HP 12C Trading

“I traded in between classes. I used a lot of pay phones on campus.”

-Ken Griffin


Of the many great interviews Lasse Heje Pedersen did in a must-read book for your investing library, Efficiently Inefficient, the one he did with Citadel’s Founder and CEO, Ken Griffin, ranks amongst the best.


I love learning about successful people in this profession. Getting insight into how they initially thought about building their #process is most interesting to me. Griffin started running money ($265,000) out of his Harvard dorm room in September of 1987.


“I had a satellite dish on top of my dorm room… back then all the decisions were made using paper and pencil and trying to approximate where I thought the bonds should trade based upon cash flow differentials, creditworthiness, and the inherent call protection of the bond… When I was in class, I’d have my HP 12C calculator, a scrap of paper, and think through information in my head and make decisions.” (Efficiently Inefficient, pg 288)


HP 12C Trading - earnings cartoon 04.12.2016


Back to the Global Macro Grind


Oh boy do I love my HP 12C.


These days, ex a few near the old battle axes who sit with me on the Hedgeye Research Desk (Tom Tobin and Todd Jordan), it’s hard to find the weaponry of these old school calculators. Sometimes the millennials mock that we use them. But we’re cool with that.


If you left me on an island (with no internet connection), here’s what I’d need to make market decisions:


  1. Notebooks
  2. Pens (I do not like pencils)
  3. HP 12C (with supply of batteries)


Oh, and cold beers … and a pay phone (1 call per day at the market close – closing price, volume, and volatility data = #critical).


That way I could build my own time-series by hand and not have to stress myself out, staring at screens all day long, trying to handicap what a bunch of machines are going to do to daily and weekly performance chasers.


Just so you know where my head is at, I’m actually heading out (with all 4 of our kids) on vacation this morning.


When taking “time” away from the screens, the real things that matter to me are my levels on intermediate-to-long-term durations. Within what I call our TRADE/TREND/TAIL model, what I’m talking about are:


  1. Intermediate-term TRENDS (3 months or more)
  2. Long-term TAILs (3 years or less)


While meeting with Institutional Investors in Boston for the last two days, I found myself answering the question “where could you be wrong?” using my long-term TAIL risk levels (slide 63 of the Q2 Macro Themes deck):


  1. US Dollar Index long-term TAIL support = 93.07
  2. Crude Oil (WTI) long-term TAIL resistance = $45.44
  3. SP500 long-term TAIL resistance = 2066
  4. US Equity Volatility long-term TAIL support = 11.71


These “levels” are dynamic (constantly changing as price, volume, and volatility data does), but the general levels on long-term durations don’t change much relative to something like my immediate-term (TRADE) risk range.


From a longer-term risk management perspective, what’s most interesting to me in macro right now is that:


A) Mostly all of Consensus Macro missed calling the long-term breakout in USD (and commensurate commodity #Deflation)

B) But, on shorter-term durations, consensus is right back in the saddle now, Short USD and Long Oil

C) And this is happening as both the Long-term support for USD is holding inasmuch as long-term resistance for Oil is


So… in addition to keeping shorts on (in Real-Time Alerts) where Earnings Season is our catalyst, maybe what I should do is just buy Dollars, short Oil & Gas Stocks (XOP), turn off my screens for a week…


While that might sound crazy to many who are fighting for their short-term performance lives right now, I think it’s crazier to think all that’s been imploding for the last 2-3 years has “bottomed” because some single-factor simple-moving-average in a chart has.


Crazy is as crazy does, I guess. After all, I’m still the guy using his HP 12C.


Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND research views in brackets):


UST 10yr Yield 1.68-1.82% (bearish)

SPX 2030-2077 (bearish)
RUT 1082-1122 (bearish)

NASDAQ 4 (bearish)

Nikkei 152 (bearish)

DAX 9 (bearish)

VIX 13.01-19.03 (bullish)
USD 93.77-95.35 (bullish)
EUR/USD 1.12-1.14 (neutral)
YEN 106.96-111.42 (bullish)
Oil (WTI) 37.09-43.11 (bearish)

Nat Gas 1.91-2.07 (bearish)

Gold 1 (bullish)
Copper 2.05-2.17 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


HP 12C Trading - 04.13.16 chart

Up Dollar = Down Yen, Down Euro

Client Talking Points


What a difference a -0.6% decline in the Yen (vs. USD) makes = +2.8% bear market bounce in Nikkei (which is still -22% since #TheCycle peaked in July of 2015). All of macro correlating to what FX does right now (has nothing to do with EPS Season).


Another fun ramp to an immediate-term overbought signal (on an oversold USD signal) finds resistance, USD bounces, and Oil sells off -1.7% this morning. OVX (oil volatility) is signaling nowhere near the end of this bear market in Oil (OVX = 48 with an immediate-term risk range of 44-53).


What’s “priced in”? We’ll see. But selling all rallies (at the top-end of the risk range) in Financials has been awesome in 2016 and we expect it will continue to be as the very obvious bull run in the Long Bond (Down Yields) and Utilities (XLU +13.2% YTD vs. XLF -5.9%) continues.


*Tune into The Macro Show with Internet & Media analyst Hesham Shaaban 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


VIDEO: ‘We Are Vigilantly Bearish On Corporate Earnings & Junk Bonds’… via @hedgeye



Great spirits have always encountered violent opposition from mediocre minds.

Albert Einstein  


The U.S. Superyacht Association estimates that the annual cost for operating a 180-foot yacht is $4.75 million, roughly an annual expense of about 10% percent of the yacht’s original cost.

