McCullough: ‘Aggressively Sell Any Market Rally’


In this excerpt from The Macro Show, Hedgeye Gaming Lodging & Leisure analyst Todd Jordan explains why you don’t want to be long his sector heading into a recession. Meanwhile, Hedgeye CEO Keith McCullough explains how investors should play our dour economic outlook.

0-Handle | 4Q15 GDP

We’ll leave it to others to review & opine in the internal minutiae of this morning’s GDP report.  We’d highlight a few tangible takeaways:    


  • GDP | #GrowthSlowing, 3 Qtrs & Counting ….   On a year-over-year basis,  growth slowed -30bps sequentially in 4Q15 to 1.80% YoY, marking a 3rd consecutive quarter of deceleration and the slowest rate of growth in 7-quarters.  Sequential deceleration was largely ubiquitous across all expenditure types and sub-aggregates (see summary table below).  It’s not incidental that employment growth, income growth & consumption growth all peaked in 4Q14/1Q15 and have since decelerated alongside headline growth.  We are late cycle in the current expansion and negative 2nd derivative changes across labor, consumption, investment, and credit growth shouldn’t be particularly surprisingly – it’s how the temporal procession of the cycle manifests and 2nd derivative trends naturally precede first derivative changes. 
  • Comps | It Gets Tougher:   Comps only get tougher in 1Q16 and given the base effects in combination with the prevailing trajectory of current domestic and global macro data we expect the trend toward deceleration to extend another quarter or two, at least. 
  • Slow and UnSexy:  Slowing growth puts us in Quad #3 (slowing growth and Inflation) or Quad #4 (stagflation) in our GIP model over the coming quarters.  $USD’s, Bonds and Utilities work under either scenario.  It's not sexy and it's as boring as its been profitable over the last ~6-months but we continue to like those slow growth exposures.  See this mornings Early Look for a further discussion. 
  • NIRP  Action out of the BOJ this morning and the resultant downward shifting of the global yield curve serves to edify our bullish view on bonds.  Divergent central bank policy and an active OUS currency war race-to-the-bottom is supportive of $USD allocations and a perpetuation of the Strong Dollar deflationary trends that have characterized much of the past year.  Resurgent central bank interventionism is not a function of improving macro fundamentals. 


 0-Handle | 4Q15 GDP - GDP


0-Handle | 4Q15 GDP - Income   Consumption Past Peak


0-Handle | 4Q15 GDP - PCE LT


0-Handle | 4Q15 GDP - Cred


0-Handle | 4Q15 GDP - Eco Summary




Christian B. Drake



BREAKING: Hedgeye Macro Team Nails U.S. GDP (Again). Consensus? Not So Much

Takeaway: Old Wall economists completely missed economic reality once again.

BREAKING: Hedgeye Macro Team Nails U.S. GDP (Again). Consensus? Not So Much - GDP cartoon 05.29.2015


BREAKING: US GDP hit the 0.7% Hedgeye forecast. We maintained our forecast of between 0.5% to 1.7% Q-o-Q for fourth quarter 2015 GDP all year, even while Old Wall consensus consistently ratcheted it back from 3% in July. 


Here's the inglorious breakdown: 

BREAKING: Hedgeye Macro Team Nails U.S. GDP (Again). Consensus? Not So Much - wall street 4q15 


In other words, our non-consensus macro team nailed the last five GDP reports while economic reality still confounds Wall Street's pundits. We'll say it again #GrowthSlowing





Here's the breakdown of today's GDP release via Hedgeye U.S. Macro analyst Christian Drake. Note all the red in the right-hand column. (That's bad.)



It's funny. Supposed "blue chip" economists can hold up personal consumption expenditure (PCE) as an economic "bright spot" all they want. But staring at the absolute number of any data release tells you nothing about where we're headed.


At Hedgeye, our analysis is more dynamic and based on the year-over-year rate of change. By this measure, PCE is slowing. (That's also bad.)



The preponderance of economic data – from employment to incomes to PCE growth – is rolling over on a rate-of-change basis. We'll throw in one more metric for good measure: Credit growth.


See the chart below. (Again, bad.)


Interesting. All of these economic indicators peaked in 1Q 2015. 


