In Debt, Do You Trust?

“The Dollar is money, money is value, value is trust, trust is a contract – and the contract is debt.”

-Jim Rickards


Who do you trust? Government monetary policy makers, markets – both? Or neither?


Have you been of the view that the money that was printed was going to create a “velocity” of money or behavioral distrust? If the short-term policy was to create the illusion of growth (inflation expectations), isn’t the long-term risk a #Deflation of those expectations?


How about the $9 Trillion Dollar Problem (see Chart of The Day) that is US Dollar-denominated credit to non-bank borrowers outside of the US? That’s a massive contract. Does it have risks? As the economic cycle slows, in debt linked to inflation expectations do you trust?


Back to the Global Macro Grind


The aforementioned quote comes from the original author of Currency Wars, Jim Rickards. I’m honored that he’ll be kicking things off at Macrocosm this afternoon in Stamford, CT alongside Jurrien Timmer, Director of Global Macro and Investment Research at Fidelity.


In Debt, Do You Trust? - Card house cartoon 12.03.2014


I think you’d guess that I don’t trust governments – certainly not on monetary policy matters. The idea that an un-elected human being whose economic forecasts are wrong 70% of the time can smooth and bend economic gravity is a little too much for me.


Not everyone at our inaugural macro conference is as bearish on the Central Planning of markets as I am, but that’s what makes a market. And I’m really looking forward to this afternoon’s Dock Debates – Macrocosm 2015.


On the heels of China’s Premier Li reminding the world that the Chinese economy has “relatively large downward pressure” overnight:


  1. Centrally planned Chinese stocks in Shanghai fell -1.0%
  2. The Hang Seng in Hong Kong dropped another -0.3%, taking its decline in the last month to -3.8%
  3. Emerging Asian Equities (Thailand down another -1.1%) resumed their bearish TREND @Hedgeye


This all came after another ugly session for those long “reflation” and “green shoots”:


  1. CRB Commodities Index dropped another -0.9% yesterday making lower-lows vs. its AUG crash lows (-20% YTD)
  2. Copper remained no bid, all-day yesterday, taking its lower-lows beyond the summer-time lows to $2.09/lb
  3. Both Oil (WTIC) -1.5% and Oil & Gas Equities (XOP) -1.9% led losers in yesterday’s Global Macro trading session


Combined with the reluctant confirmation of demand slowing from the Chinese, these appear to be red shoots to me.


US stocks tried to have their 2nd up day in a row and closed down for the 8th day in the last 10, instead:


  1. Big Cap Energy Stocks (XLE) showed no follow-through from the day prior, closing -1.1% at -14.8% YTD
  2. Financials (XLF), which are supposed to go up on a “rate” hike, dropped to -2.3% YTD
  3. Small Caps (Russell 2000) underperformed the SP500 (again), moving back to -4.4% YTD


Yep. Ex-Energy, Small Cap Domestic Growth, Financials, and most of US Retail (XRT -10.7% YTD), everything is fine YTD.


For those of you who have real-time quotes and an account with real-money in it, you’ll note that an -11% draw-down in the Russell 2000 (and/or US Retailers YTD) from its all-time #Bubble high in July is a problem. (hint: you need to be up +12.4%, from here, to break-even)


And it’s an even bigger credibility problem that the people who are still looking for 3-4% GDP and +8-10% “Earnings Growth” in 2015 are seeing Q3 Earnings Season wind down with the following reality:


  1. 468 of 500 S&P 500 companies have reported
  2. Aggregate Q3 Sales Growth is down -4.3% year-over-year
  3. Aggregate Q3 EPS Growth is down -4.6% year-over-year


I know. I know. If I back out Energy, Industrials, Retailers, etc. I still see the Financials with a -7.6% year-over-year earnings recession for Q3, so we should definitely raise rates so that Jaime Dimon can fix his NIM (net interest margin) pressure and get back to paying bonuses.


With Industrial Production Growth (IP) for October slowing to its lowest rate of change of the year at 0.3%, as the US industrial/cyclical economy enters a recession, what Dimon really needs to do is ignore that and cheer-lead some non-data-dependence @FederalReserve.


With all this politicization, it’s no wonder why Janet is having a fit about this proposed “FORM Act” (Fed Oversight Modernization Reform Act) suggesting to Congress that it would “undermine the Fed’s ability to implement policies that are in the best interest of Americans”…


On the other hand, US Presidential candidate Marco Rubio says he wants Janet Yellen out of her un-elected seat because the “Fed often times ends up making policies that dramatically alter the economy in very negative ways”…


This is still America where the Dollar is the hard-earned money of The People. The Dollar is our money, not theirs. Trust in USD policy isn’t allocated to Mr. Bernanke or Mrs. Yellen - it’s earned. Transparency and accountability is trust – and the contract is free-market liberty.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.17-2.30%

SPX 2016-2068

RUT 1134--1172

VIX 16.77-20.98
USD 98.20-100.13
Copper 2.07-2.18


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


In Debt, Do You Trust? - 11.18.15 chart

China, Commodities and Russell 2000

Client Talking Points


Our man Xi was being way too honest overnight admitting the Chinese economy has “relatively large downward pressure” right now – they didn’t like that in Shanghai, closing the index down -1% as EM Asia continues to trade terribly (Thailand -1.1%).


