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Defanging Momentum

“You buy cheap assets that are trending up and short expensive assets that are coming down.”

-Cliff Asness


Sounds pretty simple, eh? If you can nail the assumptions in the statement, that is. “Cheap” and “expensive” need to be defined using the right forward looking cash flows (not those of consensus) and “trending up” or “down” needs to be quantified, not hoped for.


Since Asness is the founder of a quantitatively driven hedge fund (AQR), he’s much more indifferent about what is going up and down than some qualitative fund managers who get married to stocks and their slide decks.


That’s not to say storytellers can’t kill it in our profession (they especially do in bull markets). It’s simply a reminder that there are lots of different strategies to consider. When the economic cycle slows, calling something “cheap” on the wrong numbers can kill your returns.

Defanging Momentum - 8 ball bubble 12.11.2015


Back to the Global Macro Grind


Table 1.2 in Efficiently Inefficient, by Lasse Heje Pedersen, does a good job tabling the differences between “Value” and “Momentum” hedge fund managers. Pedersen interviewed names you’d recognize like Asness, Ainslie, Chanos, Soros, Scholes, Griffin, and Paulson.


I call this out this morning as this is the most important debate going on in our investor base into year-end. It seems that many who were long “value” (cyclicals) this year are still long, whereas those who have been short the cycle continue to press it.


The economic cycle, that is. As in the thing that matters most at big cyclical turns. Unlike hitting daily, weekly, and monthly “exposure” and return targets, growth and inflation cycles are much more glacial. In other words:


  1. When INFLATION ACCELERATING peaked (2011-2012), “cheap” commodity plays peaked
  2. When GROWTH ACCELERATING peaked (Q414-Q215), “cheap” cyclicals started to trend down


“Expensive” growth stocks that showed organic #GrowthAccelerating (as cyclicals slowed like cyclicals do during a slow-down – hence the term cyclical) got even more expensive after the US Corporate Profit Cycle peaked in Q2 of 2015. This happened in 2H 2007 too.


This brings us to the FANG…


For those of you who are new to chasing “Momentum” as a Style Factor (expensive stocks that are trending up), the components of the FANG are Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google (GOOGL).


If you’re looking for an intermediate-term TREND signal on these stocks (a way to quantify “trending up or down”):


  1. FB intermediate-term TREND support = $101
  2. AMZN intermediate-term TREND support = $606
  3. NFLX intermediate-term TREND support = $115
  4. GOOGL intermediate-term TREND support = $720


Unlike most establishment “technicians” on Wall Street, I don’t use single-factor point and click price momentum charts to define what is bullish or bearish from a TREND perspective. I use a composite 3-factor signal that includes PRICE, VOLUME, and VOLATILITY.


I don’t use my quantitative signal to be mean to people who don’t do macro. I use it because it works. I can assure you that I have back-tested and tried most technical “signals” you can get free on the internet. They are free for a reason. They don’t work at the macro turns.


Consider an “expensive” and a “cheap” stock that are currently being defanged:


  1. Disney (DIS) broke its intermediate-term TREND line of $111, 2x in 2015 (AUG and DEC) on accelerating volume
  2. Apple (AAPL) broke its intermediate-term TREND line of $119, 2x in 2015 (AUG and DEC) on accelerating volume


Disney (DIS) now fits the intellectually appealing “expensive that is trending down” short-idea criteria, whereas Apple (AAPL) is crushing the valuation intellects as “cheap” continues to get cheaper.


So why doesn’t the Old Wall and its circus of chart chasers (they are loudest at every economic cycle peak) start talking about DA-FANG? Or Defanging Momentum? Give it some time.


Because that’s all that remains between #Deflation and #GrowthSlowing morphing into a recessionary stock market signal (see Credit Markets for details). That’s when both “expensive” and “cheap” go down at the same time.


Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND signals in brackets):


UST 10yr Yield 2.12-2.32% (bearish)

SPX 1 (bearish)
RUT 1106--1155 (bearish)

VIX 17.86-24.41 (bullish)
USD 97.61-99.42 (bullish)
EUR/USD 1.07-1.10 (bearish)
Oil (WTI) 34.99-37.37 (bearish)

Gold 1050-1085 (bearish)
Copper 2.03-2.15 (bearish)

AAPL 104-111 (bearish)

AMZN 641-682 (bullish)

GOOGL 745-779 (bullish)

KMI 13.85-17.35 (bearish)

DIS 104-111 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Defanging Momentum - 12.22.15 EL chart

The Macro Show Replay | December 22, 2015


December 22, 2015

Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, with our intermediate-term (TREND) view and the previous day's closing price for each name.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.


  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
2.32 2.12 2.20
S&P 500
1,993 2,046 2,021
Russell 2000
1,106 1,155 1,127
NASDAQ Composite
4,890 5,043 4,968
Nikkei 225 Index
18,569 19,275 18,916
German DAX Composite
10,142 10,714 10,497
Volatility Index
17.86 24.41 18.70
U.S. Dollar Index
97.61 99.42 98.46
1.07 1.10 1.08
Japanese Yen
120.35 123.05 121.21
Light Crude Oil Spot Price
34.99 37.37 35.78
Natural Gas Spot Price
1.67 2.04 1.94
Gold Spot Price
1,050 1,085 1,077
Copper Spot Price
2.03 2.15 2.14
Apple Inc.
104 111 107
Amazon.com Inc.
641 682 664
Alphabet Inc.
745 779 760
112 121 116
Kinder Morgan Inc.
13.85 17.35 15.14
Walt Disney Company, Inc.
104 111 106



USD, UST 10YR and Spain

Client Talking Points


The signal is finally starting to show a narrower immediate-term risk range of $97.61-99.42 for the USD Index (narrowing range = bullish). Both the Euro and the Yen are up +0.2% this morning vs. USD, and they’d need to be up a lot more than that to challenge #Deflation.


