Toppy? SP500 Levels, Refreshed

Takeaway: If the USD and rates fail here, this market has plenty of downside risks.

This note was originally published November 01, 2013 at 11:56 in Macro



I’m buying Gold and Treasuries for the first time in a year (today) as the S&P 500 signals lower-highs and the VIX signals higher-lows. If the USD and rates fail here, this market has plenty of downside risks.


Across our core risk management durations, here are the lines that matter to me most:

  1. Immediate-term TRADE resistance = 1771
  2. Immediate-term TRADE support = 1744
  3. Intermediate-term TREND support = 1683

In other words, with the all-time closing high (1771) registering as resistance, there’s plenty of mean reversion downside. If the market stops me out of these thoughts, so be it. But sentiment (II Bull/Bear Spread) is tracking at its year-to-date high now too.




Keith McCullough

Chief Executive Officer


Toppy? SP500 Levels, Refreshed - km1

Buy the EURO: #EuroBulls

That’s right, we believe now is a great opportunity to get long the EUR/USD on weakness [etf: FXE].


Draghi and some of his lieutenants (including ECB Governing Council member Ewald Nowotny) talked down the common currency mid-week, suggesting that the ECB was ready to issue liquidity measures to spur the broader economy.  We heard whispers of another round of LTRO, and then the manic media ran with headlines that the ECB is going to cut rates, all of which sent the EUR/USD correcting over 2%.


By our score, the first two LTROs that Draghi issued were complete failures – banks either quickly repaid these loans and/or capitalized playing the spread on these cheap 1% loans, but in any case, did not lend to the real economy. This time around, we believe Draghi has 1). learned his lesson and will not issue another failed LTRO program to boost liquidity, and 2). has suggested in press conferences and other commentary that the data he’s tracking shows initial positive signs of a recovery across the Eurozone, which therefore suggests to us that neither liquidity measures nor a rate cut (why waste the powder now?) would be warranted over the near term.  


Our #EuroBulls Purview:  as we discussed as one of the team’s Q4 quarterly macro themes, #EuroBulls, we’re bullish on German and UK equities (see Keith’s latest video for that update) and bullish on the EUR/USD, built on a few central factors:

  • Bernanke/Yellen continue to burn the USD via delaying the call to taper (note: we do not expect any update in the December meeting), #EuroBulls
  • EUR strength reflects country strength: recent data continues to reflect that the Eurozone economy has stabilized and is beginning to accelerate, #EuroBulls
  • The deflation of inflation across the Eurozone equates to more consumer purchasing power via lowering the consumption tax,  #EuroBulls
  • The ECB’s hawkish policy, which we believe is the decision not to cut rates or issue imminent liquidity, is #EuroBulls
  • The Data: as we show below in a number of updated charts from our #EuroBulls Q4 themes deck, from PMIs and Confidence to Auto Sales and Factory Orders, the trend in the data is positive : this supports our conviction to be overweight European equities over U.S. equities.
  • Further, we see a strong positive correlation between the EUR/USD and the DAX, encouraging us to be long the German DAX via the eft EWG.  [We’re also bullish on the UK’s FTSE, via the etf EWU]


By the Charts:

  • Our levels in the sand:

Buy the EURO: #EuroBulls  - zz. EUR LEVELS NEW


  • PMIs bouncing:  across the Eurozone, the majors have broadly held above the 50 level indicating expansion.  While we don’t expect gangbuster moves in PMIs over the intermediate term, we expect them to indicate the acceleration in growth we’re seeing from low levels.

Buy the EURO: #EuroBulls  - zz. pmis


  • Confidence Up: as we look out across Economic, Consumer, and Business Confidence, an upward trend is solidified. We expect this improvement to continue.

Buy the EURO: #EuroBulls  - zz. consumer conf


Buy the EURO: #EuroBulls  - zz. bus conf


  • Retail Sales: as a sign of the consumer’s health, and confidence, retail sales are even going up across the periphery: Italy Business Confidence 97.3 OCT vs 96.8 SEPT; Spain Retail Sales 2.2% SEPT Y/Y vs -4.4% AUG; Greece Retail Sales -8.9% AUG Y/Y vs -14.1% JUL

Buy the EURO: #EuroBulls  - zz. italy retail


  • Even Autos are getting a bounce:  New Commercial Vehicle Registrations for the EU just recorded +6.1% Y/Y in September. Any increase in big ticket items is a signal to us of confidence.

