(Still) Turning Japanese

Client Talking Points


It was Burning Yen (and up Nikkei) into the Japanese elections, so the Yen caught a bid to cover on the news, and the Nikkei only closed up +0.5% as a result. It's called a crowded trade. It's just how immediate-term market moves roll. No change to the bearish Yen or bullish Nikkei TRENDs.


Well, so much for the short position that Gold and Bond bulls kept highlighting. CFTC futures/options contracts showed a +56% week-over-week ramp in the net long Gold position last week. Bernanke was the catalyst, as usual. +55,000 net longs now. Gold is banging the top end of my $1241-1318 risk range this morning. Up Yen, Down rates helped too. Fading all of it.


Yields are re-testing the low-end of our 2.45-2.75% immediate-term risk range this morning. This should provide another short selling opportunity in Treasuries as they make lower-highs. See our #RatesRising Macro Theme deck for the intermediate-term call on that. Flows should continue into US Equities.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.


Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016. 


Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road. 

Three for the Road


TREASURIES: 10yr yield down to start the wk to 2.47%; creates another short selling opportunity in t-bonds



"The Federal Reserve is not currently forecasting a recession."

- Ben Bernanke on January 10, 2008


Netflix has become the best performing U.S. stock in the S&P 500 Index in 2013 and the second most expensive. The company’s stock reached a 52-week closing high of $267.92 on July 17 and now trades at 383 times 12-month profit, surpassed only by Alcoa. Its estimated price/earnings ratio for 2013 is 184. (Bloomberg)

Lest Occasion Be Given

This note was originally published at 8am on July 08, 2013 for Hedgeye subscribers.

“Idleness is the enemy of the soul.”

-Saint Benedict


There were some major contradictions in Benedict of Nursia’s “rules.” Monks not being able to openly debate what they were being told to read was one of them. I started reading Stephen Greenblatt’s Pulitzer Prize Winner, The Swerve – How The World Became Modern, this weekend. That’s what has me thinking about that.


Benedictine Rule provided the foundations for western monasticism. “Let there be complete silence. No whispering, no speaking – only the reader’s voice should be heard there… no one should presume to ask a question about the reading or about anything else, lest occasion be given.” (The Swerve, pg 27)


Reading and writing makes me think. Thinking requires what Einstein called for – constant questioning of premise. Some people don’t question either Keynesian Economics or the US Federal Reserve’s policies whatsoever. Markets, on the other hand, take occasion to debate policy makers all of the time. They front-run the next decision that will be imposed on us from upon high.


Back to the Global Macro Grind


From the holy heights of Chaos Theory the globally interconnected ecosystem gives us this thing called economic gravity. As US employment #GrowthAccelerating continues to surprise on the upside, expectations for Fed tapering get pulled forward.


Last week’s market pricing of gravitational-risk was as closely aligned with what has been happening for 6 months as any week in 2013. Here were the big week-over-week moves, bundled within our core Hedgeye Global Macro Themes:

  1. #StrongDollar – US Dollar Index +1.6% on the week; up for 3 weeks in a row, and +5.9% for 2013 YTD
  2. #RatesRising – UST 10yr Yield +25 basis points on the week to a fresh weekly closing YTD high of 2.74%
  3. #EmergingOutflows – MSCI Emerging Markets and Latam Equity indexes -2.4% and -4.3% on the week, respectively

Yes, our Macro call for the last 6 months still has some serious flow to it:

  1. Dollar Up = Commodities Down
  2. Commodities Down = Commodity Linked Emerging Markets Down
  3. Emerging Markets Down = Emerging Outflows Up

Follow the flow. All that moulah has to, eventually, flow somewhere; especially as money’s prior flows start going the other way (at an accelerating rate).


So, you can either be long US Dollars and US Consumption Equities on the following fundamentals:

  1. Employment #GrowthAccelerating
  2. #HousingsHammer ripping a +12.2% y/y gain in US Home Prices (wealth effect)
  3. Consumption #GrowthAccelerating from 1.0-1.2% to 2.0-2.4% in the last 6 months

And/or, you can being long US Dollars and US Consumption Equities because you can’t be long anything else!


