Macro Journalism

“I was a liberal arts major at Yale and wanted to become a journalist.”

-Scott Bessent


So was I. No, but seriously. Upon explaining to then Defensive Backs Coach Tony Reno (now Head Football Coach and a beloved mentor) that I wanted to be a sports broadcaster over dinner during a home recruiting visit, he remarked (paraphrasing):


“I’ve got some great news for you. Yale has the #1 communications program in the country. We ship students down-the-road to ESPN [in nearby Bristol, CT] all the time.”


Much like Scott Bessent (former CIO of Soros Fund Management), I eventually learned that Yale does not have a journalism major, though I’m guessing that he probably learned that much sooner than I did – especially given that: A) I had never heard of Yale until I met Coach Reno my senior year of high school; or B) I didn’t have the wherewithal or the means to confirm.


Specifically, you tend to take a lot of people’s word for it when you don’t have internet access at home. In fact, you could make an argument that he could’ve literally said anything positive about this mysterious place called “Yale” and I would’ve bought it. I was just excited for the opportunity to go to college. For a variety of reasons – mostly unfortunate – most people don’t go to college where I’m from.


Back to the Global Macro Grind


In reviewing my 2nd favorite book of all time, Inside the House of Money, I re-learned that Mr. Bessent and I have a fair amount in common – we both got our first jobs on Wall St. working for another Yalie (he: Jim Rodgers; me: Keith McCullough). Additionally, from the teachings of our respective mentors we both learned to have enough confidence in our own work to stand apart from the herd:


  • Steven Drobny (author): “What did you learn from Jim Rodgers?”
  • Scott Bessent: “I learned about doing primary research. To just keep digging and look where nobody else is looking. He used to have me do these spreadsheets before there was Excel. Barron’s used to have an issue that ranked the stocks of industry groups and we’d flip it upside-down to look at the worst performers to buy and the best performers to short.”


To be crystal clear, I’m no Scott Bessent. While I hope to someday improve upon his process, performance and impact on the industry, I humbly acknowledge that I have a long way to go.


Disclaimer intact, that passage resonated with me a lot because I had a very similar experience learning how to model economies like companies instead of countries. I can recall sitting in Keith’s office at the crack of dawn in 2009 and marveling at how seemingly simple modeling growth and inflation using a Bayesian Inference Process appeared to be. If the “comps” are tough, the growth rate is overwhelming likely to slow in the forecast period. If the “comps” are easy, the growth rate is overwhelmingly likely to accelerate in the forecast period. I thought to myself, “This seems too simple. Why in the world do so few investors think to do this?”


I still have that same thought. Having been one of, if not the most, accurate firms on Wall St. forecasting domestic and global economic growth over the past few years, I continue to marvel at how simple and effective, yet non-consensus modeling the economy from a rate-of-change perspective is (CLICK HERE for a more detailed discussion). Moreover, as we penned in our GDP recap note from yesterday, our forecasting process is signaling both incremental and material degradation to U.S. economic growth over the intermediate term:


“U.S. Real GDP growth slowed right on queue into steepening base effects in 3Q15. Moreover, these “comps” are set to remain extremely difficult for the next four quarters, which implies the sine curve of underlying U.S. economic growth that oscillates between +1% and +3% is likely to mean revert back to the low end of that range of probable outcomes over the next few quarters.”


Another quality Mr. Bessent and I have in common is a passion for seeing everything, which coincides with a general disdain for missing stuff. As macro investors, it’s our job not to miss stuff. In pursuit of this outcome, one thing Mr. Bessent added to his investment process is a top-down quantitative overlay that signaled, at the bare minimum, emerging regime changes and also the occasional legitimate investment opportunity:


  • Steven Drobny: “Do you use technical analysis as a behavioral analysis tool?”
  • Scott Bessent: “Yes and we also use it to keep us on top of things we might not be seeing. We have a system that screens about 1,400 stocks and commodities around the world every week. We never trade based on it, but if all of a sudden 10 stocks in Indonesia show up, then we’ll look at Indonesia.”


It was in the reading of this passage that I got the first idea to develop what would eventually become our Tactical Asset Class Rotation Model, or TACRM for short.


