Fighting Growth Bulls

“After the fight is over the winning animal emerges with even higher levels of testosterone.”

-John Coates


The thing about fighting bulls are those damn horns. No matter what the math, data, or weather, the perma ones are really stubborn too. They’ll just sit there sometimes and stare at you. So, when you’re a bear, it’s better to attack them from behind.


The aforementioned quote comes from a chapter in The Hour Between Dog and Wolf that John Coates calls The Fuel of Exuberance. “Biologists studying animals in the field had noticed that an animal winning a fight or a competition for turf was more likely to win its next fight” (pg 166).


Fighting Growth Bulls - bulls


Sounds like trending bullish and bearish price momentum to me. All our back-tests show the most powerful ramps in market emotion (fear and greed) occur when there is a reversal from bearish to bullish (or bullish to bearish) on our intermediate-term TREND duration. In other words, bear vs. bull fights matter; especially at the big TREND turns.


Back to the Global Macro Grind


From a #behavioral market strategy perspective, does the “Winner Effect” (Coates) matter? Big time. Why? It especially matters in modern markets because, newsflash: machines chase price.


What are the most interesting bullish-to-bearish reversals in the @Hedgeye quant model right now?

  1. Nikkei reversing to bearish TREND
  2. SP500 reversing to bearish TREND
  3. 10yr US Treasury Yield reversing to bearish TREND

How about the most interesting bearish-to-bullish reversals in TREND?

  1. Commodities (CRB Commodities Index) reversing to bullish TREND
  2. Utilities (XLU) reversing to bullish TREND
  3. Fear (VIX) reversing to bullish TREND

From a Global Macro Theme perspective it’s easy to explain why all 6 of these intermediate-term TREND reversals rhyme: with #InflationAccelerating, growth expectations in Japan and the US are slowing.


These same risk management signals started to manifest in Q1 of 2008 (that’s why we got so bearish on the US consumer back then), but they also started to coagulate again in Q1 of 2011.


2011 was a very interesting year in that while US stocks (SP500) closed flat on the year:

  1. Fear (VIX) ripped from 15 to 24 in Q1 of 2011
  2. Utilities (XLU) and Treasuries (TLT) marched steadily higher (relative and absolute) throughout 2011
  3. Commodities (CRB Index) had a monster Q1 of 2011

Fast forward to mid-Q1 of 2014 and here’s the score:

  1. Nikkei -13.1% YTD
  2. SP500 -5.2% YTD
  3. US Treasuries (TLT) +5.2% YTD
  4. CRB Commodities Index +2.5% YTD
  5. Utilities (XLU) +1.1% YTD
  6. Fear (VIX) +45.4% YTD

Just saying.


Oh, and there was that “financial innovation” thing (a Policy to Inflate asset prices; especially Bonds and Commodities) that eventually caused the all-time highs in commodities like Gold in Q3 of 2011 called the quantitative easing…


So, play it forward – what do you think the Mother of All Doves (Yellen) is going to do if US growth continues to slow? Bernanke didn’t go to Jackson Hole last year, but I’m betting that she’ll strap on the cowboy pants and start printing again.


I know, Hilsenrath hasn’t leaked that probability memo to the bulls or bears yet. But Mr. Macro Market has. So keep your head on a swivel out there as these currency devaluation and money printing animals at the Federal Reserve still think they’re winning.


Our immediate-term Global Macro Risk Ranges are now:



Nikkei 132

VIX 15.81-20.41

USD 80.93-81.46

NatGas 5.05-5.51

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fighting Growth Bulls - drake1


TODAY’S S&P 500 SET-UP – February 6, 2014

As we look at today's setup for the S&P 500, the range is 37 points or 0.84% downside to 1737 and 1.28% upside to 1774.                










