The Repercussions Of Yellen Fed Burning The Buck & How To Trade It

The Repercussions Of Yellen Fed Burning The Buck & How To Trade It - burn buck


With the Yellen Fed intent on burning the buck, the U.S. dollar continues to drive asset reflation.


Here's analysis via Hedgeye CEO Keith McCullough in a note sent to subscribers earlier today:


"Not surprisingly, USD oversold signal registers overbought signals in CRB Index, Gold, and Copper – WTI’s overbought level right around $49.99/barrel (CRB Index overbought level = 193); Copper backing off 1st, as it’s the weakest of the reflation hands short-term traders are willing to hold."


Hawkish, Dovish, Hawkish, Dovish

Client Talking Points


And… the buy signal – in US Dollar being immediate-term TRADE oversold at 93.62 on the USD Index with an immediate-term range of 93.62-95.48 and a EUR/USD risk range of 1.10-1.14. Good spot to raise cash (again) in USD.


Not surprisingly, the USD oversold signal registers overbought signals in the CRB Index, Gold, and Copper – WTI’s overbought level right around $49.99/barrel (CRB Index overbought level = 193); Copper backing off 1st, as it’s the weakest of the reflation hands short-term traders are willing to hold.


Big mean reversion move higher this morning for European Equities (which got hammered again last week); Italian stocks leading +1.8% on the MIB Index (after falling another -3.8% last week to -19% YTD); that’s helping US Equity futures, but #EuropeSlowing is not (yet) the latest bull case for US stocks.

Asset Allocation

6/6/16 76% 0% 0% 6% 12% 6%
6/7/16 74% 0% 0% 4% 14% 8%

Asset Allocation as a % of Max Preferred Exposure

6/6/16 76% 0% 0% 18% 36% 18%
6/7/16 74% 0% 0% 12% 42% 24%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company Ticker Sector Duration

McDonald's (MCD) is testing fresh beef in 14 Dallas-area restaurants in an attempt to become a modern progressive burger company and better compete with smaller, premium chains. Part of the reason they haven’t done this in the past is because there hasn’t been enough supply of fresh beef for their demand.


The initiative will expand further to more markets over the course of the year to test both consumer perception and their supply chains ability. This could be a big move for MCD that will undoubtedly improve food quality and consumer perception of the company.


Also in the news over the last couple of weeks is MCD’s plan to move its HQ from Oak Brook to downtown Chicago. Although not important from an operational perspective immediately, it will help the company attract and retain top talent which will be beneficial overtime. MCD remains one of our top ideas in the Restaurant space.


Friday’s jobs report represented a complete shift to any renewed expectations of a June/July hike. The yield spread ended the week pinned near the bottom of the cycle low at 92 basis points (10yr-2yr yield %). And, looking at real-time rate hike expectations, the bid-yield of December 2016 Federal Funds Futures Contracts dipped 8 basis points day-over-day, implying the market’s expectations for the first rate hike is now in 2017!


That was the commentary that closed out a deflationary month of May – USD +3.1% with Gold -6.3% and the long end of the Treasury curve and the S&P roughly flat. Fast forward a week. Gold, the Treasury market, and Federal Fund futures don’t buy the hawkish rhetoric for a second.


We’ve shown our chart of the Y/Y% change in Non-Farm Payrolls numerous times, so Friday’s Jobs report was no surprise to us. Consumption and labor market strength are classic late-cycle indicators, but eventually these indicators peak and roll-over in rate-of change terms. Here's the Jobs Report breakdown:

Non-Farm payroll additions totaled +38K in May vs. +160K est. and +160K prior. While the number was a bomb for those who follow the month-to-month sequential change (which is useless), we expected the weakness. To be clear, history paints a very clear picture. NFP additions peaked in Q1 of 2015 and have since rolled over. It’s part of #TheCycle.  

Three for the Road


Yikes: Yellen’s Favorite Market Indicator Hits 7-Year Low… @federalreserve



“I don’t believe in luck, I believe in preparation.”

                                                    -Bobby Knight                                                 


Ted Williams had a career batting avergage of .344 with 521 home runs.

The Macro Show with Keith McCullough and Jonathan Casteleyn Replay | June 7, 2016

CLICK HERE to access the associated slides.