Like Mr. Bessent’s quantitative overlay, the primary function of TACRM is to provide investors with an unparalleled degree of advanced market color. TACRM is especially useful in alerting investors to critical breakouts and breakdowns for every liquid factor exposure across the liquid global macro investment universe (~200 in aggregate) and collating those signals in a manner that significantly enhances one’s ability to identify existing or developing regime changes at the primary asset class level. It does this by employing resoundingly robust quantitative methods:


Macro Journalism - chart2 EL


So what is TACRM signaling today?:


  • TACRM is generating a sell signal for each of the seven primary asset classes tracked by the model, which implies investors should be taking advantage of opportunities to raise cash.
  • Within U.S. Equities, our preferred style factor exposure(s) – low-beta, large-cap liquidity – is dominating the leaderboard from the perspective of bullish risk-adjusted VWAP momentum across  multiple durations. Homebuilders – a factor exposure we’ve liked all year – is now bringing up the rear and perpetuating a great deal of internal debate about the outlook for the domestic housing sector.
  • Within Domestic Fixed Income, Credit and Equity Income, we continue to be on the right side of the market’s #Quad3 vs. #Quad4 debate, with REITS and TIPS at opposite ends of the leaderboard. Recall that the former is one of two factor exposures we’ve liked on the long side of the U.S. equity market and that we’ve been anticipating another round of #GlobalDeflation post the ECB’s 10/22 statement.
  • Also in line with our current investment themes, the U.S. Dollar is atop the leaderboard in FX from the perspective of bullish risk-adjusted VWAP momentum across  multiple durations. The CHF, EUR, SEK and AUD are bringing up the rear.
  • International Equities, Emerging Market Equities and Commodities are all still overwhelmingly bearish from a breadth perspective. In fact, only one factor exposure in each asset class is signaling bullish from the perspective of risk-adjusted VWAP momentum across  multiple durations: New Zealand, Argentina and Sugar. I personally wouldn’t chase either of them here, but have at it if you’re the gambling type.
  • Perhaps most importantly, Global Macro Volatility is still accelerating on a trending basis per TACRM’s proprietary calculations, having been in that state since the week-ended 10/3/14. The implications of this are two-fold. 1) All things being equal, a sustained increase in volatility forces most investors to take down their risk, at the margins, which probably caps upside and forces markets to rally to lower-highs. 2) The average investor reduces their lookback window when volatility is trending higher, meaning that he/she is more sensitive to incremental data in the context of forming a bullish or bearish narrative. For what it’s worth, we think the preponderance of incremental data is likely to continue to be negative (see Chart of the Day below).


CLICK HERE to download the complete TACRM report.


Unfazed by one of the most proactively predictable squeezes to a lower-high in S&P 500 history (the net short position in non-commercial S&P 500 and S&P 500 e-minis contracts came in -2.5 standard deviations below its TTM average on 9/18; recall that any Z-Score in excess of +/- 2 sigma has historically been a tradable/investable contra indicator), we continue to have upmost conviction in our #SuperLateCycle and #GlobalDeflation themes.


Why? Because both global macro markets signals (highlighted above) and the rate-of-change across key economic data (detailed summaries below) continue to support our conclusions, at the margins.



Stick with the #process.


Our immediate-term Global Macro Risk Ranges are now:


 UST 10yr Yield 1.98-2.19% (bearish)

SPX 2008-2099 (bearish)
VIX 13.55-19.48 (bullish)
EUR/USD 1.08-1.11 (bearish)
USD/JPY 119.02-121.31 (neutral)
Oil (WTI) 43.08-47.26 (bearish)

Gold 1141-1164 (bullish)

Keep your head on a swivel,


Darius Dale



Macro Journalism - chart1 EL

How to Be Positioned For a #LateCycle Slowdown

How to Be Positioned For a #LateCycle Slowdown - late cycle


In a recent note to subscribers, Hedgeye CEO Keith McCullough reiterated our #SlowerForLonger (growth) theme and explained how investors should play slowing economic growth:


"If we’re still right on #LateCycle GDP Slowing, easiest move is to short the Financials (XLF, KRE, JPM) and buy Utilities and Treasuries (XLU, TLT, etc.) – this is the 8th or 9th time in 2015 they’ve “rallied” the 2yr to 0.75% and failed."


Incidentally, our macro analysts Christian Drake and Darius Dale sent a detailed note to institutional subscribers Thursday afternoon providing additional context on why we believe things are going to get worse on the economic front and providing an update on how to be positioned. 


Here's the headline and takeaway:

How to Be Positioned For a #LateCycle Slowdown - darius christian note


Here's how that setup worked out in 3Q:


LONGS: Utilities (up +4.4%) and Treasury Bonds (10Y Yield down -32bps):


SHORTS: S&P 500 (down -6.9%), Financials (down -7.2%) and High Yield Credit (Yields up +148bps and OAS up +154bps, on average)


How to Be Positioned For a #LateCycle Slowdown - z 56


(If you'd like access to our macro team's non-consensus research please email


October 30, 2015

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Attention Students...

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Income, Eurozone and Inflation Carnage

Client Talking Points


We’ll get the aggregate household income & spending figures for SEPT this morning.  Decelerating growth in aggregate hours and flat wage growth in the Sept employment report should translate into a reported deceleration in aggregate income growth.  The 2nd derivative trend in income drives the capacity for consumption growth and the implication for a modern consumption economy is straightforward: lower income growth = lower consumption growth (holding savings rate & credit growth steady). Consumption growth peaked in 1Q15 and with payroll trends slowing and harder income & growth comps in the coming quarters, the probability of a material re-acceleration in household spending growth continues to trend lower.   


