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European Equities Still Stumbling, Brexit Or No Brexit

Takeaway: Italian equities are down -28% from last year's high despite the ECB's best efforts to arrest economic gravity.

European Equities Still Stumbling, Brexit Or No Brexit - Europe Japan cartoon 04.04.2016


"Unfortunately, post the Brexit vote, the world is going to have to keep reporting economic and profit cycle data," Hedgeye CEO Keith McCullough writes in a note sent to subscribers this morning. And unfortunately for Bulls that data has been continually poor.


Here's additional analysis from McCullough:


"EUROPE – seeing the weakest countries in European Equity markets get a jumpstart on selling this am with Italy leading losers -0.8%, taking its stock market crash to -28% from last year’s cycle high (Portugal -0.6%, Spain -0.4% both remain in crash mode too w/ European #GrowthSlowing no matter what the vote)"


Take a look at Italian stocks...


Italian equity markets continue to price-in reality, namely that the ECB's best efforts can't stanch the bleeding in Europe.


Brexit Vote

Client Talking Points


Seeing the weakest countries in European Equity markets get a jumpstart on selling this am with Italy leading losers -0.8%, taking its stock market crash to -28% from last year’s cycle high (Portugal -0.6%, Spain -0.4% both remain in crash mode too with European #GrowthSlowing no matter what the vote).


Especially if you haven’t been long it yet, good spot to buy some down here in the $1250-1265 range with immediate-term upside to $1305-1310; short Copper on the other side of it around $2.10-2.15 with downside to the YTD lows; great way to stay with the reality that global growth hasn’t “bottomed”.

10 YR

Day 2 for Yellen where she’ll talk about “considerable uncertainty” in her forecasting process – wow did she look wobbly yesterday; Brexit vote providing us yet another buying opportunity in what’s +15.1% from this day last year (TLT) vs. SPY -1.6%; immediate-term downside in UST 10yr to 1.54%

Asset Allocation

6/21/16 62% 4% 0% 10% 20% 4%
6/22/16 61% 3% 0% 12% 21% 3%

Asset Allocation as a % of Max Preferred Exposure

6/21/16 62% 12% 0% 30% 61% 12%
6/22/16 61% 9% 0% 36% 64% 9%
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

No matter what side of the reflation/deflation trade you’re on, the growth in global demand continues to decelerate on a trending basis. The debate is no longer whether or not growth is slowing. The real debate centers on the policy response and the market reaction to that policy response. While that question presents us with “open the envelope” risk, #GrowthSlowing will continue to be the bull catalyst for U.S. Treasuries whatever the policy response as the slow march to zero yields globally goes on. 


To sum things up, stay away from the guessing game and stick to what is empirically evident. A stronger USD over the longer term is a probable scenario in our book. We expect the Fed, and all central banks for that matter, will try to combat deflation. That said, global currencies all burning at the same time makes a compelling case for GLD, as gold knows no currency. You can sell it in local currency all over the world. Scary but true.


There have been rumblings in the news that McDonald's (MCD) 2Q comps have slowed due to the temporary replacement of the 2 for $5 value platform for Monopoly. This has clearly been reflected in the stock as of late, as MCD has underperformed the S&P 500 over the last month.

Despite this near term headwind, we still strongly believe in the long-term story for MCD and remain confident that once they get their value platform right nationally, they will be just fine. In the short to intermediate term, as we wait for a solidified value platform, this recent underperformance represents a great buying opportunity. We remain LONG MCD.

Three for the Road


"We cannot change the cards we are dealt, just how we play the hand."

-Randy Pausch


The Florida Gators became the 3rd team in the College World Series history to fail to win a game in Omaha.

CHART OF THE DAY: What Unelected Fed Bureaucrats Continually Miss

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.


"... When it comes to establishment economists, they don’t think in rate of change terms – they think about levels.


And that, for those of us who have evolved in this profession, is a damn shame. It’s not like 2nd derivatives (high-school math) are new. It’s not that people winning Nobel Prizes in Behavioral Economics should be epiphanies to these central-market planners either. What’s super sad about all of this is that no leader in either our established government or media holds these unelected people to account."


CHART OF THE DAY: What Unelected Fed Bureaucrats Continually Miss - 06.22.16 Chart

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Behavioral Revolution

“Maybe something as dramatic as a scientific revolution is in store for us.”

-Robert Shiller


I know. Sometimes I sound a little bearish (on growth). But that’s a good thing (in alpha space). After all, the year-over-year rate of return from this day in June of 2015 in #GrowthSlowing (TLT) is +15.1% vs. the beloved US equity beta of the SP500 (-1.6%).


