CHART OF THE DAY | Since Fed Is S&P 500 Dependent, Here's A Buying Opportunity

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.


"... Oh, and my precious currency, Gold got sacked for a -1.8% loss, pairing its epic lead for 2016 back to +23.1% YTD. And now that looks like a great buying opportunity if you believe the Fed is both data and SP500 dependent."


CHART OF THE DAY | Since Fed Is S&P 500 Dependent, Here's A Buying Opportunity - 09.19.16 EL Chart

Wild Randomness?

“Wild randomness is uncomfortable.”

-Benoit Mandelbrot


Back to The Brot this morning in trying to explain why one of the NFL’s best backs (yes, my RB1 in Fantasy), Adrian Peterson, only ran for 19 yards last night and how Janet Yellen could be pivoting for the 6th time in 9 months later this week.


Hawkish-dovish-hawkish-dovish-hawkish, then dovish? Loss of 2 yards, 1 yard gain, loss of 4 yards, 2 yard gain. I guess the Fed  should just pre-announce the play to the entire world and run it right up the middle, Vikings style!


As Mandelbrot goes on to remind us, “there is much in economics that is best described by this wilder, unpleasant form of randomness…” (The Misbehavior of Markets, pg 41). Random behavior usually perpetuates more “surprises”, not less.


Wild Randomness? - Fed La La Land cartoon 09.15.2016


Back to the Global Macro Grind


What’s not random is the Federal Reserve pivoting to dovish whenever they want to try to centrally plan market prices higher. Commonly called “reflation”, I’m hearing they’re going to broaden that market reality’s definition to “transitory” too.


Why are crashing inflation expectations (Oil prices for example from $105/barrel) “transitory”, but bear market bounces not equally transient? Why would an aging running back’s production ever re-accelerate back to the glory days of his injury-free youth?


With Fed Fund Futures implying a 15-20% chance of a Fed rate hike this week, Janet better not try to get cute with this and raise them anyway. In addition to #GrowthSlowing, she’ll have #Deflation Risk On again too.


Or is it already on?


That’s an interesting question I haven’t spent enough time debating in my morning rants. What happens if and when the Fed pivots back to devaluing the Dollar… and the Dollar doesn’t go down? Will the longer-term TAIL risk of Commodity #Deflation resume?


Last week’s moves in macro markets looked a little like that:


  1. Rates stopped going up (week-over-week, UST 2yr Yield down 2 beeps, UST 10yr up 2 beeps)
  2. Utilities (XLU) resumed their league leading YTD S&P Sector return, +1.7% on the week to +13.8% YTD
  3. Financials (XLF) continued to trade like Peterson’s yardage, down -1.7% on the week to -0.9% YTD
  4. But the US Dollar ended up closing the week up +0.7% to -2.6% YTD
  5. And Oil and Commodities (CRB) indices deflated -5.9% and -1.0% on the week, respectively


Deflate-gate this was not. Although Patriot fans (yes, I am one) felt some non-transitory deflation when QB Jimmy Garoppolo went down, hard, suffering a sprained AC joint yesterday. When your receiver (Julian Edelman) is your new Backup QB, that’s a problem.


But I do think there will be a definitive market deflation if Yellen makes another policy mistake.


What else went down vs. up (in Global Equities) last week?


  1. Energy Stocks (XLE) got tagged for a -3.2% loss, eating into those Q2 “reflation” gains, when the Fed went dovish
  2. Tech Stocks (XLK) rocked out a +2.3% weekly alpha move after Intel (INTC) and Apple (AAPL) ramped the bears
  3. European Stocks (EuroStoxx600) sucked wind (again) dropping another -2.2% on the week to -7.7% YTD
  4. Italian Stocks (MIB Index) got drubbed by their homeland’s guy, Draghi, crashing another -5.6% to -24.4% YTD
  5. Japanese Stocks (Nikkei) went down another -2.6% to -13.2% YTD after moarrr BOJ “buying” fumbled


Oh, and my precious currency, Gold got sacked for a -1.8% loss, pairing its epic lead for 2016 back to +23.1% YTD. And now that looks like a great buying opportunity if you believe the Fed is both data and SP500 dependent.


