Global Equity Melt-Up

Client Talking Points


Big stimuli (or rumors of moarrr) and Japanese/Chinese stocks love it! The Nikkei and Shanghai Composite up another +1% and +1.6% overnight to +11.4% and +8.3%, respectively. The KOSPI is trying to breakout now too, +2.1% after being bearish for most of 2014.



Down Day for USD yesterday had everything from Biotech (IBB) to Yield Chasers (Utilities and REITS) roaring to the upside – this is what Wall St. is begging for from Janet Yellen, lower USD and lower rates, for longer – we’ll see if she delivers #patience.


Oil doesn’t buy into the idea that USD will have more than 1 down-day, falling another -1.2% this morning to $43.34 with our refreshed risk range signaling lower-highs and lower-lows at $43.05-47.36; some of our best E&P MLP short ideas crushed yesterday.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call, U.S. #HousingAccelerating remains 1 of the Top 3 Global Macro Themes in the Hedgeye Institutional Themes deck right now. Not only did U.S. home prices accelerate (in rate of change terms) in the Core Logic data this week to +5.7%, but the supply/demand data has been improving throughout the last 3 months.


Penn National Gaming is the best way to play improving domestic regional gaming trends due to its superior operational management and unit growth opportunities. Catalysts include positive estimate revisions, the opening of the first Massachusetts casino in June, and industry leading earnings growth in 2015 and 2016.


Low-volatility Long Bonds (TLT) have plenty of room to run. Late-Cycle Economic Indicators are still deteriorating on a TRENDING Basis (Manufacturing, CapEX, inflation) while consumption driven numbers have improved. Inflation readings for January are #SLOWING. We saw deceleration in CPI year-over-year at +0.8% vs. +1.3% prior and month-over-month at -0.4% vs. -0.3% prior. Growth is still #SLOWING with Real GDP growth decelerating at -20 basis points to +2.5% year-over-year for Q4 2014.The GDP deflator decelerated -40 basis points to +1.2% year-over-year.

Three for the Road


TODAY AT 8;30AM ET Watch The #MacroShow, Live w/ @KeithMcCullough SPECIAL GUEST: @HedgeyeENERGY (Kevin Kaiser)



The power of imagination makes us infinite.

-John Muir


1 in 4 people in Japan are above the age of 65.

Shaping Buffett's House

This note was originally published at 8am on March 03, 2015 for Hedgeye subscribers.

“You shape your houses and then your house shape you.”

-Winston Churchill


William Thorndike introduces Warren Buffett in chapter 8 of The Outsiders (pg167) as “The Investor CEO.” He uses the aforementioned (and ironic) Churchill quote then cites Berkshire’s sculptor himself: “being a CEO made me a better investor, and vice versa.”


Although I’ve only been a CEO for 7 years (and, at 40 years old, I’m a very young one at that!), I definitely agree. Running a company is a lot different than generating a hedge fund P&L. Both experiences have taught me invaluable lessons about life and investing.


While Buffett’s former #1 Rule in Investing was “don’t lose money”, he doesn’t really say that anymore when promoting his positions and politics on CNBC. To be clear though, Buffett became Buffett by selling high and buying low.


By 1987, in advance of the October market crash, Buffett had sold all of the stocks in his portfolios, except for his 3 core positions. After his Capital Cities transaction, he did not make another public market investment until 1989” (pg175), when he bought Coke (KO).


The house that shapes Buffett’s commentary today is not the See’s Candies he bought in 1972 for $25 million. Buffett, due largely to his brilliant performance and compounded returns, is now the stock market. His #1 Rule now is to protect that house.


Shaping Buffett's House - b9


Back to the Global Macro Grind


I’m calling that out as there’s plenty of video circulating on CNBC’s backslapping network this morning, replaying a fawning Becky Quick with Mr. Chuckles. If you were able to play the mainstream media to your advantage like this, you’d be chuckling too!


