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Pain's Delusion

This note was originally published at 8am on July 17, 2013 for Hedgeye subscribers.

“The greatest obstacle to pleasure is not pain; it is delusion.”



When I read that in The Swerve (pg 196) I couldn’t stop drawing the analogy between the 14-16th century Vatican and the US Federal Reserve. That might sound a little out there for you this morning, but Bernanke’s fear-mongering dogma is way out there too. Hopefully you can find some balance in between our opposing definitions of economic freedom. I am, if you care, Catholic.


If you stop studying the history of your beliefs, you’ll have issues. At the end of the 4th century, “historian Ammianus Marcellinus complained that Romans had virtually abandoned serious reading.” (pg 93) Getting people to just take the church’s word for it without thinking was a process (no books). “It had taken a thousand years to win the struggle and secure the triumph of pain seeking.” (pg 107)


Mixing politics, religion, and perceived wisdoms – that’s bringing it on thick. But it’s the only way I can remind you that the pattern of changing human beliefs are not new this morning. It’s called education. The delusion that a country needs to be perpetually punished by a weak currency and a 0% return on her hard earned savings is one of the greatest obstacles to free-market pleasures.


Back to the Global Macro Grind


Many are paid to think Bernanke is right. They believe that the US Dollar needs to be beat and whipped whenever it rises from the deadness of it all. Many think bond yields should stay at the 0% bound in perpetuity too. Just don’t forget why – they run Bond funds.


This morning we’re seeing a sharp contrast between American and Chinese economic policies:

  1. In the USA, people who are long Gold, Bonds, and Crude Oil futures continue to beg for Bernanke to talk down tapering
  2. In China, they’re reminding you that the entire world doesn’t sign off on short-term (reactive) Keynesian policy making

In a strikingly simple statement overnight, China’s Finance Minister said that they “won’t use large scale stimulus.” Markets took their word for it. The Shanghai Composite backed off in a hurry and closed down another 1%.


So who wouldn’t like a statement like that? Who will be in pain if, god forbid, Bernanke isn’t dovish in today’s testimony?


1.   Copper – hopefully you aren’t long that bubble. It took the Chinese “news” (in line with Darius Dale’s view that China wasn’t going to stimulate you) seriously and Copper futures fell over -1% immediately. Don’t forget that when China was spending its brains out on “infrastructure” over 3 years ago, it represented almost 2/3 of incremental global copper demand.


2.   Caterpillar – for the last year (as the Mining Capex Bubble began to pop) its CEO, Doug Oberhelman, has sounded like he should be running for political office in the south of France. He wants bailouts and government stimuli in his Chinese order book, baby! Do you blame him? I do. Hope is not an investment process.


Copper and CAT perma-bulls are just two of the many constituencies who lobby The Ben Bernank to whisper sweet-nothings of dovishness in the ears of the WSJ Hilsy (yes, the Jon Hilsenrath) as the Rest of Us just try our best to front-run it all.


If you don’t think that’s what’s really behind the pain-seeking messaging of the Fed, you are delusional. I have never seen the US government spend so much time talking down the one thing all these central plans were supposed to produce – growth.


And I mean real (inflation adjusted) economic growth. In the USA at least, sustained growth has always been married to 2 major (and coincident) leading pro-growth indicators:


1.       #StrongDollar

2.       #RisingRates


So, if you don’t want to step on anyone at the Fed Vatican’s toes – and if you never want to question any of these money-printing pontiffs publicly, you would have probably been cool with taking The Borgias word for it in the 15th and 16th centuries too.


In other news, the US stock market finally had a down day yesterday. That was its 1st down day in the last 9 as the SP500 and Russell2000 backed off their all-time highs of +18% and +23% YTD, respectively.


Immediate-term TRADE overbought is as overbought does, so we’ll see if we can re-load the long book on a correction to a reasonable line of immediate-term TRADE support (for SPY that’s now 1656).


The #1 thing that will stop me from getting really long again is Bernanke Burning The Buck (toning down tapering expectations). Every one of the aforementioned constituencies disagrees with me on that – but I’m betting 99% of The People in this country would call my #StrongDollar America the pleasure they seek.


