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CHART OF THE DAY: The Volatile Brexit Crapshoot

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.


"... So if they the British don’t exit… and:


  1. The British Pound ramps right back to where it’s been multiple times this year ($1.46-1.47)
  2. The FTSE rips right back to intermediate-term @Hedgeye TREND resistance of 6335
  3. All equity markets worldwide go straight up …


What could possibly go wrong?


Nothing, obviously. Until the causal factor (worldwide cyclical and secular #GrowthSlowing) on why most things political that are American, Chinese, European, Japanese, etc. aren’t dying starts to get reported again, that is…"


CHART OF THE DAY: The Volatile Brexit Crapshoot - 06.20.16 Chart

A New Exit!

“I don’t believe in dying. It’s been done. I’m working on a new exit. Besides, I can’t die now – I’m booked.”

-George Burns


The late George Burns was a beauty. So is this global stock market. Of all the 1-12 month old narratives on why it can’t die now, “no Brexit” has to be the best one I’ve heard so far. Especially for super short-term investors, it’s the most irrefutable!


A New Exit! - Brexit cartoon 06.16.2016


Back to the Global Macro Grind


So if they the British don’t exit… and:


  1. The British Pound ramps right back to where it’s been multiple times this year ($1.46-1.47)
  2. The FTSE rips right back to intermediate-term @Hedgeye TREND resistance of 6335
  3. All equity markets worldwide go straight up …


What could possibly go wrong?


Nothing, obviously. Until the causal factor (worldwide cyclical and secular #GrowthSlowing) on why most things political that are American, Chinese, European, Japanese, etc. aren’t dying starts to get reported again, that is…


Before we get all emotional this morning and chase another chart to lower-highs on green, let’s take a step back and review where Global Equity markets are vs. June 20th (today) of 2015:


  1. SP500 = down -1.4%
  2. Dow = down -1.5%
  3. Nasdaq = down -5.2%
  4. Russell 2000 = down -9.7%
  5. Financials (XLF) = down -9.7%
  6. Utilities = UP +17.5%
  7. MSCI REIT = UP +9.9%
  8. US Equity Volatility (VIX) = UP +33.9%
  9. EuroStoxx600 = down -15.1%
  10. China (Shanghai Comp) = down -41.9%
  11. Hang Seng = down -24.6%
  12. Nikkei = down -22.8%
  13. MSCI World = down -7.2%
  14. MSCI EM = down -16.8%
  15. MSCI LATAM = down -17.0%


Don’t worry. I’m not just cherry picking the year-over-year return today. I can do this, every day, for the next month and the year-over-year return in most things US Equities will actually get worse.


What’s been getting better and better for the last year has been the relative and absolute return of being long assets that do well when real economic growth is slowing.


This is why longer-term bonds (and stocks that look like bonds) have been crushing it:


  1. US 10yr Yield = down 71 basis points year-over-year
  2. German 10yr Yield = down 79 basis points year-over-year
  3. Italian 10yr Yield = down 80 basis points year-over-year
  4. China 10yr Yield = down 70 basis points year-over-year
  5. South Korean 10yr Yield = down 96 basis points year-over-year
  6. Indonesian 10yr Yield = down 97 basis points year-over-year
  7. Japanese 10yr Yield = down 63 basis points year-over-year


Will a “no-Brexit” change this very obvious intermediate-term TREND? On its own, no. Time will.


Because it doesn’t line up with their own investment mandates (i.e. always be long so timing can’t really ever matter), this is what most equity bench-marking Portfolio Managers have had wrong for the last year – timing the economic cycle.


Time can’t die now. Barring any miracle that most of the central planning that’s been attempted can stop #TheCycle from doing what it always does when it laps the peaks of the economic, profit, and credit cycles… the cycle will continue to slow.


As the latest of #LateCycle components of a cycle slow (employment growth, consumer credit, advertising/marketing, business travel, etc.), we’ll get better and better entry points in certain equity sector styles.


Our long-cycle call for #GrowthSlowing probably won’t die this morning either. “No Brexit” or not, it’s booked until at least Q3/Q4 when macro markets have fully priced it in.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.54-1.72%

SPX 2055-2095


DAX 90

VIX 16.08-23.33
USD 93.18-95.25
EUR/USD 1.11-1.14

Gold 1


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


A New Exit! - 06.20.16 Chart

The Macro Show with Jonathan Casteleyn Replay | June 20, 20160

CLICK HERE to access the associated slides.

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

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Dan Christman - The Modi 'Strategic Moment' - Are We There Yet?


While the nation continues to mourn the horrific tragedy in Orlando, it's important at the same time to reflect on the critical, even emotional visit by Indian Prime Minister Modi to Washington, DC last week. It was an important visit, on many levels - commercial as well as strategic.