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.36 from 2.36
  • VIX  closed at 19.95 1 day percent change of 4.40%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: RBC Consumer Outlook Index, Feb. (prior 51.5)
  • 7:30am: Challenger Job Cuts, y/y, Jan. (prior -5.9%)
  • 8:30am: Trade Balance, Dec., est. -$36b (prior -$34.3b)
  • 8:30am: Nonfarm Productivity, 4Q preliminary, est. 2.8%
  • 8:30am: Initial Jobless Claims, Feb. 1, est. 335k (pr 348k)
  • 9:45am: Bloomberg Consumer Comfort, Feb. 2 (prior -31.8)
  • 10am: Fed’s Tarullo Senate testimony on financial stability
  • 10am: Freddie Mac mortgage rates
  • 10:30am: DOE Energy Inventories
  • 5:30pm: Fed’s Rosengren speaks in Sarasota, Fla.


    • 9:30am House Oversight and Govt Reform Cmte hearing on IRS targeting investigation
    • 10am: Fed’s  Daniel Tarullo testifies before Senate Banking Cmte’s “Oversight of Financial Stability and Data Security"; w/Treasury Under Sec. Mary Miller; FDIC Chairman Martin Gruenberg; Comptroller of the Currency Tom Curry; SEC Chairwoman Mary Jo White; Acting CFTC Chairman Mark Wetjen


  • Coca-Cola to buy 10% stake in Green Mountain for $1.25b
  • Twitter’s easy growth stalls as CEO vows to address slowdown
  • Jan. retail sales seen hurt by clearance, weather
  • Sony sees full-yr loss; plans job cuts, sale of PC business
  • Disney’s profit tops ests. as "Frozen" heats up box office
  • Apple removes Bitcoin program Blockchain from app store
  • SoftBank said to seek decision on T-Mobile bid within wks
  • Buyout firms CVC to Carlyle said to weigh bid for Deoleo
  • Credit Suisse 4Q profit misses ests. on legal provisions
  • GM adds Nissan-built cargo van to take on Ford Transit Connect
  • U.S. said near deal with EU on reprieve for swap-trading rules
  • IBM to spend $100m to bring Watson technology to Africa
  • Ford to cut third of Australia plant jobs as demand declines
  • Amazon buys video game developer Double Helix: Re/code


    • Advance Auto Parts (AAP), 8:30am, $0.81
    • Aetna (AET), 6am, $1.36
    • AOL (AOL), 7am, $0.61 - Preview
    • Apollo Investment (AINV), 7:30am, $0.21
    • Carlisle (CSL), 6am, $0.87
    • Cummins (CMI), 7:30am, $1.97 - Preview
    • Diamond Offshore Drilling (DO), 6am, $0.81 - Preview
    • Dunkin’ Brands Group (DNKN), 6am, $0.40
    • Exelon (EXC), 7:30am, $0.54
    • Flowers Foods (FLO), 6am, $0.19
    • Fortis (FTS CN), 7am, C$0.48
    • Gartner (IT), 7am, $0.69
    • General Motors (GM), 7:30am, $0.87 - Preview
    • Graphic Packaging Holding (GPK), 7:30am, $0.10
    • Kellogg (K), 8am, $0.82 - Preview
    • KKR (KKR), 8am, $0.89
    • Monster Worldwide (MWW), 7:30am, $0.11
    • New Gold (NGD CN) 7:30am, $0.04 - Preview
    • New York Times (NYT), 8:30am, $0.16
    • Nu Skin Enterprises (NUS), 7:30am, $2.01
    • Och-Ziff Capital Mgmt (OZM), 7:30am, $0.83
    • Patterson-UTI Energy (PTEN), 6am, $0.22
    • Perrigo (PRGO), 7:42am, $1.60
    • Philip Morris International (PM), 6:59am, $1.37 - Preview
    • PPL (PPL), 7am, $0.50
    • Sally Beauty Holdings (SBH), 7:30am, $0.36
    • Saputo (SAP CN) 11:59am, C$0.74
    • Sealed Air (SEE), 7:30am, $0.37
    • Shoppers Drug Mart (SC CN) 7:45am, C$0.86
    • Sigma-Aldrich (SIAL), 7am, $1.01
    • Snap-on (SNA), 7am, $1.56
    • Spirit Aerosystems Holdings (SPR), 7:30am, $0.65
    • Teradata (TDC), 6:55am, $0.85
    • Teva Pharmaceutical Industries (TEVA), 7am, $1.40 - Preview
    • Towers Watson (TW), 6am, $1.33
    • Twenty-First Century Fox (FOXA), 8am, $0.33 - Preview
    • USG (USG), 8:30am, $0.10 - Preview
    • Wisconsin Energy (WEC), 7am, $0.59


