What Is True?

“Above all else, I want you to think for yourself to decide: 1) what you want, 2) what is true and 3) what to do about it.”

-Ray Dalio


If you’re reading this note, you are undoubtedly familiar with Ray Dalio and more than likely familiar with his book Principles. In that book, he details three things:


  1. The importance of having principles;
  2. His life principles; and
  3. How he applies those principles to managing Bridgewater, the world’s largest hedge fund.


While Keith would be the first to tell you that he’s no Ray Dalio, we are also big on principles at Hedgeye.


From a philosophical perspective:


  1. Transparency: “No banking” means you don’t ever have to worry about what we really think about a specific security or economy. We aren’t trying to sell you anything but our research views.
  2. Accountability: “No asset management” means we don’t earn a management fee. We only get paid when we add value to our customers’ research processes.
  3. Trust: “No broker-dealer” means you don’t ever have to worry about us front-running your order flow – or worse…


From a research perspective:


  1. History: For every indicator we come across, we strive to analyze as much historical data as we can, across cycles, in order to identify or dispel the existence of critical mean reversion thresholds.
  2. Math: Core to our process is an overt focus on rate-of-change, which is derived from a well-researched view that market participants react to incremental developments, rather than to absolute states. As such, we employ basic differential calculus methods to project accelerations, decelerations and inflections in growth rates.
  3. Behavioral Psychology: We believe there is a considerable degree of actionable information to be derived from market prices and that contextualizing investor sentiment and positioning is critical to immediate-term risk management. Moreover, we believe the supply/demand narrative surrounding any asset is heavily influenced by its own price trends.


Back to the Global Macro Grind


Q: What [do] you want?


A: We want to determine whether or not this trending back-up in rates from the JAN 30th lows is a signal for us to: A) abandon our lower-for-longer thesis or B) double-down on said view.


Q: What is true?


A: Supportive of option “A” is 1) the recovery in Eurozone inflation expectations and 2) the recent breakdown in domestic fixed income, credit and equity income plays within our Tactical Asset Class Rotation Model.


Supportive of option “B” is 3) a likely trending deceleration in U.S. economic growth into a likely recession in CY16, 4) secular stagnation brought on by widely misunderstood demographic changes in both the domestic and global economies and 5) a trending material deceleration in global economic growth


Addressing those factors in order:


  1. Eurozone CPI accelerated to +0.3% YoY in MAY from 0.0% prior and continues to accelerate on both a sequential and trending basis. Eurozone Core CPI accelerated to +0.9% YoY in MAY from +0.6% prior and is now accelerating on a sequential and trending basis. Moreover, our predictive tracking algorithm has reported inflation in the Eurozone accelerating through the balance of 2015. In light of these developments, it’s no surprise to see that Germany’s 5Y breakeven rate (as a proxy for Eurozone inflation expectations) has backed up +107bps from its JAN 13th low to the current 0.81% – with +38bps of that delta coming in the last week alone!
  2. Without running the risk of boring you with the details of how TACRM is constructed, it’s worth noting that the model issued a “DECREASE Exposure” signal for the “Domestic Fixed Income, Credit and Equity Income Plays” primary asset class during the week-ended MAY 8th. Since then, the Bloomberg U.S. Treasury Bond 10+ Year Index has declined -3.4%, extending its YTD decline to -5.0%. From a bottom-up perspective, the eight factor exposures (out of ~200) exhibiting the greatest degree of negative VWAP momentum across multiple durations on a marginal basis are explicit bets on lower interest rates: AGG, LQD, BND, FLAT, TLT, BNDX, ZROZ and EDV. Conversely, the three factor exposures exhibiting the greatest degree of positive VWAP momentum across multiple durations on a marginal basis are explicit bets on higher interest rates: KRE, STPP and IAI.
  3. We discussed this thesis in great detail in a note earlier this week (CLICK HERE to review).
  4. Ditto.
  5. Keith and I make a point to visit each of our top customers at least ~1x/quarter. That adds up to a lot of meetings over the course of a year and a lot of travel all across the country and globe (e.g. we’re in CA next week and in London the following week after having done Chicago, Boston, NYC, Greenwich and Kansas City in the past three). The point I’m making is that we hear the perspectives of all types of investors and can readily glean when a view is becoming consensus on the buyside. Currently, one of those consensus views is an assertion that global growth is accelerating and/or poised to accelerate.


Nothing could be further from the truth.


In fact, anyone who does the work will arrive at the conclusion that global growth is slowing on both a sequential and trending basis into the most difficult compares of the year (i.e. the 2nd and 3rd quarters).


As such, the probability for global growth to get cut in half on a YoY basis in 2015 is extremely great. That would represent the slowest rate of global growth in this cycle and ~100bps shy of the trailing 3Y average of +2.2%.


Fortuitously for you, you don’t have to do the work because you pay us to have your back on all things Global Macro.  If you do nothing else for the rest of the week, the one thing you must do is download the following presentation which quickly contextualizes the rapidly deteriorating global growth picture:


All told, if Industrials (XLI) is your best idea on the long side of U.S. equity sectors, then now is the time to start working on thesis drift…


Q: What [do you want] to do about it?


A: All things considered, we want to take advantage of this weakness in long duration securities to double-down on our lower-for-longer thesis.


Going back to Draghi’s press conference yesterday, we will note that he was keen to address recent bond market volatility by reiterating that ECB QE will continue as planned throughout the stipulated duration of the program – which is at least through SEP ‘16 and until the ECB sees a “sustained adjustment in the path of inflation” towards its goal of +2%. As such, investors needn’t worry about an untimely removal of the ECB’s bid from European sovereign debt markets.


The immediate-term risk to that decision is that the MAY Jobs Report is strong and the Fed anchors on that as justification for pulling forward their guidance on “liftoff” timing in the JUN 17th FOMC statement.