Now, if only the US government explained it to them like we do, without all the conflicts of interest…


Our immediate-term Risk Ranges are now:


UST10yr 2.49-2.75%

SPX 1656-1701

Shanghai Comp 1951-2099

USD 82.12-83.61 (bullish)

Brent Oil 107.61-110.13

Copper 3.05-3.19


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Pain's Delusion - COPPER vs CAT


Pain's Delusion - vp 7 17

July 31, 2013

July 31, 2013 - dtr



July 31, 2013 - 10yr

July 31, 2013 - spx

July 31, 2013 - nik

July 31, 2013 - dax

July 31, 2013 - dxy

July 31, 2013 - euro

July 31, 2013 - oil



July 31, 2013 - VIX

July 31, 2013 - yen

July 31, 2013 - natgas
July 31, 2013 - gold

July 31, 2013 - copper


TODAY’S S&P 500 SET-UP – July 31, 2013

As we look at today's setup for the S&P 500, the range is 16 points or 0.18% downside to 1683 and 0.77% upside to 1699.                                  










  • YIELD CURVE: 2.29 from 2.30
  • VIX closed at 13.39 1 day percent change of 0.00%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, July 26 (prior -1.20%)
  • 8:15am: ADP Employment Change, July, est. 180k (prior 188k)
  • 8:30am: Employment Cost Index, 2Q, est. 0.4% (prior 0.5%)
  • 8:30am: GDP Q/q, 2Q, est. 1% (prior 1.8%)
  • 8:30am: Personal consumption, 2Q, est. 1.6% (prior 2.6%)
  • 8:30am: U.S. Treasury quarterly refunding announcement
  • 9am: ISM Milwaukee, July, est. 52 (prior 51.55)
  • 9:45am: Chicago Purchasing Mgr, July, est. 54 (prior 51.6)
  • 10:30am: DOE Energy Inventories
  • 2pm: FOMC rate decision
  • 3pm: Fed Aug. schedule for tentative outright Treasury buys


    • President Obama meets w/ House, Senate Democrats
    • Biggest U.S. equity exchange operators, trade group plan to ask SEC to delay final phase of market-wide program aimed at curbing sudden stock swings that takes effect Aug. 1
    • 9:30am: Senate Environment and Public Works Cmte hearing on toxic chemical threats
    • 10am: Senate Judiciary Cmte hearing on Foreign Intelligence Surveillance Act programs
    • 12:30pm: House Budget Cmte hearing on poverty
    • 2pm: Joint Economic Cmte hearing on tax laws, eco growth
    • 2:30pm: Senate Finance Cmte hearing on principles for energy tax changes
    • 2:30pm: Senate Commerce, Science and Transportation Cmte hearing on energy drinks, concerns about marketing to youth
    • Senate confirms 5 to U.S. Labor Board, averting shutdown


  • Ebbing finl-mkt risk gives Fed option to delay tapering
  • Alexion said to enlist Goldman to advise amid Roche overture
  • Bill Ackman to unveil $2b investment, WSJ says
  • Cubist buys Trius, Optimer to expand stable of antibiotics
  • Intuit settles antitrust suit on pact to not hire from rivals
  • U.S. economy probably grew at slower pace in 2Q
  • HP says ex-SEC general counsel advising on Autonomy deal probe
  • Amgen boosts yr EPS view; Phase 2 AMG-747 study terminated
  • KKR said to consider bidding for Hutchison’s ParknShop
  • Las Vegas Sands loses bid to vacate $101.6m trial verdict
  • Honda maintains forecast after profit misses ests.
  • Schneider Electric to buy Invensys for GBP3.4b cash, shrs
  • Blackstone said to buy 7 Australian offices from GE Capital
  • UBS to pay $60m fine to settle SEC mortgage-bond probe: WSJ
  • BlackRock starts retirement indexes in push for retail assets
  • German retail sales drop in sign of slow recovery
  • Euro-area July consumer prices up 1.6% Y/y; est. 1.6%
  • Toyota said to prepare to raise output target above 10m
  • China leadership pledges steady growth w/ eco reforms
  • EADS to adopt Airbus name, reflecting dominance of unit


