The Early Look

Screen Shot 2018-12-13 at 10.53.25 AM.png

Ha! Now there’s a guy I should be looking to for some advice. Perversely, if he was doing the rounds on Wall St. like I was yesterday, some people would definitely listen to him … if he gave them a road map on how the Fed is going to bailout this stock market decline.

Door to door, meeting to meeting, this was the general path of Institutional Client questioning:

“Nice call on Quad 4. Provided that you continue to be right on the data, doesn’t that mean the Fed is one and done in December? I heard they might not even go in December… doesn’t this setup great for a big stock market rally? Where do we bottom?”

Back to the Global Macro Grind…


If you google “Bailout Quotes”, you see that ‘People Also Ask’:

  1. How much did Goldman Sachs get in bailout money?
  2. How much did the bailout cost?
  3. How much did banks get in bailout?

These aren’t Institutional Investors. All they really want to know is when the Fed goes dovish and why that’s not good for stocks. Meanwhile, I’m already positioned for the Fed going dovish, in the right kinds of stocks (Bond Proxies like Utes and REITS).

Obviously as the Mr. Market starts to discount that:

  1. Growth is slowing
  2. Inflation is slowing
  3. Profits are slowing

Then longer-term interest rates:

A) Fall … and
B) The Curve compresses

After a two-day bounce in most things that have been crushed in Quad 4, the Yield Curve (10s/2s kind) is compressing to a fresh YTD low of +12 basis points wide this morning.

To put that 12 beeps in context:

  1. The Curve was +80 basis points wide in FEB (i.e. as the “globally synchronized recovery” peaked)
  2. The Curve was +55 basis points wide in MAY (i.e. when Commodities and Inflation Expectations peaked)

On those Inflation Expectations falling, here’s your latest data dump from @Hedgeye Jedi Darius Dale:

Domestic Inflation Resumes Its Downtrend In November: Headline CPI decelerated -30bps to 2.2% YoY in NOV, driven down by a -566bps deceleration in Energy CPI (to 3.18% YoY), a -268bps deceleration in Wireless CPI (to -3.3% YoY), as well as a -46bps deceleration in Transportation Services CPI (to 3.35% YoY). It’s nice to see that our inflation nowcasting tools continue to be more accurate than consensus fears of accelerating wage growth spilling over into reported inflation over the short-to-intermediate term – a faulty assumption we’ve long since debunked. Core CPI ticked up marginally to 2.2% YoY – a reminder that, as we currently stand, the Fed does not have nearly as much air cover in the form of reported economic data to support a materially dovish pivot at next week’s FOMC meeting. Core PCE – the Fed’s preferred inflation metric – is probably the only data point they could hang their hat on currently after it ticked down to an 8-month low of 1.78% YoY in OCT. All told, we remain of the belief that the Fed will tighten into a #Quad4 slowdown – which has historically been a really negative [and unnatural] catalyst for risk assets, across economies. Absent a material decline in equities or a widening of credit spreads from here, it’s unlikely the Fed will have the ability to fully adopt a dovish policy bias until 4Q18E Headline GDP prints a 1-handle on January 30th (according to our latest nowcast). That could set the stage for risk assets to make capitulatory lows to start the year – a la 2016.

I know, for some of you who have this forwarded to you for free, that’s just too much data! Btw, if you’d like to pay for all of the data-driven components and predictive tracking algos that lead me to my morning research rants, ping

Back to what a lot of people (and I mean a lot!) are hoping comes after the aforementioned A and B parts of the story. Rates fall, Curve compresses… and C) Fed goes dovish!

Yes. But what happens when the Fed is going dovish (from hawkish) and… the economy continues to slow?

I know memories on the Old Wall can be either selective or short, but what happened coming out of the late 2007, 2010, 2015 cycle slow-downs? What if you “bought stocks” on the Fed bailout theory in JAN 2008, JAN 2011, and JAN 2016?

Since I don’t believe that any cycle is the same and I do believe that, instead of chasing other people’s narratives, we should continue to measure and map A) what economic Quad we’re heading toward and B) what my quantitative market signals are suggesting in kind…

I don’t believe that JAN-MAR of 2019 is going to be anything like anything other than JAN-MAR of 2019. And, for now, my signaling process is suggesting lower-lows in all of the parts of the US Equity market that we’re still short, including US Tech.

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:

UST 10yr Yield 2.78-3.03% (bearish)
SPX 2581-2706 (bearish)
RUT 1401-1503 (bearish)
NASDAQ 6861-7205 (bearish)
REITS (VNQ) 79.12-83.41 (bullish)
VIX 16.34-25.72 (bullish)
GBP/USD 1.24-1.28 (bearish)
Oil (WTI) 49.18-53.58 (bearish)
Nat Gas 4.08-4.75 (bullish)
Gold 1220-1262 (bullish)

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer


Screen Shot 2018-12-12 at 10.31.08 AM.png

Do you know what percentage of daily trading in the US stock market is systematic? Did you know that “aortas and tree trunks scale in the same way” (Scale, pg 93)? Did you know that a one legged-duck swims in a circle?

Instead of having a small and distracted mind anchoring on Trump tweets this morning, let’s try to maintain deliberate and disciplined study… and learn something that can help us nowcast where economies and markets are going next.

Systematic scaling laws are something to be, at a bare minimum, aware of when building a multi-factor and multi-duration Global Macro Risk Management #process. As West went on to teach us in Scale, “there are probably well over 50 such scaling laws…”


Back to the Global Macro Grind…

Did the emergence of “the quants” and the proliferation of systematic and “rules-based” trading change The Game that you’re tasked with winning out there in the market every day? Big time.

Are you fighting that or using the knowledge of The Game to win more often?

