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CHART OF THE DAY: Complacency At All-Time Highs?

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. 


"... Looking a little deeper into how the latest all-time high in SPY has become:

  1. VOLUME: yesterday’s Total US Equity Market Volume (including dark pool) crashed -26% vs. its 1yr avg
  2. VOLATILITY: remained like a ball-under water (sub 14-15 on front month), sucking everyone back to VIX 10-11
  3. PRICE: SPY has only moved > +/- 0.5% in 5 of the last 31 trading days (will day 27 of complacency be today?)"


CHART OF THE DAY: Complacency At All-Time Highs? - 08.24.16 chart

Artistic Narratives

“No one can see in the work of the artist how it has become.”



With long-term bonds yields down (Long Bond Up) and Oil Up yesterday, the SP500 took another peak at all-time highs. Perfect. If ole Nietzsche was still kicking around he might have warned that “with everything perfect, we do not ask how it came to be.”


Or, for the many who are in the business of being long-only anything (or everything) - stocks, bonds, commodities, etc. – who really cares about auditing the narrative on why? As long as the clients don’t ask any questions … all good.


I have to take the other side of the German philosopher on “no one can see.” The poor guy didn’t have Google, You Tube, or Twitter. You don’t have to look very hard to see how perma bull narratives have become. There’s one for every asset class, all of the time.


Artistic Narratives - TLT safewaters 10.15.14


Back to the Global Macro Grind


I didn’t wake up this morning reading Nietzsche. In fact, I do not enjoy quoting the man at all. His name is too artistic. I was just spell-checked into the boards on his name 3x in a row!


He’s dog-eared in my Grit book where Angela Duckworth makes an astute point about our profession (anyone with an establishment of perceived wisdoms really) that “mythologizing natural talent lets us all off the hook. It lets us relax into the status quo.” (pg 39)


In hindsight, there’s no doubt that the status quo of a macro market price has a comfortable narrative that lulls everyone to a level of preceded complacency.


“You just have to buy stocks” (as long as they weren’t Chinese, Japanese or European)… because:


  1. Growth is slowing
  2. Rates are at all-time lows
  3. There’s no alternative


Ah, the artistry of that puck-head Mucker. Did I just slip one past the goalie there and start the narrative with the #1 thing very few asset management marketing decks mention as THE causal factor?


  1. What if US Growth didn’t slow?
  2. What if the Fed wasn’t forced to pivot back to dovish (multiple times) as a result?
  3. What if the Dollar didn’t stop going up, and Oil, Junk, etc. didn’t stop crashing?


Oh boy. I don’t think I would have been able to complement this morning’s all-time high in the Equity Beta Navel Gazer with Long Bond Up, Oil Up… would I?


Looking a little deeper into how the latest all-time high in SPY has become:


  1. VOLUME: yesterday’s Total US Equity Market Volume (including dark pool) crashed -26% vs. its 1yr avg
  2. VOLATILITY: remained like a ball-under water (sub 14-15 on front month), sucking everyone back to VIX 10-11
  3. PRICE: SPY has only moved > +/- 0.5% in 5 of the last 31 trading days (will day 27 of complacency be today?)


The price of an asset class, of course, is a function of its realized volatility. So… if you smash volatility, and hold it down there with “there’s no alternative to stocks”… and keep registering all-time highs on crashing volume, what is a short-seller to do?


Cover. Capitulate. Cry.


Yeah. Poor little hedgie, cry me a river. Life has been so hard that you have to deal with some adversity every 3-4 months before volatility ramps like a bat out of hell and you’re running reluctantly levered long again…


Seriously. From a price, volume, and volatility perspective… this has to be the best time to be a short seller of anything US Equity beta since … well, every time the VIX goes to 10-11!


That said, you do have to wait and watch for that 11 VIX handle. Mainly because the damn thing keeps going to 13 (sucking bears back in) and then backs right off, squeezing Style Factors like High Short Interest, High Leverage, High Beta, etc. in a hurry.


So what’s next?


