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Mix Matters

“What kind of cookies do they sell at the airport? Plain.”


Rene Descartes - famed mathematician, creator of the Cartesian plane and bane of 7th grade math classes - enjoyed getting up late, preferring to spend the morning lying in bed thinking.  


The story goes that he invented the coordinate plane while lying in bed watching a fly crawl on the ceiling, reasoning that he could describe the exact location of the fly by knowing its distance from two perpendicular walls. 


Descartes laid in bed. Socrates engendered philosophical insight strolling the gardens. Einstein intuited and fully conceptualized his theory of relativity “during long walks on the beach” and while “lying down and gazing at the ceiling” before any math entered the equation.   


When I was in construction, I had everyone take a week off every six weeks. The path to improved morale and elevated productivity was, ironically, not working. 


In athletics (and life in general), an exceedingly effective way to hinder long-term progress and physical/mental adaptation is through over-work. 


Workout 2-3 times a day for a couple weeks and your progress will be great. Try to do that for a year straight and performance will invariably go downhill. 


A small minority of people have the genetics to sustain 12-14 hr days of focused attention. The vast majority don’t and performance, creativity and mental plasticity start to deteriorate over time under that kind of regimen. 


This is basically fact, and it’s interesting that even people who know this (myself included) still succumb to the prevailing Wall Street culture that more hours = more & better productivity.    


There is a trade-off to be sure. 


Work wins high-frequency battles and grinders generate ideas but #BigIdeas, it seems, are the product of restless but rested minds.


Mix Matters - NFIB CoD1


Back to the Global Macro Grind


A notable takeaway from last Friday’s jobs reports is that with hourly earnings growth decelerating and average hours worked per week declining, aggregate income growth will show further deceleration when the official income and spending data are released for February later this month.   


Further, unless credit growth accelerates meaningfully and/or the savings rates declines materially, consumption growth for February should follow income growth lower.


This week is light in terms domestic fundamental data flow but we did receive some incremental updates related to both wage and credit trends.


Credit | Consumption’s Wild-Card: With household debt still very much elevated and no rope left on lowering debt service costs, the capacity for debt to support consumption growth over the intermediate and longer term remains constrained.  


In the shorter-term, however, there exists some runway for accelerating credit growth to help offset slowing income growth in support of consumption. 


Yesterday’s consumer credit data for January showed total borrowing rose $10.5B, marking the slowest gain in 27-months. 


Non-revolving credit (i.e. auto’s and student loans) rose $11.6B sequentially while decelerating to +6.9% YoY – the slowest pace of growth since July 2012. Revolving credit (i.e. credit cards) dropped for the first time in a year, declining at an annualized rate of -1.4%. On a year-over-year basis, however, growth in credit card debt made a new cycle high at +5.27% YoY. 


So, credit growth appears to be moderating but remains a modest, positive support to consumption growth. Not enough to fully compensate for the deceleration in income growth but a positive offset to buttress a slowdown in aggregate consumer spending. 


Compensation Plans | Hurry Up & Wait: Keeping with the theme of wage and income growth, we got the NFIB small business confidence data for February this morning and, with it, the sub-indices tracking both actual Compensation trends and Compensation Plans. 


Economists and strategists focus on the Small Business Compensation Plans index because, historically, it has presaged actual compensation increases pretty well – typically leading growth in the ECI and reported hourly earnings by ~3 quarters. 


Indeed, and as we’ve highlighted, the strong advance in NFIB Compensation Plans over the last 39 months along with more recent strength in the Employment Cost Index (ECI) have backstopped consensus expectations for accelerating wage inflation for the better part of the past two years. 


The Data | Ruh-roh? The February data showed the Hiring Plans Index decline -1 pt, the Compensation Index decline -5pts and the Compensation Plans Index decline -3pts; all marking 9 month lows and multiple months of sequential decline (See Chart of the Day above).   


The decline off the recent peak and the failure for hourly earnings to accelerate as labor slack has diminished continues as a lead source of consternation for late-cycle labor and Phillips curve economists.


Why has the conventional relationship between unemployment and wages failed to materialize?


Mix Matters: Yesterday, the San Francisco Fed put some quant around a dynamic we’ve known was impacting the wage growth data but had yet to study intensively. 


Specifically, they explored the impacts exerted by labor composition and the flow of workers into and out of the labor force on reported wage inflation. 


You can read the note HERE but it’s worth reviewing the key takeaways.


Some of the underlying methodology is complex, but the conceptual crux of the analysis is pretty straightforward.


The analysis centers on the premise that income is generally an increasing function of age and tenure. That is, wage and salary income typically rises with experience and duration of full-time employment. 


Commonsense and empirics side with that presumption.


