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Always Learning

“Organizations cannot learn unless the individuals within them learn.”

-Edward Hess


“Always Learning” is a nicer title for the morning after the long weekend than the title of the most recent book I cracked open: Learn Or Die, by Edward Hess.


For those of you who missed the Late-cycle slow-down in the US labor report on Friday, Global Macro markets did not. It’s a big Rates Down, Dollar Down (Commodities Up) morning here in America that we need to risk manage.


We’re on the right side of the rates move, so my primary focus will be risk managing the losing side of the Currency move. Will a bearish TRADE in the US Dollar disrupt our bearish intermediate-term TREND view of Commodities? Learning starts by questioning what it is that we believe.


Always Learning - 44


Back to the Global Macro Grind


When it comes to running money or an independent research firm, I think Hess asks the right question as an opening volley to the aforementioned book: “Learn or Die: Is this just a snappy title or is it a business truth?”


Having run both a buy-side and research company, I’d say that it is an absolute truth. Everyone makes mistakes. Not everyone can recover from not learning from those mistakes.


Since what I believe about Global Macro markets today can easily change tomorrow, I try to put myself in a position of perpetually being open to the idea that Mr. Market’s immediate-term TRADE can change the direction of our intermediate-term TREND views.


With that in mind, the easiest call to reiterate this morning is the one where both the TRADE and TREND agree: lower-for-longer on US interest rates. Here’s how that looked both week-over-week, and in the context of the intermediate-term TREND:


  1. US 2yr yield dropped -12 basis points last week to 0.48% (-19 bps YTD) and remains bearish TREND
  2. US 10yr yield dropped -12 basis points last week to 1.83% (-33 bps YTD) and remains bearish TREND


Whereas the toughest call to make is the counter-TREND move (which was caused by the same employment #GrowthSlowing factor – a weak jobs report) in the US Dollar. Here’s how I’d contextualize that, across durations:


  1. US Dollar Index -0.5% on the wk to 96.80 (+7.2% YTD with bullish intermediate-term TREND support of 93.71)
  2. CRB Commodities Index +0.4% last wk to 216 (-6.0% YTD with bearish intermediate-term TREND resistance of 239)


What makes easy even easier (and tough tougher) is Consensus Macro positioning (in non-Commercial CFTC futures and options positioning terms) right now:


  1. Long Bond (10yr US Treasury) net SHORT position still way too short at -134,579 contracts
  2. EUR/USD net SHORT position at its highest short position of 2015 at -225,776 contracts


In other words, Bond Bears got squeezed on Friday inasmuch as Euro Bears did – and now one major question is will there be follow through on either and/or both? The other, of course, is what do slowing growth expectations mean for US stocks?


If you’re purely playing this from a Correlation Risk perspective (like many of the machines are), answering the question on US Equities is tough too. That’s because shorter-term durations have an inverse correlation, whereas longer-term ones have a positive correlation.


Here’s what I mean by that:


  1. US Dollar Index 30-day correlation to the SP500 is -0.70
  2. US Dollar Index 180-day correlation to the SP500 is +0.73


I could be wrong on this, but what I believe Mr. Market is trying to tell us with that juxtaposition is that for the US stock market to go up longer-term, growth expectations need to stabilize and strengthen. That only happens with a #StrongDollar – not a weak one.


But, if growth expectations continue to fall, at an accelerating rate:


  1. US interest rates will fall
  2. US Dollar will fall
  3. And as expectations for an easier Fed rise, stocks could bounce like commodities just did


If I haven’t confused you yet on the potential for multiple scenarios playing out, across multiple durations, let me speak to you every other day as rates, currencies, stocks, and commodities whip around! This is going to be fun.


