Exhilarating Start To 2014

This note was originally published at 8am on January 21, 2014 for Hedgeye subscribers.

“Conquering of fear produces exhilaration.”

-J.T. MacCurdy


I don’t know about yours, but in my life the aforementioned statement definitely holds true. My fellow Canuck, Malcolm Gladwell, cited MacCurdy’s psychological work in David and Goliath (pg 148) to explain the resilience of the British during the London Blitz.


Do you need a psychiatrist? How many days after 2008 did it take you to conquer your fear about growth? The earlier in 2009 (or 2013) the better, obviously. But some of the savants sipping on Champagne in Davos this week are just starting to get bullish now. #Exhilarating


While Gladwell’s latest book is a little too thick on sociology for me, I loved a few of his stories simply because they spoke to me personally. Unfortunately, Mr. Macro Market couldn’t care less about me as a person. Whatever speaks to me this morning has very little place in my risk management process. The easiest way for me to conquer my market fears is to grind through the process and get on with my day.


Back to the Global Macro Grind


With a day off here in the US, it’s a good time to take a step back and review what the score is for 2014. From a performance divergence perspective, it’s been an exhilarating start to the year!


In the land of Global Equities, here are the world’s Top 3:

  1. Greece +9.2%
  2. Argentina +8.7%
  3. Portugal +8.5%

In other words, the markets that some of the fear-based advertising blogs talked most about for the last 3 years are your portfolio’s top money-makers. After all, who in Davos didn’t tell you to buy Greece?


And here are the world’s 3 dogs (YTD):

  1. China -5.3%
  2. Brazil -4.5%
  3. Japan -3.4%

Yep, remember the ole “BRICs” long-term investment theme from Davos before they had Davos? #Mint, that was. Brazil in particular has been just sad to watch – and who isn’t long Japan, after it being one of the world’s best performers in 2013 btw?


To summarize what we think will be a glaringly different year for asset allocation in 2014, we called one of our Top 3 Global Macro Themes for Q114 #GrowthDivergences. This theme should not only make for winners and losers in what we call Country Picking, but sector and stock picking within those countries too.


Speaking of #GrowthDivergences, check out the Sector Divergences in the US Equity market for both last week and 2014 YTD:

  1. Consumer Discretionary (XLY) -1.9% w/w to -2.60% YTD
  2. Healthcare (XLV) +0.5% w/w to +2.85% YTD

Yep, that’s a +545 basis point performance spread between two of the most widely held US stock market sectors. So much for Sector Variance (see our Q413 Macro Themes deck and Chart of The Day) hitting all-time lows. Mean reversion is #exhilarating, indeed.


And what’s driving that? In our GIP (Growth, Inflation Policy) model, the traverse from:


A)     Quadrant #1 in our GIP Model (Growth Accelerating as Inflation Decelerates), to

B)      Quadrant #2 in the same model (Inflation Accelerating alongside Growth Accelerating),


… shows you that Consumer Sectors are two of the worst sectors you can be in (makes sense because, on the margin, #InflationAccelerating (another Q114 Macro Theme),  slows real consumption growth), while Healthcare and Tech are two of the best.


Technology (XLK) and the Nasdaq (QQQ) are up +0.03% and +0.5%, respectively, for 2014 YTD (versus the Dow and SP500 -0.7% and -0.5%, respectively).


Looking beyond US Equities, you can see the same performance divergence taking hold in Global Equities that you are already seeing in the world’s top and bottom 3:

  1. EuroStoxx600 = +1.8% last week to +2.3% YTD
  2. MSCI Latin American Index = -1.5% last week to -4.6% YTD

So, maybe this year at Davos they put Captain Pie-Chart on “global emerging market equity diversification” in one of the breakout rooms. He’ll have plenty of time and space to hear himself talk. Maybe his government will pay for his psychiatrist and post meeting masseuse too.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.79-2.89%

SPX 1825-1854

DAX 9599-9851

VIX 11.84-13.44

USD 80.76-81.45

EUR/USD 1.35-1.37


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Exhilarating Start To 2014 - Chart of the Day


Exhilarating Start To 2014 - Virtual Portfolio

Bubbles Pop

Takeaway: If my SPY TREND line wasn't broken, I'd buy the damn-bubble. But it is. And bubbles pop.

Deep breaths, people.


Today’s ISM report was a total train wreck … on both growth and inflation. It was the biggest one-month drop in new orders since 1980. I review that and much more in the 5 minute video below.



With #InflationAccelerating on the margin, US #GrowthSlowing mattered.


Now we have a bearish Hedgeye TREND setup in SPY. The bullish breakout in volatility is killing levered long momentum monkeys. That's why we fell so fast; monkeys on Old Wall 2.0 die real fast. Bullish monkeys taking "green arrows" to the head.


It was ugly out there today.


The Russell 2000 was smacked in the face for a -3.1% loss leading today's decline – nasty.