    • Activision Blizzard (ATVI), 4:05pm, $0.73
    • Expedia (EXPE), 4pm, $0.85 - Preview
    • Fifth Street Finance (FSC), 4:37pm, $0.25
    • FMC Technologies (FTI), 4pm, $0.65
    • Genpact(G), 4pm, $0.26
    • LinkedIn (LNKD), 4:05pm, $0.38 - Preview
    • Lions Gate Entertainment (LGF), 4pm, $0.47
    • NCR (NCR), 4:02pm, $0.79
    • Neurocrine Biosciences (NBIX), 4:02pm, ($0.17)
    • News (NWSA), 4:05pm, $0.19
    • Noble Energy (NBL), 5pm, $0.59
    • ON Semiconductor (ONNN), 4:05pm, $0.14
    • Republic Services (RSG), 4:05pm, $0.46
    • Tempur Sealy (TPX), 4:03pm, $0.62
    • Ubiquiti Networks (UBNT), 4:05pm, $0.45
    • VeriSign (VRSN), 4:05pm, $0.60


  • WTI Crude Rises a Third Day as U.S. Chill Erodes Fuel Stockpiles
  • Cotton Crop in Australia Declining to Three-Year Low on Drought
  • Virus Killing 5 Million Pigs Spurs Hog-Price Rally: Commodities
  • U.S. Natural Gas Rises as Inventories Seen Declining on Weather
  • Nickel Rises Amid Speculation Stainless Steel Will Fuel Demand
  • Gold Reversal May Signal Lows for U.S. Stocks: Chart of the Day
  • Wheat Trades Near Highest in Three Weeks Amid Signs of Demand
  • Arabica Coffee Falls First Time in 8 Days; Sugar Little Changed
  • Japan Turns to U.S. Wheat Amid Delays in Shipments From Canada
  • Rice Farmers in Thailand Urge Stockpile Sales to Meet Payments
  • World Food Prices Drop to 19-Month Low as Sugar to Grains Slide
  • Tightly Knit Europe Gas Grid Matches Local Need With Global Feed
  • Oman’s $3 Billion Railroad Plan to Blunt Iran Oil Risk: Freight
  • Gold Holds Below 1-Week High as Silver Extends Best Run in Month


























The Hedgeye Macro Team














February 6, 2014

February 6, 2014 - Slide1 


February 6, 2014 - Slide2

February 6, 2014 - Slide3

February 6, 2014 - Slide4



February 6, 2014 - Slide5

February 6, 2014 - Slide6

February 6, 2014 - Slide7

February 6, 2014 - Slide8

February 6, 2014 - Slide9

February 6, 2014 - Slide10



the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Theory vs Practice

This note was originally published at 8am on January 23, 2014 for Hedgeye subscribers.

“In theory, there is no difference between theory and practice. In practice there is.”

-Yogi Berra


I had a ton of feedback on yesterday’s Early Look (on how and why I use Twitter), so I wanted to thank you for that. Without having to answer to and consider your objective questions and thoughts, I’d just be a man in a room who is hostage to my own thinking. #scary


Your feedback generates more questions and ideas for our research team to work on. So I decided to take 6 minutes to walk through who scores as The 3 Most Overrated Economists in The World (for @HedgeyeTV video CLICK HERE ). I also crowd-sourced (on Twitter) who my followers thought were the most overrated. We came up with completely different answers.