We realize our competition is still calling for “reflation” (they have been since July) and “green shoots”, but the CRB Index breaking down through lower-lows vs. the AUG low yesterday, and Copper crashing to new lows again this morning (-0.3% to $2.09) appear to be red shoots alongside the aforementioned Chinese confirmation.


The Russell 2000 continues to flash a bearish divergence vs the SPX, closing down -0.4% yesterday, taking it’s draw-down from the all-time #bubble high in July to -11.0%; reiterating the U.S. economic slow-down as the Russell is a purer domestic play on #GrowthSlowing.


**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

Restaurants Sector Head Howard Penney attended MCD's investor meeting in New York City early last week. His takeaway from the meeting was that it was "very very bullish" for investors. Expectations were high, but CEO Steve Easterbrook came to NYC with big changes which have ultimately exceeded those expectations. "The big smile on Steve Easterbrook's face when talking about the current quarter was very telling," Penney writes. "He could not hide the enthusiasm." MCD increased the dollar value returned to shareholders by $10 billion. Penney and his team still see +30% upside from here.


Restoration Hardware (RH) shares got caught up in the tumultuous selloff of other high-end retailers. But we're still bullish on RH. Here's why. RH Tampa has just opened. That makes 4 new Full Line Design Galleries in 90 days. And all will be open before the start of holiday shopping season and just in time to house the new product lines RH Modern and Teen. Add up the four stores and we’re looking at about 210k square feet. That alone represents about 25% growth in square footage.


When all is said and done, we still think this company has $11 in earnings power 4-years out, which is nearly double the consensus. We remain convinced that the debate should not be ‘if or when’ the stock hits $115, but rather is it going to $200 or $300? We’ll be looking at an earnings CAGR of 40-50% over five years. What kind of multiple does that deserve? 20x? 25x? 30x? We’d argue the higher end.


It was a nasty end to the week for the “growth is back” bulls. It was an equally nasty end to the week in equity markets. The S&P 500 was “going to all-time highs” Tuesday before retreating over 3% from Wednesday to Friday.


With continued data-driven confirmation that growth is slowing:

  • PPI (producer price index) printed -1.6% Y/Y for October
  • On a m/m basis, PPI declined -0.4% 
  • Declines in the energy component certainly bring the index lower, but PPI ex. Food and energy only printed +0.1% Y/Y which is ugly

Three for the Road


VIDEO (3mins): Ignore Volume and Volatility At Your Peril



You're happiest while you're making the greatest contribution.

Robert F. Kennedy


Builder Confidence slipped -3 points in November, dropping for the 1st time in 6-months and retreating off the cycle high of 65 (revised +1 point) recorded in September. Across the sub-indices, Current Sales and 6M Expectations declined -3 points and -5 points, respectively, while Current Traffic rose +1 point sequentially.

The Macro Show Replay | November 18, 2015


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.35%

November 18, 2015


  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
2.30 2.17 2.25
S&P 500
2,016 2,068 2,050
Russell 2000
1,134 1,172 1,153
NASDAQ Composite
4,907 4,991 4,986
Nikkei 225 Index
19,015 19,933 19,630
German DAX Composite
10,663 11,002 10,971
Volatility Index
16.77 20.98 18.84
U.S. Dollar Index
98.20 100.13 99.70
1.05 1.07 1.06
Japanese Yen
121.83 123.92 123.42
Light Crude Oil Spot Price
39.75 42.96 41.12
Natural Gas Spot Price
2.23 2.42 2.37
Gold Spot Price
1,065 1,088 1,069
Copper Spot Price
2.07 2.18 2.09
Apple Inc.
110 116 113
1,195 1,306 1,258
Valeant Pharmaceuticals International, Inc.
68.01 78.91 70.32
Facebook, Inc.
102 110 105
Athenahealth Inc.
150 163 153
Alibaba Group Holding Ltd.
73.82 80.41 78.13



Cartoon of the Day: Loves Me... Loves Me Not

Cartoon of the Day: Loves Me... Loves Me Not - rate hike cartoon 11.17.2015


"... Remember that if/when the Fed pivots back to dovish from pretend-hawkish, they have to tell the American People why they are doing that," wrote Hedgeye CEO Keith McCullough in today's Early Look. "Say it with me now – Super #LateCycle Growth Slowing…"




Takeaway: We hosted a one hour call this morning introducing our bearish thesis on PRA Group (PRAA). Links to the deck and replay are below.

Slides: HERE

Call: HERE





  • Supply/Demand Headwinds: The market for buying defaulted receivables is especially unfavorable. Demand for paper has exceeded supply for a few years now, mirroring the environment last seen from 2005-2007 when shares of PRAA tumbled ~70%.
  • Growing Debt: Leverage at the company has risen quickly in the wake of the Activ deal.  
  • Insiders Dumping: Widespread insider selling suggests that insiders see similar intermediate/longer-term headwinds.
  • History's Guide: Our analysis of the interplay between labor markets, terminal IRRs and pre-tax margins will shed light on what to expect fundamentally from a timing standpoint.
  • Regulatory Pressure: The CFPB is expected to set new rules for debt collectors in 2016.
  • Current Value Unsustainable: The ERC less cost to collect and taxes is currently ~$400mn below the net debt of the company.


Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT

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.