Here’s my 1 minute video on the matter:


Another reason to callout the chart-chasing buy-high-and-hope-to-sell-higher strategy (commonly called momentum and/or performance chasing) is that the US stock market closed at its all-time high of 2117 (+2.8% YTD) yesterday.


All-time, as I like to remind time-series fans, is a long time. And you generally don’t want to have the all-time high as your invested cost basis. You can ask some of the private equity firms who bought upstream and/or MLP Energy assets with a $105-120 price deck about that.


While it might be nice to avoid Buffett’s advice about having no shorts on “when the tide rolls” out, I did have 3 of them on in Real-Time Alerts yesterday, so it’s worth calling all 3 of them out as things that didn’t work for me, in that product, yesterday:


  1. Copper (JJC)
  2. J P Morgan (JPM)
  3. Foot Locker (FL)


Yep, while all 3 of these securities have sucked in 2015 YTD (i.e. they have negative returns), I guess I was the one who sucked having them on the short side yesterday. If you’re not sucking sometimes, you don’t have mirrors in your house either.


To review why I kept these “SELL” ideas on versus others:


  1. Copper – down -1.6% this a.m. (-6.4% YTD) remains one of the most obvious ways to play our top theme, Global #Deflation
  2. JPM – down -1.3% YTD is in 1 of the 2 US Equity Sector Styles I like the least (Financials – sector ETF -0.8% YTD in an up tape)
  3. FL – down 2 cents YTD is on our Best Ideas SELL list (Brian McGough is the analyst, ask our team for his deck for details)


The other thing that went wrong for me yesterday was another one of these counter-TREND moves in US (and global) interest rates. While many might quibble with the simple calculation of +10% move in German Bund and Japanese Government Bond Yields (when you devalue to zero, that is the math), the move on the long-end of the US rates curve is where I seem to have the most lovers and loathers.


After dropping -12 basis points last week, the 10yr US Treasury Yield bounced +9 beeps (basis points) on the day yesterday. That brought back a whole host of tweeters who have been shorting the Long Bond via TLT for, well, the last 25% of the up move (since January of 2014).


One mainstream economic headline that hit the tape was the ISM slowing in FEB to 52.9 versus the initially reported 53.5 for JAN (which was then revised lower). So, other than it not being the worst monthly decline since OCT 2008 (like the PMI was on Friday), I don’t see any fundamental economic reason to be selling Long-duration, low-volatility, high return bonds.


That said, we need to risk manage the range, and here’s some time and space to consider:


  1. Immediate-term TRADE risk range for the 10yr Yield has widened to 1.84-2.16%
  2. Intermediate-term TREND resistance for the 10yr Yield = 2.39%
  3. US monthly Jobs Report is due out on Friday and that will definitely move the bond market


On a jobs miss, I think you test the low-end of that immediate-term risk range. On a jobs beat, I think you test the high end. The house that I built alongside my teammates @Hedgeye won’t make our call any more complicated than that.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.84-2.16%
SPX 2096-2122

VIX 12.80-16.39

USD 94.63-95.81

Oil (WTI) 48.04-52.23
Copper 2.55-2.73


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Shaping Buffett's House - 03.03.15 chart

CHART OF THE DAY: Piling In For a Hike (CFTC Net Non-Commercial Futures and Options Positions)

CHART OF THE DAY: Piling In For a Hike (CFTC Net Non-Commercial Futures and Options Positions) - 03.17.15 chart


Editor's note: This is an excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here to learn more and subscribe.


Do I have an opinion on what the Fed should do? Of course. But that and a bus ticket will get me a swift beating at a men’s league hockey game in northern Quebec. What the Fed should and could do are two very different things.


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I Can't See Land!

“The problem was sight.”

-Peter Zeihan


That quote is not alluding to the Fed’s decision tomorrow. Peter Zeihan was describing what I am sure all of your FOMC day previews are writing about this morning - 14th century macro strategy.


