Central Market Planning

Client Talking Points


Breaking bad, the belief system is here – Japan says “negative yields” (and they got them – 10YR JGB -0.04% now), but they didn’t get Down Yen, Up Nikkei – they got Up Yen, Crashing Nikkei! (Nikkei -5.4% overnight, -22.8% since July).


If you thought the central planning experiment in the U.S. and Japan went bad, look at what Draghi is doing to the banks in Europe. Italy’s stock market is down another -1.5% this morning taking it’s crash (since July) to -32.8% (if the SPX crashed that % it would be at 1,436 FYI).


We shifted our favorite S&P Sector short from Energy to the Financials on JAN 5th and the main reason for that was our uber bullish call on the Long Bond (calling for all-time low in UST 10YR Yield) and Financials being the most over-owned group relative to its rate risk. The XLF is now -14.3% vs. Utes (XLU) +7.2% year-to-date.


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

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The bond market understands #GrowthSlowing. So do Utilities (XLU), which is why XLU is leading S&P sub-sector performance in 2016. XLU is up +7.6% versus down -8.0% for the S&P 500. Stick with it on the long side.  


GIS remains one of analyst Howard Penney's top Long ideas in the Consumer Staples space. As we have continued to say, it boasts style factors ideal in turbulent times; high market cap, low beta and liquidity. While GIS is down year-to-date, it's held up very well against the broader stock market. GIS is down -4% versus down -8% for the S&P 500 in 2016.


GIS has been picking up steam, as the company is working to improve merchandising and advertising on core business. One of the initiatives is making a distinct effort to delve deeper into the natural and organic category. That will certainly help them a lot in the long run. More to come.


Down go growth expectations and down goes the yield curve. That's the latest from Macro markets last week and it plays right into our long Long-Term Treasuries (TLT) and short Junk Bonds (JNK) Investing Ideas.


The UST 10YR Yield declined another -9 basis points last week which helped boost TLT +1.1% on the week. In a healthy environment, bonds as an asset class go up in tandem, but JNK lost -0.9% on the week despite a falling yield curve. That’s because we’re NOT in an “all is good” environment. Credit spreads widen in turbulent times. This widening is the alpha-generating opportunity in long TLT, short JNK.

Three for the Road


VIDEO FLASHBACK: 4 Videos With Keith McCullough On Our Economic Outlook & Long Bond Call… via @hedgeye



Not appreciating what we have now robs us of our abundance even when it exists.

Marshall Sylver                                     


Anheuser-Busch Inbev has spent $278.3 million on Super Bowl ads over the past decade, according to Kantar Media.

VIDEO FLASHBACK: 4 Videos With Keith McCullough On Our Economic Outlook & Long Bond Call

Takeaway: Hedgeye CEO Keith McCullough likes to say "I'm the most bullish guy on Wall Street... on Long Bonds (TLT)."

VIDEO FLASHBACK: 4 Videos With Keith McCullough On Our Economic Outlook & Long Bond Call - tlt say cheese


We've been bullish on the Long Bond (TLT) since August 2014. Here's what the score looks like versus the S&P 500.


VIDEO FLASHBACK: 4 Videos With Keith McCullough On Our Economic Outlook & Long Bond Call - LONG BOND


In fact, Hedgeye CEO Keith McCullough is fond of saying, "I'm the most bullish guy on Wall Street... on Long Bonds." Below are four recent videos in which Hedgeye CEO Keith McCullough lays out our dour economic outlook and explains why that is bullish for Long Bonds.


1. McCullough on Fox Business, 10/20/2015.


"If you’re a CIO and you told everyone that rates would surprise to the downside, you’re doing your job. You’re giving [clients] a much lower volatility profile and they would have a big position in the Long Bond. To me that’s the elephant stomping around in the room." 



2. McCullough on The Macro Show, "The Best Way to Play the Coming Recession," 12/29/2015.



3. McCullough on The Macro Show, "This Is Our Best Idea Right Now," 12/30/2015.



4. McCullough on Fox Business, "The Economy Is A Slow Moving Train Wreck," 1/4/2016


Cartoon of the Day: Extinct?

Cartoon of the Day: Extinct? - bull cartoon 02.08.2016


"Fortunately, we don’t have to apologize this morning," Hedgeye CEO Keith McCullough wrote in the Early Look today. "We were on the right side of the #LateCycle US Employment report going into the weekend. And we’re on the strong side of a worldwide selloff in both stocks and long-term bond yields this morning."

