Morning Reads on Our Radar Screen

Takeaway: Here's a glimpse at what some of our analysts are reading this morning

Morning Reads on Our Radar Screen  - Screen Shot 2013 08 01 at 8.47.35 AM




Australia to Raise Tobacco Tax to Narrow Budget Shortfall (via Bloomberg)





Boyd Gaming Corporation Announces Offering Of Common Stock (via Yahoo!Finance)





SAC Seen Avoiding $14 Billion Death Penalty From U.S. (via Bloomberg)


Eminent Domain Battle Pits Homeowner Against Hospital (via Bloomberg)





WTO Report: Developing World Will Dominate Textile Exports (via Sourcing Journal)


J.C. Penney Says It Has CIT's Backing (via WSJ)





Italy Banks Bad Loans Underline Southern Europe Malaise (via Bloomberg)


U.K. Factory Growth Quickens as Recovery Strengthens (via Bloomberg)



Capital Flow Beneficiaries...

Client Talking Points


Yen Down, Nikkei Up.  Welcome to the New Month, same as the Old Month.  Big +2.5% move to the upside for the Japanese stock market to kick off August.  The Yen failed at our TREND line of 97.41 resistance (vs USD) as the Nikkei held our TREND support level of 13,421.  From a quantitative perspective, holding TREND support is a key #Bullish signal for Japanese equities and, from a strategy perspective, we continue to like deep, liquid markets as capital recipients.    


Ahhh, remember the good ole day’s of the late 19th century when the U.K. accounted ~10% of World GDP!  Don’t look now but the U.K. is starting to string together solid sequential economic data.  This morning’s 54.6 PMI print for July (vs 52.5 last mth) was the best global macro data point of the morning and the FTSE is looking increasingly better on the long side  – alongside the U.S. and Japan, the U.K. sits as our other favored, liquid market, capital flow beneficiary.


Up, Down, Up.  Despite the daily oscillations, the trend remains higher as  yields continue to make higher-lows on pullbacks and probe higher-highs on the rips.  The current yield of 2.60% = +4bps w/w, +12bps m/m, +107bps y/y.  #RatesRising, particularly a first step function move higher towards interest rate normalcy, is not the enemy of growth or equity performance.  

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


Government requests for Twitter users' data on the rise 





Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible.”

- John Maynard Keynes


The Eurozone PMI Manufacturing number for July increased to 50.3 (exp. 50.1) from 48.8 in June, this is the first expansionary reading since July 2011.


Bernanke's Blue Pills

This note was originally published at 8am on July 18, 2013 for Hedgeye subscribers.

“I only take Viagra when I am with more than one woman.”

-Jack Nicholson


Obviously Jack Nicholson doesn’t trade Oil or Gold futures. All you need to bid up the futures curve of inflation expectations are a few Washington whispers and some dovish Bernanke Blue Pills – and, oh baby, will some of the old boys in Chicago chase!


With time, trading losses, and substance abuse, I’ve seen some men in this business get dumber, faster. Yesterday, one of my Senior Analysts on the Hedgeye Macro Team, Christian Drake, reminded me why: “Keith, neuro-plasticity and de Novo brain cell creation are generally fixed by the time you enter adulthood… except for one notable exception:”


“The hormonal milieu present in pregnant women works to create new neural circuitry and further develop parts of the brain responsible for reasoning and problem solving. So, if you’re a female and need a cerebral kick-start, get pregnant.  If you’re gender deficient (i.e. male) you have to resort to more nuanced methods of warding off cognitive deflation.” 


Back to the Global Macro Grind


“Cognitive Deflation”. Bro, that’s what I’m talking about. I love that stuff!

On Twitter, I affectionately call some of the people I do not know, “bro.” If I’m really in a good mood, I might call one of these beauties something like “princess.” But that’s a special name that usually calls for very special circumstances.


When it comes to fading consensus, you need to pay attention to where the bros are at all times. If Bernanke understood how markets trade, he’d pick up on this pretty quickly.


Toning down the raging net long position of over +325,000 contracts in Oil futures and options contracts (and giving Americans a long awaited Tax Cut at the pump), would be easy. Just have Obama tell the bros that Bernanke is out of pills.


A version of that happened yesterday. Since the last thing Bernanke actually wants is for Gold Bond bulls to crash again, the shift in expectations was at first very subtle – then it happened all at once.


Viagra really should be sponsoring C-SPANs Congressional testimony coverage at this point. Here was the play-by-play:

  1. Bernanke’s testimony said nothing new (he wasn’t incrementally more dovish than when he spoke last time)
  2. The US Dollar Index immediately went from red to green
  3. And both Gold and Oil futures went from green to red

Both Gold and these bastardly looking Gold Miners (GDX) then started going really red – and my contra-stream of bros on Twitter were quick to say “buy the dip, he’s going to say something else.”


He didn’t.  Then there was more red, the bros turned into crickets, and the blue pill rally was over.


I know. It’s so anti-climactic at this point that it could make you cry. But why should it? Why do we need the entire world to wake-up every morning with the hope of a false dawn? Why has this game turned into purely front-running the Fed?


As Melvin Udall (Jack Nicholson in As Good As It Gets) said to his dog Verdell, “Don’t be like me. Don’t you be like me!” And since we aging men don’t have much upside left, we need to switch it up from time to time anyway.


The upside to the Hedgeye plan for Cognitive Deflation (i.e. getting it through the thick skulls of the bros that Bernanke is done and Oil could go to $65), would be the most exciting bull market catalyst for US stocks of the year – sustainable growth!