As the US stock market was having one of the many bounces you should have been selling into since September yesterday (SPX ended up down for the 4th day in 5), I was on the phone with who I think is one of the best Quantamental PMs (portfolio managers) in the business.

For the sake of anonymity I’ll call him Q…

Q: “See the MSZZBETA (MS beta factor on Russell 3) is down 24.4% since Oct 1. Wow.”

KM: Yep.

Q: “That means that as The Machine resets for 3 and 6 month factor exposures, your Quad 4 call could just be getting started.”

KM: That makes sense.

Q: “I still don’t think the fundamental guys are getting that.”

KM: Nope.

You see, the thing about my buddy Q is that he’s worked with and been hedge fund partners with lots of “fundamental guys.” There are plenty of gals in that camp too. He’s not just a quant. He’s the special kind of quant who is aware of how non-quants think.

Q also stands for Quantamental. What does that mean?

  1. Someone who is both quantitatively and fundamentally oriented
  2. Someone who starts with data (numbers) instead of political opinions

I’ll stop there before I insult someone (I’d never do such a thing!) because some people take what it is that they do so dogmatically that there’s no room to learn never mind, God forbid, change their process and/or what it is that they do.

I’ll readily admit that I used to be a fundamental guy. Long/Short Captain Stock Picker, I was – oh yeah, I knew everything about the companies – I thought I was pretty sweet, until my super duper stock picks got run over by the macro.

Through my biggest mistakes I realized (at a relatively young age, thank God) that if I didn’t do macro, it would eventually do me in. So now I’m a Quantamental guy who is just trying to not be wrong when everyone else is.

Back to the Systematic Bear Market in Global Equities that continues to develop with the mean and mode of the Global Economy in Quad 4 here in Q4:

  1. Chinese Stocks are down -27% their 2018 peak
  2. Italian Stocks are down -23% from their 2018 peak
  3. Russell 2000 is down -17% from its 2018 peak

There are certainly people who don’t want to call this a “bear market” never mind a systematic one that’s had fractal patterns as interconnected as they always become in Quad 4, so that’s why I’ll call it one this morning. Someone has to be the realist.

If you haven’t been a data-driven realist, you’ve lost a lot of money buying what haven’t been dips in Global Equities this year. Even if I look at the Japanese stock market (which peaked right as Quad 4 in Japan started in Q4 in the first week of OCT), what do I see?

  1. Bearish @Hedgeye TREND for the Nikkei with a series of lower-highs (on bounces) and lower-lows (on selloffs)
  2. Japanese Machinery Tool Orders DOWN -16.8% year-over-year in NOVEMBER

Quant-(bearish TREND signal)-Amental (down -16.8% year-over-year growth)!

There’s no irony that the market signal front-ran the fundamental data point. If that’s not fundamental Quad 4 #slowing, what is it? This is precisely why a reformed fundamental guy came up with this 4 Quadrant Model.

What would Captain Stock Picker’s fav Semiconductor long idea do if the company saw revenues drop -16.8% from #PeakCycle?

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:

UST 10yr Yield 2.78-3.02% (bearish)
SPX 2590-2709 (bearish)
RUT 1409-1508 (bearish)
Utilities (XLU) 54.50-57.39 (bullish)
REITS (VNQ) 80.01-83.40 (bullish)
Nikkei 20900-21925 (bearish)
VIX 16.96-25.49 (bullish)
USD 96.27-97.56 (bullish)
GBP/USD 1.25-1.28 (bearish)
Oil (WTI) 49.65-53.82 (bearish)

Best of luck out there today,

Keith R. McCullough
Chief Executive Officer



Screen Shot 2018-12-11 at 1.05.43 PM.png

You probably wouldn’t believe the number of times I’ve been asked that question (Was That The Bottom?) since the US stock market joined Asian, European, and Emerging Market ones careening to the downside in October.

If I didn’t have a process to measure and map what Economic Quad any of these parts of the world are in AND their respective rates of change in market price/volume/volatility, where would I begin to answer THE question?

To me, the volatility of a market price is like the metabolism of a human being. “You could not walk, think or even sleep without being supplied by metabolic energy… Metabolic rate is the fundamental rate of biology.” (Scale, pg 88)


Back to the Global Macro Grind…

But that’s just me. Here are some of the bigger buckets of things other people think matter more to a market:

  1. The simple moving average of a market price (1-factor model, instead of Multi-factor)
  2. The “level” of growth and/or inflation in an economy (instead of the Rate of Change)
  3. The “valuation” of a market (without an accurate view on The Cycle of earnings)

I’m obviously not going to dismiss how other people think. To the contrary, I think understanding how other people think about the market is critical in contextualizing the opportunity in taking a contrarian position.

Let’s use the 2018 currency market as an example.

Since calling out a -50% crash in an Emerging Market currency like the Argentine Peso (and their subsequent begging for a bailout from the IMF in EARLY 2018) is too easy to explain, let’s do the British Pound:

  1. Coming out of Q4 2017’s #PeakCycle UK inflation readings, the BOE was hawkish
  2. As we’ve rolled through 2018, the UK economy has slowed into #Quad4
  3. The British Pound has been an awesome short against our #StrongDollar call since April

That’s right. I didn’t mention anyone’s political thoughts about Brexit, did I? Where do I think the Pound bottoms? Well, that’s pretty straightforward – when the rate of change of the UK economy stops slowing and comes out of Quad 4.

Yesterday’s Industrial Production print in the UK was horrendous at -0.8% year-over-year growth. Do you think the #slowing UK economy has affected the political prospects of Teresa May? Of course it has.

How about Germany?