    • Humana (HUM) 6am, $2.47 - Preview
    • ADT (ADT) 6am, $0.43
    • Huntsman (HUN) 6am, $0.39
    • Athabasca Oil (ATH CN) 6am, C($0.04)
    • CGI Group (GIB/A CN) 6:30am, C$0.58
    • NiSource (NI) 6:30am, $0.23
    • Regency Centers (REG) 6:30am, $0.64
    • Energen (EGN) 6:30am, $0.61
    • SPX (SPW) 6:30am, $0.65
    • Ingredion (INGR) 6:35am, $1.17
    • Intact Financial (IFC CN) 6:55am, C$0.75
    • Comcast (CMCSA) 7am, $0.63 - Preview
    • American Tower (AMT) 7am, $0.90
    • Delphi Automotive (DLPH) 7am, $1.14
    • Wisconsin Energy (WEC) 7am, $0.47
    • RioCan REIT (REI-U CN) 7am, C$0.40
    • Garmin (GRMN) 7am, $0.65
    • Burger King Worldwide (BKW) 7am, $0.19
    • Booz Allen Hamilton (BAH) 7am, $0.40
    • Jones Group (JNY) 7am, ($0.12)
    • AllianceBernstein (AB) 7:02am, $0.38
    • Southern (SO) 7:30am, $0.68
    • Exelon (EXC) 7:30am, $0.54
    • Hess (HES) 7:30am, $1.40
    • Invesco (IVZ) 7:30am, $0.51
    • Hyatt Hotels (H) 7:30am, $0.30
    • Energizer (ENR) 7:30am, $1.31
    • Hospira (HSP) 7:30am, $0.51
    • Level 3 Communications (LVLT) 7:30am, ($0.09)
    • Heartland Payment Systems (HPY) 7:30am, $0.58
    • SodaStream International (SODA) 7:30am, $0.66
    • Sherritt International (S CN) 7:42am, C$0.12
    • Mastercard (MA) 8am, $6.29
    • Phillips 66 (PSX) 8am, $1.81
    • AGL Resources (GAS) 8am, $0.27
    • Hudson City Bancorp (HCBK) 8am, $0.10
    • Hercules Offshore (HERO) 8am, $0.05
    • PG&E (PCG) 8:03am, $0.73
    • AGCO (AGCO) 8:15am, $1.81 - Preview
    • Allergan (AGN) 9am, $1.20
    • Great-West Lifeco (GWO CN) 10:24am, C$0.54 - Preview
    • New Gold (NGD CN) Bef-mkt, $0.05 - Preview
    • Williams (WMB) 4pm, $0.14
    • Bruker (BRKR) 4pm, $0.14
    • WebMD Health (WBMD) 4pm, $0.06
    • CBS (CBS) 4:01pm, $0.72 - Preview
    • Williams Partners (WPZ) 4:01pm, $0.37
    • Pioneer Natural Resources (PXD) 4:01pm, $1.11
    • Amdocs (DOX) 4:01pm, $0.73
    • Open Text (OTC CN) 4:01pm, $1.41
    • CBL & Associates Properties (CBL) 4:01pm, $0.53
    • Trinity Industries (TRN) 4:01pm, $0.95
    • Bloomin’ Brands (BLMN) 4:01pm, $0.23
    • DreamWorks Animation SKG (DWA) 4:01pm, $0.20
    • Whole Foods Market (WFM) 4:02pm, $0.37 - Preview
    • ServiceNow (NOW) 4:02pm, ($0.05)
    • Shutterfly (SFLY) 4:02pm, ($0.16)
    • Thoratec (THOR) 4:02pm, $0.43
    • MetLife (MET) 4:03pm, $1.33
    • Yelp (YELP) 4:03pm, ($0.04)
    • Allstate (ALL) 4:05pm, $0.98
    • Lam Research (LRCX) 4:05pm, $0.71
    • Pharmacyclics (PCYC) 4:05pm, ($0.04)
    • QEP Resources (QEP) 4:05pm, $0.35
    • Seattle Genetics (SGEN) 4:05pm, ($0.21)
    • Questar (STR) 4:05pm, $0.22
    • Atmel (ATML) 4:05pm, $0.06
    • SunPower (SPWR) 4:05pm, $0.11 - Preview
    • Rovi (ROVI) 4:05pm, $0.46
    • PHH (PHH) 4:05pm, $0.37
    • Ruckus Wireless (RKUS) 4:05pm, $0.03
    • Ashford Hospitality Trust (AHT) 4:05pm, $0.60
    • Atwood Oceanics (ATW) 4:09pm, $1.34
    • Lincoln National (LNC) 4:10pm, $1.15
    • Western Gas Equity Partners (WGP) 4:10pm, $0.13
    • Western Gas Partners (WES) 4:13pm, $0.38
    • Microchip Technology (MCHP) 4:15pm, $0.54
    • Concur Technologies (CNQR) 4:15pm, $0.37
    • Trulia (TRLA) 4:17pm, $0.03
    • Yamana Gold (YRI CN) 4:23pm, $0.11 - Preview
    • Essex Property Trust (ESS) 4:27pm, $1.85
    • Marriott International (MAR) 4:30pm, $0.57
    • Charles River Laboratories (CRL) 4:30pm, $0.71
    • Eagle Rock Energy Partners (EROC) 4:30pm, $0.05
    • Murphy Oil (MUR) 4:31pm, $1.54
    • First Quantum Minerals (FM CN) 5pm, $0.21
    • Kinross Gold (K CN) 5pm, $0.06 - Preview
    • DDR (DDR) 5pm, $0.27
    • Ctrip.com International (CTRP) 5pm, $0.30
    • Axiall (AXLL) 5pm, $1.18
    • Vanguard Natural Resources (VNR) 5:15pm, $0.33
    • NXP Semiconductor (NXPI) 8pm, $0.66
    • Suncor Energy (SU CN) 10pm, C$0.63 - Preview
    • US Silica (SLCA) Aft-mkt, $0.40