Got Consumer Discretionary (XLY)? It was down another -2.6% to -8.6% YTD! Eek.


If my SPY TREND line wasn't broken, I'd buy the damn-bubble. But it is.


And bubbles pop.


Bubbles Pop - bubb2


Right now there’s simply no long-term TAIL support on the S&P 500 to 1683.


The writing was on the wall. Financials (XLF) -2.5% snapping our @Hedgeye TREND (in our Risk Manager product) last week was a huge signal.


Bearish TRENDs are to be traded as aggressively as bullish ones.


If you want more information on how you can subscribe to our services, click here


Perhaps the discrete tanking in the Jan ISM Manufacturing data was due to the weather as some ISM respondents intimated (comments below). 


Or, perhaps, after binging on a GDP juicing inventory build in 2H13, we get to deal with the hangover to start 1Q14 as the weaker, concomitant rise in household income proves insufficient for expeditiously drawing down that burgeoning goods stock.     


Today’s ISM manufacturing data for January serves as a solid microcosm for our view of the broader macro dynamics as New Orders rolled over (#GrowthSlowing) alongside a material acceleration in Prices Paid (#InflationAccelerating). 


Headline ISM dropped 5.2 pts sequentially to 51.3 with softness pervasive across the sub-indices as Production, New Orders, Employment and Backlogs all declined in January while Prices Paid jumped above 60 for the first time in a year.  Most notably,  New Orders declined from 64.4 in December to 51.2 in January – the largest MoM decline since December 1980. 


We’ve been fairly vocal on our expectation for a sequential move into Quadrant #3 – Growth Decelerating as Inflation Accelerates -  in our GIP (Growth/Inflation/Policy) model for the U.S. economy and how to play that from a positioning perspective. Please see the links below to our 1Q14 Macro Investment Themes call and recent update notes for additional detail . 









In short, we turned increasingly more bearish in 1Q14 as the price signals broke down (see:  Not #BTDB Today: SP500 Levels, Refreshed) and the domestic fundamental macro data began slowing on the margin (See Eco Summary Table below).  Incremental, growth-slowing data over the last few weeks has served to further confirm that price signal.  


We started the week net short in Real-Time Alerts and aren't overly keen on attempting to catch the knife here this morning.  


ISM Services, Employment and Debt Ceiling on Deck.  Keep Moving.











ISM: THE MORNING AFTER - Eco Summary Table 020314



Christian B. Drake



[video] McCullough: Why Stocks Are Getting Whacked

European Banking Monitor: Switching From Bullish To Bearish

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .




Last week's risk monitor argued for being cautiously opportunistic on the long side as the interbank risk measures remained benign, Euribor-OIS & TED Spread, in spite of the growing concern around EM market and currency risks. This week is a different story. On Friday of last week we saw the Euribor-OIS spread hockey stick higher. We also saw a notable upward move in the TED Spread. These have historically been two of the most accurate risk gauges in signaling when to move from an aggressive to a defensive posture. They're indicating fairly clearly now that the situation is deteriorating. Couple that with our quantitative line of intermediate-term support (TREND: $21.36) in the XLF being broken, and there are clear, bright-red warning signals flashing. We'll heed them until they tell a different story.



European Financial CDS - Swaps were slightly wider, on average, across European banks last week, but, looked at on a month-over-month basis, continue to push higher. Italian banks are showing some of the worst performance on a month-over-month basis.


European Banking Monitor: Switching From Bullish To Bearish - zzzzbanks


Sovereign CDS – Sovereign swaps were modestly wider last week, outside of Japan and Portugal. 


European Banking Monitor: Switching From Bullish To Bearish - zz. sov1png


European Banking Monitor: Switching From Bullish To Bearish - zzz. sov2


European Banking Monitor: Switching From Bullish To Bearish - zzz. sov3


Euribor-OIS Spread – The Euribor-OIS spread widened by 5 bps to 16 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 


European Banking Monitor: Switching From Bullish To Bearish - zz. euribor



Matthew Hedrick



Just Charts: Dog Breath

Last week was another difficult week for consumer stocks, with the XLP down -1.74% versus the SPX down -0.43%.  The Hedgeye U.S. Consumption Model is flashing predominantly red, as only 3 of the 12 metrics are flashing green.  Please see the table below for more detail.  Although personal spending turned green last week, it comes with a caveat – it is being driven primarily by re-leveraging, as the personal savings rate fell to the lowest level since 2008 (3.9%).


The Macro team’s 1Q14 theme of #InflationAccelerating continued to play out last week and manifested itself in the form of slower growth.  There were plenty of red flags for growth in December and things appear to have slowed further in January.


