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January 27, 2014

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Dog or Wolf?

“The hour between dog and wolf, that is, dusk.”

-Jean Genet


Customer questions on Friday went something like this: ‘Keith, was that a bull or bear? Dog or wolf? What do you think?’ I don’t know. But I’m not in the business of walking up to a bear in the dark without a real-time gun! So let’s stay on our toes here and react accordingly. The best market calls are made by Mr. Macro Market, not me.


Ironically enough, last week I started reading the latest behavioral psych book to bubble up to the top of my pile, The Hour Between Dog and WolfRisk Taking, Gut Feelings and the Biology of Boom and Bust, by former Goldman/Deutsche trader, John Coates.


In his introduction, “it has been said of war that is consists of long stretches of boredom punctuated by brief periods of terror, and much the same can be said of trading” (Coates, pg 5). I’d say that if you were buying-the-damn-bubble #BTDB on Wednesday and Thursday of last week, Friday’s move, punctuated by a +45.8% VIX rip on the week, felt like terror.


Back to the Global Macro Grind


First, instead of screaming bloody murder this morning, let’s contextualize where Friday’s -2.09% drop in the SP500 came from. In an intraday note (11:45 AM on Thursday January 23rd) I wrote a risk management note titled “Not #BTDB Today” and outlined 3 main issues that were signaling in our model:

  1. US Consumption #GrowthSlowing (rate of change vs. Q313’s sequential top)
  2. SP500 broke our immediate-term TRADE line of 1837 support
  3. US stocks making lower-highs (vs. all-time highs) and down YTD perpetuates performance chasing

In other words, this was very much a playbook 3-factor (History, Math, and Behavioral) line of reasoning that seems sound, after the fall:

  1. HISTORY: our Q114 Macro Theme of #InflationAccelerating has historically slowed consumption growth
  2. MATH: immediate-term TRADE signals matter in either confirming existing TRENDs or signaling new ones
  3. BEHAVIORAL: consensus is still in the business of chasing (buying) high and freaking out (selling) low

Got #InflationAccelerating?

  1. The US Dollar (index) was down a full -0.9% last week (down -2.2% now in the last 6 months)
  2. The CRB Index (19 commodities) was +1.5% last week vs the SP500 -2.6%
  3. US Consumer Discretionary Stocks (XLY) are already down -4.98% YTD (vs SPX -3.1%)

And while, Janet Yellen’s new Fed will see no inflation this week (on a lag, after comping the all-time highs in food/commodity inflation of 2011-2012), real-time men and women trying to decide between dog and wolf see breakevens (inflation expectations rising) and Natural Gas +19.8% last week for what it is, on the margin, #inflationary.


Interestingly, but not surprisingly, so does Mr. Macro Market. Remember that down days for US stocks in 2014 have been #timestamped frequently by the following pattern: Down Dollar + Down Rates = Down Stocks.


That’s why the immediate-term TRADE correlations between the US Dollar and the SP500 are as follows:

  1. 15-day = +0.66
  2. 30-day = +0.43

In other words, if economic gravity still matters (it does), and the Dollar and Rates are signaling bear (on the slope of US economic growth), it’s probably a bear.


While everyone in the Barron’s Roundtable said it’s all about the Fed (you have to quantify less in making general groupthink statements), we continue to think that getting market beta right for the last few years has been more about getting the slope (rate of change) of GROWTH and INFLATION right.


On the GROWTH front, this week’s Macro Calendar will show you more #GrowthSlowing (on the margin):

  1. TUESDAY: Durable Goods should slow in December versus November’s +3.4%
  2. THURSDAY: Q413 US GDP should slow to 3-something percent vs Q313’s +4.12% sequential peak
  3. FRIDAY: PMI for January could easily slow form December’s frothy 60.2

Oh, and your illustrious open market committee of forecasting the weather (on a lag) at the Federal Reserve may well taper again on Wednesday into #GrowthSlowing too. Never mind dog or wolf – that’s just dumb.


Our immediate-term Global Macro Risk Ranges are now:


*= new TREND change (in brackets)


*UST 10yr Yield 2.72-2.79% (bearish)

SPX 1 (bullish)

*Nikkei 149 (bearish)

*VIX 14.91-20.41 (bullish)

*USD 80.19-80.79 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Dog or Wolf? - Chart of the Day


Dog or Wolf? - Virtual Portfolio

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TODAY’S S&P 500 SET-UP – January 27, 2014

As we look at today's setup for the S&P 500, the range is 46 points or 0.63% downside to 1779 and 1.94% upside to 1825.         