This logic implies that older, continuously employed full-time workers, on balance, make more than part-time or recently employed, younger full-time workers.


Now, what would the impact to average wage growth be if labor turnover evolved in an exaggerated barbell type of way that saw older, more highly compensated workers retire and be predominately replaced by new lower-wage entrants?


Suppose further that at the same time, and in addition to this secular reality, labor slack and underemployment remain a cyclical overhang on compensation growth – and disproportionately so for new, younger entrants into the labor force. 


Hidden In Plain Sight: Does the entry of younger, comparably lower-wage workers to full-time time employment and the exit of a large bolus of higher-wage retirees sound like any (Millennial-Boomer) developed market economy you know?


In other words, mix matters and when taking a composition-centric view of the labor force the protracted stagnation in reported average wage growth isn’t particularly surprising.


The implications are a few fold. 


Labor composition shifts give leash to businesses, in the aggregate, to help manage and minimize labor cost pressure. However, if new entrants are less productive then unit labor costs may actually be rising (even though it wouldn’t be showing up in the headline inflation data, to the Fed’s continued chagrin). 


Rising unit labor costs in combination with decelerating demand = incremental margin pressure for a corporate sector collectively past peak in profitability and now on the wrong side of the global growth curve.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.67-1.92%


Nikkei 157

VIX 16.37-23.49
USD 96.44-98.78
YEN 111.70-114.64
Oil (WTI) 29.86-36.98


Best of luck out there today,


Christian B. Drake

U.S. Macro Analyst


Mix Matters - Mix CoD2

Cartoon of the Day: Jaws

Cartoon of the Day: Jaws  - deflation cartoon 03.07.2016


Deflation is stalking Europe.

[UNLOCKED] Big Bang Theory

Editor's Note: Below is a complimentary Early Look (our daily morning market newsletter) written by Hedgeye CEO Keith McCullough. In it, McCullough explains why stocks crash when earnings roll over. "Is this time different?," he asks. "Unlikely." Click here to subscribe.

*  *  *  * 


“There were humans long before there was history.”

-Yuval Noah Harari

The big picture

I think there were lots of bears before there was a Wall St. bull too. If you go all the way back, you’ll find that there was physics before humans. A new book on #evolution called Sapiens, by Yuval Noah Harari, got me thinking about this last night.


As Harari reminded me, “about 13.5 billion years ago matter, energy, time and space came into being in what is known as the Big Bang…” After physics, came biology (3.8 billion years ago) … then human history (70,000 years ago)…


And now, post a 500 year long scientific revolution, we have a social “science” experiment (or ideology) called central-market-planning (or QE)… which could easily implode if the #BeliefSystem that humans can bend and smooth economic gravity crashes.


[UNLOCKED] Big Bang Theory - Growth cartoon 11.10.2014

Macro grind

Wow. In terms of a time-series, that’s a little deeper than staring at a 50-day moving monkey, isn’t it? While our understanding of physical, biological, and human histories continue to evolve at an accelerating rate, how did the Old Wall’s thinking get left behind?


Over the course of the last 30 years, Japan’s “growth” story has been left for dead. Instead of asking yourself when you should be “buying Japanese stocks”, why not ask yourself if this is the beginning of the end – of the grand central-market-plan, that is?


My Big Bang Theory for the #CurrencyWar (one of the Top 3 Themes in our Macro deck right now) is as follows:


  1. Japan is no longer able to convince markets that it can burn its currency at the stake on command
  2. Japan’s Yen starts to rise, and Japanese stocks start to crash
  3. Europe then fails to convince consensus of the same
  4. Euro goes up (instead of down) on Draghi’s next central-market-planning day (March 10)
  5. European and US stocks resume their current crashes and go straight down


I know, I know. It’s just a theory. But it’s what I would call one that has a probability that is rising, not falling, in rate-of-change terms. Not only is my intermediate-term TREND signal research suggesting rising probability, but super long-term history has always sided with gravity. So why would economic reality vs. perma-asset-inflation-hope be any different?


On a much shorter-term basis (because that’s where the next ECB and Fed meetings reside):


  1. Realize that the inverse correlation between the USD and Commodities remains pervasive (not transitory)
  2. But there is a developing POSITIVE correlation (15-30 day = +0.5-0.7) between USD and US stocks


What that tells me is that if we’re right on both the US economic and profit cycle continuing to slow in 1H 2016, Dollar Down => Rates Down => Stocks Down, could easily be perpetuated by the #BeliefSystem in both Japan and Europe breaking down.


Anyway – just a theory. Moving along…


As you know, irrespective of any longer-term Big Bang Theories that have a short-term catalyst, the easiest call for me to stick with is the intimate relationship PROFITS have with CREDITS at this stage of the cycle.