  1. Coming out of Q4 2017, Germany’s y/y #PeakCycle GDP growth rate was in the 94th percentile of historical readings
  2. As we’ve rolled through 2018, Germany’s economy hit Quads 4 (in Q1) and Quad 3
  3. German stocks crashed (DAX down -21% since JAN) and the Euro has been a great short vs. #StrongDollar too

Did you think the #slowing German economy affected the political prospects of Angela Merkel? Of course it did. Why did shorting both European Stocks and the Euro work? Because Old Wall consensus was long them into the slow-down!

Not surprisingly, my point this morning is about process. You could have been trying to call “bottoms” in European stock markets for at least a year now and lost a lot of money doing so.

You’ll note that as their Moving Monkeys broke, consensus stopped calling European Stocks “cheap.” You’re obviously hearing less and less Portfolio Managers talk up how bullish they are on the level of European economic growth this year too.

BREAKING: The ROC (Rate of Change) is THE leading indicator for subsequent levels

Back to the USA… since, there is no economic data and/or multi-factor market signal for me to make a call that the US stock market has “bottomed”, why would I make a call on that or Santa Claus rallies for that matter?

That doesn’t mean that yesterday’s intraday lows didn’t signal a short-term bottom.

Since the SP500 hit the low-end of my @Hedgeye Risk Range, my process says that’s as good a place as any to cover shorts on red so that you can re-short the bounce.

Was it THE bottom though? Call one of the Old Wall strategists who didn’t call the topping process for US stocks in September of 2018 for that answer. I’m sure they’ll give you an answer if you give them a brokered commission.

UST 10yr Yield 2.79-3.03% (bearish)
SPX 2601-2715 (bearish)
Utilities (XLU) 54.05-57.25 (bullish)
DAX 10559-11128 (bearish)
VIX 16.62-25.08 (bullish)
USD 96.25-97.52 (bullish)
EUR/USD 1.11-1.14 (bearish)
GBP/USD 1.25-1.28 (bearish)
Oil (WTI) 49.64-53.62 (bearish)
Gold 1211-1262 (bullish)

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer


Screen Shot 2018-12-10 at 10.06.23 AM.png

“I put on weight like Santa Claus. I just get this belly that kind of extends out.”
-Christian Bale

Bale is a beauty. He’s British and played Batman in The Dark Knight. Amongst many other great movies (The Fighter, American Hustle, etc.), he also did a great job in Wall Street’s The Big Short.

How about The Dark Knight Rises? Bear markets? Big shorts? Oh yeah, bears and bulls, I love them all.

But what about the Santa Claus rallies? I love those too. What if we get one this year (defined in the Stock Market Almanac as the last 5 trading sessions of the year)? But what if it comes from SP500 2600?

Back to the Global Macro Grind…

Where's Santa? - 12.06.2018 another coal cartoon

It’s Macro Monday @Hedgeye. Thanks to those of you who are new to joining our Global Macro Risk Management #process. As always, thanks to our long-time and loyal subscribers too.

As a matter of measuring and mapping #process, we always start the week with a week-over-week review of what moved in macro within the context of our intermediate-term @Hedgeye TREND view.

Let’s start with a the Global Currency market:

  1. US Dollar Index was down for the 1st week in 3, correcting -0.7% to +4.9% YTD and remains Bullish TREND @Hedgeye
  2. EUR/USD had a counter-TREND bounce of +0.8% last week to -5.0% YTD and remains Bearish TREND @Hedgeye
  3. British Pound was flat vs. USD last week at -5.7% YTD and remains Bearish TREND @Hedgeye
  4. Canadian Dollar dropped another -0.2% vs. USD last week to -5.6% YTD and remains Bearish TREND @Hedgeye
  5. Turkish Lira’s crash continued, -1.6% vs. USD last week to -28.2% YTD and remains Bearish TREND @Hedgeye
  6. India’s Rupee deflated another -2.2% vs. USD last week to -10.6% YTD and remains Bearish TREND @Hedgeye
  7. Brazil’s Real fell another -1.0% vs. USD last week to -15.2% YTD and remains Bearish TREND @Hedgeye

In other words, even when the USD corrects (infrequent since April), Mr. Market is still telling you that plenty of these Emerging Markets are going to stay in Stagflation (when your currency collapses, local inflation rises, and real growth slows).

We also call Stagflation, Quad 3.

In case you’re overly enjoying Quad 4, don’t get too cozy with that portfolio construction. We have the USA rolling into Quad 3 by Q2 of 2019. Not surprisingly, since GROWTH is slowing in both Quad 4 and Quad 3, some of your positions stay the same.

What works in both Quad 3 and Quad 4?

  1. Utilities (XLU) were up another +1.6% in a down tape last week to +7.2% YTD and remain Bullish @Hedgeye TREND
  2. REITS (VNQ) were up +0.2% last week to -1.0% YTD and remain Bullish @Hedgeye TREND
  3. Both Short (SHY) and Long-term (TLT) US Treasuries were up again last week and are both Bullish @Hedgeye TREND

Oh, I know. All of your kids want some Fortnite and TLT for the holidays, eh!

For all of my friends and foes who didn’t like the Treasury “charts” back when they should have been buying them (SEP, OCT, NOV), I have a sneaking suspicion that some of them like those charts now:

A) UST 2yr Yield dropped another -7 basis points last week to 2.71% and remains Bearish TREND @Hedgeye
B) UST 10yr Yield dropped another -13 basis points last week to 2.85% and remains Bearish TREND @Hedgeye

Obviously when Bond Yields are Bearish TREND, being long Treasury Bonds = Bullish TREND @Hedgeye. After 5 straight weeks of bond yields falling, the charts look more like our Quad 4 in Q4 research call.

