[UNLOCKED] Early Look: Sloppy Guesswork

Editor's Note: Below is a complimentary Early Look written by Hedgeye CEO Keith McCullough on 5/4/16. In it, McCullough discusses our process, Wall Street's poor economic forecasting track record, and why our GDP model has been spot on over the last 5 quarters. McCullough also nails the April "jobs bomb" ahead of the BLS's monthly jobs report that Friday. Click here to get the Early Look delivered in your inbox weekday mornings.


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“Isn’t it time for such sloppy guesswork drawing to a close?”

-Phil Tetlock


Yesterday was a good day. The Long Bond was up big and I spent the day meeting with some of the largest hedge funds in my home state of Connecticut. I absolutely loved the debates.


The aforementioned quote (from a great book I’m reviewing called Superforecasting) really nails a common thread we hear from the sharpest institutional investors in the world when it comes to The Establishment’s US GDP forecasting process.


In one meeting in particular, the PM (who oversees an entire office of hedge fund PMs) read an excerpt from a sell-side note that said “GDP feels like it’s going to be 2.5% in Q2.” A feel? Really? I don’t feel anything in our predictive tracking algo, but we’re at 0.3%.


[UNLOCKED] Early Look: Sloppy Guesswork - GDP cartoon 05.29.2015 large


Back to the Global Macro Grind


Let me take that back. I do feel something. I feel really good when A) our GDP forecast is a long way from Old Wall consensus and B) consensus positioning in the SP500 (Index +E-mini futures/options contracts) is leaning as long as it has been for all of 2016.


Oh you bombastic Hedgeye boy, you.


Yep. I’m proud of both my people and process. We’ve actually been, on average, within 20-30 basis points of getting the US GDP number right for the last 5 quarters (the historical standard error in our model is 35 basis points).


The main reason why we’ve been so much more accurate than any other research department on accurately forecasting one of the most important factors in any economic model (growth) is that, instead of “feeling” it, we use modern-math and machines.


“After all, we live in an era of dazzlingly powerful computers, incomprehensible algorithms, and Big Data… isn’t it time for such sloppy guesswork drawing to a close? … The point is that if you have a well-validated statistical algorithm, use it.”

-Phil Tetlock, Superforecasting (pg 20-21)


While I am sure our forecasting #process will continue to evolve alongside technology and time, for now I probably sound overly confident that what we do crushes what they keep doing. With statements like this, how do you feel about it?


  1. “A rate hike could be appropriate, if the data is as expected.” –John Williams (San Francisco Fed Head, yesterday)
  2. The economy is offering mixed signals, but favors unemployment data.” –Dennis Lockhart (Atlanta Fed, yesterday)


Given that a recently reported GDP of 0.5% isn’t in the area code of “as expected”, I don’t think Williams has a lot of credibility as a Wall St. forecaster. But Lockhart’s Atlanta Fed actually has a “GDP Now” tracking model (that has recently had an intra-quarter standard error of 200-250 basis points!) that is NOT mixed. It’s flat out bad. So he’s “favoring” non-GDP data.


I know. I know. You’re probably saying to yourself that the Fed is obviously dovish now (US Dollar at a 16-month low, post Janet Yellen’s recent rate-cutting-of-the-hikes), so this banter from Williams, Lockhart, Bullard, etc. is just popycock and posturing.


I don’t disagree with that. Neither would most people I meet with.


In modern forecasting, we deal with everything in rate of change terms and then probability-weight surprises vs. expectations.


As the rate of change in the economic, profit, and credit cycle continues to slow, the probability continues to rise that the Fed’s latest of #LateCycle indicators (Employment) starts slowing at a faster pace.


In other words, you’re one NFP (non-farm payroll) jobs bomb away from both Trump and Sanders sounding really right on the economy.


I’m sure we have absolutely nothing to worry about if Trump or Sanders becomes President of the United States. But last night’s voting machine in Indiana reveals that it’s more than just Hedgeye (and the Bond Market) that gets what’s really going on in the US economy.


Instead of those who were “feeling” US GDP was going to be 3-4% with “falling gas prices” (last year), now they have to spin that into rising gas prices are good for US Consumer Confidence as both the conference board and Univ. of Michigan report hit new YTD lows.


It’s either sloppy guesswork or just the conflict of interest ridden cabal of The Establishment consensus doing what they think they have to do before it becomes obvious to The People right before The Election.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.72-1.87%

SPX 2053-2083
RUT 1101-1140

NASDAQ 4711-4844

VIX 14.26-17.83
USD 92.35-94.50


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


[UNLOCKED] Early Look: Sloppy Guesswork - 05.04.16 chart

Getting Paid? Mr. Market Remains Fond of Growth Bears

Takeaway: The S&P 500 is down 3 straight weeks and down 6 of the last 8 as US Consumption and global growth slows.