Buy the EURO: #EuroBulls  - zz. clunkers


  • Deflating the Inflation: anchoring improving retail sales and confidence is deflation of the inflation.  While Draghi has “failed” to meet his 2% CPI target (currently at 0.7% Y/Y vs 1.1% in September), deflating the inflation equates to a lower consumption tax, which will boost real inflation adjusted growth.

Buy the EURO: #EuroBulls  - zz. inflation target


  • The CPI Turn Matters: the year over year changes are huge!

Buy the EURO: #EuroBulls  - zz. inflation comp


  • German Preference: we continue to like the DAX, on a positive correlation to the EUR/USD. Fundamentals remain grounded with a low unemployment rate (6.9% vs 12.2% in the Eurozone), CPI at 1.3% Y/Y, strong PMIs and consumer and business confidence, and an inflection in factory orders to the upside. [Long German DAX via the etf EWG]

Buy the EURO: #EuroBulls  - zz. eur vs das new


Buy the EURO: #EuroBulls  - zz. germany factory



Enjoy the weekend!


Matthew Hedrick


3Q13 Earnings Scorecard: Macro Monopolization

Macro's Monopolization:  The EPS-Sales Beat-Miss spread continues to widen vs 2Q13 and the TTM average while macro, more than fundamentals, has persisted as the dominate driver of beta during earnings season.  Forecasting fundamentals has been something of an antediluvian exercise thus far with only 60% of companies that have beaten estimates subsequently outperforming the market.   


Beat-Miss:  Beat-Miss trends remained largely static over the last week as 53% and 75% of SPX constituent companies have beaten Sales and Earnings estimates, respectively.  With three-quarters of companies having reported, the Sales-EPS beat-miss spread continues to widen vs the 2Q13 (54%/71%) and TTM (51%/72%) averages. 


3Q13 Earnings Scorecard:  Macro Monopolization - ES Table 110113


Style Factor Performance:   Reported results vs expectations across style factors has flattened out in the latest week with the exception of high topline growers, where high growth equities continue to perform better vs existent estimates that their slow growth counterparts. 


3Q13 Earnings Scorecard:  Macro Monopolization - ES SFP Table 110113


Fundamental Performance:    Slight deterioration WoW with 51% and 53% of companies registering sequential acceleration in sales growth and earnings growth, respectively.  55% of companies are reporting sequential expansion in operating margins as cost initiatives, modest efficiency gains and muted wage pressures continue to drive peak returns to capital.  At the sector level, Materials, Tech, Industrials and Staples are reflecting improving trends across sales, profitability and margins.


3Q13 Earnings Scorecard:  Macro Monopolization - ES OP Table 110113 


The Post-Print Random Walk?  Below we chart company Beats & Misses vs subsequent market adjusted 3-day performance.

  • Sales: 60% of companies that beat sales estimates subsequently outperformed the market to the tune of 4.0% on average.  The other 40% of companies that beat sales estimates underperformed the market over the subsequent 3-day period by an average of -3.7%.  Subsequent performance for companies missing Sales estimates was similarly mixed.  
  • EPS:  57% of companies beating EPS estimates have subsequently outperformed the market by ~3.8% on average while 43% went on to underperform the market by an average of -3.9%. Subsequent performance for companies missing EPS estimates was similarly mixed.  

3Q13 Earnings Scorecard:  Macro Monopolization - BM Sales


3Q13 Earnings Scorecard:  Macro Monopolization - BM EPS


Christian B. Drake


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U.S. Macro: A Catch-up Week for Domestic Data

A quick data flow management update here as it relates to the U.S.   


This week was a fairly heavy one for domestic macro data, but much of the flow consisted of delayed government sourced data releases playing catch-up post the government shutdown.


Immediately below is the summary list of delayed releases by period with this week’s releases highlighted in blue.  A more detailed highlight of the week’s data follows. 


Next week’s domestic macro calendar is equally heavy as we get ISM services for Oct, the latest read on Personal income and Spending, the advance 3Q13 GDP estimate, the 1st monthly read on confidence post the government shutdown resolution, and the BLS Employment data for October.  Plenty of speculative fodder for the Taper tea-leaf reading contingent.


