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What Didn't Work?

This note was originally published at 8am on May 06, 2015 for Hedgeye subscribers.

“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
RUT 1204-1230
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

CHART OF THE DAY: Macro Calendar Catalysts (For Resumed Down #Dollar Correction)

Editor's Note: The chart and excerpt below are from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here for info on how you can subscribe and begin receiving a lot more insight than the little blurb below.


CHART OF THE DAY: Macro Calendar Catalysts (For Resumed Down #Dollar Correction) - Chart of the Day


As a reminder, here are your immediate-term Macro Calendar Catalysts for a resumed Down Dollar correction:


  1. May 29th – ugly headline Q1 2015 GDP report will keep political pressure on the Fed to push out the dots
  2. June 5th – watch out for the cycle on the labor front; especially if we get the 2nd bad jobs report in the last 3
  3. June 17th – Fed Day in America (FOMC meeting); sleep in until 9AM and just buy everything


Stirring The Masses

“The men who have changed the world never succeeded by winning over the powerful, but by stirring the masses.”

-Napoleon Bonaparte


Like all of us, Napoleon obviously had his issues. Unlike most of us, he changed part of the world at a time when it needed changing.


In 1799, France was littered with a political elite (The “Directory”) that plundered its People with a Policy To Inflate. Most British historians of the Napoleonic era missed that part. That’s because they were writing from their own aristocratic perspective.


Ah, the historical perspective. If you want to stir the masses in America like JFK or Reagan did (or like Thatcher did in the UK), promote the truth about a #StrongCurrency. It ensures the purchasing power of the many, at the expense of the political few.


Back to the Global Macro Grind

Stirring The Masses - Draghi 09.04.2014


If only because the Eurocrats were Burning Euros yesterday, it was a great day for Americans who don’t get paid by the edifice of asset price inflation. On a US Dollar +1.1% day (EUR/USD was -1.5% at one point):


  1. The CRB Commodities Index (19 commodities) deflated -1.9%
  2. Oil (WTI) got tagged for a -3.7% loss on the day
  3. Coffee and Corn dropped -2.3% and -1.6% in price, respectively


I’m not sure what part of the world you grew up in, but I can tell you that crushing a long-term inflation expectations bubble in food and gas prices would go over quite well in my Canadian stomping grounds.


It wouldn’t go over particularly well in parts of Texas or Alberta, however:


  1. Oil & Gas Stocks (XOP) led losers at -2.9% on the day
  2. Energy Stocks at large (XLE) weren’t far behind at -1.4% (in a flat US equity market)
  3. Oh, and Russian stocks (RSX) dropped -2.3% too


Futhermore, I can’t for the life of me find the part in the Federal Reserve Act of 1913 that states that un-elected-US-linear-economists shall be tasked with upholding levered Energy Junk Bonds and/or “international earnings” from SP500 cohort companies…


In other words, never did so many do so well yesterday, at the expense of the few.


Sadly, this too shall probably pass as the Federal Reserve boxes itself in a corner at this stage of what we have been calling #LateCycle in the US economy – and that’s devalue the Dollar as both US consumption and labor cycles slow.


As a reminder, here are your immediate-term Macro Calendar Catalysts for a resumed Down Dollar correction:


  1. May 29th – ugly headline Q1 2015 GDP report will keep political pressure on the Fed to push out the dots
  2. June 5th – watch out for the cycle on the labor front; especially if we get the 2nd bad jobs report in the last 3
  3. June 17th – Fed Day in America (FOMC meeting); sleep in until 9AM and just buy everything


If the European, Japanese, and Chinese central planners don’t come out and devalue, daily, that is…


Looking for immediate-term risk management levels on that?


  1. US Dollar Index immediate-term TRADE overbought at 96.02 with no support to 92.82
  2. EUR/USD immediate-term TRADE oversold at $1.10 with no resistance to $1.14
  3. CRB Index immediate-term TRADE oversold at 224 with no resistance to 234
  4. Oil (WTI) immediate-term TRADE oversold at $56.14 with no resistance to $61.37
  5. Gold immediate-term TRADE oversold at $1200 with no resistance to $1239


That’s just the immediate-term though – and if you’re paid to not risk manage that duration (or take advantage of the opportunities it presents), no worries – you probably aren’t reading this anyway.  


From a long-term TAIL risk perspective, the onus is definitely on the Europeans (and Japanese) to prove that they aren’t who we think they are – some version of what Napoleon crushed over 200 years ago.


But, other than Warren, who in this business is really allowed to stir the masses with long-term leadership views and skip over everything that could happen until June 17th? I’m not. So, for now, I’ll take our asset allocation to Commodities to its YTD high of 10%.


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


UST 10yr Yield 1.97-2.32% (bearish)

SPX 2105-2140 (bullish)
RUT 1 (bullish)
DAX 118 (bullish)
VIX 11.91-14.98 (bullish)
USD 92.82-95.92 (neutral)
EUR/USD 1.10-1.14 (neutral)
YEN 118.91-120.99 (bearish)
Oil (WTI) 56.14-61.37 (bullish)

Natural Gas 2.79-3.11 (bullish)

Gold 1 (bullish)
Copper 2.78-2.91 (neutral)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Stirring The Masses - Chart of the Day

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REPLAY | The Macro Show - You Asked. We Delivered

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