Disease Of Expectations

“Because I and my companions suffer from a disease of the heart which can be cured only with gold.”

-Hernan Cortes


Not to be confused with the disease of begging central-market-planners for more currency devaluation (punishes the many) in exchange for short-term asset inflation (pays the few), that’s how the boys back in the day used to think about pillaging populations for Gold.


“In 1519, Hernan Cortes and his conquistadors invaded Mexico, hitherto an isolated human world. The Aztecs, as the people who lived there called themselves, quickly noticed that the aliens showed an extraordinary interest in a certain yellow metal.”


Since the Aztecs were used to paying for things with cocoa beans and cloth, “the Spanish obsession with gold thus seemed inexplicable” (Sapiens, pg 173). Ah, what idiots those Aztecs must have been. They totally wouldn’t have understood QE either.


Disease Of Expectations - Fed Up cartoon 03.22.2016


Back to the Global Macro Grind


I believe that our profession is fighting a serious mental disease. I spent all of yesterday going from meeting to meeting in NYC and eventually, most meetings devolved into why stocks can’t go down because the Fed has an extraordinary interest in keeping them up.


‘Yeah Keith, we hear you Brofessor… you say it’s The Cycle… but if you’re right then the Fed is definitely going to bail out markets and go to Qe4, aren’t they? Why not? Seriously, think about everything the Fed can still do – they’re already going dovish…’


Sadly, at that point in the conversation (trust me, I have a lot of reps when it goes that way!), I immediately agree with the client and say, “absolutely – they can do anything they want to do – they can make it really big and super you-ge.”


That is core to the #BeliefSystem.


And, by the way, in going to “negative yields” (after 90-100 TRILLION Yen in money printing, per year, AND buying stocks) in Japan, and QE + buying corporate bonds in Europe, you know what their hoped-for stock market inflations are doing this morning?


  1. Japanese Stocks (Nikkei) down another -2.4%, taking their #crash since July’s (2015) high to -24.6%
  2. German Stocks (DAX) down another -2.4% this morning, taking their #crash since April’s high to -22.6%
  3. Italian Stocks (MIB Index) no bid, -1.8% this morning, taking their #crash from last year’s high to -28.1%


Q: Do you know what the range on the SP500 would be on a -23% to -28% #crash?

A: SPX 1


So, I’m “reducing my price target” (since everyone asks me for one!) to that range, down from a prior target of 1704 (which would be a -20% decline from the all-time closing #Bubble high of July = 2130).


How the heck could that ever happen? It’s impossible that the #BeliefSystem could ever break down, isn’t it? Other than US corporate profits being negative for 2 consecutive quarters (which has always equated to a > 20% decline), what is your catalyst, Keith??”


A: The Cycle


Oh, am I teasing you? Not on the probability of 1704 then 1640 then 1533 rising (SP500). Just a little tickler for you ahead of our Q2 Macro Themes Call that we’ll host at 11AM EST on Thursday (ping for access).


In other news this morning, here’s how our Q1 Macro Ideas are doing (hint: I’m doubling down on them in Q2):


  1. Long-term US Treasury Yields dropping to 1.73% on the 10yr, only 5 basis points away from the Q1 low
  2. Utilities (XLU) are +14.6% YTD and primed to outperform Financials (XLF) -5.6% today with rates crashing
  3. Gold is +1.4% this morning to +16.2% YTD


Why didn’t the masters of the super smart alpha generating universe go all 16th century on their investors and ramp up their Gold holdings? “Believe me”, the spread on GLD vs. Valeant is super huge and really really smart. You need a really big brain for it.


According to the FT, Q1 report cards weren’t as good as yours was. Apparently 19% of mutual funds beat their benchmark in Q1. That was their worst quarter since 1998. Only 6% of “Growth” fund managers beat their bench (worst performance since 1991).


Many are suffering from a disease of expectations (either they’re too bullish on growth and/or always too bullish because they think the Fed can do something to replicate growth via asset inflation when they’re wrong) which can only be cured by performance.