In the meantime, the only big macro call that I’ll stay with is being long Long-term Bonds. While I’m always learning about theoretical scenarios where the easiest call to make can be wrong, the only thing that’s been dead wrong there is the Rate Hike consensus.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.80-1.93%
SPX 2039-2076
USD 96.60-98.80
EUR/USD 1.07-1.10
Oil (WTI) 46.48-51.06
Gold 1181-1227


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Always Learning - 04.06.15

April 6, 2015

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Investing Ideas Newsletter

Takeaway: Current Investing Ideas: UUP, EDV, GS, ITB, TLT, MTW, MUB, RH

Below are Hedgeye analysts’ latest updates on our eight current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.


We also feature two additional pieces of content at the bottom.

Investing Ideas Newsletter      - 88 

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less


Investing Ideas Newsletter      - central planning cartoon 04.01.2015



Goldman Sachs stock had a good week rising 1.8% against an S&P 500 that was flat in the holiday shortened week. This extends outperformance for the leading investment banking stock against the broader market with GS investors outflanking the S&P 500 by 5.9% over the past 12 months.


With the firm reporting first quarter earnings in two weeks on April 16th, the market will be speculating no more on the solid capital position of the firm and also an improved trading environment for an equity and fixed income franchise that has gained market share as European competitors retrench. Revenue estimates for Fixed Income, Currency and Commodity trading sit at $2.8 billion for the quarter but the result should be in the $3.0 billion+ range, which will get investors thinking about growth again for the company with the first year-over-year gain in bond trading since 2009.


Investing Ideas Newsletter      - gs1


March Mojo


The housing data was again strong in the latest week with Pending Home Sales, HPI and Purchase Demand all accelerating to close out March.


  • Pending Home Sales rose +3.1% sequentially in February with signed contract activity up a remarkable +12% YoY, taking the index to a new 19-month high. Pending Home Sales is a lead indicator for Existing Home Sales and the recent strength in Pending argues for upside risk in reported Existing sales (where the trend has been comparably softer) over the next couple months.
  • Mortgage Purchase Applications – the most real-time, high frequency housing demand indicator - rose +5.7% WoW on the back of last week’s +4.9% advance and accelerated to +7.6% on a year-over-year basis. Given the notable acceleration in activity in the last two weeks of March, the data does indeed appear to be catching up to the thaw – a trend we expect to continue over the next 6-8 weeks
  • HPI: The Case-Shiller 20-city series showed home prices grew +4.6% year-over-year in January, accelerating moderately relative to the 4.4% growth reported in December. A stabilization/inflection in home price growth is important as housing related equity performance tracks the slope of home price growth strongly.
  • March Employment: The March Employment report released on Friday was broadly disappointing but belied ongoing, modest strength in housing demand fundamentals. First, 25-34 year old employment growth – the key demographic for 1st time buyer demand - held near the cycle high (& at a premium to the broader average) at 2.6% YoY. Second, residential construction employment rose +4K in March despite both adverse weather and softness in the balance of construction industry (total construction employment was down -1K for the month). On a year-over-year basis, employment growth continues to hold in the high single digits as conditions in the resi construction labor market continue to tighten.

We detailed our outlook for housing in 2Q with a deep dive conference call on Thursday entitled “If It Ain’t Broke…”. In short, we continue to like the setup for the sector over the current quarter.


Investing Ideas Newsletter      - phs


It was another week of declining long-term yields getting you paid on the long-side of Long-term Treasury bonds (TLT, EDV) and anything that acts like it (MUB) as the benchmark 10-Year U.S. Treasury yield declined another -12 basis points. The USD experienced some volatility ending the week down (~-50bps) with the most pressure coming after Friday’s big Non-Farm Payrolls Report (#LaborMarket).


To reiterate our view over the longer-term, we pin a good chance the U.S. Dollar will reach new highs ($120 anyone?) with the probably of long-term Treasury yields reaching all-time lows very much in play.