More good news is that the massively net LONG positioning in pretty much everything US stocks corrected as the US Equity market has in the last few weeks. Here’s the updated CFTC non-commercial (hedgies) net LONG positioning of major macro markets:


  1. SP500 (Index + Emini) net LONG position down -79,747 contracts last week to +113,534
  2. Russell 2000 (mini) net LONG position down -15,166 contracts last week to +8,183
  3. 10YR Treasury net LONG position down -56,539 contracts last week to +72,415
  4. Crude Oil net LONG position up +34,607 contracts last week to +360,492
  5. Gold net LONG position down -30,136 contracts last week to +248,858


In other words, after spiking to > +2.3-2.9x on a 1-year z-score, the SP500 and Russell net long positions are back down to +1.18x and 1.90x, respectively. Meanwhile the Long Bond (10yr) z-score is down to 0.92x – Gold and Oil are 1.07x and 0.83x, respectively.


Yep. You already knew that. The Fed got everyone to be long everything (stocks, bonds, stocks that look like bonds, Oil, Gold, etc.) on the concept that bad economic data is good for asset reflation.


This, unlike many things in markets, is not wild and crazy randomness. That may not make the economic puritan in you comfortable. It certainly doesn’t make the 2016 growth bulls “right” on stocks for the right reasons either.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.50-1.73%

SPX 2105-2161

Nikkei 168

VIX 14.02-19.95
USD 94.50-96.42
Oil (WTI) 42.38-45.22

Gold 1


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Wild Randomness? - 09.19.16 EL Chart

The Macro Show with Keith McCullough and Darius Dale Replay | September 19, 2016

CLICK HERE to access the associated slides.

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


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This week, we take a look at some of the largest and most important southeastern states in this year’s presidential election - VA, NC, and FL. With 57 electoral votes at stake, these three states are shaping up to be some of the most highly contested and contentious in U.S. election history.




VA has 13 electoral votes, making up around 5% of the 270 electoral votes needed to win the general election.


Between 1900 and 2012, VA cast votes for the winning presidential candidate 68% of the time, and in the same time frame, VA supported Democratic candidates for president more often than Republican candidates. The state, however, favored Democrats and Republicans equally in every presidential election between 2000 and 2012; with Democrat Barack Obama winning VA in 2008 and 2012, making it a newly-minted blue state.


VA has long been a battleground state, and is looking to repeat again this year. Hillary Clinton has maintained a large lead over Donald Trump in VA due to her large investments in advertising and staffing in the state. Clinton is also buoyed by her veep pick Tim Kaine, the former Governor and current Senator, who has a long history in local politics and boasts solid favorabilities in the state.





NC has 15 electoral votes, which is 5.5% of the 270 electoral votes needed to win the general election.


Between 1900 and 2012, NC cast votes for the winning presidential candidate 65% of the time. In that same time frame, NC supported Democratic candidates for president more often than Republican candidates. The state favored Republicans between 2000 and 2012 with Republican candidates winning in 2000, 2004, and 2012; with the exception of Democrat Barack Obama winning the state in 2008.


NC has been a highly competitive state, and will be so again this year. The state has garnered significant attention and resources over the past few months as each candidate has shared a lead in the polls. Trump spent the earlier part of last week in the state campaigning in the rural town of Asheville, an area that holds his core demographic, but with changing demographics, NC has been in Clinton’s crosshairs for some time now, and with her deep reservoir of resources in the state, we expect this one to be a fight to the finish. 





FL is the fourth largest state in the Electoral College with 29 votes, making up a whopping 11% of the 270 electoral votes needed to win the general election.


Between 1900 and 2012, FL cast votes for the winning presidential candidate 75% of the time, and in that same time frame, FL supported Democratic candidates for president more often than Republican candidates. The state, however, has favored Republicans and Democrats equally between 2000 and 2012, with Republican George W. Bush winning in 2000 and 2004 and Democrat Barack Obama winning in 2008 and 2012.


FL is characteristically the nation’s largest swing state, and it looks as if it will to live up to that reputation this year. With polls showing a statistical tie, the outcome will depend on whether Trump can motivate enough voters to the polls, or if Clinton’s more methodical campaign - relying on data and analytics to identify and coordinate supporters - will overcome the lack of excitement for her candidacy. One thing’s for sure, it’s going to be a hot one down there in the sunshine state.  


A Good Year for Middle America. The CPI and the Long Bond. Now It’s a Race. NewsWire. Did You Know?





According to the latest annual Census report on income and poverty, 2015 was a very good year for the typical household. After declining for seven straight years since 2007, real U.S. median household income jumped by 5.2%. Coming after the longest negative growth stretch ever recorded (since the Census first started this series in 1968), this latest one-year climb is the biggest ever recorded. Census has given the last three years an artificial boost by redrafting their questionnaire, which causes an upward break in the series from 2012 to 2013. But this still leaves 2015 trailing several earlier years. The real median income figure in 2015 ($56,516) remains roughly $1,000 below its peak in 2007. It also remains slightly below what it was 1999, 2000, and 2001—at the peak of the prior business cycle.