The intermediate-term risk to that decision is that no matter how “data dependent” the Fed claims itself to be with respect to “policy normalization”, they are actually politically motivated to move the Fed Funds Rate well off of the zero bound no matter what. In light of the aforementioned global growth trends, that is definitely a view being intensely scrutinized across global macro markets right now.


The long-term risk to that decision is that “we are all dead” anyway…


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.03-2.39% (bearish)

SPX 2098-2130 (bullish)

USD 94.73-96.78 (neutral)
EUR/USD 1.07-1.14 (bearish)

Oil (WTI) 57.32-61.91 (bullish)

Nat Gas 2.52-2.67 (bearish)

Gold 1175-1210 (bullish)


Keep your head on a swivel,



Darius Dale



Click to enlarge 

What Is True? - Chart of the Day

Consensus Corrections

This note was originally published at 8am on May 21, 2015 for Hedgeye subscribers.

“Brevity and conciseness are the parents of correction.”

-Hosea Ballou


I figured I’d use that title this morning to pad my open-rates. Bears love to read about corrections.


Correction? Looking at futures and options activity, consensus hedge fund positioning has been looking for a big correction for two weeks (i.e. they ramped the net SHORT position in the SP500 and Russell 2000 to YTD highs after the correction we had 4 weeks ago).


Short low, cover high, eh.

Consensus Corrections - Bubble bear cartoon 09.26.2014


Back to the Global Macro Grind


I’ve spent the last decade of my career analyzing relationships between price, volume, and volatility. Before that, all I’d stare at was price. For 6 long years I’d watch some of my bosses and their buddies chase price charts. Sometimes it worked; sometimes it didn’t.


Ole school money managers will recall Stan Weinstein’s technical reports and a charting program called TC 2000. While they hopefully worked for some, they didn’t work for me. So I built my own.


There’s no need to get into a fight with the point-and-click zoo-keepers of the 50 and 200 day moving monkeys today. My point on this matter is this: a market price has a tendency to put in a short term top when:


  1. Volume starts to decelerate into the final stages of the accelerating price momentum
  2. Volatility (in terms of how I calculate historical as a leading indicator) starts to signal higher-lows
  3. Price itself finally signals a series of lower-highs


That’s not the SP500, yet (it might be within another full day of fresh price, volume, volatility data today), but it is the Russell 2000. I’m not saying this is going to provide you the elixir of a “technical” life (it’s actually math). But it sure beats chasing charts.


As the years have gone by, I’ve added analysts to my risk management #process and, in turn, they’ve added their own ideas, revolutions, and overlays to my timing model. One of the big ones is a z-score to measure what we call the “lean” in Consensus Macro hedging.


This is one of the many ways we have tried to quantify one of the 3 core legs to the Hedgeye Process stool – Behavioral Market Analysis. Just as a quick reminder to those of you who are new to reading my rants – those 3 legs are:


  1. History
  2. Math
  3. Behavior


If our analysis can’t be quantified into one of those 3 buckets, we don’t really find it a productive and/or effective use of our research time. In other words, we don’t do the GDP or markets “feel” thing – and we definitely don’t try to tell markets what they should do.


Back to this epic SP500 “correction” that consensus has been positioned for (at the start of this week = YTD high net SHORT positions of -60,044 and -31,909 in SP500 Index + E-mini and Russell 2000 mini contracts, respectively):


  1. SP500 was down -0.1% yesterday
  2. SP500 was down -0.1% the day before that
  3. SP500 is down -0.2% from its all-time high


This isn’t always the case, but in a centrally-planned-raging-bull-market, it happens frequently. When everyone is positioned for down, and markets go up - consensus capitulates and covers… then volume dries up and volatility starts to rise – then markets go down!


Intraday yesterday, the US stock market gave you a preview on what keeps the Pain Trade (higher stocks for longer) in motion. It’s called a Dovish Federal Reserve (see Fed Minutes and/or Hilsenrath parroting the same in the Journal this a.m. for details).


So that makes this setup for timing the call on a correction tricky:


  1. Higher-all-time highs are bullish, until they are not
  2. The all-time closing high for the SP500 is only 3 days old
  3. We have at least 3 dovish catalysts between now and June 17th


Nope. No one said timing markets is easy. But there are north of 14,000 hedge funds out there that are still competing with me on the timing of it all! With over $2.2 TRILLION in assets under management, it’s a crowded game.


But, if you’re able to keep your emotions, frustrations, and intellect intact… while, at the same time, concisely measuring the rate of change in net positioning, volume, and volatility… your timing won’t be perfect, but it will be more profitable than consensus.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.97-2.32%

SPX 2105-2139
RUT 1224-1265
VIX 12.14-14.48
USD 92.75-96.16
Oil (WTI) 56.31-61.40

Gold 1200-1240


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


***Click here to watch The Macro Show live at 8:30am.


Consensus Corrections - zzz Chart of the Day

The Macro Show Replay | June 4, 2015


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We will host a conference call on Friday, June 4 at 1PM ET to discuss the latest Macau data, our outlook on the market and the stocks and the presentation of a new, original research topic.




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June 4, 2015

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EVENT: YELP SHORT Best Idea Update Call (TODAY)

Takeaway: Join us on TODAY, June 4th at 1:00pm EDT as we update our bearish thesis and assess the M&A landscape.

EVENT: YELP SHORT Best Idea Update Call (TODAY) - YELP   invite 2

We will be hosting an update call to our SHORT Yelp (YELP) Best Idea.  YELP's business model is unsustainable, and is already breaking down.  Further, a new major red flag has emerged, which we believe is what prompted YELP to shop itself.  However, we don’t believe YELP will find a buyer.


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