Character Breakfast

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

“Character is inspired; it is not imparted.”

-Laura & Malcolm Gauld


While I didn’t subject my son to a “character breakfast” with Cinderella @Disney last week, I think he built some in realizing that his little sister was less scared than he was on Space Mountain.


After a neck wrenching week of family fun on the rides, it’s good to be back in my un-buckled seat this morning! I hope you’ve had some quality time away from the screens with your family this Spring break too.


The aforementioned quote comes from a good parenting book I read last week called The Biggest Job We’ll Ever Have. It’s an especially relevant book for those of you who are into self-reflection and improvement – we can all build character by doing, every day.


Back to the Global Macro Grind


I don’t unplug from markets very often, but when I do… I like it when they don’t do a whole heck of a lot that surprises me. I left you suggesting that I think the Fed gets easier at their April meeting. I’ll come back to you this morning reiterating the same thing.


Character Breakfast - Yellen dove 09.17.2014


Amongst other things, a more dovish Fed does a few big things to macro markets – and they are not the same things:


  1. Down Dollar – that’s a counter-TREND move for Commodities and their linked-securities
  2. Down Rates – that’s a continuation of a bullish TREND for Bonds


Breaking that down in week-over-week, in rate of change terms:


  1. US Dollar Index dropped -1.9% last wk to +7.9% YTD
  2. UST 10yr Yield dropped another -3 basis points last wk to 1.87% (-31 basis pts YTD)


In Correlation Risk terms, what that translated into was:


  1. Euro (EUR/USD) counter-TREND bounce of +1.9% wk-over-wk (but still -10.7% YTD)
  2. CRB Commodities Index and Oil (WTI) +3.1% and +8.6%, respectively, on the week


US and European Equities did not enjoy inflation expectations bouncing:


  1. SP500 and Dow Jones Industrial Index were both -1.3% on the week to +1.1% and 0.0% YTD, respectively
  2. EuroStoxx600 and the DAX corrected -2.2% and -5.5% to +17.9% and +19.2% YTD, respectively


Net, net, net, both the TREND move in super-sized asset allocations to US Fixed Income continued to beat US Equities YTD, while a big league counter-TREND move in USD driven Correlation Risks frustrated #Deflation bears who didn’t dynamically reset esposures.


If you look at the Correlation Risk (USD vs. everything Commodities) on a 1-month basis, it’s been significant, even though the USD hasn’t corrected much on a percentage basis. Here are the 1-month moves:


  1. US Dollar Index -2.2%
  2. EUR/USD +2.0%
  3. CRB Commodities Index +7.1%
  4. Gold +4.8%
  5. Copper +6.1%
  6. Oil (WTI) +24.1%


Yep, that’s right. You can tell yourself all the stories you want about supply/demand in Oil related markets, but the reality is that the #1 driver of macro inflation expectations remains an easier Fed. Those expectations turned on a dime on that last lousy US jobs report.


What’s next?  The point I was trying to make before I left for vacation was pretty simple: “Some of my very short-term views are at odds with my longer-term ones – and others (rates) are aligned.” (apologies for quoting myself)


In other words, you’re one better jobs report away from both the USD and rates bouncing again. But, there’s this thing called the Fed meeting (April 29th) and a weak headline Q1 GDP report (reported on the same day), before the April jobs report (May 8th).


Yeah, inflation expectations bounce when the Dollar goes down and dovish central planning expectations go up. You already know that. So sending me a chart of something like break-evens bouncing reflects that people who manage risk in real-time get that too.


US 5-year break-evens bounced (just like everything Commodities did) +9 basis points last week to 1.7% and look a lot like Oil does on a 1-month basis (+32 bps is a big bounce!). But if you look at the TREND, they’re still down -25 basis points year-over-year.


My sense is that not everyone nailed all of these moves. If success was imparted on your portfolios, well done. This hasn’t been easy. Trying to risk manage all of these calendar catalysts, inflation/deflation expectations, etc. (across multiple durations) builds character.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.85-1.95%

SPX 2066-2093
DAX 11709-12133
USD 97.01-98.74
EUR/USD 1.05-1.08
Oil (WTI) 49.05-57.69


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Character Breakfast - 04.20.15 chart

China, Europe and Global Bond Yields

Client Talking Points


Terrible economic data from China leads to the stock market moving higher; China now has a 6% handle on GDP and its PMI for APR (HSBC print) hit a new low of 48.9 (vs. 49.6 last). The Shanghai Composite is up another +0.9% to +38.6% year-to-date.


