CHART OF THE DAY: The Widely Watched Widow-Maker (for Long Bond Bears)

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.


"... But, but… “they’re expensive” (Old Wall PM speak for I didn’t and don’t own them) and “eventually” the bubble in bonds “has to pop” (but in “stocks”, never – always room to go higher)…


That’s what’s been filling up my inbox for the past few weeks. And that’s primarily because long-term bond yields, globally, bounced off their all-time lows. The widely watched widow-maker (for Long Bond Bears) – Japanese Government Bonds – sold off 22 basis points!" 


CHART OF THE DAY: The Widely Watched Widow-Maker (for Long Bond Bears) - 08.10.16 chart

Golden Opportunity

“We urge change.”

-Benoit Mandelbrot


I’m up in the homeland this week. This time of year is always a wonderful opportunity to spend time with my wife and kids. Selfishly, I do from time to time get to sneak away for some fishing and fractals. Reading about fractals fascinates me as much as the fish do.


The aforementioned quote came from the founding father of Fractal Geometry, Benoit Mandelbrot, in October of 2008. Fortunately, for all of us, the establishment in our profession has not yet heeded his advice. This presents us with the golden opportunity of change.


As Mandelbrot wrote in The Misbehavior of Markets, “Financial economics, as a discipline, is where chemistry was in the 16th century: a messy compendium of proven know-how, misty folk wisdom, unexamined assumptions, and grandiose speculation.”


Golden Opportunity - Growth cartoon 05.19.2015


Back to the Global Macro Grind


If everyone’s already figured it all out, why haven’t they been ultra-long both duration and Gold for the last year? “All-time highs” in SPYs are fun to navel-gaze at, but reality is that on a year-over-year basis:


  1. Gold is up +23.2%
  2. Extended Duration Bond (EDV) is up +18.0%
  3. The Long Bond (TLT) is up +12.1%
  4. SP500 is up +3.7%


Yes. I know. There are some very bond-like components of the SP500 that have crushed it more than TLT has (Utilities (XLU) and REITS (RMZ Index) are +14-15% year-over-year, respectively), but … seriously, Gold has been going all power-law on the bears.


“Examine price records more closely… and you typically find a different kind of distribution than the bell curve: the tails do not become imperceptible but follow a power law. These are common in nature.” –Mandelbrot, The Misbehavior of Markets (pg 13)


Do your returns in the last year look more like equity beta than they do the power-law thing embedded in the Phelps Gold count? He won #21 and #22 last night. In fishing speak, that dude has ripped some serious lip!


Since July of 2015 (Global Equity Bubble Top), it’s been a Golden Opportunity to invest in Global #GrowthSlowing.


When both local (US GDP has slowed from 3% to 1%) and global growth are slowing, long-term bond yields fall. Then … central-market-planners try to make them fall further, in hopes that the illusion of growth (“stocks” in devalued currencies) fools you.


All the while, those who are long either duration and/or safe-yields get paid, taking on much less portfolio volatility.


But, but… “they’re expensive” (Old Wall PM speak for I didn’t and don’t own them) and “eventually” the bubble in bonds “has to pop” (but in “stocks”, never – always room to go higher)…


That’s what’s been filling up my inbox for the past few weeks. And that’s primarily because long-term bond yields, globally, bounced off their all-time lows. The widely watched widow-maker (for Long Bond Bears) – Japanese Government Bonds – sold off 22 basis points!


That’s in yield terms. But what does this immediate-term TRADE higher (in yields mean)?


  1. That growth is back, baby! (???)
  2. That a fiscal bazooka strapped to a Qe5 Heli-Ben might work?
  3. That what crashes (yields) eventually bounces, for a trade?


While #1 is what we continue to track like a bear (like in 2013 when our call on US #GrowthAccelerating had us bearish on both the Long Bond and Gold), it’s showing nothing but signs of TRENDING (multi-quarter cycle research) growth slowing.