I think you know what I think is coming next. But you also know that I don’t know when. Do you? Moreover, can you tell me what happens to stocks and long-term bonds if Oil is done going up for the next 3 months?


I say Long Bond Up, Gold Up, Low Beta-Safe Yield Up… and Low Quality Narratives Down.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.49-1.59%

SPX 2169-2192

VIX 11.06-14.35
EUR/USD 1.10--1.13
Oil (WTI) 42.18-49.45

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Artistic Narratives - 08.24.16 chart

Live Q&A Wednesday at 12:00PM ET | Credit Cards Lose Their Charge

Takeaway: The credit card industry faces an uncertain future—will it be able to weather the storm?





What's the outlook for the credit card industry? When you look at the central players up close--focusing, say, on the latest revenue and earnings numbers for the key network providers (V and MA)--the outlook appears pretty bright.


But when you step back and take a broader view, several large warning lights appear. Let's start upstream, where growing price competition for consumers and retailers is forcing acquiring banks to cut back on fees, thereby pinching margins. Tellingly, the most "premium" brand of all (AXP) is now in real trouble: Hip hop and HBO stars are no longer bragging about their titanium black card. Then let's focus on today's frozen credit cycle, which is depriving the acquirers of the "revolver" interest income they usually enjoy as the recovery matures. Finally, let's look ahead to the seemingly unstoppable growth in debit cards, prepaid cards, and ACH as a share of all noncash payments. Or further ahead to the even faster growth in mobile payments.


What about opportunities abroad? Sorry, that window is closing as well. Indeed, there is growing worry about threats from abroad. If there is one specter that wakes up credit card executives in the middle of the night, it is the image of millions of 30-year-old Americans tapping on WeChat (the English-language version of "Weixin," the single most used mobile app in China). Looking ahead, some analysts already prefer to talk not of the credit card industry but rather of the "payments" industry.


Pushing all of these challenges is a strong and adverse generational tide. Quite simply, as you go younger than the 1970 birthyear, you will increasingly find Americans who don't like credit cards, don't like banks, and in fact don't really care for much of the financial services industry. A revolution is brewing.


CLICK HERE to read the full report.



Trump Goes All In. Why Are Public Pensions So Messed Up? NewsWire. Did You Know?





During the post-convention plunge in Trump’s poll ratings, many of his closest associates (including RNC Chairman Prince Priebus and campaign chairman Paul Manafort, Jr.) urged Trump to try to exercise self-discipline and be more “presidential.” Last Wednesday, in appointing Steve Bannon as campaign chairman while demoting Manafort and elevating Kellyanne Conway as campaign manager, Trump decisively rejected their advice. He did so after coming to the opposite conclusion—that the reason he was losing was precisely because he was trying to stifle the reckless, uncouth, and anti-PC abandon which served him so well during the primaries.


Trump’s hard-core supporters were delighted: “Let Trump be Trump” has long been their battle cry. The GOP leadership and doctrinal conservatives were aghast, since Trump was apparently giving up on any effort to unify the party. Bannon in particular (as head of Breitbart News) leads a crusade of “alt conservative” populists and nativists who have directed at least as much rage against the “Republican establishment” as against Clinton and the Democrats. Pollsters and political forecasters, meanwhile, simply rolled their eyes. Almost without exception, these professionals have been saying that Trump’s only hope was to cement party unity, pull back the sharp edges, and reach out earnestly to independents in the middle. Trump to the pros: Like hell I will.


My own reaction is mixed. I actually know Steve Bannon fairly well. He’s a big Fourth Turning fan. He once directed a movie called Generation Zero about the 2008 GFC which borrowed heavily from my work. Before he became head of Breitbart he was a film director, and before that he worked for a decade at Goldman Sachs. He’s deeply knowledgeable about economics and history, tuned-in culturally (he runs a business that sells digital paraphernalia to World of Warcraft players)—and, no question, a total firebrand.


