Fragile Power

“Everywhere, the basis of political power is growing more fragile.”

-Moises Naim


Not every book I read is well timed and/or pertinent to my research, but many of them are. It’s part of my #process. I build an inventory of books that I think are relevant to where we are in the macro debate, and I pull forward that inventory when a topic flares up.


How about the fragility of markets, economies, and the politicians who are trying to centrally plan them? Got Europe, China, Japan (oh, and the US)? Yep. It’s on.


We’ve finally reached the beginning of the end of this grand policy experiment. As a politician, all you can do now is panic & print. No, you can’t print growth. I think that’s why the plannings, panics, and printings are all accelerating again. Global growth is slowing.


Fragile Power - macro call cartoon

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Back to the Global Macro Grind


The aforementioned quote comes from a book I finished last month called The End of Power, where the author, Moises Naim, cites very relevant work by Max Weber on the behavioral side of politics/power:


“He who is active in politics strives for power, either as a means of serving other ends, ideal of egoistic, or as power for power’s sake, that is, in order to enjoy the prestige-feeling that power gives.”


But (and here’s the connection to the market-driven-politics that have been accelerating since the last economic cycle peaked in 2007), “that prestige-feeling is a fragile emotion. And these days, its half-life is getting shorter.” (Naim, pg 76)


Think Varoufakis.


Moving along… since that Greek dude is off in the sunset and his communist/socialist partner Tsipras is folding like a cheap Canadian pup-tent this morning, that brings us to your macro morning US equity futures ramp!


Yesterday they ramped the S&P Futures by what, +27 handles? By day’s end, they closed up +4. But I think that was on the 4-finger Johnny threat to anyone who isn’t on the do-it-yourself program (Jason Pierre-Paul) in China who dared sell a stock.


This morning’s futures wood (+22 handles) is on Greece saving itself from itself, again. And the macro market correlation to that trade is very straightforward:


  1. Euro Up (vs. USD) +1% to $1.11
  2. Commodities Up (Dollar Down) +1-2%
  3. European Stocks +1.5-2%, across the board


But, again, this has nothing to do with growth. Neither did Chinese stocks “rallying” overnight (when almost 50% of the stocks in the market are still halted). Nor will US equity values going up on negative (think profit cycle) -4% year-over-year earnings growth in Q2.


It has everything to do with the fragility of the power – and the last gasps of it that many are all clinging to (in many mainstream media cases, they’re begging for it), which is, of course, the next central-market-plan.

So what am I going to do from here? Here are my thoughts, from an asset allocation perspective:

  1. CASH – I am going to raise cash to 52% (love selling on green, buying/covering on red)
  2. US EQUITIES – keeping my net position (+4%) low, and my Style Factor setups the same – long LOW BETA; Short HIGH BETA; LONG Healthcare, REITS, Consumer Staples; SHORT Cyclicals and Reflation sectors
  3. INT’L EQUITIES – we’ve been out of European Equities since April so nothing do to there (not buying them) as #EuropeSlowing remains the tail wagging the dog; still like Japanese Stocks, but only on oversold days
  4. COMMODITIES – after being net LONG them for part (not all – didn’t nail that) of the reflation trade in Q2, all we’ve signaled is sell those in Q3, and we’ll keep doing so as #StrongDollar’s long-term bullish TAIL continues to wag that #Deflation dog
  5. FIXED INCOME – still The Treasuries Bull, and won’t apologize for that (was The Bear in 2013 and have been bullish since early 2014 – like any long-term investor, I’m staying with slower-for-longer); Short Junk + Credit Risk; Long Liquidity
  6. FX – probably the best place to be incrementally allocating right now – buying US Dollars on all pullbacks (selling commodities and commodity linked stocks/bonds/countries, on centrally-planned ramps, bounces, etc.)


That is all.


Call me the crazy long-term guy, but I haven’t seen a cycle slowing this clearly since the summer of 2008. No, my call then had nothing to do with Lehman and Bear…


As the economic cycle slowed, central planners started to panic. And, ultimately, their panic perpetuated the crisis. Back then it was the so called “capitalists” (George Bush, Hank Paulson, Tim Geithner, etc.). Now it’s the socialists and communists.


