McCullough: Secular Stagnation Is a Real and Systemic Threat


In this brief Q&A excerpt from Hedgeye’s Q2 quarterly macro themes call, CEO Keith McCullough discusses why former Fed chairman Ben Bernanke has the story completely wrong on secular stagnation.

Regulatory Shout-Out | New York Judge To Congress: Write A Law, Already!

By Moshe Silver

Regulatory Shout-Out | New York Judge To Congress: Write A Law, Already! - jed1


New York district judge Jed Rakoff continues to annoy folks by insisting that government do its job.  In his famous rant about a proposed settlement between the SEC and Citigroup over allegations of billion-dollar fraud, Rakoff said “you’re asking me to exercise my authority, without exercising my judgment,” pushing back against the age-old practice where the SEC reaches a settlement with an accused party and a court rubber stamps it.  The standard outcome is, the accused pays a lot of money to the SEC, the SEC doesn’t identify accused individuals, no one has to admit to anything, and the firm or individuals who paid the settlement resume Business As Usual.


If, like us, you get your daily dose of rage by watching the ongoing blatant collusion between the worst of Wall Street and government’s “brightest and best,” you may recall that Rakoff held firm on not approving the Citi/SEC settlement without knowing the details.  Finally, the SEC and Citibank got together and sued in appeals court to force Rakoff to sign off.  We think this looks like the sheriff and the burglars getting together to poison the watchdog, but the courts are generally not interested in our opinion.


Now, Judge Rakoff is giving the SEC the go-ahead to proceed with a civil insider trading case against two stockbrokers, even though federal prosecutors have dropped the case. 


Prosecutors are treading gingerly after an appeals court threw out the insider trading convictions of Anthony Chiasson and Todd Newman, respectively of Level Global Investors and Diamondback Capital.  This was a mega-high-profile case – complete with FBI raids of hedge fund offices in broad daylight – and was considered a major win for the government.  Until another arm of that same government ruled that – in the absence of clearly defined insider trading laws – prosecutors had to meet an increasingly heavy burden of evidence, the further the insider tip was from its source.  In the Newman case, the fund managers were found to have benefited from tips that originated three or four degrees of separation away from them and their firms – hardly the same as handing the CFO a bag full of unmarked $100 dollar bills to get him to tell you what next week’s earnings report will be.


Judge Rakoff found that, while prosecutors may not have been comfortable bringing a criminal case, the charges meet the lower standards of evidence for civil cases, and the SEC could proceed with its independent case.


But Judge Rakoff also wrote that “difficulties” arise from the current scenario, where courts and regulators are forced to make insider trading law case by case.  “The tensions thereby created cannot always be resolved in satisfactory fashion,” he wrote, “thus reinforcing the need for Congressional action.”


Late last year Supreme Court justices Scalia and Thomas wrote that it is not up to appointed members of government agencies (the SEC, the Justice Department) to decide what constitutes a federal crime.  The court has declined to hear insider trading appeals, indicating a general discomfort with letting the SEC call the shots on a case-by-case basis, in the absence of actual legislation.


Judge Rakoff suggests that Congress should make black-letter laws defining insider trading, thereby telling prosecutors when they can bring future cases.  These laws would clarify categories requiring punishment for wrongdoing – which, unlike the current practice of settling with the Commission, would require identifying wrongdoers by name and maybe even putting them in prison.


Following up on our favorite legal doctrine, the Law of Unintended Consequences, we note that, the minute Congress sets out to write laws defining securities fraud in such a way that people run a real risk of going to prison, there will be a massive shift in campaign funding.


According to the website, the financial and securities sector comes in as far and away the largest donor to Congressional races – nearly twice the amount given by the next-largest donor group: lawyers (who get paid to represent guys on Wall Street… are you beginning to see where this is going?) 

We applaud Judge Rakoff for telling Congress it’s time they actually do their job.


A man can dream, can’t he?


Moshe Silver is a Managing Director at Hedgeye Risk Management and author of Fixing a Broken Wall Street.




Takeaway: Inclusive of the holiday distortion, the separations side of the labor market continues to signal ongoing strength.

Seasonal distortions in high frequency macro data during peri-holiday periods are notoriously prevalent.  Floating holidays, such as Easter, are particularly challenging in terms of normalizing so investors should take an un-convicted view of the single-week seasonally adjusted initial claims data in isolation.   


