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0% Contradiction

“Contradiction insights spark the emotional reaction.”

-Dr. Gary Klein


While “getting off of 0%” with a rate hike (into 2015 #GrowthSlowing) is something that the same crowd that didn’t want a rate hike (into 2013 #GrowthAccelerating) is a classic Wall Street contradiction, it’s consistent. Consensus begs for what it’s positioned for.


As Klein goes on to explain in Chapter 5 of Seeing What Others Don’t, “Contradiction insights send us on the road to a better story. They signal that there’s something seriously wrong with the story we’re currently telling ourselves.” (pg 61)


Fortunately, we humble observers of Mr. Macro Market’s signals have an opportunity to obtain insights into the rate of change in Global Economic Growth & Inflation, every day. The best story you can tell yourself is that you beat consensus.


Back to the Global Macro Grind


Friday’s -1.6% drop in the SP500 came on massive volume. Total US Equity Market Volume (including dark pool) was up +24% and +26% vs. its 1-month and 1-year averages, respectively. That took the SP500 to -4.9% for the YTD and -8.1% from its YTD peak.

0% Contradiction - volume cartoon 5.20.2014


For the week, you might say nothing happened. Especially if you run the place, you can pretty much tell yourself whatever you want. Reality, however, is timestamped, across durations. Here’s last week’s score with a 1-month overlay as context:


  1. US Dollar Index flat on the week and down -1.9% in the last month
  2. Japanese Yen up another +0.5% on the wk (vs. USD) and +3.7% in the last month
  3. CRB Commodities Index -1.3% on the wk and -1.3% in the last month
  4. OIL (WTI) up another +0.7% on the wk and +4.2% in the last month
  5. Gold was the biggest macro winner last week = +3.2% on the wk and +2.0% in the last month
  6. Long-Bond (10yr Treasury) down -5 bps last wk to 2.13% (-6bps in the last month)
  7. SP500 down another -0.2% on the wk and -6.6% in the last month
  8. US Financial Stocks (XLF) -2.0% on the wk and -10.4% in the last month
  9. European Stocks (EuroStoxx600) -0.3% on the wk and -8.6% in the last month
  10. Emerging Market Stocks (MSCI Index) +3.1% on the wk and -2.4% in the last month


What you see here (on both a 1 week and 1 month duration) is that macro markets look a lot like they did when US and European growth slowed into the back half of 2011. The end of that move capitulated with both Gold and the Long Bond at all-time highs.


There’s plenty of contradiction in how the Federal Reserve depicts the #LateCycle US labor market and the “transitory” nature of both cyclical growth and inflation slowing, globally. At the same time, the market is pricing in something that looks like stagflation.


In other words, for the last month, you’ve made a lot more money:


A)     Buying Oil and Gold instead of the US and/or European stock markets

B)      Buying Long-term Bonds (and/or stocks that look like bonds) instead of “cheap” Financials


That said, you wanted to have timed the Fed punting on the “rate hike” right. Because being long Oil and Emerging Market related equities would have train wrecked your year. Don’t forget that US Energy Stocks (XLE) are -20.3% YTD.


Got timing?


I certainly hope you have a way to think about it. There’s contradiction in telling your investors that you are super long-term in nature but not completely aware of the super-secular headwinds to both growth and inflation, from a demographic perspective.


How about sentiment?


Building #behavioral models to help contextualize when consensus is positioned for reality (as opposed to fighting for the positions they’ve already built up – like “Long Financials because we have to raise rates eventually”) is also critical.


There are plenty of indications in non-commercial futures/options positioning that suggest that consensus is now bearish on growth. This typically happens AFTER market moves:


  1. SP500 (Index + Emini) net SHORT position hit its highest of the year last week at -240,720 contracts
  2. US Dollar net LONG position dropped another -13,666 contracts to its lowest of the year at +39,364 contracts


In other words, as US growth slows, both the US currency and equity market positioning reflect both the fundamentals and our proprietary signal (both USD and SP500 are signaling bearish on both our TRADE and TREND durations).


That’s why, from a Style Factoring perspective, if all you’ve done in the last 3 months is downshift your portfolio’s Equity Beta (i.e. sell your cyclical and chart chasing betas), you’ve beaten most of your competition.


