Client Talking Points


The Shanghai Composite had a big move off its lows... all the way up to our 2,123 TREND line... and then it failed. China's stock market is now down two consecutive days (-1.2%) from a critical signaling line in our model. The only major economic indicator that went less bearish was the Chinese Yield Spread (+44 basis points). Incidentally, Japan was also in the red down -2.1% overnight. Bottom line? Cisco's recent comments summarize our Global Macro view – USA is not Asian demand right now.


Across the pond, the economic data continues to surprise on the upside. UK Retail Sales for July were up +3% year-over-year vs up +2.2% in June. We call that #GrowthAccelerating. And now, both the Pound and the FTSE are bullish TREND in our Hedgeye model. No, we have not seen that combination in a long time. Yes, I need to buy both.


The rip of the morning? It belongs to Brent. It jumped +1.1% to $111.39. Now that rip is certainly not going to help anyone in this world other than those folks who are long of it. Our long-term TAIL risk line for Brent is $108.11. So keep a close eye on that on your screens. We have no position here.

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


BREAKING: SP500 closes down -0.52% on the day, extending correction from all-time high to a whopping -1.4% @KeithMcCullough


It is better to remain silent and be thought a fool than to open one's mouth and remove all doubt. - Mark Twain


It will cost an estimated $241,080 for a middle-income couple to raise a child born last year for 18 years, according to a U.S. Department of Agriculture report released yesterday. That's up almost 3% from 2011 and doesn't include the cost of college.

Moody Markets

“How far is it wise to respond to a mood?”

-Frank Oppenheimer


Since yesterday’s Early Look focused on asking ourselves baseline risk management questions, I’ll roll with a good one that particle physicist Frank Oppenheimer asked his older brother in the 1930s. Here’s how Robert Oppenheimer answered it:


“… my own conviction is that one should use moods, but not be greatly deflected by them; thus one should try to use the gay times to do those things one wants to do that require gaiety, and the sober moods for the work one wants, and the low moods for giving oneself hell.” (American Prometheus, pg 95)


I’m a moody guy. So that answer spoke to me. Sober every morning, working. Giving myself hell about all my market mistakes come the afternoon. Sounds about right.


Back to the Global Macro Grind


Markets are moody too. They rarely cooperate with all of your positions. And they don’t care whatsoever about your views. Tough relationship we have with this Mr. Market, I know. That’s why I am lobbying the Fed to call her Mrs.


Early last week I polled you asking whether you thought the latest #EOW (end of the world) correction in US stocks would be on the order of 1, 2, or 5%. Since only one client answered 1%, I figured the probability of that being the correct answer was going up.


If you answered 5%, please don’t go all caps or moody on me. Take a breath. It’s just an opinion. And we all have one or we wouldn’t be playing this game. Currently the correction (from the all-time closing high of 1709 in the SP500) is -1.4%.


Now what? Well, let’s redo the poll with some forward looking information:

  1. Immediate-term TRADE support is 1680 = -1.7% from the all-time high
  2. Intermediate-term TREND support is 1637 = -4.2% from the all-time high
  3. Immediate-term risk range for US Equity Volatility (VIX) = 11.62-13.71

So, what do you think?


A)     1% correction (i.e. the market closes up today and yesterday was it)

B)      2% correction (somewhere between today and early next week, that’s it)

C)      4% correction (re-testing the TREND line, which we haven’t done since late June)


I’m going with B again.


If the market closes up on the day today, that will make me and everyone else (other than anonymous client Mr. X) who answered the poll last week wrong. If that happens, we can all just give ourselves hell.


What would have been really hellish in 2013 is missing this call on US employment #GrowthAccelerating. Again, we don’t care about the line-items in the BLS data; we only care about the slope of the line in the only leading indicator we can find for the bond market: NSA (non-seasonally adjusted) rolling US jobless claims. Most of the monthly payroll data is statistically useless.


We’ll get that weekly US Jobless Claims data point this morning – and if there’s one data point that matters to both the long-end of the US Treasury curve (and the US stock market), that is it. So let’s put this morning’s number in the context of recent history:

  1. Last week’s NSA claims number came in -10.5% year-over-year (slight improvement vs the previous week)
  2. The average for the last 12 weeks is claims falling -8.8% year-over-year
  3. Giving exception to a single anomalous data point 3 weeks ago, avg y/y improvement over 12 weeks = -9.7%

Yes, that’s a lot better than your parroting partisan pundit would lead you to believe. It’s also our definition of not only what matters to the employment vs Fed story, but what Mr. Market trades on – the 10yr US Treasury Yield fits NSA rolling claims like a glove.


Oh, and there’s seasonal headwinds in this jobless claims series that become tailwinds in September (that can run through February). Most (other than Mr. Bond and Stock Market) don’t expect to see the jobs picture improve, so it probably will.


One other way to measure the moodiness of it all is the weekly II Bull/Bear Spread:

  1. Last week, Bulls dropped from 51.6 to 47.4%
  2. Last week, Bears rose from 18.5 to 20.6%
  3. Last week, Bull/Bear Spread re-tested its most bearish level since Q2 at 2680 basis points wide

Yep – everyone says everyone is bullish. But they aren’t. Less than 50% are bullish. That’s really bearish. And the last time we saw a 2600bps handle on the Bull/Bear spread was in the 1st week of July. The SP500 proceeded to move from 1631 (our new TREND support) to 1709 within a month.


