May 13, 2015

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2nd Big Capitulation Day

Client Talking Points


Meanwhile the U.S. Dollar continues to break down from an immediate-term TRADE perspective as the U.S. economic data continues to slow in rate of change terms. The EUR/USD risk range has tightened up as well (higher-low, which is new) to  1.09-1.13.


Oil loves Down Dollar; absolutely loves it – but does the consensus Consumer bull case on “lower gas prices”? WTI is up another +1.2% this morning to $61.53 and is also signaling higher-lows within its $55.06-62.36 risk range. 


Epic moves in the UST 10YR, almost daily, now – but the Bond Bears were backed off by another 13-14 basis points on the UST 10YR from around this time yesterday (2.36% drops to 2.22%). We would have to see a sustainable close > 2.39% to shake us out of Treasuries.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

One way to invest in Lower-For-Longer, from an equity perspective, is being long U.S. REITS (VNQ). The highly anticipated Non-Farm Payrolls report came and went Friday, and it was largely a non-event. The change in non-farm payrolls was +223K vs. consensus estimates of +228K for April. Considering last month’s report was a bomb (revised to 85K from 126K), April had an easy comp. Our thesis on interest rates remains lower-for-longer, but that view is being tested in the short-term.


iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. It was a relatively light data week for housing with weekly mortgage application data and the March employment report offering incremental updates on the current state of housing demand.  On the market side, interest rate volatility remained a concern for the public homebuilders but one we believe remains shorter-term in nature absent another expedited, step function increase in interest rates. We think the rate related pressure will be largely transient unless we see a further back-up in mortgage rates on the order of +50-100bps from here – a potentiality we would not view as probable at this point. On the fundamental side, the drumbeat of improvement remains ongoing.


The U.S. dollar has gone on a big reversal since the Fed’s March 18th meeting. Since the meeting, the dollar has moved lower and rates higher. This short-term move in rates has caused confusion with respect to our lower for longer call. Put simply, we have been wrong on the direction of our four macro tickers in the newsletter. A continuation of this trend will force us to re-evaluate the longer term call.

Three for the Road


NEW VIDEO | Will Rising #Rates Derail The #Housing Train?

via @HedgeyeUSA + @Hedgeye_Comdty

cc @KeithMcCullough



We all have experiences in our lives that change us, and we all learn from people, like my dad, but at the end of the day, it's only us. And we're only responsible to make ourselves happy.

Tom Brady 


The average American walks a total of 110,000 miles in their lifetime, that’s equivalent to 4 times around the world.

CHART OF THE DAY: What Matters In Global Macro (Occurs On The Margin)

Editor's Note: The chart and excerpt below are from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. For information on how you can subscribe click here


CHART OF THE DAY: What Matters In Global Macro (Occurs On The Margin) - z 05.13.15 chart


While our #process is easier to understand by using today’s Chart of The Day (a sine curve), let me just make this macro Risk Manager point one more time in plain english:


  1. When #LateCycle macro indicators go from good to less good, that’s bad
  2. When #EarlyCycle macro indicators go from bad to less bad, that’s good



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Aging Cycles

“Growing old is not upsetting; being perceived as old is.”

-Kenny Rogers


It’s hard to believe that legendary singer-songwriter, Kenny Rogers, is 76 years old. I can still remember my Dad playing his 8-tracks in our pickup-truck on the way to a day on the worksite.


I’m 40 years old now, and I’m pretty sure that if my old man told me to get up and dig 18 post holes tomorrow morning I’d pull every muscle in my back. There are millions of hard working men my age who can still bang that out, no problem.


While I agree that age is an attitude, there’s one component to it that we can’t control: #time. I’ve been to Chicago, NYC, CT, and Boston in the last 48 hours – and that’s all I’ve been talking about. This economic cycle is running out of time.


Aging Cycles - z time


Back to the Global Macro Grind


I’ve spent a lot of time on the road, debating with investors and … in the words of one of my favorite Rogers songs (The Gambler) “readin’ people’s faces… knowin’ what the cards were, by the way they held their eyes…”


And, while I am sure I mis-read plenty of people, I don’t think that’s one of my weaknesses. After Darius and I slap our current 99 slide-deck on the table, the investor can see all of our aces – and I’m not bad at hearing what they say back.


The best cards the buy-side plays on us are bottom-up ones. Almost every great stock picker has an ability to communicate a corrolary from the perspective of a company they either just talked to and/or are invested in.


The least impressive cards they show us are in quantifying what that means within the macro cycle. In fact, many aren’t focused on cyclical risk management, and by their investing nature don’t consider a business being “good” as bad.


While our #process is easier to understand by using today’s Chart of The Day (a sine curve), let me just make this macro Risk Manager point one more time in plain english:


  1. When #LateCycle macro indicators go from good to less good, that’s bad
  2. When #EarlyCycle macro indicators go from bad to less bad, that’s good


In other words, if a company’s revenues and earnings have been accelerating to their all-time highs, then start to slow, sequentially – that’s less good. And it will likely go from good to bad if the macro cycle turns, at the same time.


But, but, business is good and it’s a “great company.” Roger that. And only the super-duper-great ones can trump cyclical slow-downs. The time to buy a great company like Starbucks (SBUX) was in 2009, at $5.76/share (split adjusted). Not now.


By the time a company tells you things are slowing, markets have usually front-run them. This is called discounting the future, and most of you who have been at this for a while get that.


