Don't Blame China

Client Talking Points


Thinking like consensus does is the biggest risk, but they will stare at the absolute number this morning instead of the rate-of-change; don’t forget that the U.S. employment cycle peak was a NFP growth rate of 2.3% in Q1 of 2015 – it’s also the latest of late cycle indicators (put another way, there’s nothing this number can be to change our bearish TREND view).



We remain bullish on this breakout in volatility (new range = 18-26) – if all the Chinese could do having the government buy stocks overnight is get a +0.6% bounce in Hong Kong, London, and Germany, that’s not what stock market bulls need here. We believe the bulls are sellers on rallies for the 1st time – hedge funds have to get a lot shorter too; performance out there is bad.

S&P 500

The U.S. stock market has never NOT crashed (20% or more decline from peak – that would get you 1704 SPX from the 2130 #bubble high) when corporate profits go negative for 2 consecutive quarters – we’ll have that in earnings season that starts next week – JPM’s earnings are way more important to me than this jobs report.


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

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

With the Fed's 25 basis point hike in interest rates, in the financial sector, FII stands to benefit most from even this marginal change.


In essence, Federated Investors (FII) has a stable business for what we think will be a volatile 2016. 2015 finished with slight positive inflows into the firm's main business line, money market or cash products. This is reminiscent of the start of cash builds in 1999 and 2006 ahead of the negative returns in risk assets in 2000 and 2007.


RH is our top long idea in all of retail, and we view the recent weakness in the stock as a buying opportunity. All in we think the company will build to $5bn in sales at mid-teens operating margin which equates to $11 in earnings power. This growth and profitability comes from...

  •  ~30% Square footage growth with new full line design galleries.
  • New businesses, like Modern and Teen, that can be easily layered over its low cost infrastructure.
  • Leveraging occupancy from the "sweet heart" real estate deals the company is getting as a high end traffic driving 

The yield spread (10Y’s -2Y’s) compressed to a 52-week low of 120 basis points last week.  AGAIN, that’s a 52-week low in growth expectations right after “lift-off”. Into year-end, the bond market continues to price in what it has all year long: #Slower-and-lower-for-longer.


We continue to believe deflation will pressure the policy-fueled leverage embedded in junk and high yield bond markets. The cheap money, corporate credit boom inflated asset prices and it has more room to deflate. This deflationary run started in the second half of 2014, with the introduction of our #Deflation theme. Back then, was also the low in cross-asset volatility and the high in outstanding corporate credit (commodity producers chasing inflation expectations were the largest contributor).

Three for the Road


LIVE Healthcare Q&A Friday @ 11AM - A Special Jobs Report Edition & Best Ideas Recap… via @hedgeye



Keep steadily before you the fact that all true success depends at last upon yourself.

Theodore T. Hunger


Star Wars: The Force Awakens is now the highest-grossing film ever in North America, pulling in $758.2 million and beating out Avatar.

The Macro Show Replay | January 8, 2015


WisdomTree (WETF) - More Questions Than Answers - We Remain Short

Takeaway: WETF announced a suite of dynamically hedged international products. Our research shows the FX hedge provides the bulk of returns however.

WisdomTree announced a suite of dynamically hedged ETFs yesterday. In concert with its main currency hedged Japanese fund the DXJ, and the Euro-zone ex. Euro ETF, the HEDJ, the firm has launched 4 new products. The firm is now adjusting an "always on" FX hedge (on the HEDJ and DXJ) to a rules based approach that will dynamically apply and remove the FX hedge depending on market conditions. These latest products have been launched on European equities, Japanese equities, small cap foreign equities, and a broader international equity fund (see WETF info HERE). The latest information on the firm's website outlines the following new rules based approach for the new "dynamic" FX hedge:


WisdomTree (WETF) - More Questions Than Answers - We Remain Short - chart 1

WisdomTree (WETF) - More Questions Than Answers - We Remain Short - chart 2


While dynamically hedged products allay some of our concerns that historically, local currency exposure has been beneficial for foreign investors (and thus the FX hedge nullifies important returns), we remind investors that the HEDJ and DXJ underperform in local currency outside of the FX hedge because of a beta construction issue. Both DXJ and HEDJ construction is weighted by dividend paying stocks, with also favorable weightings for export driven companies. This benchmark construction thus far has proven to underperform standardized benchmarks in local currency.


The main issue with the new dynamically hedged products is that the WisdomTree products underperform in local currency outside of the FX hedge (in both Japan and Europe).