Forget the average at best economic data, a Down Euro is what European Equities crave – German PMI still blah at 52.1; French PMI terrible at 48.0; Spanish PMI beats (again); DAX +0.9%, Denmark +1.2%, Austria +1.1% as the Euro vs USD risk range widens to its widest in a year at $1.05-1.13.


After a monster move (in % terms) last week, Global Bond Yields are still sticky here this morning – German and Swiss 10YR Yields +1 beep each to 0.37% and -0.01%, respectively – Spain’s 10YR +7 basis points to 1.45% and USA’s = 2.11% with a very wide risk range of 1.86-2.12% ahead of Friday’s jobs report.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We view ZOES as a very strong long-term investment. Part of what we like about Zoe’s is its strong new unit economics.  Not only does Zoe’s have strong restaurant level margins, but also has best-in-class build out costs and cash-on-cash returns.  In addition, we believe Zoe’s new units are exceeding management’s targets, driven by higher than expected year three average unit volumes. While it may be difficult for some investors to swallow Zoe’s valuation, we believe it represents one of the best early stage restaurant growth chains trading on the public market.  


iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. Builder performance was choppy in the latest week alongside beta volatility and investor attempts to square the net impact to housing from rising rates and ongoing improvement in housing fundamentals. As it stands currently, rates remain a tailwind to affordability relative to last year and would require a significant, expedited increase to have a material negative impact on housing activity in the immediate/intermediate term. Elsewhere across Housing Macro, the fundamental data continued to roll in strong.


Insomuch as the April Jobs Report may prove to be a bearish catalyst for Treasury bonds, 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.

Three for the Road


REPLAY: Fed Day Analysis @HedgeyeTV




We become what we think about.

Earl Nightingale


The top 10 most popular Instagram accounts are all owned by women.

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May 4, 2015

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General Confusion

“To be a good General, you must know mathematics.”



If macro markets haven’t been confusing you as of late, give me a buzz. This 5’9 General needs to know the math that gave you clarity!


Napoleon went on to say that mathematics “serve to direct your thinking in a thousand circumstances” (Napoleon, pg 11). And in attempting to risk manage Global Macro markets, it’s tough to disagree with that.


The math simply gets tougher when correlations start to break-down. While they are not collapsing across durations (yet), correlations between the US Dollar, Rates, and Equities definitely don’t look like USD vs. Commodities do. That’s new. Welcome to a new week.


General Confusion - a.nap


Back to the Global Macro Grind


I’ll get into the point about correlations in a minute, but first let’s look at the FX move, in context:


  1. US Dollar Index dropped another -1.7% on the week, taking its 1mth correction to -2.9%, but still +5.6% YTD
  2. Euros (vs. USD) got squeezed +3.0% wk-over-wk, taking its 1mth rally to +4.1%, but still -7.4% YTD
  3. Canadian Dollar inched up another +0.2% on the week, taking its 1mth bounce to +3.8% (still -4.4% YTD)


In other words, whether it was priced in what became the most Consensus Macro FX position (short Burning Euros post the drop to $1.05 vs. USD in March) and/or a Commodity Currency like CAN/USD, that was one heck of a 1-month move.


The impact on macro markets, however, was not homogenous from a correlation perspective:


  1. CRB Commodities Index +1.7% last wk = +5.5% 1-month, but -0.9% YTD
  2. Oil (WTI) up another +3.5% last wk = +14.3% 1-month = +6.3% YTD




  1. Gold 0.0% last week = down -2.8% in the last month to -0.9% YTD
  2. UST 10yr Yield = +20 basis points last wk to 2.11% = down -6 basis points YTD


It’s pretty easy to argue that Gold doesn’t work when Bond Yields rise as market #history suggests that the absolute return of Gold then has to compete with higher yields. It’s harder to argue why USD and Bond Yields moved in the opposite direction.


