CHART OF THE DAY: Fed Forecast Versus #TheCycle

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.


"... And now, markets are “gonna rip” based on a low-probability scenario that the Fed’s forecast for growth to magically re-accelerate (into peak of #TheCyclecompares in Q2) is accurate? #Cool. Good luck with that.


We’re sticking with our forecast of GDP sub 1% for Q2 and the worst profits of #TheCycle in Q2 and Q3. Alongside #EmploymentSlowing, we remain The Bears on #EarningsSlowing. We expect The Financials (XLF) to lead on the downside of earnings with the Yield Spread (10yr minus 2yr) not budging last week (still at YTD lows of 94 basis points wide)."


CHART OF THE DAY: Fed Forecast Versus #TheCycle - 05.31.16 Chart

Bad Fed Estimate

“A bad anchor can easily produce a bad estimate.”

-Phil Tetlock


On Friday @Harvard, Janet Yellen said that, based on her estimate of where the US economy is at, the Federal Reserve will “probably” raise rates in June or July… Ok. What if she raises and her estimates are wrong (again)?


As Phil Tetlock explains in Superforecasting: “When we make estimates we tend to start with some number and adjust. The number we start with is called the anchor. It’s important because we typically underadjust, which means a bad anchor can easily produce a bad estimate. And it’s astonishingly easy to settle on a bad anchor.” (pg 120)


Like they did when they raised rates into the Q1 slow-down (DEC), the Fed is anchoring on a +2-3% GDP scenario for Q2. They’re also anchoring on a #LateCycle view of US Labor, which has clearly slowed since their bad anchor led to bad estimates in Q1. Since the Fed’s forecast has always been one of the biggest risks to macro markets, I don’t see why consensus is complacent about that now.


Bad Fed Estimate - On your mark GDP 6.12.2014


Back to the Global Macro Grind


Complacent? “Keith, everyone is bearish – this is why markets are gonna rip.”


Let me get this straight – the only reason why markets didn’t keep crashing in FEB-MAR is that Janet Yellen went dovish as the data did, the US Dollar careened to the downside, and reflation ripped…


And now, markets are “gonna rip” based on a low-probability scenario that the Fed’s forecast for growth to magically re-accelerate (into peak of #TheCycle compares in Q2) is accurate? #Cool. Good luck with that.


We’re sticking with our forecast of GDP sub 1% for Q2 and the worst profits of #TheCycle in Q2 and Q3. Alongside #EmploymentSlowing, we remain The Bears on #EarningsSlowing. We expect The Financials (XLF) to lead on the downside of earnings with the Yield Spread (10yr minus 2yr) not budging last week (still at YTD lows of 94 basis points wide).


Back to the complacency factor, on last week’s slow-volume-month-end-markup (Total US Equity Volume including dark pool down over 20% vs. the 1-month average), here’s what CFTC futures & options net positioning did:


  1. SP500 (Index + E-mini) moved to its largest net LONG position of 2016 at +95,251 contracts
  2. 10YR Treasury net SHORT position came in small to -93,475 contracts
  3. Gold net LONG position came in bigger than small to +169,491 contracts


To put that net LONG position in US Equity Beta in context, that’s 2.73x its 1-year z-score!

*anything plus or minus 2.0x is usually a fade signal, from a sentiment perspective


Since I didn’t think the Fed would be stubborn enough to stay with a pseudo “mid-cycle” economic view, I didn’t think they’d pivot from hawkish (DEC) to dovish (MAR-APR) back to hawkish (MAY)… but I guess I thought wrong (I thought she was data dependent!).


That’s why I sent out SELL signals (i.e. take down exposures) to my favorite intermediate to long-term LONG ideas after listening to Janet on Friday. After having such a great start to the year by simply staying with #TheCycle call, why would I just let the Fed making a policy mistake eat into my family’s hard earned absolute returns?