WisdomTree (WETF) - More Questions Than Answers - We Remain Short - chart7

WisdomTree (WETF) - More Questions Than Answers - We Remain Short - chart8


Thus it's a double edged sword with the WisdomTree's hedged FX products as the FX hedge has been the source of most of the ETF's returns recently for both the DXJ and the HEDJ:


WisdomTree (WETF) - More Questions Than Answers - We Remain Short - chart3

WisdomTree (WETF) - More Questions Than Answers - We Remain Short - chart4


But there are plenty of historical references that foreign investors would have benefited from having local currency exposure (see first grayed boxes versus the second grayed periods). 


WisdomTree (WETF) - More Questions Than Answers - We Remain Short - chart5

WisdomTree (WETF) - More Questions Than Answers - We Remain Short - chart6


The last question on the new dynamically hedged products is will overall fund returns suffer when the hedge comes off. Currently the hedge ADDS credits or returns to fund holders out of the gate as overnight interest rate differentials and liquidity pay the manager to undergo the FX hedge:


WisdomTree (WETF) - More Questions Than Answers - We Remain Short - chart12

WisdomTree (WETF) - More Questions Than Answers - We Remain Short - chart11


Dynamically hedged ETFs could be signaling our view that the U.S. dollar move higher has already experienced the bulk of its move. Our main basis for this stance is that the dollar has already made a 3 standard deviation move over a 10 year period and is also bumping up against its historical 20% year-over-year rate of change ceiling.


WisdomTree (WETF) - More Questions Than Answers - We Remain Short - chart13

WisdomTree (WETF) - More Questions Than Answers - We Remain Short - chart14


WisdomTree trends are inflecting negatively with the firm just having put up its worst quarter from an asset raising standpoint in 4Q15 with a $2.6 billion redemption (and an unprecedented second consecutive quarter of outflows in the firm's now 9 year history). Prior to 3Q and 4Q '15, the firm only had redemptions in 3Q 2008 and 1Q 2014. Trends accelerated to the downside to finish 4Q15 to boot with the HEDJ and DXJ losing $3 billion and $2 billion respectively in the last 10 business days of 2015.


WisdomTree (WETF) - More Questions Than Answers - We Remain Short - chart9



We think 2017 estimates (the best way to value this growth stock) are implying an unacheivable ramp in the firm's AUM to over $80 billion from the current tally of ~$50 billion. This assumption supports the Street's estimate of $0.97 per share. Our estimate of $0.79 per share is supported by a slower ramp to just over $70 billion.


WisdomTree shares continue to trade ahead of median takeout multiples implying further downside. We think shares start to look attractive at $10 pending no substantial degradation of recent trends. We hosted our best ideas Short call on December 17th with the stock at $17.30.


WisdomTree (WETF) - More Questions Than Answers - We Remain Short - chart10


WisdomTree Best Ideas Short - Not So Smart Beta

Video Replay of Best Ideas


Please let us know of any questions,


Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA


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.

MUST SEE | Healthcare Q&A - A Special Jobs Report Edition & Best Ideas Recap

did you miss it?

Watch the replay below.



Healthcare analysts Tom Tobin and Andrew Freedman were in the Hedgeye studio today discussing the key takeaways from the latest U.S. jobs report and implications for their current top ideas.


The team also highlighted what's new on their radar.


Cartoon of the Day: Knot Good

Cartoon of the Day: Knot Good - China cartoon 01.07.2016


The People's Bank of China devalued the yuan another 0.5% overnight. The Shanghai and Shenzhen Composite indices closed down -7% and -8.3% respectively and Chinese regulators announced that significant shareholders were not allowed to sell stock equivalent to more than 1% of a company's shares outstanding.


Not good. We reiterate our bearish bias on the Chinese economy, its capital and currency markets.

[UNLOCKED] Early Look: Workingest Boys

Editor's Note: It's been a tumultuous start to the New Year for the stock market. Below is a particularly prescient Early Look written by Hedgeye CEO Keith McCullough on December 11, 2015. In it, he explains why "we are in the midst of the 3rd major crash I've seen in my Wall Street career." You can still take advantage of our special New Year 66% off deal on this product and more here.




* * *

 [UNLOCKED] Early Look: Workingest Boys - z el


“It wasn’t luck that made them fly – it was hard work and common sense.”

-John T. Daniels

The big picture

One of the most recognizable pictures in the history of American innovation (“First In Flight”) is the Wright Brother’s original “Flyer.” John T. Daniels “was the amateur photographer who took the photograph of their first flight on December 17th, 1903.” (Wikipedia)


He was also one of the men who spent a lot of time with the Wrights in their workplace. He said “they put their whole heart and soul and all their energy into an idea and they had the faith.” (The Wright Brothers, pg 108)


While we don’t just have boys working here @Hedgeye, if there’s one thing I’m most proud of it’s how hard everyone works. I know - on Wall Street everyone thinks they work hard. Build a culture where you actually work harder than most, and your business will fly.


