The Macro Show Replay | June 26, 2015


Japan, China and Volatility

Client Talking Points


Japan posted the best Household Spending print of the year at +4.8% year-over-year in May (vs what had been negative year-over-year numbers at -1.3% most recently in April) and now we get another shot at buying more Nikkei post a 2-day correction from our overbought signal (Japanese Stocks remain our top International Equity asset allocation). 


Kaboom! Or were those “margin calls”? Down -7.4% in one day for the Shanghai Composite Casino will leave a mark on the chart chasers, who are now down -14.6% in the last month on the same index performance chase. Maybe China shouldn’t have reported a better PMI earlier this week – what they need is horrible economic data to drive that stock market higher?!


Every time the VIX has tested the 11-12 zone, sentiment gets too bullish (II Bull/Bear Spread popped +25% week-over-week to the #bullish side after the recent SPX rally) and U.S. stocks are right back where they’ve been (SP500 +2.1% on the year with Industrials sucking wind -2.9% year-to-date – Energy (XLE) led losers yesterday -1% to -4.2% year-to-date).


**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET, with Macro Analyst Ben Ryan and Industrials Sector Head Jay Van-Sciver.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Shares of Penn National Gaming are up approximately 9% since it was added to Investing Ideas on May 26. Our Gaming, Lodging & Leisure team reiterates their high conviction on the stock and notes that Ohio and Kansas have both been super-strong revenue generators in the month of May. This positive development has has led our analysts to raise their estimates even higher (and we're already the highest on the street...).


It was a busy week across the housing space with a host of fundamental releases, builder earnings and notable regulatory updates.   Net-net-net....the past week offered another positive update on the state of the residential real estate market with housing turned in a second week of strong, positive absolute and relative performance. The NAHB HMI (Builder Confidence Index) for June surged across all categories and in all regions, posting its best reading in almost 10 years. Total Starts declined -11% MoM to +1.036 MM units with SF and MF starts declining -5.4% and -20.2% month-over-month, respectively.  Permits, meanwhile, rose to an 8-year high advancing +11.8% sequentially and +25% year-over-year.   The strength in permits augurs forward strength in Starts and suggest residential construction spending will be (increasingly) supportive of GDP growth over the next couple quarters.


Bottom line right now remains that Lower-For-Longer is firmly intact as long as US #GrowthSlowing is. As Keith pointed out on Friday, Consensus Macro is still stubbornly sticking to the tired idea that rates have to go higher - they just have to... because, they haven't? All told, it was a great week sticking with the process on the long side of bonds. Here we feature an in-depth discussion from Senior Macro Analyst Darius Dale which does a thorough job outlining where our macro team currently stands with respect to the Fed, interest rates, markets and economy. The prescient discussion occured just hours before release of the FOMC statement.

Three for the Road


(VIDEO) Me on Industrials: Just Terrible… via @hedgeye



Success is on the far side of failure.

Thomas Watson Sr.


The households’ savings rate backed off of 28-month highs, declining -3 basis points month-over-month to 5.1%.

CHART OF THE DAY: U.S. Monetary Policy Model

Editor's Note: Below is a chart and excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here to learn more and subscribe.


CHART OF THE DAY: U.S. Monetary Policy Model - 06.26.15 chart2


In reality, what we have learned in the last 5-10 years (after almost 600 “rate cuts” globally) is that:


  • A)  When real-growth misses the perpetually optimistic government “forecast”,
  • B)  Central planners ease (cut rates) and devalue their currencies… then that “policy action”
  • C)  Reflates asset prices (cost of living in local currency terms) and slows real-purchasing power (spending)


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

2.75% or 1.75%?

“Take your pick as to when the story begins.”

-Moises Naim


Was it when Chinese growth really started slowing? Was it when #LateCycle sectors of the US stock market (Industrials and Transports) started to break down? Or was it when secular European #deflation started to “reflate”?


Was it a “technical” breakout in bond yields from levels very few fund managers thought we’d ever see (don’t forget that all-time lows in Global Yields were in Q1 of 2015)? Was it a “liquidity” move? Or was it both?