Eurozone CPI jumped a whole 10 basis points to 0.0% in OCT year-over-year, yet remains at a far cry from the ECB’s 2.0% inflation target.  As ECB head Mario Draghi talks up the prospect of increasing the Bank’s QE purchasing program, expect the EUR/USD to fall in kind. Our GIP model continues to signal the Eurozone in QUAD 3, equating to growth slowing and inflation accelerating.  


We’re 2/3rds of the way through S&P earnings season and the carnage in Energy, Materials, and Industrials continues. Energy, materials, and industrials Sales have comped -33%, -17%, and -6% respectively. Earnings growth is down -62%, -20%, and +0.70%. It’s not just the smaller, leveraged names getting hit. Royal Dutch Shell on Wednesday reported a Net Loss of -$7.4Bn vs +$4.5Bn Q3 2014. They took a $-7.9Bn write-down for a halted project in Alaska, but even backing that out they were barely profitable. Strong USD deflation feedback loop à lower commodity prices means lower cash flows, which equals more leverage, especially for those international names with USD denominated debt and weaker currencies. Remember that Debt due is nominal.


**Tune into The Macro Show at 9:00AM ET - CLICK HERE


Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

What week it was for MCD shareholders! Shares finished the week up 7.3%. We have been saying all along that the third quarter of 2015 would be the inflection point for the McDonald’s (MCD) turnaround. After this print, it appears that the heartache is finally over at McDonald’s, as this quarter marks the first good quarter the company has had in two years.


From here, the upside in the stock price lies with the growth of All Day Breakfast, additional G&A cuts, national value offering implementation, reimaging of restaurants, commodity deflation, especially in beef and increased operational efficiencies, among others. In addition, the REIT is a potential driver of incremental value but not crucial to the long-term success of this call. With Steve Easterbrook at the helm we are confident this company will be better managed than it has been in a long time.


RH unveiled a full floor of Modern product in their New York Flatiron store this week. The new concept sits on the first floor of the 21k sq. ft. store and marks the 3rd property in RH’s fleet (along with Denver and Atlanta) to carry the new product line.


Fundamentally and financially, we’re about to see growth at RH go on a multi-year tear. We think this stock is headed to $300 over the next 2-3 years. We’ve been patient for the catalyst calendar to begin, and the waiting is finally over.


As devaluation and global currency war jockeying from central bankers around the world continues, the acknowledgement of growth slowing continues to push yields lower. The long-bond was up on Thursday, after the ECB meeting, despite an easing-fueled rip in equities. The bond market doesn’t believe in the growth storytelling and we expect it to continue.


Remember that Down Euro Devaluation is a global TIGHTENING event because the world’s biggest asset price #deflation risk is that the world’s inflation expectations (commodities, debt, etc.) are DENOMINATED IN DOLLARS. That has implications for gold (risk to being long), but we want to get through the Fed meeting and GDP data next week before we pivot on a gold view. Stay tuned.

Three for the Road


REPLAY: An Inside Look at Healthcare Earnings with Hedgeye's Tom Tobin… @HedgeyeHC



Happiness is not a state to arrive at, but a manner of traveling.

Margaret Lee Runbeck


72% of all Halloween candy bought this year will be chocolate, according to CashNetUSA.


Takeaway: Do your job because everyone is watching all of the time.


Growth at Valeant accelerated when they bought Philidor in the fall of 2014. When we saw the 3Q result, it was confusing.  How could a business with little to no internal investment see growth break out to mid teens from low single digits over night?  Now we know, and now the payors know.  The payors who are in the process of reviewing their claims data and writing new claims edits and will be likely scrutinizing every claim for a Valeant product from now on. 







I don't have to be a super smart hedge fund guy to see Valeant and the cast of rogues for what it is.  As an industry, we should all be ashamed that malignancies like Valeant, Bill Ackman, Pearson, and their deformed brain-child Philidor were allowed to flourish even for a brief period of time.  


Either Pershing knew that Valeant had Philidor in their back pocket and how the company was driving growth, and should not be trusted with managing money... or they didn't know, and can't do their job.  It is more true because everyone is looking all of the time.  


Most people getting up to go to work this morning don't have the slightest clue who any of these rich guys are.  But to everyone who didn't do their job; the reporters who stand idly by warming their ratings, clicks, and views by the media fire storm, the sellside and their "buy" ratings, the buyside that didn't do their own research, Valeant is a loud and clear warning.  How you behave and the quality and integrity of your work when no one is looking is not an anachronism. Do your job because everyone is watching all of the time.



Thomas Tobin
Managing Director 



Andrew Freedman



The Macro Show Replay | October 30, 2015


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