A Good Year for Middle America. The CPI and the Long Bond. Now It’s a Race. NewsWire. Did You Know? - median HH income


Nearly every demographic group—by age, race, region, and income bracket—shared in the jump. Core urban areas were up (+7.3%), while the most rural counties actually regressed (-2.0%). Late-wave Gen-Xers age 35-44 did especially well (with a +7.0% gain). Late-wave Boomers age 55-64 did less well (+3.5%). The West did best (+6.4%), the South worst (+2.9%). Noncitizens gained by +10.5%, due to the ongoing decline in newly arriving illegals and the rising influx of skilled workers and affluent students on visas. The poverty rate also declined significantly, from 14.8 to 13.5%, the biggest yearly decline since the 1990s. By the Census’ estimates, the biggest gainers were in the lowest 20% income bracket and in the highest 5%.


The cause of this good news? Well, partly it was somewhat better GDP growth in 2015: at 2.6%, it was not great but better YoY than any year since 2006. And partly it was a boost in the share of GDP going to workers, generating a 1.4% real gain in compensation. Most importantly, the dramatic decline in both energy and food prices suppressed the PCE deflator and gave households a big “real” purchasing power gain.


Though federal agencies to do not calculate separate deflators for different income brackets, it’s reasonable to assume that the gas and food price drops disproportionately benefited lower income groups. From 2014 to 2015, according to the JP Morgan Chase Institute, the lowest quintile spent 1.4% less of their income on gas while the highest quintile spent 0.4% less. More generally, the Institute’s analysis of credit and debit card spending shows that older and more affluent households showed the weakest consumption gains in 2015 and younger and less affluent households showed the strongest gains. Small wonder that, since Q3 2015, firms like WMT have been surprising mostly on the upside while firms like TIF surprised mostly on the downside.


What’s ahead for 2016? Almost certainly, household income growth gains will come nowhere near last year’s performance. For starters, YoY GDP growth will very likely be weaker this year. And the big boost from declining gas and food prices will disappear—indeed, it may even turn into a drag. Monthly estimates extending through July of 2016 conducted by Sentier Research shows that median household income may already have fallen by at least 1.0% this year since peaking in January.




Last Friday’s CPI report generated titters of concern about accelerating inflation—and reinforced the bearish outlook on TLT. I don’t buy it. The MoM numbers (0.2% overall, 0.3% core) are not out of bounds, and the YoY number remains very low, in the 1.0% range.


What’s more, the recent CPI results have recently been skewed by steep medical price hikes which reflect out-of-pocket spending only. Here, in other words, we are dealing with the poor souls buying Epi-Pens for $300 each rather than the majority of Americans who (through insurers) get them for around $100 each. The PCE deflator, which includes all medical purchasers, is not showing this accelerating medical inflation. And in July, the PCE deflator weighed in YoY at 0.79%. Keep in mind the comps here: In July 2015 falling crude oil prices were already approaching $50.


Near-term expectations data, as summarized by the Cleveland Fed, are also not showing much change. The 5-year ahead breakeven rate, now at 1.3%, has been trending downward since March. With the U.S. economic indicators recently surprising on the downside, few investors can be worried about an incipient growth surge. The market consensus is that the Fed will do nothing until after the election.


So what can explain the rise in the 10-year TIPS breakeven over the past 90 days? And perhaps the catch-up rise in 10-year yields over the past 30 days? Clearly long-term inflation expectations are rising, but this rise is being driven entirely by expectations beyond 5 years. Since the GFC, the 5-plus breakeven has generally been around 0.5 to 1.0% higher than the 5-minus breakeven. Investors assumed that the economy would eventually “recover” and inflation would bounce back to some extent over the long term. During 1H 2016, anomalously, that optimism collapsed and the 5-plus and 5-minus numbers merged. Now they are pulling apart again.


A Good Year for Middle America. The CPI and the Long Bond. Now It’s a Race. NewsWire. Did You Know? - 5 year ahead


So what has happened since last July to cause investors to change their minds again about long-term outcomes? Let me suggest two things. First, there is the perception that global monetary policy has reached its endgame and that NIRP cannot be pursued much further. This sweeps away a scenario which seemed all too possible last spring: endless ECB and BOJ rate cuts, endless euro or yen carry trade into the US, and endless US $ appreciation. Second, there is the growing probability that in future years, no matter who wins the 2016 election and no matter what the rest of the G20 does, America is heading politically toward a new regime of substantial fiscal stimulus.