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.

JT Taylor: Big Winner From Rubio Stumble? Trump ... Hillary Finally Unleashes Bill

Takeaway: Marco Rubio could have capitalized off his third place finish in Iowa but dropped the ball to Trump and Cruz's benefit.

Editor's Note: Below is a brief excerpt from Potomac Research Group Senior Analyst JT Taylor's Morning Bullets sent to institutional clients each morning. 


JT Taylor: Big Winner From Rubio Stumble? Trump ... Hillary Finally Unleashes Bill - trump point


NH voters have had a full day to process Saturday night's debate and it's not good for Marco Rubio. Govs Christie, Bush and Kasich have all climbed in a number of polls conducted since the debate and are showing new life. Rubio had a chance to capitalize on real momentum coming out of Iowa and he blew it.  The race for second is now a free-for-all. The absence of a convincing win for Rubio benefits current NH frontrunner Donald Trump as well as Ted Cruz, who is better-positioned for the SC primary. The longer there's no clear winner in the Rubio/Christie/Bush/Kasich fight to make it a three-way race, the better for Trump. With so much volatility in the race, why would anyone considering dropping out?


JT Taylor: Big Winner From Rubio Stumble? Trump ... Hillary Finally Unleashes Bill - bill clinton


We're wondering why it took so long for Bill Clinton to step in and attack Bernie Sanders -- we know he's been chomping at the bit for weeks. Clinton took Sanders to task for being "hermetically sealed" outside reality, and exhorted his supporters to come to their senses as Hillary has been closing the gap on Sanders in the Granite State.  Do you think they're reading the sequel to the Comeback Kid?



Buy Stocks Now? Nope. Here’s Why


In this brief excerpt of The Macro Show this morning, Hedgeye Senior Macro analyst Darius Dale explains the fallacy of Wall Street’s S&P 500 year-end targets and why the stocks could fall a lot further from today’s prices.


Subscribe to The Macro Show today for access to this and all other episodes. 


Subscribe to Hedgeye on YouTube for all of our free video content.

Global Slowdown or Outright Recession? A Special Guest Commentary By Daniel Lacalle

Editor's Note: We are pleased to present this special Hedgeye Guest Contributor column by Daniel Lacalle. Mr. Lacalle is CIO of Tressis Gestion and professor of Global Economics at the Instituto de Empresa, UNED and IEB. His books include Life In The Financial Markets (Wiley) and The Energy World Is Flat (Wiley). You can follow him on Twitter at @dlacalle


Global Slowdown or Outright Recession? A Special Guest Commentary By Daniel Lacalle - recession cartoon 12.22.2015


By Daniel Lacalle


One of the most dangerous statements we usually hear is that “fundamentals have not changed.” They change. A lot.


If we analyze the global growth expectations of international organizations, the first thing that should concern us is the speed and intensity of downward revisions. In the US, for example, we had an expectation of growth of 3.5% revised to 2% in less than six months. If we look at the revision of the estimates for the fourth quarter of 2015 of the major economies of the world, they were downgraded by 40% in less than twenty days.


Not surprisingly, the IMF and the OECD have cut their expectations for 2016 and 2017 growth already in January. Can they be wrong? Yes, but if we look at history, they have mostly been optimistic, not cautious.


This downgrade process is not over.


China is one of the key reasons. The global economy has geared itself to justify huge investments to serve the expected Chinese growth, ignoring its fragility. China, with an overcapacity of nearly 60% and total debt already exceeding 300% of GDP, has a financial problem that will only be dealt with a large devaluation, many investors expect 40% vs the US dollar over three years, and lower growth . That landing will not be short. An excess of more than a decade is not resolved in a year. This exports deflation to the world, as China devalues and tries to export more, and when the “engine of the world” slows down because it ends an unsustainable model, we are left with the excess in global installed capacity created for that growth mirage. Commodities fall and mining and energy dependent countries suffer.


Consensus economists have overestimated the positive effects of monetary policy and expansionary fiscal measures and ignored the risks. Emergency measures have become perpetual, and the global economy, after eight years of expansionary policies shows three signs which increase fragility.


First, excess liquidity and low interest rates have led to increase total debt by more than $ 57 trillion, led by growth in public debt of 9% per annum, according to the World Bank.