Like so many Boomers, he doesn’t mind contemplating the apocalypse. Like the Joker in Dark Knight Rising, he bills himself as an agent of chaos. In a Washington Post interview earlier this year, Bannon explained that, “We think of ourselves as virulently anti-establishment, particularly ‘anti-' the permanent political class.” According to a 2015 Bloomberg Businessweek cover story headline: “This Man is the Most Dangerous Political Operative in America.”


By any conventional calculus, it’s hard to see how the Bannon and Conway makeover improves Trump’s odds of winning. On the other hand, it’s also hard to see how, in a strictly conventional campaign, Trump was ever going to win anyway. In an era of deep voter skepticism, maybe his best chance is to go for the edge, take some risks, hope he can (for once) put Hillary off balance, and go into the debates with gusto. As a candidate, Trump may be ignorant on the issues. But his political instincts have always been pretty good.


Trump’s national poll deficit, by the way, has closed slightly over the last week, from about 7-8% to about 5-6%. (A recent LA Times/USC national poll anomalously gave Trump a 1% lead.) He is gaining mainly by keeping his mouth shut. By most estimates, clearly, Trump still has a very long way to go.


Trump Goes All In. Why Are Public Pensions So Messed Up? NewsWire. Did You Know? - RealClearPolitics02




If you see a man walking across a frozen lake during spring thaw, two questions may go through your mind. Is he going to fall in? And, am I going to have to risk my life trying to save him? You may want to ask similar questions about your local public pension system.


On paper, the typical U.S. state or county pension system is 26% underfunded (that’s $1.1 trillion of red ink in aggregate). But even this number is hopelessly optimistic, since it is based on patently unrealistic projections. Most systems assume an indefinite real rate of return of around 7.5%: That’s inflation-adjusted and forever, to pay for benefit obligations that pension boards claim are contractual. Apparently, they still think it’s 1955—and have not woken up to the current global demographic (and productivity) outlook. Plug in a more reasonable RROR, like 4%, and their unfundedness rises to 55% (and their unfunded liabilities mount to around $4 trillion).


Why do public pension systems persist in making these outlandish discount assumptions, even in the face of so many howling critics (like me)? Well, it’s pretty simple: They do so because they can. Almost everywhere in the world, both in the private and public sector, funded DB pension plans are required to set their discount rate at the rate for long-term sovereign debt or for high-grade, secured corporate debt. This is true, for example, in Canada, Australia, the U.K., and the Netherlands. It’s also true for the U.S. private sector. But it’s not true in the U.S. public sector, where GASB accounting rules allows pensions to set their discount rate at the “reasonable” rate of return for whatever asset class they choose to invest in.


A cynic (again, like me) might suspect that these plans have been pushing their assets into higher-risk asset classes just to reduce their future liabilities. Sounds perverse, but is there any evidence to support this claim? Well, now there is. A brilliant new paper by Aleksandar Andonov, Rob Bauer, and Martijn Cremers, an international team of economists which analyzed 850 pension plans over 22 years (1), throws new light on why plans choose their discount rates.


First of all, Andonov et al. show that since 1990 discount rates for nearly all non-U.S. public funds have declined steadily along with the declining yields on sovereign debt. Meanwhile, the discount rate on U.S. public funds has hardly dropped at all (from 8.0% to 7.5%). How did they manage this? By moving steadily into riskier asset classes, including equities, high-yield bonds, emerging market debt, and alternative assets. Back in the 1970s, an estimated 75% of public-fund assets were in safe fixed-income instruments. By 1990 (see below), it was about 50%. Today, it’s about 25%.


Trump Goes All In. Why Are Public Pensions So Messed Up? NewsWire. Did You Know? - Pension Study


The researchers show that the change in U.S. Treasury yield has been highly and inversely correlated, year by year, with the change in the risky asset share. Looks suspiciously like causation to me. They also find that the speed at which these funds have moved into risky assets is positively correlated with the maturity of the fund (i.e., the ratio of retirees to workers in the system). In other words, the closer they are to big payouts, the more risks they take—which is exactly the opposite of the behavior of all the other systems the researchers examined. Ordinarily, of course, you are supposed to steer away from volatility as your due date approaches.


