Process of Discovery

“Humble inquiry is a process of discovery.”

-Ed Hess


That’s a solid research thought from a section of a solid #behavioral book I finished reading on vaca, Learn Or Die. The section is titled “Asking Not Telling” and I thought a lot about that when it comes to my #process.


In addressing our ability (or lack thereof) to listen, Hess cites the behavioral research of Edgar Schein (MIT Professor) “who believes that the US has a culture that values telling over asking.”


I know more than you, and therefore, I am smarter and better than you.” Sound familiar? … “alternatively, asking says I care about what you think and I am ready to invest myself in listening.” (pg 66) Are you a good listener?


Process of Discovery - z li


Back to the Global Macro Grind


While I am still quite bullish on both stocks and bonds into the Fed meeting next week, I am still short of something that I always seem to be short of – time! That makes the listening exercise all the more important. It’s who/what you listen to that matters.




For the first part of my career, I listened to my bosses. Then, while my bosses were making mistake, I started to realize that if I listened more to the market, I could help them make less mistakes. Hedgeye’s #process is highly influenced by this experience.


As our process evolves, more and more of my time is spent listening to my analysts. That’s a role reversal from my beginnings. Technically, I’m the boss – but our analysts are empowered to know more than me about their respective domains.


In the spirit of listening to the best analyst there is (Mr. Macro Market), here’s what he’s saying this morning:


  1. Pain Trade in US Stocks = #on
  2. Chinese, Japanese, and European Bull Market in Equities = still #on
  3. FX and Fixed Income markets = #boring


Boring works. Defined in Hedgeye mathematical speak, boring is when the variance of what I call the risk range compresses. Tighter ranges are easier to risk manage. They tend to trend upwardly, as volatility falls. They don’t have a lot of chop.


There‘s not a lot of “chop” in raging bull markets (like the Shanghai Composite, Nikkei, or DAX) as the only things getting chopped there are fingers of the short sellers who didn’t obey the commands of the central planners.


If you want to discover “chop” try trading something with a widening risk range (rising variance) that goes both up and down with no discernible TREND, then drop whatever that something is -1% one day, and ramp it +1% the next. Rinse/Repeat.


That something, in this morning’s case (per Mr. Macro Market) is the SP500:


  1. She was -1.1% on Friday, then +0.9% yesterday
  2. She’s been down, up, down, up for the YTD, depending on the month you listened to
  3. And now, she’s ramping what I call the Pain Trade to test the top-end of the range (again)


Pain Trade is the one that the largest % of market participants are not positioned for. One very important way to listen to where the crowd is positioned is in futures and options contract terms. Before yesterday’s (and this morning’s pre-market futures) ramp, here’s where non-Commercial CFTC futures/options NET positioning stood:


  1. SP500 (Index + Emini) net SHORT position of -40,978
  2. The 3 month avg net position = +13,092 (net LONG)
  3. The 6 month avg net position = +31,930 (net LONG)


In other words, if you’re good at listening to Mr. Macro Market, then you have to be quick to contextualize what it is you think you heard. I don’t know about you, but as I get older I need to double check things as I see/hear less well! Then there’s listening to opposing thoughts across multiple durations and trying to put that within a context of rising and falling probabilities…


This hockey player guy still thinks the Fed is going to be less hawkish on rates in 2015, but then there’s this Japanese dude named Hamada who told Abe that he might need moarrr central planning cowbell overnight = Down Yen, Up Dollar…


Trying to risk manage it all can be quite humbling, indeed.


Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) across 12 big macro factors are now as follows:


UST 10yr Yield 1.85-1.95% (bearish)
SPX 2084-2117 (bullish)
RUT 1 (bullish)
Nikkei 198 (bullish)
DAX 116 (bullish)

VIX 12.34-15.27 (bullish)

USD 97.02-98.95 (bullish)
EUR/USD 1.05-1.08 (bearish)
YEN 118.61-121.12 (bearish)
Oil (WTI) 48.72-57.69 (bearish)
Gold 1181-1210 (neutral)
Copper 2.67-2.79 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Process of Discovery - 04.21.15 chart

Dream Themes

This note was originally published at 8am on April 07, 2015 for Hedgeye subscribers.

“Deep into that darkness peering, long I stood there, wondering, fearing, doubting, dreaming dreams no mortal ever dared to dream before.”

-Edgar Allan Poe


Yesterday was the championship game for college basketball and like most NCAA tournaments, this one was full of its share of surprises.  To many (especially Wildcat faithful) the biggest surprise in the tournament was the premature end to Kentucky’s perfect season.  (Although after last night’s 5th national victory for Coach K, the Duke basketball faithful probably aren’t too concerned about Kentucky!)


The dream of a perfect season in NCAA basketball begins anew next season.  It has been 39 long years since Indiana, under Bobby Knight, last had a perfect season in 1976.  That’s a long time for basketball fans to wait for a proverbial “Dream Team”.  Luckily for all of you, once a quarter Hedgeye releases our "Dream Themes" and today at 11am ET we will be walking you through our Q2 2015 investment themes (ping if you haven’t already received the dial-in).


