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No Silver Linings: December Durable Goods

The weather, expiration of investment tax credits, exclusion of commercial aircraft orders in the advance estimate (Boeing orders that will probably show up in the Jan data) and seasonality will all be held out as potential distortions in the December figures. 


With Durable Goods being one of the more volatile series, subject to significant revision, and negatively diverging from the ISM mfg data for December, we may indeed see a positive revision and sequential acceleration next month, but the reality is that the deceleration reflected in this morning’s durables data agrees with the sequential slowdown observed more broadly across the domestic macro data. 


Headline Durable Goods printed its worst number in five months, accelerating to the downside sequentially with New Orders declining -4.3% MoM while decelerating meaningfully on both a YoY and 2Y basis. 


Core Capex Orders growth accelerated to the downside as well, declining -1.3% MoM and >300bps on a 2Y.  If there was a lone positive in the release, it’s that core capital goods orders growth did accelerate 70bps sequentially to 6.2% from +5.6% in November. 


Additionally, both headline New Orders and Core Capex figures for November were revised lower by -80bps and -150bps, respectively.


No silver linings to be had in the sub-aggregates either with (perhaps) the cleanest read on household consumerism - New Durable Goods Orders Ex-Defense & non-defense Aircraft - decelerating on a MoM, 1Y and 2Y.  


In short, today’s durable goods data agrees with our expectation for a sequential slowdown in domestic growth and suggests some emergent weakness in what has been a key source of macro strength over 2H13 (with wage inflation still muted and services consumption growth flagging). 


As we highlighted in our 1Q14 Macro themes call (HERE), easy 1H14 inflation comps and our expectation for a deceleration in the rate of change in reported growth has us incrementally more cautious on U.S. equities than we have been over the TTM.   


Now, with the risk management/price signals flashing red with a breakout in equity volatility above TREND resistance and the S&P500 flirting with a TREND breakdown (SPX Trendline = 1779), in the more immediate term, we’ll keep our net exposure to domestic equities relatively tight.


No Silver Linings: December Durable Goods - Durable Goods


No Silver Linings: December Durable Goods - Eco Table 012814



Christian B. Drake



Keep Your Noggin Up!

Client Talking Points


The good news is that the S&P 500 held our Hedgeye TREND support (1779) yesterday. The bad news is that front-month VIX is still solidly above TREND support of 14.91. So I’d sell an up open in US stocks unless volatility calms. Unlike the UK (whose Q4 GDP accelerated sequentially this morning to +2.8% year-over-year, USA’s should slow on Thursday from the Q3 peak).


If you’re long European Equities versus virtually any other region of the world year-to-date, you are less miserable and sleeping a little bit better. Europe is bouncing as Germany's DAX holds our Hedgeye TREND support of 9166. Meanwhile, Portugal was up +1.2%, Denmark +0.8%, and Austria +0.6%. All of them are still up +3-4% year-to-date versus the S&P 500 which is down -3.6% YTD. The rate of change in growth is our #GrowthDivergences theme. 


It's game time again for the 10-year yield as our TREND level of 2.80% and yield just bounced 6 basis points off of Friday’s lows. Gold didn’t like that, so we’re waiting and watching for the next Gold buy signal. If the 10-year fails at 2.80% again, buying back Gold is at the top of my macro menu. We will let the market decide.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

JPMorgan shares are currently trading with the most implied upside to fair value in our fair value model for money-center, super-regional and regional bank stocks. By our estimates, JPM shares have upside of 33% based on our regression of EVA (economic value added) – which looks at the spread between return on capital and cost of capital – and the current multiple to tangible book value. Over time, we have found that sizeable discounts and premiums mean revert toward fair value giving JPMorgan an embedded tailwind in 2014.


We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road


No one but baby boomers play slots! that's the long-term problem for regional gamers and slot companies $IGT. also a near term problem @HedgeyeSnakeye


"Oh yes, the past can hurt. But you can either run from it, or learn from it." - Rafiki, from The Lion King


The U.S. retail price for regular gasoline fell to $3.279 a gallon yesterday, according to AAA, the nation’s largest motoring company. The countrywide average rose to within a cent and a half of $4 in April 2011.

Early Look

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Silent Apprehension

“Wall St. was a street of vanished hopes, or curiously silent apprehension, and a sort of paralyzed hypnosis.”

-New York Times


Imagine that was the header for @NYT on the eve of America’s central economic planner in chief’s State of The Union. Newsflash: it’s not. That was the front page of the New York Times on the day after the 1929 US stock market crash.


John Coates cites the aforementioned headline in chapter 1 (The Biology of a Market Bubble) of The Hour Between Dog and Wolf and goes on to remind us that “research on body-brain feedback, even within physiology and neuroscience, is relatively new.” (pg 28).