  • ANZ Opens 50 Ton Gold Vault in Singapore as Asian Demand Climbs
  • Potash’s $20 Billion Market Transformed by Uralkali: Commodities
  • Wheat Climbs on Signs Lower Prices Fueled Demand From Importers
  • Commodity-Linked Structured Note Sales Slump to Nine-Year Low
  • Gold Extends Biggest Monthly Gain Since January 2012 Before Fed
  • WTI Set for Best Month Since August Before U.S. Oil Supply Data
  • Rebar Advances for Second Month as China Pledges Steady Growth
  • Palm Oil Climbs to One-Week High as Weak Ringgit Boosts Exports
  • Potash Group Surviving Demise of Russian Rival: Corporate Canada
  • Glencore Takes Lead in Metals Storage as Goldman, JPMorgan Cut
  • Oil Contango Hazard for Bulls Seen in WTI Prices: Energy Markets
  • Shell to Chevron Move Offshore as Nigerian Risks Mount: Energy
  • LME Zinc Stocks at 10-Month Low Amid Supply Deficit: BI Chart
  • Corn Seen Sliding Below $4.50 on Bear Flag: Technical Analysis


























The Hedgeye Macro Team












Early Look

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Zero Resistance

“Through years of experience I have found that air offers less resistance than dirt.”

-Jack Nicklaus


I was playing in a golf match at the Newport Country Club in Rhode Island yesterday and, in the final pairing of the day, found myself playing against our all-star Energy analyst (and former Princeton Hockey Captain) Kevin Kaiser.


He hit a tee-shot on a 240 yard par 3 (into the wind on the ocean side of the course) that appeared to have zero resistance until it was in the hole. #Ace


As his playing partner (former NHL’er , Jeff Hamilton) and I walked down the fairway towards the hole, Hammy said “you guys are one-down.” I had zero resistance to that comment too.


Back to the Global Macro Grind


What if the stock market had zero resistance? That would be cool. I’ve never seen it before, but that doesn’t mean it can’t happen. What is resistance for a market price after it hits an all-time high anyway?


Higher-lows and higher-highs for market prices are bullish. Higher-lows and higher-all-time-highs, are really bullish. And no matter what fairway of life you are walking down into today’s month-end, that’s what the US stock market continues to signal in our model.


Plenty of pundits who were shorting the market since March said you “sell in May and go away.” Then they changed that to June. Now I guess they’ll just have to push that out to August, because here’s what the score card reads on the last day of July:

  1. SP500 (SPY) = +4.96%
  2. US Healthcare Stocks (XLV) = +7.12%
  3. US Financial Stocks (XLF) = +5.32%

In other words, if you weren’t long stocks for all of July, you’ll either need a hole-in-one today, or to just go on CNBC and place your own ball in the hole (after the Herbalife thing, Ackman had to resort to something; pitching a massive long position at month-end).


As stocks continue to make higher-lows and higher-highs, the “value” buyer’s game gets tougher. Combine that perpetual waiting (to buy the dip that doesn’t come) with a massive tail-wind called fund-flows into equities, and playing into that wind gets tougher.


Why does consensus continue to chunk dirt into this epic rally?