Maybe I should have started a 2 & 20 operation on that.


Kidding. What I signed up for when I went down this path to start Hedgeye was to sit on the front lines of what my favorite professor in New Haven (Shiller) told me could be in store – a revolution. A Behavorial Revolution in the study of economics, that is.


Back to the Global Macro Grind


By the time I got to Yale in the 1990s, the revolution was well underway. “The debate between behavioral finance researchers and defenders of the efficient market hypothesis was just beginning.” (Misbehaving, pg 168)


Little did I know what I didn’t know back then. That said, almost 20 years later, I don’t think the head of the Federal Reserve knows how to apply basic behavioral economics to her decision making process now either.


Behavioral Revolution - Yellen cart 06.07.2016


In what seemed like an exasperating moment for the Fed Chair yesterday, when Senator Pat Toomey (PA) asked Janet Yellen if she’d yet considered that 0% rates might be a bad thing in the years 2017 and beyond… she answered “no.”




Upon further questioning by another gentleman on the Senate Banking Committee (sorry, these aren’t leaders in my life – I don’t know them all by name), when he asked Yellen why she didn’t consider her favorite labor market indicator bearish (now that her Change in Labor Market Conditions Index has been negative on an absolute basis for 5 months in a row), she muddled an answer about “levels.”


You see, when it comes to establishment economists, they don’t think in rate of change terms – they think about levels.


And that, for those of us who have evolved in this profession, is a damn shame. It’s not like 2nd derivatives (high-school math) are new. It’s not that people winning Nobel Prizes in Behavioral Economics should be epiphanies to these central-market planners either. What’s super sad about all of this is that no leader in either our established government or media holds these un-elected people to account.


We’re probably going to need a crisis to change that.


How else do you think this scary movie of abysmal forecasting (and monetary policy based on those forecasts) is going to play out? Will it get so bad that they just give up on it? Or are we about to enter the next frontier of OMG market operations?


Senator Reed (RI) gave us a looksy into that yesterday.


Yep. If Hillary wins, you know that Larry Summers is the front-runner to take over for Janet Yellen, right? If you didn’t know, now you know. He’s going to try to combine FISCAL policy with MONETARY!


Oh yeah, baby. We’re talking maybe a 50-year Treasury Bond issuance to finance building “bridges and roads” … and heck, anything someone in Big Government Spending land has ever dreamed of. Didn’t you hear, there’s supposed to be a “multiplier” on that!


Maybe that will make non-behavorial-linear-economic forecasting great again.


The way that math works is that you take The People’s taxes to securitize and finance the G (Government) in GDP = C + I + G (Consumption + Investment + Government Spending) equation … and voila, you’ll have a better forecast for GDP!


Don’t worry about the debt side of that equation. As Summers taught us with the Harvard Endowment’s, that stuff is for the birds.


After 8-9 years of printing and easing, Janet Yellen said that “considerable uncertainty about the economic outlook remains.” And per Senator Reed, that’s only “because you have one hand tied behind your back.”


Imagine what the next government can do with both hands in your pockets? Maybe Shiller was right. Maybe something dramatic is in store for us. But is that going to be a good thing? Or will that finally expedite the revolution?


Our immediate-term risk ranges (with intermediate-term TREND research view in brackets) are now as follows:


UST 10yr Yield 1.54-1.72% (bearish)

SPX 2055-2095 (bearish)
RUT 1125-1175 (bearish)

NASDAQ 4 (bearish)

Nikkei 150 (bearish)

DAX 99 (bearish)

VIX 16.26-22.67 (bullish)
USD 93.52-95.28 (bullish)
EUR/USD 1.11-1.14 (bearish)
YEN 103.09-105.95 (bullish)
Oil (WTI) 46.14-51.06 (bullish)

Nat Gas 2.41-2.79 (bullish)

Gold 1 (bullish)
Copper 2.00-2.14 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Behavioral Revolution - 06.22.16 Chart

JT TAYLOR: Capital Brief

JT TAYLOR:  Capital Brief - JT   Potomac banner 2

“Status quo, you know, is Latin for 'the mess we're in'.”