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.40 from 2.38
  • VIX closed at 18.14 1 day percent change of 31.74%

MACRO DATA POINTS (Bloomberg Estimates):

  • 10am: New Home Sales, Dec., est. 455k (prior 464k)
  • 10:30am: Dallas Fed Mfg Activity, Jan., est. 3.2 (prior 3.1)


    • Conferees negotiating agriculture law have been told to come back to Washington early today to try to get bill through House this week, Bloomberg News reported


  • AT&T gives up right to offer to buy Vodafone within 6 months
  • Vodafone said to seek purchase of Ono before planned IPO
  • Liberty Global agrees to buy Dutch cable provider Ziggo
  • Apple scheduled to report 1Q results after close of trading
  • Apple said to be exploring mobile-payments system expansion
  • BofA swaps desk investigated by CFTC, DOJ, filing disclosed
  • Google to buy artificial-intelligence co. Deepmind: Re/code
  • Samsung, Google sign agreement to license each other’s patents
  • YRC wins key refinancing ingredient with union vote, Welch says
  • Japan posts record annual trade deficit as import bill soars
  • ICBC offers clients option to recoup funds in troubled trust
  • Ukraine crisis deepens; power-shr bid fails to end protests
  • German business confidence beats estimates on growth outlook
  • U.S. East set for another Arctic blast as snow heads for Texas
  • Universal’s ‘Ride Along’ tops box office with $21.2m
  • Tesla finishes L.A.-to-New York electric Model S drive chargers
  • Disney’s ESPN seeking profit with online video demand: WSJ
  • Diageo speculated to consider bid for Brown-Forman: Times
  • AT&T meets with EU on possible acquisitions, NSA role: WSJ
  • Altegrity said to resume talks on sale of HireRight: Reuters
  • Easton-Bell Sports seen likely to sell some brands: NY Post
  • Boeing Set to Face Additional Safety Checks on 767 Jets: WSJ


    • American Electric Power (AEP) 6:57am, $0.57
    • Caterpillar (CAT) 7:30am, $1.27 - Preview
    • Rayonier (RYN) 8am, $0.52
    • Roper Industries (ROP) 7am, $1.61
    • Royal Caribbean Cruises (RCL) 8:31am, $0.18 - Preview

     PM EARNS:

    • Apple (AAPL) 4:30pm, $14.07 - Preview
    • Ashland (ASH) 5pm, $1.31
    • Brookfield Canada Office (BOX-U CN) 5pm, $0.42
    • Crane Co (CR) 5:48pm, $1.03
    • Graco (GGG) 4:10pm, $0.76
    • Olin (OLN) 5pm, $0.29
    • Plum Creek Timber (PCL) 4:01pm, $0.28
    • Rambus (RMBS) 4:05pm, $0.14
    • Rent-A-Center (RCII) 4:15pm, $0.74
    • Sanmina (SANM) 4:02pm, $0.38
    • Seagate Technology (STX) 4:01pm, $1.39
    • Steel Dynamics (STLD) 6pm, $0.25
    • STMicroelectronics (STM IM) 4:46pm, $0.02
    • Swift Transportation (SWFT) 4:02pm, $0.35
    • U.S. Steel (X) 5:15pm, $(0.26)
    • Zions Bancorp. (ZION) 4:10pm, $0.43


  • Copper Advances as Business Confidence Strengthens in Germany
  • Brent Crude Drops Amid Concern of Slowing Emerging Market Growth
  • Gold Bulls Boost Bets Amid Longest Rally Since 2012: Commodities
  • Platinum Falls for Second Day as Talks Resume to End Strike
  • Sumitomo Sees Nickel Glut Shrinking 43% on Indonesia Ban, China
  • China’s Gold Shipments From Hong Kong Climb to a Record in 2013
  • Rebar Falls on China Growth Concern as Margin Requirements Rise
  • Gold Mint Running Overtime in Race to Meet World Coin Demand
  • Hedge Funds Most Bullish on Gas Since 2006 After Freeze: Energy
  • Wheat Rises Amid Concern U.S. Freezing Weather May Damage Crops
  • Natural Gas Trades at Highest Level in Four Years on U.S. Cold
  • Meat Diet in China Means Record Corn Imports: Chart of the Day
  • Less Thermal Coal From U.S., Colombia Aids Market: Bull Case
  • India to Review Gold Import Curbs in March on Deficit Control


























The Hedgeye Macro Team















This note was originally published at 8am on January 13, 2014 for Hedgeye subscribers.

“You can’t win a horse race with mules.”

-Tim Taylor


This was a weekend of winners and losers.  On the athletic front, I was excited that Yale’s hockey team beat Harvard hockey like a rented mule by a score of 5 – 1 in the inaugural Rivalry on Ice at Madison Square Garden.  (Admittedly, Yale did lose by a wider margin in the alumni game!)  And no doubt my colleague Darius Dale was excited that his hometown Seahawks went into full on beast mode and beat New Orleans 23 – 10.


As it relates to losing, the nation of Israel suffered a major loss with the passing of former Prime Minister Ariel Sharon.  A loss like this of course is on a much greater scale than how any sports team did this weekend.  I’m far from an expert on Israeli politics, but it’s hard not to respect a man who gave everything for his proverbial team.  As a soldier, defense minister and finally prime minister, Sharon fought in or commanded every one of Israel’s major conflicts starting with its 1948 independence war.