So, if you are all beared up (on stocks) this morning, just remember that bullish gaiety can quickly become a mid to late month-end move. The profitable bearish mood is in bonds. We’ll see if this morning’s jobless claims print reiterates that. September is coming.


UST 10yr 2.64-2.75%


VIX 11.62-13.71

USD 80.94-82.02

Yen 97.37-99.45

Brent 108.11-111.49


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Moody Markets - Claims 080813


Moody Markets - Virtual Portfolio

Liberty's Flows

This note was originally published at 8am on August 01, 2013 for Hedgeye subscribers.

“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%

SPX 1682-1699

Nikkei 13421-14295

VIX 11.96-13.85

Yen 97.12-101.01

Gold 1279-1327


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Liberty's Flows - Chart of the Day


Liberty's Flows - Virtual Portfolio

August 15, 2013

August 15, 2013 - dtr



August 15, 2013 - 10yr

August 15, 2013 - spx

August 15, 2013 - nik

August 15, 2013 - ftse

August 15, 2013 - dxy

August 15, 2013 - euro

August 15, 2013 - oil



August 15, 2013 - VIX

August 15, 2013 - yen

August 15, 2013 - natgas
August 15, 2013 - gold

August 15, 2013 - copper



TODAY’S S&P 500 SET-UP – August 15, 2013

As we look at today's setup for the S&P 500, the range is 30 points or 0.20% downside to 1682 and 1.58% upside to 1712.                                   










  • YIELD CURVE: 2.40 from 2.39
  • VIX closed at 13.04 1 day percent change of 5.93%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:15am: Fed’s Bullard speaks on economy in Louisville, Kentucky
  • 8:30am: Initial Jobless Claims, Aug. 9, est. 335k (prior 333k)
  • 8:30am: Empire Manufacturing, Aug. 7, est. 10 (prior 9.46)
  • 8:30am: Consumer Price Index M/m, July, est. 0.2% (prior 0.5%)
  • 9am: Total Net TIC Flows, June (prior $56.4b)
  • 9:15am: Industrial Production, July, est. 0.3% (prior 0.3%)
  • 9:45am: Bloomberg Consumer Comfort, Aug. 11
  • 10am: NAHB Housing Market Index, Aug., est. 57 (prior 57)
  • 10am: Philadelphia Fed Biz Outlook, Aug., est. 15 (prior 19.8)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: Fed to purchase $3b-$4b notes in 2019-2020 sector
  • 11am: Treasury announces offering size for auction of 5Y tips


    • 11am: FDIC hosts teleconference on interim final capital rule for community banks approved by board on July 9


  • Amgen talks to buy Onyx said to stall over drug trial data
  • JPMorgan said to expect multiple fines as Whale traders charged
  • AMR bankruptcy plan goes to judge after U.S. suit on merger
  • Cisco cutting jobs as Chambers turnaround hit by sales slowdown
  • Credit Cards report July Charge-Offs, delinquencies
  • Gold bull Paulson cuts SPDR stake by half in 2Q amid bear market
  • Cohen’s SAC reduces U.S. stock holdings by $2b in 2Q amid probe
  • BP asks judge to deny investors’ bid to sue as group over spill
  • Loeb’s Third Point Re raises $276m pricing IPO at low end
  • U.K. July retail sales rise more than forecast amid heatwave
  • Lenovo 1Q profit beats ests. on handset market share gains
  • Berkshire 13F filing due today after Edgar glitch: Reuters


    • Applied Materials (AMAT) 4pm, $0.19
    • Aspen Technology (AZPN) 4:02pm, $0.08
    • Bally Technologies (BYI) 4:01pm, $0.94
    • Dell (DELL) 4:01pm, $0.24
    • E-Commerce China Dangdang (DANG) Bef-mkt, $(0.15)
    • Estee Lauder (EL) 7:30am, $0.21
    • Kohl’s (KSS) 7am, $1.04
    • Nordstrom (JWN) 4:05pm, $0.88 - Preview
    • Pan American Silver (PAA CN) Bef-mkt, $0.05
    • Perrigo (PRGO) 7:44am, $1.56
    • Wal-Mart Stores (WMT) 7am, $1.25 – Preview


  • Gold Bull Paulson Cuts SPDR Stake by Half Amid Bear Market
  • Cocoa Crunch in Ivory Coast Heads for Bull Market: Commodities
  • Gold Demand Fell 12% to Four-Year Low in Quarter on ETP Selling
  • Brent Crude Rallies to Four-Month High on Crackdown in Egypt
  • Soybeans Rise to Three-Week High on Concern About Dry Weather
  • Copper Declines Amid Speculation Fed Will Reduce Debt Purchases
  • Aluminum Premium Trading Rises as Regulators Focus on Warehouses
  • Commerzbank’s Physical Gold Trading Is Active Amid Bear Market
  • Gasoline Slumps as End of Driving Season Nears: Energy Markets
  • Indonesia’s Kharisma Sells 15,000 Tons of Crude Palm Oil (Table)
  • Indonesia’s July Tin Exports Seen Dropping on Low Prices: Timah
  • Gold Rebound to $1,600 Seen by Fund Manager Day on Bank Stimulus
  • Oil Pipeline From Kurdistan Makes Gulf Keystone Target: Energy
  • Gold Gains to Three-Week High on Signs of Demand as Dollar Drops


























The Hedgeye Macro Team













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