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“I’m not confused, I’m just well mixed.”

-Robert Frost

Wow. What a macro move that was yesterday!

While I have a lot on my plate personally this morning (God willing, the pending birth of our 4th child), markets have a lot to deal with, generally. I haven’t seen this kind of confusion ahead of a Fed meeting since this entire 0% rates experiment started.

Get The Drill? - Bull and bear extra cartoon

Back to the Global Macro Grind

To review what happened intraday (on slow Total US Equity Market Volume of -8% and -11% vs. the 1-mth and 1-yr averages, I might add) yesterday – here’s how I scored it:

  1. US Equity Futures were DOWN after Chinese stocks retested the lows on a -3.5% drop
  2. US Economic Data SLOWED (Retail Sales and Industrial Production for AUG)
  3. USD and Rates DROPPED on the econ DATA, US equity futures RALLIED on “Dovish Fed”

*Then, intraday, FX and Rates REVERSED, taking USD, YIELDS, and STOCKS straight up on the day

The “reasons” on the reversal were many. Being the guy who can’t front-run your desk with mine (I don’t have one), I tend to get a lot of real-time, trusting, client intel on what people think is going on. Here were the big ones yesterday:

  1. “The Chinese are selling Treasuries” (implying they had to defend their stock market and raise money to do it)
  2. “A big asset allocation trade” (out of bonds into stocks)
  3. “That was the low in US economic data” (US data should accelerate to the downside in Q4, not bottom in Q3)

I could go on and on with the less impressive rumorings, but you get the point – these are not only dramatic reasonings, but highly debatable ones that I think macro markets have been pricing in, for a long time now.

What makes the debate intense are the performance problems out there. With a large % of “Long Onlys” underperforming their “bench” (and that equity benchmark being down YTD) and plenty of hedgies losing moneys, that is what it is.

For those of us writing this strategy letter (who haven’t had to make excuses for the last 3 months), we’re happy to be well mixed after a tough day of trading, and readying our good wife to give birth!

What to do from here?

  1. Answering that question with more questions is where I’m going and I’ll…
  2. Probably do a whole heck of a lot of nothing… as I
  3. Wait and watch for this Federal Reserve EVENT RISK to play out

In terms of this move in rates, for those of you who follow my signaling product (Real-Time Alerts), you know that, fortuitously, our risk management #process signaled to get out of some Treasury exposure, on Friday (TLT was at $122).

Since I’m short on time this morning here were the highlights of that “call”:

“With TLT doing it's job (again) +1% on the day in another down US stock market tape, this is not an easy signal for me to send out - and maybe that is precisely the point... I spend a lot of time thinking about what our GIP Model (Growth, Inflation, Policy) is signaling. When we have heightening convictions on what we call a Phase Transition(going from bearish to bullish TREND or vice versa), we make that call. Updated examples of that are as follows:

1. GROWTH - signaled bullish (growth accelerating) coming out of 2012, then bearish (slowing) here in 2015

2. INFLATION - signaled #Deflation in Q3 of 2014 and have not yet signaled anyPhase Transition from that TREND

The problem with making a call on POLICY (from here into the Fed meeting next week) is that I have no idea what the Fed is going to do. My confusion on POLICY risk should not to be confused with:

A) What they should have done - started raising rates in SEP 2013, so that they'd have room to cut, eventually and/or

B) What they should do now - nothing as tightening into a slowdown isn't modern day monetary policy rules 

What scares the hell out of me is that they still don't know what they want to do - and they have to decide within a week.

Will that decision be based on what the US Equity Futures do in the next 3 hours or 3 days of trading? Or will it be based on "proving they can" despite Fund Fund Futuressaying they shouldn't? Consensus Macro may not, but we know growth (globally and locally) is slowing. We don't know what Janet Yellen is going to do with that. So I'd rather take down some Treasury Bond market exposure to an open-the-envelope event, then revisit on the event.”

Yep. I just quoted myself.


And, while I can assure you that I’m more confused today than I was on Friday (in terms of how this all plays out in the very immediate-term), I’m still as confident as I can be in both the gift of life and staying true to our process.

Sometimes it gives us conviction. Sometimes it gives us pause. Waiting and watching for something you cannot control is a humble position to take. But after my first 3 kids (and 3 #LateCycle slow-down calls in the last 15 years), I get the drill.

UST 10yr Yield 2.12-2.29%

VIX 21.03-29.07
USD 94.68-96.48
Oil (WTI) 43.19-48.90

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

Get The Drill? - z zod 09.16.15 chart