What else happens in Quad 4 when it’s Global? Equities (especially higher beta ones) get body bagged:

  1. SP500 got tagged for a -4.6% loss last week to -1.5% YTD and remains Bearish TREND @Hedgeye
  2. RUSSELL 2000 lost another -5.6% last week to -5.7% YTD and remains Bearish TREND @Hedgeye
  3. EuroStoxx600 fell another -3.4% last week to -11.2% YTD and remains Bearish TREND @Hedgeye
  4. Germany’s DAX got smoked for another -4.2% loss last week to -16.5% YTD and remains Bearish TREND @Hedgeye
  5. Emerging Markets (MSCI) lost another -1.6% last week to -15.5% YTD and remains Bearish TREND @Hedgeye

And this morning we have the German stock market joining a broadening list of major Global Equity index crashes (greater than a -20% decline from peak) which includes China, South Korea, Italy, etc.

Eventually, even the Fed, ECB, BOE, etc. figure out that the world is slowing and stock markets are crashing. But that doesn’t mean that everything is “Goldilocks” again. Even if that or Santa is your new narrative, don’t forget about The Three Bears.

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:

UST 10yr Yield 2.81-3.03% (bearish)
SPX 2602-2713 (bearish)
RUT 1438-1518 (bearish)
Utilities (XLU) 54.02-57.05 (bullish)
REITS (VNQ) 79.51-83.48 (bullish)
Industrials (XLI) 67.22-71.43 (bearish)
Shanghai Comp 2514-2679 (bearish)
DAX 10650-11256 (bearish)
VIX 17.75-25.19 (bullish)
USD 96.10-97.47 (bullish)
EUR/USD 1.11-1.14 (bearish)
YEN 112.11-114.11 (bearish)
GBP/USD 1.26-1.28 (bearish)
Oil (WTI) 49.78-53.91 (bearish)

Best of luck out there this week,


Keith R. McCullough
Chief Executive Officer

Where's Santa? - 12.10.18 EL Chart

Screen Shot 2018-12-07 at 9.31.24 PM

“Two words: Quad Four … that is basically all you needed to know to beat not only the market but your competition in 2018. Importantly, you had to know when 1 of the 2 words changed. That’s when we went from Quad Two to Quad Four (in Q4).” Keith McCullough, yesterday

We’ve spared no digital ink in detailing the dynamics surrounding domestic growth accelerating over the past year and a half.

Organic (& globally harmonized) acceleration combined with trough industrial/profit recession comps conspired to drive perhaps the finest protracted stretch of growth and risk adjusted returns of the cycle.

But macro, of course, remains an exercise in successfully front-running Better/Worse and, from a slope-of-the-growth-line perspective, organic improvement and base effects aren’t mutually exclusive. 

To be clear, our near-term outlook remains growth and asset price positive, but marked accelerations and all-time highs eventually become the comp and as good as those cycle highs look against recessionary compares can be as challenging as they become after those trough comps are fully annualized.   

The objective of this note is simple:

Below we’re simply cataloguing the recent and forward comp dynamics across a selection of high frequency domestic fundamentals. 

Green Line in the Chart = TTM/2017 Comps

Red Line in the Chart = the NTM/2018 comp setup.

There’s nothing conceptually groundbreaking in visually cataloguing reported reality, but degree of difficulty doesn’t (necessarily) count and simply identifying gravity doesn’t indemnify one from its effects if you’re not also proactively prepared for it.

After all, the post-crisis market reality remains one where everything is obvious and nothing is what it seems …. 

Back to the Global Macro Grind …..

I wrote the above on January 23rd, 2018 (11 months ago) as a kind of forward looking fundamental prospecting piece.

I went on to visually catalogue the comp dynamics across a broad range of high frequency domestic macro series on the way to stressing a point around duration sensitivity – namely that the near-term outlook and the associated quad 1 &2 allocation playbook remained in force but that as we move through 3Q18 and into 4Q, fundamental gravity would invariably and increasingly assert itself.

In other words, this was one of the most slow moving and proactively predictable phase transitions in growth imaginable – fully baked and inclusive of unprecedented late-cycle stimulus, recurrent geopolitical potholes, rampant Trade and Tariff covfefe, rhetorical shifting’s in Monetary Policy, unending politically shaded punditry and all manner of reflexive price action and volatility clustering across global markets.

Again, it’s not that policy, politics and topical headlines don’t matter and can’t feed into and shape the market narrative, it’s that they are almost never the defining factor driving the underlying Trend in a developed market economy….they’re almost exclusively supporting actors, serving as amplifier or dampening agent to financial market prices within the prevailing growth regime.

And that remains the simple, and liberating, point.

You could have sidestepped all the psycho-emotional trappings of Macro Tourism – ignored all the tweets, all the headline jumping, all the daily myopia & fabricated import – in favor of simply measuring and mapping the data within the baseline expectation for how the cycle would evolve over the NTM.

Ironically, not only is that approach objectively more effective, it’s way easier and way less emotionally taxing.

Anyway, clearly our Quad 4 in 4Q call has been exceptional … pretty much every allocation we highlighted back on September 27th has worked, conspicuously, and they started working like 5 hours after we made the call to pivot out of the pro-growth Quad 1&2 allocations we’d been loading up on over the prior 18-months.

By definition, exceptional means ‘unusually rare or extraordinary’.   In other words, future calls are unlikely to unfold so dramatically or be as neatly timed as this one.

Now, with that expectation calibration out of the way, lets grind on the marginal developments within the Trend view, with a focus on the labor market given Jobs Day:

Initial Jobless Claims:  We highlighted this in an institutional note alongside the latest weekly data yesterday but it’s worth reduxing here.

Peak improvement in initial claims has been one of most consistent lead indicators of the cycle with peak improvement in rolling 3Mo. claims preceding the peak in the economic cycle by an average of 7 months over the past 7 cycles.

