What's Priced In?

“You don’t want to negotiate the price of simple things you buy every day.”
-Jeff Bezos


Maybe Bezos should become the national spokesperson for stocks. Why haggle over things like the rate of change in the economy and profits when you can simply buy stocks (with other people’s money) at every price, every day?


What's Priced In? - Earnings cartoon 11.03.2015


Back to the Global Macro Grind


As Darius Dale and I head into Day 2 of Institutional Investor meetings in Boston, MA I’m going to proactively predict that we get hammered on one question that kept coming up yesterday: “what’s priced in?”


This is, of course, one of the most important questions that an objective investor would start asking you AFTER you’ve convinced them that the causal factor in things like the Long Bond (TLT), Gold (GLD), and Utilities (XLU) winning 2016 = #GrowthSlowing.


When the rate of change in growth slows from its cycle peak…


Drumroll… long-term bond yields fall alongside the collective economic expectation of consensus… and Low-Beta “quality” beats High Beta “leverage” to hopes like “reflation.”


On the latter, look at what Alcoa (High Beta Leverage) had to say as they kicked off Earnings Season last night:


  1. We missed revenues (again)
  2. We’re guiding down revenues
  3. We’re guiding down margins and earnings (and firing people)


Stock drops -5% on that. So what was priced in?


A) Alcoa crashing -60% from $17 to $7 from #TheCycle peak of 2014 to the FEB 2016 low?

B) Alcoa ramping +40% from $7 to $10 “off the lows” on the “bottom is in” view?


As 10th grade math majors know, if you lose -60% of your money in a stock “pick”, you need to be up +150% from that price (I’m using $7, but the stock obviously traded lower than that) just to get back to breakeven.


Moreover, if you don’t get anywhere near break-even, at some point (before and after Earnings Reports) you have to ask yourself:


A) If the underlying business, cash flow, balance sheet, etc. risks are improving or deteriorating and …

B) What’s priced in?


People who bought Alcoa in March of 2011 (with a $17 in front of it) were selling it into year-end 2011 with an $8 in front of it. For those of you who remember 2011, that’s when Bernanke had to save all natural buyers of “stocks” with unprecedented QE.


But Ben wasn’t able to save the performance spread between Utilities (XLU) and Financials (XLF) in 2011 (record high for Utes). He wasn’t able to stop Gold and Long Bond Bulls from having an awesome year either.


For Gold, 2011 was the top. For the Purchasing Power of Americans (US Dollar) that was Bernanke’s bottom.


With that historical context in mind, what if Janet Yellen is NOT able to go to Qe4 by Jackson Hole 2016? What if the US Dollar is about to lock in its YTD low and ramp back up from here? What is priced in under that probable scenario?


Or is it more probable at this point that we’re much more right on the economy than we’ve ever been, US GDP goes negative in Q2, profits continue to slow against #TheCycle peak, and Yellen goes all heli-ski-easy-money-drop on Trump for Hillary?


Lots of questions, but not a lot of time. Between now and when these cyclical realities take hold, that is…


As you can see in today’s Chart of The Day (slide 14 of the recently published Q2 Macro Themes Deck), Aggregate US Corporate Profits put in the mother of all peaks (all-time high) in the 2nd half of 2014. In this chart you can also see where:


  1. SP500 Operating Margin PEAKED and rolled
  2. US #Recessions typically appear AFTER profits and margins PEAK


For long-term investors who have modern day risk management overlays to their stock “picks”, the relationship between profits, margins, and stock prices is very obvious.


Less-obvious at the March 2016 highs for the SP500? Yes. More obvious at the February 2016 lows? Absolutely.


Fully loaded with Premier Li’s comments that China continues to see “downward pressure on the economy” overnight, what’s “priced in” from today’s price (vs. February’s)? I’m looking forward to analyzing what’s left of the free-market negotiation.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.68-1.82%

SPX 2026-2058
RUT 1081-1105

VIX 14.07-19.11
USD 93.74-94.99


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


What's Priced In? - 04.12.16 chart

Yen, Euro and Gold

Client Talking Points


The Yen finally stops going parabolic (down -0.3% vs USD) on these poor Japanese central planners who are now calling for an “end to one-sided speculative moves”, LOL. The Nikkei gets relief on that obviously, +1.1% and still -24% since #TheCycle peak in July.


No relief for the Euro’s ramp ($1.14 vs USD) for European Equity bulls who not only have to deal with the reality of an economic slow-down from #TheCycle (2015) peak, but crashing banks and equity indices; Italy leading losers (again) this morning taking the MIB Index crash to -27% since July.


With the Down Dollar trade signaling immediate-term oversold, both Gold (which we like) and Oil (which we don’t like) are signaling immediate-term TRADE overbought at $1262 and $41.57, respectively (good spot to buy some USD for a trade and sell some Commodity exposure).


*Tune into The Macro Show with Macro and Materials analyst Ben Ryan live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

McDonald's (MCD) hit another all-time high last week. As we continue to reiterate, the company has all the style-factors that we like – high market cap, low beta and liquidity. Stick with it.


We are going to be looking at a much different company 1-3 years from now. Urgency has been instilled from the top down by new CEO Steve Easterbrook. He wants more speed and is encouraging people to get things done faster. The food and experience provided to the customer will greatly improve over the coming months as “Experience the Future” is implemented across the system. It won’t be instantaneous though, as MCD has a lot of work to do around changing the perception to bring back customers it may have lost.


