• run with the bulls

    get your first month

    of hedgeye free


CHART OF THE DAY: A Prime Example of Central Planning Failure

Editor's Note: Below is a brief chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.


"... We’ll get into much more detail on how the #BeliefSystem is breaking down in both Japan and Europe on our Q2 Global Macro Themes Call at 11AM EST, but at a basic level here were some basic rules that levered macro strategies used to get paid by:


  1. BOJ (Bank of Japan) prints, devalues, and prints => Yen falls => Japanese Stocks rise
  2. ECB (European Central Bank) says “whatever it takes” => Euro falls => European Stocks rip"


CHART OF THE DAY: A Prime Example of Central Planning Failure - 04.07.16 chart

Levered Business

“A leveraged business is much more difficult to run than a long-only business.”

-Myron Scholes


Myron Scholes is a Canadian who hails from up in my neck of the woods (a small town in Northern Ontario called Timmins). He’s famous in Economics circles for his Black-Scholes model (Nobel Prize in 1997) and infamous for his role at Long-term Capital Management.


The aforementioned quote came from his interview in Efficiently Inefficient where Lasse Heje Pederson asked him about the main takeaways from his experiences at Salomon Brothers and LTCM.


“It is necessary to plan for shocks and losses across positions that are held at times of shock… it’s tough because you are dealing with three things simultaneously: the assets you acquire; the business that you’re in; and how you actually finance activities.” (pg 268)


Back to the Global Macro Grind


Is the business of risk managing macro markets in what was the Golden Age of Central-Market-Planning tough? Very. Especially at this stage of the game when all of the “rules” of the #BeliefSystem start to break down, the Levered Business of carry trading gets scary.


Levered Business - Yellen cartoon 04.06.2016


We’ll get into much more detail on how the #BeliefSystem is breaking down in both Japan and Europe on our Q2 Global Macro Themes Call at 11AM EST, but at a basic level here were some basic rules that levered macro strategies used to get paid by:


  1. BOJ (Bank of Japan) prints, devalues, and prints => Yen falls => Japanese Stocks rise
  2. ECB (European Central Bank) says “whatever it takes” => Euro falls => European Stocks rip


Sound familiar? All Janet Yellen has to do at this stage of the game in the USA is Devalue The Dollar and stocks, commodities, and junk bonds, that are inversely correlated to that go straight up (to lower-highs).


But what if you’re short Yens and/or Euros and long Nikkei and Italy’s MIB Index, with leverage?


A: You’re out of business


Yen Bulls (there aren’t many) are lovin’ Yellen right now. While the Japanese Yen (vs. USD) is signaling immediate-term TRADE overbought at $108 (within a bullish intermediate-term TREND), what is it going to take for the BOJ at their meeting on April 28th to change TREND?


A: I don’t know (they don’t either)


In Europe this morning, overlord Draghi issued the ECB’s Annual Report and said (I couldn’t make this up if I tried), “we will not surrender.” And you know what the Euro (vs. USD) did on that?


A: It went down 10 basis points


Now if you have friends that are in the business of only being long US Equities, this is a good thing (for now). But what happens when more and more and moaarrr dovishness is needed to keep the US Dollar from going up?


A: Eventually the USA ends up in the same place as Japan and Europe


Never, Keith. ‘We are the best house in a bad neighborhood… Auto sales were strong… but now gas prices are stronger’ … or something like that will be the perma bs case. Reality is that eventually it gets to your country’s banks.


How does that happen?


  1. Central-market-planners have to keep devaluing their currencies…
  2. But they have to cut long-term interest rates to all-time lows, in doing so…
  3. Eventually, instead of ZIRP, they get NIRP (negative interest rate policy)…


And a lot of businesses (lots of banks) don’t make money in that scenario.


In other words, to keep the game going this way, Janet Yellen’s Fed will have to eventually reduce the probability of ANY rate hike to 0%, long-term Yields will break to all-time lows, and Jamie Dimon will have to try to create his own CNBC “double-bottom”, buying back stock as JPM fundamentals look the way every other bank in Japan and Europe does under a negative yield regime.


This is why I pivoted from bearish on Energy (XLE) to most bearish on Financials (XLF) when we did our Q1 Macro Themes Call. It’s also why I signaled “buy more” Utilities (XLU) on yesterday’s pullback.


Our Best Ideas are levered to the Fed coming around to our #LateCycle US economic view. If you ran a fund that was only long Utes and short Fins in 2016, you’d want leverage on that P&L too!


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.69-1.81%

SPX 2025-2077
RUT 1069-1130

Nikkei 152
USD 94.01-96.04
EUR/USD 1.11-1.14
YEN 108.33-111.99
Oil (WTI) 35.04-40.25


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Levered Business - 04.07.16 chart

This Is Getting Fun

Client Talking Points


Yet another intraday ramp in U.S. stocks yesterday on “Fed Dovish” (Fed Minutes) – wow is this getting fun. But what does dovish do when the #BeliefSystem on central-market-planning is breaking down? Draghi + Constancio were both out this morning trying “whatever is needed.” Draghi says he “will not surrender.” The Euro is only moving -0.1% on that; Spanish and Italian stocks barely up and remain in crash mode.


Yellen for Yen President! The Yen is at $108 now vs. USD and is finally signaling immediate-term TRADE overbought within a bullish TREND and the Nikkei stopped going down (post 7 straight down days), albeit only +0.2%. We thought Janet was focused on “stabilizing the global economy”, not imploding Japanese and European stock markets.


No follow through to the +5.1% WTI day as the pop in this inverse correlation trade runs into resistance; immediate-term risk range for WTI is now $35.04-40.25 (top end of the range used to be closer to $42-43). We’ll be hosting our Q2 Macro Themes Call at 11:00AM ET.


*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

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


Live Healthcare Q&A with Tom Tobin Thursday at 2:15PM ET | $ZBH $AHS $MD $HCA $HOLX

FREE: https://app.hedgeye.com/insights/50147-live-healthcare-q-a-with-tom-tobin-thursday-at-2-15-pm-et-zbh-ahs



When you win, say nothing. When you lose, say less.

Paul Brown


Volkswagon’s VW XL1 uses barely 0.004 gallons of fuel every mile (261 mpg).

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.

Replay: Healthcare Q&A with Tom Tobin | $ZBH $AHS $MD $HCA $HOLX

CLICK HERE to access the associated slides.


Healthcare analysts Tom Tobin an Andrew Freedman hosted a live Q&A today to review their latest research and answer your questions.


Cartoon of the Day: Listen Up!

Cartoon of the Day: Listen Up! - Yellen cartoon 04.06.2016


All eyes on the Fed today, ahead of the release of the FOMC minutes.

A Brief Warning On Q1 Earnings

Takeaway: Be very careful out there.

A Brief Warning On Q1 Earnings - earnings cartoon 01.27.2015


Think first quarter earnings are growing gangbusters? Think again.


Here's the latest from our Macro team in a note sent to subscribers this morning:


"Q1 earnings season kicks-off next week with the bulge bracket banks leading the way (JPM next Wednesday). If you think we’ll follow-up an awful Q4 2015 reporting season (S&P revs -4.0% Earnings -6.9%) with a rebound, think again. We won’t be lapping bad comps until at least Q3 of this year (reported in Q4). In Q1 of 2015, 8/10 sectors saw Y/Y earnings growth, and the one sector with awful earnings was energy, where WTI averaged $48.57 vs. $33.63 in Q1 0f this year. Don’t get excited about Q1 earnings season. It will be more of the same. #thecycle."


Here's the chart highlighting why all of this is so significant.


A Brief Warning On Q1 Earnings - z 77



Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.