Here’s how “Low-Beta” (mean performance of the Top Quartile in the SP500 vs. the Bottom Quartile) has performed:


  1. One-week duration = +1.1% (vs. High Beta -0.6%)
  2. One-month duration = -4.7% (vs. High Beta -6.0%)
  3. Three-month duration = -2.3% (vs. High Beta -13.7%)


Yes. The performance lessons of the last 3 months are more obvious than the last month. But my point here is that even if you missed shifting your portfolio 3-6 months ago, you could have reset and beat consensus in the last month anyway.


Sometimes there’s 0% contradiction in sentiment being bearish, when it should be.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.11-2.21%

Oil (WTI) 43.48-48.71

Gold 1120-1146


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


0% Contradiction - zz chart day 09.21.15 chart

The Macro Show Replay | September 21, 2015


Dovish Fed

Client Talking Points


The Fed’s Dollar Devaluation (EUR/USD +2.5% month-over-month) thing isn’t appreciated by either the DAX or ECB President Mario Draghi (he testifies to European Parliament Wednesday). The DAX is down another -0.6% and keeping the crash (-20.4% since APR) in play, but signals immediate-term oversold here, for a trade.


Gold and Oil were +3.2% and +0.7%, respectively last week (vs. SPX -0.2%) and WTI is up another +1.5% to $45.34 this morning taking it to +5.7% in the last month (vs. SPX -6.6%) – is the new perma bull U.S. stock market catalyst “higher gas prices”?


Signaled immediate-term TRADE overbought on Friday as the USD was signaling oversold (and Gold immediate-term overbought); the risk ranges in all of these big FICC trades (USD, Rates, Oil) are narrowing now (leading indicator for lower highs in volatility).


**Tune into The Macro Show with Hedgeye CEO Keith McCullough at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

McDonald’s remains one of our Restaurant teams Best Ideas on the LONG side.  We continue to believe that 3Q15 will be the inflection point for the company’s turnaround and that we are going to be looking at a much different company 1-3 years from now.


Urgency has been instilled from the top down by new CEO Steve Easterbrook. He wants more speed and is encouraging people to get things done faster. The food and experience provided to the customer will greatly improve over the coming months as “Experience the Future” is implemented across the system. It won’t be instantaneous though, as MCD has a lot of work to do around changing the perception to bring back customers it may have lost.


Penn National Gaming continues to be our favorite Regional Gaming stock.


Regional numbers for August have come in soft, but we predicted the August weakness. September revenues should rebound and serve as a catalyst for the stock going into Q3 earnings. On the research side we have not altered our views of PENN’s long term growth story. We continue to see more upside from current price levels. 


Slower (and Lower) For Longer remains our non-consensus call. It's nice to see that the Fed is finally starting to see what the #GrowthSlowing late-cycle data does.

  1. GROWTH: is #LateCycle and will be slower (again) in Q3 than it was in Q2
  2. INFLATION: misreported, yes – in the area code of the Fed’s 2% “target”, no

Our estimate for Y/Y% GDP for Q3 is a range of 0.1% to 1.5%. Even the Q/Q SAAR # that consensus hangs on will be comping against a 3.7% Q/Q SAAR GDP print (second revision). Good luck positioning for a rate hike. Prepare for the fade…. AGAIN.


Three for the Road


VIDEO (2mins) Kaiser: Why Chesapeake May Be Headed to $0 | $CHK  https://app.hedgeye.com/insights/46425-kaiser-why-chesapeake-may-be-headed-to-0-chk… @HedgeyeEnergy



What people say, what people do, and what they say they do are entirely different things.

Margaret Meade


Total U.S. Equity Market Volume (including dark pool) was up +24% and +26% vs. its 1-month and 1-year averages, respectively.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

September 21, 2015

September 21, 2015 - Slide1



September 21, 2015 - Slide2

September 21, 2015 - Slide3

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September 21, 2015 - Slide5

September 21, 2015 - Slide6 

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September 21, 2015 - Slide11

Monday Mashup

Monday Mashup - CHART 1



HABT: HABT is down 25% over that last three months and down 40% from its POST IPO high of $41.89 back on 12/12/14.  The declines in the stock price and the strong fundamentals now have the stock more reasonably valued at 12x NTM EV/EBITDA.  HABT is one of the recent IPO’s we have been tracking on the SHORT side but never really pulled the trigger to get more aggressive on the SHORT.  That being said, the stock might not be a great SHORT at this point.  We believe that the overall fundamentals of the company are sound and believe the stock could be setting up to be a LONG. The concept and management have always been great and valuations have come down to more modest levels. We are going to monitor and dig in a little further, and hopefully will be moving it above the line in the coming weeks.