But that’s not all. When Andonov et al. look at the governance of the U.S. plans, they find another strong link. They reveal a strong and positive correlation between the share of pension board members who are political appointees or plan-member representatives (as opposed to general-public appointees) and the tendency to go for riskier assets. Keep in mind that a lower discount rate threatens public employees or elected officials (through higher payroll deductions or the need to raise taxes). A higher discount rate and a riskier asset allocation, on the other hand, only threatens future taxpayers.


Finally, and most revealingly, Andonov et al. find that the public funds aren’t really very good at investing in riskier asset classes. They underperform most of the benchmarks (especially for alternative assets) by at least 50 bp. This makes sense, when you consider that their main object is not so much to attain the higher RROR ex post, but rather raise their discount rate ex ante. That’s what eases the near-term political pressure. And sadly, for too many of these plans, it’s really all about the near term.


According to The Economist, which gave these authors a brief mention, “This paper demonstrates convincingly that American accounting regulations have created perverse incentives for public pension funds. And that can mean only one thing. The rules need to change.” Amen to that. I’ve talked to enough pension managers to know that it isn’t their fault. They're simply following instructions. The real problem is rooted in a political and regulatory system that doesn’t fully level with the public about unsustainable generational promises.


  • Millennial Chris Plante says he’s finally cutting the cord because cable is too time-consuming for his lifestyle. On top of prohibitive costs, cable also doesn’t have the functionality and the ease of use that Millennials want from their entertainment: “Cable is built around channel surfing….[it] isn’t built to curate television. And it barely allows for us to handle the curation on its behalf.” (The Verge)
  • Authors of the new book The Danish Way of Parenting argue that Danes are the happiest people in the world because of their upbringing. Danish parents and school systems emphasize interdependence, empathy, and teamwork rather than individual achievement—a good example for parents who want well-behaved and emotionally intelligent Homelanders. (The Guardian)
  • A new show called The Great Indoors contrasts Millennial reporters’ “overly PC, coddled work environment” with the new Gen-X employee’s rugged old-school-style journalism. While the Millennial stereotypes may be a bit over the top, the show hits the nail on the head when it comes to Gen X feeling a bit old and out of place in an office of recent college grads. (The Oregonian)
  • According to the Journal of Hand Therapy, Millennial men have significantly weaker hands and arms than men the same age did 30 years ago. The major driver behind this finding is America’s changing work habits: Men are less likely to be employed in jobs involving manual labor than they were in the ‘80s. (The Washington Post)
  • Population expert Sami Karam examines America’s demographic headwinds brought on by the continued aging of Boomers. He points out that as more and more Boomers retire, the working-age population will shoulder an ever-heavier tax burden, sending the U.S. dependency ratio to levels not seen for half a century. (newgeography.com)
  • Despite overall increases in box office revenue, there have been 15 big-budget movie disappointments or flops so far in 2016—compared to just eight at the same point last year. In an increasingly fragmented entertainment landscape, there’s simply room for fewer winners at the box office than ever. (The Wall Street Journal)
  • After pushback from Silent and Boomers, the Social Security Administration is reversing course on a mandate that required account holders to use a password sent to them via text message. One Boomer couple’s e-mail captured the generational tension: “Who’s the youngster who dreamed up the idea of text messaging for senior citizens?” (The Washington Post)
  • Xer military veteran Carl Forsling says that Millennial enlistees don’t deserve the “soft” label they often get. He points out that while Xers joined the ranks at a time when combat was only a possibility, “Almost all Millennials in the military joined after 2001. Service in combat theater was a certainty for them, yet they joined anyway.” (Task & Purpose)
  • The number of U.S. renters over age 55 has been steadily increasing since 2007, adding to the growing number of Millennials who are also renting instead of buying. Boomers are looking for very different amenities than budget-conscious Millennials, including more space, longer leases, and more luxury options that will allow them to age comfortably. (Apartment List)
  • Contributor Catherine Baab-Muguira notes how Millennials have no problem committing the ultimate Xer sin: selling out. She makes a clear point: While Xer icons like Kurt Cobain could wear a t-shirt saying “Corporate Magazines Still Suck” on the cover of Rolling Stone, many Millennials can’t afford not to sell their souls to the highest bidder. (Quartz)

Did You Know?

