CHART OF THE DAY: Sell On The News Anyone?

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.


"... As the vote to Remain ramped, so have these bets. Going back to the week prior, the net SHORT position in GBP/USD hit its YTD high at -2.39x on a 1-year z-score.


And now, my immediate-term risk range process is implying that the asymmetry (in Pound terms) is to the downside with an immediate-term GBP/USD risk management range of $1.40-1.47.


Sell on the news anyone?"


CHART OF THE DAY: Sell On The News Anyone? - 06.21.16 Chart

Tendency To Stay

“People have a tendency to stay with what they have, at least in part because of loss aversion.”

-Richard Thaler


Don’t go all Brexit on me. You know that there’s a tendency to stay, right? That’s what we #Behavioral Economics people call the Endowment Effect – i.e. that people over value their stuff vs. other people’s stuff (see George Carlin’s “A Place For My Stuff” for the more graphic depiction of why you probably think your stuff is better than other people’s stuff).


As Thaler explains, “while loss aversion is certainly part of the explanation for our findings, there is a related phenomenon: inertia. In physics, an object in a state of rest stays that way, unless something happens. People act the same way: they stick with what they have unless there is some good reason to switch.” (Misbehaving, pg 155)


Are there some good reasons for Brits to exit? Sure. Are there more reasons to stay? Probably. At $1.47 GBP/USD (Pound vs. USD), that’s not my opinion. That’s what’s priced in. The tendency for The People of the UK to stay is already priced into both the Foreign Currency and US stock markets.


Tendency To Stay - Brexit cartoon 06.20.2016


Back to the Global Macro Grind


Oh Muddler, did you have to add that last part? Did you really have to remind me that if I was chasing the spooz at SP again yesterday that I was pricing in what’s already priced into both FX and Equity markets?


It’s not personal, bro. Most of the time, my stuff (multi-duration, multi-factor quantamental process, bro!) is better than the moving monkey stuff. We built Hedgeye on that.


One of the core behavioral risk management screens we’ve built to monitor what is (or is not) priced into consensus is looking at the rate of change in the big bets Institutional Investors are making in macro markets.


Looking at the most recent CFTC futures & options data, here’s what augments what I think is getting priced in:


  1. SP500 (Index + E-mini) net LONG positioning +117,566 contracts is the biggest net long position of the year
  2. USD net LONG position of only +4,681 contracts is well under its 3-to-12 month avg of +12,000-to-36,000
  3. GBP/USD net SHORT position of -33,972 dropped -30,719 from its net short peak last week


In other words, measuring where macro positioning is relative to itself (using 1-year z-scores):


  1. SP500 net LONG position = +2.63x
  2. USD net LONG position = -1.81x
  3. GBP net SHORT position = -0.54x


And this positioning was BEFORE yesterday’s squeeze in both Pounds and the SP500!


I’m not suggesting that neither the SP500 nor the GBP/USD can’t go higher (there’s always a chance!). What I’m telling you is that consensus was already positioning for both to go higher… and they did. #NiceCall


Yes, rate of change matters. As the vote to Remain ramped, so have these bets. Going back to the week prior, the net SHORT position in GBP/USD hit its YTD high at -2.39x on a 1-year z-score.


And now, my immediate-term risk range process is implying that the asymmetry (in Pound terms) is to the downside with an immediate-term GBP/USD risk management range of $1.40-1.47.


Sell on the news anyone?


No matter what the decision, on Friday morning we’ll all get to enjoy going back to risk managing what’s going on in the rest of the world’s markets and economies.


On that broader signaling horizon, here are some things Mr. Macro Market is thinking about this morning:


  1. Dr. Copper being blasted for another -1% #deflation down day (post its “No Brexit” reflation day)
  2. Spanish Stocks (IBEX) leading the first batch of European stocks to go red (still in crash mode)
  3. Chinese Stocks (Shanghai Comp) showing no follow through, down another -0.4% overnight


Imagine “no Brexit” wasn’t priced in and it perpetuated a worldwide “bottom” in global demand? Lol. The dude who has been calling for “PMIs to bottom” for a year now will have officially nailed it using the wrong causal factor!


More realistically, what these 3 things might be signaling is that:


  1. USD is about to make another long-term-higher-low vs. GBP
  2. European Stocks are about to make another lower-high within their bearish @Hedgeye TRENDS
  3. Chinese Stocks still suck (-44% from last year’s high), no matter what gets newsy


And my vote on my 11-month old tendency to stay with our local and global #GrowthSlowing call will be to remain.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.54-1.72%

SPX 2056-2095


DAX 91

VIX 16.33-23.12
USD 93.12-95.04
EUR/USD 1.11-1.14
Copper 2.00-2.10


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Tendency To Stay - 06.21.16 Chart

JT TAYLOR: Capital Brief

JT TAYLOR:  Capital Brief - JT   Potomac banner 2 


“Divide and rule, a sound motto. Unite and lead, a better one.”

                                           ― Johann Wolfgang von Goethe


CLINTON COURTS MILLENNIALS: Now that Hillary Clinton has sidelined Bernie Sanders, she’s making a play for some of his most diehard supporters - millennials. The first of many Sanders staffers joined Clinton’s camp with the main objective of corralling and converting college students. More importantly, though, are the ongoing talks between both campaigns regarding how to best deploy Sanders as a Clinton surrogate later this year. Millennials rallied behind Sanders because they were inspired by his vision for change and political revolution. Clinton must determine where she too can foster change and promote those policies. For Clinton, targeting young voters is a critical element in unifying the part of the party’s base that turned out in record numbers to put Obama into the White House in ’08 and then again in ’12. Keep snapping those selfies, H.