How about the latest no-volume-ramp in both US and European stocks? Was it the more dovish Fed (which Bond Bears had dead wrong)? Was it “Greece”? Was it both? Or neither? Take your pick.


2.75% or 1.75%? - TsipuMerk


Back to the Global Macro Grind…


As my French Canadian hockey roommate in college used to say, “the thing of it is, Mucker…” that whoever the establishment was and/or is supposed to be on Global Macro matters, they just don’t seem to matter much anymore.


The fact of the matter is that after all the storytelling, 6 months into 2015 the Dow/SP500 are +1-2%; Oil = range-bound; bond yields have ramped from 3yr lows (in January) to +23 basis points (10yr) YTD, and US earnings have slowed, big time.


Sure, you can tell me a story about “liquidity and technicals” … and until something drops like Chinese stocks just did (-7.4% overnight, -14.8% month-over-month), I’ll entertain it – because the “charts look good” and I’m just a really nice guy.


But, to be clear, chasing the momentum associated with what already happened (charts), isn’t a research #process. On that front, the biggest top-down factor to solve for is real (inflation adjusted) growth. So what’s your pick?

  1. US and Global Growth are going to accelerate from here through 2016 and beyond
  2. US growth accelerates sequentially in Q2, then slows (again) in Q3 and beyond
  3. European growth slows sequentially in Q2/Q3; Japanese growth accelerates Q2/Q3

I’ll pick 2 and 3 (because that’s what our GIP Models are signaling as the highest probability). For those of you who are new to considering our research and risk management process, GIP model stands for:

  1. Growth
  2. Inflation
  3. Policy

In meetings with Institutional Investors, I affectionately call this our government PIG model (GIP in reverse) because, essentially A) that’s what big central-planners are and B) they believe the P (policy) solves for the G (growth).


In reality, what we have learned in the last 5-10 years (after almost 600 “rate cuts” globally) is that:


A)     When real-growth misses the perpetually optimistic government “forecast”,

B)      Central planners ease (cut rates) and devalue their currencies… then that “policy action”

C)      Reflates asset prices (cost of living in local currency terms) and slows real-purchasing power (spending)


If you want to retire from 2/20 and become a famous academic, spend the rest of your life telling the world a story that’s based on that (I’m too busy reading to write a book).


My name is Keith McCullough, and I write daily-non-fiction macro from a house on the lake in Northern Ontario (Canada).


Other than reading my rant right now, what do you do? Do you write? Or do you read what other people write? Can you, transparently and accountably explain, daily, what it is that you think is going to happen next and why?


I know. It’s hard. But so is life.


It’s even harder to spend your Global Macro life chasing consensus and big round “targets” like 3% GDP, Dow 20,000, and “the 10yr is definitely going to 2.75%, bro.”


Btw, that last one isn’t a joke. It must be making the rounds on the buy-side these days because I have heard 2.75% about two dozen times in the last 3 weeks from very sharp accounts (more when last price was at 2.54%, eh).


No, God doesn’t call with a level. And no, I don’t purport to know anything about nothing either.


All I know is that our Bayesian-inference research #process got us as bullish on real US growth (bearish on long-term Treasury Bonds) in 2013 as it’s getting me bearish on this #LateCycle (74 months in) expansion slowing into 2016.


Our predictive-tracking algorithm is implying a sequential acceleration in real GDP in Q2, then another big deceleration in Q3. Does that get the Bond Bears 2.75%? Maybe. But maybe not. And, more importantly, if it does, maybe it’s 1.75% after that.


Q2 ends in 5 days. And Mr. Macro Market will decide when the discounting of real GDP slowing in Q3/Q4 matters - not a research note that cherry picks the timing of what already happened.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.19-2.44%

SPX 2083-2130
Nikkei 205
USD 93.91-95.99
YEN 122.69-124.36
Oil (WTI) 59.06-61.14

Gold 1164-1194


Best of luck out there today (and enjoy your weekend),



Keith R. McCullough
Chief Executive Officer


2.75% or 1.75%? - 06.26.15 chart2

Popping Headache?

This note was originally published at 8am on June 12, 2015 for Hedgeye subscribers.

“I thought so hard I got a headache.”