In the world before 1400, true ocean transport was a rare thing, being neither quick nor reliable nor safe… once line of sight to the land was lost, you had to more or less guess.” (The Accidental Superpower, pg 24)


Guess? When I was first hired on the buy-side, sometimes I’d guess. Then I’d lose lots of other people’s money and my boss, Jon Dawson, would tell me not to guess. “We don’t do open-the-envelope investing.” It was a great risk management lesson.


And it’s one that has stuck with me for the 14 years since he taught it to me. That’s why I’ve been taking down my asset allocation to long-term Treasuries on the recent bounce. I can’t guess what Yellen says tomorrow. I’d rather raise cash and react to it. I Can't See Land! - Yellen cartoon 09.17.2014NEW


Back to the Global Macro Grind


This is not to suggest that what super “smart” people on the Wall Street refer to as an ‘educated guess’ can’t make you a lot of money. As I implied in my intro, the smartest of those types have figured out to bet big with other people’s money!


Will Janet Yellen remove the word “patient” from tomorrow’s Fed policy language? Will she replace it with another scrabble word score? Will she leave the word in there and be “data dependent”? Will a ramping US Dollar find its way into the language? How about the dirtiest word she’s ever whispered publicly, #deflation?


You can buy-pass the whole seeing thing if you just have answers to the aforementioned questions in advance. It’s called inside information. Some pay a lot of dough for it! If you’re a little Mucker in Stamford, CT – you’re going to have to wait and watch.




Since we said buy both stocks and bonds before they started bouncing last week, now we can sell some of what we bought, raise some cash, and sleep soundly. Chasing beta by levering up your bets after markets bounce is no way to live.


Bets? Yes, people in this profession bet. Before yesterday’s US stock and bond market ramp, here’s where consensus macro bets were leaning, from  CFTC Non-Commercial futures and options perspective:


  1. SP500 (Index + Emini) net SHORT position hit a YTD high of -39,891 contracts
  2. Russell 2000 net SHORT position hit a YTD high of -40,793 contracts
  3. Long-bond Bears ramped the net SHORT position in the 10yr Treasury to -173,194 contracts
  4. Crude Oil Bulls remained pervasive with a net LONG position of +294,609 contracts
  5. US Dollar Bulls hit YTD highs at +81,210 NET long contracts


And, guess what? Every single one of those Consensus Macro positions was wrong on the day:


  1. After 3 straight down weeks (yes people get bearish after corrections), SP500 popped +1.35%
  2. Russell 2000, which has been our favorite of the US major indexes, tested an all-time high
  3. 10yr UST Treasury Yield dropped to 2.07% (TLT was up +1% on the open)
  4. Oil continued to crash with WTI closing -2.3% on the day at -17.7% YTD
  5. US Dollar Index had one of its biggest down days of 2015, -0.76%


“So”, what does this mean?


  1. You should pay attention to modern day mind-maps like futures and options positioning
  2. Wall Street is begging for Janet to devalue Dollars and keep rates lower for longer
  3. If Yellen delivers #dovish tomorrow, you’ll see a lot more of Consensus Macro bets being wrong


I personally don’t like being wrong. That’s why, especially heading into an open-the-envelope event day like tomorrow, I lower the probability of being wrong by raising cash.


Do I have an opinion on what the Fed should do? Of course. But that and a bus ticket will get me a swift beating at a men’s league hockey game in northern Quebec. What the Fed should and could do are two very different things.


Since we’ve had a good run here in March, I’d rather cling to my cash (US Dollars) than pretend to see something I have absolutely no edge on. And I’ll let the clairvoyant vision of the Federal Reserve rule another non-free-market day.


Today we’ll be hosting a Macro Call on the US Employment Cycle at 11AM EST (ping for access). Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.01-2.14%

SPX 2053-2112

VIX 13.72-17.39
USD 98.50-101.17
Oil (WTI) 43.05-47.36
Gold 1131-1169


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


I Can't See Land! - 03.17.15 chart

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REPLAY: The Macro Show With Keith McCullough

Today's edition of The Macro Show with Hedgeye CEO Keith McCullough features a can't-miss special appearance by Hedgeye Energy Sector Head Kevin Kaiser.






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