U.S. Macro:  A Catch-up Week for Domestic Data - Delayed Release TableM



ISM:  Strongest Reading Since April 2011

Today’s ISM Manufacturingrelease – the 1st and most consequential private sector release of the month – showed domestic manufacturing activity remained healthy to start the fourth quarter. The composite indexed advanced 20bps MoM to its highest level since April 2011 with new orders holding >60 for a 3rd consecutive month. 


Manufacturing and consumption of goods has accelerated and helped to provide an offset to muted services consumption growth as real disposable personal income growth has remained constrained alongside (still) lackluster private sector wage inflation and the negative, furlough/sequestration impacts at the Federal level.


U.S. Macro:  A Catch-up Week for Domestic Data - ISM Table Oct


INDUSTRIAL PRODUCTION & RETAIL SALES:  Delayed, September IP and Retail Sales numbers reflect the same trend prevailing in the (leading) ISM data for October. 


  • Retail Sales:  Headline Retail Sales declined in September but that was mostly on the back of sequential weakness in auto sales as Retail Sales ex-Auto’s and ex-Autos & Gas both improved sequentially.  At the industry level Food and beverage gained against an easy comp and Electronics were strong with i-products and the Grand Theft Auto release helping support sales in the category.


  • Industrial Production:  Solid print as Industrial Production and Capacity Utilization hit their strongest levels since Feb. 2008 and July 2008, respectively.  Growth in Durables (6% weight) decelerated sequentially on a MoM basis but accelerated on a YoY and 2Y basis while growth in NonDurables (21% weight in Index) accelerated sequentially, moving back to positive growth after two consecutive months of decline.  


U.S. Macro:  A Catch-up Week for Domestic Data - Retail Sales


U.S. Macro:  A Catch-up Week for Domestic Data - IP Table Oct


Initial Claims: Inconclusive

Taking this week’s figures at face value, the labor market appears to be decelerating modestly.  However, it’s unclear whether the the distortive impact of the CA technology upgrade issue has fully resolved.


If California has, indeed, trued up its backlog of unprocessed claims in full than the observed deceleration in labor market improvement could be taken to accurately reflect deterioration in organic trends.  If, on the other hand, a residual drag from the computer upgrade persisted through the latest week, we would expect a return to trend line improvement (approx -10% YoY) over the next couple weeks.   The picture should be clearer next week when we get the state level data. 


Please see this weeks note: INITIAL CLAIMS: INCONCLUSIVE for detail.


U.S. Macro:  A Catch-up Week for Domestic Data - JS 1


U.S. Macro:  A Catch-up Week for Domestic Data - JS 2


Christian B. Drake





Takeaway: Global CPI readings should trend higher in the short-term, but to low absolute levels before resuming their current disinflationary trend.

This note was originally published January 25, 2013 at 16:41 in Macro



  • After several meetings on the road with clients and prospective clients this week, it became clear to our team that a noteworthy competitor of ours is making noise about a demonstrable pickup in inflationary pressures that will slow inflation-adjusted GDP growth across the globe.
  • While we would agree that CPI readings are going to, on balance, trend higher here in 1Q and perhaps through 2Q as well, we completely disagree with the premise and conclusion of the aforementioned view.
  • Broadly speaking, we think reported CPI readings are poised to continue their rocky path lower over the next several quarters, fully equipped with a transient bounce(s) to demonstrably lower cycle peaks relative to their 2008 and 2011 highs.
  • Our call for reported inflation to broadly continue making a series of lower-highs is backed by our call for the DXY continue making a series of higher-lows while the global commodities basket (via CRB Index) continues to make a series of lower-highs.


At Hedgeye, we have developed a proprietary modeling process that allows us to front-run both consensus estimates of and the actual reported growth and inflation readings of any country, region or economic bloc (such as the world, on a GDP-weighted basis). In the note below, we walk through what this rigorous analytical process is signaling to us right now.



Unlike many researchers who impose their theses and theories upon the market – usually the “smartest guys in the room” types – our research process remains grounded in uncertainty. We use a proven, three-factor quantitative overlay to consistently guide us to the most appropriate places to “fish”.


Right now, those signals are suggesting the US Dollar Index is poised to continue making a series of higher-lows over the intermediate-to-long term. That view is underpinned by our uber-bullish bias on US housing, our street-leading expectations for US employment growth and our call for a currency crisis in Japan.