So long as initial claims continue to make lower lows, the separations side of net employment remains supportive of further labor market tightening and the expansionary party can persist without acute risk of large-scale dislocations (consumer credit or otherwise), particularly in a consumer-centric domestic macroeconomy.

What’s notable is that peak improvement in rolling Initial claims now appears to be rearview with the inflection coming off the cycle low registered in October.  The peri-holiday period can be noisy and subject to distortions but with claims progressively increasing over the last couple months and the global and domestic economy now traversing the backside of the growth curve, a retrace back to multi-decade lows is increasingly less probable.

Is it a harbinger of imminent recession?  No, but like the implications of yield curve inversion, it does mean the cautionary drone of the late-cycle expansion clock starts to tick a little louder.

NFP:  All the Quad 4 talk probably has you all bear’d up, but it’s not all fire and brimstone.   By the numbers, we need +221K on the headline to get a sequential acceleration in year-over-year payroll growth.  Do we get something roughly 200K+/-?  Probably.  And the probable range for AHE is 2.9%-3.1% Y/Y.

The market obviously does not need a rogue inflation print to stiff-arm the Fed’s newly revised, coordinated communication strategy but assuming the numbers come in roughly in-line, the primary implication remains to income growth, and by extension, consumption growth.

The product of flattish payroll and wage growth will be stable growth in aggregate income.  And with income growth comps easing modestly the next few months and the specter of wage inflation casting an increasingly longer shadow, the baseline expectation should be for income growth to remain relatively strong which, by extension, should cultivate a stable nearer-term read through for consumption growth –  something like 3% +/- Y/Y with further declines in the savings rate available to buttress any deceleration in aggregate income growth should that emerge.  In other words … domestic growth will move past peak but Consumption is unlikely to manifest as an outsized negative drag, at least through the balance of the year.

Market Prices & Expectations:  The WSJ’s Fed piece helped stick save equities yesterday (which were signaling oversold intraday) but with Reits, Utes, Staples, Low Beta and High Yield all outperforming, the complexion of sector/style factor performance was more of the same.  Moreover, and more notably, the recent re-rating lower of growth, inflation and policy expectations has been ubiquitous, particularly over the last week+:

  • Inflation Expectations have collapsed: 10Y Breakevens sunk further below 2% and are -15bps in the last month, the unwind of the large speculative short position in Treasury’s is in motion, the TIPS curve remains inverted and the ongoing collapse in oil/energy prices and lagged effects of strong $USD effectively ensures reported headline inflation will continue to decelerate.
  • Policy Expectations:  Fed Fund futures are now pricing in barely one rate increase in 2019 and the Eurodollar curve is collapsing (recall, the Eurodollar curve represent the markets view on the pace/magnitude of policy tightening).  Indeed, the Eurodollar market is only pricing in 14bps of increase in 2019 (down from expectations for almost 3 full hikes at the beginning of October) with expectations having fully shifted towards policy easing in 2020.

Again, all that is just a textbook manifestation of Quad 4 and the markets renewed acknowledgment that when Powell peer’s into his policy ball he sees last month’s data.

If we’re right on Quad 4 extending through 1Q19, the new “wait & see” policy initiative should get a lot of reps over the next few months.

In the meantime, shot of egg nog for every manic “yield curve inversion” reference and useless year-end 2019 price target  …….

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:

UST 10yr Yield 2.84-3.04% (bearish)
SPX 2602-2769 (bearish)
RUT 1456-1548 (bearish)
NASDAQ 6905-7487 (bearish)
Utilities (XLU) 54.01-56.61 (bullish)
Consumer Staples (XLP) 53.67-56.88 (bullish)
REITS (VNQ) 79.30-83.51 (bullish)
Industrials (XLI) 68.07-73.35 (bearish)
Shanghai Comp 2522-2680 (bearish)
Nikkei 21405-22335 (bearish)
DAX 10814-11268 (bearish)
VIX 16.17-24.32 (bullish)
USD 96.10-97.52 (bullish)
EUR/USD 1.11-1.14 (bearish)
YEN 112.16-114.10 (bearish)
GBP/USD 1.26-1.28 (bearish)
Oil (WTI) 49.45-53.96 (bearish)
Nat Gas 4.08-4.77 (bullish)
Gold 1207-1252 (bullish)
Copper 2.66-2.83 (bearish)

Christian B. Drake
U.S. Macro Analyst





Screen Shot 2018-12-06 at 10.04.34 AM.png

  • Almost everything happening in Global Macro markets this morning can be explained in two words: Quad Four
  • That is basically all you needed to know to beat the market in 2018
  • GROWTH and INFLATION are the 2 most causal factors affecting market returns. Knowing their Rate of Change matters more than any unique thought you might think you have in your head


You’re either frustrated with the futures this morning, or you are crushing it. After the 3rd Best Selling Opportunity since September, your performance today will be determined by the decisions you made on Monday’s rally to lower-highs.

Instead of opining on the politics of what you think “could” or “should” be making the market go up and down, I highly encourage you to go back to the basics of counting what both the data and markets are actually doing.

If, like Ed Thorpe, you have a repeatable and data driven process, I don’t have to encourage you to do that. Why? Because that’s what you do. No matter what the newsy headline of the day, the data trumps all of the tweets and noise. That’s your edge.


Almost everything that is happening in Global Macro markets this morning can be explained by two words: Quad Four. Yep, instead of all the super smart theories out there, that’s all you really need to know.

Think about that for another few minutes…

Two words. That is basically all you needed to know to beat not only the market but your competition in 2018. Importantly, you had to know when 1 of the 2 words changed. That’s when we went from Quad Two to Quad Four (in Q4).