So, instead of whining about where the SP500 is (which you don’t need an active manager to buy for you), I say they better get on board with our Best Long Ideas, Macro Exposures, and Style Factors, before it’s too late.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.71-1.85%

SPX 2018-2077
RUT 1069-1130

Nikkei 151


VIX 13.01-19.45
USD 94.11-96.06
Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Disease Of Expectations - 04.05.16 Chart

#BeliefSystem Crash

Client Talking Points


Big rip higher in the Yen to immediate-term overbought at 110 (vs USD) smoked Japanese stocks again, -2.4% Nikkei taking the crash from the July U.S. Equity market high of 2015 to -24.6% - negative yields is not working in Japan or Europe (DAX down -2.4% and -22.6% since last year’s top).


What went up to a lower-high and failed @Hedgeye TREND resistance of $46/barrel came straight back down – an 11% drop in the last week in WTI should back the machines off from chasing Energy related charts; risk range now = $35.09-38.64.


Forcing yourself NOT to buy/cover U.S. Equities at VIX 12-14 has saved/made you a lot of absolute and relative return since that July #Bubble High and that just happened again; FT with a long-only performance article this morning citing only 6% of Growth managers beating their bench in Q1 (worst since 1991).


*Tune into The Macro Show with Hedgeye CEO Keith McCullough, Demography analyst Neil Howe and Macro analyst Darius Dale live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

McDonald's (MCD) hit an all-time highs last week. "They can't chase Energy Charts today, so they're just dog-piling into our long calls on GIS and MCD," wrote Hedgeye CEO Keith McCullough on Friday.


We've said it before, McDonald's has all the style factors that we like during these turbulent macro market times; high market cap, low beta and liquidity. The stock is up 7.5% this year beating the S&P 500 by more than 600 bps. In August 2015, Restaurants analyst Howard Penney wrote that "2015 will be the last time this stock is below $100."


CME Group (CME) stock is among the small cohort of financial companies that benefit from volatile markets. With the exchange's open interest continuing to expand, which will drag trading volume higher, CME Group is one of the few lower beta longs that will hold up relatively better in the current environment.


The exchange guided to just a +1% operating expense increase for 2016, guided to slightly lower annual taxes for '16 (with more activity coming from abroad), and again announced that open interest was setting a new record, at over 111 million contracts. Even assuming some mean reversion to just over 16.5 million contracts (depending on product group), 1Q is running at ~$1.20 per share in earnings, which means the Street will need to perk up its current $1.06 estimate. Simply put, this is one of the few growth stories in the current macro environment within Financials.


Non-Farm payroll additions came in over +200 again (+215K to be exact) and private sector wage growth was also “good,” increasing +4.2% year-over-year on Friday. We’re most concerned with "better" or "worse" from a rate of change perspective. The non-farm payroll number is "less good" (i.e. "worse") from a year-over-year rate-of-change perspective. Growth in non-farm payrolls peaked in February 2015 at +2.3% year-over-year and the trend since then has been one of decline (+2.0% Y/Y for March 2016). And private sector salary and wage growth peaked on a year-over-year percent change basis in December of 2014.


We remain bullish on Long Bonds (TLT and ZROZ), Utilities (XLU) and short Junk Bonds (JNK). We expect more alpha after what was a great Q1, as the back-end of the Treasury curve continues to get flatter regardless of Fed rate hikes. We were alone in that camp, in December, when we first told you that a rate hike was in fact good for long-duration Treasury bonds. Stick with what's worked.


Here's the Q1 2016 Scorecard (data through 3/31):

  • TLT +8.3%
  • XLU +14.7%
  • JNK +1.0%
  • versus S&P 500 +0.7%

Three for the Road


About Everything: A Perfect Storm of Trends Points to Less Interest In "Things" … via @hedgeye



You can be comfortable or you can be courageous. But you cannot be both.



32% of international students studying in the U.S. in 2015 were from China.

Cartoon of the Day: Crash Test Investors

Cartoon of the Day: Crash Test Investors - Europe Japan cartoon 04.04.2016


Japan's Nikkei is down -23% from its 2015 high. Meanwhile, in European equities, drawdowns from last year's peak range from -13% to -28%.

