McCullough: Get The Euro Right, You’re Going To Get The Dollar Right

Editor's Note: This is an excerpt from Hedgeye CEO Keith McCullough's remarks on The Macro Show yesterday morning. If you'd like to learn more about how you can ramp up your investing and trading game before the market opens every day click here.

McCullough: Get The Euro Right, You’re Going To Get The Dollar Right - Euro cartoon 03.23.2015


Get the euro right, you’re going to get the dollar right. And then you get the reflation or the deflation trade right. I can’t say that enough. Again, we called this back in September. We are going to call it again now. You can see it with the dollar breaking out which of course is a derivative of the euro breaking down.


Do you have a catalyst to get the euro back above 1.13? I don’t. All the catalysts are lined up to devalue the euro. Whether it is the…


  • ECB response
  • Greek response
  • ‘No soup for you!’ response


… I don’t care what the response is. But it is going to be a devaluation of the European currency. So again, 1.09 this morning, which is down -0.7%.


Click here to learn more about Hedgeye.


Takeaway: We'll be holding a Black Book Call on McDonald's, today July 8th at 11:00am ET.


We are adding MCD to the Hedgeye Best Ideas list as a LONG. 


Watch the REPLAY below.



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Confirmation Number: 13613786

Materials: CLICK HERE


After nearly four years of being bearish on MCD, it’s now time to reverse course.  We are confident that MCD is not a structurally broken company.  Importantly, there are a number of initiatives in place that will ultimately reverse the fortunes of the company. 


Yes, fixing McDonald’s operationally will take time, but the seeds have been planted.  From the work I have done, by 2016 it will be clear that MCD is well on its way to reasserting itself as the dominate company that it is. 


McDonald’s CEO, Steve Easterbrook, is reshaping the company from the inside out and the financial impact of these actions are about to be clear.  Returning MCD to sustainable growth is centered on structural changes to the operating model and a recommitment to regaining the trust and loyalty of customers.


These changes are taking place in Oak Brook and at the local level.  Within McDonald’s local management and franchisees working together to improve the McDonald’s experience.  The new experience is consistent with what made the company great in the first place.


While financial engineering is part of the new foundation, its limitations are obvious so understanding how an operationally led turnaround will unfold is critical to make a longer-term commitment to being LONG MCD.


The LONG MCD BLACK BOOK will focus on:

  • How the new operating structure of the company is breathing new ENERGY into the company including improved profitability
  • The primary cause for the market share losses in the USA over the past three years and how the company is fixing it
  • The timeline for the turn in sentiment and performance  
  • Updated financials



CHART OF THE DAY: Déjà Vu On #Quad4 Deflation Risk?

Editor's Note: This is an excerpt and chart from today's morning strategy note written by Hedgeye senior macro analyst Darius Dale. Click here to learn how you can subscribe. 


CHART OF THE DAY: Déjà Vu On #Quad4 Deflation Risk? - z DD Chart of the Day


...As it relates to #Quad4 deflation risk, I believe Yogi Berra said it best: “It’s like déjà vu all over again.”




Keep your head on a swivel and trade accordingly. Risk managing the push-pull between #Quad3 (i.e. policy-based reflation and yield-chasing) and #Quad4 (i.e. deflation and defense) will not be easy.

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Déjà Vu

“It’s like déjà vu all over again.”

-Yogi Berra


I’m guessing most of you know who Yogi Berra is, but for those of you who do not, he is widely considered one of the greatest baseball players of all time – if not, then certainly at his position, catcher.


While Berra’s career statistics and accolades are impressive – including being a 15-time All-Star, a 3-time MVP and a Hall of Fame inductee – what impresses the [washed up] former athlete in me most about Berra is his propensity to flat-out win. As a player, coach or manager, Berra appeared in 21 World Series winning 13 titles.