We have been vocal about our call for the domestic housing market and the yen in recent weeks/months, as culminated in our 1Q13 Macro Themes of #HousingsHammer and #Quadrill-yen. Our updated thoughts on the domestic labor market can be found in the notes below:



Moving along, we anticipate that the confluence of the domestic factors highlighted above will result in the FX market pulling forward its expectations of the culmination of QE (which, on the margin, would likely be functionally equivalent to a rate hike).


That’s explicitly bullish for America’s currency and bearish for commodities and international inflation hedges – which are broadly priced in and settled in US dollars internationally.






At least for now, domestic interest rates are confirming this view:





Now that we know where to look from a quantitative perspective, we turn to our predictive tracking algorithms to guide us to hard numbers on the economic data front. With respect to Bloomberg’s GDP-weighted world CPI YoY index specifically, our algorithm backtests with an r² of 0.76 on the median estimate.


For background, the model is purposefully designed to produce a high, mid and low estimate and we use the respective market-based quantitative signals to guide our expectations to the higher or lower of the two economic data risk ranges.


Applying the same algorithm to a particular country, region or economic bloc’s GDP growth figures allows us to triangulate the associated sequential deltas and monetary/fiscal policy implications on our GIP chart. Currently, the world is entering Quad #2 on this analysis (i.e. Growth Accelerates as Inflation Accelerates).




Taking a broader perspective of what the model is signaling to us, we can rest assured that any near-term pickup in reported inflation across the world (again, generally speaking) will be both transient and to absolute levels that we would consider not threatening to economic growth.




As the chart above highlights, our model has been better than bad at calling for major inflection points and trends in global inflation readings for the past 4-5 years, so we feel comfortable with its summary outputs in the absence of disconfirming evidence.



It would be intellectually lazy to rest our call on the confluence of quantitative signals and the output of our modeling of economic data. Rather, the appropriate exercise – which is what we spend all day doing when not publishing research or engaging with clients – is to constantly vet confirming or disconfirming evidence.


With respect to commodities specifically – which we think holds a slightly leading relationship with reported CPI readings globally (varies by country based on index weights) – we are coming up with some particularly muted YoY gains when you streamline current prices throughout the year, which is in and of itself a generous assumption.


In fact, the current estimate of a JUN ’13 peak of +10% is well off the peak YoY growth rates of we saw in the summer of 2008 (+45.4%) and the summer of 2011 (+37.2%).




Our Global Macro team continues to hold the view that commodities – particularly food and energy price inflation/deflation - have become the largest contributors to the direction and magnitude of global inflation readings in the post-crisis era of muted/nonexistent labor and income growth across the key developed markets. Slack capacity utilization also remains a headwind for the economic growth-driven inflation policymakers have been desperately searching for across much of the developed world.


You can see the obvious aforementioned relationship in the following chart of median YoY CPI readings of the US, Eurozone and China overlaid with our commodity price sample:




Net-net-net, it’s really tough to get to anything more than +3% inflation in the world’s three largest economies on a median basis by mid-summer without some meaningful degree of commodity price inflation from here – which is precisely what we do not expect to happen. If anything, further weakness across key commodity markets should augment our call for lower-highs in global reported inflation readings throughout the year.


Looking to the previous chart, we don't find it at all ironic that the universal view of "price stability" across developed central banks anchors on +2% YoY CPI when considering that the same +2% happens to align with neither inflation nor deflation in international commodity markets. The deep simplicity of chaos theory strikes again...


On the disconfirming evidence side, both Oil and the EUR are outliers here; each looks good quantitatively at the current juncture and both stand completely counter to our call for strength in the DXY and weakness across the commodity complex (energy prices are a key driver) over the intermediate term.






While it’s rather difficult for us to endorse a rock-solid fundamental call on either asset class at the current juncture, we think our non-consensus fundamental thesis regarding the USD and international commodities prices will ultimately prevail. For now, however, both crude oil and the EUR remain the two largest financial market-based risks to this view.



All told, our models, signals and the data all suggest global inflation readings should trend higher in the short-term, but to low absolute levels relative to their prior peaks. As such, the current disinflationary trend across the world economy is very much intact.


Have a wonderful weekend,


Darius Dale

Senior Analyst