In the end, I think the Fed will be proven wrong (again) and the curve will continue to flatten as the rate of change in US economic growth slows in Q2 and Q3. But in between now and the end, I have to deal with the risk these bad Fed estimates impose on my portfolio’s preferred asset allocation. So this is what the Hedgeye Asset Allocation Model’s key moves look like, in context:


  1. CASH going to 77% (from 49% when US Equities hit their May lows)
  2. Taking US Equities from 6% back to 0% (like I did in late DEC)
  3. Taking Fixed Income 31% to 11% (i.e. from 91% of my max exposure to 33%)


I’ve also cut my net asset allocation (I’m a former Hedge Fund PM so I think of all my positions on a net longs vs. shorts basis) to commodities from 10% net long to 6%. Yeah, I know – maybe I should cut that to 0% too (Gold, which I like, was -3.1% last week).


After writing this letter to many of you for going on 8 years now, I realize that how I think about my personal asset allocation isn’t for most Institutional Investors. That said, I’m ok with that because instead of some marketing message, it’s the transparent truth. I’m not an institutional investor anymore and many of you who are can still go to 77% cash in your own accounts anyway!


Since there are no rules against the Fed flip-flopping from hawkish-to-dovish-to-hawkish, why shouldn’t I operate with the same short-termism? Rates can easily rise from 1.70% (where they went to post the recent rate of change #EmploymentSlowing report) to 2.00% on Fed rhetoric, only to crash right back to 1.70% again.


That’s what we call moving the MOVE Index (Bond Market Volatility). And there’s no historical precedent for that being a short-term bullish catalyst for either high beta stocks or junk bonds. You’ll be able to thank the Fed’s bad estimates for that. I know I will. That’s when I get to buy-back everything I sold higher, lower (again), by having a better estimate of intermediate-term growth.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.75-1.91%

SPX 2040-2110
RUT 1105-1160

VIX 12.74-17.18
USD 94.58-95.95
Oil (WTI) 46.53-50.14

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bad Fed Estimate - 05.31.16 Chart

OPEC Meeting Preview: No Policy Change Now But Potential Signals About the Future

Takeaway: We don't expect any OPEC policy change at the June meeting. But still important meeting for potential signals of future action at year-end.

NOTE: Hedgeye will host a client conference call on Wednesday, June 1 at 1:00PM Eastern Time with Senior Energy Analysts Joe McMonigle from Vienna and former US Energy Secretary Spencer Abraham from Washington. Participating Dialing Instructions -- Toll Free: ; Toll: ; UK: 0 ; Confirmation Number: 13638678.

VIENNA, AUSTRIA – May 31, 2016 – Greetings from Vienna where I have arrived over the weekend in preparation for this week’s OPEC meeting on June 2. Several months ago, we forecast not to expect any policy change at the June meeting, and we do not have a different view now.

However, we see Thursday’s meeting as important for gathering potential signals about what OPEC, and in particular, Saudi Arabia might do as it approaches the December meeting amid declining US and non-OPEC production.  While we are not predicting a policy change at the year-end meeting in December, we do believe it may be under consideration for the first time in two years. Much will depend on reductions in US, other non-OPEC and perhaps even OPEC (i.e. Venezuela) production in the fall.

The June meeting is also important for two other reasons. Primarily, it will be the first OPEC meeting since nuclear sanctions against Iran have been lifted resulting in an additional 700,000 barrels a day (b/d) in Iranian crude exports to the market in April. You may recall that since December 2015 we have been bullish at Iran’s re-entry to oil markets and forecasted Iranian crude exports to increase by 700,000 b/d in March. We were off by one month but it's safe to say that the speed of Iran coming back to the market has surprised most observers. These developments are significant because Iran is focused solely about getting its own market share back post-sanctions. Therefore, it is very unlikely that there will be any agreement on an OPEC policy change until Iran meets certain internal production and export objectives.

In addition, as we saw at the April Doha meeting, the Saudis are standing firm that all members, most especially Iran, must participate in any production policy change such as a freeze. We don’t expect the Saudis will change this view going forward regarding any future coordinated OPEC action on production.

The other chief reason we are closely monitoring Thursday’s OPEC gathering is that it will be the first meeting to be attended by the new Saudi Arabian Energy Minister Khalid Al-Falih. As the former CEO of Saudi Aramco, Al-Falih is well known to the energy community but we will be watching the new minister for signals about what the Kingdom may do later this year when non-OPEC production should have declined significantly.