Yes, I am spelling out the 2 and the 4 this morning in an attempt to be creative. When my process and “call” on markets doesn’t change, I hope you can empathize with the reality that I run out of ways to say the same thing.

As a refresher for those of you who are new to our Global Macro Risk Managementbean counting process:

  1. Quad 1 = real GROWTH accelerating as INFLATION is slowing
  2. Quad 2 = both GROWTH and INFLATION accelerating at the same time
  3. Quad 3 = real GROWTH slowing as INFLATION is accelerating
  4. Quad 4 = both GROWTH and INFLATION slowing at the same time

There’s a ton of measuring and mapping that goes into getting to what Quad we’re in. As opposed to the obvious ignorance most Macro Tourists talking on TV have, there’s an implicit awareness of economic history embedded in the process too.

Once you understand that GROWTH and INFLATION are the 2 most causal factors affecting market returns, you come to realize why only knowing the ROC of those 2 words matters more than any unique thought you might think you have in your head.

I don’t know about you, but the scariest thing I can do to my own money is think about what could or should happen in both the global economy and markets without having counted the numbers with my entire team counting at the same time.

I’m not alone. Ask Ed Thorpe how he’d probability-weight his blackjack bets without counting the cards as they appear.

Even if we weren’t in Quad 4, I still wouldn’t have bought stocks on either NOV 7thor DEC 3rd because:

A) Both times the SP500 was at the top-end of my @Hedgeye Risk Range and
B) Both times the implied volatility (vs. 30-day realized) for SPY was trading at a -36-37% DISCOUNT

One of the most critical components of a disciplined risk management process is having rules within your rules. However unique this might sound, one of the most basic rules I have is don’t chase.

Put simply, that means:

A) Don’t buy or cover at the top-end of the range and
B) Don’t sell or short at the low-end of the range

To use Thorpe’s blackjack example, if you don’t have a process to calculate the range (probabilities) of outcomes, you don’t have a process to begin with. If you can’t re-calculate for new information (dealer re-shuffles the deck), your process isn’t dynamic.

Prior to getting new PRICE, VOLUME, and VOLATILITY data when markets re-open for trading this morning, my process counts the SP500’s risk the following way:

  1. SP500 @Hedgeye Risk Range = 2602-2772
  2. Implying -3.6% immediate-term TRADE downside vs. +2.7% immediate-term TRADE upside
  3. With an implied volatility DISCOUNT (vs. 30-day realized) of -24% vs. -36% prior to Tuesday’s open

Again, playing The Game is all about awareness. If I don’t have a process to probability-weight my next move, why would I trust making any market moves never mind write to you about how I think about the market’s next move every day?

After I do all my counting, I go back to reading something that can teach me something new. That’s the only way I can think about new ways to evolve my process from what it has become. Thanks to Thorpe I learned a lot from him yesterday too.


Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:

UST 10yr Yield 2.87-3.05% (bearish)
SPX 2602-2772 (bearish)
NASDAQ 6842-7479 (bearish)
Utilities (XLU) 54.01-56.61 (bullish)
Shanghai Comp 2512-2679 (bearish)
Nikkei 21222-22879 (bearish)
DAX 10854-11375 (bearish)
VIX 16.20-24.18 (bullish)
USD 96.06-97.44 (bullish)
EUR/USD 1.11-1.14 (bearish)
Oil (WTI) 49.09-54.71 (bearish)
Gold 1210-1245 (bullish)
Copper 2.68-2.89 (bearish)

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer


Screen Shot 2018-12-04 at 9.51.45 AM.png

  • The Cycle data does not care (like consensus does) about Trump, Trade Wars, and/or Tariffs.
  • Yesterday was the 3rd best Selling Opportunity in Momentum, High Beta, and Growth since September
  • Our non-consensus Long Treasury Bonds call continues to perform very well



If you think risk managing Quad 4 in Q4 stock market rallies to lower-highs is tough, try being a honeybee. They don’t know who Trump is or what happened at dinner with the Chinese. They don’t know what the “deal” is either!

“Each year, the population of a honeybee hive splits in two. One half stays where it is while the other goes in search of flower-filled fields that could provide a new home… before the local fields dry up, some bees head out to find richer ground. Because they don’t know where richer fields lie, they deploy an advanced team of scouts. Similarly, humans have the capacity to generate options at different distances from current standards.” –The Runaway Species, pg 163

While yesterday was the 3rd best Selling Opportunity in Momentum, High Beta, and Growth since September, you didn’t have to do much on the long-side of your Asset Allocation. Long Treasury Bonds is a flower-filled field and a new home for hard earned capital.


Did you sell yesterday? What did you sell? I certainly hope you weren’t shorting the Long Bond alongside consensus. That field has been drying up for 5 weeks in a row now.

With the UST 10yr Yield selling off to 2.95% this morning, the Yield Curve has compressed to YTD lows. Some parts of the curve are inverted this morning. The critical 10s/2s Yield Spread (10yr Yield minus 2yr) has compressed to +13 basis points wide.

Omg. Omg. Is it going to be a recession? No, not yet. It’s going to be Quad 4 in both Q4 and Q1 though, so your Asset Allocation, Sector, and Factor Exposures shouldn’t change one bit. You’re already in the field that has the alpha.

Why did I sell yesterday?

  1. US Equity Beta (SPX) was at the top of the @Hedgeye Risk Range
  2. IVOL (implied volatility vs. 30-day realized) for the SP500 got smoked to a -36% DISCOUNT
  3. The Cycle’s economic data is still in Quad 4 (our headline GDP nowcast for Q418 = 1.37%)

Why didn’t I panic like the bulls did?

