Confusion's Masterpiece

“Confusion now hath made his masterpiece!”

-William Shakespeare


Oh boy, are macro markets confused by the collision of central plans now!


Shakespeare fans will remember the aforementioned quote from Act II (Scene 3) of Macbeth. It’s a great metaphor to use in answering the question I get from most long-term risk managers: “How does this all end?


While it would be reckless to predict precisely how it ends, I have a pretty good idea how the beginning of the end looks – confusing. Confusion in the timing of central planning breeds contempt. And that perpetuates volatility which, in due course, crushes confidence.

Confusion's Masterpiece - Card house cartoon 12.03.2014


Back to the Global Macro Grind


How confident are you in explaining how rates can ramp to the top-end of their respective ranges as the US Dollar goes straight down? In rate of change terms, German Bund Yields doubled in 48 hours! Irrespective of what the Fed said, did that have anything to do with the US move in rates? Big time.


Was the rates move linked to the currency and commodity move (Down Dollar = Up Oil, Energy Stocks)? I don’t think so. The FX (foreign currency) market move and Global Rates moves went in the opposite direction of what most correlation models would have predicted. #Fun? Not.


But isn’t this what we’ve all signed off on? Wasn’t central planning of markets supposed to be a “smoothing” exercise whereby all of us “smart” people could make linear-assumptions to drum up macro correlation models for all of our asset allocations and bonuses?


Let’s get real here. Macro markets just did.


Setting aside the non-linear-multi-standard-deviation-move in both German Bund Yields and the European Currency for a minute, let’s bring this discussion back to the USA and what the Federal Reserve said yesterday:


  1. On Growth – ‘our forecasts continue to be too high, but it’s all “transitory” because it snows in the winter time’
  2. On Inflation – ‘our forecasts on 2% inflation were wrong, but that’s transitory too – everything we get wrong is’
  3. On Timing –  ‘rate liftoff is data dependent on the labor market – so run money on best #NFPGuesses’


That last point isn’t a joke (neither are paraphrasing points 1 and 2). The Fed has effectively reduced the timing of its first rate hike to the most lagging of #LateCycle economic indicators. And now you literally have to guess what the next jobs number is going to be.


Since my research team cannot predict an un-predictable number (we’ve tried to build models to front-run BLS Labor report data and, trust me, I’d have a prediction if there was a repeatable #process to be accurate with one), guessing is the only option.


Confused yet? You should be. Much like the March 18th Fed decision on “to, or not to, be lower on rates for longer” the May 8th jobs report is a binary event:


A)     Jobs report “beats” useless forecasts of lagging indicator = Dollar Up, Rates Up, Oil Down (hard)

B)      Jobs report “misses” useless forecasts of lagging indicator = Dollar Down, Rates Down, Oil To Infinity And Beyond


“So”, as my hedge fund friends in Chicago would say, place your bets!


Oh, did I mention that this is only a 6-7 day trading bet? Dammit this is getting good! Not only do we have to now day-trade US monetary policy based on best-guesses, but we have to completely ignore this longer-term thing called the cycle, at the same time.


What happens if the June and/or July jobs reports are bad? What happens if the May report is bad? I can tell you one thing – the entirety of Old Wall Consensus isn’t predicting anything bad – every question I get on rates has to do with ‘what if it’s good?’


There is nothing good about confusion in macro market correlations when volatility accelerates. There is no risk management #process in guessing either. So I’m selling in May and getting the heck out of the way. For now, going to cash beats confusion.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.84-2.06%

SPX 2085-2117

VIX 12.96-14.91
USD 95.12-97.66

EUR/USD 1.05-1.12
Oil (WTI) 52.96-59.69

Gold 1180-1215


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Confusion's Masterpiece - z 04.30.15 chart

The Holy Grail

This note was originally published at 8am on April 16, 2015 for Hedgeye subscribers.

“We have a lot of rookies in the lineup.  More than anybody, I would say.  It’s going to be something new for them. They have to understand that it’s totally different hockey in the playoffs.  Starting with the fans, the intensity of the game, every mistake counts.”

-Jaromir Jagr


Last night the pursuit of Lord Stanley’s Cup began in earnest with the first series of games in the NHL Playoffs.  Certainly, the team at Hedgeye is over indexed to the love of the great game of hockey.  But whatever your athletic passion, it’s hard to deny that playoffs are an exciting time of year.


For those of you who don’t follow hockey closely, the quote at the outset is from one of the true iron men of the NHL.   At 43 years of age, Jagr was the oldest player to play in the NHL last season.  His first season was 1990 and with the exception of a few seasons in Russia, Jagr has been playing in the NHL ever since.  In fact, he is the only player in the history of the NHL to play in the playoffs as both a teenager and a 40-year old.


Being the wily vet that he is, Jagr’s aforementioned quote is spot on.  Whether in sport or business, you need to let the rookies play, but as their GM or boss you also need to realize that their experience is limited and when the intensity picks up during crunch time they need to know that every mistake does matter.   And if they don’t, the experience will teach them that very quickly.


