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CHART OF THE DAY: How To Risk Manage Our Favorite Macro Positions

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.


"... Since Utilities (XLU) and Long-term Bonds (TLT) already signaled immediate-term TRADE oversold (lower) last week, the only big thing that I like on the long side that is signaling oversold today (i.e. it’s at the low-end of the risk range today) is Gold.


Gold’s immediate-term risk range is now $1215-1260. So I’d buy some at $1215 and sell some at $1260."


CHART OF THE DAY: How To Risk Manage Our Favorite Macro Positions - 05.25.16 EL Chart

Brier Bear

“The distance between what you forecast and what actually happened.”

-Phil Tetlock


Not to be confused with Tim Horton’s Brier Cup (or what Canadian Curling fanatics call The Brier), your Brier Score is a probability weighted measure of how good you are at forecasting.


As Phil Tetlock explained in the must-read #behavioral economics book I’ve been citing for the last month, Superforecasting, “Brier scores are like golf scores: lower is better. Perfection is 0.” (pg 64)


No one is perfect. But that doesn’t mean we shouldn’t strive for excellence. We’ve been within 20-30 basis points of forecasting US GDP perfectly for the last 5 quarters. If we’re right on Q2, being positioned for lower-for-longer is going to make for better performance again.


Brier Bear - growth cartoon 05.24.2016


Back to the Global Macro Grind


But, but… bond yields rose (for a week), gold is getting “hammered” (to +15% YTD), and… if the SP500 can hold it’s short-squeeze day of +1.4% (yesterday), US stocks are going to be up for the 1st week in the last 6…


Doesn’t that mean GDP is going to be 2.5% and the Fed can raise rates in June?


C’mon. Let’s keep it real here. Inasmuch as the SP500 signaled immediate-term TRADE oversold (after 4 straight down weeks) in the 2030-2040 range last week, it will signal immediate-term TRADE overbought in the 2080-2090 range this week.


Oh, and it’s month-end.


That’s when everyone @CNBC who is in the business of marketing “but the market isn’t down” (meanwhile most fund managers they interview are) gets to try to tell you another story about how #TheCycle wasn’t really happening, afterall.


Yes, getting the rate of change in GROWTH And INFLATION right is a major component of having a low Brier Score. But risk managing the range (i.e. trading) of immediate-term oversold vs. overbought is a critical component to scoring well too.


From a Hedgeye #Process perspective, what I mean by that is this:


  1. Start with your best Bayesian bet on where the intermediate-term TREND is going (our research view)
  2. Contextualize that TREND within the long-term TAIL duration (i.e. #TheCycle)
  3. And then just risk manage the immediate-term TRADE range of oversold/overbought signals


I know. This isn’t perfect. But after 17 years of trial and error (making legions of mistakes), this process of marrying my multi-duration cycle research with quantitative risk management signals (multi-duration, multi-factor) is the best I can do.


What do you do? If you’re reading this, I certainly appreciate you having an open mind to what it is that I do.


What I don’t do is chase high and freak-out (sell) low. While it seems like forever ago (in inbox question terms), it was only last week that I wrote to you about 9-10 buy/cover signals, taking Real-Time Alerts to 9 LONGS and 3 SHORTS.


In the spirit of the chapter in Superforecasting that today’s quote about Brier Scores comes from (called Keeping Score), on May 18th, I also took our “Cash” position down to its lowest level of 2016 at 49%.


That’s when bond yields tapped the top-end of my risk range (and stocks sold off to the low-end of the immediate-term TRADE range) though. This morning European, Japanese, and US Equities are trading at the top-end of the range:


  1. SP500 immediate-term risk range = 2037-2084
  2. Nikkei immediate-term risk range = 16,331-16,890
  3. German DAX immediate-term risk range = 92


So I’ll raise my “Cash” position back up to 58% now (selling some US Equity and USD exposure).


Since Utilities (XLU) and Long-term Bonds (TLT) already signaled immediate-term TRADE oversold (lower) last week, the only big thing that I like on the long side that is signaling oversold today (i.e. it’s at the low-end of the risk range today) is Gold.


Gold’s immediate-term risk range is now $1. So I’d buy some at $1215 and sell some at $1260.


Selling and/or buying “some” in something doesn’t mean I don’t have “conviction.” It means I have a process to measure the distance between what I’m forecasting and what is actually happening.


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


UST 10yr Yield 1.68-1.89% (bearish)

SPX 2037-2084 (bearish)
RUT 1090-1140 (bearish)

NASDAQ 4 (bearish)

Nikkei 160 (bearish)

DAX 92 (bearish)

VIX 13.86-17.58 (bullish)
USD 94.11-95.95 (bullish)
EUR/USD 1.11-1.13 (bearish)
YEN 108.45-110.79 (bullish)
Oil (WTI) 46.98-49.89 (bullish)

Nat Gas 1.95-2.17 (bearish)

Gold 1 (bullish)
Copper 2.02-2.10 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Brier Bear - 05.25.16 EL Chart

The Macro Show with Keith McCullough Replay | May 25, 2016

CLICK HERE to access the associated slides.