#GlobalDeflation was one of our top 3 themes for Q1 and we’re continuing to ride that call:

With Q1 coming to a close on Tuesday, here’s how things shake out YTD:

  • UUP +7.2%
  • TLT: +3.8%
  • EDV: +5.1%
  • S&P 500: +0.40%
  • MUB -0.1%
  • XLE (Energy): -1.8%
  • XLI (Industrials): -2.0%
  • CRB Commodities Index: -6.0%

Deflation crushes the debtor who makes pays interest in U.S. dollars (over-leveraged energy companies) and the earnings power of industries leveraged to commodity Inflation. Unfortunately the pain may not be over (Steer clear)!

Both the Hedgeye macro team and your central planners in D.C. will continue to eye the labor market intently for direction on the U.S. dollar but remember that rates can go lower with the dollar going both ways (In 2014 rates reverted a whole 75bps even though the U.S. dollar declined -2% from January 1st to May 6th before going on a tear through the back half of 2015 into this year).

  • Wednesday’s ADP report printed a number that slowed again sequentially in March which doesn’t bode well for the current rate hike expectation
  • Friday’s Non-Farm Payrolls report for March was a certified disaster for those long of rates rising:
    • Non-Farm Payroll additions added +126K vs. and expectation of +245K (+264K revised in February) 


Retail Sector Head Brian McGough and his partner Alec Richards remain big believers in Restoration Hardware (even with its recent run higher) and reiterate that RH is their best idea in retail. This recent deep dive note fleshes their thesis out in more granular detail.


While the crane business receives the most attention in part due to its cyclicality and because they are well, more noticeable, Manitowoc’s other business, Foodservice equipment, is the larger of the two in terms of operating income (60% vs. 40% for Cranes).


Several indicators are pointing towards upward momentum for MTW’s Foodservice business. Restaurant same store sales have benefitted since the drop in oil prices. Furthermore, an indicator by the National Restaurant Association, RPI Capital Expenditures Index, has surged recently in part due to lower fuel prices driving restaurant traffic and restaurant owners’ outlook.


Investing Ideas Newsletter      - MTW 4 3 20151


* * * * * * * * * * 



Senior macro analyst Darius Dale says domestic economic growth remains fairly anemic with mounting risks to the downside as we progress through the balance of the year.

Investing Ideas Newsletter      - 14

ual: will losing win, long-term?

"While a drop in jet fuel prices has led to a surge in airline shares," Industrials sector head Jay Van Sciver writes, "evidence continues to mount that UAL is not like the others."

Investing Ideas Newsletter      - 23

real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

The Week Ahead

The Economic Data calendar for the week of the 6th of April through the 10th of April is full of critical releases and events.  Here is a snapshot of some of the headline numbers that we will be focused on.



The Week Ahead - Week Ahead

Hiccup or Harbinger? A March Jobs Report Drilldown + 10 Bonus Charts You Won't See Anywhere Else


It’s always hard to take a convicted view of a single month of data in isolation but there was little to celebrate in the March employment report.  Total Nonfarm payrolls recorded their softest sequential gain since December of 2013, Jan/Feb saw a net negative revision of -69K, hours worked slowed by 0.2%, the breadth of industry employment gains declined and the Unemployment rate held flat for the wrong reasons. 


Hiccup or Harbinger? A March Jobs Report Drilldown + 10 Bonus Charts You Won't See Anywhere Else - chart1

Silver Linings 

The primary bullish rejoinder to march’s weak print is that weather played an outsized factor and similarly soft gains observed in Dec/Jan of last year were followed by the strongest annual gains in two decades.  Further, while the +126K monthly gain in March was well below the TTM average of +269K, year-over-year growth in payrolls held near cycles highs at +2.27% YoY and was flat at 1.99% on a 2Y basis.  We are in the twilight of the current expansion and whether the March data was simply a hiccup  or a more ominous harbinger of things to come remains TBD> 

Hourly earnings

Average hourly earnings in the private sector accelerated +10 bps sequentially to +2.1% YoY.  However, earnings for nonsupervisory and production employees – which BLS estimates to be ~80% of the workforce – grew just 1.8% YoY, marking the 3rd month in 4 of sub 2% growth.  While labor slack continues its slow march towards tautness, both wage and broader inflation continue to elude policy makers.   