Second, industrial overcapacity has been perpetuated by the refinancing of inefficient and indebted sectors. Governments do not understand the cumulative effect of this overcapacity because they always attribute it to lack of demand, not misallocation of capital. In 2008, there was a problem mainly in developed countries. With the huge expansion plans in emerging markets, overcapacity has accumulated and been transferred to two-thirds of the global economy. Brazil, China, the OPEC countries, and Southeast Asia in 2015 join the developed nations in suffering the consequences of investment in huge white elephant projects of questionable profitability “to boost GDP.”


Third, financial repression has not led to the acceleration of activity from economic agents. Currency wars and manipulation of the amount and price of currencies makes the velocity of money slow down. Because the perception of risk is higher, and solvent credit does not grow, as the average cost of capital is still greater than expected returns, causing debt repayment capacity to shrink in emerging and cyclical sectors below 2007 levels, according to Fitch and Moody’s.


Since 2008, the G7 countries have added almost $ 20 trillion of debt, with nearly seven trillion from expansion of central bank balance sheets to generate only a little over a trillion dollars of nominal GDP, increasing the total consolidated debt of the system to 440% of GDP.


A balance-sheet recession is not solved with more liquidity and incentives to borrow. And it will not be solved with large infrastructure spending and wider deficits spending, as Larry Summers requests.


Offsetting the slowdown from China and emerging markets with public spending is fiscally impossible. We have exceeded the threshold of debt saturation, when an additional unit of debt does not generate a nominal GDP increase. Global needs for infrastructure and education are about 855 billion dollars annually, according to the World Bank. All that extra expense, if carried out, does not make up for even half of the impact of China, even if we assume multipliers that are more than discredited by reality, as seen in studies by Angus Deaton and others.


China is about 16% of global GDP, its slowdown to sustainable growth cannot be compensated with white elephants. It is not pessimism, it is mathematics.


The monetary “laughing gas” only buys time and gives the illusion of growth, but ignores the imbalances it generates. Financial repression encourages reckless short-term borrowing, attacks disposable income and is accompanied by tax increases that affect consumption.


In the United States, following a monetary and fiscal expansion of over $24 trillion, the economy is growing at its slowest pace in three decades, real wages are below 2008 figures and labour force participation is at levels of 1978. Its total debt is nearly 340% of GDP. The economy´s fragility is such that the impact of an insignificant rate hike -from 0% to 0.25% – is phenomenal.


The odds of a recession in the US have tripled in six months. Although I find more plausible a scenario of poor growth, indicators of consumer and industrial activity show a clear weakening.


The capital misallocation created by excess liquidity and zero rates have led to a credit bubble in high yield that issued at the lowest rates in 38 years, masking their true ability to repay. Looking at the figure globally, maturities of corporate and sovereign bonds to 2020 are nearly $20 trillion. Up to 14% of those are considered “non performing”.


With all these elements of fragility, it is normal to assume we face an environment of low growth, but there is reason to doubt a global recession.


The Chinese problem is mostly in local currency and within its financial sector, reducing the risk of contagion to the global financial system.


Dollar reserves in emerging countries have only fallen by 2% in 2015 and remain at record levels.


Although default risks in emerging markets, mining and commodities has risen recently, the total combined fails to reach a fraction of the extent of the real estate bubble risk in 2008.


Additionally, it is unlikely that a global financial meltdown effect will happen when it did not occur in 2015, with the perfect storm of devaluations, falling commodity prices, terrorism, Greece and growing geopolitical risk.


Consumption continues to grow due to the growth in the global middle class and the effect of technology, which provides efficiency and good disinflation.


This is a slowdown from oversupply, not a credit crunch led by financial risk, and as such it puts in question the possibility a global recession. But increased consumption will not compensate for the saturation of the obsolete indebted industrial growth model.


For more than a year I have warned of a long period of weak growth, but we should not confuse it with a global recession. Repeating the mistakes of these past years will not change the landscape. It will perpetuate it.


Negative real rates do not stimulate investment. They slow lending to the real economy and encourage short-term speculation.


The exit from a balance-sheet recession is not going to come from the same mistake of increasing public spending and adding debt. It will only be solved when we recover as main policy objective to increase disposable income of households, not attacking it with financial repression.

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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.