The Saudi delegation arrived late Monday night and has already thrown a surprise to reporters. Several pre-meeting press articles profiling the new minister predicted that he will be more out-spoken and transparent than his predecessor. Reporters who were staked out in the Park Hyatt hotel lobby expecting comment from the arriving Minister on Monday night were disappointed that he slipped in through the hotel’s back door. Likewise, he departed the hotel this morning again through the back entrance without comment. Many reporters on Twitter expressed surprise that the Minister avoided engaging the press. We wonder if they will start staking out the hotel’s back entrance now.

While there is no specific proposal regarding production policy on the meeting agenda, OPEC will use the occasion to admit Gabon with 250,000 b/d production as a new member. In addition, the issue probably getting the most attention from members is a decision on a new OPEC Secretary-General. The group is considering three outside candidates of which we view Nigeria’s Mohammed Barkindo as an early  favorite. However, a disagreement could result in a continuation of Secretary-General el-Badri’s “acting” term. Alternatively, a disagreement could also result in a rotating figure-head administrator by the OPEC President for annual terms. The current Presidency held by the Qatar Minister will end in December and would rotate to the next member in alphabetical order which would result in Saudi Arabia serving as the next OPEC President and potentially as a figure head Secretary-General. While this may provide incentive for consensus on one of the three candidates for Secretary-General, there is no question that Saudi Arabia will be assuming the OPEC Presidency at a time when a policy change may be under consideration for the first time in two years.


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 80.46%
  • SHORT SIGNALS 78.35%

OPEC Meeting Preview Conference Call with Secretary Abraham & Joe McMonigle

Takeaway: OPEC meets June 2 amid $50 oil and Hedgeye is attending the meeting in Vienna. Join us for a conference call previewing the meeting.

Will $50 oil create tension at next week's OPEC meeting in Vienna?


Watch a replay below.


Oil bulls are no doubt pleased that oil passed the $50 threshold on this week but the recent rally may create tension at the June 2nd OPEC meeting. While the rally is certainly welcome news for many OPEC members, we believe the Saudis see a sustained price rebound as premature - only serving as a lifeline for US shale production.


Potomac Hedgeye's Senior Energy Analyst Joe McMonigle will be in Vienna to attend various pre-meeting salons and the meeting on Thursday.


Join us for a conference call previewing the OPEC meeting with Joe McMonigle from Vienna and former U.S. Energy Secretary Spencer Abraham from Washington.


When: 1:00 PM EDT on Wednesday June 1, 2016 


Call Details 

  • Toll Free:
  • Toll:
  • UK: 0
  • Confirmation Number: 13638678

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. Steiner: ‘China Is An Enormous Systemic Risk’ (5/26/16)




In this brief excerpt from The Macro Show, Hedgeye Financials analyst Josh Steiner discusses why the “unbelievable rate of credit growth” in China is now slowing and why it could pose risks for investors long the stock market.


2. McGough: 10 Reasons Why I Don’t Like Hanesbrands | $HBI (5/25/16)



Retail analyst Brian McGough hosted a Black Book presentation earlier this week to update his short call on Hanesbrands (HBI). In this brief video excerpt, McGough lays out the ten reasons HBI shares are headed lower.


3. McCullough: Stop Whining, Stick With The Process (5/25/2016)



During the live Q&A section of The Macro Show earlier today, Hedgeye CEO Keith McCullough provides a “stick with the process” pep talk for a subscriber worried about his short positions.


4. Why We Remain Bearish On Junk Bonds (5/24/2016)



In this brief excerpt from The Macro Show earlier today, Hedgeye Macro analysts Darius Dale and Ben Ryan respond to a subscriber’s question about our views on the credit cycle and high-yield debt.


5. What The Yield Spread Reveals About Growth (5/23/2016)



In this brief excerpt from The Macro Show this morning, Hedgeye Senior Macro analyst Darius Dale provides an in-depth, granular look at why investors should pay close attention to the yield curve and what it says about growth.

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