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 80.45%
  • SHORT SIGNALS 78.38%

CHART OF THE DAY: Breaking Down The Cycle's Toughest Earnings Growth Comps

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 that’s really the point on raising Cash. I have no problem buying stocks when they are on sale. But when they are at the top-end of my current SP500 risk range (2049-2116) AND the latest bull case is one of the easiest yet to refute, I get out.


As you can see in today’s Chart of The Day (slide 35 in our Q2 Macro Themes Deck) the toughest comps (comparative period) for #LateCycle Sector Earnings Growth is the 2nd quarter. That’s because Q2 of 2015 was the peak."


CHART OF THE DAY: Breaking Down The Cycle's Toughest Earnings Growth Comps - 06.07.16 Chart

Changes vs. Levels

“People think about life in terms of changes, not levels.”

-Richard Thaler


That’s a great Behavioral Economics quote from Richard Thaler in an excellent chapter of Misbehaving that he called Value Theory. “They can be changes from the status quo or changes from what was expected, but whatever form they take it is changes that make us happy or miserable.”


In that same chapter, Thaler shows what most rate-of-change macro analysts will recognize as an S-curve. Yes, “people like gains… but they hate losses more…” and that’s a critical lesson every portfolio manager should learn earlier in his or her career than later.


“Kahneman and Tversky recognized that we had to change our focus from levels of wealth to changes in wealth. This may sound like a subtle tweak but switching the focus to changes as opposed to levels is a radical move” (pg 30).


Changes vs. Levels - Bull goes... 07.11.2014


Back to the Global Macro Grind


The further you get from academia (and the closer you get to how real money is managed), the faster you’ll realize that using linear econ/valuation models generally don’t work. If you can get ahead of a rate of change move however, you might generate alpha.


No, generating alpha (or excess returns on capital) in any industry that is oversupplied (like the money management business has become) is not easy. That’s why we have to constantly evaluate and evolve our #process. As the game changes, we should.


But at what point do we start trying to change what it is that we do for the sake of very short-term change in market prices that we were not positioned for? Do we capitulate? Do we chase?


I’m on the road in Baltimore, Pittsburgh, and Minneapolis this week and I can guarantee you that in a significant percentage of my meetings at least one person will say “but the market is back to flat.”


Then, as I’m accustomed to answering with a question, I’ll say “what market do you mean, the SP500?” Because, of course, macro markets (stocks, bonds, currencies, etc.) have been far from flat as markets started pricing in #TheCycle going back to late 2014.


Sure, you can just sit there at your desk and complain that “this market won’t go down”…


Or you can be long the things that have actually gone up. Amidst crashes and draw-downs in asset classes around the world, the 1yr return (June to June) in the Long Bond has been double digits.


So, from a rate of change perspective, with the US 10yr at 1.73%, SP500 at 2109, and CRB Index at 192, where to from here? What’s going to be the best place to avoid losses?


  1. CASH – yep, good ole fashioned world reserve currency style – I say the US Dollar


Nope, from these macro market prices (now that Gold and Utilities are +15-17% YTD), there really isn’t anything that beats raising CASH for this pending period of the employment, consumption, and #ProfitCycle slowing.


Slowing? I thought the Old Wall said the call that they didn’t make (before earnings slowed) is done slowing?


Yep, if I don’t hear that 3x per day on the road for the next 3 days, I will be shocked. You see, the way this works is that the sell-side’s perma bull strategists do the rounds too. And I spend a fair amount of time auditing their ever-changing reasons to “buy stocks.”


And that’s really the point on raising Cash. I have no problem buying stocks when they are on sale. But when they are at the top-end of my current SP500 risk range (2049-2116) AND the latest bull case is one of the easiest yet to refute, I get out.


As you can see in today’s Chart of The Day (slide 35 in our Q2 Macro Themes Deck) the toughest comps (comparative period) for #LateCycle Sector Earnings Growth is the 2nd quarter. That’s because Q2 of 2015 was the peak.


No, I’m not talking about Energy and Industrials (which, by the way, we don’t see consensus “backing out” of the “but the market is flat” comment do we?)….


I’m talking about the mainline of the US economy: Consumption, Employment, Financials, Healthcare, Tech, etc. And oh is that going to look slow, in rate of change terms, by the time late summer hits (Q2 reports).


At a level, do I care? Sure, but only if the rate of change in profit growth goes positive. No macro man worth his #timestamped t-shirt makes BUY/SELL calls based on a “valuation” model.