-J.D. Cobb


Oh, look – the US 10yr Yield just dropped back to where it started the week (2.39%). Nothing must have happened this week!


BREAKING: “Bond Selloff Could Cause Headache For Fed” -Reuters


Nah. #NoWorries

Popping Headache? - Fed cartoon 06.11.2015


Back to the Global Macro Grind


After seeing the yield quintuple in a month, what’s a German Bund Yield (pronounced Boo-nd) dropping -16% (10yr 0.86% this morning vs. 1.03% yesterday) in 24 hours amongst central planning friends?


Germany’s almighty President of the Bundesbank (as in the place where they make the Bunds), Jens Weidman, told the European press yesterday that recent volatility in the European Bond Market was not “exceptionally high.”


It’s a good thing that the biggest 1-month percentage move ever in Global Bond Yields and the worst month-to-date for sovereign bonds in over 30 years isn’t exceptional.




I had one. Now I’m fine. I’m about to get on a plane from LA to NYC. Then it’s London from there. I’m looking forward to hearing many more of the creative narratives on what, precisely, is going on out there in bond yield terms.


With all this bond market talk, I haven’t spent enough time keeping you up on Global Equity markets this week (they don’t cease to exist), here’s what I’m thinking:


  1. Japanese Stocks (Nikkei): +4.0% month-over-month and still our favorite International Equity allocation
  2. Chinese Stocks: to infinity-and-beyond (+17.4% month-over-month) even though FXI is breaking down
  3. South Korean Stocks (KOSPI): down for the 8th day in the last 10 – must be a global #growthaccelerating signal
  4. Indian Stocks (BSE Sensex): barely up on the bounce this morning – still bearish, -2.1% in the last month
  5. Mongolian Stocks (yep): +12% month-over-month; I hope you nailed that
  6. UK Stocks (FTSE): +0.3% this morning to +2.5% in the last month; Top 3 International Equity allocation
  7. German Stocks (DAX): big bounce yesterday, but still -1.1% m/m and I’m not buying this dip
  8. Greek Stocks (Athex): -2.2% this morning, -2.9% m/m, and -38.4% y/y #GongShow
  9. Polish and Russian Stocks: -6.5% and -10.5% month-over-month, respectively (I don’t like either)
  10. US Stocks (SP500): +0.17% yesterday and +0.46% in the last month – fair fight; bullish ahead of the Fed


Sorry. I had to mention the Fed and bond market again in order to say #bullish on US Stocks (SPY). It’s all one and the same call. If the Fed alleviates the headaches next week (just reiterates what they’ve been saying), you probably buy everything (on red).




Not Mongolian stocks – they’re overbought. But if the Fed knocks the US 10yr Yield back to where it was only 12 days ago (2.10%), I certainly wouldn’t want to be short bonds or any US stock that looks like a bond (REITS, Utes, etc.).


In US Equity terms, here’s what we still like the most in terms of net LONG asset allocation:


  1. US Healthcare Stocks (XLV)
  2. US Housing Stocks (ITB)
  3. Restoration Hardware (RH)


You mean you’re still not long RH? Ah, that’s because it looks “expensive”, right? Well, it’s my All-Star Partner, Brian McGough’s, birthday today and I wanted to give him a shout-out for staying with what’s been a world class research call.


*Note to the valuation experts:


  1. “Expensive” stocks with high short interest get more expensive when they deliver on the growth story
  2. “Expensive” macro exposures (like Treasuries) get more expensive when growth slows
  3. “Cheap” gets cheaper when a company misses and your boss blows it out due to his/her P&L headache


Oh, and if your stock is expensive and your CEO sucks – just fire/remove him like Twitter (TWTR) did this morning and you get that pop. You know – like when you try so hard that nothing is working.


Then you stop doing that. And things pop! My head feels better now. Enjoy your weekend.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.14-2.51%

SPX 2092-2123
Nikkei 20064-20787
VIX 12.56-15.38
USD 94.01-95.88
YEN 122.61-125.46
Oil (WTI) 57.68-61.91

Gold 1165-1198


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Popping Headache? - ccc 06.12.15

June 26, 2015

June 26, 2015 - HE DTR 6 24 15

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.