Coincidence? We think not.



For investors (particularly long-only investors), the current macro environment presents an especially tough setup. Our Macro team has been highlighting the increasing likelihood of a U.S. #Recession in the 2Q or 3Q of this year.


Moreover, as Hedgeye CEO Keith McCullough continues to reiterate, regardless of whether our #Recession call is right or not, the U.S. stock market is headed for a 20% correction. No ifs, ands, or buts about it.


How do you play it?


Here are our top Macro ideas: Long bonds (TLT) Utilities (XLU)



In the meantime, stay (far) away from consensus forecasts.


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AMZN | Timing

Takeaway: This would’ve been a great qtr a wk ago. We’re bifurcated by duration on AMZN. While we like it 1 yr out, need to get past next 2 Qs first.

It goes without saying that this is one of the more polarizing quarters for Amazon in quite a while. But let’s put aside the stock move for a minute and look at what’s changed fundamentally – after all, with the sell-off the stock is trading about in line with where it was just two days ago.


  1. The irony with all of this is that the quarter itself was very good. Sales grew by 25%, in its core business – what we’ll call US Retail – 60% of sales (it’s actually North America EGM + Media). This is a BIG plus for those out there that think that AMZN can one day capture 10% of total US Retail Sales.  That’s a $500bn number. You may balk at it. We might too. But people believe it, and as long as they do, they’ll hold this stock forever.
  2. AWS also looked relatively solid. Yes, it decelerated to 69% (from 78% last quarter) but is well above a rate we need to make this model work.
  3. International is a clear hole we can poke in the quarter, as we saw growth of only 12%. Keep in mind that AMZN has about 33% share of US Online Spending, but only about 8% in its more developed non-US regions.  While there’s a big opportunity for AMZN to grow outside our borders – potentially fueling one of the next multi-year legs of growth – it’s not acceptable for a company like this to see Int’l sales go from 45% to 33% over the past economic cycle.
  4. That brings us to the only thing we’re really concerned about, which is AMZN’s profitability to the extent we are, in fact, headed into a recession.  Roughly 65% of its total sales are in the US. At the same time, we just saw gross margin improvement decelerate materially, suggesting tougher GM compares 2-3 quarters out. If we have down gross margins, sales erode on the margin due to the economy, then the only thing that could sustain AMZN’s EBIT line is cuts to SG&A growth. If there’s anything we know (and respect) about AMZN, it’s that the company will spend money how, where, when and on what it so chooses. In fairness, this is a $100+bn revenue company that is producing over 50% returns on incremental cash. From where we sit, Bezos has earned a hall pass to do pretty much whatever he wants (that hall pass can be revoked if returns go the other way).


Hedgeye has a very bearish view on the US economy, so we’re concerned about the guide in another 13 weeks.  The SIGMA chart below supports this, as it’s the first time AMZN has been in a negative Sales/Inventory position in seven quarters. Unless estimates come down materially when they hit by the end of the weekend, we’re more on the bearish side from a near-term perspective. Though from a TAIL duration 3-years or less, we still like the story a lot.


AMZN  |  Timing - 1 29 2016 amzn chart1


AMZN  |  Timing - 1 29 2016 amzn chart2


Charts include consensus estimates:

AMZN  |  Timing - 1 29 2016 amzn chart3


Gross Margin expectations remain high.

AMZN  |  Timing - 1 29 2016 amzn chart4

[UNLOCKED] Keith's Daily Trading Ranges

Editor's Note: We've made some new enhancements to Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers weekday mornings by CEO Keith McCullough. Click here to view a brief video of McCullough explaining how to use it most effectively.


Subscribers now receive risk ranges for 20 tickers each day -  the last five are determined by what's flashing on Keith's radar screen and what tickers subscribers are asking about. Click here to subscribe.