Today, I’d like to throw that right back at you and add the follow-on question – who are The Most Underrated Economists (and/or strategists) that you follow? This has nothing to do with being mean or nice. This has everything to do with competence. We all need to find a better way. In theory, there are “experts” spewing on TV all day long. In practice, you (the players) know who gets it.


Back to the Global Macro Grind


#Davos is a big deal. CNBC focused on Matt Damon’s "Save the World’s Water" thing yesterday and Reuters is all over actress Goldie Hawn this morning. Up next, after living large last night, Nouriel Roubini is Snapchatting the world a picture of him pecking Arianna Huffington on the cheek.

Theory vs Practice - nour5 


In other news, 2 of our Top 3 Global Macro Themes are trending in markets this morning, big time:


1.       #InflationAccelerating
2.       #GrowthDivergences


On Inflation, just to clarify:

  1. Our call here is like all the calls we make – rate of change – deflating the inflation (last year’s theme = #over)
  2. We aren’t purely focused on commodity deflation ending; but it’s a big part of the market expectations mismatch
  3. #InflationAccelerating is a bigger problem in the US than it is in Europe (that’s why we like European Equities more)

Got Commodity inflation in 2014 YTD?

  1. CRB Commodities Index (19 commodities) is beating both the Dow and the SP500 YTD (it’s up instead of down)
  2. CRB Food Index = +1.5% YTD (after food prices crashed last year from the 2012 all-time highs)
  3. YTD Food Inflations = Oats +12.9%, Cattle +5.1%, Coffee +3.9%
  4. Natural Gas at $4.76 (don’t tell Washington about heating your home) = +12.9% YTD
  5. Precious Metals YTD = Platinum +6.5%, Palladium +4.3%, Gold +3.7%

In stark contrast to what you would have seen in the Hedgeye Asset Allocation Model for the better part of the last year (0% allocation to Commodities), we have a 9% asset allocation to Commodities right now. From here, that’s going up, not down.


In Real-Time Alerts we are long of Gold in Gold terms (GLD) and Coffee via the CAFÉ (take the little chapeau off the French spellchecker and you’ll see the Coffee ETN – not a perfect security, so if you’re an Institutional investor, just buy the futures).


On the other side of this Q1 theme, there are plenty of short ideas to sink your teeth into; Restaurant Shorts in particular (Slowing Sales and Rising Food Costs). This is the highest # of short ideas our Food/Bev guru Howard Penney has had since 2008. He held a Best Short Ideas call last week @Hedgeye on Cheesecake Factory (CAKE). And he’ll write the Early Look for you tomorrow.


With Roubini going bullish, got short ideas? Here are some high-quality Food #InflationAccelerating ideas currently in Real-Time Alerts:

  1. Cheesecake (CAKE)
  2. Bloomin’ Brands (BLMN)
  3. Red Robin Gourmet Burgers (RRGB)
  4. McDonald’s (MCD)

In other words, 50% of my #timestamped short book is in Restaurant Shorts (10 LONGS, 8 SHORTS currently @Hedgeye after selling into yesterday’s all-time Russell2000 high of 1181).


In another @HedgeyeTV video this week titled Here’s What’s Working (for video CLICK HERE), I made a very simple point about our #GrowthDivergences theme (which syncs with #InflationAccelerating): country and sector picking matters as much as stock picking right now (i.e. pick the right sectors in the right countries and you’ll look like a good stock picker!).


If you really want to boil that macro point down, for now you want to be:


A)     Long Inflation Expectations assets (like breakevens)

B)     Short US Consumption assets (like restaurants)


Since the European growth recovery is 1-2 years behind the US (and most of Asia, including Japan), that’s the other reason why we think you’re going to continue to see European Equities outperform the Global Equities league tables.


Remember, in theory consensus might think it’s about absolute levels of growth. In practice, it’s all about the rate of change of growth. And that’s all I have to say about that.