Lots of clients are asking us what we’re going to do with Gold, Treasuries, and Emerging Markets from here. And our answer is more of the same. We update our dynamic asset allocation model daily. Here’s the latest on that:

  1. Commodities = 0%
  2. Fixed Income = 0%
  3. Int’l Equities = 0%

Zero percent is about as clear a statement as we can make. And while we’ve had 0% in Commodities and Fixed Income for some time now, I don’t think last week’s combination of #StrongDollar + #RatesRising gets us less confident in that positioning.


Why would it? In macro there is this thing called momentum that trumps valuation. When negative PRICE MOMENTUM meets VOLATILITY and OUTFLOWS  (all at once), that’s uber bearish.


Having 0% asset allocation to International Equities is probably the position we’ll hold for the least amount of time. But, with Emerging Markets (MSCI EM) -13% and Latin American Equities (MSCI Index) -19.7% YTD, respectively, we’re in no rush.


For now, with both the Russell 2000 (IWM) and US Consumer Discretionary (XLY) US Equity market indexes hitting fresh all-time highs at +18.4% and +21.8%, respectively, occasion has been granted by the gods of our meritocracy to keep questioning consensus and reading more books.


Our immediate-term Risk Ranges are now:


UST 10yr 2.55-2.74%

SPX 1617-1639

VIX 14.14-16.49

USD 83.39-84.59

Yen 99.13-101.71

Gold 1179-1242


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Lest Occasion Be Given - Chart of the Day


Lest Occasion Be Given - Virtual Portfolio

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

July 22, 2013

July 22, 2013 - dtr



July 22, 2013 - 10yr

July 22, 2013 - spx

July 22, 2013 - dax

July 22, 2013 - nik

July 22, 2013 - dxy

July 22, 2013 - oil



July 22, 2013 - VIX

July 22, 2013 - yen

July 22, 2013 - natgas

July 22, 2013 - gold
July 22, 2013 - copper


Don't Cheat

“They cheat. You cheat. And yes, I also cheat from time to time.”

-Dan Ariely


This weekend I cracked open a behavioral psych book that is quite relevant to our profession this morning. The book is about how and why people cheat. It’s called The (Honest) Truth About Dishonesty, by the founder of The Center for Advanced Hindsight, Dan Ariely.


“In a nutshell, the central thesis is that our behavior is driven by two opposing motivations. On one hand, we want to view ourselves as honest, honorable people… on the other hand, we want to benefit from cheating and get as much money as possible.”


“This is where our amazing cognitive flexibility comes into play. Thanks to this human skill, as long as we cheat by only a little bit, we can benefit from cheating and still view ourselves as marvelous human beings.” (pg 27)


Back to the Global Macro Grind


Now what happens if your internal view of cheating by a “little bit” ends up being viewed externally as cheating by a lot? Well, in our business, that might mean your firm gets a big fine and/or, alternatively, you get to slap on an orange-jump suit for a while.


With an oversupply of money managers, the pressure to perform in this profession is intense. I get that. That’s why people cheat. I’ve worked in more than enough hedge fund environments to know how some people define grey – and the definition is loose.


I also get what it means to build a family, firm, and culture with principles that are black and white. In the face of temptation, those principles need to stand like a rock. Ariely nails this in quoting Oscar Wilde (pg 28): “Morality, like art, means drawing a line somewhere.”


Enough about that. Our Macro edge isn’t inside info; it’s math – so let’s draw some TREND lines:

  1. SP500 = at the all-time highs, +18.7% YTD, with bullish intermediate-term TREND support = 1602
  2. Russell2000 = at the all-time highs, +23.7% YTD, bullish intermediate-term TREND support = 965
  3. US Dollar Index = -0.5% last week to $82.61 = +3.6% YTD with bullish TREND support = $81.63
  4. US Equity Volatility = -9.4% last week to 12.54 = -30.4% YTD with bearish TREND resistance = 18.98
  5. US Treasury Yield (10yr) = -10bps to 2.48% last week = +41% YTD with bullish TREND support = 2.21%
  6. Gold = +1.1% last week to $1294 = -23.3% YTD with intermediate-term TREND resistance = $1520

In other words, the 2013 Global Macro playbook didn’t require any cheating at all.


