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CHART OF THE DAY: Dear US Equity Beta Chasers, Here Are 3 Catalysts To Risk Manage

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.

"... That’s right muddlers – there has been a ton of alpha out there to be had. So let’s get with the program and do what we’re paid to do and get the next move right from here. For US Equity Beta chasers, I think the next move is Up, then Down. Potential catalysts:


  1. The Fed (going back to dovish today with Late Cycle #EmploymentSlowing)
  2. Brexit (if they don’t exit)
  3. Mean reversion and performance chasing"


CHART OF THE DAY: Dear US Equity Beta Chasers, Here Are 3 Catalysts To Risk Manage - 06.15.16 EL Chart

Time To Muddle Long?

“I’m at my best in a messy, middle-of-the-road muddle.”

-Harold Wilson


Have you ever “muddled along”? For those of you who are new to Wall Street, those are code words for “the market can’t go down” (as long as nothing really bad happens).


But, like most things group-think, the precise definition of what people might think something is, isn’t! To muddle (verb used with object per Dictionary.com):


  1. To mix up in a confused or bungling manner
  2. To cause to become mentally confused
  3. To cause to become confused or stupid or as if with an intoxicating drink


Oh boy, do I like that last one! If we either start re-living the stagflation of the 1970s (like Harold Wilson did: PM of the UK 1 and 1) or just get right hammered every night, all of our real growth hopes might just muddle away.


Time To Muddle Long? - Fed cartoon 06.10.2016


Back to the Global Macro Grind


“So”, in the spirit of Old Wall sayings, I’m going to muddle to the long side of US Equities this morning. Yep, you read that right. For the first time all year I’m going to mentally confuse you in a bungling manner.


To be crystal clear, this is more of an immediate-term risk management call than it is a change in the bearish #GrowthSlowing call we’ve had for almost a year now. At best, this is going to be messy. And I reserve my liberty and rights to change my mind 50 handles higher.


What’s 50 handles?


  1. In beloved beta chasing terms, 50 handles in the SP500 = 50 points
  2. The SP500 just dropped approximately 50 handles (-2.4%) in less than a week
  3. A 2.4% move, in equity return terms, beats more than 90% of equity managers YTD


To be doubly clear as I muddle, I don’t subscribe to some passive aggressive version of Wall Street relative performance Schadenfreude where my goal in life is to help you achieve mediocre returns and/or barely beat beta. I want you to crush it.


For “long onlys” what is crushing it from both #TheCycle high of July 2015 and for 2016 YTD?


  1. Not being long any European or Japanese Equity Index whose draw-down/crash is currently -22-30%
  2. Not being long higher beta versions of US Equities like the Nasdaq or Russell which are -7.2% and -11.4% since July 2015
  3. Being long the Long Bond and/or anything equities that looks like a bond (Utilities = +17.3% YTD)


For hedgies…


  1. How about being up +22.2% YTD if you had a 2/20 fund long Utes (+17.3%) vs. short Financials (XLF) -4.9% YTD
  2. Long Gold, i.e. #GrowthSlowing (+21% YTD) vs. Short Copper (i.e. demand hasn’t “bottomed”) -5.5% YTD
  3. Long Energy (XLE +11.3% YTD) on Down Dollar Dovish Fed (#GrowthSlowing) vs. Short Ackman (VRX -76% YTD)


That’s right muddlers – there has been a ton of alpha out there to be had. So let’s get with the program and do what we’re paid to do and get the next move right from here. For US Equity Beta chasers, I think the next move is Up, then Down. Potential catalysts:


  1. The Fed (going back to dovish today with Late Cycle #EmploymentSlowing)
  2. Brexit (if they don’t exit)
  3. Mean reversion and performance chasing


Sound risky? Oh yeah. But aren’t we all just gambling that the Fed will help us “muddle away” as the rest of The People in this country melt-down? With a lot of PMs behind the 8-ball, don’t forget there’s a natural willingness to believe in almost any catalyst at this point.


As Richard Thaler reminds us in Misbehaving, “gambling when behind in an effort to break-even can be seen in the professional investor… people who are threatened with big losses and have a chance to break-even, will be unusually willing to take risks.” (pg 84)


If you’re one of the alpha generators playing with 1 year and YTD relative and absolute performance leads right now, getting net long US Equity Beta here for an immediate-term return that beats the year-over-year return of the SP500 (-0.44%) sounds like fun, no?


