Painless Starts

This note was originally published at 8am on April 22, 2015 for Hedgeye subscribers.

“The marvelous thing is that it’s painless.”

-Ernest Hemingway


In one of my favorite Hemingway short stories on mortality (The Snows of Kilimanjaro), that’s how a dying man explained the beginning of the end to his wife.


“That’s how you know when it starts”, he said. “It’s painless.”


To be clear, I don’t mean to bug you out this morning. I just wanted to remind you that while it’s been painless to be long of Chinese, Japanese, European (and now, on the margin, American) “easing” (in bond/stock market terms), this won’t end well.

Painless Starts - bubble cartoon 09.09.2014


Back to the Global Macro Grind


‘How could you write such a thing? Et tu, brute? How can you be bullish for the last leg of this ramp and, at the same time, remind me how it all ends? I knew it Mucker… you are a perma bear! You bastard.’


Enough of my literary attempts to entertain you, eh. Let’s just stick with the data (and some hilarious headlines for this stage of what’s been nothing short of an epic inflation of global stock and bond market prices):


  1. Chinese “investors” open a record number of stock brokerage accounts week-over-week (
  2. Mystery Traders armed with algorithms rewrites Flash Crash story (
  3. Greek Contagion risks may be higher than you think (


Ok. Maybe it’s not hilarious. I was just looking for some alliteration. But it is extremely amusing (which is the definition of hilarious).


As you know, mainstream media (especially Financial media), chases its own tail in its perpetual quest to prove to its advertisers that yesterday’s news matters today. #RatingsAtAllTimeLows


The way that these headlines work is that they are pro-cyclical to price action (i.e. they chase stories/price):


  1. Chinese stocks (Shanghai Composite) ramped another +2.4% overnight to +36.1% YTD
  2. Storytellers have been trying to become famous writing about the Flash Crash for years
  3. Oh, and if you didn’t think Greek stock market risks were real, you’re losing money long that


Since I haven’t had one real Institutional Investor ping me on the latest trader to sport the orange jump-suit risk for flash crashing the party (for a day), I give you a few more fun facts about Chinese and Greek stocks, instead:


  1. CHINA: since growth and inflation really started slowing in OCT, the Chinese stock market is +92%
  2. GREECE: since mainstream media started trumpeting “Greece Fixed” in DEC, Greek stock market -32%


In Hedgeye-speak, that makes China a bullish intermediate-term TREND and Greece a bearish one. If intermediate-term (3 months or more = TREND duration) is too short-term for you, look at both of these country stock markets year-over-year:


  1. CHINA: Shanghai Composite Index = up +112%
  2. GREECE: Athens General Share Index = down -44%


“So”, what I’d really need to get bullish on Greek stocks is:


  1. The Greeks telling the world the half truth (like China did) about slowing growth and #Deflation
  2. The Germans confirming that they get the truth, but have no intention of letting Greece “exit”
  3. And the mother of all Greek bailouts right when CNBC/Bloomberg are as bearish as they were on China last year


The death of the lies is where the painless progression starts, no?


It worked in Ireland and Iceland (sort of). And while I completely disagree with the policy to bailout losers, my political view on that front would have rendered my research opinions useless for the last 5-6 years too.


Can you imagine being the “smartest” man on earth right now (per yourself) and short Chinese stocks from last year’s lows? There is nothing painless about hubris. And I’ll define that in market terms for you too – not respecting Mr. Macro Market’s message.


I’ve lived and learned through this entire central planning circus alongside you, writing and ranting about it, almost every day for 7 long years…


I’ve always thought this won’t end well. But “ends” are processes, not points. And I’ve tried to time the beginning of the end as painlessly as possible. Because realizing perpetual P&L pain is no way to live.


Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:


UST 10yr Yield 1.85-1.95% (bearish)
SPX 2082-2112 (bullish)
RUT 1250-1275 (bullish)
DAX 11683-12195 (bullish)

VIX 12.37-15.27 (bullish)
USD 97.04-98.76 (bullish)
EUR/USD 1.05-1.08 (bearish)
YEN 118.99-121.14 (bearish)

Oil (WTI) 49.35-57.69 (bearish)
Natural Gas 2.44-2.65 (bearish)
Gold 1182-1209 (neutral)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Painless Starts - 04.22.15 chart

Front-running A Bad Jobs Report?