Indeed, over the past five years, the holiday week data has carried a discretely upward bias with the week-over-week change averaging +20K.  This morning’s data – which was up +14K WoW - is largely congruent with the recent historical tendency.


Holiday related noise aside, the broader conclusion remains unchanged.   With single week claims holding below the 300K level, rolling claims improving to their best level since June of 2000, and the year-over-year change in rolling NSA claims improving to -13% in the latest week, the separations side of the labor market continues to signal ongoing strength.   


And while conspicuous weakness in the energy sector remains  a concern along with emergent weakness in goods employment (strong dollar, declining export demand, lower energy sector investment, and residual port shutdown impacts), strength in the balance of the economy continues to swamp that duo of drags, for now.


INITIAL CLAIMS | EGG-CELLENT - IC Easter Wk historical


The Data

Prior to revision, initial jobless claims rose 13k to 281k from 268k WoW, as the prior week's number was revised down by -1k to 267k.


The headline (unrevised) number shows claims were higher by 14k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -2.25k WoW to 282.25k.


The 4-week rolling average of NSA claims, another way of evaluating the data, was -13.3% lower YoY, which is a sequential improvement versus the previous week's YoY change of -11.3%


Our basket of energy-heavy state claims fell in the week ending March 28th. However, as oil prices remain low, the spread between that basket and the U.S. as a whole continued to widen to 27.5 from 24.8.














Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Keith's Daily Trading Ranges [Unlocked]

This is a complimentary look at Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers every weekday morning by CEO Keith McCullough. It was originally published April 09, 2015 at 08:07. Click link above to subscribe.

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Keith's Macro Notebook 4/9: Japan | Commodities | Gold


Hedgeye Macro Analyst Ben Ryan shares the top three things in CEO Keith McCullough's macro notebook this morning.

Japan, CRB, Gold

Client Talking Points


With the Dollar Up and the Yen Down, the Nikkei rips to new 7 year highs (+0.8% overnight to +14.9% YTD vs SPX +1.1% YTD); the caveat here is that my FX risk ranges are tightening, so up here we’ll register an overbought signal in Japanese stocks .


Dollar Up -> CRB Commodities Index has a big -2.5% down day (led by Oil’s -5.6% daily decline); while it’s tempting to get off the #Deflation theme, there’s no fundamental research reason to do so yet.


While it appeared to enjoy the 3 week Dollar Down, Rates Down combo move (you need those 2 things happening at the same time for Gold to really work), now you have USD Up and Rates trading in a lower, but tighter range – and Gold doesn’t enjoy that, -0.5% to $1196/oz and still signaling bearish TREND @Hedgeye.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Manitowoc (MTW) is splitting the business into two companies. Given the valuation differential between the sum-of-the-parts and the current enterprise value of the company, the break-up should be a substantial positive. Recent nonresidential and nonbuilding construction data remains firm for 2015, which suggests that MTW’s crane sales should see a pickup in the first half of the year. The Architecture Billings Index (a survey of architects) typically leads nonresidential and residential construction spending by approximately 9-12 months. More importantly, the ABI Index leads MTW Crane Orders by 2 quarters.


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. Builder Confidence retreated for a 3rd consecutive month in March and New Home Starts in February saw their biggest month-over-month decline since January 2007.  We think the underlying reality is more sanguine with the preponderance of the weakness in the reported February data largely attributable to weather.  


                                                  While labor supply constraints may serve as a drag to builder confidence, presumably it is rising demand trends that are driving tighter conditions in the resi employment market.  All else equal, we’d view improving demand as a net positive.  On the New Construction side, while the sharp drop in Housing Starts captured most of the headlines, we believe the real story was in the 3% gain in permits. We'd expect to see a big rebound in the next two months in housing starts as the data plays catch-up to the thaw.


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. Most of the #Deflation trades bounced to something less-than-terrible (both absolute and relative) for 2015, whereas the real alpha trending in macro markets continues to play to the lower-rates-for-longer camp’s advantage.

Three for the Road


Looking forward to being LIVE w/ Maria @MariaBartiromo for the hour at 9AM EST @OpeningBellFBN 



“While you’re sitting there thinking about it someone else is out there doing it.”

         -Rodger Halston


Dwayne "The Rock" Johnson eats about 821 pounds of Cod per year.

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