  • Business groups like the U.S. Chamber of Commerce, in advance of the visit, laid out the business challenges and "hopes unfulfilled" with the Modi government. Despite a promising beginning to the Modi tenure as PM two years ago, with frequent statements by the Prime Minister about India being "open for business," long-standing impediments remain. In a letter to the president and Congressional leaders, these business groups stated, "Thus far, the new Indian government has produced troubling policies of its own," with "backsliding" in key areas.
  • Nevertheless, in the euphoria of the visit, substantive business announcements were made: Toshiba's Westinghouse unit has preliminarily secured a contract, to be finalized next year, to produce six nuclear power reactors in India, the first such "win" by a U.S. subsidiary since the breakthrough U.S.-India civil nuclear agreement nearly eight years ago; and to highlight their joint commitment to clean energy, the two leaders advanced a solar initiative that can marshal financing to help India "Green its Grid."

But one area not covered in the business coalition letter was military cooperation. And here, the "Modi Moment" has yet to produce a hoped-for strategic advance. U.S.-India defense cooperation (or lack of it) has been symbolized by the oft-stymied "Logistics Supply Agreement (LSA)." This potential deal was pushed strongly by U.S. Defense Secretary Ash Carter during his visit to India in April. The U.S. has been pressing India for over 10 years to consummate an LSA, and Carter and his Indian counterpart announced in April an "agreement in principle to conclude (the agreement) in the coming months." However, the deal remained unfulfilled prior to the prime minister's visit; and it was not inked during the Modi-Obama summit.

  • To be clear, an LSA even when concluded, would not be a major breakthrough in U.S.-India strategic relations. It is not a "basing agreement," for example; it would just give the U.S. Navy and other branches of our military occasional access to Indian basing support – refueling, spare parts, etc.
  • But even this minor deal has raised political objections in India; those blocking the arrangement cite India's tradition of "non-alignment" and a contemporary worry about being drawn into U.S. strategic quarrels with China.

The LSA (and some other minor but stymied defense deals on mapping and communication) are a metaphor for the complicated and evolving US-India geo-political relationship. In one of the few areas of U.S. foreign policy consistency that spans three administrations (Clinton, Bush43 and Obama), the White House has tried to draw the two countries closer together in a strategic relationship between the world's two largest democracies.

  • But, as reflected in the LSA stand-off, it has always posed problems in New Delhi. (I was reminded of this complication 10 years ago by an Indian Air Force Vice Chief of Staff when I was pushing the sale of U.S. combat aircraft; he curtly opined then that the "U.S. is not a reliable supplier!") 

Henry Kissinger summarized the big picture well. In talking about Bush43's efforts to effect U.S.-India "strategic coordination," Kissinger cautioned that "India's tradition of nonalignment (stands) in the way of a global arrangement."


So, while Modi's visit held hope for advances in key business areas, the business community was right in telling the president and Congress, "Hope is not a method." It still isn’t; much more needs to be done to open Indian markets, despite the welcomed breakthroughs last week in clean energy -- nuclear power in particular.

  • That same advice holds for security cooperation. For sure, India has eagerly accepted the transfer of U.S. technology, is enthused about co-development, participates more frequently with the U.S. in training exercises; and if an LSA is finally inked in the coming weeks -- and it is expected to be --  it will be yet another step in a slowly evolving strategic relationship. But despite the advances in our bilateral military ties since the late 90’s, New Delhi will continue to say, "No thanks" to a genuine strategic realignment with Washington.


Markets Underestimate Brexit Odds

Takeaway: Current betting odds for Brexit (28%) are too low. Even if Brexit fails, the odds will likely tighten (and the FXB fall) before Thursday.

"Patriotism is a strong nationalistic feeling for a country whose borders and whose legitimacy and whose ethnic composition is taken for granted."

--Michael Ignatieff


The ghastly murder of MP Jo Cox midday last Thursday by a deranged Brexit supporter triggered a revulsion rally for the Remain camp later that afternoon and Friday. The steep UK market declines earlier in the week were reversed in a sudden bounce. During the last 12 trading hours of the week, the £/$ surged (from $1.41 to $1.44) and the FTSE100 gained just over 2%. Meanwhile, Betfair odds in favor of Brexit, which peaked at 41% midday on Thursday, plummeted to 35% on Friday--and still further to a volatile 28`% by Sunday evening. In early Monday Asia trading, the pound soared to $1.46.


Possible drivers behind the falling Brexit odds: New polls showing the Remain side gaining on the Brexiteers; forecasts for gorgeous weather next Thursday; and the Remain endorsement by the Daily Mail.


These are all substantive drivers. But they don't justify a turnaround of this magnitude. The markets--and specifically the oddsmakers who are driving the markest--have gone too far.