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About Everything: A Perfect Storm of Trends Points to Less Interest In "Things"

Takeaway: The industrial economy’s struggles reflect a perfect storm of trends— all pointing toward less interest in things.

Editor's Note: In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses why manufacturers and retailers should prepare for the possibility that “goods” aren’t coming back anytime soon. And, even when (and if) the industrial sector emerges from its long-term atrophy, the underlying framework of the “old economy” will look entirely different than what we see today. 


About Everything: A Perfect Storm of Trends Points to Less Interest In "Things" - z sto



Worldwide, the goods-producing sector is in trouble.


Ever since the Great Recession, global trade has struggled to keep up with GDP—something it used to beat easily. Over the last two years, the global manufacturing PMI has been steadily sinking.


About Everything: A Perfect Storm of Trends Points to Less Interest In "Things" - neil chart 1


The U.S. PMI has been under 50.0 for five of the last six months. Globally, both output and new orders are decelerating—for example in China, where manufacturing has been contracting for 13 straight months.


And what about commodity and producer prices? They’ve been tanking. Amazingly, the PPI in just about every major economy has been stuck in deflation since the summer of 2014. 


About Everything: A Perfect Storm of Trends Points to Less Interest In "Things" - neil chart2


Goods are being lapped by services.  The services sector—encompassing activities like media, software, health care, and finance—has posted just one month of contraction over the past two years.


About Everything: A Perfect Storm of Trends Points to Less Interest In "Things" - callout box


The decline of goods and the rise of services, of course, is a long-term trend that began many decades ago in the high-income world. U.S manufacturing employment peaked in 1979 and has mostly been declining ever since. Yet there was a brief respite following the Great Recession, especially here in the United States. Now, however, the goods sector is once again under assault. 


About Everything: A Perfect Storm of Trends Points to Less Interest In "Things" - neil chart 3


Let’s take a look at some of the new forces that may be driving it down.



The China slowdown

Up until 2014, China’s voracious appetite for more industrial capacity, housing, and infrastructure was propping up raw material prices and goods production worldwide. In its heyday, China was consuming roughly half of the world’s supply of just about every industrial input—from steel and copper to cement trucks and construction cranes. No longer.


Urbanization & Extended Familes

Over the last decade, U.S. rural counties have been depopulating and core urban areas have been growing much faster than historical trend. A rising share of Millennials are ditching their cars, flocking to cities, and starting out their careers in cramped apartments with limited space. More than a quarter of 18- to 34-year-olds live in their parents’ homes and don’t need to buy their own household goods.


Growth of the sharing economy

Old computers and furniture no longer get thrown in the trash, but now enjoy a second life thanks to services like Craigslist and eBay. Platforms like Uber and NeighborGoods allow people to find and use items they want without buying them.


“Experiences” as the new form of conspicuous consumption

In the old days, we bought expensive things to affirm their social status. Nowadays, we can buy expensive experiences and curate them on social media. We can thereby define ourselves more by what we do than by what we own. This trend has taken on new meaning with Millennials, who would much rather go out to dinner or attend a music festival than purchase the latest handbag or golf club.


About Everything: A Perfect Storm of Trends Points to Less Interest In "Things" - neil chart 4


Digital unicorns

Thanks to monumental advances in IT capabilities and infinite returns to scale, entrepreneurs can now start a profitable company without spending much at all on physical capital (or even on employees). Think Google, Uber, and Amazon. The whole concept of “book value” assets is becoming antiquated.


Demographic change

Aging societies (I’m looking at you, Europe and East Asia) no longer require capital-widening investment. A contracting working-age population no longer needs new factories—or even new houses. Moreover, the retired elderly are the least likely to spend on things and the most likely to spend on services (starting with health care and personal care). What’s more, they receive their benefits from taxes on young people—who historically are the most likely to want to buy things.



Falling commodity prices are hammering developing countries. Major players in Latin America and Sub-Saharan Africa have entered a “tailspin.” If this decline is indeed the new normal, poor commodity-exporting countries will have to turn to human capital—like India and the Philippines, which are turning their fluency in English to open up new service  opportunities for the working class.


