Don't Cheat

This note was originally published at 8am on July 22, 2013 for Hedgeye subscribers.

“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%

SPX 1675-1702

VIX 12.20-14.53

USD 81.87-83.21

Yen 99.30-101.26

Gold 1241-1318


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 – August 5, 2013

As we look at today's setup for the S&P 500, the range is 20 points or 1.03% downside to 1692 and 0.14% upside to 1712.                      










  • YIELD CURVE: 2.31 from 2.30
  • VIX closed at 11.98 1 day percent change of -7.42%


MACRO DATA POINTS (Bloomberg Estimates):

  • 10am: ISM Services Index, July, est. 53.0 (prior 52.2)
  • 11am: Fed to buy $1.25b-$1.75b debt in 2036-2043 sector
  • 11:30am: U.S. to sell 3M, 6M bills
  • 11:45am: Fed’s Fisher speaks on economy in Portland, Ore.
  • U.S. Weekly Rates Agenda


    • Transportation Sec. Anthony Foxx, NHTSA hold event highlighting latest pedestrian fatality data, agency efforts to reverse trend of rising fatalities, 11am
    • Washington Weekly Agenda


  • Apple can keep selling iPhone 4 after reprieve from U.S.
  • U.S. decision seen aiding cheaper iPhone push
  • China services, manufacturing indicate slowdown stabilizing
  • Terrorism threat extends U.S. embassy closures through Aug. 10
  • CBS blackout continues on Time Warner Cable stations
  • New York Times agrees to sell Boston Globe to John Henry
  • Fed should reverse commodity-trading policy: CFTC’s Chilton
  • MBK said in exclusive talks to buy ING’s Korean insurance unit
  • California Governor Brown ends immediate threat of BART strike
  • 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. Services, BOJ, Carney, HSBC, Rohani: Wk Ahead Aug. 5-10


    • Atlas Pipeline Partners (APL) 4:35pm, $0.39
    • Bristow Group (BRS) 5:05pm, $0.94
    • Dun & Bradstreet (DNB) 4:15pm, $1.52
    • EW Scripps (SSP) 7:30am, $0.07
    • EXCO Resources (XCO) 4:01pm, $0.11
    • Fidelity National Financial (FNF) 4:04pm, $0.63
    • GT Advanced (GTAT) 4:15pm, $0.09
    • Hologic (HOLX) 4:01pm, $0.37
    • Integrys Energy Group (TEG) 5:07pm, $0.37
    • Jack in the Box (JACK) 4:01pm, $0.38
    • Kosmos Energy (KOS) 7am, $(0.10)
    • Macerich (MAC) Aft-mkt, $0.81
    • Mindray Medical Intl (MR) 5pm, $0.50
    • PAA Natural Gas Storage (PNG) 4:07pm, $0.19
    • Plains All American Pipeline (PAA) 4:05pm, $0.60
    • ProAssurance (PRA) 4:01pm, $0.87
    • Retail Properties of America (RPAI) 4:01pm, $0.23
    • Rockwood (ROC) 6:28am, $0.76
    • Stone Energy (SGY) 4:03pm, $0.69
    • Sunstone Hotel Investors (SHO) 4:14pm, $0.30
    • Tesoro Logistics (TLLP) 4:30pm, $0.47
    • Tyson Foods (TSN) 7:30am, $0.60
    • Unum Group (UNM) 4pm, $0.79
    • Volcano (VOLC) 4:05pm, $0.00
    • Vornado Realty Trust (VNO) 5:17pm, $1.21


  • Fed Should Reverse Commodity-Trading Policy, CFTC’s Chilton Says
  • p Commodities Market, Industry News »             
  • Gold Bulls Cut Wagers on Signs U.S. Growth Quickens: Commodities
  • U.S. Milk Climbs as Fonterra Halt Seen Spurring Demand Elsewhere
  • Corn Slumps to Lowest Since 2010 on Outlook for Record U.S. Crop
  • Brent Drops a Second Day as Libya Reopens Port, Rohani Appointed
  • Gold Swings Between Gains and Declines Amid Stimulus Speculation
  • Copper Swings Between Gains and Drops Amid Signs of U.S. Rebound
  • Palm Oil Declines as Global Cooking Oil Supplies Seen Expanding
  • Shale Drillers Pull Ahead of Global Oil Giants in Profit: Energy
  • Cocoa Net Long of Money Managers on Liffe Rose in Latest Week
  • Port Hedland Iron Ore Exports Drop as Shipments to China Decline
  • Metal Prices May Be Capped by Negative Economic Surprises
  • Lab Burger Reared to Challenge Real Meat Faces Taste Test Today
  • COMMODITIES DAYBOOK: Gold Bulls Cut Bets as U.S. Growth Quickens
  • Rusal Says Aluminum Premiums to Stay High as LME Tackles Backlog


























The Hedgeye Macro Team












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 80.46%
  • SHORT SIGNALS 78.35%

Market Generals

“In general, our Generals were out generalled.”

-John Adams


While that’s what John Adams wrote to his wife, Abigail, in October of 1776, it wasn’t an entirely accurate summary of what happened. The planned escape of American forces in October was based on a British battle lost, but it also helped them win the war.