When it comes to #2, there’s always a chance! So we’ll have to see about that (Krugman is sooo excited!). Meanwhile reason #3 is the winning answer, until Mr. Macro Market goes all fractal on us and signals otherwise.


On that score, here are some @Hedgeye intermediate-term TREND signal levels to watch:


  1. US 10yr Yield TREND = +1.87%
  2. Japan 10yr Yield TREND = +0.03%
  3. German 10yr Yield TREND = +0.24%
  4. UK 10yr Yield TREND = +1.39%


That last one (UK 10yr Gilts) is conspicuously kept out of the email chain on how “this is it… look at JGBs…” and that’s mainly because it doesn’t corroborate the view that “bonds yields can’t go lower.” Today alone the UK 10yr Yield is down 6 basis points to +0.52%


Oh, and US, German, and Japanese 10yr Yields are all lower too this morning to +1.54%, -0.10%, and -0.11%, respectively.


So if you nailed it (instead of being nailed for the last year shorting “expensive” bonds and their proxies) and shorted JGBs, Bunds, and Treasuries at the all-time lows in yields, I say you book those gains before the Gold Bond Bulls run you over.


We’re not yet Merrill’s thundering herd of stock chart chasers, but we’re a growing community of longer-term investors who crush it when growth slows. We continue to urge you to understand this causal factor and change your asset allocation accordingly.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.44-1.60%

SPX 2155-2189


VIX 11.01-14.99
USD 94.80-97.00

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Golden Opportunity - 08.10.16 chart

JT TAYLOR: Capital Brief

JT TAYLOR:  Capital Brief - JT   Potomac banner 2

“The bud of victory is always in the truth.”

-Benjamin Harrison


A PARTY DIVIDING?: Following one of his campaign’s worst weeks yet, Donald Trump claims he won’t change his strategy or alter his temperament even slightly. His Second Amendment comments were beyond the pale - overshadowing yet another headline on Hillary Clinton’s State Department emails and influence from the Clinton Foundation - and will likely cost him more party members and donors as some are now making their support of Hillary Clinton very public. The list continues to grow - this time including ME Senator Susan Collins saying she would not vote for Trump. In addition to Collins, and other high-profile former Bush Administration defections, a letter signed by 50 senior Republican national security officials warned that a Trump presidency would “risk our country’s national security and well-being.”  


TRUMP ECON 101: Amid protesters’ interruptions, Trump’s economic speech to the Detroit Economic Club was a mix of the good, the bad, and the ugly. The plan stitched together old ideas from the left and the right, including a large dose of tax cuts mixed with outdated protectionism, reformed conservative social policy and a deregulation plan that would make Wall Street cheer. Will the unusual mix of policy captivate those outside of Trump’s constituencies and stall his recent slide in the polls and recapture the momentum that led him to the nomination? Clinton is expected to lay out her rebuttal later this afternoon.


UNANSWERED QUESTIONS: It’s hard to dismiss the fact that Clinton is leading by double digits in most national polls and now with just 90 days until election day, Trump still has not spent a dime on television advertising, even as Clinton continues to flood the airwaves with more than $50 million in ad spending. It's not for lack of money as the Trump campaign raised $80 million in July and finished the month with $37 million cash-on-hand. We’re stymied that he hasn’t tried to make up any lost ground not even posting during the Olympics as Clinton drops $5.5 million on prime time ads.


GIVE ME FIVE: Five candidates are now in the presidential race with Evan McMullin, a CIA veteran and former House Republican policy adviser, launching his independent bid amid angst over Trump and his policy agenda. McMullin, a longtime anti-Trump advocate, believes he has the funding ties and conservative support he needs to be competitive in the race.  Many obstacles exist for third-party candidates entering the race at this juncture, but it’s still likely that McMullin will pull votes from Trump if he makes the ballot; couple that with votes for Gary Johnson and Trump’s disadvantage becomes even greater.