So far, from a US centric investor’s perspective at least, all you’ve needed to do was:


A)     Short Fear (Gold, Bonds, Volatility) and

B)      Buy Growth (High Beta, Low Yield, Growth Stocks)


It hasn’t been any more complicated than that.


What has been complicated has been understanding the storytelling of US stock market bears and Gold Bond bulls alike. With Gold, Bonds, and Yens bid up to lower-highs again this morning, there will be nothing new on that front either.


Another thing that isn’t new is “long-term” investors saying they don’t care about “all the short-term stuff” until all the short-term stuff is going the other way. This is where our immediate-term TRADE risk management duration comes in handy:

  1. Japanese Yen (vs USD) immediate-term TRADE support = 98.49
  2. Gold’s immediate-term TRADE resistance line = $1386
  3. 10yr US Treasury Yield’s immediate-term TRADE support = 2.45%

So, what would get me to start doubting our intermediate-term Macro view?


A)     Every one of those TRADE lines being violated on a closing basis, then confirmed for more than three weeks

B)      A fundamental research case that doesn’t lead me to believe in #StrongDollar #RatesRising #CommodityDeflation  


What wouldn’t get me to change my views are things like:

  1. “Hearing Bernanke could do XXX this week”
  2. “Consensus is too bearish on Gold”
  3. Etc. etc.

You know, all the loosy goosy whispering stuff. There’s always someone cheating to aid and abet their position somewhere. It’s our job to absorb all the noise into our process and make the highest probability decisions we can make with public information.


Take for example the latest bull case on Gold (i.e. that people are too “bearish” on Gold, now that it’s crashing). Every man, woman, and child who is still long it is now talking about the “high short position” of a few weeks back…


Meanwhile this morning’s CFTC futures/options data showed consensus ramping the NET LONG Gold position by +56% last week to +55,535 net long contracts.


Ostensibly, the catalyst for buying Gold was what it’s been for both the YTD and the last ½ decade – Bernanke speaking. But, on Bernanke day (last Wednesday), Gold got clocked. The bull catalyst is consensus. Don’t let yourself cheat thinking about the intermediate-term TRENDs of #StrongDollar and #RisingRates otherwise.


Our immediate-term Risk Ranges are now:


UST 10yr 2.45-2.75%


VIX 12.20-14.53

USD 81.87-83.21

Yen 99.30-101.26

Gold 1


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Don't Cheat - Chart of the Day


Don't Cheat - Virtual Portfolio


TODAY’S S&P 500 SET-UP – July 22, 2013

As we look at today's setup for the S&P 500, the range is 27 points or 1.01% downside to 1675 and 0.59% upside to 1702.                        










  • YIELD CURVE: 2.18 from 2.19
  • VIX closed at 12.54 1 day percent change of -8.93%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Chicago Fed Nat Activity Index, June (prior -0.3%)
  • 10am: Existing Home Sales, June., est. 5.25m (prior 5.18m)
  • 11am: Fed to purchase $1.25b-$1.75b in 2036-2043 sector
  • 11:30am: U.S. to sell $30b 3M bills, $25b 6M bills
  • U.S. Weekly Rates Agenda


    • SEC deadline for comments on the rulemakings and policy statements related to security-based swaps
    • Federal Housing Finance Agency deadline for comments on the proposed rulemaking to remove references to credit ratings in certain regulations governing the federal home loan banks
    • House, Senate in session
    • Washington Weekly Agenda