Yet beware: All this hedging against new prospective inflation risks remains tentative. There is still little current data pointing toward inflation. And any further deceleration in the U.S. economy—especially if the Fed hikes rates into bad news—could put longer-term inflation risks on hold for a while.




Who would have guessed that the Donald could put in a stellar appearance on Jimmy Fallon’s Tonight Show—watched by millions of college-educated Millennials? It’s been another good week for Trump. With two new surveys giving him the edge nationally, he has cut Hillary’s lead on RealClearPolitics to only 0.9% points. Election odds now range from 73-27 for Clinton on the NYT’s Upshot to 60-40 on Nate Silver’s FiveThirtyEight. The superforecasters’ market at Hypermind puts the odds at 58-41. Most betting markets are around 65-35.


A Good Year for Middle America. The CPI and the Long Bond. Now It’s a Race. NewsWire. Did You Know? - realclearpolitics3


At the state level, Trump has an emerging poll lead in Florida and Ohio and is now neck-and-neck in North Carolina, Nevada, and Colorado. All of these are states he probably needs to win—especially if he doesn’t gain ground in Virginia or Pennsylvania.


Last spring, I suggested that Trump was likely to veer way to the left of other recent GOP candidates in promising to spend federal money to either to assist Americans in need or to get them jobs. This week he showcased both themes. He filled in the details on his program to help parents pay for childcare (this time including a refundable tax credit for low-income families) and outlined a federal guarantee for six weeks of maternity leave for any employed woman.  While both proposals were heavily panned by Democrats and by the media generally, they helped remind the electorate that Trump is no ordinary Republican—which was no doubt his intention. Meanwhile, Trump continues to draw the ire of GOP leaders by trying to outbid Clinton on how much he will spend on infrastructure.


The first candidate debate is Monday, September 26—eight days from now. The stakes are huge. Many Democrats will fret over Clinton’s higher expectation bar and worry that she may not be fully recovered from her pneumonia. Many Republicans will also be holding their breath, fearing that Trump may ruin his entire campaign in just one moment of outrageous ignorance or vulgarity. Quite literally, anything could happen.


  • U.K. writer Charlotte Gill debunks Millennials’ “yolo” spending habits, and claims that deep down, older people know that the issue is not getting Millennials to save more, but getting them more money to save. After all, “A cup of coffee or a mortgage shouldn’t be a choice; in better decades, you could have had your cake, eaten it, and bought a house.” (The Spectator)
  • Forbes contributor Anna Sofia Martin highlights how Xers have transitioned from generational underdogs to powerful individuals over the years. Her warning is spot on: “They quietly have become residents of the C-suite, your friends, moneymakers, and spenders. Ignore them at your peril.” (Forbes)
  • Author Joel Kotkin argues that Boomers’ destruction of the economy and toxic political divisions will be their legacy. But there is some hope: Millennials’ rejection of “the Boomer plague” suggests that forthcoming generations may have a future after all. (Orange County Register)
  • Transportation experts are up in arms over Uber’s new pilot program, which allows consumers in Pittsburgh to hail a “driverless” Uber vehicle. Not to worry: Each car includes a “safety driver”—and given the severe limitations of driverless tech, it will take far longer than expected for Uber (or anyone else) to go fully autonomous. (The Washington Post)
  • A new Mintel survey finds that Millennials are more likely to be pet owners than their generational predecessors—with 71% of men and 62% of women between the ages of 18 and 34 claiming dog ownership in particular. It should come as no surprise that the generation that grew up with “family pets” continues to keep furry companions by their side as they enter adulthood. (The Washington Post)
  • With retirement looming ever closer, financial services writer Cyril Tuohy thinks Generation X needs a wake-up call (and maybe a shoulder to lean on). Despite being in a hectic stage of life, Xers can’t keep withdrawing from their 401(k)s or waiting for an inheritance—Tuohy is right that they could use an advisor, and they definitely need to start saving now. (InsuranceNewsNet)
  • The number of Airbnb hosts over age 60 doubled from March 2015 to March 2016. More and more Boomers are leveraging their empty nests and using the service to supplement their income—a trend that will only ramp up as less-affluent, last-wave Boomers near retirement. (Airbnb)
  • A recent study shows that Millennials are the generation most comfortable discussing finances with their significant other. Coming of age in the wake of the Great Recession and saddled with student loan debt, more young people than ever are strapped for cash—making it not at all surprising that 74% of young couples discuss money issues weekly. (TD Bank)
  • Contributor Felix Morgan asserts that Homelanders’ closest generational parallel is the Silent, not Millennials. While the birth years she uses are a bit off, she correctly points out that both the Silent and Homelanders were shaped by a major global financial crisis that occurred in early childhood. (The American Genius)
  • Alphabet’s Project Wing team and Chipotle began testing out burrito deliveries by drone at Virginia Tech this week. Although the rules surrounding commercial drones are still up in the air, it looks like the tech giant is one step closer to a future of drone-delivered goods. (The Roanoke Times

Did You Know?

