McCullough: It Might Be Worse Than 2008


On Monday’s edition of RTA Live, Hedgeye CEO Keith McCullough talks about where investors should have stopped out of big-cap names like Disney and says 2015 is different from (and potentially worse than) 2008.


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CHART OF THE DAY: Take a Look At This Volatility Chart | $VIX

Editor's Note: The chart and excerpt below are from this morning's Early Look written by Hedgeye CEO Keith McCullough. If you're serious about the markets and economy, you should seriously consider subscribing. Click here to learn more.


CHART OF THE DAY: Take a Look At This Volatility Chart | $VIX - z br cod 08.25.15 chart


...You see, this most recent rout (SP500 and Russell 2000 experiencing 11.1% and -14.2% drawdowns from all-time highs) is, after all, from the all-time highs! And there are compelling things to consider on the long side here that I personally missed (Gold’s most recent ramp) that are coming off 4-yr lows. As you can see in today’s Chart of The Day, the 1st blast higher in US Equity Volatility in 2011 wasn’t its last.

Understanding The Bounce

"Seek to understand more than to be understood.”

-St. Francis


That’s an important quote about one of the most important attributes of a great analyst (or leader for that matter): empathy. Can we find it within ourselves to see someone else’s point of view? If we can, we’ll learn a lot faster – and make less big mistakes, as a result.


In #behavorial psych, one of the glaring risks of not being empathetic and open-minded is called the Fundamental Attribution Error. “At the heart of it is the tendency of human beings to attribute the negative or frustrating behaviors of their colleagues to their intentions and personalities, while attributing their own to environmental factors.” (The Advantage, pg 32)


Sound familiar? It sure does to me. I can assure you that both in my business and life I have made this mistake more times than I can count. Whether or not I’ve had this stage of the “market call” right or wrong isn’t the point this morning. Win or lose, my #1 goal should be to seek and understand the #truth; not data and excuses that support my position.


Back to the Global Macro Grind

Understanding The Bounce - global growth.sick bull cartoon 08.24.2015


Understanding the bounce (in stocks, oil, etc.) this morning has to start with understanding what caused some of these big things to crash to begin with. If we can’t contextualize reality, the mistakes we’ve made along the way are going to compound.


So, like a good Bayesian, reset. Like, every day.


No, it’s not easy. Yes, it’s a grind. And yes you’re going to be humbled many more times than you feel “smart.” Most people in this profession are smart. That doesn’t differentiate us. What does is how you behave into and out of big macro market Phase Transitions.


What were the causal factors behind China, Emerging Markets, Oil, Junk Bonds, Bond Yields, etc. crashing?


1. GROWTH: the #LateCycle is meeting the secular = #Slowing

2. INFLATION: #Deflation continues to win the debate; inflation expectations have crashed

3. EARNINGS: with 480 of 500 companies (SP500) reporting, Q215 Revenues -3.9%, EPS -2.7%


I’d say those are 3 pretty important causal factors that all proved to be A) true and, more importantly, B) non-consensus. And that’s really the other place (alongside risk managing our behavior) to differentiate oneself in this profession - not being a groupthinker.


Alongside ramping SUPPLY and slowing DEMAND (happens at the end of every cycle), what else proved to be causal?


1. CHINA: slowing, panicking, centrally-planning

2. VOLATILITY: undergoing a very bullish Phase Transition from its all-time cross asset class lows (JUL 2014)

3. LIQUIDITY: chart/performance chasing on decelerating volume (higher); puke on accelerating volume (lower)


Ok, there are 6 things we should have had right. I can keep going, but I won’t. Because the point of this morning’s strategy note is to seek truth and position for what happens next.


Since “valuation” isn’t a catalyst in a #GrowthSlowing market where rev/eps forecasts are too high, what (if anything) is going to change what caused this?


1. GROWTH: US and European growth expectations remain way too high given the Q3 and Q4 #LateCycle comps

2. INFLATION: the #Deflation could stop crashing (if the Fed does Qe4), but is that really the bullish camp’s catalyst?

3. EARNINGS: revenue and earnings expectations for Q3 and Q4 remain way too high as well

4. CHINA: oh great, they’re cutting rates this morning – look how well that worked last go-round

5. VOLATILITY: what does “investing” look like in High Beta, High Growth Style Factors in a 29-47 VIX range?

6. LIQUIDITY: yesterday’s US equity volume was +58% and +40% vs. its 1mth and 1yr averages, respectively


Sure, you can blame the “machines”, my brother’s father-in-laws’ son, or we simpleton’s paying “too much attention to the data”? Or you can ask yourself what you missed and question whether or not you should be selling what you should have on today’s bounce.


You see, this most recent rout (SP500 and Russell 2000 experiencing 11.1% and -14.2% drawdowns from all-time highs) is, after all, from the all-time highs!