WHAT TO WATCH         

  • Apple said to buy navigation app maker HopStop
    • Patent envisions projector inside iOS devices, Cnet says
    • Co., suppliers testing larger screens for devices, WSJ says
  • Dell, Silver Lake said to disagree on breakup fee
  • Facebook plans release of feature phone functions, NYT says
  • Boeing 787 operators told to inspect radio beacons
  • Study of fire on Ethiopian 787 involves beacons, Reuters says
  • RadioShack selects Solomon Co. to raise new financing: WSJ
  • Carl Icahn raises Navistar stake to 16.55%
  • Big bank commodity trading in jeopardy amid Fed review
  • Goldman “warehouse dance” exploits pricing regs: NYT
  • TSA to expand options for expediting airport security
  • JPMorgan, FERC said close to $410m settlement: WSJ
  • Microsoft said pressured to grant board seat to ValueAct
  • G-20 “fully” endorses OECD action plan on tax evasion
  • Japanese shrs gain after Abe’s ruling coalition wins elections
  • “The Conjuring” leads theater ticket sales at $41.5m
  • 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
  • Apple, U.S. Home Sales, Facebook, Ford: Wk Ahead July 22-27


    • Hasbro (HAS) 6:30am, $0.34 - Preview
    • Halliburton (HAL) 6:57am, $0.72 - Preview
    • Bank of Hawaii (BOH) 7am, $0.83
    • Kimberly-Clark (KMB) 7:15am, $1.39
    • RPM International (RPM) 7:30am, $0.67
    • McDonald’s (MCD) 7:58am, $1.40 - Preview
    • Lennox International (LII) 8am, $1.19
    • Six Flags Entertainment (SIX) 8am, $0.74
    • Gannett (GCI) 8:15am, $0.58
    • Northwest Bancshares (NWBI) 8:45am, $0.18
    • NVR (NVR) 8:50am, $11.96
    • BancorpSouth (BXS) 4pm, $0.23
    • United Stationers (USTR) 4pm, $0.76
    • WR Berkley (WRB) 4:01pm, $0.68
    • Canadian National Railway (CNR CN) 4:01pm, C$1.61 - Preview
    • Netflix (NFLX) 4:05pm, $0.40 - Preview
    • Hexcel (HXL) 4:05pm, $0.47
    • Sanmina (SANM) 4:05pm, $0.35
    • Zions Bancorporation (ZION) 4:10pm, $0.41
    • Rent-A-Center (RCII) 4:18pm, $0.75
    • Texas Instruments (TXN) 4:30pm, $0.41
    • IDEX (IEX) 4:52pm, $0.74
    • Brookfield Canada Office Properties (BOX-U CN) 5pm, C$0.41
    • Crane (CR) 5:44pm, $1.04
    • Helix Energy Solutions (HLX) 6pm, $0.20
    • Gulfmark Offshore (GLF) 6pm, $0.33
    • BBCN Bancorp (BBCN) 7:25pm, $0.27


  • Big-Bank Commodity Trading in Jeopardy as Fed Reviews Policies
  • Gold Bulls Bet Right as Prices Rally Most Since ’11: Commodities
  • WTI Crude Gains a Fourth Day as Hedge Funds Boost Bullish Bets
  • Gold Rises Above $1,300 to 1-Month High on Stimulus Outlook, Oil
  • Copper Advances for a Third Day Before U.S. House-Sales Reports
  • Corn Declines as U.S. Rains Boost Outlook for Record Production
  • Coffee Gains Before Possible Frost; Raw Sugar Extends Advance
  • CFTC’s Chilton Says ‘Thoughtful Review’ of Warehousing Needed
  • Cocoa Processing Rises in Indonesia as Cargill, Callebaut Expand
  • Sifca to Invest $417 Million in Africa Palm-Oil Expansion
  • Rebar Drops as Weather Slows Construction Demand, Iron Ore Falls
  • U.S. Natural Gas Declines Second Day on Cooler Weather Outlook
  • Coking Coal May Find Support With Prices Below $150: Bull Case
  • Rubber Advances to Six-Week High as Oil’s Rally Increases Appeal


























The Hedgeye Macro Team












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