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[UNLOCKED] Early Look: A Courageous Vote

Editor's Note: Below is a complimentary Early Look written by Hedgeye CEO Keith McCullough this morning. Click here to learn more.

 

“Your heart is free – have the courage to follow it.”

-William Wallace

 

For many, today will not be easy. For many others, it will be one of their best. This is the path. This is life. Everyone doesn’t always get a sticker. There are winners and losers. This is democracy.

 

[UNLOCKED] Early Look: A Courageous Vote - Brexit cartoon 06.16.2016

Click here to watch our post-Brexit analysis from renowned European economist and market strategist Daniel Lacalle and Hedgeye CEO Keith McCullough in this morning's The Macro Show.

 

I realize that there were crazy people on both sides of this vote. There always are. People are crazy. But The People do have a right to vote against both the establishment of a highly-paid-political-life and being centrally planned from an office they didn’t elect.

 

What will the ECB and lord Draghi do next?

 

Will they opt for another currency devaluation? Or will they realize now that a debased currency undermines the legitimacy of the government trying to manipulate it? Will they “cut rates” from negative to negative-and-beyond? What happens to the banks?

 

I don’t know.

 

But do they? That remains The Question I have about the entire #BeliefSystem of central market-planning. That’s the question I have been asking myself ever since markets started pricing in that the probability of this not ending well was rising.

 

No, this is not a day for a victory lap.

 

Not for me. This isn’t my win. This is theirs. And don’t kid yourself – there are a lot of “they” out there who have been pounded by the confiscation of their purchasing power. That’s what’s in the value of a currency. And governments should never compromise its trust.

 

Do we have you positioned properly for this?

 

  1. Long The Long Bond (TLT)
  2. Long Gold (GLD)
  3. Short SP500 (SPY)

 

Yes. But, again, this is not a day to party. This is a serious day where serious leaders need to step up and have a real conversation about what it is that The People just voted for.

 

If Americans don’t have this public conversation, is our stock market next?

 

Today’s market news might be that:

 

  1. Japan’s stock market closed down -8%
  2. Germany’s opened down -7%
  3. Spain and Italy’s are trading down -11% (on the day)

 

But the real story has been one that’s been priced in sometimes slowly – and now all at once.

 

This is partly a story of central market-planners having the arrogance to promise the world that they can bend and smooth economic gravity and that “there is no alternative to buying stocks.”

 

In 17 years, I’ve worked and lived through two major US stock market crashes. Today, I’m proud to say I worked and lived through another crash in European stock markets not having to make excuses to my clients on why “no one could see this one coming.”

 

Macro markets did see this coming.

 

I know you are not the consensus. You wouldn’t be reading this if you were. If you had the courage to follow your own research and risk management process, I sincerely hope that you and all that you’ve worked for in your life has a good day.

 

It’ll be a great day for democracy and what’s left of our free-market liberties.

 

[UNLOCKED] Early Look: A Courageous Vote - asset alloc 6 24

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.49-1.72%

SPX 2039-2113

Nikkei 14802-15918

DAX 9199-10306

VIX 16.40-30.99 
USD 93.08-95.80 
EUR/USD 1.10-1.13 
Oil (WTI) 44.79-50.72

Gold 1260-1328

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

[UNLOCKED] Early Look: A Courageous Vote - tlt


JT TAYLOR: Capital Brief

JT TAYLOR:  Capital Brief - JT   Potomac banner 2

“Any fool can know. The point is to understand.”

                        ― Albert Einstein

 

DONALD DRIVING DOLLARS: After getting skewered for his miniscule campaign account, Donald Trump quickly raised $3 million from online donations - and of course – “matching” it with $2 million of his own cash. Trump 2.0 is planning on using these funds to jumpstart his nascent ground game as his camp is clearly at a disadvantage in comparison to Hillary Clinton’s. He’s also promised to step up fundraising activities on behalf of the Republican party at the same announcing that he’s forgiving $50 mm in personal loans to his campaign (for the second time). So far, we’re 48 hours into the latest Trump pivot, and he’s largely avoided the spotlight while decamping across the pond to promote one of his “money-making” golf ventures in Scotland. In the wake of the historic Brexit vote overnight, Trump drew parallels to the anger that persists in the U.S., but is treading carefully in Scotland where over two-thirds of the populace supported the Remain campaign.

 

CLINTON NOT YET CENTERED: Clinton plans to derail the Trump train using the same agenda she used to beat back Bernie Sanders. Her back-to-back speeches have drawn attention for how little new ground they broke, considering that many candidates use the general election to pivot to the ideological center to draw votes from the middle. Clinton gave no indication she would back off the relatively liberal agenda she embraced when Sanders was nipping at her heels, instead highlighting her party’s political high ground on the key questions of taxes, jobs, and the economy. This humdrum approach is unlikely to win over Sanders’ supporters who view her agenda as lackluster and uninspiring - though she professes she’s a progressive leader that likes to get things done. We’ll see if that rounds them up.