DFRG: This stock has been beaten to a pulp, down ~30% over the last three months. We are starting to feel that at 6x EV / NTM EBITDA all the bad news has been priced into the name. Management recently spoke about changes to the operating model that should improve profitability in 2016.  Specifically, slowing growth of “The Grille” and closing two unprofitable locations are good news. These two events will help put a floor on the stock, and will ultimately help sentiment and improve profitability.  Unfortunately, the company's strongest brand, The Double Eagle, is seeing slowing sales trends due to market volatility and the associated decline in banquet business. As for the changes within their control, this is exactly what we want them to be doing, and we believe that they will get the Grille concept running smoothly.




9/15/15 August Restaurant Sales and Employment Trends





Thursday, September 17

JMBA | Announced the signing of a 13 store refranchising deal in southern California, 88% of their stores are now franchised (ARTICLE HERE)

BWLD | Will stop airing commercials with spokesman Steve Rannazzisi after he made up a story of being at the World Trade Center during the terrorist attacks (ARTICLE HERE)


Wednesday, September 16

CBRL | Reported 4Q15 that disappointed on the top-line, reporting revenue of $719mm versus consensus of $726, as well as FY2016 guidance that came in below consensus estimates (ARTICLE HERE)

DFRG | Opened a new Grille location in Little Rock, AR, this marks the 20th Del Frisco’s Grille (ARTICLE HERE)


Tuesday, September 15

YUM | Taco Bell is opening first ‘Cantina” units with alcohol in Chicago and San Francisco that are meant to appeal more to the millennial generation (ARTICLE HERE)


Monday, September 14

QSR | Tim Hortons has improved its lunch offering, adding four new sandwiches to the menu in an effort to entice afternoon customers to buy food and not just drinks (ARTICLE HERE)



Casual Dining and Quick Service stocks that we follow widely underperformed the XLY last week. The XLY was down -0.1%, top performers on a relative basis from casual dining were DFRG and RUTH posting an increase of +3.7% and +1.9%, respectively, while NDLS and JMBA led the quick service group this week up +6.6% and +6.1%, respectively.

Monday Mashup - CHART 2

Monday Mashup - CHART 3



The XLY has fared better than most other sectors in the YTD time period and as of late especially. In the last five trading days while the SPX was down -0.2% the XLY was down only -0.1%, outperformed only by XLP (Consumer Staples), XLV (Healthcare), and lastly XLU (Utilities).

Monday Mashup - CHART 4



From a quantitative perspective, the XLY looks bearish from a TRADE and TREND perspective, TRADE support is 73.64.

Monday Mashup - CHART 5



Monday Mashup - CHART 6

Monday Mashup - CHART 7

Monday Mashup - CHART 8



Monday Mashup - CHART 9

Monday Mashup - CHART 10

Monday Mashup - CHART 11


Keith’s Three Morning Bullets

Dovish Fed = Oil, Gold, EM all up last wk; Rate Sensitive Stocks (Utes, REITS) outperformed big time too:


  1. DAX – the Fed’s Dollar Devaluation (EUR/USD +2.5% m/m) thing isn’t appreciated by either the DAX or Draghi (he testifies to European Parliament Wed); DAX down another -0.6% w/ keeping the crash (-20.4% since APR) in play, but signals immediate-term oversold here, for a trade
  2. OIL – Gold and Oil were +3.2% and +0.7%, respectively last week (vs. SPX -0.2%) and WTI is up another +1.5% to $45.34 this morning taking it to +5.7% in the last month (vs. SPX -6.6%) – is the new perma bull US stock market catalyst “higher gas prices”?
  3. YEN – signaled immediate-term TRADE overbought on Friday as the USD was signaling oversold (and Gold immediate-term overbought); the risk ranges in all of these big FICC trades (USD, Rates, Oil) are narrowing now (leading indicator for lower highs in volatility)


SPX immediate-term risk range = 1; UST 10yr Yield 2.11-2.21%


Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw



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