Per Joseph Ellis in Revolutionary Summer, on September 5th, 1776, American General, Nathanael Greene, advised George Washington that a “retreat is absolutely necessary, and that the honor and interest of America require it.” (Ellis, page 135)


Although it wasn’t Washington’s style to retreat, Greene was right in advising the Continental Army to do what the Continental Congress probably wouldn’t understand. Out generalling the conventional wisdom of politicians requires flexible leadership.


Back to the Global Macro Grind


With the US stock market closing at yet another all-time high on Friday (SP500 +19.9% YTD), I’m advising the US Government to retreat from Quantitative Easing and let free-market prices start to clear.


While Bernanke has the Congress right freaked-out about the idea of interest #RatesRising, it’s the only way out of the long-term slow-growth problem they have perpetuated under both Bush and Obama economic policy making regimes.


Let the US Dollar strengthen and let US interest rates rise and you’ll get two big things:


1.       Continued #CommodityDeflation

2.       #Debt Deflation


Deflation isn’t a bad word inasmuch as retreat isn’t – so don’t let your local Keynesian of the Princetonian Econ 101 Regimen sucker you into thinking so. Inflations have caused more depressions in the last 180 years than deflations have (*Atkeson/Kehoe study).


What’s better, filling up your gas tank 10x for $100/pop, or filling it up 10x for $50? Send that brain teaser to someone on team Bernanke that takes a tax payer funded car service to work.


Tapering expectations have already:

  1. Raised the value of American Purchasing Power (US Dollar) by +3% YTD
  2. Deflated the value of Commodities (CRB Index, 19 commodities) by -4% YTD
  3. Crushed the net long futures and options spec positions in everything but Crude Oil contracts

If and when the debate moves from tapering to tightening, I think that we’ll finally get after some deflation at the pump. But we’re nowhere near having an economic General in the Obama Administration stand up for the little guy on this front (yet).


Looking at last week’s CFTC futures and options activity, a #StrongDollar #RatesRising week had the following impact:

  1. Total CFTC net long commodities position dropped -15% wk-over-wk
  2. Gold’s net long position fell for the 1st week in 5, down -7% wk-over-wk to +65,517 contracts
  3. Crude Oil’s net long position fell for the 1st week since late June, -5% wk-over-wk, to +318,819

To put that +318,819 net long position in Crude Oil in context, that’s 1-week removed from its all-time high. If you’re telling me Obama and Bernanke couldn’t smoke the oil price via monetary policy, I’ll buy you dinner (on them) for life.


#CommodityDeflation has helped drive the core of US Consumption Growth for the last 2 quarters, but that’s going to be less of a tailwind if Oil prices continue to trend higher. Last week, Brent Oil was up +1.7% - and it’s up another +0.3% this morning to $109.30/barrel. Our long-term TAIL risk line (to the upside) for Oil = $107.71/barrel.


Put another way, after getting smoked by Bernanke’s Policies To Inflate for the last 6 years, the US Consumer just got some purchasing power back and won a few quarterly battles. But if we don’t back off (taper) and eventually tighten, it’ll be your every day American who loses the inflation war.


Our immediate-term Risk Ranges are now:


UST 10yr 2.54-2.72%


VIX 11.72-13.85

USD 81.53-82.48

Brent Oil 107.99-109.67

Gold 1


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Market Generals - Chart of the Day


Market Generals - Virtual Portfolio


The Economic Data calendar for the week of the 5th of August through the 9th 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.



CHD – Expectations Deflating & Rates Rising

Church and Dwight reported 2Q13 EPS of $0.61 versus $0.60 consensus.  Top-line growth was underwhelming, with organic growth coming in at 3.2% but segment results were mixed with weather and variable consumer demand impacting performance.



#RatesRising Pressuring Staples: If we accept the premise that rising rates are negative for the XLP, it follows that such an outcome will likely pressure CHD’s stock price. Over the past four years, CHD and the U.S. 10-Year Yield have a negative correlation of -0.8.  As rates rise, we expect that to pressure XLP versus other sectors and CHD, given its premium multiple, could continue to underperform versus its peers. As the table below illustrates, CHD has outperformed its peers over the past three years but has lagged over the past three months.


CHD – Expectations Deflating & Rates Rising - 10yr yield chd xlp


CHD – Expectations Deflating & Rates Rising - home price action 8.3



Guide-Down: Management guided to 2% full-year organic sales from a previous range of 3-4% due to competitive pressure pushing the company to lower price/mix and weak results in the Specialty Products segment (6% of consolidated revenue). Productivity initiatives are sustaining gross margin expansion, which is a positive, but earnings guidance for 3Q of $0.73 falls short of consensus $0.75.


Management struck a decidedly cautious tone during the conference call, highlighting the fact that five of the company’s fourteen categories saw declining year-over-year sales while an additional five saw growth of less than 2%.


What we liked:

  • EPS beat expectations
  • Gross margin expanded 110 basis points unaided by commodity prices; gains were driven by productivity programs and sales growth
  • Operating income growth came in at 17.8% versus sales growth of 13.1%
  • Value brands (40% of revenue) continuing to appeal to price-conscious consumers
  • Growth potential of Avid business


What we didn’t like:

  • Lowering organic growth guidance
  • Consensus expectations above guidance for 3Q
  • Management’s commentary on more difficult operating environment


Rory Green

Senior Analyst

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.