As you can see in Europe and China, their emotions are a little more fragile too.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.19-2.45%

SPX 2035-2087
DAX 105
VIX 15.59-21.08
USD 95.82-97.56
EUR/USD 1.09-1.12

YEN 121.90-123.45
Oil (WTI) 49.62-55.29


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fragile Power - z chart DAY

The Macro Show Replay | July 10, 2015


The Euro, Oil and China

Client Talking Points


Pretty straightforward trade here with another socialist compromise equating to Euro +1% vs. USD and all of the correlation trades to USD reflating. The key here isn’t being reactive, its making good decisions at the low and high end of the range which is now 1.09-1.12 EUR/USD. In other words since we have no European shorts on, we’ll probably start making sales at EUR/USD $1.12 (they can’t print growth). 


Euro Up equals Dollar Down equals Commodities/Oil Up, but the risk ranges here have widened, big time (leading indicator of continued volatility) – the risk range for WTI is now $49.62-55.29 and we see no reason why you can’t test the top-end of that range if Janet Yellen is dovish in here Cleveland speech.


Last, but not least, big night for the non-halted (> 1400 stocks still halted) part of the market – Shanghai Comp +4.5% on the session but still in crash mode, -24.5% month-over-month. We’re not smart enough to dip a toe in this market yet (plus we wouldn’t want it chopped off by a Chinese dude if we then made a sale).


**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET with CEO Keith McCullough and Macro Analyst Ben Ryan.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We’re all-in on Kate Spade at current levels. The Hedgeye Retail team believes that comps are accelerating into the double digits in 2H, and we think that KATE’s margin guidance for this year will prove conservative. Ultimately, we think that numbers this year are 10% too low – a delta that widens to 20%+ next year, and to 50%+ by 2018 when we think KATE has $2.50 to $3.00 in earnings power. Using decelerating multiples as growth accelerates and the P&L matures gets us 50%+ upside in a year and a 2-3-bagger by 2018.


Our Gaming, Lodging and Leisure team reiterates its high-conviction thesis on Penn National Gaming. PENN remains one of our favorite names on the long side. It maintains the best new unit growth story in domestic gaming. PENN's property in Massachusetts has had an excellent start. We expect June to be as strong as May, setting up Q2 to be estimate-beating quarter for PENN.


The Hedgeye Growth, Inflation, Policy (GIP) model is signaling a move into QUAD 3 for the second half of 2015. This is a set-up for the domestic economy where growth is slowing and inflation is accelerating. We reiterate our intermediate to long-term bullish bias on long-duration Fixed Income and gold. Our back-testing results cast a favorable outlook for Long-Term Treasuries, REITs, and Gold with a favorable set-up as seen in the first three charts below. When growth is slowing (QUAD 3 and QUAD 4), long term rates tend to move lower.  The logic is simple:

  • #GrowthSlowing: As growth slows, a revision in forward-looking growth expectations manifest in lower yields
  • #InflationAccelerating: Commodity prices have made a significant move off of the 2015 lows as seen in the last chart below, and we expect the follow-through to play out in Q3 inflation readings. CPI readings track the commodity price sample used in chart #4 below very closely and CPI compares are easy in 2H 2015 vs. more difficult GDP comps (QUAD 3)       

Three for the Road


McCullough: #Draghi Is Gearing Up For More 'Cowbell'

via @KeithMcCullough on @FoxBusiness



The greatest of faults, I should say, is to be conscious of none.

Thomas Carlyle


As of 2013, ~41% of Households making < $45K paid more than 50% of income towards housing costs while over 70% of households paid more than 30% of income towards rent.  

Early Look

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July 10, 2015

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McCullough: Draghi Is Gearing Up For More 'Cowbell'

Hedgeye Risk Management CEO Keith McCullough offers his take on what's going on in Europe, China and Greece with Fox Business anchor Maria Bartiromo and FBN’s Charles Payne and Cheryl Casone.