Unemployment Rate

The U-3 Unemployment rate held flat at 5.5% while the U-6 rate (underemployment Rate) ticked down 10.9% from 11% - although it was largely negative fundamental developments that drove the stability/improvement as the flow of workers from unemployed to out-of-the-labor force rose and the  labor force participation rate declined.


Job loss in the energy sector stabilized in March – at least according to BLS and Challenger Job Cut data.  Oil & Gas extraction employment - which includes data thru March  - saw a marginal increase in employment (following 3 consecutive months of job loss) in the latest month.  Broader energy sector employment  - data thru February – played catch-up, declining by -17K sequentially with the rate of YoY growth dropping 290bps sequentially to +1.2% - the slowest pace of growth in 56 months. So, while the energy sector has, in fact, been a source of relative weakness in recent months, it was not a driver of deceleration in March. With Energy state initial jobless claims accelerating in the latest week, however, we do expect further net declines in industry employment in the coming months.


An estimated 182K workers missed work due to severe weather in March.  This compares with 148K last year and a trailing five year average of 130K so weather may have served as a modest drag – (recall that the BLS survey is conducted during the pay period including the 12th of the month and temperatures and initial claims were worse during this period than for the month on average)


Key housing employment demographics remained solid in March and should continue to flow thru to housing demand at a modest rate. We continue to like housing on the long side. 

  • 25-34 year old employment growth held near the cycle high (& at a premium to the broader average) at 2.6% YoY.
  • Residential Construction employment rose +4K in March despite both adverse weather and softness in the balance of construction industry (total construction employment was down -1K for the month).  On a year-over-year basis, employment growth continues to hold in the high single digits as conditions in the resi construction labor market continue to tighten. 


Manufacturing employment declined for the first time since july of 2013 as the confluence of strong dollar, declining export demand, lower energy sector investment, and residual port shutdown impacts continue to weigh on the industry.  The softness was not unexpected given the lackluster gain in February and the slowdown observed in the ISM employment sub-indices. 


With global deflation/disinflation predominating, Japa-German yields anchoring the U.S. 10Y and a strong probability that Fed policy normalization drives a flattening in the curve we think the long-bond (TLT) continues to perform under most immediate/intermediate term macro scenario’s.  

Click chart to enlarge.


Hiccup or Harbinger? A March Jobs Report Drilldown + 10 Bonus Charts You Won't See Anywhere Else - chart2


Hiccup or Harbinger? A March Jobs Report Drilldown + 10 Bonus Charts You Won't See Anywhere Else - chart3


Hiccup or Harbinger? A March Jobs Report Drilldown + 10 Bonus Charts You Won't See Anywhere Else - chart4


Hiccup or Harbinger? A March Jobs Report Drilldown + 10 Bonus Charts You Won't See Anywhere Else - chart5


Hiccup or Harbinger? A March Jobs Report Drilldown + 10 Bonus Charts You Won't See Anywhere Else - chart6


Hiccup or Harbinger? A March Jobs Report Drilldown + 10 Bonus Charts You Won't See Anywhere Else - chart7


Hiccup or Harbinger? A March Jobs Report Drilldown + 10 Bonus Charts You Won't See Anywhere Else - chart8


Hiccup or Harbinger? A March Jobs Report Drilldown + 10 Bonus Charts You Won't See Anywhere Else - chart9


Hiccup or Harbinger? A March Jobs Report Drilldown + 10 Bonus Charts You Won't See Anywhere Else - chart10


Hiccup or Harbinger? A March Jobs Report Drilldown + 10 Bonus Charts You Won't See Anywhere Else - chart11

Giant Macro River

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

“It was the transformation of the ocean from a death sentence to a sort of giant river.”

-Peter Zeihan


After a mentally exhausting month on the road where I was debating investors on what the Fed could and should do, now we have the proverbial giant macro river card priced into the marketplace, and I can go back to reading my books and brackets.