Déjà Vu - z yb


Whether you’re employed on the buy-side or sell-side, it’s hard to consistently “win” in financial markets. While some periods are easier to get lucky in than others, we can all agree that the best way to consistently set oneself up for victory is via implementing some form of the following trifecta:


  1. Repeatable research process
  2. Thorough risk management systems
  3. Doing your own work


It’s worth noting that while applying all three doesn’t guarantee consistent success in profiting from financial markets, it does at least guarantee an investor the consistent opportunity to fail, learn and evolve – which is all we can really ask for.


Back to the Global Macro Grind


Yesterday we live-streamed our 3Q15 Macro Themes presentation (CLICK HERE to watch the video replay); the summary of each theme is as follows:


  • #ConsumerCycle: We think the peak rate of change in consumption growth for this economic expansion is poised to slow due to a confluence of cyclical (e.g. accelerating inflation) and structural (e.g. demographics) factors.
  • #SecularStagnation: Our multi-factor analysis suggests both growth and inflation will remain at structurally depressed levels for the foreseeable future, ultimately negating any perceived need to tighten monetary policy in the U.S.
  • #EuropeSlowing: Our predictive tracking algorithm is projecting a broad-based slowdown in economic growth throughout the Eurozone in 2H15, which would likely require more easing out of the ECB. This reaction should weigh on the EUR/USD cross and perpetuate a continuation of cross-asset volatility via correlation-based spillover risks.


It would seem that themes #1 and #3 are somewhat at odds with each other. Specifically, having a bearish bias on the EUR would support a bullish bias on the USD, which, in turn should support having a bearish bias on commodity reflation and, ultimately, a bullish bias (at least on the margin) on the U.S. consumer.


It’s worth noting that the U.S. Dollar Index (DXY) holds inverse correlations of -0.74, -0.59, -0.97 and -0.95 to the CRB Commodity Index on a trailing 3M, 6M, 1Y and 3Y basis. Supply and demand analysis reigns supreme when picking winners and losers in the natural resources space, but in terms of getting the general direction of inflation expectations right, the math continues to suggest forecasting the direction of the USD remains paramount.


As one might guess, given our bearish bias on the EUR (57.6% of the DXY basket), we are also bearish on reflation. In this context, the opening quote from Mr. Berra is especially appropriate because it reminds us of the Global Macro setup this time last year:


  • If you’ll recall, we were then forecasting a trending delta into #Quad3 (Hedgeye speak for YoY real GDP growth slowing while YoY CPI accelerates) for 2H14 – much like our GIP Model is signaling today.
  • Yet less than a month later (early August to be exact), we ditched the #InflationAccelerating component of the aforementioned thesis in transitioning to a #Quad4 outlook; recall that #Quad4 is an economic state whereby the YoY rate of change is decelerating for both real GDP growth and CPI.
  • In #Quad4 both top-down and bottom-up expectations for nominal growth broadly decline and, as one might imagine, it’s a scenario in which not a lot of factor exposures tend to work.


So are we headed into #Quad3 or are we careening towards another [painful] 2H #Quad4 setup? That was the essence of what I thought was the most thoughtful subscriber question posed to Keith during yesterday’s quarterly macro themes presentation:


“Your consumer slowing theme seems to be heavily focused on consumers getting squeezed by inflation. Yet it also seems like you’re gearing up to make the Quad 4 call based on your expectations for European policy and its impact on the exchange rate. Which thesis do you have more conviction in today, given that shorting the consumer and shorting reflation likely can’t work simultaneously?”


We love fielding difficult questions from our thoughtful base of existing and prospective subscribers. On that note, Keith will be on a panel at the 6th Annual Inside Alternatives Conference July 13-14, 2015 in Denver CO. Click here to learn more…


From a modeling perspective, it’s almost impossible for the U.S. economy to  avoid transitioning into #Quad3 for the upcoming two quarters; the base effects alone would perpetuate two-thirds to three-fourths of that delta.