TRUMP TURNAROUND PART FOUR?: One of Donald Trump’s first campaign hires, Corey Lewandowski, has departed amidst chaos in the Trump campaign following two particularly bad weeks. Firing your campaign manager five months out from Election Day is usually not the sign of a winning campaign. Trump needs to use this moment to change course and pivot away from the missteps and the resulting criticism his campaign has endured. He’ll likely pin the blame on Lewandowski and move on – hopefully for the Republican party - with a fresh approach. With his recent decline in national polls, and Hillary Clinton’s barrage of attack ads, change is a must – but whether it will actually occur is the real question. Trump now finds himself in an even bigger rut, lacking staff, organization and most importantly money - he has less cash-on-hand than Ted Cruz - and he dropped out of the race six weeks ago.


WARREN WARNINGS: Wall Street has a clear message for Clinton – don’t pick Senator Elizabeth Warren (MA) as your veep if you want our money. Harsh, but true. Warren’s war on Wall Street has been one of the largest political battles any sector has withstood in recent years. She was the driving force behind the CFPB and wants to break up big banks - even the mere mention of her name draws groans from the pinstriped crowd. Clinton is flirting with the left in her courtship of Bernie Sanders’ supporters – which Wall Street can stomach – but if she goes at it with Warren, she can kiss those checks goodbye.


OFF THE TRACKS: It has been almost 50 days since Trump was declared the presumptive Republican nominee, but you wouldn’t think it by the way his campaign has responded. With Trump’s general election campaign yet to start, Republicans are beginning to confront their destiny. The anti-Trump camp has begun holding calls with delegates and donors exploring other options – but in reality, the other options are much worse as Republicans are risking a civil war if they contest the will of primary voters at the convention. Trump won the primary election fair and square - and if he gets pushed off of the ticket - where would his supporters go?  Third party or stay home in disgust? Trump likes to point out that he pulled in a record number of votes for the Republican party during primary season - losing them would be a critical blow to their efforts this fall.


“REMAIN” INCHES AHEAD IN THE HOME STRETCH: With only a few days left before the “Brexit” referendum, a new series of polls indicate an increased likelihood of victory for “Remain,” reversing “Leave” momentum from last week and placating investors’ fears. Stocks and oil bounced upward while the pound saw it's largest single gain since 2008. Increasingly aggressive rhetoric from the “Remain” camp on the downside economic risks of leaving appears to have trumped immigration concerns and swayed undecided voters.


ELECTION PREVIEW WITH SCOTT REED: Join us today at 11:00 AM EDT as we speak with Scott Reed, one of Washington’s top political strategists, to discuss the efforts corporate America will be undertaking on behalf of pro-business candidates this fall – as well as the outlook for control of Congress, the Republican and Democratic Conventions and the state of the presidential race. You can find the dial-in information here.


NET NEUTRALITY RULING MAY ENCOURAGE ISP DIVERSIFICATION: Our Telecommunications-Media Policy Analyst Paul Glenchur shared his insight on tougher privacy rules coming for telecommunication and cable operators. You can read his piece here.


THE MODI “STRATEGIC MOMENT” – ARE WE THERE YET?: Our Geopolitical Analyst LtGen Dan Christman offered his insights on the Indian Prime Minister’s visit to DC last week. You can read his piece here.


HUNTED: THE F-35 PROGRAM AT FARNBOROUGH: Our Senior Defense Policy Advisor LtGen Emo Gardner hosted a call on the first ever appearance of the F-35 at the upcoming Farnborough International Airshow. You can listen to the replay here.


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Does Trump Lack The Cash (And Campaign Organization) To Beat Clinton?


Hedgeye Potomac Chief Political Strategist JT Taylor takes a looks at cash concerns inside the Trump campaign, and what the firing of controversial campaign manager Corey Lewandowski means going forward.

Markets Underestimate Brexit Odds

Below I include a recent note on Brexit from our new head of the Demography Sector, Neil Howe. If you missed Neil's official launch presentation last week, I highly encourage you to review his video presentation.  Neil is an all-star in the demography arena and we're excited about how his work will enhance our Macro team's research.  If you'd like to learn more about Neil and his research please contact .


While my opinion (see research) remains that Brexit will not prevail at this Thursday’s vote – note that recent polls are swinging towards this opinion — it remains an incredibly close vote and Neil’s commentary offers insightful context to this most historic vote.  


-Matthew Hedrick


Markets Underestimate Brexit Odds - Brexit1


"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, and you will be hard pressed to detect much of a swing.


Markets Underestimate Brexit Odds - Brexit2


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 - brexit3


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.

Cartoon of the Day: Short-Sighted

Cartoon of the Day: Short-Sighted - Brexit cartoon 06.20.2016


Investors caught up in Brexit risk can't see the forest for the trees.


"Our long-cycle call for #GrowthSlowing won’t die this morning either," Hedgeye CEO Keith McCullough wrote in this morning's Early Look. “No Brexit” or not, it’s booked until at least Q3/Q4 when macro markets have fully priced it in."