Before we get into the macro grind today, I’ll give you my pick to win the holy grail of hockey.   Since the team Keith and I own with some friends, the Arizona Coyotes, is out of the running, I’m going with the New York Rangers over the Chicago Blackhawks with New York winning at home in game 5.


Who is your pick to win the Cup?


The Holy Grail - a. Jagr


Back to the Global Macro Grind


It seems that our friends at the IMF weren’t settled into their chairs watching playoffs last night.  The Financial Times is reporting this morning that the IMF is warning that the Fed’s first rate hike could lead to a so-called “Taper Tantrum”.  In effect, the IMF is concerned that volatility in U.S. rates will spike dramatically in conjunction with the first rate hike.


In the Chart of the Day we look at the U.S.  10-year yield versus U.S. unemployment going back as far as the data was available.   In stating the obvious, as the chart shows, we are certainly in an unprecedented period of monetary policy.   Will we get a massive spike in interest rate “vol” when the first hike happens?  It’s tough to say without a crystal ball.  But what IS already happening is a spike in opinions on when and how to raise rates.


On that front, the esteemed Bernank (aka former Fed Chair Ben Bernanke) weighed in this morning on when and how to guide rates higher.   Not surprisingly part of the Bernank’s plan is to keep the balance sheet larger for longer and also focus on the repo rate and other short-term money market rates.   Some of his views probably have credibility, but whatever happened to central bankers focusing on the data?!


Speaking of extremes, the Energy Information Administration (EIA) yesterday reported that crude inventories rose less than expected by a mere 1.3 million barrels on the week to 483 million barrels in total.  According to EIA records dating back to 1920, this is the most inventory the U.S. has had on hand since the 1930s (that was back when the NHL only had six teams for crying out loud!).


In conjunction with that, a Federal Reserve index showed that crude production rose 1.3% in March.  This increase took it to the highest level since 1973, which was before I was born and I’m no spring chicken.   If that isn’t enough, Iraq crude exports hit a record of 3.0 million barrels in March and the Saudi’s did exactly what they said they would do and took production up to 10.3 million barrels per day.


Earlier in the week we used a quote from Templeton about waiting to buy when there is blood in the street.  Certainly there is truth to that if we look at investing history.  When it comes to getting long of oil, due to the lack of storage, we may literally get a chance to buy it when it is in the streets!


In Europe, Greek’s clock is running down.  Yesterday, it was leaked that the Greeks approached the IMF about a rescheduling of repayments and were told categorically that no rescheduling of debt is possible.    As a result, yields on 2-year Greek notes spiked by more than 180 basis points to 25.7% and 10-year yields were up 100 basis points to 12.65%.  If the IMF wants interest rate volatility, they got it.


As for Greek catalysts, there are a couple to focus on:

  • The Eurogroup meeting next week on April 24th; and
  • The next payment to the IMF due on May 12th of 747 million euro.

Overtime for the Greek debt market is here! Let’s hope they have a good goaltender in PM Alexis Tsipras.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.86-1.96%

SPX 2083-2117
VIX 12.34-15.49
USD 98.01-100.24
EUR/USD 1.04-1.08
Oil (WTI) 48.19-56.69

Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Holy Grail - 04.16.15 chart

April 30, 2015

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Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

VIDEO REPLAY: Fed Day Live on HedgeyeTV

Watch the replay of our analysis of the FOMC statement below.


Today we live-streamed our recap of the FOMC statement and our outlook for financial markets over the immediate and intermediate terms. The discussion runs just shy of 30 mins and hits on every major risk investors must consider from here. It’s a real must-see in our opinion; we recommend finding the time to review it soon.


Key conclusions:

  • Within equities: It’s a good spot to book the #Quad1 trade and rotate into the #Quad4 asset allocation from a sector and style factor perspective.
  • Within fixed income: The April Jobs Report is the next catalyst for Treasury bonds and could prove decidedly bearish insomuch as slowing growth data over the next two quarters should prove decidedly bullish. Fighting buy-side consensus on the long side of Treasury bonds been a great call thus far so we’d be booking gains and taking down our gross exposure to this asset class on the next immediate-term pop. Ultimately, we think our #lowerforlonger theme prevails, but volatility is likely to pick up in the interim.
  • Within foreign exchange: We still think that both the Europeans (ECB) and Japanese (BoJ) are unlikely to allow a sustained rally in either of their respective currencies, which would also imply a sustained correction in their respective equity markets. We expect one or both central banks to jawbone and/or expand their LSAP programs over the intermediate term. As such, we remain bullish on the U.S. dollar with respect to the intermediate-to-long term.
  • General: The next few weeks will be a difficult time for any investor to gain conviction in either the deflationary trend in place since fall of last year or the counter-trend reflation rally we’ve seen in recent months. We certainly do not have a ton of conviction in either direction, specifically as it relates to our thematic investment conclusions. As such, we’d be raising cash and reducing our over and under weights across the board. Lastly, the risk of a “sell in May and go away” outcome is high in our opinion.


