Expectations Management

Las Vegas is busy every day, so we know that not every man is rational.”

–Charles Ellis


Today at 11am, we are going to be joined via conference call by Dr. Richard Peterson of MarketPsych Data.  He will be giving a presentation called, “Behavioral Markets: Quantifying the Psychological Drivers of the Global Economy.”  Over the course of the past 9 years, Peterson and his team have been developing sentiment based investment models based on global news and social media sources.


Their underlying technology scours 1,000s of data sources (in natural languages) and then assigns scores for various indicators.  These scores are then updated by the minute to create an ongoing data feed, which can provide a real time assessment of sentiment in over 200 countries stock markets, 60 commodities, 30 currencies, and 40 industries.


The key reason that Peterson believes his models can highlight inflection points in markets, via blog and news sources, is based on science.  In effect, intense emotions direct attention to vivid events and catastrophic consequences.  As a result, the reasoning prefrontal cortex is taken offline and probability assessments are distorted.  To Ellis point in the quote above, men and women are not always rational.


In his presentation today, Peterson will walk us through his process and analysis, and then get into the outputs of his model on various time frames and over various asset classes.  Many of his investment conclusions we agree with, but others stand in contrast to our models and analysis.  This last point should make this morning’s discussion a lively one.


The dial-in information for the call this morning is and conference code is 141433. The materials can be downloaded at 10:00am following the link hope you can join us for the call to get a sense for how a true behavioral finance practitioner quantifies expectations in markets.


Related to gauging the market sentiment, Friday’s labor report was a bomb by almost any estimation.  Non-farm payrolls increased by a mere 88,000 in March versus 190,000 expectations and a 268,000 increase in February.  Most disconcerting was the internal participation rate, which measures the percentage of total eligible employees that are in the labor force.  We highlight this in the Chart of the Day with a look at long term labor force participation rates, which is now at its lowest level since 1979.


Clearly, muted employment growth is a potential risk to growth accelerating in the U.S. , so we are and will be monitoring this data closely.   The response on Friday from the SP500 was somewhat muted as the market was down -0.47% and remains up on the year just under +9%.  In terms of sector divergence on Friday, the worst performing sector was Technology -0.8% (and +3.1% on the year) and remains NEGATIVE in our quant models on the shortest duration.   The best performing sector on Friday was Utilities +0.43% on the day and +13% on the year.


As usual, we are seeing the interconnected follow through this morning from global markets as Taiwan is down -2.4%.  Taiwan is an important geography in the global technology food chain, so is seeing some of the follow through from U.S. technology stock weakness on Friday.  As well, having been closed since Wednesday, both the bird flu fears are being reflected in the Taiwanese market as is an increase in North Korean sabre rattling.


The latest from North Korea this morning is that there are signs the country is preparing for a fourth nuclear test.  This is based on South Korean intelligence that is showing increased movement of vehicles and personnel at Punggye-ri.   This is the site on North Korea’s northeast coast where the previous three nuclear tests occurred.  The prior three detonations occurred in 2006, 2009 and February 12th of this year.  Clearly, any additional detonation would be a notable acceleration of activity.


In terms of positives related to the North Korean situation, they received their strongest, although also most subtle rebuke, over the weekend from the Chinese.  Chinese President Xi Jinping was speaking at the three-day Boao Forum for Asia and said:


“No one should be allowed to throw a region and even the whole world into chaos for selfish gains.”


This is notable in that there is strong support for North Korean within the Chinese People’s Liberation Army, so Jinping is going out on a limb.


The head of the International Monetary Fund Christine Lagarde went less out on a limb when she strongly encouraged Japanese monetary actions over the weekend and called the latest move from Japan a “welcome step”.  Her statement is a precursor to newly anointed Treasury Secretary Jack Lew’s first strip to Europe where he is expected to encourage, are you ready for this, more government spending.  Keynesians of the world unite!