FREEZE SEPTEMBER SEQUEL WILL HAVE SIMILAR ENDING: NO AGREEMENT: Our Senior Energy Analyst Joe McMonigle shared his insight on why the target of freeze talk is sentiment, not production; and how Saudi Arabia and Iran will not be able to come to an agreement because the September timing is too soon. You can read his piece here.


PENTAGON OCO FUNDING TAKEN HOSTAGE IN WASHINGTON: Our Senior Defense Policy Advisor LtGen Emo Gardner shared his thoughts on Overseas Contingency Operations funding and how it has become a game of political football in the debate between increasing all federal spending or only defense spending. You can read his piece here.


NICE INCREASE IN REIMBURSEMENT FOR SNFS BUT FOCUS ON VALUE-BASED PROGRAM: Our Healthcare Policy Emily Evans shared her insight on the Skilled Nursing Facility Value-Based Purchasing Program’s increase in reimbursements and how it’s not a big negative in the short term, but does represent a challenge for providers. You can read her piece here.


COPYRIGHT OFFICE OBJECTS TO FCC SET-TOP PLAN: Our Telecommunications-Media Policy Analyst Paul Glenchur shared his insight on the Copyright Office’s legal doubts about the FCC plan to unleash retail set-top competition and why cable operators and STB vendors should benefit. You can read his piece here.


ISLAMIC TERROR: SHRINKING CALIPHATES, EXPANDING NARRATIVES: Our Geopolitical Analyst Dan Christman shared his insight on the shrinking caliphates in Iraq, Syria, and Libya, and the increase in jihadist adherent attacks around the globe. You can read his piece here.



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The Macro Show with Keith McCullough and Christian Drake Replay | August 10, 2016

CLICK HERE to access the associated slides.



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

August 10, 2016

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  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
1.60 1.44 1.55
S&P 500
2,155 2,189 2,182
Russell 2000
1,200 1,240 1,232
NASDAQ Composite
5,115 5,241 5,225
Nikkei 225 Index
16,050 16,886 16,765
German DAX Composite
10,166 10,691 10,693
Volatility Index
11.01 14.99 11.66
U.S. Dollar Index
94.80 97.00 96.13
1.09 1.12 1.11
Japanese Yen
99.22 103.98 101.89
Light Crude Oil Spot Price
39.12 43.70 42.77
Natural Gas Spot Price
2.53 2.93 2.62
Gold Spot Price
1,326 1,378 1,347
Copper Spot Price
2.14 2.23 2.15
Apple Inc.
101.73 109.66 108.81
734 782 768
Netflix Inc.
89.95 96.99 93.99
J.P. Morgan Chase & Co.
62.80 66.75 65.87
Ford Motor Co.
11.28 12.69 12.31
SPDR S&P Oil & Gas Explore
32.19 36.11 35.31
1234 1283 1255

Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, along with our intermediate-term (TREND) view.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.

YELP | Earnings Call Notes (2Q16)

INITIAL TAKEAWAY: 2Q was basically driven by the algorithm stunt implemented in 1Q.  Everything else was just noise; including mgmt’s efforts to change their message, which they are actually doing a decent job with.  Below are our notes from the call.  We’ll have a more detailed note out in the morning.


CEO Prepared Remarks

  • Local Ad Revenue growth accelerated to 41% (vs. 40% in 1Q), exceeding expectations across sales channels, with slightly better revenue retention
  • 3 priorities for the year:
    • Driving awareness/engagement
      • TV/Online Ad spend
      • Request a quote feature drove over 1M consumer inquiries
      • Business owner app drove 1/3 of activity for business traffice
    • Growing core local advertiser business
      • Providing performance based solution for independent to national accts
      • Investing in client service teams
    • Developing transactional capabilities
      • Total transaction volume grew almost 50% y/y
      • Nearly 6M transactions across Eat2Q, Yelp reservations
      • Consumers can now transact w/ over 100K local businesses
  • Announced small investment in Nowait
    • Product helps restaurant to manage waitlists, over 4K restaurants using already
    • Wil be integrated on YELP platform, enabling consumers to see current wait times
  • Jed Nachman appointed to COO effective today
    • Donaker will be retiring, will be an advisor and retain seat on Board