                                                     ― Ronald Reagan


MONEY AIN’T A THANG: Really - it’s not an issue for Donald Trump, but despite claims that he’s worth over $10 billion, the same can’t be said for his campaign. His war chest – if you’d even call it that - currently holds only $1.3 million. That’s about the size of a congressional campaign. Hillary Clinton, on the other hand, has outraised him by a long shot, boasting $42 million in cash, and climbing at an even faster rate than the primary, putting the Republican front-runner on ice with less than five months to go. Recent FEC filings also show that Trump’s campaign has rented his own venues, jets, and hotels, and that Trump continues to loan the campaign money – bringing the total amount of Trump loans to $45.7 million. If Republican pockets aren’t deep enough, Trump promises that he will personally fund his own campaign...


GENERAL ELECTION GROUND GAME: Clinton now holds early leads in four key swing states - FL, VA, MI, WI – further underscoring our point that having an organization really does pay off. If Trump wants to stay in it, he’s going to need boots on the ground – and fast. His campaign currently employs only 69 staffers, while Clinton woefully outnumbers him with 685. Trump boasts that he runs a lean, tight-knit campaign, but that won’t cut it. In states like battleground NC, Clinton employs around 100 staffers, while Trump counts 10. Though, with the race looking tighter in PA and OH, Trump has an opportunity to be competitive in two of the most critical states this fall.


FAR WORSE THAN FUNDRAISING: When all is said and done, it’s not the money, organization, or events that people remember – it’s the message. “Make America Great Again” was a sturdy slogan during primary campaign –  something supporters could hang their hats on - but now, that message appears to be muddled. Though Trump held campaign rallies last week in five states run by Republican Governors (four were potential battleground states - AZ, NV, GA, NC) - not one of them appeared on stage with him. If that doesn’t sound the alarm, then what does?


CLINTON’S CLAIMS: Clinton cautioned voters of a “Trump recession” in a speech on the U.S. economy, implying that electing Trump, “the king of debt,” would send the economy into a tailspin. In a speech outlining what won’t make America great again, Clinton feels that she’ll be the one to unite the nation, moving the U.S. economy into prosperous times like never before. She’s taking her message to Capitol Hill today to strategize with House Democrats, while Trump is expected to counterpunch in a speech to badly-needed donors this afternoon.


SANDERS STILL STEAMING: The fire under Bernie Sanders’ campaign might have gone out, but he’s got quite the large amount of steam leftover. His mission – reform the Democratic platform. He’s recently recruited a number of Democratic senators to support the reform of the superdelegate system, a framework knocked even by Trump as undemocratic and elitist. The continued push by Sanders and his cohorts, combined with Clinton’s interest in winning over his supporters, is likely to push the issue onto the agenda in Philadelphia.


ELECTION PREVIEW WITH SCOTT REED: We spoke with Washington insider Scott Reed on the upcoming presidential election, the lay of the land for Senate and House races this fall, and the overall effort businesses play in campaigns and politics. Reed highlighted the importance of Trump getting his message back on track after releasing his top campaign manager, while betting his fate on three factors: VP pick, the convention, and the first debate. Reed also keyed in on Senate elections – predicting Republicans retain the Senate with wins in OH, PA, NH, NV, and FL, but dropping seats in WI and IL. A replay of the call can be found here.


#BELIEFSYSTEM BREAKDOWN: One of our top three 2Q16 macro themes warned of a breakdown in the central banking #BeliefSystem. In other words, investor faith that the Fed and global central banks can “save the day” is faltering. Every day now we hear about Fed “credibility problems.” Indeed, Janet Yellen was peppered by Congressmen with questions yesterday about the Fed’s faulty forecasting. Meanwhile, St. Louis Fed head James Bullard made headlines last week saying that the Fed was “backing off the idea that we have dogmatic certainty about where the U.S. economy is headed in the medium and longer run.” That’s a big deal. All of this, while the industrial recession continues, corporate profits continue to go negative, employment growth slows and global economy stalls. We continue to reiterate that the biggest risk to investors is believing in the Fed’s rosy economic forecast. The belief system is breaking down.


WHY IPAB WON’T GET TRIGGERED TOMORROW (& IT WON’T MATTER IF IT IS): Our Healthcare Policy Advisor Emily Evans shared her insight on why the Medicare Trustees report probably won't trigger IPAB and the action for Medicare cost reduction at CMMI will happen anyway. You can read her piece here.


5G WIRELESS RULES ON FCC JULY AGENDA: Our Telecommunications-Media Policy Analyst Paul Glenchur shared his insight on how the FCC's 5G rules could boost wireless ecosystem leaders like VZ and CCI. You can read his piece here.




The Macro Show with Keith McCullough Replay | June 22, 2016

CLICK HERE to access the associated slides.


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

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%