Moreover, you’d likely need to see some confluence of the following for CPI to arrest its basing pattern just based on the statistical relationship between these factors and the trend in reported inflation: a crash (from here) in crude oil, a concomitant crash in food prices and/or rental inflation arresting its ascent – the latter of which is unlikely given the bullish supply/demand/price dynamics in the residential real estate market (which our housing team has, quite frankly, nailed in the YTD).


From a market perspective, this is where things get interesting. The probability of the aforementioned crashes occurring is rising due to both fundamental and quantitative reasons. The former is well covered in Q3 Macro Themes presentation (i.e. #EuropeSlowing), so we won’t beat a dead horse here. The latter factor warrants our attention, however.


Our Tactical Asset Class Rotation Model (TACRM) is one of the core quantitative tools we use to guide our fundamental expectations for both the domestic and global economy. TACRM is helpful to investors in many ways, but one of the things it is most effective at is prospectively signaling sustained breakdowns and breakouts at the primary asset class level.


Recall that in the aforementioned August ‘14 #Quad4 presentation, TACRM signaled the breakdown in European growth and inflation expectations across a variety of factor exposures in 2H14, effectively front-running the deflationary #StrongDollar risks associated with the ECB’s eventual implementation of QE.


What is TACRM signaling now from a quantitative perspective? An eerily similar risk management setup to that of this time last year to be exact:


  • Specifically, within the last three weeks, EM Equities, Commodities and Foreign Exchange have all registered bullish-to-bearish reversals at the primary asset class level, in that order (slide 6).
  • At the factor exposure level, the multi-duration negative VWAP momentum exhibited by German (EWG), French (EWQ) and Eurozone (EMU) equities lends credence to our #EuropeSlowing theme (slide 18).
  • Similar weakness exhibited by base metals (slide 22) and commodity currencies (slide 21) lends credence to our existing view that global growth is slowing and will remain unsupportive of consensus reflation expectations.


But you needn’t require a sophisticated multi-factor, multi-duration quant model to tell you that global growth is slowing. Just pull up a chart of global industrial, financial, basic materials and/or energy stocks – all of which are down for the YTD at the sector and/or subsector level (e.g. XLI, IYT, XLF, XLB and XLE).


As it relates to #Quad4 deflation risk, I believe Yogi Berra said it best: “It’s like déjà vu all over again.”




Keep your head on a swivel and trade accordingly. Risk managing the push-pull between #Quad3 (i.e. policy-based reflation and yield-chasing) and #Quad4 (i.e. deflation and defense) will not be easy.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.21-2.39% (bearish)

SPX 2042-2087 (bearish)

USD 95.68-97.32 (bullish)
EUR/USD 1.09-1.12 (bearish)

Oil (WTI) 51.56-55.36 (bearish)

Gold 1162-1185 (neutral)




Darius Dale



Déjà Vu - z DD Chart of the Day

The Macro Show Replay | July 8, 2015


INVITE | Should You Rethink Your Assumptions? Airline Black Book July 14th @1PM ET

Airline shares have been enormously volatile in the last year as concerns about intensifying competition have largely offset the initial gains from lower fuel.  Given the recent drop, is the potential upside worth the risk?  Are airlines actually undervalued ‘real’ businesses?  Has consolidation really changed the behavior in the industry?  How has competition evolved from both a top-down and bottom-up perspective?  We will present a black book examining the myths, half-truths, and genuine progress in the US airline industry on July 14th at 1PM.



  • A Long View of Airlines:  Valuation, capacity sensitivities, adjusted performance
  • Fleet Dynamics:  Lower fuel, capacity trends, historical drivers
  • UAL Update:  Changing tactics, problem generating cash
  • Consolidation:  Competitive intensity, cream skimming, industry comparisons, so-called collusion
  • Industry Changed?  Vehicles & strategy to reduce the odds of being the greater fool


INVITE | Should You Rethink Your Assumptions?  Airline Black Book July 14th @1PM ET - ual lt margin


INVITE | Should You Rethink Your Assumptions?  Airline Black Book July 14th @1PM ET - ual cds2


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