anyone who was long anything.


It wasn’t just the US stock market that deflated. It was the FX market, Commodities market, and Bond Market. Oh, and Emerging markets got crushed too. An inverse-correlation spiking of the US Dollar it was, indeed.

Touchdown Deflation - Fed cartoon 01.28.2015


Back to the Global Macro Grind


Get the US Dollar right, you tend to get a lot of other things right. While I definitely didn’t get the long-end of the US Treasury bond market right last week, our #StrongDollar Global #Deflation Theme remains firmly intact.


With the US Dollar Index up another +2.5% on the week to +8.3% YTD, here’s what else happened across Global Macro:


  1. Burning Euros were devalued by another -3.1% to -10.4% YTD
  2. Canadian Loonies lost another -0.9% of their value to -7.9% YTD
  3. Commodities (CRB Index) deflated another -1.8% to -4.3% YTD
  4. Oil slid another -0.3% (WTI) to -8.6% YTD
  5. Gold got crushed -4.0% to now down for 2015 at -1.7% YTD
  6. Copper resumed its #deflation, -3.1% to -7.6% YTD
  7. Wheat #deflation of another -5.9% puts it at -18.8% YTD
  8. Oranje Juice got sacked for another -4.3% at -17.7% YTD


Wheat and OJ? Really? Yes, some of us Gen-X guys pound both for breakfast (every morning) and quite like the Gronk action in those prices. It’s kind of like a tax-cut (even though most companies aren’t get cutting those end market prices)!


And in terms of what most people care on (unless their asset allocator has Gold, Commodities, FX, etc. in their pie chart portfolio), which are stocks and bonds, the week-over-week wasn’t pretty either:


  1. Latin American Equities led losers, -7.2% on the week to -9.7% YTD
  2. Chinese stocks dropped -2.1% week-over-week to +0.2% YTD
  3. US stocks (SPY) were down for the 2nd straight week, -1.6% to +0.6% YTD
  4. US Energy stocks (XLE) deflated another -2.8% on the week to -3.0% YTD
  5. US REITS dropped -3.7% week-over-week to -1.2% YTD
  6. US 10yr Yield ramped +25bps on the week to close at 2.24%


Yep, it’s been a while since REITS (VNQ), the Long Bond (TLT), and the SP500 (SPY) were anywhere close to flat-to-down for the YTD… but no matter where you go this morning, there those returns are (the UST 10yr Yield started 2015 at 2.17%).


Clearly the market is a little freaked out that the Fed might make a policy mistake and go for what John, the Wild Thing, Williams in San Francisco calls “liftoff.” Forget spiking the ball, for some of these non-athlete central planners, this is as intense as it gets!


So now it’s game time for the Fed. At their March 18th meeting, they’ll need to either confirm or fade on the obvious market expectation of a June rate hike. But they’ll also have to outline the data “dependence” plan between now and June.


  1. What if the March or April jobs reports are as bad as February was good?
  2. What if February was literally as good as a late-cycle jobs report is going to get?
  3. What happens if the stock market does what it did Friday, every Friday?


Lots of questions. Lots of non-linear and interconnected risks. It’s not like the late-cycle recovery in the US employment data is either new or going parabolic like the US Dollar is.


To put the Non-Farm Payroll print in rate-of-change context, it was +2.39% year-over-year vs. +2.32% in the prior month. That was the 6th consecutive month of what we’ve called “acceleration”, but 6 months ago the rate-of-change was 2.04%. #nothingness


And, most importantly, as you can see in the Chart of The Day, the payroll numbers are the most lagging of late-cycle employment numbers there are. Most of the time they peak, AFTER the economic cycle does.


Sorry football fans, this makes for a macro market that I think will make for a lot of what hockey players call “read and react.” Other than risk managing levels and calendar catalysts, until the Fed clarifies, what else would you do other than stay flexible?


While I had some big immediate-term oversold signals in things I like right now (on Friday in Real-Time Alerts I signaled buys in IWM, XLV, and EDV – Russell, Healthcare, and Long-term strips), a hawked up Fed can #deflate my confidence in those positions, in a hurry.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.91-2.28%

SPX 2064-2105
VIX 13.81-16.21
USD 95.60-97.92
EUR/USD 1.07-1.10
Oil (WTI) 48.05-51.95
Gold 1165-1201


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Touchdown Deflation - drake1

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March 9, 2015

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Shaaban: Why BABA’s Rate Of Growth Is Set To Suffer

Takeaway: The tug-of-war between user growth and pricing pressure will negatively impact BABA’s rate of growth.

In this Q&A excerpt from an institutional call held earlier this week, Internet & Media Sector Head Hesham Shaaban explains how the tug-of-war between user growth and pricing pressure will negatively impact BABA’s rate of growth.

The Week Ahead

The Economic Data calendar for the week of the 9th of March through the 13th of March is full of critical releases and events.  Here is a snapshot of some of the headline numbers that we will be focused on.

Click to enlarge.

The Week Ahead - benryan 1

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