CFO Prepared Remarks

  • YELP model is diversified, defensible core business
    • No customer represents > 0.5% of rev, largest product category 15% of rev
    • Revenue growth is still in the 30%-40% range in longest tenured markets
  • Business model provides significant near-term visibility
    • Entering 2Q, YELP had commitments representing ~75% of the local rev it expected
  • Core local Sales team
    • Produced over half of the y/y increase in Local Revenue
    • Grew small business advertisers nearly 30% y/y
  • National accounts
    • Higher rev/rep, rev/customer, and renewals than core local
    • Expanding sales team in this area
  • Self-serve
    • revenue more than doubled y/y, small part of Local rev, but strong growth in accounts
    • Lower budget commitments, tend to advertise more opportunistically
  • Revenue and adjusted EBITDA both exceeded expectations
    • Local ad revenue ahead of expectations, flowed through to EBITDA
  • Revenue up 38% y/y ex Brand, Local revenue up 41%
    • New account growth among smaller businesses was biggest driver
    • Saw slightly higher revenue retention across its customer base
    • Transaction up 37% y/y, now past year anniversary of Eat24
    • Other revenue flat q/q
  • Expenses
    • Cost of revenue up 16% y/y, gross margin % up 100bps
    • Sales and marketing up 39% y/y, 12M ad investment accounted for $7M of the increase
    • Sales & Market % of revenue was 54% vs. 60% in 2Q15
  • EBITDA up 24%vs. last year
  • Guidance (midpoints)
    • 2016 Revenue of $704 (vs. 696M prior), 2016 Adjusted EBITDA of $104M (vs. 99M prior)
    • 3Q rev of $182M, 3Q EBITDA of $26M




  • Budget Fulfillment
    • "No step function kind of improvements"
  • User Growth softening
    • More of a function of general trends moving more toward apps, away from desktop/mobile
  • Guidance around $1B revenue target for 2017
    • Not sure when they will get to $1B, but not giving a timeframe as to when
  • Update on YP partnership
    • Portion of revenue in Other, no incremental color
  • Transactions accounts, over 100K, what is overlap b/w that and the LAAs
    • Dodged question
  • Slightly improved revenue retention, anything it can attribute to
    • Doing a little better than retention, within historical ranges
    • Are starting to experiment with client service reps in local
  • Commitments in place for 3Qs of guide
    • Quite a bit of visibility, a lot of annual contracts, multi-month contracts
    • No real change, just a fact of the business
  • Salesforce productivity across cohorts
    • No silver bullets, modest outperformance against expectations across all channels
    • Varity of segments impacting
  • Inventory constraints/sell-out in any regions?
    • dodged
  • YELP Knowledge launch, initial feedback
    • Data opens doors to have dialogue with certain companies it couldn’t have had otherwise
    • Note a game changer overnight
  • International Monetization improved
    • More focused on domestic, but making modest investments
  • Customer/ROI dashboard impact on retention
    • Not seeing direct correlation
  • Contributions by business lines
    • Multi-location business is about 20% of Local Revenue (referring to 1Q comment)
    • Bulk of local growth coming from adding new accounts
    • National is the inverse, mostly in the upsell
    • Seeing nice growth in self-serve, balanced b/w ARPU and account growth
  • Contract Duration
    • There is natural attrition once customers lapse annual contract
    • Going to let customers buy in the way they want to buy (3, 6 , 12-month contracts, and self-serve)
  • Guidance: 2H revenue is going up in excess of the 2Q beat, but adjusted EBITDA not up as much
    • Numerous investment opportunities
  • Salesforce Hiring tracking well closer to 40% vs. 25%-30% target, expecting to ramp up
    • Retention and hiring trends within historical ranges
    • Still expecting 20%-30% range for the full year

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