Client Talking Points


Asia is not a headline story (yet) but our model is signaling multiple breakdowns across Eastern stock markets. Indonesia broke a few weeks ago and India’s (BSE Sensex) recent breakdown was confirmed overnight with another -2.3% drop to -2% year-to-date.  Australia cut rates and its stock market dropped -2.3% (with Commodities up!). The Shanghai Casino Composite is -5.6% in 2 days #MarginCalls.


Oil experienced an epic 6 month crash, then rally – the inverse correlation between Oil/USD is screaming right now (yes, we know supply/demand narratives help too) with USD signaling immediate-term lower-highs and Oil higher-lows into this U.S. jobs report (bad jobs report = USD bearish, Oil bullish).


The Russell 2000 does not like Down Dollar, and that makes sense to us as the “tax cut” from lower gas prices is, well, getting cut! This is going to be a problem for a narrative that even Janet Yellen has recently been forced to acknowledge (#StrongDollar, Down Oil, Stronger Consumption). The Russell 2000 is in the midst of a -4.7% correction – overlay that with what’s happening with the USD and you’ll get the point.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Russell 2000 does not like Down Dollar, and that makes sense to us as the “tax cut” from lower gas prices is, well, getting cut! This is going to be a problem for a narrative that even Janet Yellen has recently been forced to acknowledge (#StrongDollar, Down Oil, Stronger Consumption). The Russell 2000 is in the midst of a -4.7% correction – overlay that with what’s happening with the USD and you’ll get the point.


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


VIDEO (1min) Get. Out. Of. The. Way.… via @hedgeye



One of the facets of extreme originality is not to regard as obvious the things that lesser minds call obvious.

Jack Good


New York City Mayor Bill De Blasio is committing $70 million to low-cost broadband access in the city.

CHART OF THE DAY: Intermediate-Term TREND Price Deck for #Oil

CHART OF THE DAY: Intermediate-Term TREND Price Deck for #Oil - z chart day


Editor's Note: The chart above and excerpt below are from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here for more information on how you can become a subscriber.

*  *  *  *  *  *  *

The first thing you’ll probably notice about my intermediate-term view is that:


A)     It’s more in line with the Global Macro reality of the last 6-12 months than the last 6-12 weeks

B)      And that the intermediate-term risk ranges are wacky wide


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 78.67%

What Didn't Work?

“I have not failed. I’ve just found 10,000 ways that don’t work.”

-Thomas Edison


If you analyze every line item of what I like and don’t like right now, there are plenty of things that aren’t working. Unless you’re raging Long Chinese stocks and Commodities vs. Short US/European Stocks (and Bonds), you probably have some issues too.


In the last week the US Dollar has completely dislocated from what was a consistent and correlated moved with US interest rates. What was the #StrongDollar Deflation (one of the biggest macro moves in a decade) has morphed into Down Dollar, Up Rates.


But is the US Dollar down ahead of another weak US jobs report? Or are Rates Up ahead of a good one? I can’t give you 10,000 different ways to ask me those two very basic questions – but in the last week, I’ve fielded hundreds of them!

What Didn't Work? - z d4


Back to the Global Macro Grind


Some people say that part of the value I provide is my unique perspective. Unlike many macro economists, strategists, and chartists, I am a former hedge fund guy who has made almost every mistake you can make, using live ammo.


Setting aside all of my human flaws, I think most of you (buy-siders) can empathize with getting things wrong. It’s only on the sell-side where the pace of improvement in Macro Strategy has been stalled by not accepting mistakes and learning from them.


As one of the bigger buy-siders (Ray Dalio) wrote in Principles: “At Bridgewater, we created a culture in which it is ok to make mistakes, but unacceptable not to identify, analyze, and learn from them.”


Roger that, Ray.


One of the mistakes I made recently was underestimating how our fundamental research call (#LateCycle Growth Slowing) would impact the USD/Oil trade.


From an intermediate-term TREND perspective, I thought Oil (WTI) would settle into a range of $36-57/barrel. This morning, on another Down Dollar move, Oil is up another +2.5% to $61.91.


You can apply creative writing skills from your no-buy-side-P&L-experience all you want, but from where I was born/raised in this business, this is commonly called being wrong (until you have the mental humility to change your mind).