Think it through. Both Reagan and Clinton did:

  1. Average Price of Oil 1983-1989 = $22.16/barrel
  2. Average Price of Oil 1993-1999 = $18.63/barrel

Both Presidents signed off on massive #StrongDollar Tax Cuts that drove US Consumption growth through the roof:

  1. Average US GDP Growth 1983-1989 = +4.31%
  2. Average US GDP Growth 1993-1999 = +3.84%

So what say you to leader of the bros, President Obama?


I say it’s time to get rid of this un-elected academic. The bros can handle it. They are big boys who can always find something else to chase. Buying into any gold rally lasting for more than 4 hours requires medical attention anyway.


Our immediate-term Risk Ranges are now:


UST 10yr yield 2.46.-2.75%

SPX 1663-1701

VIX 13.25-15.01

USD 81.96-83.59

Brent 106.99-108.95

Gold 1210-1294


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bernanke's Blue Pills - Blue Pills


Bernanke's Blue Pills - vp 7 18

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.47%
  • SHORT SIGNALS 78.71%

August 1, 2013

August 1, 2013 - dtr



August 1, 2013 - 10yr

August 1, 2013 - spx

August 1, 2013 - nik

August 1, 2013 - dax

August 1, 2013 - dxy

August 1, 2013 - euro

August 1, 2013 - oil



August 1, 2013 - VIX

August 1, 2013 - yen

August 1, 2013 - natgas
August 1, 2013 - gold

August 1, 2013 - copper

Liberty's Flows

“We are sowing the seeds of Ignorance, Corruption, and Injustice, in the fairest field of Liberty.”

-John Adams


According to Joseph Ellis in Revolutionary Summer, that’s what John Adams wrote to Joseph Hawley on August 25, 1776. Adams could have said that about heavy-handed government in August of 2013 – and, in principle, he’d still be right. But betting against the prospects of American growth rising above compromised politicians has often been wrong.


Politics versus people - that’s not new. Americans generally dislike socialists and/or plutocratic pomp. On August 13, 1776, George Washington called the British out like most of us call out conflicted central planners today: “Their cause is bad; their men are conscious of it, and if opposed with firmness and coolness… victory is most assuredly ours.” (Revolutionary Summer, pg 86)


I like that, a lot.


Back to the Global Macro Grind


I also like seeing all of the growth factors in our multi-factor model rip to the upside. It’s especially fun to watch on days like yesterday when my contra-stream (I built one on Twitter of market pundits who are wrong at least 65% of the time) starts whining.


Winning versus whining – that’s not new either. There are a lot of losers out there who whine but, over time, Americans eventually put those people on mute and roll with winners who have principles they can associate with.


There’s been a lot of whining about US GDP “dropping to 1%” in Q213 – but that didn’t happen either. US GDP has by no means had a championship season, but it’s been a heck of a lot better than Q412’s 0.38% - and it’s what happens on the margin in macro that matters to us most. Here’s the Q213 breakdown:

  1. Consumption (C) = +1.8% quarter-over-quarter, contributed +1.22% to Q213 GDP
  2. Investment (I) = +9.0% quarter-over-quarter, contributed +1.32% to Q213 GDP
  3. Government (G) = -0.4% quarter-over-quarter, contributed -0.1% to Q213 GDP 

In other words, government spending fell as Consumption and Investment rose. Good, eh? It’s not a new story in America. It just hasn’t happened in a while – and that’s the point.


Since C + I + G + (EX-IM) is the GDP equation, whiners (particularly partisan ones) will add that:

  1. Net Exports (EX-IM) = +5.4% quarter-over-quarter, but contributed negatively to GDP by -0.81%
  2. Inventories contributed positively to GDP by +0.4%
  3. Inflation (PCE Deflator) was at its 2nd lowest level ever of +0.8%

But let’s get real here – who really cares about those line items when the big stuff (Consumption and Investment growth) is finally going the right way for once?


To give them some air-time, the Princeton/Yale/Harvard Keynesian Econ 101 textbooks will also whine about “net exports being down because the Dollar went up” and “disinflation is a threat to our academic dogma” – but again, who cares?


I went to Yale and, admittedly, was confused about this “inflation is good, deflation is bad” concept. My family doesn’t buy into the class warfare labeling thing, but we do buy (and invest) more when the purchasing power of our hard earned currency appreciates.


Is Bernanke’s fear-mongering about “deflation” really the hobgoblin?


We answer that on slide 36 of our current Global Macro Themes deck (ping if you’d like a copy) where we outline a recent study by Atkeson & Kehoe that spans a time period of 180 years (across 17 countries) that found no relationship between deflation and depressions.


The objective study actually found a greater number of episodes of depression with economies experiencing inflation than with deflation. Over the 180 year time period:

  1. 65 out of 73 deflation episodes had no depression
  2. 21 out of 29 depressions had no deflation

So what say you President Obama? Yes, we know. We know that you know that we know.


Bernanke’s cause is no longer saving us from the end of the world. That was so 3-5 years ago. Perversely, it’s to talk down growth in order to uphold un-precedented (and un-elected) central planning power on the order that this country hasn’t seen in 237 years.


But he’s conscious of it. So is the country.


Mr. Market gets it too. That’s why all of these end of the world (#EOW) trades that were driven by an explicit Policy To Inflate (Gold, Treasury Bonds, etc.) are coming unglued. That’s also why growth investors are getting paid.


Liberty flows. She still plays to the hands of the independent minds. We don’t have to be long Bernanke Bubbles in order to get paid. We have to be right on the slopes of the lines in our model.


Growth’s slope is up; Inflation’s is down – and unlike the government, I like that, a lot.


Our immediate-term Risk Ranges are now as follows (12 big macro risk ranges are in our new Daily Trading Range product):


UST 10yr 2.52-2.71%


Nikkei 135

VIX 11.96-13.85

Yen 97.12-101.01

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Liberty's Flows - Chart of the Day


Liberty's Flows - Virtual Portfolio

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