Our immediate-term Global Macro Risk Ranges are now:


SPX 1828-1856

Brent 105.87-108.75

NatGas 4.35-4.77

Gold 1227-1267

Copper 3.30-3.40


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Theory vs Practice - Chart of the Day


Theory vs Practice - Virtual Portfolio


In preparation for BYI FQ4 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • International units and revenue were down, largely as a result of continued importation restrictions in Argentina, which were partially offset by increased sales into Mexico. While international game sales improved by 5% to 782 units versus last year, they did not meet our internal expectations.


  • Our domestic ASP has been more or less holding up the way it was before. And we have been very disciplined with our pricing.
  • And international ASP is down because we shipped a lot more to Mexico this quarter. So, if you remove all those particular regional and product effects, our ASP has held really steady across the quarters.
  • This Pro Wave will help keep the ASP at current levels and probably slightly higher, but I wouldn't think of that as a big contributing factor to ASP of game sales.
    • If you remember when we introduced the Pro Curve a while back, it initially took a slight hit on our margins. We don't actually expect that with the Pro Wave, but I don't think it's going to be accretive probably for at least the first 12 months.


  • With more new products coming to market, based on brands which are terrific, fits for our target demographics, and utilizing proven math models, we are confident that our Gaming Operations business is well positioned to see meaningful growth resume before the end of FY 2014.
  • The margin on Gaming Operations was 70%, up from 69% in the comparable period last year, and within our expected range at 68% to 73%.


  • Given the continued growth of maintenance revenues, we now expect annual Systems' gross margin will approximate 75% for the full year.


  • Yield will continue to improve. The last two WAP releases, we have out there, the latest Michael Jackson and Jackpot Empire, are definitely doing very well. So we are positive as far as the yield improvements in the future go.
  • Based on our current release schedule, we do not anticipate our WAP footprint to grow (i.e. flat-to-slow growth) during the second quarter. However, we do expect the growth in our WAP install base to pick up again during the second half of this fiscal year.
    • I would expect it to be a bit flat, but not go down, and then pick up again in the subsequent quarters.


  • We continue to expect to establish a new annual revenue record for Systems in fiscal 2014, with revenue expected to grow by at least 10% over fiscal 2013, which was itself a record year.


  • At least $30 million


  • Most of our unit shipments just kind of follow the approvals by the gaming board there. In Q4 there were a lot of approvals. In fact, recently, there were a lot of approvals. So I would expect Q2 to be equal to or greater than Q1, but no competitive pressure there. We're still getting our more than fair share of the market.


  • With respect to our premium footprint, it still remains healthy. We've actually got a number of releases slated up over the next couple months.
  • Pawn Stars is reaching about a year old. You have Cash Wheel, a quick hits-style game going out on that, which customers have really been asking for. So, there's a lot to come in our premium footprint.

European Research Bullish; Quant Bearish

Below we update the chart of PMIs (Manufacturing and Services) for the month of January -- the Eurozone aggregate continues its bullish outlook in expansionary territory above the 50 line.


From a research perspective, we continue to see strong European PMIs, a reduction in sovereign debt levels, and outperformance from the periphery (of note is Spain) as continuing signals that support our Q4 2013 and Q1 2014 macro themes of #EuroBulls and #GrowthDivergences, respectively, that forecast a bullish growth recovery in Europe, specifically with a bullish outlook for UK and German equities and the British Pound vs the USD.


While our research view remains intact, we want to make note that our fundamental view has currently diverged from our quantitative view with key signals coming from the TREND lines in the DAX and Russian equities breaking down.  While we’ve favored European equities over U.S. equities on the margin in 2014, the signal here trumps the research and so we are not invested in European equities in our Real-Time Alerts Portfolio.

As the signals change, we change. It’s after all not always the case that our fundamental view matches our quantitative view… and we’re fine with that. Managing risk is dynamic.  


European Research Bullish; Quant Bearish - aa. pmis


Matthew Hedrick


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.