While they’ve “rallied” US stocks “off the lows” on slow-volume (Total US Equity Volume -15% vs. 1-month avg yesterday), the SP500 and Russell 2000 are still -8.7% and -21.1% (crashing), respectively, from their all-time #Bubble highs established in July.


Meanwhile, here’s the update on corporate profits:


  1. 435 of 500 S&P 500 companies have reported their respective quarters
  2. Aggregate SALES growth is -4.2% year-over-year and EPS down -6.5% year-over-year
  3. Only 3 of 10 S&P Sectors have POSITIVE year-over-year EPS growth
  4. ENERGY (31 of 41 companies reported) has SALES -34%, EPS -74%
  5. FINANCIALS (85 of 89 companies reported) has SALES -1%, EPS -8.8%


In other words, if your friends are still “backing out energy” and levered long US Equity beta, they’re a lot more exposed to rates crashing, Yield Spread compressing, and the Financials (XLF -11% YTD) than they’ve ever been!


Unless it’s different this time, US stocks always crash (greater than 20% decline from peak) once corporate profits go negative (on a year-over-year basis) for two consecutive quarters.


I’m certain that physics and biology have played a part in all economic cycles. But given that there was history before there were “stocks”, I have no idea how slowly or quickly the beginning of the end turns into a new beginning for a more credible belief system.

Our levels

Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.62-1.84%

SPX 1811-1966 
RUT 939-1038

Nikkei 15129-16740

VIX 18.43-29.58 
YEN 111.41-114.86 
Oil (WTI) 25.77-33.61


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


[UNLOCKED] Big Bang Theory - 02.23.16 chart

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A Brief Appraisal Of Central Banker Credibility

Takeaway: Fitch cuts its global growth outlook. BIS economists say central bankers are out of ammo. Should bulls really be all that bullish?

A Brief Appraisal Of Central Banker Credibility - central bank cartoon 02.17.2016


As faith in global central planners continues to wane, policymakers from the Fed to the BOJ watch as macro markets deteriorate in direct opposition to their optimistic forecasts. 


This Thursday (drumroll please...) we'll hear from ECB head Mario "Whatever It Takes" Draghi. Below is an update from our Macro team on what we expect to hear from him in a note sent to subscribers this morning:


"This Thursday the ECB meets and we expect it to announce additional simulative policy. According to our Big Bang Theory, after 600 rate cuts globally, there’s a new regime of investors that has given up on the belief that central bankers can artificially produce stimulus and weaken their currency for economic benefit.


This policy hasn’t worked in Japan, and it isn’t going to work in the Eurozone. We expect the EUR/USD to bounce on a simulative announcement:  to our TREND ($1.12) and TAIL ($1.13) resistance levels. We also expect associated selling of European equities."


A Brief Appraisal Of Central Banker Credibility - eurusd


More bad news for global central planners 

Over the weekend, Bank For International Settlements chief Claudio Borio said there are "signs of a gathering storm" as central banking policies lose their potency.


In a paper, the BIS noted that inflation expectations were deteriorating, high-yield credit and sovereign emerging market debt spreads have blown out, and there has been a marked selloff in global banks. Here's the conclusion:


"Underlying some of the turbulence of the past few months was a growing perception in financial markets that central banks might be running out of effective policy options... Markets had seemingly become uncertain of the backstop that had been supporting asset valuations for years. With other policies not taking up the baton following the financial crisis, the burden on central banks has been steadily growing, making their task increasingly challenging."


A Brief Appraisal Of Central Banker Credibility - Draghi cartoon 01.08.2015


Meanwhile, earlier today ratings agency Fitch cut its outlook for global growth to 2.5% in 2016. (Welcome aboard the #GrowthSlowing train.) This is down from its previous forecast in December of 2.9%. Apparently, the slowdown in China and collapsing commodity prices that shocked emerging markets had handicapped prior estimates.


No worries right? With bulls placing their faith in omnipotent, gravity-arresting, global central banks to stop the bleeding, what could possibly go wrong?


more to be revealed...


JT Taylor: How To Beat Trump... & Thoughts On Current GOP & Democratic Delegate Counts

Takeaway: What to watch on the election 2016 campaign trail.

Below is a brief excerpt from Potomac Research Group Chief Political Strategist JT Taylor's Morning Bullets sent to institutional clients each morning.


Despite the increasing chatter about Trump's unstoppable momentum, everyone in the field is far from the 1237 required for the nomination: 

  1. Trump has 392 delegates;
  2. Cruz has 305;
  3. Rubio has 130;
  4. And Kasich has 35

So On the Democratic side, where a candidate needs 2,383 delegates to secure the nomination:

  1. Clinton has a clear lead with 1,121;
  2. Compared to Sanders' 481.  


MI, MS and HI are up to bat tomorrow.