In Boston today, I’ll be focusing on the #LateCycle data showing things like:


  1. US Corporate Profits as a % of GDP being “past peak”
  2. How the beloved “Earnings” consensus trumpets peak #LateCycle too
  3. And how SP500 Operating Margins look, in context (hint: rolling off peak)


You did not want to be the bottom-up investor who missed the peak-and-rolls off the 2000 or 2007 peaks (in either margins or the earnings that manifested from them).  


You don’t want to be assigning peak multiples to cyclical companies whose revenue growth rates and margins have peaked and rolled either (hint: the stock gets more “expensive” on the way down, when EPS get cut).


Unless, of course, it’s “different this time”… (which people pitch to me all the time). If that’s your bottom-up call, just know that that perception is as timeless as economic cycles themselves.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.91-2.32%

SPX 2079-2117
VIX 13.03-15.79
USD 94.09-95.89
EUR/USD 1.09-1.13
Oil (WTI) 55.62-61.12


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Aging Cycles - z 05.13.15 chart

Who Really Knows?

This note was originally published at 8am on April 29, 2015 for Hedgeye subscribers.

“Our greatest power is that we know that we don’t know.”

-Ray Dalio


Do you really know what the Federal Reserve is going to say today? I don’t. If you do, with 100% certainty, please don’t call and/or email me with that information. I don’t want to go to jail.


Having witnessed some characters in this business take on orange-jump-suit-risk to get what some of them call “edge” (i.e. inside information), I’ve spent my entire career trying to build a #process that doesn’t need short-cuts (i.e. cheating).


That puts me in a position of really not knowing what I’m not supposed to know. Instead of selling you certainty, it forces me to embrace uncertainty… and probability weight each and every decision I make based on the most recent data and market pricing.

Who Really Knows? - Fed doves cartoon 04.21.2015


Back to the Global Macro Grind


We had our company meeting yesterday. We do one every quarter. It’s usually lunch and 3-4 hours of thought leaders at Hedgeye thinking out loud about #process: what’s working; what’s not – what can we do next. #BestPractices


The best part about these meetings is the element of surprise. When you have 57 thoughtful people in a room who have decided to open their minds to learning, a lot can happen in an afternoon. Who can really make you challenge yourself and think?


Our veterans (Daryl Jones, Howard Penney, and Tom Tobin) stepped up and delivered the wood on that front yesterday. In fact, I don’t think I’ve ever seen objective and critical self-reflection like that – back to back to back.


You can call us a cult. But we call ourselves a team.


During yesterday’s meeting, circa 3:15PM, one of our analysts slammed his laptop and left the room in a frenzy. This had nothing to do with Penney telling Hesham Shaaban to “embrace meditation” – one of his Best Short Ideas, Twitter (TWTR) was blowing up!


Fat finger on the pre-market close release. Stock down 18% in a New York minute. Halted. #Boom!


And the Hedgeyes smiled.


There’s something about building an independent think tank that prides itself in SELL ideas that gets me up in the morning. As most of you know, building a repeatable #process on the short side is not an easy thing to do. That’s why we’re doing it.


At one point in the QA session of the meeting, I was asked what our “pipeline of prospective analyst hires” was looking like. And, for the first time, instead of rattling off names of people we’re interviewing, I said I just wanted to see more of our rookies play.


Not only do the “young” guys/gals at this firm get how to not be certain about anything, they know how to build a battle-tested #process that allows them to probability weight both the accuracy and timing of their research ideas.


While you can criticize Shaaban for literally never having presented a Best Long Idea (yet), he’s nailed the following names to the proverbial NHL playoff boards in the last 18 months (i.e. since we let him start publishing on his own names):


  1. Weight Watchers (WTW)
  2. eHealth (EHTH)
  3. Pandora (P)
  4. Yelp! (YELP)
  5. Alibaba (BABA)


In other words, what he really needs next is to get run-over in one of these things. Because no analyst I have ever worked with stays this good (on the short side) for this long, in an up market!


I obviously don’t want the man to get crushed. But reality is that everyone gets tagged in this business, eventually – and that’s how we all learn. But if you listen to Shaaban talk through his ideas, he’s constantly talking about not only what he doesn’t know… but what the management teams he follows don’t know either.


And that, my friends, is how you get really good at this game.


That’s how you beat the guys who take the short-cuts, cheat, and have no other process than asking “management” what the numbers are. When management doesn’t know what they don’t know – the fundamentally driven research analyst who thinks for himself wins.


As for what macro “management” (The Fed) really knows… Cyclically, do they get that the US is #LateCycle? Secularly, do they get global demand is slowing due to #DemographicYields? We’ll see.


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


UST 10yr Yield 1.85-2.02% (bearish)
SPX 2095-2126 (bullish)

RUT 1248-1277 (bullish)
DAX 11651-12098 (bullish)
VIX 11.89-14.82 (neutral)

USD 95.63-97.83 (bullish)
EUR/USD 1.06-1.10 (bearish)
YEN 118.55-120.81 (bearish)
Oil (WTI) 52.61-58.30 (bearish)
Natural Gas 2.44-2.62 (bearish)
Gold 1181-1215 (neutral)
Copper 2.65-2.83 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Who Really Knows? - z 04.29.15 chart

McCullough Slams Harry Reid on Online Gambling: 'He Should Get an Internet Connection'

Can you smell the cronyism? Sen. Harry Reid (D-Nev) is officially backing Las Vegas Sands CEO Sheldon Adelson’s push to ban online gaming. Hedgeye Risk Management CEO Keith McCullough responds to the news on Fox Business with "Opening Bell" anchor Maria Bartiromo.

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