[UNLOCKED] Early Look: Workingest Boys - wright bro

Macro grind

With the beloved “the market is flat” quote of the year (SP500) hovering below where it started the year (2058), many other components of the Global Macro market (Credit, Currencies, Commodities, EM, etc.) continue to crash into week’s end.


Not to cherry pick the composite performance of 2000 stocks instead of 30 or 500, but the Russell 2000 is down -5% for 2015 YTD. More importantly, it’s down -11.3% from the all-time #bubble high for US stocks that we called in July. The 2nd half of 2015 draw-down has been nasty.


What is a draw-down? You don’t need the Wright Brothers to build you a draw-down table:


If you lose this amount…      you have to return this to break even:   


-10.0%                                     11.1%

-11.0%                                     12.4%

-12.0%                                     13.6%

-13.0%                                     14.9%

-14.0%                                     16.3%

-15.0%                                     17.6%

-20.0%                                     25.0%

-25.0%                                     33.3%

-30.0%                                     42.9%


This is very basic math that most in the mainstream (who haven’t run client portfolios) don’t think about when they talk about what “the market” is doing vs. what it would need to do to get people who got plugged chasing charts back to break-even.


In other words, what is the catalyst to get:


  1. The Russell (2015) Bubble +12-13%, from here, to break even?
  2. The CRB Index (2011-2012 Bernanke Bubble) +33%, from here, to break even?
  3. Kinder Morgan (the Yield Chasing Inflation Expectation Bubble) +163%, from here, to break even?


That’s right. If you chased the Kinder Morgan’s (KMI) chart and bought it at $44.57, on April 23rd, 2015, your client’s account is First In Crashing to a level they’ll never be able to recover from. That’s why Kevin Kaiser putting all his energy into a SELL idea mattered.


I get why innovation in Wall Street Research hasn’t included many independent research firms that have literally 0% conflicts of interest. If you don’t have a bank, broker dealer, or asset manager on your platform, it’s really hard to “get paid.”


What you may not see is that when I started Hedgeye, I wasn’t looking to get paid. I was simply burnt out by the compromised and constrained ways of the Old Wall and wanted to build a better way. I really wanted to help the average person not crash again.


Forget what people who are in the business of marketing “the market is flat” are telling you, across asset classes we are in the midst of the 3rd major crash I’ve seen in my Wall Street career. All 3 coincided with a major economic cycle top:


  1. 1999-2000
  2. 2007-2008
  3. 2015-2016


Every one of these economic cycle tops had different asset bubbles underpinning their hopes that it was “different this time.” Not one of these cycle tops was different in terms of classic rate of change slowdowns in major economic factors.


As you can see in today’s Chart of The Day (one of my favorite 20 year cycle charts in all of macro), the Commodity Super-Cycle crash we are witnessing today is largely a function of both Greenspan and Bernanke devaluing the US Dollar to a 40-year low from 2001-2011.


That’s a decade of devaluing the purchasing power of hard working Americans (their currency) every time the US economy started to slow from its cycle peak. While the early 20th century had The Wright Brothers, the early 21st had The Central Planners.


No, that’s not to say that there wasn’t American innovation all the while (newsflash: most innovation is born out of necessity, not economic expansions). It’s simply to say what the mother of all economics risks remains the unwind of a centrally planned bubble.


I’m obviously not alone in defining history this way (they’re just time series charts). Most of the money managers who are having a fantastic year understand that The Deflation Risk is real and not “transitory.”


If you want to have a big-gravity-bending economist tell me that the Federal Reserve wasn’t the causal factor in USD Devaluation, that’s fine. I’ll smile and move along. I have too much work to do to argue with these people anymore.


It’s hard work and common sense that will preserve and build wealth during this slow-down. That’s not different this time either.


[UNLOCKED] Early Look: Workingest Boys - asset alloc

Our levels

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


UST 10yr Yield 2.13-2.32% (neutral)

SPX 2033-2072 (bearish)
RUT 1131--1172 (bearish)

NASDAQ 4987-5092 (bullish)

Nikkei 19010-19447 (bullish)

DAX 10308-10856 (bearish)

VIX 16.85-20.47 (bullish)
USD 96.70-98.73 (bullish)
EUR/USD 1.05-1.10 (bearish)
YEN 121.24-122.69 (bearish)
Oil (WTI) 35.41-39.25 (bearish)

Nat Gas 1.95-2.13 (bearish)

Gold 1049-1084 (bearish)
Copper 2.01-2.12 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


[UNLOCKED] Early Look: Workingest Boys - 12 11 Chart of the Day