Millennials Cuckoo for Couponing. “Extreme couponing” may conjure up images of a middle-aged individual with plenty of time on their hands. (See: “What’s the Deal with Extreme Couponing?”) But as Bloomberg Business reports, many of today’s heaviest coupon users run with a younger crowd. Marketing firm Valassis reports that nearly nine in 10 Millennials use coupons. But how young shoppers find these coupons is changing. Although print coupons still enjoy record circulation, many of today’s bargain-hunters find their own deals through websites, Web extensions, and digital apps. As a result, avid 31-year-old couponer Heather Schisler says that she “[doesn’t have to] get three or four copies of the newspaper anymore.” Traditional coupon distributors are quickly adapting to this fragmented landscape. Firms such as News America Marketing and Quotient Technology have each acquired app-based discount companies in a play for Millennials. Even Valpak, famous for its blue envelopes stuffed with local deals, says that website and app users printed more than 2 million digital coupons last year.

INVITE | P Best Idea Long | Call Thursday at 1pm EDT

Takeaway: We will host a conference call Thursday August 25th at 1pm EDT to present P as a new Best Idea Long.


INVITE | P Best Idea Long | Call Thursday at 1pm EDT - P   Best Idea Long Image


  1. AD MODEL IS SO POORLY MONETIZED THAT: P’s ad-supported model hasn't produce any real operating leverage/cash flow to date, and is now more expensive to run post Web IV.  P’s 2Q results reinforce our long-standing view that revenue growth is tied to its salesforce growth, meaning the ad model may never get off the ground.
  2. VERY LITTLE SUB CONVERSION GOES A LONG WAY: The sub model is far more lucrative from both a revenue and margin perspective.  The stark difference b/w the two models means the expanded sub launch is a massive growth opportunity, particularly in the initial years, maybe more depending on how aggressively P commits to it.
  3. P = CALL OPTION: Basically a hedged bet: mgmt either executes on its sub expansion (new deals + revenue) or is forced to entertain acquisition offers if can’t do so, which should buoy the stock at a minimum.  The former offers more upside, but the stock should end up much higher either way by this time next year, if not sooner.

 Attendance on this call is limited. Ping  for more information.

AHS: Adding AMN Healthcare Services to Investing Ideas (SHORT SIDE)

Takeaway: We are adding AHS to the short side today.

Editor's Note: Please note that Healthcare analyst Tom Tobin will send out a full report outlining our high-conviction short thesis. In the meantime, below is a brief summary written by Hedgeye CEO Keith McCullough earlier this afternoon.

AHS: Adding AMN Healthcare Services to Investing Ideas (SHORT SIDE) - z ahs

I'm I afraid to short High Short Interest (in most cases low quality) US stocks? 




After a big decline on accelerating volume, AMN Healthcare Services (AHS) has bounced to a lower-high and is signaling immediate-term TRADE overbought within Tom Tobin's bearish intermediate-term TREND view.


On the fundamentals (per Tom Tobin and Andrew Freedman):


"Organic growth slowed sequentially again at AHS from peaks over 30% in 2015 to 28% in 1Q16, to 19% now in 2Q16.  The reasons presented by management that have led growth from negative territory in 1Q14 center on an aging and retiring nurse and healthcare workforce alongside a tight labor and macro factors generally.  We've been much more specific in our analysis of demand drivers, showing a strong relationship between the increase in insured medical consumers caused by the Affordable Care Act (and to a lesser extent payroll growth), which increased patient volumes and demand for labor on a 2 quarter lag, and subsequently produced accelerating price and volume for AHS and other staffing companies.  As the contribution from insured medical consumers has already slowed from a peak of +8% to its current level of +1.5% currently (and likely lower in 2017), we believe the deceleration in organic growth at AHS is on a programmed path to turn negative, taking consensus revenue and margins with it."


Short Green,


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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.