  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
2.03 1.92 2.00
S&P 500
1,850 1,913 1,893
Russell 2000
980 1,020 1,003
NASDAQ Composite
4,412 4,592 4,506
Nikkei 225 Index
16,112 17,820 17,041
German DAX Composite
9,304 9,959 9,639
Volatility Index
20.45 28.96 22.42
U.S. Dollar Index
98.19 99.93 98.62
1.07 1.10 1.08
Japanese Yen
118.06 120.61 118.82
Light Crude Oil Spot Price
27.69 33.99 33.72
Natural Gas Spot Price
2.04 2.29 2.23
Gold Spot Price
1,080 1,130 1,115
Copper Spot Price
1.95 2.10 2.05
Apple Inc.
92 97 94
539 616 635
Netflix Inc.
89 99 94
McDonald's Inc.
118 124 122
iShares 20+ Year Treasury
125 128 126
Microsoft Corp.
50.22 53.72 52.06

Japan, Utilities and The ECB

Client Talking Points


News of the morning = Japan goes NIRP – and the Yen goes >120, 10Y JGB’s trade down to 0.09% (as in “nine” basis points) and along with the balance of global yields, U.S. 10Y treasury yields followed suite and are trading down -6bps to 1.91% as the yield curve (10’s-2’s) compresses to another new low. Together with yesterday’s durable goods disaster, this morning’s slowing GDP report and more rumors of stimulus out of China the global #GrowthSlowing data remains conspicuous. Resurgent central bank interventionism is not a function of improving macro fundamentals. 


There’s always a bull market somewhere, even if it’s with growth-slowing bond proxies. The XLU is outperforming the S&P by 10% on a relative basis, and is the only S&P sub-sector in positive territory YTD (+2.9%). We continue to like growth-slowing, low-beta vehicles as the market continues to crush high beta, indebted names. High beta stocks are down -15% for the month (low-beta -2.4%) and high debt is down -9%. The market is not paying for 2018 earnings right now. Companies with high earnings growth estimates are down -10% on the month. 


The ECB’s Jens Weidmann (also President of the Bundesbank) warned fellow policy makers that the ECB should not go too far with the QE program, but will President Mario Draghi listen?  We doubt it!  Weidmann rightly points out that the ECB needs to lower its inflation forecast for 2016. A 2% target is after all a pipedream!


*Tune into The Macro Show with Gaming, Lodging & Leisure analyst Todd Jordan live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Utilities (XLU) continue to be the bright spot in the equity markets for 2016. XLU is up 1% this year, having edged out all other S&P 500 subsectors by a wide margin. Last week, XLU was down marginally but was still second best among the subsectors, beating all but Healthcare (XLV). Essentially, it's paying off to own low-beta XLU in a crashing market.


General Mills (GIS) has turned on its advertising for no artificial colors and flavors in its cereal, as well as an increased effort for its gluten free campaign. Click here to view the 30 second spot TV commercial.


These steps taken on cereal, coupled with improved merchandise planning across their portfolio in the second half should bode well for the company’s future performance. Additionally, General Mills fits neatly into the style factors that we like from a macro point of view, large cap, low beta and liquidity.


Rating agency S&P disclosed on Thursday three concerning stats as it relates to the wellness of credit oustanding:

  • More companies were at risk of having their credit ratings cut at the end of December than at the close of any other year since 2009
  • The number of potential downgrades was at 655, compared with 824 reported by the finish of 2009
  • The year-end total for 2015 was "exceptionally" higher than a yearly average of 613


Then on Friday, S&P followed with additional action:

  • Disclosure that oil-exporting countries face fresh downgrades as crude prices fall further and that it could repeat last year's move when it made a big group of cuts all at once
  • S&P currently has Azerbaijan, Bahrain, Kazakhstan, Oman, Russia, and Saudi Arabia on negative outlook in its Europe, Middle East and Africa region, as well as Brazil and Venezuela in Latin America

Moody’s echoed the shaky state of credit markets by announcing it was putting the ratings of 120 oil and gas companies on watch Friday.


Strap on your seatbelts as we expect that credit spreads will continue to widen. If the Fed pivots on its “4 rate hikes” in 2016 as the data continues to slow, Treasury bond yields get pushed lower and high-yield spreads widen into a late cycle deleveraging. This should continue to generate alpha in a Short JNK, Long TLT trade.

Three for the Road


Kaiser: ‘I Think The Old MLP Model Is Dead’… via @hedgeye



Mistakes are the portals of discovery.

James Joyce


The 20 most profitable hedge funds pulled in $15 billion last year, while all the hedge funds combined lost $99 billion.