Since my NCAA brackets are basically an uneducated guess from a 5’9 right-hand-only-dribble-Canadian who doesn’t know the difference between the SEC and whatever division UAB played in this year, my picks did well yesterday.


Go figure. Guessing works some of the time – but it gets you run over in macro markets most of the time. So let’s go back to analyzing the transformation of an interconnected, but non-linear, global currency, commodity, fixed income, and equity market.

Giant Macro River - z9


Back to the Global Macro Grind


The transformation of the oceans (across the last six centuries) is a fantastic metaphor for macro markets to consider as you watch your basketball brackets this weekend. If you’re not into doing either – let me save you the required reading and give you the history point:


The most lasting impact of the deep water revolution, wasn’t the shifting of the spice trade, the fall of the Ottomans, or even the rise of the British Empire… Deepwater navigation cracked the world open, launching the Age of Discovery, which in turn condensed the world both culturally and economically.” (The Accidental Superpower, pg 31)


Never mind not having a modern day #process to contextualize and risk manage the oceans. Trading macro used to be a death sentence for people who A) didn’t have live quotes and/or B) liquid macro securities that helped them express their macro themes.


Today, all of that has changed. Currency markets are some of the deepest and most liquid in the world – and most central planners wake up every morning looking for ways to manipulate them.


Last night, BOJ (Bank of Japan) overlord Kuroda was trying to jawbone the Yen lower by suggesting he could come up with some moarrr “innovative monetary policy.” What he meant by that is he can do moarr and moarrr of what has not worked, and take Japan’s annual money printing from 80-90T Yen to something greater than 100 TRILLION Yens…


Awesome, eh?


Yeah, these guys are totally awesome. As they are blowing up the purchasing power of The People, they are providing us an excellent map of how to navigate the River Alpha of Global Macro returns.


How did Kuroda impact macro markets?


  1. Yen Down (Dollar Up) = Nikkei Up
  2. With Burning Yens testing YTD lows, Weimar Nikkei ramped to a 15yr high at +12.2% YTD
  3. Janet’s attempts to devalue the US Dollar past 1-day were foiled


Oh, then Draghi woke up and gave the Greek guys a buzz telling them to just float it out there that they are “feeling confident” about their talks with the Germans:


  1. After hitting fresh YTD lows (see Chart of The Day), Greek stocks bounced +3% on that and…    
  2. The Euro (vs. USD) bounced to another lower-highs too at $1.06…
  3. So Janet doesn’t have to intervene just yet –until Euros and Yens are both on their lows again, I guess


This is, of course, the problem with trying to centrally plan your own domestic waterways as the rest of the world is trying to boil the currency ocean. If your “policy” is linear and local in its design, it’s going to get wiped out by non-linear global macro risks.


“So”, Janet, while I’m a fan of the no policy mistake move this week… and I think that the move you made on the non-impatience vs. “patient” was cute… in trying to devalue the Dollar from here, I think you’re up this river without a paddle until you make your next move.


How do we invest in these #StrongDollar + Down Rates Global Macro waters? No real change from where I’ve been:


  1. Commodity #Deflation = rocks, so avoid those (reiterating the asset allocation of 0%, which we’ve had for 6 months)
  2. US Equities = domestic consumption opportunities abound (Russell 2000, Housing, Consumer, Healthcare)
  3. Int’l Equities = owning central plans to ramp stocks markets (Japan, Germany, Italy, Spain, etc.)


And in FX and Fixed Income you obviously own what the long-term investors in Global #Deflation and #GrowthSlowing do – US Dollars and Long-term Treasuries. It’s a Giant Macro River, and I’m happy owning the deepest and most liquid parts of it.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.91-2.05%
SPX 2069-2107
RUT 1234-1265

DAX 11804-12230
USD 97.97-100.69
EUR/USD 1.04-1.08


Best of luck out there today and have a great weekend,



Keith R. McCullough
Chief Executive Officer


Giant Macro River - 03.20.15 chart

Early Look

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