  1. Same reasons why I didn’t on NOV 7th with the SPX at 2813 (top-end of the @Hedgeye Risk Range)
  2. On NOV 7th, IVOL was at a similarly complacent (bulls) and capitulatory (bears) -37% DISCOUNT
  3. I don’t think The Cycle data cares (like consensus does) about Trump, Trade Wars, and/or Tariffs

The Cycle is the cycle … because it cycles. It’s almost mathematically impossible for:

  1. China to cycle the biggest monetary stimulus in the history of China (2016-2017)
  2. Europe to cycle a 6 year cyclical economic expansion (stimulated at the end by the Chinese and the US)
  3. USA to cycle an epic economic response to Tax Reform in Q4 of 2017

Ok. But what about yesterday’s ISM and PMI reports?

  1. European PMIs in Germany, France, and Italy all #slowed (again) in NOV (with Italy and France looking recessionary)
  2. USA’s ISM acceleration was a monthly one, not a trending one (59.3 NOV vs. the 61.3 #PeakCycle print in AUG)
  3. USA’s ISM Prices Paid decelerated to 60.7 NOV vs. #PeakCycle of 79.5 in MAY of 2018

Cyclical companies that are losing their pricing power will lose their #PeakCycleQ2/Q3 2018 margins, don’t forget. “So”… if you’re buying stocks because the SPX “multiple is cheap”, you’re using the wrong E in your 2019 P/E anyway.

If you want to be long that option (i.e. #InflationSlowing), you buy the Long Bond (TLT).

Yes, you’ll have to buck up and pay more for a 2 or a 10yr US Treasury than where you could have loaded up on them throughout OCT and NOV, but that’s life as a honeybee, baby. Move on. There’s always a new bull market developing somewhere.


Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:

UST 10yr Yield 2.94-3.08% (bearish)
SPX 2590-2812 (bearish)
NASDAQ 6780-7519 (bearish)
Utilities (XLU) 53.82-56.50 (bullish)
Consumer Staples (XLP) 54.20-56.77 (bullish)
REITS (VNQ) 79.80-82.85 (bullish)
Industrials (XLI) 68.20-73.95 (bearish)
Shanghai Comp 2526-2682 (bearish)
Nikkei 21208-22690 (bearish)
DAX 11101-11495 (bearish)
VIX 15.56-23.92 (bullish)
USD 96.00-97.50 (bullish)
EUR/USD 1.11-1.14 (bearish)
Oil (WTI) 49.07-54.97 (bearish)
Gold 1211-1244 (bullish)

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer


Screen Shot 2018-12-03 at 11.11.34 AM.png


  • Not every month is as successful as OCT and NOV were for us, but I am looking forward to the 3rd big short-selling opportunity we’ve had since September to go for 3 great months in a row
  • With UST Yields down for 4 weeks in a row, Treasuries are one of our best new asset allocations as the US economy slows into Quad 4
  • #StrongDollar has a TRENDING @Hedgeye inverse correlation of -0.72-0.75 vs. both the SP500 and Oil. It’s also one of the biggest asset allocation winners when the mean and mode of Global Economic Growth slows into Quad 4


I don’t know about you, but I’m a pretty hopeful person. If you want to build and grow your own company (and/or a family with 4 children!), you have to be. You have to have a passion to pursue all of your hopes and dreams. You also have to grind.

That said, especially when building a company and/or portfolio, hope is not a risk management process. Neither is hyping up your positions in hopes to sell people on a situation being more truthful than it really is.

What is the truth about China? What is the truth about the Global Economic Cycle? What will the truth about the US cycle look like within 2 months if we get our first big rate of change slow-down in headline GDP?


Today will be a super huge and wonderful day for Macro Tourists looking to tell you a new narrative about why the stock market is up. Will it jive with the one of a “Dovish Fed” from earlier last week? Uh…

Regardless of the storytelling, we’ll stick with the same risk management #process that A) got you out of China, Europe, and Emerging Markets back in JAN and B) got you out of Momentum, High Beta, and US Growth on SEP 27, 2018.

Today is indeed, Macro Monday @Hedgeye. So let’s get after it and measure and map what macro markets did within the context of our multi-factor and multi-duration TRADE, TREND, and TAIL model.

First, let’s start with one of the biggest things that did not change last week – the Global FX market signal:

  1. US DOLLAR Index was up another +0.3% last week to +5.5% YTD and remains Bullish @Hedgeye TREND
  2. EUR/USD was down another -0.2% last week to -5.7% YTD and remains Bearish @Hedgeye TREND
  3. Yen was down -0.5% vs. USD last week to -0.7% YTD and remains Bearish @Hedgeye TREND
  4. Pound was down another -0.5% vs. USD last week to -5.7% YTD and remains Bearish @Hedgeye TREND
  5. Canadian Dollar was down another -0.4% vs. USD last week to -5.4% YTD and remains Bearish @Hedgeye TREND
  6. Argentine Peso was down another -0.4% vs. USD last week to -50.7% YTD and remains Bearish @Hedgeye TREND
  7. Brazilian Real was down another -1.0% vs. USD last week to -14.3% YTD and remains Bearish @Hedgeye TREND
  8. Russian Ruble was down another -1.4% vs. USD last week to -14.0% YTD and remains Bearish @Hedgeye TREND

#StrongDollar has a TRENDING @Hedgeye inverse correlation of -0.72-0.75 vs. both the SP500 and Oil. It’s also one of the biggest asset allocation winners when the mean and mode of Global Economic Growth slows into Quad 4.