Whether it be winning in politics or winning on the field or ice, victory is rarely an event that happens in isolation.  My former college hockey coach, Tim Taylor, used the quote at the start of the note to describe our team when we were doing more losing than winning.   His point is spot on that any great victory, in any field, takes hours of practice, repetition, and preparation.  Nothing in life comes easy and the investment management business is no different.


Back to the global macro grind . . .


One of the big winners in the global asset class race over the past twelve months has been European sovereign debt.  Specifically, both Spain and Italian 10-year yields have come in meaningfully.  This morning the Spanish 10-year yield is at 3.83% and the Italian 10-year yield is at 3.91%.  Both are effectively Euro era lows.


The healing of European credit markets, and the improvement has been meaningful, is part of what is underscoring our relatively bullish view on European equities in 2014.  Ironically, the Financial Times still has a tab called, “Euro-in-Crisis”, despite a marked improvement in the outlook for the Euro.  Also ironically, the five headlines in this section are as follows:

  • Portugal Plans Post Bail-Out Cash Cushion;
  • Investors Warm to Spanish Banks;
  • Too Early To Declare Crisis Over Says Draghi;
  • Draghi Can’t Keep Euro Down For Long; and
  • Portugal Enjoys Huge Demand in Debt Sale

The conclusion from those headlines, and much our analysis, is that if the Euro-crats can actually get out of the way we might have a meaningful recovery in Europe.


Speaking of winners and losers, the employment report on Friday threw many U.S. focused economists for a loop and also reinforces our Q1 2014 macro theme of #GrowthDivergences.  Friday’s employment report, which showed non-farm payrolls increasing +74K month-over-month to close 2013, was a disappointment versus prevailing expectations and an outlier verses the balance of higher frequency labor market data. 


Indeed, in the context of the broader labor market data, where the preponderance of evidence remains positive with the ADP private employment estimate, initial jobless claims, and the ISM Manufacturing and Non-manufacturing employment indices all reflecting moderate, ongoing improvement, the BLS data sits as a single negative outlier. 


With 273,000 people out of work due to bad weather (vs. an average of 166K over the prior five December’s) weather was held out as the biggest distortive factor and a favorite pundit talking point post the December release.  


Our retail and restaurant analysts have highlighted weather as a drag on traffic over the last month as well, so we’re inclined to accept that unusually inclement weather did, indeed, have some negative drag – with the largest impact across hours worked and construction/transports/trade employment.    


The other favorite talking point was the continued retreat in Labor Force Participation Rate (LFPR) which dropped another 19bps sequentially to 62.79% from 62.98%, driven by a net drop in the total labor force of -347K (-490K unemployed plus +143K increase in employed).  The continued drop in the LFPR remains in excess of that implied by demographic trends (which we’ve written about previously) and should remain an intermediate term issue as the labor market continues to grapple with higher structural unemployment driven primarily by the stubbornly, persistent elevation in long-term unemployment.  This point is highlighted in the Chart of the Day.


Further, the LFPR may seen another step function lower over the next couple months if congress fails to renew jobless benefits for the ~1.3M individuals who lost unemployment benefits at 2013 year end.   Perversely, perhaps, if those individuals drop out of the labor force, the unemployment rate will show improvement at the expense of a further depression in the participation rate. 


The other, somewhat disappointing metric in the release was average hourly earnings – which slowed 20bps sequentially to 1.80% year-over-year.   You can’t spend it if you don’t got it and if the savings rate holds little upside and the current iteration of the wealth effect is muted compared to historical precedent, then middling, sub 2% growth in income (ie. capacity for consumption) isn’t the path to winning for a domestic economy still beholden to consumption for 70% of GDP. 


Our immediate-term Risk Ranges are now:


10yr UST Yield 2.85-2.98% 

SPX 1825-1850

VIX 11.84-13.95 

USD 80.11-81.12

Gold 1195-1256


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research



#Winning - Chart of the Day


#Winning - Virtual Portfolio






The Chimelong International Ocean Resort on Hengqin Island will open its doors tomorrow for a trial run.  Mainland media reported that Guangzhou Chimelong has completed some 80% of the park’s facilities, and that an aquarium, a whale exhibit and roller coaster rides would be open.  About 20 million visitors a year are expected to visit the park, generating more than RMB50 billion (MOP65.5 billion) for Hengqin annually, the company estimates.



Lawson CEO Takeshi Niinami and Suntory Executive Vice President Shingo Torii are among corporate and academic leaders forming a group to support a legalization bill introduced by lawmakers, said Hiroshi Mizohata, a former head of the Japan Tourism Agency, who will also be a member.  Niinami heads Japan’s second-biggest convenience store chain and Torii runs Japan's third-biggest brewer. 



Macau's migrant labour force increased to 137,838 workers last month, 1,952 more than in November.  Official data show more than 87,000 workers were from the mainland.  The hospitality industry was the biggest employer of migrant workers, employing about one-third of the total.  The government has set quotas that limit mainland domestic helpers to 200 people from Guangdong and 100 people from Fujian.

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