The Macro Show with Hesham Shaaban Replay | April 13, 2016

CLICK here to access the associated slides

 An audio-only replay of today's show is available here.

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REPLAY Inversion Immersion | Dissecting New Treasury Rules on the M&A Market

Takeaway: We hosted a call today with Jeff Shapiro of policy firm Peck Madigan Jones on Treasury's new rules. Enclosed is our replay.

REPLAY Inversion Immersion | Dissecting New Treasury Rules on the M&A Market - invite





We hosted a call with a leading policy advocate firm today regarding the Treasury's new rules on permitted M&A inversions. The 40 minute call outlines the latest specifics on the new rules. 3 main takeaways are:


1.) The new language retroactively adjusts the equity contribution of a serial inverter (foreign company in this example). Thus the prior acquisitions of the foreign company are retroactively stripped out for the past 36 months and then that smaller equity amount is counted with the equity of the U.S. acquirer to establish allowable ownership ranges to invert. For example the original Pfizer/Allergan deal resulted in PFE equity in the proforma company of 56%, avoiding the restriction band of 60-80% of U.S. ownership. At 60-80% of U.S. equity percentages (in a combination), Treasury doesn't break up the deal however the benefits of the inversion are nil. At above 80% U.S. ownership, the government treats the combined companies as U.S. based completely, negating the inversion even if the corporate address is foreign. Under these new rules, PFE/Allergan went to 80% U.S. ownership (as the Allergan equity was brought down as its prior deals were stripped out) and hence the deal was called off.


2.) There have been 50 inversions since 1982, but 20 deals since 2012. Total M&A activity from inversions is roughly 5% on a dollar value as deal tickets have tended to be large. Greater than 50% of all inversion activity has been in the Healthcare group.


3.) The earnings stripping parameter goes into effect in 90 days or in June of this year and essentially classifies an intracompany loan of bigger than $50 million as subject to new Treasury regs. If a loan, for example, is characterized as an expanded group instrument, or EGI, then the capital is treated as equity, not debt, and taxed as dividends rather than tax deductible interest payments. The latest Treasury version on EGI's expanded coverage to include partnerships and foreign corporations.


Please let us know of any further questions for our speaker,


Jonathan Casteleyn, CFA, CMT 


Joshua Steiner, CFA


Cartoon of the Day | Earnings: Dead In The Water

Cartoon of the Day | Earnings: Dead In The Water - earnings cartoon 04.12.2016


In what is already expected to be an ugly quarter for corporate earnings, Alcoa kicked off 1Q earnings season with a bang last night. The aluminum producer missed revenue estimates, earnings fell by 92% and reduced guidance for the year. 

Eurozone’s #BeliefSystem Fails!

What do you believe in?  Do you still believe that ECB President Mario Draghi’s policy to do “whatever it takes” to burn the currency can and will spur Eurozone growth and inflation?


As we present in our Q2 2016 Macro Theme of #BeliefSystem (click here for the replay – slides and video – of our second theme starting on page 37 and minute 25:14), not only do Eurozone fundamentals continue to materially slow (witness the progression of slowing data over the last 12 months in the charts of Eurozone Retail Sales, Industrial Production, Exports, Consumer and Business Confidence, and Inflation), but the region is experiencing the perfect storm given the combination of:


Negative interest rate policy (NIRF) + Quantitative (and Qualitative) Easing + Talking Down of Forward Guidance.


According to our Big Bang Theory that we originally discussed ahead of the ECB’s March 10th 2016 interest rate meeting, we’ve underlined our view that 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.


Not only were we right with our call that more ECB “easing” would equate to EUR/USD strength (versus a bearish consensus view), but we’ve continued to be right forecasting growth and inflation levels below consensus.  


Specifically, we’ve signaled through our GIP (growth, inflation, policy) model that the Eurozone would return to Quad 4 (equating to growth slowing as inflation decelerates). In the second chart below, we show our forward GDP estimates over the next four quarters, declining to +0.2% in Q4 2016.  #ouch!


Eurozone’s #BeliefSystem Fails! - EUROZONE

Eurozone’s #BeliefSystem Fails! - Eurozone GDP Est.


If the deterioration of growth fundamentals and consumer and business confidence weren’t enough, the ECB’s negative interest rate policy is artificially pushing down bond yields, making it harder for banks to lend (while pilfering savers), and the equity market has taken it on the chin – the EuroStoxx 600 has crashed, down -20% Y/Y.


Schäuble Speaks – In related news, German Finance Minister Wolfgang Schäuble blew the horn this weekend echoing our sentiment on the negative impact of the ECB’s quantitative and qualitative policy. Specifically he suggested that the ECB’s loose monetary policy is partly to blame for the rise of the populist Alternative für Deutschland (AfD) party in Germany, and argued:


“I said to [ECB President] Mario Draghi…be very proud: you can attribute 50% of the results of a party that seems to be new and successful in Germany to the design of this policy. There is a growing understanding that excessive liquidity has become more a cause than a solution to the problem.”


We'll continue to bang the boards with our call that the #BeliefSystem in the Eurozone is broken -- that neither Draghi nor other central banker can bend economic gravity.  This time is in fact not different, and as the Eurozone experiences the drag from an aging population (see chart directly below), the prospect of a buoyant and sustained economic recovery appears even further out of reach. 


Eurozone’s #BeliefSystem Fails! - Eurozone Demographics

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