But… drumroll… “the Fed went dovish” (sort of) last week… because… we’re in Quad 4, and stocks (globally) loved that:

  1. SP500 was up for the 3rd week in the last 10, +4.9% to +3.2% YTD but remains Bearish TREND @Hedgeye
  2. EuroStoxx 600 was only up +1.0% last week to -8.1% YTD and remains Bearish @Hedgeye TREND
  3. Emerging Markets (MSCI) were +3.0% last week to -13.8% YTD and remain Bearish @Hedgeye TREND
  4. Japanese Stocks (Nikkei) were +3.3% last week to -1.8% YTD and remain Bearish @Hedgeye TREND
  5. Chinese Stocks (Shanghai) were only +0.3% last week to -21.7% YTD and remain Bearish TREND @Hedgeye

Well, if you want to call Europe up +1% and China barely up on the week “loving” the newly re-synchronizing-global-recovery… you can call it that. In truthful news, November PMIs in Germany, France, and Italy all slowed (again) this morning.

The other big thing that happened with #StrongDollar and Global Quad 4 economic data last week was that the biggest nominal net SHORT position in macro (short Treasuries) continued to get unwound:

A) US 2yr Yield was down another -2 basis points last week to 2.79% and is now Bearish @Hedgeye TREND
B) US 10yr Yield was down another -5 basis points last week to 2.99% and is now Bearish @Hedgeye TREND
C) Yield Curve (10s minus 2s) compressed another -3 basis points last week to +20bps wide

Obviously when Yields move to Bearish @Hedgeye TREND that makes the underlying Treasury Bonds Bullish @Hedgeye TRENDs. With UST Yields down for 4 weeks in a row, I just thought I’d mention that again as that’s one of our best new asset allocations (Treasuries across the curve) when the US economy slows from Quad 1 and 2 into Quad 4.

Utilities (XLU) weren’t up as much as Healthcare Stocks (XLV) last week, but both are Top US Equity Sector Overweights when the US economy moves into Quad 4:

A) Healthcare (XLV) was up a monster +7.0% last week to +16.0% YTD and remains Bullish TREND @Hedgeye
B) Utilities (XLU) were up another +2.7% last week to +5.5% YTD and remain Bullish @Hedgeye TREND

On the short side, I’ll be looking to add to pretty much every short I covered in Real-Time Alerts in November.

Not every month is as successful as OCT and NOV were for us, but I’m sure looking forward to the 3rd big short-selling opportunity we’ve had since September to go for 3 great months in a row. Admittedly, I have to thank Old Wall hype for that.

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:

UST 10yr Yield 2.99-3.09% (bearish)
SPX 2600-2813 (bearish)
NASDAQ 6789-7489 (bearish)
Utilities (XLU) 53.80-55.75 (bullish)
Shanghai Comp 2528-2698 (bearish)
Nikkei 21289-22599 (bearish)
VIX 15.48-23.65 (bullish)
USD 96.01-97.56 (bullish)

Best of luck out there this week,

Keith R. McCullough
Chief Executive Officer


Screen Shot 2018-11-30 at 12.23.07 PM

While I’m sure it’s going to be a really super great and wonderful dinner for Trump and Xi in Argentina tomorrow night, I’m not sure the US Growth, Momentum, and Junk Bond Bulls are going to get paid on that.

In fact, they might get dumped on again … and not because of that!

It’s Friday, so please bear with me as I’m running out of things to say about this damn meeting. That’s mainly because there is nothing left to say. The meeting is going to happen … and then, so will The Cycle.

You know, bro. The Global Economic Cycle: 

A) The one that started to slow in Europe at this time last year
B) The one that started to slow in China in Q1 of this year
C) The one that started to implode in Argentina in Q1 of this year

Yep, the one that is:

A) Slowing against a 6-year European CYCLICAL expansion (Q417 German GDP = 94th percentile of historical readings)
B) Slowing against the LARGEST monetary stimulus in the HISTORY of China (pre Xi being elected for life)
C) Slowing against an unprecedented 8 quarter streak of Argentina being in Quad 1 or Quad 2

Enough of the base effects and The ROC (rate of change) time series, dude. Gimme a beat to some bullish catalysts!

Imagine I worked for a broker dealer or a bank. Man could I generate some full-time-pre-Mifid-trading-flow for a firm like that, bro. I’d always have some new narrative to pivot bullish towards. #Not

There is no pivoting from touristy headline-to-headline here @Hedgeye. There’s looking back (at the ROC data) and re-calibrating, daily, against those base effects with both incoming data and market signals.

The ROC data part on China, EM, and Europe #slowing is so easy to see at this point of The Cycle that most perma bulls have already turned to begging for the Fed to go dovish.

All that’s done this morning is give birth to the New Momo (1-month price Momentum). Gimme a beat on that, bro. The UST, yeah-you-know-me, 10yr Bond is giving it to Long Bond Bears with its yield being down for the 4th week in a row!

Back to how complacent consensus is on pricing this effervescent Trump/Xi dinner:

  1. Implied volatility on Chinese Stocks (FXI) has fallen to a -15% DISCOUNT vs. 30-day realized
  2. Implied volatility on US Tech Stocks (XLK) has been crushed to a -37% DISCOUNT vs. 30-day realized
  3. Implied volatility on Amazon (AMZN) has been buried to a -44% DISCOUNT vs. 30-day realized

Huh? You messin’ with my FAANG, fool?

Oh, no. I’m looking for some ho-ho-ho, bro. You get out there and buy yourself some FAANG puts for that Santa Claus rally, bro. At these DISCOUNTS, it’s Black Friday all over again! (all FAANG TREND views and risk ranges attached)

That’s record-word-count-exposure given to the bros. So I’ll stop there and simply ask you to consider protecting yourself against a potential Trump and DumpThe Cycle should continue to earn volatility premiums in your portfolio.

Screen Shot 2018-11-30 at 12.23.51 PM