Yes, the pro-Brexit margin in the polls is down somewhat since early last week. But even the new weekend polls show the two sides in basically a dead heat. Take a look at the following list of polls compiled by ft.com, and you will be hard pressed to detect much of a swing.


Markets Underestimate Brexit Odds - FT polls


The bigger question is why the Brexit camp has made such substantial gains over a longer two- or three-month time frame. A month ago, I predicted on Hedgeye TV (on the basis of other Eurosceptic votes in the EU) that a rise in the pro-Brexit camp would come mainly from a pro-Brexit shift in young voters. That's exactly what's been happening. Back in April and May, according to the prestigious ICM poll, Britons under age 35 were pro-Remain by 27-to-30 percentage points. In ICM's latest (June 10-13) poll, that margin has shrunk to 14 percentage points. Though youth overall remain firmly in the Remain camp, a fall in the pro-Remain youth margin has played a major in pushing the pro-Brexit trend since early May.


Interestingly, the demographic profile of a UK Brexiteer is strikingly similar to that of a US Trumpista: Disproportionately white, rural, working class, distrustful of large political and business institutions, and somewhere between age 45 and 65. Support for both causes falls slightly over age age 65 and dramatically under age 35.


But let's return to the last few days and the dimming oddsmakers' outlook for Brexit. Weather? Yes, good weather favors the Remain camp. But that's because the Remain voters just don't care as much. Everyone acknowledges that the Brexit voters are vastly more motivated and would walk over hot coals to cast their vote. The Remain voters are more like "Meh, I suppose we should stay." This has to be a plus for Brexit--since we really aren't sure if all the Remain supporters will show up to vote even on a sunny day.


As for op-eds, Murdoch's The Sun (with the largest circulation of any UK newspaper) just announced for Brexit--joining the Daily Telegraph and the Daily Express. And even many of those backing Remain (such the Daily Mail and The Times) sound almost apologetic about their stand--unlike the Brexit op-eds, which brim with conviction. While backing Remain, for example, The Times admitted that the EU leadership is "undemocratic, meddling, and short-sighted" and is not "truly listening or open to reform." But yeah, well, we should stay in anyway.


What makes all the polls hard to interpret is that the two campaigns are appealing to entirely different regions of the voter's brain. The Remain arguments are all about bean counting, cost-benefit analysis, and losing maybe a percent of GDP. If they rouse any feelings at all among voters, it's the dreary anxiety (per Chancellor George Osborne) that their wages may rise less and their taxes may rise more. The Brexit arguments, on the other hand, are passionate appeals about regaining national sovereignty. Once you hook voters with that, the Remain arguments become irrelevant. To preserve our nation, who cares what the costs are? It's Winston Churchill time. It's "fight them on the beaches" time.


It's head versus heart, left brain versus right brain.


This stark asymmetry in motivation may again work in Brexit's favor. The very fact that the financial media and multilateral organizations (from the FT and Economist to the IMF and World Bank) tirelessly lobby for Remain feeds the nationalist flame of the working-class Brexit supporter. As do the endless and condescending exhortations by foreign leaders, from Barack Obama to Francois Hollande. French Economic Minister Emmanuel Macro just declared that Brexit would "make the UK about as significant in the world as the Isle of Guernsey." Touché! I'm sure that will get many a John Bull to ponder and reconsider.


The Telegraph's Ambrose Evans-Pritchard, a celebrated financial journalist who is exquisitely informed about the economic costs of Brexit, came out in favor of Brexit last Thursday with a telling headline: "Brexit vote is about the supremacy of Parliament and nothing else: Why I am voting to leave the EU."


Oddsmakers continue to favor Remain because (they say) voters tend to shy away from big risky innovations when they actually vote. Brexit would need a sizeable lead in the polls in order to just squeak by on decision day: Witness the referendum on Scotland or the various succession votes on Quebec. But these may not constitute valid comparisons. Scotland and Quebec were integral parts of their respective nations for centuries before these votes. Independence really would have been a step forward into the unknown. The European Union, on the other hand, is only 24 years old (since the Maastricht Treaty), and most Britons have never felt any social or cultural connection to its Brussels- and Strasbourg-based leadership. Brexit can be plausibly billed as a step backward into the known.


As intermediaries, of course, oddsmakers can't just choose the odds on their own. They need to adjust the odds in response to the demand for bets on both sides. And by all accounts, the bets are as asymmetrical as the voters: Individuals making small bets are largely pro-Brexit; institutions making big bets are largely pro-Remain. And since the markets are responding to these odds, it is possible that some institutions may be flooding the bookies with bets not to win the payout on voting day, but to influence markets before voting day. Quite simply, nothing about the coming vote is certain. If oddsmakers are getting pushed around by investors not out to win the bet, then all we get is noise. Even if they are all out to win the bet, the best they can do is look at the pollsters. Yet these pollsters themselves failed miserably in their last test in 2015--when they were blindsided by the scale of the Tory victory.


