CHART OF THE DAY: The Fed's Illusion Of Growth = Bubbles

Editor's Note: Below is a brief chart and excerpt from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.  


"... I’ll move along and get back to today’s tape (and apologies in advance for leaving out FANG and more than a few other bubbles), but that’s effectively what the ZIRP created – a galaxy of “unintended consequences”, that were A) intended and B) real.


Creating the illusion of growth that is inflation expectations – i.e. the belief system that prices cannot go down – gave birth to every centrally-planned bubble I’ve ever attacked with live ammo from the short side."


CHART OF THE DAY: The Fed's Illusion Of Growth = Bubbles - 12.30.15 EL chart

The Resistance

“It’s true. All of it. The Dark Side, the Jedi. They’re real.”

-Han Solo


I’m at a hockey tournament in Simsbury, CT this week and after yesterday’s game I took my son Jack to see Star Wars. Oh boy, am I glad I did! There’s nothing more important than teaching our children about truth, character, and principles.


Don’t worry, I’m not going to spoil the movie for those of you who haven’t seen it. I do, however, think it’s a great time of the year to reflect upon why something like “The Resistance” against The Establishment has always mattered in America.


I came to this country in the 1990s fundamentally believing in free-markets, liberty, and The American Dream. I know many of you still believe. And while we may feel like we’re outnumbered, The Force is strengthening in all of us. We can be the light. It’s real.


Back to the Global Macro Grind


“How do we blow it up? There’s always a way to do that.”

-Hans Solo


Yep. While the Fed is just one component of the dark side of central-market-planning, they’ve been causal in perpetuating the asset price bubbles that have been blowing up during my entire career.


The Resistance - Yellen Yoda cartoon 12.01.2015


#Bubbles, Jedi? “Transitory, they are supposed to be.”


Yep. Internet Bubble, Real-Estate Bubble, LBO Bubble, “Emerging Market” Bubble, Commodity Bubble, Credit Bubble, M&A Bubble… all “transitory.” Absolutely. I am certain they are certain about that.


I’ll move along and get back to today’s tape (and apologies in advance for leaving out FANG and more than a few other bubbles), but that’s effectively what the ZIRP created – a galaxy of “unintended consequences”, that were A) intended and B) real.


Creating the illusion of growth that is inflation expectations – i.e. the belief system that prices cannot go down – gave birth to every centrally-planned bubble I’ve ever attacked with live ammo from the short side.


The Resistance to Yield Chasing and Kinder Morgan, Hedgeye was.


Understanding what ideology underpinned many of these asset bubbles has been as critical in not trying to call “bottoms” and/or “reflations” of them inasmuch as mapping the economic cycle has been.


That’s why my (and Mr. Macro Market’s) main resistance to the perma-bull narratives this year has been where we are in the cycle. Until we get through at least Q2 of 2016, there is both a profit cycle and credit cycle to continue to price in.


If you think yesterday’s +1% no-volume “rally” changes our cycle call, think again. That was only the 15th up day in the last 37 and on total US Equity Market Volume (including dark pool) that was down -16% and -18% vs. the 1-month and 1-year averages.


Moreover, Jedi Signals this morning remind us that:


  1. #StrongDollar remains firmly intact (China has devalued Yuans -1.4% in the last month to a 5yr low)
  2. #Deflation in both Commodity and Credit Markets remains obvious (Oil -2.3% breaking $37, again)
  3. Russia is down another -1.5% (down -10% in the last month) after printing a recessionary PMI of 48.7 for DEC
  4. Dr. KOSPI (South Korea) is closing out DEC on a down note (-1.5% for the month) and remains bearish TREND
  5. Yield Spread (10yr Treasury Yield minus 2yr) just flattened to its YTD low


In the universe of correlating mathematical truths, there are few more consistent than the rate of change in the Yield Curve (flattening or steepening) that reflect the rate of change in the US economy.


It’s true. And it’s measurable. All of it.


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


UST 10yr Yield 2.16-2.32% (bearish)

SPX 2001-2093 (bearish)
RUT 1108--1169 (bearish)

NASDAQ 4 (neutral)

Nikkei 182 (neutral)

DAX 105 (neutral)

VIX 14.30-21.71 (bullish)
USD 97.41-99.40 (bullish)
EUR/USD 1.07-1.10 (bearish)
YEN 119.84-121.52 (neutral)
Oil (WTI) 34.83-38.29 (bearish)

Nat Gas 1.69-2.36 (bearish)

Gold 1049-1081 (bearish)
Copper 2.03-2.15 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Resistance - 12.30.15 EL chart

Volume, Oil and #Recession

Client Talking Points


Total U.S. Equity Market Volume (including dark pool) is down -16% and -18% vs. their 1-month and 1-year averages on yesterday’s +1% SPY day. The Liquidity Trap in small caps (and Russell) remains obvious, looking nothing like the headline level of the S&P 500.


Oil experienced a textbook crash, bounce, fade move in what so many pundits have hoped for in 2015 – we think they call (ed) it “reflation” – but #Deflation is still winning with WTI down -2.3% (Russia -1.5%) after failing at the top end of the $34.83-38.29 risk range.