Things like All Day Breakfast, responsibly sourced ingredients, and bringing back the value proposition will lead to increased sales and customer satisfaction. While this company is too big to be completely fixed overnight, management has the right plans in place. We are confident in where they are headed.


We recently completed a granular, deep dive study demonstrating that all classes of volatility including equity, fixed income, and FX have been managed lower by a U.S. Central Bank engineering a historically abnormal quantitative easing policy over the past 7 years.


What does this mean and what are the implications? Well, with Quantitative Easing over (for now) and the Federal Reserve on a rate hiking policy path (for now), for the first time in a long time there is a reason to hedge bond and equity exposure. CME is one of the few venues that allows both institutional and retail investors to do exactly that. The company manages the entire Treasury futures curve and also most of the equity index futures in the U.S.


In this late cycle economic environment, CME Group (CME) has a solid earnings trajectory. The exchange continues to benefit from all 3 legs of the exchange stool including incremental volatility; incremental participants coming into its markets; and also new product introduction. Over the course of the next 12 months, we think the earnings opportunity will jump and the path to more than $5 per share in earnings will become more obvious.


We outlined our expectation and outlook moving into Q2 last Thursday in our quarterly macro themes presentation for institutional clients. The first of the three themes was labeled #TheCycle:


With the recessionary industrial data ongoing, employment, income and consumption growth decelerating, corporate profits facing a 3rd quarter of negative growth and Commercial and Industrial credit tightening, the domestic economic, profit and credit cycles are all past peak and continue to traverse their downslope. With this cyclical backdrop, the U.S. economy faces its toughest GDP comp of the cycle in 2Q16”….


The takeaway is that the economy faces a difficult GDP comp (growth rate) in Q2 within the continued late-cycle slowdown. 

Three for the Road


Utilities $XLU (our fav Sector) +12.4% YTD vs. Financials $XLF (fav Short) -7.1% YTD



Great spirits have always encountered violent opposition from mediocre minds.

Albert Einstein  


According to the Centers for Disease Control and Prevention smoking kills half a million Americans each year and costs more than $300 billion.

The Macro Show with Ben Ryan Replay | April 12, 2016

CLICK HERE to access the associated slides.

 An audio-only replay is available here. 

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.

Gen-X Weighs on Housing Market


In this brief excerpt from The Macro Show earlier today, Hedgeye Housing analyst Christian Drake discusses the demographic and structural headwinds facing U.S. housing. 

Cartoon of the Day: The Cycle

Cartoon of the Day: The Cycle - GDP cartoon 04.11.2016


The U.S. growth outlook is getting pretty grim. The Atlanta Fed's GDPNow tracker for U.S. economic growth in Q1 2016 just hit 0.1% after a spate of new negative data.


We've been making this bearish call for a while now and highlighted in our Q2 Macro themes that "the U.S. economy faces its toughest GDP comp of the cycle in 2Q16."

Central Planning Delusions: From Helicopter Money To NIRP

Central Planning Delusions: From Helicopter Money To NIRP - central bank cartoon 02.17.2016

Falling behind on the latest central planning nonsense?


We think it's pretty clear that the central planning #Belief system is breaking down (see chart below... since the BOJ announced negative interest rates (1/29), the Yen is up +10.8% and the Nikkei is down -10.1%)


Central Planning Delusions: From Helicopter Money To NIRP - boj nirp nikkei jpy 


However, the links below are must-reads to stay up on the latest central planning shenanigans around the world. Whether you agree or disagree with the authors, insights abound, from Ben Bernanke's defense of "helicopter money" to German Finance Minister Wolfgang Schäuble comparing easy-money policies to drug addiction.




  1. Ben Bernanke's Brookings blog: What tools does the Fed have left? Part 3: Helicopter money --  Helicopter money gets the Bernanke stamp of approval and how it would work... "Money-financed fiscal programs (MFFPs), known colloquially as helicopter drops, are very unlikely to be needed in the United States in the foreseeable future... However, under certain extreme circumstances—sharply deficient aggregate demand, exhausted monetary policy, and unwillingness of the legislature to use debt-financed fiscal policies—such programs may be the best available alternative. It would be premature to rule them out."
  2. IMF: The Broader View: The Positive Effects of Negative Nominal Interest Rates -- Insight on the IMF's latest thinking about negative interest rates... "Although the experience with negative nominal interest rates is limited, we tentatively conclude that overall, they help deliver additional monetary stimulus and easier financial conditions, which support demand and price stability. Still, there are limits on how far and for how long negative policy rates can go."
  3. WSJ: Germany’s Schäuble: Time Is Near to End Central Banks’ Easy-Money Policies -- Refreshing sanity from ECB critic German Finance Minister Wolfgang Schäuble... "There is a growing understanding that excessive liquidity has become more a cause than a solution to the problem,” Mr. Schäuble said, comparing the move away from easy-money policies to ending a drug addiction."

  4. Bloomberg: Former Yellen Adviser Proposes Sweeping Reform of Fed System -- Good ideas... "Dartmouth College professor Andrew Levin targeted four areas of change for the Federal Reserve system: make the Fed a fully public institution; ensure the process of picking regional Fed presidents is transparent; set seven-year term limits for regional presidents and Board governors; and make the entire Fed subject to external review."

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.47%
  • SHORT SIGNALS 78.68%