So how are you feeling this morning? While you know that hope is not a risk management process, apprehension and paralysis are all part of the game. While it’s hard to sell`em on green and buy`em on red, fading your emotional state is often the precise action to take.


Back to the Global Macro Grind


I don’t know about you, but in the heat of the decision making moment I fade how I feel about markets a lot. Through 15 years of trial and error, I’ve learned to increasingly rely on multi-factor, multi-duration, risk management signals amidst the research noise.


Since I don’t have a dog (or wolf) in the fight in marketing a perma bullish or bearish position, I use the TRADE versus the TREND in order to tone down my testosterone. Yep, I’m a dude – keeping that under control matters!


To review our process lingo:

  1. TRADE is 3 weeks or less in duration
  2. TREND is 3 months or more in duration

The reason why I use “more” or “less” is because time in my model (days) varies inversely with volatility. In other words, if front-month volatility ramps +50% in a week, the number of days in my TRADE model falls, fast – and, if implied volatility (looking out on the curve) doesn’t confirm that immediate-term information surprise, I keep an above average amount of duration (time) in the TREND model.


That may or may not make sense to you. So to put it more simply:

  1. When both front-month and implied volatility are signaling lower-highs and lower-lows, a monkey can buy stocks
  2. When both front-month and implied volatility move from bearish to bullish TRADE and TREND, monkeys get killed

Momentum monkeys, I mean.


I know, I know. Every time I call someone a monkey, I trigger an emotional response. But, please, don’t be offended. I am a monkey too – I’m just one that tends to learn from the cage door being slammed on my fingers.


Volatility, of course, is the #1 risk factor that every major fund manager who has fallen from grace has messed up. Even the world’s best messed this up in bonds last June. Many more have already messed this up in Japanese and Emerging Market Equities YTD.


This is basically why I completely disagree with the concept of being an active “long-term investor” who doesn’t use an implied volatility risk management overlay. While it would be nice to wake up to sun and bananas at the zoo every day, reality is that every once in a while a storm rips the cages open and the tigers, who have been putting up with monkey-bull chirping for a year, are hungry.


Back to the actual levels, to keep this simple, let’s just focus on the inverse relationship between the SP500 and VIX:

  1. TRADE – SPX 1837 momentum support broke as 13.81 VIX resistance became immediate-term support
  2. TREND – SPX 1779 support was tested intraday yesterday (and held), but VIX 14.91 TREND is firmly intact

And here Mucker the monkey was covering oversold shorts (and buying one long, LVS) into the close as 1779 SPX held (which would be called a high-probability gamble - dealer shows a 6 in #BlackJack)… and the minute I saw Apple (AAPL) guide down, I thought it was going to be a gamble I’d pay for today (and deserve it).


But, the US Equity Futures are up 8-10 handles and I’ll play lucky on the open today instead. I won’t, however, confuse that with the next leg up in this market ripping to fresh all-time highs. Provided that 1837 SPX TRADE resistance and 14.91 VIX TREND support remain intact, I’ll be a seller again this morning on green (like we were in #RealTimeAlerts on the open yesterday).


I know that playing the game across durations isn’t for everyone. But this is what I do. And I like it. I can assure you that the longest of “long-term” investments you can ever make is starting your own company with all of your own money. And for me at least, that investment requires absorbing 24/7 risk management, apprehension, and pain – if you want the long-term to last longer, that is.


Our immediate-term Global Macro Risk Ranges are now (12 Big Macro Ranges are in our Daily Trading Range product):



VIX 14.91-20.41

USD 80.18-80.79

Pound 1.64-1.66 (bullish)

NatGas 4.58-5.15

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Silent Apprehension - Chart of the Day


Silent Apprehension - Virtual Portfolio


Takeaway: We are adding LVS to Investing Ideas.

Gaming, Lodging & Leisure Sector Head Todd Jordan has added Las Vegas Sands Corp. (LVS) to Investing Ideas.


We will send out a full report for subscribers detailing Jordan's bullish case for the stock this week.








MPEL has raised its planned investment in City of Dreams Manila to USD680 million.  CEO Lawrence Ho said yesterday, adding that the figure could rise further. “It keeps going up. Our most recent number is USD680 million because PAGCOR will allow us more (gaming) tables and we keep finding great brands,” said Ho. City of Dreams Manila will open mid-2014 and is part of the government’s Entertainment City in the reclamation area on Manila Bay, which was modeled after the Las Vegas gaming strip.  City of Dreams Manila will open with 365 gaming tables, 1,680 slot machines and 1,680 electronic table games.



December passenger traffic at Singapore's Changi airport rose 4.1% YoY to 5.12 million.



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