  1. #CYA – lots of people who blew up buying the 2007 top are simply not allowed to buyem this high
  2. Sentiment continues to be long of fear, when fear itself in Equities (VIX) continues to crash
  3. The potentially generational fund flow shift out of bonds and into stocks still doesn’t have consensus buy in

If you look at this morning’s II Bull/Bear Spread, it’s more of the same on that front:

  1. Bulls in the survey dropped back below 50% last week to 48.4%
  2. People who admitted to still being bearish remained at 19.6%
  3. The Bull/Bear Spread = +2880 basis points to the bull side

I’m not trying to suggest that after the Russell 2000 and SP500 are up +22.9% and +18.2% YTD that everyone is bearish. I’m not telling you to chase and buy the market on green days either. I’m just reminding you that less than ½ of the players out there are bullish!


And when month-end and YTD performance is in the hole like this, time becomes the bull’s bff…


Let’s go back to the point I made about fear crashing for a minute:

  1. VIX crashed (again) in July (its -20.6% for the month-to-date)
  2. VIX is still crashing YTD at -25.6%
  3. VIX, on a 3yr basis, is -43.0%

That’s a lot of baggage for a dirty ball to carry. And I think, more than anything, else – that’s the point. There’s a lot of mental baggage out there on this course. Consensus bears have been buying 25-30 the thunder and lightning VIX rain protection all year, when it’s been a clear and sunny path toward an implied VIX of 10-12.


Never underestimate the behavioral side to this game. It’s a lot like golf – and, as the great Bobby Jones once said, “Golf is a game that is played on a five-inch course – the distance between your ears.”


Our immediate-term Risk Ranges are now as follows:


10yr 2.57-2.71%


Nikkei 132

VIX 11.99-13.89

USD 81.43-82.59

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Zero Resistance - 2


Zero Resistance - Virtual Portfolio

HBI: Bad Core, Good Acquisition

Takeaway: We don't like the base business one bit. But HBI is sandbagging on acquisition accretion. That's tough to bet against, for now.

Conclusion: We think that HBI has some fiercely opposing investment characteristics right now. It’s got abysmal top line growth and tougher margin compares shaping up on one end, but low expectations for the addition of the (sandbagged) MFB acquisition on the other. In the end, while we don’t think HBI is comfortably investable here, we think that the stock falls into the ‘unshortable’ category for the next year (at least at this price).  



On one hand, the company is ‘growth challenged’. Let’s face it…HBI is buying Maidenform because it has to.  Since it anniversaried the Gear For Sports acquisition in 2Q11, HBI’s top line growth has averaged zero percent. Yeah, there’s perhaps a 1% hit from exiting the screenprinting business, but 1% growth in aggregate is hardly anything to get too excited about. Our biggest beef is that International and Direct-to-Consumer are both smaller today than they were two years ago. FX has been a factor, we’ll give ‘em that (though it hasn’t stopped others over this time period). But DTC, which should be the low hanging fruit for any company that owns its own brand – especially one that manufacturers vertically – simply can’t seem to grow. Ironically, the MFB acquisition will not improve the proportion of Int’l or DTC, it simply fills out a different part of HBI’s bra business in US mass channels and department stores.


On the positive side, the reality on Maidenform is that a) HBI got it for a steal, b) management lowballed on accretion as they simply add it to HBI’s model, c) there’s easy margin upside as HBI unravels failed MFB programs put in place over the past two years, and d) there further upside as HBI fills out its excess capacity with MFB business (i.e. transitions MFB to an insourced model from an outsourced model).  They guided to $0.15-$0.20 per share from MFB. Seriously? If we simply add on MFB’s net income after borrowing costs from last year – which was abysmal, by the way (worst in 8-years) we get to $0.25-$0.30 in accretion. When all is said and done, we think the accretion numbers will be at least 2x guidance in year 1, and could be closer to a buck versus management’s $0.60 guidance three years out.


The bottom line is that it does not matter one iota that sales are punk. We might start to see some positive benefit from HBI’s organic marketing initiatives in 2H – but that gives them maybe a point or two in growth.  The big upside begins in another two quarters when HBI gets 15% sales growth alone just from adding MFB. Along the way, cash flow looks good, and the company looks on track to pay down the debt associated with the deal just over a year after it closes. Organically, we’re not fans of this story by any stretch (challenged top line and cotton-led gross margin benefit coming to a close). But the reality is that the market won’t look at the ‘organic growth and margin characteristics’, it will look at reported numbers, and lowballed expectations.  As a merged entity, this one will be tough to bet against.

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