Getting Paid? Mr. Market Remains Fond of Growth Bears - bear 2


Growth Bears have been getting paid. this may is no exception.


Here's analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:


"The Yield Spread smashed to fresh YTD lows last week (10yr minus 2yr = 95bps) keeping the Financials (XLF -4.0% YTD) our fav sector on the short side vs. Utes (XLU +14.1% YTD) our fav on the long side."


(We've been the unabashed bulls on the Long Bond via TLT which is up 9% YTD versus flat for the S&P 500.)



In other words, Utilities (XLU) is the top performing sector year-to-date. We've been recommending it to our subscribers since January.


Getting Paid? Mr. Market Remains Fond of Growth Bears - xlu 5 16


As growth has continued to slow, there's been an unequivocal bull market in Gold (GLD).



Meawhile, there are plenty of global #GrowthSlowing barometers out there...


Take a look at Italy:



... And China:



Here's the global equity drawdown map:

Click image to enlarge

Getting Paid? Mr. Market Remains Fond of Growth Bears - drawdown



While global growth slows we're sticking with what's worked all year...

  • Utilities (XLU)
  • Gold (GLD)
  • Long Bonds (TLT)

Daily Market Data Dump: Monday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, and rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products




Daily Market Data Dump: Monday - equity markets 5 16


Daily Market Data Dump: Monday - sector performance 5 16


Daily Market Data Dump: Monday - volume 5 16


Daily Market Data Dump: Monday - rates and spreads 5 16

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 80.52%
  • SHORT SIGNALS 78.70%

CHART OF THE DAY: What Works When Yield Spread Hits YTD Lows

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


"... Maybe that’s why everyone is getting long the Gold chart again. As you can see in today’s Chart of The Day, they did so when the Yield Spread started to break down in 2011 too.


With the 10yr Yield falling another -8 basis points last week to 1.71%, the Yield Spread (10yr yield minus 2yr yield) pancaked to a fresh YTD low of 95 basis points last week. Flapjack flattening is not bullish for the Financials. It’s bullish for Utes, baby!"


CHART OF THE DAY: What Works When Yield Spread Hits YTD Lows - 05.16.16 EL Chart

REPLAY | Special Free Edition of The Macro Show: Global Markets .. Grave Risk?

You're invited.

REPLAY | Special Free Edition of The Macro Show: Global Markets .. Grave Risk? - z ba ba


Hedgeye CEO Keith McCullough hosted a granular, no-punches pulled, deep-dive look at why markets are more vulnerable than ever and how to prepare for the uncertainty ahead.

As you may already know, Keith has been proactively warning our subscribers about the coming crash.

You do not want to miss this opportunity.


Click here to watch the replay.


Like what you see? Subscribe to The Macro Show here.

REPLAY! This Week On HedgeyeTV

Our deep bench of analysts take to HedgeyeTV every weekday to update subscribers on Hedgeye's high conviction stock ideas and evolving macro trends. Whether it's on The Macro ShowReal-Time Alerts Live or other exclusive live events, HedgeyeTV is always chock full of insight.


Below is a taste of the most recent week in HedgeyeTV. (Like what you see? Click here to subscribe for free to our YouTube channel.)




1. McGough: Behind The Massive Spike In Retail Bankruptcies (5/13/2016)



In this brief excerpt from The Macro Show earlier today, Hedgeye Retail analyst Brian McGough explains why we’ve already seen more retail bankruptcies this year than in any full year in the last six.


2. As Neil Howe Predicted In March … ‘Trump Will Run To Left Of Clinton’ (5/10/2016)



Renowned Demographer and Hedgeye Sector Head Neil Howe is always one step ahead of the crowd. Case in point: A popular Washington Post article today lays out how presidential hopeful Donald Trump is “running to the left of Hillary Clinton.” In a then controversial video on HedgeyeTV, Howe predicted this would happen … back in March. Watch as Howe and Hedgeye CEO Keith McCullough review and update his prescient call in this brief excerpt of The Macro Show.


3. McCullough: Expensive? ‘I Love Expensive’ (5/9/2016)



In this brief excerpt from The Macro Show today, Hedgeye CEO Keith McCullough responds to a subscriber’s question about why he’s still bullish on McDonald’s (MCD), Utilities (XLU), and Long Bonds (TLT) even though they are “getting expensive.”


the macro show

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Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.