 

GUN CLUB: House Democrats ended their sit-in on the chamber floor after an almost 26-hour protest resulting from inaction on gun control measures. As members head back to their districts for the July 4th recess, expect Democrats to work on drumming up support for gun legislation. Dramatic tactics like the sit-in are rare, but may have served its purpose in prodding the Senate to vote on two related measures – one being pushed by endangered Senator Ron Johnson (R-WI), highlighting the importance this issue carries. Though the gun measure may never see light of day in this Congress, it does add another issue to the top of the laundry list for the general election.

 

VEXING THE VIRUS: Congress approved a spending bill that includes a controversial $1.1 billion plan to fight the Zika virus in an early morning vote amidst Democrat protests. The 239-171 vote came during the 15th hour of the dramatic sit-in by Democrats over gun control legislation. The bill, which includes the same level of funding as the Senate’s package, falls short of $1.9 billion the Obama Administration requested. Senate Democrats strongly oppose the bill, while President Obama has threatened to veto it, further muddying the waters in the heat of mosquito season.

 

FIDUCIARY RULE UPDATE:  House Republicans failed to gather the two-thirds majority needed to block the Obama Administration’s controversial fiduciary rule, with the House voting 239-180 – more than 40 votes short of the total needed. While the Congressional effort to overturn the rule now has fallen short, the Obama Administration still must fend off lawsuits filed by the U.S. Chamber of Commerce and several other business groups that could drag on for years.

 

SCOTUS SLAMS OBAMA: In a 4-4 split decision, SCOTUS let an appeals court ruling stand that confirms President Obama overstepped his authority when he acted to shield as many as 4 million unauthorized immigrants from deportation. The court’s ruling is a major blow to Obama who looked to claim the issue as a significant part of his legacy - and, yes, piling on another emotional issue to the election list.

 

NOTE:  We’re out on Monday, returning on Tuesday.  Have a great weekend.

 


CHART OF THE DAY: Were You Positioned Properly For Brexit?

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. 

 

***Click here to watch our post-Brexit analysis from renowned European economist and market strategist Daniel Lacalle and Hedgeye CEO Keith McCullough in this morning's The Macro Show.

 

"... Do we have you positioned properly for this?

 

  1. Long The Long Bond (TLT)
  2. Long Gold (GLD)
  3. Short SP500 (SPY)

 

Yes. But, again, this is not a day to party. This is a serious day where serious leaders need to step up and have a real conversation about what it is that The People just voted for."

 

CHART OF THE DAY: Were You Positioned Properly For Brexit? - tlt


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A Courageous Vote

“Your heart is free – have the courage to follow it.”

-William Wallace

 

For many, today will not be easy. For many others, it will be one of their best. This is the path. This is life. Everyone doesn’t always get a sticker. There are winners and losers. This is democracy.

 

A Courageous Vote - Brexit cartoon 06.16.2016

Click here for post-Brexit analysis from renowned European economist and market strategist Daniel Lacalle and Hedgeye CEO Keith McCullough in this morning's The Macro Show, live at 9am ET.

 

Back to the Global Macro Grind

 

I realize that there were crazy people on both sides of this vote. There always are. People are crazy. But The People do have a right to vote against both the establishment of a highly-paid-political-life and being centrally planned from an office they didn’t elect.

 

What will the ECB and lord Draghi do next?

 

Will they opt for another currency devaluation? Or will they realize now that a debased currency undermines the legitimacy of the government trying to manipulate it? Will they “cut rates” from negative to negative-and-beyond? What happens to the banks?

 

I don’t know.

 

But do they? That remains The Question I have about the entire #BeliefSystem of central market-planning. That’s the question I have been asking myself ever since markets started pricing in that the probability of this not ending well was rising.

 

No, this is not a day for a victory lap.

 

Not for me. This isn’t my win. This is theirs. And don’t kid yourself – there are a lot of “they” out there who have been pounded by the confiscation of their purchasing power. That’s what’s in the value of a currency. And governments should never compromise its trust.

 

Do we have you positioned properly for this?

 

  1. Long The Long Bond (TLT)
  2. Long Gold (GLD)
  3. Short SP500 (SPY)

 

Yes. But, again, this is not a day to party. This is a serious day where serious leaders need to step up and have a real conversation about what it is that The People just voted for.

 

If Americans don’t have this public conversation, is our stock market next?

 

Today’s market news might be that:

 

  1. Japan’s stock market closed down -8%
  2. Germany’s opened down -7%
  3. Spain and Italy’s are trading down -11% (on the day)

 

But the real story has been one that’s been priced in sometimes slowly – and now all at once.

 

This is partly a story of central market-planners having the arrogance to promise the world that they can bend and smooth economic gravity and that “there is no alternative to buying stocks.”

 

In 17 years, I’ve worked and lived through two major US stock market crashes. Today, I’m proud to say I worked and lived through another crash in European stock markets not having to make excuses to my clients on why “no one could see this one coming.”

 

Macro markets did see this coming.

 

I know you are not the consensus. You wouldn’t be reading this if you were. If you had the courage to follow your own research and risk management process, I sincerely hope that you and all that you’ve worked for in your life has a good day.