So let’s go there and put the US 10yr Treasury Bond Yield move in the context of Global Yields:


  1. Germany’s 10yr Yield was +22 basis points (bps) on the wk to +0.36%
  2. Netherland’s 10yr Yield was +22bps wk-over-wk to +0.52%
  3. Austria’s 10yr Yield = +23bps wk-over-wk to +0.50%
  4. Belgium’s 10yr Yield = +22bps wk-over-wk to +0.65%
  5. Canada’s 10yr Yield = +22bps wk-over-wk to 1.66%
  6. Australia’s 10yr Yield = +15bps wk-over-wk to 2.68%


Not only was that a completely correlated move across bonds markets (un-correlated to the USD Down move), it was the biggest week-over-week percentage gain in Global Yields, ever.


And while I’m sure the next thing an absolutist will say is “but it’s from a low level”, that doesn’t matter when most of the institutionalized world runs money and chases returns, on a relative basis!


Yes, math majors who specialize in mean reversion history will also keenly note that “ever” is a long time. And for that reason alone I think it’s fair to say that US Bond Yields weren’t charging to lower-highs on bullish US economic data.


To the contrary, actually, the ISM report for the US that was reported on Friday was still plenty slow at 51.5 APR vs. the same in MAR (and it didn’t snow in April). Moreover, the employment component of the ISM slowed to sub 50 at 48.3.


That makes this week’s US jobs report all the more important as almost everyone I talk to thinks that the non-farm payrolls recover month-over-month (even though almost none of the Global Macro data did!).


Confused yet?


Just to add some Consensus Macro color to where the crowd is positioned coming into this week, here’s the most recent CFTC (non-Commercial) futures and options positioning:


  1. Russell 2000 net SHORT position at its lowest level of 2015 at -5,486 contracts (6mth avg -25,989)
  2. 10YR (US) Treasury net SHORT position at its lowest level of 2015 at -115,917 contracts (6mth avg -158,559)
  3. Crude Oil net LONG position tracking around its highest level of 2015 at +371,486 contracts (6mth avg +306,931)


This tells me (partly) why the Russell 2000 was the dog of the US major indices last week (many covered shorts high and are now too long small/mid caps lower) and what Bond Bears really think (i.e. they don’t think rates go up a lot from here).


As for people who are in the business of being bullish on Oil. There are many. There are also many, many, more Americans whose confidence and real-spending power slows alongside rising gas prices and a general confusion about markets vs. economic reality.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.86-2.12%

SPX 2087-2117
VIX 11.77-14.84
USD 94.25-96.71
EUR/USD 1.05-1.13
Oil (WTI) 54.62-60.15


Best of luck out there this week,



General Confusion - 05.04.15 chart



  • Revenue run rate equal to 2011
  • Final 2014 div/share of $0.62
  • Permission have been granted to resume construction work two days ago on Casino Jai Alai. New timeline will take around one year.  Total capex: HK$1bn. 130 rooms and 45 gaming tables. 
  • Hard to conclude GGR has bottomed
  • Lisboa Palace: still expect 1H 2017 opening
  • Capex 2015: $HK7.1 bn ($HK5.8 bn due to Lisboa Palace) 
  • Lower occupancy at Grand Lisboa due to junkets giving back some room inventory (5%/21 rooms). Signing more rooms to mass and premium mass. 
  • Galaxy Macau Ph 2: 
  • Dividend payout policy: no less than 50% of net profits.  70% payout is still sustainable.
  • Have not seen an acceleration of Junkets closing 
  • Visa cap: do not see any further tightening of visa. 21m as a cap is talked about. 
  • Smoking ban: still govt discussions being made on smoking lounges
  • Cost control due to tough conditions:  costs held stable QoQ.  Pulled $23m in labor/opex costs out in Q1.  
  • 5% corporate pay raise in Q1. Living subsidies also increased in Q1. 
  • Gaming volumes picked up in recent weeks in April.
  • Premium mass impacted by visa restrictions
  • Slowdown impact (in that order):  Premium mass, grind mass, and slot win
  • Rest of 2015 capex (HK$1.3bn): Grand Lisboa- some slot upgrades and maintenance capex
  • Want to inject more some VIP tables into mass. 
  • % promo expenses/revenues:  flat QoQ
  • Grand Lisboa 1Q VIP win %: 3.26%
  • Have not heard of Mainland govt loosening policies due to poor economic data

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