While you might want to just get long SPY, here’s what I’ve done on red this week (in Real-Time Alerts):


  1. Gone from 3 LONGS and 11 SHORTS to 6 LONGS and 3 SHORTS
  2. Covered my SPY (SP500 short position)
  3. Signaled BUY in Healthcare Stocks (XLV) for the 1st time in 2016
  4. Signaled BUY in High Dividend Yield (VYM) stocks
  5. Signaled BUY in a low-beta big cap exposures (LMT)


Yep. If you’re muddlin’, keep it simple, stupid, I guess. The quantamental reasoning for this is two-fold:


  1. All of US Equity Beta signaled immediate-term TRADE oversold (and volatility overbought at VIX 22) yesterday
  2. Our predictive tracking-algo for US GDP just ticked up to +1.4-1.7% year-over-year


More on the muddling GDP reality later. Unlike the Fed, the thing about being objective and data-dependent is that we actually change as the data does. It’s non-linear.


Sure, a big reason for GDP not having a 0% in front of it for Q2 (like it did in Q1 on a SAAR basis) is that the US government is understating inflation with a 0.7% Deflator. But that is what it is and it’s going to give us a middle-of-the-slowing-road muddle.


It’s messy. It’s confusing. It’s bungling. So I suggest you trade the chop associated with it accordingly.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.57-1.76%

SPX 2066-2100
RUT 1140-1170


VIX 16.03-21.55
USD 93.13-95.45


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Time To Muddle Long? - 06.15.16 EL Chart

JT TAYLOR: Capital Brief

Takeaway: End of the Primary Season; Clinton's Full Court Press, Trump Tacking Back to the Hill

JT TAYLOR:  Capital Brief - JT   Potomac banner 2


GAME, SET, MATCH: And just like that, primary season comes to an end - bet everyone out there is breathing a sigh of relief. For those keeping score, Hillary Clinton won the final primary in Washington, DC by a landslide adding 16 more delegates and bringing her final tally to 2,800 to Bernie Sanders’ 1881.


FULL COURT PRESS: Look for Hillary Clinton to build on her press blitz now that the primary season is over. With the general election campaign underway, fundraising has increased, grassroots efforts are in progress, and most importantly, tv face time, will begin to pick up. Clinton is determined to match the Republicans speech for speech, interview for interview, sound bite for sound bite, and then some. Her focus will be to polish her image, build trust, and improve her likeability factor over Trump’s. The Orlando tragedy has quickly set the tone for how the two candidates plan to deal with the press in the coming months.


TRUMP TACKS BACK TO CAPITOL HILL: Donald Trump is heading back to Capitol Hill ahead of the July convention to address the entire Republican House after his May visit with leadership came under criticism from rank and file members. Trump will have an opportunity to discuss his priorities and share his vision for moving the party forward. House Republicans are unveiling their “ A Better Way” agenda to show how they would govern should they win back the White House – they’re desperately hoping Trump takes the cue and runs on their issues - we think he has other plans.


MAJORITY MOMENTUM?: Democrats feel they have a good shot at taking the White House and Senate this year, but what about the House? Democrats are 59 seats out of the majority - and until last night (Randy Forbes of VA was tossed) - no incumbent House Republican had lost a race. Given turnout in last week’s presidential primary, CA Republicans, like Rep. Darrell Issa and Rep. Steve Knight, will have big bullseyes on their backs this fall - both candidates narrowly skated by in their primaries. Guilt by association will become the main drag on Republicans with Trump as the presumptive nominee - and the Democrats will remind voters of that every step of the way.


RYAN’S ROUND THREE: Speaker Paul D. Ryan announced the third part of his six-point plan with a focus on regulatory overhaul -  scaling back Dodd-Frank, expanding energy production on federal lands and limiting lawsuits against businesses. Ryan’s laser focus on policy has helped define and forge the Republican agenda ahead of the upcoming Senate and House races. If Republicans want to stay in control of Congress - and take back the White House - they’ll need to run on ideas and draw a distinction with the Democrats and the top of their own ticket.