And there are compelling things to consider on the long side here that I personally missed (Gold’s most recent ramp) that are coming off 4-yr lows. As you can see in today’s Chart of The Day, the 1st blast higher in US Equity Volatility in 2011 wasn’t its last.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.98-2.13%


VIX 29.03-47.13

EUR/USD 1.12-1.16

Gold 1131-1168


Best of luck out there today,



Keith R. McCullough

Chief Executive Officer


Understanding The Bounce - z br cod 08.25.15 chart


Early Look

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The Macro Show Replay | August 25, 2015


And The Bounce…

Client Talking Points


A massive move in cross-asset class volatility (one of the biggest in macro history) now has the USD in the position of bearish TRADE, bullish TREND – with EUR/USD risk range now = $1.12-1.16, will ECB President Mario Draghi be the news @JacksonHole and devalue again? BOJ guys don’t have it in their central planning playbook to let Yen run away from them from here either.


Gold is correcting this morning (alongside Treasuries) on the Global Equity bounce and maybe that’s sniffing out a Draghi move too – we’ll see, but we’re in wait and watch mode here on buying Gold as we would rather buy it at the low-end of my 1,131-1,168 range on a European or Japanese FX War move.


One of the most epic moves in U.S. Equity volatility, ever – and ever, given the 2008 and 2011 moves we risk managed through, is a long time - this is an absolute Phase Transition that will ultimately have to answer to growth expectations – risk range on VIX is now 29.03-47.13!

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

One of the ways that McDonald's is going to take market share back is through one of the most popular items on its menu—the Egg McMuffin. "I honestly believe that if there is a silver bullet, it’s all day breakfast for McDonald’s," says Restaurants Sector Head Howard Penney. "And I do believe they’re going down that road and they will do it."


Penney adds that we’ll probably know more about that at the November analyst meeting and what the breakfast potential will be. There’s obviously a lot of things that go around MCD doing breakfast (e.g. shrinking other parts of the menu, etc).


"We continue to like Penn National Gaming here due to stable regional gaming trends, better than expected quarterly and annual earnings, and the Plainridge and Jamul contribution to PENN’s two-year growth story," writes Hedgeye Gaming, Lodging & Leisure Sector Head Todd Jordan. 


It was a very good week for those sitting behind the long-bond coming out of the FOMC minutes release on Wednesday. During a tumultuous 5-day stretch in which the S&P 500 fell over -5%, subscribers who followed our recommendation on TLT were sheltered from the market storm and gained almost +2%. Moreover, during the past month, TLT has gained +5.7% versus a -6.8% loss for the S&P 500 (a 1,200 basis point difference). In other words, it has paid handsomely to buck the consensus tide.

Three for the Road


FLASHBACK: 2.75% or 1.75%? … via @hedgeye



Keep your eyes on the stars and your feet on the ground.

Franklin D. Roosevelt


The average age of German citizens is 46, the average age is second only to Japan’s. One in 20 Germans is over 80 and by 2050 it will be one in six, according to UN data.

TWTR: The Crossroads (User Survey: n=7,500)

Takeaway: TWTR is risking long-term damage to its business model by trying to appease the street. Mgmt needs to shift gears before it’s too late.


  1. THE PROBLEM: Monetization is coming at the expense of user growth and retention.  TWTR runs a CPC ad model, meaning the user must engage with TWTR’s ads in order to generate revenue.  In order for TWTR to drive the level of revenue growth the street is expecting, it must continually introduce more and more ad load, which has historically pushed its more casual users away.  In short, TWTR has been chasing good prints at the cost of potential life-time users.  Longer-term, TWTR’s business model will be hampered by its cumulative churn, leading to a smaller user base to distribute ad load on to, hence lower potential revenues down the road.
  2. THE DATA: We have seen this dynamic playing out throughout TWTR’s reported history, with US MAUs and Ad Engagements (proxy for ad load) moving in opposite directions (see note below).  We also ran a survey attempting to segment TWTR’s users by engagement levels (n=7,500).  What we’ve found is almost 40% of respondents with a twitter account are no longer using the platform.  Of those that do remain, roughly half do not use the platform daily, suggesting they are more casual users, hence more likely to churn off.  The good news is that there is still room for user growth (estimated 38% US penetration), but not enough to support a model with elevated churn.
  3. THE CROSSROADS: TWTR needs to decide what matters more: appeasing near-term street expectations, or building a sustainable business model.  The latter means that TWTR needs to prioritize the user; both attracting new users and reclaiming the ones that it has lost.  We’re not sure exactly the best way go about doing that, but what we can say is TWTR can’t win the user while simultaneously chasing lofty consensus revenue expectations with rampant increases in ad load.  Mgmt's approach to 2016 guidance will essentially tell us where its priorities lie; i.e. whether TWTR is a secular short or something we can potentially get behind.  For now, we remain short.  


TWTR: Are Acquisitions Enough?
03/17/15 08:50 AM EDT
[click here]


TWTR: The Crossroads  (User Survey: n=7,500) - TWTR   Ad eng vs. MAU 2Q15

TWTR: The Crossroads  (User Survey: n=7,500) - TWTR   User Survey Churn 3Q15



Let us know If you have any questions or would like to discuss in more detail.


Hesham Shaaban, CFA