The UST 10YR Yield was down to 2.18% yesterday and holding 2.19% so far this morning with Yield Spread compression (10YR minus 2YR) still testing year-to-date lows as #GrowthSlowing in Q4 remains obvious to anyone who is rate of change driven and data dependent.


Somehow Spain was lost in consensus media’s shuffle yesterday, but this political uncertainty (voting Left) definitely matters to macro markets. Spanish stocks (IBEX) are not bouncing this morning and are down -9.1% in the last month.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Federated Investors (FII) profitability got a boost last week as the Fed boosted short term rates for the first time in 7 years. Even the slight 25 basis point hike improves profitability in the firm’s leading money fund business by +30% into the New Year.


In essence, the firm rolls 30-day paper throughout the short term fixed income curves and the new higher yields forthcoming into 2016 will allow the company to claw back some of the waived fees it has extended to its client base in money funds. Year-to-date the company has waived over $300 million in fees. With that firmly in the rearview, it becomes an opportunity set as FII gets higher yield from cash products next year.


In the financial sector, FII is the most asset sensitive name we cover, meaning it benefits most from even marginal interest rate hikes.


We have to give Restoration Hardware Chairman and CEO Gary Friedman props for his approximately nine minute segment on Cramer last week. Let's face it, him going on what's arguably the most volatile and biased financial media platform, unscripted, is not what we wanted to see. The risk of fireworks was high.


But he capped off a successful day RH (CFO and IR) had on the investor conference circuit by focusing on the real value drivers at Restoration Hardware (RH) -- growth in product concepts, and RH's real estate transformation. The appearance was planned well before the earnings release, by the way, coinciding with a business-focused trip to NYC. All-in, it was a positive event for the stock.


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


Now that the Fed finally hiked federal funds by 25 basis points into a late-cycle slowdown, the fact that TLT was up 1.8% (Wed-Fri.) on “lift-off” should be concerning to the growth accelerating bulls. After the dovish hike, the U.S. Treasury 10-Year Yield (THE GROWTH EXPECTATION PROXY) was down 10 basis points (2.3% to 2.2%). And yes, the most telegraphed rate hike ever was dovish.


Just look at the Fed’s projections and the language in the FOMC's statement. Yellen, essentially, acknowledged what we have said for ~ a year and a half now:

  • “The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate”
  • “Market-based measures of inflation expectations remain low; some survey-based measures of longer-term inflation expectations have edged down”
  • “Net exports have been soft”
  • ... And on the Fed’s forward-looking economic projections:
  • The Fed kept 2016 GDP estimates unchanged, and downwardly revised 2017 to 2.0-2.3% from 2.0-2.4%.
  • 2016 PCE Inflation was downwardly revised to 1.2-1.5% from 1.5-1.8%. 

Three for the Road


US Retailers $XRT testing YTD lows in spite of "low gas prices" narrative



I played the game one way. I gave it everything I had. It doesn’t take any ability to hustle.

-Wade Boggs


November Department Store Sales in Japan were down -2.7% year-over-year from 4.2%

Cartoon of the Day: In The Sand

Cartoon of the Day: In The Sand - Fed cartoon 12.21.2015


"As we move into the final weeks of 2015, it’s still very obvious that the Federal Reserve’s grand experiment has generated forecasts that are very much out of order," Hedgeye CEO Keith McCullough wrote in today's Early Look.

Why a Perfect Storm Is Brewing in Healthcare

Why a Perfect Storm Is Brewing in Healthcare - z storm


In recent weeks politicians and the media have been preoccupied with ISIS, Donald Trump and “Star Wars: The Force Awakens,” marking a major shift in attention away from Obamacare. After dominating the media cycle with its rocky start, including crashing enrollment websites, Republican votes to repeal the legislation (61 votes so far), and damning forecasts of spiraling costs, millions of previously chronically uninsured people now have access to medical care. It is not an understatement to make the claim that lives were likely saved as a result of Obamacare, but alas our collective attention is on to different things these days.


Why a Perfect Storm Is Brewing in Healthcare - tobin aca


The benefits to these newly insured are clearly significant. Studies have shown 30 – 50% reductions in mortality from having health insurance, not to mention reduced fear and anxiety, and the potentially ruinous financial burden that comes from going without insurance. But the benefits don’t just stop with the individuals the legislation helped. The Affordable Care Act created legions of newly minted medical consumers which benefited the bottom line of the companies that cared for them, their executives, and investors who enjoyed incredible stock returns.


For investors who bet on healthcare stocks during the roll out of the ACA, the portfolio returns have been stellar...


* * *


Click here to continue reading Tobin's Healthcare piece on Investopedia. 

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