Clearly, we are being somewhat facetious in suggesting our quarterly investment themes are perfect.   But even if we aren’t perfect, every quarter we endeavor to highlight the top three macro-economic themes that we believe are most relevant.  To some investors, quarter-to-quarter thematic investing may seem counterintuitive. 


In a globally integrated economy that is increasingly being managed by governments and central bankers, we think nothing could be further from the case.  When the direction of the markets can be influenced by the simple changing of a single word in a central bank’s policy statement, frankly it is careless not to stay on top of the real-time changing currents in macro investing.


Dream Themes - central planning cartoon 01.04.2015


Back to the Global Macro Grind...


The key themes we will be discussing later this morning are highlighted below and as usual there will be heavy focus on the U.S. economy:


1. LateCycle USA: Employment, Inflation and Earnings follow an archetypic progression over the course of the economic cycle and always look best before the crest.  We'll detail where we are in the current cycle, the likely trajectory for this trinity of late-cycle macro indicators from here and how best to be positioned in the twilight of the current expansion.  


2. DemographicYields: Year after year in the post-crisis era, investors, economists and policy-makers alike have consistently seen their estimates for GDP growth, inflation and interest rates surprised to the downside. Perhaps there is some merit to the "secular stagnation" thesis most recently highlighted by Bernanke's blog. In this theme, we pull back the curtains on the impact of demographics on the domestic and global economy. The conclusion? Lower-for-longer...


 3. Oil's #DeflationDeck:Taking a birds-eye view of oil prices throughout the peaks and troughs in business cycles provides essential context as deflation's dominoes continue falling on a global scale. With the U.S. production machine changing the supply/demand dynamics in global energy markets, a deep-dive of this shift is key to generating sector-specific alpha into 2016 and beyond.     


Given the recent disappointment in U.S. employment, the #LateCycle USA is likely to be the most controversial to investors.  Specifically, on Friday the Labor Department’s data showed the U.S. added a mere 126,000 jobs in March.  The economic bulls of course will tell you, and there is some credence to their argument, that part of the fall in March was a one-time correction in the energy sector as domestic oil drilling adjusts to a new, and much lower, paradigm in oil.


In today's Chart of the Day, we take the longer view of the employment cycle and we show initial jobless claims going back to the mid-1960s.  The data in this chart quite clearly shows that if anything we are closer to the peak in the employment cycle than the trough.  More interestingly, as the chart also shows, employment improvement peaks, on average, 7 months before an economic cycle does. 


With the current expansion getting long in the tooth at 71 months versus a median expansion of 51 months,  you probably get very clearly why we think the most important current macro topic is to focus on where we are in the cycle.  In as much as we’d like to dream of economic cycles that expand in perpetuity, that’s not how the world works outside of academia.


In typical reactionary fashion, members of the Federal Reserve are now beginning to explicitly push out the so-called “dots”.  Yesterday Atlanta Fed President Dennis Lockhart, who is currently a voting member, said he favors a July or September “lift off” instead of June, with the caveat that most of the negative data in Q1 was transitory (which is how most economists classify data that doesn’t agree with their prevailing view).


The irony of course is that to the extent that the Fed doesn’t continue to be wrong on real-time economic data, and does at some point in the next couple of quarters get the chance to raise rates, the Fed will be signaling that we are likely in the longest economic expansions in the history of the U.S. economy.  This assumes that the Fed then raises rates through 2017, which would put the U.S. economic expansion at near 100 months!


Sounds like a bit of a dream to you? Well, us too.  And as Victor Hugo wrote about dreams in Les Miserables:


“There is nothing like a dream to create the future.”




Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.84-1.93%
SPX 2044-2094

VIX 13.63-16.21
YEN 118.98-120.49
Oil (WTI) 46.39-52.24
Gold 1180-1218 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research 


Dream Themes - 04.07.15

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Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.68%

REPLAY | The Macro Show with Keith McCullough

If you didn't see The Macro Show this morning, we've got you covered. Watch the replay right here. 




The Macro Show is Hedgeye's pre-market rundown of what's happening in global macro where we offer insight on how you, the investor, can position yourself for the day ahead. We share 15 minutes or less of prepared market analysis and commentary and then answer your questions in a live Q&A session.

Cartoon of the Day: G(LOW)Bal Bond Yields

Cartoon of the Day: G(LOW)Bal Bond Yields - 10 yr yield cartoon 04.20.2015

"The UST 10YR Yield is at 1.87%, down 31 basis points year-to-date as lower-for-longer continues to get priced in," Hedgeye CEO Keith McCullough wrote earlier today. "The German 10YR is at 0.07% and the Swiss 10YR is at negative -0.21% this morning.

McCullough: Global Bond Yields Flummoxing Investors


In this brief excerpt from today’s institutional morning macro call, Hedgeye CEO Keith McCullough discusses the continuing descent of bond yields around the world.


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