U.S. retailers are updating their playbooks. Companies from Urban Outfitters to REI are turning their stores into “experiences” with fun diversions and top-notch customer service. Others, like Home Depot and Lowe’s, are expanding into new markets (home services, in this case). And e-tailers like eBay and Bonobos are going high-touch with new brick-and-mortar outlets.


The U.S. economy is encountering an imbalance between the buying of private things (which is weakening) and the backlog of demand for public things like infrastructure (which is growing). It was the G.I. Generation’s commitment to building a new public infrastructure in the 1930s, ‘40s, and early ‘50s, which enabled the booming “affluent society” in subsequent decades. America may be ready for a reboot.



Manufacturers and retailers should prepare for the possibility that “goods” aren’t coming back anytime soon. Even when (and if) the industrial sector emerges from its long-term atrophy, the underlying framework of the “old economy” will look entirely different than what we see today. 


Our monthly sentiment run is a behavioral, market-based gauge of investor sentiment in the Basic Materials Sector. Any relative performance measure is tied to the benchmark S&P 500 Materials Sector INDEX (GICS). Further screening methodologies are included in the link to the tracker below.




CLICK HERE to access this presentation.


Key Call-Outs:


Positive Sentiment

Negative Sentiment


  • Looking at short-interest, 5 of the top 12 least shorted names are in the Gold Mining & Chemicals space with large-cap Diversified Metals and Miners being the most heavily shorted (FCX, AA, TCK, AWC, FMG). With the reflation in commodity-leveraged sectors from the February lows, short-interest has declined 2-5% of float in the aforementioned 5 large cap miners. Gold Miners and Trading & Distribution are the least heavily shorted sub-sectors with Commodity Chemicals, Coal, and Aluminum the most heavily shorted.
  • 9 of the top 12 with the lowest buy ratings are in the Metals & Mining space, with 4 of those 9 being Gold Miners. Forest Product companies West Fraser Timber and Canfor Corporation have the highest sell-side “BUY” ratings in the sector. Construction Materials is the other sub-sector with the highest sell-side “BUY” ratings
  • Combining consensus “buy” ratings and short-interest, Forest Products, Diversified Chemicals, and Specialty Chemicals names have the most positive relative sentiment when combining both metrics. Diversified Metals and Mining, Aluminum, & Steel have the most negative sentiment.
  • With the move in the precious metals against a depreciating USD YTD, relative outperformance, declines in volatility premiums, and net futures and options positioning all suggest the market views Gold Miners much more favorably vs. the beginning of 2016. Earnings estimates have also been revised higher with little sector short-interest prices as much of gold production and sales in the sector is left unhedged. Looking at gold derivative markets, the market has gone from a consensus net short futures and options position moving into 2016, to a consensus long position in gold (TTM and 3 year z-scores are tracking +2.2 and +2.7 respectively). With that being said bullish price and VWAP momentum and the bullish rate-of-change in contract positioning and open interest have slowed substantially month-over-month.
  • The market has treated the Fertilizer and Ag. Chemicals relatively poorly over the last year with bearish top-down macro and industry fundamentals weighing on the sector. MOS, POT, CF, and YARA are among the top 12 underperformers relative to the XLB on a 1-mth window. YARA, AGU, and K+S are trading -2.5, -1.9, -1.9 (SIGMA) on a relative basis below the S&P 500 Materials Index on a 6-mth window. YARA, AGU, and CF are trading -2.5, -1.8, -1.8 (SIGMA) on a relative basis below the S&P 500 Materials Index on a 1-Year window.    
  • The largest sector divergences in growth metrics (TOP-LINE, OPERATING, BOTTOM LINE) exist in the mining space. We expect a downward revision in sell-side estimates in the space as many mining company expectations still need to be taken down while some are already discounted. Earnings growth estimates remain depressed in the large cap-diversified Metals & Mining Companies (TCK, VALE, FMG). Gold Miner earnings expectations have been upwardly revised with the YTD move in gold prices while some remain depressed. We attribute any depressed gold miner earnings expectations to a lag in sell-side revisions. 5 of the top 12 names with the highest earnings growth expectations are Gold Miners (EGO, ACA, AEM, GG, AUY).


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