CFPB’S INSURANCE COVERAGE: The Consumer Financial Protection Bureau has boosted its advertising funds by almost 1.5 percent this year, spending $15.7 million on advertising thus far. The purchases are twice what the agency spent in 2015, focusing on growing awareness and trust of the CFPB as a free and unbiased resource. The boost comes in wake of the Republican’s financial reform plans – both Speaker Ryan and Rep. Jeb Hensarling (TX) look to restructure the CFPB, along with other financial initiatives. Although the legislation will end up at the bottom of the barrell, expect financial services reform to be one of the issues that dominates the election and serve as a placeholder in the next Congress.  


BREXIT: With eight days left before the “Brexit” referendum, recent polls suggest that momentum has swung toward the “Leave” camp unsettling investors. “Leave” in recent days has focused its campaign on the issue of immigration with the recent tragedy in Orlando. We spoke with Alexander Nicoll, a consulting member of the UK-based International Institute for Strategic Studies, on the events leading up to the UK vote and what the outcome of the vote spells for the UK and EU. You can listen to the replay here.


COURT UPHOLDS FCC NET NEUTRALITY RULES: Our Telecommunications-Media Policy Analyst Paul Glenchur shared his insight on the Federal court’s decision to uphold the FCC’s net neutrality rules. You can read the piece here.


ELECTION PREVIEW WITH SCOTT REED: Please join us for a call next Tuesday, June 21st at 11:00 AM EDT, with Scott Reed, one of Washington’s top political strategists, as he shares his insight on the presidential election, the upcoming Democratic and Republican conventions, and Senate and House races this fall. You can find the dial-in information here.


HUNTED: THE F-35 PROGRAM AT FARNBOROUGH: On Friday, June 17th at 11:00 EDT, our Senior Defense Policy Advisor LtGen Emo Gardner will host a call for investors regarding the first ever appearance of the F-35 at the world’s most important aerospace show, the Farnborough International Airshow, July 11-17.

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Drake: Keep An Eye On (Decelerating) Income Growth


In this excerpt from The Macro Show earlier today, Hedgeye U.S. Macro analyst Christian Drake explains why income growth continues to slow and what it means for the U.S. economy.

Cartoon of the Day: An Update On Global Bond Yields

Cartoon of the Day: An Update On Global Bond Yields - Yield cartoon 06.14.2016


The yield on the 10-year German Bund hit an all-time low today falling into negative territory for the first time ever. Global sovereign bond yields continue to make new lows as #GrowthSlowing fears persist.

Credit Drought (Part 2): Trouble Ahead For The Ag Sector?

Takeaway: The agricultural economy hasn't bottomed and farmers are struggling to keep up with mounting debt.

Credit Drought (Part 2): Trouble Ahead For The Ag Sector? - farm storm


Is the agricultural economy troughing?


The answer is no.


As Hedgeye Commodities analyst Ben Ryan points out, the trends in the farm credit cycle are disconcerting to say the least. Below are four charts and brief analysis from Ryan as a follow-up to "Credit Drought: A Weary Road Ahead For The Ag Sector." (You can follow him on Twitter @Hedgeye_Comdty.)


As you may have guessed, all is not well on the farm.



"According to the Kansas City Fed, more than 30% of financial institutions reported increasing collateral requirements for farmers in Q1."


Credit Drought (Part 2): Trouble Ahead For The Ag Sector? - kc fed 1



"Bankers noted greater than 18% of loans made to farmers in Q1 involved restructuring existing debt to meet short-term liquidity needs."


Credit Drought (Part 2): Trouble Ahead For The Ag Sector? - kc fed 2



"In Q1, farm real estate accounted for 22% of collateral on non-real estate loans greater than $250K, up from 13% two years ago."


Credit Drought (Part 2): Trouble Ahead For The Ag Sector? - kc fed 3



"So according to Farmer Mac, every single Ag. related commodity is 'low.' I'd be begging for bottom too."


Credit Drought (Part 2): Trouble Ahead For The Ag Sector? - kc fed 4

Need more?


Here's a key takeaway from a recent Bloomberg story:


"The USDA has forecast farmer income will drop to $54.8 billion this year, the third straight decline and less than half of the record profit earned in 2013. The ratio of debt to income has more than doubled in three years to 6.8 percent, the highest since 1984, when the Midwest was mired in a farm crisis that saw the highest foreclosure rates since the Great Depression."


Early Look

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