JT Taylor: How To Beat Trump... & Thoughts On Current GOP & Democratic Delegate Counts - hill bern


Hillary Clinton and Bernie Sanders clashed in MI last night two days before another critical primary in that state. The debate felt like a sharper-elbowed replay of their past performances covering some of the same ground -- trade, economic plans and of course the water crisis and auto bailout.


Clinton holds a double-digit lead going into tomorrow's primary and, despite Sanders racking up a number of wins this weekend (ME, KS and NE), he needs to beat her in a big state to actually change the trajectory of the race.


We've said before that Sanders is in this for the long haul, and certainly realizes the math is not in his favor -- he's pinning his hopes on amassing enough delegates to ensure his role and message in Philadelphia will be felt and heard.



JT Taylor: How To Beat Trump... & Thoughts On Current GOP & Democratic Delegate Counts - cruz trump


Ted Cruz effectively split the day with Donald Trump on Saturday, and importantly, the reasons why may offer a potential path ahead to Cruz contesting the nomination. The Republican contests this weekend marked the beginning of several closed primaries, meaning only Republicans can vote in Republican primaries and Democrats in Democratic primaries.


From here on out, closed primaries dominate the nominating calendar, offering Cruz an opportunity to methodically close the delegate gap. By appealing to Republican voters who may feel a Trump candidacy is a bridge too far, Cruz may be able to take advantage of the long primary calendar in order to prevent Trump from securing enough delegates too early in the contest.


No one can argue that the nomination appears to be Trump's to lose, but were not ready to concede that one of the wildest and most surprising contests in history is all wrapped up.  


Takeaway: Much of the data we track globally has been bouncing for the last few weeks. This doesn't change our increasingly bearish view of the setup.




Key Takeaway:

Last week's better than expected reading on non-farm payrolls coupled with the ongoing stabilization in oil has fueled an impressive relief rally. Our heatmap shows that CDS spread significantly tightened across the globe last week. Additionally, high yield YTM dropped 58 bps to 8.0%, and the Leveraged Loan index rose by 24 points.


While short-term readings have skewed positive over the last three weeks, intermediate and longer-term measures remain negative, on balance.


Current Ideas:



Financial Risk Monitor Summary

• Short-term(WoW): Positive / 8 of 13 improved / 3 out of 13 worsened / 2 of 13 unchanged
• Intermediate-term(WoW): Negative / 3 of 13 improved / 7 out of 13 worsened / 3 of 13 unchanged
• Long-term(WoW): Negative / 1 of 13 improved / 4 out of 13 worsened / 8 of 13 unchanged



1. U.S. Financial CDS – Swaps tightened for 12 out of 27 domestic financial institutions. With last week's better than expected reading on non-farm payrolls, domestic CDS tightened by an average 9 bps.

Tightened the most WoW: AIG, PRU, HIG
Widened the most WoW: AGO, TRV, MBI
Tightened the most WoW: AXP, JPM, C
Widened the most MoM: AIG, COF, MET



2. European Financial CDS – With positive economic data from the United States and the continued stabalization in oil, swaps mostly tightened in Europe last week .



3. Asian Financial CDS – Swaps tightened across the board in Asia last week. Japan's Sumitomo Mitsui tightened the most, by 24 bps to 131.



4. Sovereign CDS – Sovereign Swaps mostly tightened over last week. Portuguese swaps tightened the most, by 57 bps to 268.






5. Emerging Market Sovereign CDS – Emerging market swaps tightened last week. Brazilian and Russian swaps tightened the most, by -40 bps to 416 and by -30 bps to 302 respectively.



6. High Yield (YTM) Monitor – High Yield rates fell 58 bps last week, ending the week at 7.99% versus 8.56% the prior week.


7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 24.0 points last week, ending at 1813.


8. TED Spread Monitor  – The TED spread rose 5 basis points last week, ending the week at 37 bps this week versus last week’s print of 32 bps.


9. CRB Commodity Price Index – The CRB index rose 4.4%, ending the week at 169 versus 161 the prior week. As compared with the prior month, commodity prices have increased 4.1%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.


10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 14 bps.


11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 10 basis points last week, ending the week at 1.95% versus last week’s print of 2.05%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.


12. Chinese Steel – Steel prices in China rose 2.2% last week, or 47 yuan/ton, to 2172 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.


13. 2-10 Spread – Last week the 2-10 spread widened to 101 bps, 4 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.


14. CDOR-OIS Spread – The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. The CDOR-OIS spread widened by 2 bps to 41 bps.


Joshua Steiner, CFA

Jonathan Casteleyn, CFA, CMT

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.