So here’s my mind-changing this morning:


  1. Intermediate-term TREND price deck for Oil now = $42.06-$69.03
  2. Intermediate-term TREND risk range for the US Dollar Index = $90.29-100.03
  3. Intermediate-term TREND risk range for 10yr US Bond Yield = 1.73-2.39%


My mind changes every day actually. As price, volatility, and economic data changes, what do you do, Sir or Madame?


The first thing you’ll probably notice about my intermediate-term view is that:


A)     It’s more in line with the Global Macro reality of the last 6-12 months than the last 6-12 weeks

B)      And that the intermediate-term risk ranges are wacky wide


#WackyWide risk ranges are leading indicators for rising volatility. And rising volatility perpetuates mistakes.


To be clear, my mistake wasn’t being short Oil for this entire move up (we covered commodity shorts ahead of an easier Fed and #LateCycle Labor reports, for a trade). It wasn’t being long it at $100 either. It was in not being long it from $45 to $62.


My main mistake there was that I didn’t think Oil’s Volatility was going to compress almost as fast as it exploded to the upside. To put the volatility of volatility (in Oil) in context:


  1. From SEP 2014 to FEB 2015, Oil Volatility (OVX) went from 17 to 63 = +270%
  2. From FEB 2015 to now, OVX dropped from 63 to 36 = -42%


Every buy-sider who survived the 2007-2009 gets that unless you were on the right side of the decline, it was hard to run out and buy something with historical volatility of 20-30, never mind 63. This #behavorial reality leads me to more of a question (from here) than an answer as to whether or not I should buy Oil with upside to $69.03, when the downside is still $42.06.


Did the guys/gals who bought Oil and its cyclically related inflation expectations exposures (E&P MLP stocks, Energy Junk Bonds, Levered Long Oil Futures, etc.) down at $45 own it from $90 to $45? Or are we talking about a whole new investor class who nailed it both ways? While I’m not certain about anything in this profession, I’m pretty sure long-term Oil bulls averaged in.


Of all the mistakes I’ve made, averaging into losers is by far the most punishing. Especially when I’d have our funds in smaller cap exposures, doubling and tripling down on mistakes could make them all the more severe. Sure, I could tell my partners that I wasn’t wrong. I could say I hadn’t really failed (yet). But the #truth happens on the next decline, when you can’t get out.


When my Global Macro model says lower-for-longer on both US and Global Growth Rates… and every central planner on the planet is trying to “ease” the confusion implied in the volatility of the aforementioned risk ranges, what works for me isn’t adding to my mistakes; raising Cash does. And I’ll do that again this morning in the Hedgeye Asset Allocation Model.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.85-2.21%

SPX 2084-2106
VIX 13.03-14.79
USD 94.08-96.01
EUR/USD 1.06-1.13
Oil (WTI) 53.99-62.30


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


What Didn't Work? - z chart day

May 6, 2015

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May 6, 2015 - Slide11

WTW: Don’t Care Until 2016 (1Q15)

Takeaway: This story doesn’t get interesting again till we get closer to 2016. But the bigger question now is whether mgmt can stave off Chapter 11.


  1. UNEVENTFUL PRINT: Mgmt already conceded 2015 was going to be a rough year when it disappointed on 2015 guidance.  While the print was relatively uneventful with a slight top-line miss on Fx, and reiterated guidance, the key takeaway from the print was that the 2015 winter selling season was in fact its worst winter selling season in its public history.
  2. DON’T CARE UNTIL 2016: Our tracker is showing decent improvement into 2Q15, but that doesn’t matter all that much.  The first quarter sets the tone for any given year given WTW’s seasonal attrition issues.  That said, no quarter in 2015 will change the tide from here, and 2015 is largely irrelevant outside of tracking seasonal attrition patterns, which at a minimum appear to be approving.  
  3. CHAPTER 11?  WTW is dangerously approaching the point where it costs more to acquire its members than the gross margin it earns from them.  If that ever happens, it’s basically game over.  WTW’s 2015 target of $290M in cash can only go so far with an annual debt service of roughly $120M.  For more detail, see the note below.


WTW: Chapter 11?

02/27/15 08:46 AM EST

[click here]


WTW: Don’t Care Until 2016 (1Q15) - WTW   1Q Selling Season 2015 4

WTW: Don’t Care Until 2016 (1Q15) - WTW   Tracker 4 15

WTW: Don’t Care Until 2016 (1Q15) - WTW   Per Member 1Q15



Let us know if you have any questions or would like to discuss in more detail. 


Hesham Shaaban, CFA



Thomas Tobin



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