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

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JT Taylor: Capital Brief (formerly Morning Bullets)

Takeaway: Trump Hitting Hard, Clinton Hits the Casinos; Dem Trouble in VIrginia

JT Taylor: Capital Brief (formerly Morning Bullets) - JT   Potomac banner 2


TRUMP HITS HARD: Time to play hard ball. We knew it was coming, we just didn’t know when. Donald Trump doesn’t care about the issue or the context - he’s going ugly, early.  Although the presidential primaries are cooling, they’re still not over as neither candidate is their party’s official nominee yet and they’re already crossing the line – to the extent that one even existed this cycle. Trump seems to keep the surprises coming and one of his allies summed it up perfectly: “What Trump is going to do only Trump knows. Trump is not scripted, he’s not programmed and he’s not handled, but he can read, and he does know the Clintons.” A storm is brewing.


ET TU SUSANA?  Hillary Clinton isn’t the only one he’s going after. Trump attacked fellow Republican and NM Gov Susana Martinez and her record in the state claiming he’d do a better job as Governor after she snubbed his rally in Albuquerque last night. We’ll scratch her from the Veep shortlist.


CLINTON HITS THE CASINOS: “How does anybody lose money running a casino?” Well, people do lose money at casinos, but that’s not what she was referring to as Hillary Clinton follows suit by going after Trump’s past and this time, we’re talking business. Clinton poked fun at the presumptive Republican nominee for his four businesses’ bankruptcies, including his famously failed Atlantic City casinos. Additionally, Clinton shined a light on Trump Mortgages, their role in the housing recession, and Trump’s nerve in rooting for the economy to fail.


DEMOCRAT WOES IN VA: VA Democratic Gov Terry McAuliffe was named the subject of an ongoing investigation by the FBI and prosecutors from DoJ’s public integrity unit. McAuliffe, a longtime friend and confidant of the Clintons, is likely to cause problems for both the Democratic Party and their frontrunner as well - you can bet Trump will go after him as the investigation involves a Chinese billionaire, who has not only donated to McAuliffe’s campaign, but to the Clinton Foundation as well. VA is a toss-up state and, with an eventful summer ahead for McAuliffe, it doesn’t look as if he’ll be much help for the cause down the road.


CALI KNOWS HOW TO PARTY: Californians are registering to vote faster than ever before. More than twice as many voters have registered this year than in the same four-month period in 2012. The growing voter groups identify themselves as Hispanics and Millennials. Both are left-of-center groups, with one favoring Sanders and the other favoring Clinton. CA is too blue for Republicans to be competitive in the fall, but look for a more engaged electorate to impact the Democratic race there in less than two weeks.


LET’S PLAY FAIR:  Bernie Sanders will get more slots on the platform-writing committee for the upcoming Democratic Convention in Philadelphia. Under a new agreement, Sanders will now occupy a third of the fifteen seats on the committee, while Clinton will name six, and DNC Chairwoman Debbie Wasserman Schultz will name four. Sanders and his staff have complained for months that the Democratic Party was tilted in Clinton’s favor and Democratic officials have responded saying that they will give the senator an “unprecedented” say over the official policies of the Democratic Party.  Sanders was quick to act, appointing two controversial figures: James Zogby, a pro-Palestinian activist who serves as president of the Arab-American Institute; and Cornel West, liberal author and racial justice activist who is one of President Obama’s highest-profile African American critics.


Cartoon of the Day: Atlas

Cartoon of the Day: Atlas - growth cartoon 05.24.2016


Global growth continues to surprise Macro consensus to the downside.

6 Picture-Perfect Cartoons Capture Breakdown In Central Planning #BeliefSystem

Takeaway: Below are six cartoons illustrating our latest thinking on the central planning #BeliefSystem.

Our quarterly macro themes form the bedrock of our Macro team's investment conclusions. One of our most recent macro themes is the crashing central planning #BeliefSystem, in which investors lose faith in the policies of central banking bureaucrats.


The notion that central bankers are increasingly pushing on a string is being progressively priced into global financial markets...


6 Picture-Perfect Cartoons Capture Breakdown In Central Planning #BeliefSystem - Central bankers in corner cartoon 04.20.2016 


... With one lone holdout: U.S. equities.


6 Picture-Perfect Cartoons Capture Breakdown In Central Planning #BeliefSystem - Easy money cartoon 04.28.2016


While we admire the blind faith of domestic stock market operators in Yellen’s ability to keep “the game” going...


6 Picture-Perfect Cartoons Capture Breakdown In Central Planning #BeliefSystem - Yellen cartoon 03.31.2016 


... We are keen to cite specific risks that marginally dovish policy in the U.S. will fail to overcome the depths of the domestic economic, credit and corporate profit cycles.


6 Picture-Perfect Cartoons Capture Breakdown In Central Planning #BeliefSystem - hour glass cartoon


The #BeliefSystem breakdown is already happening in Europe and Japan, with respective equity markets in crash mode and currencies strengthening despite easy money policies. 


6 Picture-Perfect Cartoons Capture Breakdown In Central Planning #BeliefSystem - Draghi Peter Pan cartoon 04.13.2016


It's just a matter of time before investors loose faith in Yellen & Co. too.


6 Picture-Perfect Cartoons Capture Breakdown In Central Planning #BeliefSystem - central bank cartoon 04.22.2016

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 80.37%
  • SHORT SIGNALS 78.32%