The probability of a recession continues to rise as we head into 2016. The Yield Spread (10YR minus 2YR) just flattened to a year-to-date low of 121 basis points and its rarely seen this level during the Bernanke/Yellen regime. If they (Fed) keep tightening into the slow-down, they’ll perpetuate it.


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

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Federated Investors (FII) profitability got a boost 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 2 weeks. 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.



In case you were looking for Style Factors that crushed it last week – the Top 3 gainers were the Top 3 #Deflations of 2015!

  • High Beta Stocks were +3.5% last week to -12.0% YTD
  • High Debt (to EV) Stocks were +2.9% last week to -10.9% YTD
  • Small Cap Stocks were +3.2% last week to -12.4% YTD
  • *Mean performance of Top Quartile vs. Bottom Quartile (SP500 Companies)


In other words, the no-volume squeeze had the smaller cap Russell 2000 outperform the large cap Dow at +3.0% week-over-week vs. 2.5%. Heading into the final week of the year, the Dow and Russell are down -1.5% and -4.1%, respectively.


In a slower-for-longer secular growth world, you should pay more for the organic growth that you can find. But, more importantly, you should realize that “cheap” has the illusion of “cheap” because the U.S. economic cycle is slowing alongside the secular. 

Three for the Road


Darius Dale: This Is the 'Biggest Risk Heading Into 2016’… via @HedgeyeDDale



If you lose an hour in the morning, you have to hunt for it the rest of the day.

Chinese Proverb


The 20 retail companies in the Fortune 500 recognize an average of $6,300 in annual profit per employee. The minimum wage decisions being discussed at WMT would take annual profit per employee down by 38% for a hike to $9 and 71% for a hike to $10.10.

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.

December 30, 2015

  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
2.32 2.16 2.32
S&P 500
2,001 2,093 2,078
Russell 2000
1,108 1,169 1,160
NASDAQ Composite
4,913 5,129 5,107
Nikkei 225 Index
18,525 19,342 18,982
German DAX Composite
10,339 10,885 10,860
Volatility Index
14.30 21.71 16.08
U.S. Dollar Index
97.41 99.40 98.17
1.07 1.10 1.09
Japanese Yen
119.84 121.52 120.46
Light Crude Oil Spot Price
34.83 38.29 37.33
Natural Gas Spot Price
1.69 2.36 2.32
Gold Spot Price
1,049 1,081 1,068
Copper Spot Price
2.03 2.15 2.14
Apple Inc.
104 110 108
660 696 693
Alphabet Inc.
763 797 793
Walt Disney Company, Inc.
102 110 107
Kinder Morgan Inc.
13.81 16.45 15.10
Valeant Pharmaceuticals Inc.
98.06 111.31 101.39


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.


Cartoon of the Day: Roadkill

Cartoon of the Day: Roadkill - Deerflation cartoon 12.29.2015


Fed head Janet Yellen has called deflation "transitory." There's nothing transitory about it. In fact, deflation is pervasive; just look at the crash in commodity prices. 

INSTANT INSIGHT | How To Risk Manage The Coming Recession

INSTANT INSIGHT | How To Risk Manage The Coming Recession - tlt lowdown


Wait... didn't the Fed just hike interest rates? Why are interest rates falling? 


Good question.


Here's the lowdown from Hedgeye CEO Keith McCullough in a note to subscribers earlier this morning:


"The yield spread (10Y's - 2Y's) compressed another -2 basis points yesterday back down to a 52-week low of 122 basis points with the retreat in the long-end driving most of the compression. Into year-end, the bond market continues to price in what it has all year long... Slower-and-lower-for-longer (i.e. slower growth and lower rates)."


Unconvinced that growth is slowing?


Check out this compendium of contractionary macro data put together by Hedgeye Senior Macro analyst Darius Dale. (Please note the abundance of red.) 



INSTANT INSIGHT | How To Risk Manage The Coming Recession - darius macro data


... Or, for good measure, watch Dale on Fox Business this morning where he discusses our economic outlook for 2016. (Spoiler alert: It's not looking good.) 



Let's not mince words. Our Macro team has been sounding the alarm on the increasing probability that the U.S. will enter a recession in 2016.


So... how should investors play the compression of the yield curve and coming economic slowdown? Three letters:




Yesterday afternoon, McCullough advised subscribers book some gains in their Long bond (TLT) position in Real-Time Alerts. 


INSTANT INSIGHT | How To Risk Manage The Coming Recession - tlt rta


Make no mistake though, McCullough is very bullish on long-term Treasury bonds. It's a linchpin for investors who subscribers to our #GrowthSlowing theme, hence the bullish green indicators above over all three of our durations, "trade," "trend" and "tail." (TLT has been a core holding in our longer-term oriented product Investing Ideas. As McCullough is fond of saying, he's "the most bullish guy on Wall Street" ... on Long bonds.)


In Real-Time Alerts, McCullough is simply risk managing entry and exit points in an effort to maximize returns in that core, longer-term TLT position.


INSTANT INSIGHT | How To Risk Manage The Coming Recession - tlt say cheese 

investing ideas

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Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.