In the short run, accelerating government spending in Europe would have the likely side effect of expanding deficits.   This morning, we can actually see real time the impact of not reducing spending in Europe on government bond yields.  Portugal’s Supreme Court rejected cuts in state and pensions and cuts in public sector wages and as a result peripheral bond yields are spiking with Spain and Italy backing up 4.7% and 4.3%, respectively.


Given all of the negative global macro events on the horizon this morning, we have a number of potholes to seemingly avoid so that domestic equity returns can continue their upward climb.  The caveat being that the chief risk may be staring at us in the mirror.  As Benjamin Graham once said:


“The investor’s chief problem – and even his worst enemy – is likely to be himself.”




Our immediate-term Risk Range for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $104.18-108.31, $82.48-83.44, 94.62-98.71, 1.71-1.85%, 12.31-14.55, and 1, respectively.



Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Expectations Management - Chart of the Day

Expectations Management - VP


Cave Dwellers

This note was originally published at 8am on March 25, 2013 for Hedgeye subscribers.

“New is always bad. Never not be afraid.”



If you don’t know who Grug is, take your kids to see The Croods – the latest American computer-animated family film by Dreamworks that opened this weekend. Nicolas Cage crushes it in this one. We loved it!


The movie starts with scarier stuff than Cyprus (Croods fend it off), then Grug’s daughter introduces herself: “My name is Eep and this is my family, the Croods. We never had the chance to explore the outside world because of my Dad’s one rule: Never leave the cave.”


I know – I’m too bullish about US Equity markets, life, etc. these days. But, sometimes, it’s ok to look on the bright side. If you have a fear-mongering Cave Dweller in the office, maybe you should take him to see the movie too. Everyone needs to leave the cave.


Back to the Global Macro Grind


There are plenty of things to worry about out there – and, from a time and price, that will include US Equities too – but for now, the most bullish TREND in America remains your friend: #StrongDollar = Stronger America. Period.


We’ll dig deeper on the Dollar on our upcoming Q2 2013 Global Macro Themes presentation, but for now it’s important to review why US Equity Markets are testing all-time highs into the end of Q1 (our Q113 Themes):

  1. #GrowthStabilizing – US GDP Growth bottomed, sequentially, in Q4 of 2012; upside vs consensus in Q1/Q2 2013
  2. #HousingsHammer – consensus is not yet Bullish Enough on US employment and housing reflexivity
  3. #QuadrillYen – as the US Dollar strengthens on domestic factors, it’s picking up the relative (Burning Yen) trade too

What’s good for the US Dollar is bad for Commodities:

  1. US Dollar Index = +0.5% last week to $82.53 (up for 6 of the last 7 weeks)
  2. CRB Commodities Index = -0.6% last wk to 294 (down for 6 of the last 7 weeks)

What’s good for the US Dollar is also bad for Commodities Correlation Risks:

  1. 30-day inverse correlation between USD and Brent Crude Oil = -0.97
  2. 30-day inverse correlation between USD and High Grade Copper = -0.94
  3. 30-day inverse correlation between USD and Rough Rice = -0.86

Rice? Grug didn’t know how to boil water, but it’s still the world’s top consumed food these days.


And that’s the other big thing going on out there this year in Global Equity markets – not all markets are going up as the US Dollar does.


A)     Emerging Markets that don’t have a US Dollar peg are seeing local inflations (inflation is priced in local FX)

B)      Emerging Markets whose Equity Markets are commodity-linked are losing (Brazil = down -9.4% YTD)


On that score, note the following Global Equity market divergences:

  1. SP500 and Russell2000 = +9.1% and +11.4% YTD, respectively
  2. MSCI Emerging Markets (EM) Index = -3.8% YTD
  3. MSCI Emerging Markets (EM) Index = -1.9% last wk vs the Dow -0.013%

If you want to freak yourself right out, there are plenty of securities and markets out there where you can do that. After all, there’s always a bear market somewhere – and the top 3 bearish TRENDs in our macro model continue to be:

  1. Japanese Yen
  2. US Treasuries
  3. Commodities

Within the Commodities Deflation trend, consensus first saw Copper imploding as a “bearish growth signal.” Now, consensus is calling it what it is this morning – the biggest build of Copper inventory on the LME (London Metals Exchange) since 2003. What if you bought SPY in 2003?