Our Keith McCullough calls the Brexit vote a coin-flip--and no one wants to trade on that. But I will wager that the true odds of Brexit are considerably higher than the 28% now quoted by the bookmakers. This matters because in recent weeks the £/$ rate has fluctuated inversely with these odds quotes.

Markets Underestimate Brexit Odds - Brexit Odds FX2


At the very least we can expect, between now and the announcement of the referendum results (at around 11 pm Thursday U.S. eastern time), that the pound risk is mainly on the downside and the dollar risk is mainly on the upside. Even if Brexit loses, tightening odds could easily pull the FXB back down to 140 by June 23.


And if Brexit wins? Well, in that case the consequences may be every bit as dramatic as the alarmists suggest. David Cameron may be forced to step down in favor of Boris Johnson, handing over leadership of the ruling Conservative Party to its "Trump" wing. UK's trade agreements and London's status as a financial hub will be thrown into limbo well into 2017. The EU's prestige will take another beating, as many Euro-skeptic parties on the continent press for their own exit vote (Frexit, Nexit, Spexit…). Safe-haven capital flows will push long-term sovereign yields to new lows worldwide. Gold will pop. The Fed may rethink its whole game plan. Many dominoes will teeter and fall.


If you're short the pound, this will be your payday.


Still, the bookmakers say that Brexit is very likely to lose. And there's a lot to be said for their view. Why in the world would the British vote for a course of action whose economic costs are so clear and so certain? Could the mere idea of national sovereignty be so important to them?


It's instructive to think back 34 years, to 1982, when a military junta in Argentina decided to invade a couple of barren and barely occupied islands off its coast. They were called the Falklands. Yes, the UK claimed them, but almost no one, not even many Brits, had ever heard of them. The junta logically figured that since the islands were worthless, and since the cost of sending a counter-invasion fleet to Argentina would be astronomical, Britain would surely just let the Falklands go. Incomprehensibly, the British public paid no attention to the cost-benefit calculators. They were adamant about keeping the islands. PM Margaret Thatcher gave her nod, and several weeks later a vast British flotilla was steaming south across the Atlantic.


As Paul Harvey would say, we already know the rest of the Falklands story. And very soon, late Thursday night, we will know the rest of the Brexit story.

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: 8 Retail Stocks With Credit Cycle Risk (6/17/2016)



In this excerpt from The Macro Show earlier today, Hedgeye Retail analyst Brian McGough explains why certain retailers are overexposed to a rollover in the credit cycle.


2. REPLAY: Healthcare Q&A with Tom Tobin | $AHS $HCA $HOLX $MD $ZBH (6/16/2016)



Our Healthcare analysts Tom Tobin and Andrew Freedman hosted a live Q&A earlier today to discuss their top ideas and the latest trends in the Healthcare space.


Topics include:

  • Employment, JOLTS and #ACATaper Update related to AHS, HCA, HOLX, MD and ZBH
  • ATHN Tracker Update and Latest Thoughts

Click here to access the associated slides. 


3. About Everything | Q&A with Neil Howe & Tom Tobin: Demographic Warning Shots Fired In America (6/16/2016)



In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe explores the troubling rise in the U.S. mortality rate that's coincided with declining fertility rates. Howe walks through the myriad demographic and social trends which have conspired to cause this development.


Click here to read Howe’s associated About Everything piece.


Click here to access the associated slides.


4. Drake: Why The Central Planning #BeliefSystem Is Breaking Down (6/16/2016)



In this excerpt from The Macro Show, Hedgeye Senior Macro analyst Christian Drake gives subscribers a brief tutorial on one of our top three Macro Themes.


5. McCullough: My Response To Today’s Fed Statement (6/15/2016)



In this special HedgeyeTV presentation, Hedgeye CEO Keith McCullough explains why “the Fed is not trying to protect the American people and their cost of living. It wants to keep the financial market bubbles that they created intact.” 


6. Credit Cycle: The Beginning Of The End? (6/15/2016)



In this excerpt from The Macro Show this morning, Hedgeye Financials analyst Josh Steiner joins CEO Keith McCullough to discuss why the #CreditCycle is just beginning to wreak havoc on financial markets. Steiner cites the recent blowup in Synchrony Financial (SYF) as a prime example.


7. Drake: Keep An Eye On (Decelerating) Income Growth (6/14/2016)



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.


8. The Clock Is Ticking: Will Trump Bring The GOP Together? (6/14/2016)



Much is being made of Donald Trump’s inability to unite Republicans at this stage of the campaign. Hedgeye Potomac Chief Political Strategist JT Taylor takes a look and offers some key thoughts on the subject, as well how Hillary Clinton stacks up on the Democratic side.

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