“Ex-Energy” (lol), we’re about to see the biggest rate of change slow-down (year-over-year) of #TheCycle. Give this macro market a few months to noodle over that and we’ll see if I was right to raise Cash in June.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.69-1.81%

SPX 2049-2116
RUT 1115-1183

VIX 12.99-16.84
USD 93.62-95.48
Oil (WTI) 47.36-49.99

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Changes vs. Levels - 06.07.16 Chart

JT TAYLOR: Capital Brief

Takeaway: Hillary the Historic, Bernie's California Dream; the Other Republican Agenda

JT TAYLOR:  Capital Brief - JT   Potomac banner 2

HILLARY THE HISTORIC: Hillary Clinton has secured enough delegates to claim the Democratic presidential nomination and is poised to become the first female candidate to lead a major party to the White House in U.S. history.  A handful of super delegates pushed Clinton over the finish line of 2,383 ahead of a jampacked day full of primaries. Clinton will call for the  Democrats to unify behind her candidacy as primary season comes to an end today – and she and party leaders expect Bernie Sanders to follow suit. To pad her lead, look for her to pick up a sizeable chunk of delegates in the six states voting today; her campaign hopes that being declared the presumptive nominee 24 hours before CA votes doesn’t suppress turnout and handing a victory to Sanders.


BERNIE’S CALIFORNIA DREAM: Now that Clinton has been declared the presumptive Democratic nominee, this leaves Sanders with a hard decision to make – accept it or fight until the death. Sure, a win in CA would help him pitch his future to superdelegates - but to what end? Sanders’ case is broken - Clinton won a majority of the states, pledged delegates and super delegates - not to mention tens of  thousands of more votes. We think that despite Sanders’ reputation for obstinance, he’ll turn the corner once he realizes the only thing he can do between now and the convention in late July is hobble Clinton and her ability to get a head start on outmaneuvering Donald Trump, not to mention damage the party’s increasing chances at making gains in Congress.


No matter what happens in today’s primary, with Democrats adding 2.3 million voters to their ranks in the past four months, CA has become increasingly blue and will be an insurmountable challenge for Trump come November.


THE OTHER REPUBLICAN AGENDA: Speaker Ryan will release the first installment of a six point Republican agenda – “A Better Way” – presenting different types of conservative policies the Republican party will implement if they take the White House. To make it work - Republicans need a compromise with Donald Trump. Disagreements between establishment Republicans and Trump continue to flare and so far establishment Republicans have taken a back seat – but with a plan in place – look for their voices to trump the party’s standard-bearer.


GARY’S GAINS: Libertarian presidential nominee Gary Johnson may not have solidified a serious position in the election race yet, but he’s sure on his way – he’s currently polling at 10 percent and gaining ground. Senator Ben Sasse (NE) – who was long considered as a potential third-party nominee – may be hopping on team Johnson. While Trump continues to double down on his hijinks and as Johnson begins to pick up big endorsements and earns media coverage - he’ll climb in the polls – something he needs to happen to be included in the general election debates.


FRENCH FRIED: David French stepped out of the limelight almost as fast as he came into it. Bill Kristol’s choice for an independent third party challenger confirmed he will withdraw his name from consideration for president. No surprise here as the third-party position has been filled by Johnson, the Libertarian.


FICKLE FED: Fed head Janet Yellen expressed concern about the jobs market, while reiterating that the Fed is data dependent - stocks popped on the news. In the past six months, the Fed pivoted from Hawkish (in December) to Dovish (March/April) to Hawkish (May). Market consensus now perceives Yellen and the Fed as flipping back to Dovish in June. Yellen’s favorite economic indicator (the “Labor Market Conditions Index”) just hit a 7-year low. U.S. #GrowthSlowing. So, what’s an investor to do? The Fed is perpetuating volatility in macro markets, so stick with what’s worked all year, Long Bonds (TLT). For the record, our most vocal call has been TLT – it’s up around 9% YTD versus 3% for the S&P 500.


NEUSTAR: NATIONAL SECURITY POLITICAL FIGHT: Our Telecommunications-Media Policy Analyst Paul Glenchur gave us his insight on Neustar’s continued fight to retain the lucrative local number portability contract “Neustar: National Security Political Fight


BREXIT: SHOULD I STAY OR SHOULD I GO?: Join us for a call this Wednesday with Alexander Nicoll, a consulting member of the UK-based International Institute for Strategic Studies, as he discusses the events leading up to the UK vote and what the outcome of the vote spells for the UK and EU. Please email us for dial-in information

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