As Keith highlighted in today’s Early Look:

  1. CRB Commodities Index (19 Commodities) = +0.3% last wk to +1.1% YTD (vs SP500 -3.6%)
  2. CRB Commodities Foodstuff Index = +1.1% last wk to +3.3% YTD
  3. Corn +1.0% last week to +2.8% YTD
  4. Cocoa +4.3% last week to +7.5% YTD
  5. Coffee +9.4% last week to +13.1% YTD
  6. Cheese +2.2% last week to +18.0% YTD

In the charts below we look at the largest companies by market cap in the Consumer Staples space from both a quantitative perspective and fundamental aspect where we can offer one.  As you will see over time, sometimes our fundamental view does not align with the quantitative setup (though not often).



Top 5 Week-over-Week Divergent Performances:

Negative Divergence: ENR -7.4%; DEO -6.1%; MKC -7.0%; MO -5.6%; DF -4.3%

Positive Divergence: NUS +10.7%; TSN +7.6%; HLF +7.2%; HSH +5.2%; IFF +2.0%



The “Newsy” News Flow:

Herbalife (HLF) announced this morning that it will boost its share buyback by 50% to $1.5 billion and offer $1 billion in convertible senior notes.

  • We still like the stock on the long side from a trading perspective – the company clearly has the cash to protect the stock, key activist investors remain poised on the other side of Ackman’s short bet, no government agency appears ready to open Pandora’s box on the multi-level-marketing industry, and any claims that Ackman may have against HLF’s China business as a pyramid scheme (expected to be presented this month) may be at best immaterial: 1) they will be hard to investigate given the lack of transparency in China, and 2) HLF can afford to cut its exposure to China, which is only ~11% of sales.  

Altria (MO) announced this morning it’s in agreement to acquire the e-vapor business of Green Smoke for $110M in cash.

  • This is a key signal that Big Tobacco is looking to play catch-up for e-cig market share. LO was first out of the box with its acquisition of Blu in April 2012, then bought UK-based e-cig manufacturer SKYCIG in October 2013 to expand internationally. Both MO and RAI were late to the e-cig “party”, rolling out their own e-cig brands (MarkTen and Vuse, respectively) only in late 2013 in test markets, with plans for national distribution by mid-year.  A wild card on the future direction of the industry remains the FDA. We’d expect it continues to drag its feet, balancing the need to protect the consumer while promoting harm reduction of traditional tobacco. We’re bullish on e-cigs and see moves to consolidate as conviction from Big Tobacco that the category is here to stay.

POST announced this morning it has agreed to buy the PowerBar and Musashi sports brands from Nestle for $550 million.

  • We’re bullish on CEO William Stiritz’s push to transform the portfolio to meet consumer trends of health (fitness) and wellness.  This adds to such brands as Premier Nutrition supplements and Hearthside Food Solutions’ organic cereals and snacks that were acquired since Post was spun off from Ralcorp in 2012. Note: Stiritz also holds a 7.4% stake in HLF, and has said he’s willing to take part in a leveraged buyout of the company.


Earnings Calls This Week (in EST):


Tuesday (2/4): ADM 9am; CHD 10am; HAIN 4pm

Wednesday (2/5): EL 9:30am; CCE 10am  

Thursday (2/6): K 9.30am; PM 1pm



Howard Penney

Household Products


Matt Hedrick

Food, Beverage, Tobacco, and Alcohol







Just Charts: Dog Breath - 1

Just Charts: Dog Breath - chart1

Just Charts: Dog Breath - 2

Just Charts: Dog Breath - 3

Just Charts: Dog Breath - 4




BUD – doesn’t look much healthier than DEO or MO now either; has moved from bullish to bearish TREND in the last month; TREND resistance = 101.28


Just Charts: Dog Breath - 5


DEO – looks just like MO – no more TREND mo mo as TREND reverses from bullish to bearish w/ $127.96 TREND resistance


Just Charts: Dog Breath - 6




KO – you’d think the consumer and emerging market world was ending looking at some of these charts; big time bearish breakdown confirmed here this week; TREND resistance = 40.19


Just Charts: Dog Breath - 7


PEP – doesn’t look as horrendous as KO, so it just looks horrible instead; bearish TREND confirmed this wk = 83.18 resistance


Just Charts: Dog Breath - 8




GIS – nothing new here; stock still looks awful; Bearish Formation @Hedgeye w/ TREND resistance = 50.07


Just Charts: Dog Breath - 9


MDLZ – no Peltz takeout premium = no more bullish TREND; what was support is now TREND resistance up at 33.67


Just Charts: Dog Breath - 10




KMB – the only name on this list that signaled bullish for real last week had some real alpha this wk; love that – bullish TREND confirmed with immediate-term TRADE support above that at 106.08


Just Charts: Dog Breath - 11


PG – another Bearish Formation with TREND resistance confirmed this wk up at 80.36


Just Charts: Dog Breath - 12




MO – just lost whatever was left of its mo mo; TREND reversal from bullish to bearish this wk (TREND resistance = 36.92)


Just Charts: Dog Breath - 13


PM – dog breath stock continues to implode as our Bearish Formation signal remains firmly intact; TREND resistance = 85.46; classic series of lower-highs and lower-lows


Just Charts: Dog Breath - 14

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