As always, feel free to ping the desk () to the extent you have any follow-up questions and would like to set up a call.


Best of luck out there!


-The Hedgeye Macro Team

Cartoon of the Day: $#&% | $TWTR

Cartoon of the Day: $#&% | $TWTR - twitter cartoon 04.29.2015

Our Internet & Media analyst Hesham Shaaban remains the bear on Twitter.

The ECB’s QE Machine; Stronger EUR? and Bullish Germany Continues

Fed Day Cometh… and the US Dollar Index is trading down around -1% intraday.


Position/Outlook Updates:

  • EUR/USD – trading higher within our intermediate-term TREND bearish outlook.  We shorted the cross (via FXE) today as the price collided with our immediate-term TRADE line of resistance ($1.10)
  • EUR/USD – the Fed’s FOMC statement proves the Bank has a more moderate assessment of economic conditions/momentum, which could lead to further expectations of a delay in a rate hike, weakening the US Dollar from here.  
  • German Equities – weak in the face of a stronger EUR/USD (the DAX fell -3.2% today and is +20.3% YTD); we remain bullish on an intermediate-term TREND duration as Draghi’s foot remains on the QE pedal. 
  • German Equities – while not necessarily “trading” on fundamentals, recent data is mixed, with German CPI jumping 10bps to 0.3% in APR Y/Y while last week’s release of German PMI Manufacturing and Services figures fell for the first time this year (APR reading).


Shorting FXE


TRADE: Today Keith recommended shorting the EUR/USD (via the etf FXE) at $109.13. He wrote: “There are plenty of macro positions pushing to the top/bottom ends of their immediate-term ranges right now. My strategy during these counter-TREND moves is to wait/watch for the bullish/bearish TRADE to tap the top/bottom end of the range - sometimes it takes time.


I've been waiting for the Euro (vs. USD) to do that for a few weeks now, and this is my 1st SELL signal. There's no immediate-term TRADE support in the EUR/USD cross to $1.06.” 


Additionally, we believe the US Dollar has been pushed to 2 month lows as investors expect the Federal Reserve’s more moderate assessment of economic conditions/momentum will push the dots (again) on a rate hike. A worse than expected US Q1 GDP and inflation report could drag the USD lower over the immediate term. 


The ECB’s QE Machine; Stronger EUR? and Bullish Germany Continues - v. eur 1


TREND/TAIL: Longer-term bearish: we continue to think a whole host of reasons will drag the common currency lower, including:

  • ECB President Mario Draghi’s willingness to do “whatever it takes”, including a QE package that may win him the ‘Currency Wars’ over the USD
  • There’s no end in sight for an exit of the Eurozone’s weaker countries, and in particular Greece’s debt hang will play out in multiples of years, not months
  • A monetary policy across uneven economies will be highly conflicting
  • Cultural differences that will limit cross-border labor movement 
  • Bearish demographics

The ECB’s QE Machine; Stronger EUR? and Bullish Germany Continues - v. ecb 2



Bullish German Equities

The German equity market (DAX) had a significant -3.2% pullback today. We continue with the stance that the Eurozone’s equity markets do not like a strong euro.


The DAX is up 20.3% YTD, and we continue to think that over the TREND/TAIL it will pay to obey the commands of the central planners, in particular by being long of German equities.


To reiterate our TREND thesis:

  • QE is only just beginning; the euro will continue to weaken; Germany will disproportionately benefit due to exports; and asset classes like equities will inflate due to money creation
  • The German economy sits in the sweet spot to benefit from a weaker euro as its exports account for a monster 47% of German GDP
  • Since the ECB announced QE on 1/22/15 the correlation between the DAX and EUR/USD is -0.84, a strong inverse relationship that we expect to persist as the ECB keeps its foot on the QE pedal for longer than its intended target (late 2016)
  • Recommending long the DAX (HEWG or EWG) and short EUR/USD (FXE)

If you missed our call titled “Germany: Still Bullish” on 4/14, CLICK HERE for a 30 minute video replay that walks through 40 slides of supporting material.


While German Equities are not necessarily “trading” on fundamentals, recent data is mixed. A couple notable call-outs include:

  • German CPI jumping 10bps to 0.3% in APR Y/Y
  • German PMI Manufacturing and Services figures fell for the first time this year (APR reading), in-line with the Eurozone average

The ECB’s QE Machine; Stronger EUR? and Bullish Germany Continues - v. cpi 3


From a quantitative perspective, the DAX recently broke its immediate-term TRADE line of support (to become resistance), but remains firmly above its intermediate-term TREND and long-term TAIL levels, a bullish signal.  


The ECB’s QE Machine; Stronger EUR? and Bullish Germany Continues - v. dax 4




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