 

It’ll be a great day for democracy and what’s left of our free-market liberties.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.49-1.72%

SPX 2039-2113

Nikkei 148

DAX 9199-10306

VIX 16.40-30.99
USD 93.08-95.80
EUR/USD 1.10-1.13
Oil (WTI) 44.79-50.72

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

A Courageous Vote - 06.24.16 chart


REPLAY | The Aftermath: Post-Brexit Market Analysis with Keith McCullough & Daniel Lacalle

Takeaway: We opened up The Macro Show for free to the world this morning.

***In light of momentous, market-moving events surrounding Britain's decison to LEAVE the EU ... we opened up the The Macro Show for free this morning. Renowned European economist and market strategist Daniel Lacalle joined Hedgeye CEO Keith McCullough one-on-one to discuss the implications.

CLICK HERE TO WATCH the replay

 

REPLAY | The Aftermath: Post-Brexit Market Analysis with Keith McCullough & Daniel Lacalle - HETV macroshow title Lacalle

 

Lacalle will be LIVE FROM LONDON providing critical insights and takeaways for global investors with Keith. Have a question? We will open up the conversation to live Q&A as we do every weekday morning.

 

A brief overview of what will be covered:

  • The Brexit vote outcome … what it ultimately means for the EU
  • Investing Implications … analysis of global stocks, bonds and currencies
  • What to watch ahead of this weekend’s uncertain Spanish election (and why it matters)

 

Join us live at 9am ET—you don’t want to miss this. 

 

Brief Bio on Daniel Lacalle

Lacalle is a European economist, who previously worked at PIMCO and was a PM at Ecofin Global Oil & Gas Fund and Citadel.  He is the author of Life In The Financial Markets and The Energy World Is Flat and a lecturer for the IE Business School and Master MEMFI at UNED University. He is currently CIO of Madrid-based Tressis Gestion.

CLICK HERE TO WATCH


WisdomTree (WETF) | Timber!

Takeaway: WisdomTree flows out of their hedged products are continuing and although off of lows in 1Q are extremely worrisome.

  • We are lowering our out year 2017 estimate to $0.28 per share, -30% below consensus on ongoing dramatic outflows from the company's 2 biggest products, the Hedged European Fund (HEDJ) and Hedged Japan (DXJ). While the sequential rate of change has improved slightly from -$5.4 billion in outflow last quarter (the worst quarter in the firm's history) to a running outflow of -$3.9 billion thus far in 2Q16, this time last year, WETF was still gathering assets at a substantial pace so the redemption story is still quite new. We don't think the firm has any chance of comping positively on a year-over-year basis until the first quarter of 2017.
  • Most investors that are positive on the story believe that HEDJ and DXJ are just getting swept up in an unpopular International equity category which is not factually accurate in our view. The biggest factor for the substantial about face in positive trends in HEDJ and DXJ is the currency hedge which has nullified +15% annual returns in the Yen this year and a positive +3% return in the Euro. These funds were designed solely to capture QE trends, i.e. weakening currencies and positive equity returns but with risk aversion instead taking place, investors are covering Yen and Euro shorts (causing those currencies to rally) and are pulling out of local equities.
  • The resting value for HEDJ and DXJ was roughly ~$1 billion each prior to respective QE programs and thus with the funds still at a combined $19 billion, there is still substantial downside in our view. Our $0.28 estimate assumes total AUM at $35 billion next year but we think a break even scenario is possible at $20 billion in AUM (we haven't forecated that scenario yet but we are watching for this). In our current earnings scenario we see fair value at $5-6 per share (using median valuation multiples on Revenue, Earnings, EBITDA, and AUM). If a breakeven scenario (on earnings) comes about, we forecast an equity value of $2 per share. We do not think shares currently are attractive as a take out candidate considering dour trends and concentration risk in the International Hedged Equity category. 

 

Contrary to investor belief that the firm's biggest funds are "out of favor" because of the International Equity category, the bigger issue is the firm's hedging of foreign currencies within these funds which are now forcing investors out of these products as the hedges are now nullifying currency gains: 

WisdomTree (WETF) | Timber! - Chart 1 dxj

 

The resting value of both DXJ and HEDJ prior to QE programs in Japan and Europe was ~$1 billion each which leaves plenty of downside if risk aversion in both geographies continues:

WisdomTree (WETF) | Timber! - Chart 2 hedj

 

 Although flows have improved from -$5.4 billion last quarter, Q2 is running at -$3.9 billion down -150% from +$6.5 billion in 2Q15:

WisdomTree (WETF) | Timber! - chart 3 revised

 

Fair value at our current projection for 2017 on Revenue, Earnings, EBITDA, and AUM points to downside of up to -50% from here. At a breakeven scenario on earnings at $20 billion in AUM, we see fair value at $2 per share. We do not think shares are attractive as a take out candidate with distressed trends:

WisdomTree (WETF) | Timber! - Chart 4 Valuation

 

 

WisdomTree (WETF) - It's Different This Time

WisdomTree (WETF) - The Land of the Sinking Sun

WisdomTree (WETF) - The Kuroda Kicker

WisdomTree (WETF) - More Questions Than Answers - We Remain Short 

 

Please let us know of questions,

Jonathan Casteleyn, CFA, CMT 

 



Joshua Steiner, CFA


Early Look

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