Yep, LME Copper inventory is up +76% YTD. With supply that high and the Correlation Risk in Copper to #StrongDollar ripping, who cares about anything else? It certainly doesn’t mean the world is ending either.


The End of World (#EOW) trade has great marketing programs and tends to get priced into Gold in a hurry. Last week’s net long position in Gold (per CFTC futures/options data) exploded to the upside by 63% week-over-week (to 70,193 net long contracts).


But Gold bulls have been going back to this Cave Dweller well of fear for the last 6 months. So that’s not new. Neither is Gold’s price not reacting to the fear-born expectation that it out-performs. Gold is down again this morning, testing $1605 support.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST 10yr Yield, VIX, and SP500 are now $1599-1619, $106.97-108.66, $3.36-3.48, $82.15-83.25, 94.07-96.71, 1.89-1.97%, 10.78-14.92, and 1543-1565, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Cave Dwellers - Chart of the Day


Cave Dwellers - Virtual Portfolio


TODAY’S S&P 500 SET-UP – April 8, 2013

As we look at today's setup for the S&P 500, the range is 26 points or 0.40% downside to 1547 and 1.27% upside to 1573.   










  • YIELD CURVE: 1.49 from 1.49
  • VIX closed at 13.92 1 day percent change of 0.22%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Fed’s Pianalto speaks in West Palm Beach, Fla.
  • 11am: Fed to purchase $1b-$1.5b notes in 2017-2043 sector
  • 11:30am: U.S. to sell $35b 3M bills, $30b 6M bills
  • 7:15pm: Fed’s Bernanke speaks at Atlanta Fed conference
  • U.S. Rates Weekly Agenda


    • President Obama travels to Connecticut to discuss gun policy
    • Washington Week Ahead


  • Alcoa reports 1Q after the close, beginning earnings season
  • UPS appeals EU rejection of $6.7b TNT Express merger
  • Macy’s, Martha Stewart return to trial if no settlement made
  • Icahn says he won’t waive right to Dell proxy fight: WSJ
  • Dell board ready to repay Icahn for offer-related expenses
  • Adelson returns to stand in $328m suit over Macau deal
  • Merck starts fresh trial on claims Fosamax causes broken legs
  • Chesapeake to keep stake in FTS after value declines: WSJ
  • GE said to be near purchase of Lufkin Industries: WSJ
  • AB InBev has pact in principle with U.S. on Modelo takeover
  • Occidental Chairman Irani should retire, shareholder says
  • Pentagon to seek less for missile defense in FY 2014 budget
  • GM Holden cuts 500 Australian workers citing currency strength
  • Exchanges begin using limit up/limit down circuit breakers
  • Ex-News Corp. COO Chernin said to bid $500m for Hulu site
  • “Evil Dead” tops N.A. box office w/ $26m in sales
  • China’s local debt may be double audit figure: ex-official
  • U.S. Weekly Agendas: Finance, Industrials, Energy, Health, Consumer, Tech, Media/Ent, Real Estate, Transports
  • North American M&A Agenda
  • Canada Weekly Agendas: Energy, Mining
  • U.S. Budget, Bernanke, China, Masters: WK Ahead April 8-13