Residents Ask for a Second Opinion. Four Harvard Medical School-affiliated hospitals have developed new “escalation-of-care” policies that coach new medical residents to ask veteran doctors for help more often. The initiatives come in response to studies showing that residents often fail to ask for assistance due to overconfidence, lack of knowledge, or fear of seeming incompetent. Further exacerbating residents’ fears is intimidation by senior physicians. To resolve this issue, hospitals are taking a generational approach: Hospitals are not only issuing new residents pocket cards listing 15 situations that require a senior colleague’s opinion, but are also encouraging older doctors to offer that help more readily. For Millennials who have always turned to authority figures for guidance, these policies are common sense. While older doctors may roll their eyes at treating Millennials with kid gloves, surgeon and researcher Atul Gawande says that chiefs of surgery make it clear that they “really expect [older doctors] to take the call and not bite anybody’s head off.”      

Dan Christman / Syria: Another 30 Years War?



With Russian foreign minister Sergei Lavrov at his side, Secretary John Kerry a week ago announced a Syrian cease-fire deal that could lead to coordinated U.S.-Russian air operations against Syria-based jihadists; Kerry also posited that the deal could provide an eventual path to a negotiated political settlement to replace the Assad regime in Damascus.


  • Unfortunately, based on previous efforts to secure a pause in the fighting alongside Moscow, this will likely prove to be a classic triumph of hope over experience. 
  • Syria is already on a long path to repeat Europe's 17th Century 30 Years War - one that laid waste to much of what is today's Germany. Syria will never again be the pre-2011 unified state it was before the onset of the current anti-Assad fighting.  Sadly, this latest Kerry deal will probably do nothing to alleviate the horrific suffering of the Syrian population or even begin the process of putting the Syrian "Humpty-Dumpty" back together.

 Consider the deal itself: 

  • In its essence, it requires a cease fire, effective last Monday, in which all parties - the Assad government as well as the opposition - stop air and ground attacks; humanitarian corridors would be opened to relieve suffering in the city of Aleppo in particular; and IF the cease fire is effective for seven continuous days, then and only then would the US and Russia work to establish a Joint Implementation Center (JIC) to coordinate air attacks against ISIS and the principal al Qaeda affiliate in the area, "Syria Conquest" (formerly al Nusra).  
  • But who seriously believes that the dozens of opposition groups battling Assad (many closely intertwined with Syria Conquest) or the Damascus regime will adhere to this? The "support" for the deal from Russia, Iran, Damascus, and Hezbollah is beyond cynical.  Because of "facts on the ground," each now holds the military advantage; there's no incentive for them to change anything.
  • Numerous cease fire violations of the accord this week have confirmed the worst; yet, so far, the deal has gotten off the ground – but barely; sadly, like the “cessation of hostilities” accord from last February, an agonizing death for this deal probably awaits.

Many have talked about what might be needed to change the "facts on the ground" in Syria. Here's one answer: 

  • First, because nearly all of the civilian casualties in major population centers like Aleppo, Homs, and Hama - and the refugees flows from these areas - are caused by barrel bombs, cluster bombs, and chlorine gas dropped from Syrian aircraft and helicopters, Washington needs to bluntly warn Assad, in simplest terms: "NO More!"
  • Then, if Assad uses those systems, after a one hour notice to the Russians (the notice they gave us before they launched their first air combat sorties in Syria), the U.S. should send cruise missiles, drones, rockets, and stealth aircraft to target every Syrian fixed wing asset, every helicopter, and all of Assad's personal aircraft. If a restrike is necessary after a bomb damage assessment (BDA), we should execute it immediately. 
  • The U.S. should then say to Assad, "Don't do this again." This becomes a “no-fly” zone, but vigorously enforced from the outset.
  • The Russians would howl; but Washington would have their attention, and in the end, their cooperation.   

The U.S. is currently not a country that believes in changing "facts on the ground" in the Middle East, even "facts" that have produced over 400,000, largely civilian, deaths. But an action like the one outlined above may be about the only way to get the attention - and the respect - of Vladimir Putin. And it can also help move us to the ultimate goal: a political solution in this fractured country - one that is the only way to end the Syrian version of Europe's 30 Years War. 





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%