    • Alcoa (AA) 4:03pm, $0.08 - Preview
    • A Schulman (SHLM) 4:01pm, $0.40


  • Copper Climbs Before Chilean Miners Give Start Date for Strike
  • Hedge Funds Cut Bets Most Since ‘08 as Prices Slump: Commodities
  • Wheat Climbs as China Purchases Almost 1 Million Tons From U.S.
  • Gold Falls in London as Stronger Dollar Curbs Investment Demand
  • WTI Rebounds in New York After Biggest Weekly Drop in Six Months
  • Soybeans Climb as Drop to Lowest in Three Months Attracts Buyers
  • Sugar Rebounds After Bearish Bets Reach Record; Coffee Gains
  • Trust in Gold Not Bernanke as U.S. States Promote Bullion Tender
  • Iron-Ore Swaps Extend Gains as Chinese Mills Seen Restocking
  • Palm Oil Stockpiles in Malaysia Seen Declining Most in Two Years
  • Sundance Scraps Hanlong’s $1.18 Billion Iron Ore Takeover
  • Sewer Bonds Now Saving Power as Simon Property Uses Pace: Energy
  • Bullish Gas Bets Jump as Supply Glut Disappears: Energy Markets
  • Rebar Futures Climb as Rising China Demand May Trim Inventories






















The Hedgeye Macro Team











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Just Charts: Employment Data

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The Economic Data calendar for the week of the 8th of April through the 12th is full of critical releases and events. Attached below is a snapshot of some (though far from all of the headline numbers that we will be focused on.



STZ and BUD - Drama Nears Conclusion and Something to Think About as You Prepare Your Taxes

Late Friday, Constellation Brands provided an update regarding its joint (along with Anheuser-Busch InBev) negotiations with the Department of Justice.  STZ announced that the parties had reached an agreement in principle that was “substantially in line” with the revised transaction and that the parties had approached the Court to request one final stay of the proceedings until April 23rd in order to finalize the documents associated with the DOJ’s consent decree.

This all but ends the drama associated with Anheuser Busch InBev’s acquisition of Grupo Modelo and the associated Crown transaction, after much hand wringing (some of it my own) and at least three downgrades of Constellation Brands (at $30/share).  We won’t belabor our view of the companies involved, it’s been consistent from the start – we see STZ fairly valued at $50/share, but recognize that mid-cap managers may chase this name subsequent to the DOJ’s final approval.  We prefer BUD toward $110 per share and suspect that the name could see money flows with the deal in the rear view mirror.


What we would prefer to comment on now, with tax day right around the corner, is what the Department of Justice has done for you, the U.S. taxpayer, during this process.  From the DOJ’s website:


“The goal of the antitrust laws is to protect economic freedom and opportunity by promoting free and fair competition in the marketplace.  Competition in a free market benefits American consumers through lower prices, better quality and greater choice. Competition provides businesses the opportunity to compete on price and quality, in an open market and on a level playing field, unhampered by anticompetitive restraints. Competition also tests and hardens American companies at home, the better to succeed abroad.”


Sounds reasonable, right?  Or…


When the DOJ filed its lawsuit to block this deal, we took issue with more than a few statements made in the brief and saw them as counterfactual to the current state of affairs in the U.S. beer industry.  At the heart of our disagreement with the DOJ’s position was this notion that the 6.5% market share owned by Grupo Modelo in the U.S. somehow represented a significant counterweight to the pricing intentions of the other 93.5% of the market.  Or that the decisions made by Grupo Modelo on pricing were a permanent state of affairs.  We could keep going, but you get the point.  In an effort to combat an unlikely decrease in competition, here is what the DOJ has accomplished:

  1. Forced a U.S. company (STZ) to substantially increase its debt burden by all but compelling ABI’s sale of production assets in Mexico to STZ
  2. Increased capital investment ($400 million over three years by STZ) and employment in Mexico

Here’s what would have happened had the DOJ done nothing, in our estimation – a better run Modelo increases sales in the U.S. through a more focused Crown, retailers and consumers are happier on the margin and the government collects a few extra bucks in terms of duties on increased beer imports.


Unfortunately, under our scenario, the DOJ doesn't get to puff its chest and say that it fought for Joe Six Pack (literally).


Happy Tax Day!


Enjoy the weekend,




Robert  Campagnino

Managing Director




Matt Hedrick

Senior Analyst

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