• run with the bulls

    get your first month

    of hedgeye free


The 4% Economy?

“Most successful pundits are selected for being opinionated, because it’s interesting, and the penalties for incorrect predictions are negligible.  You can make predictions and a year later people won’t remember them.” 

-Daniel Kahneman


Last night I gave the keynote presentation at the Trader’s Expo at the Marriot Marquis in Times Square.   Prior to giving the speech, I walked around the conference floor and heard a lot of stories of trading systems that would generate ten bagger returns, some that had triple digit positive performance last year, and so on.  Clearly, the exhibitors needed to grab people’s attention in order to engage in a sales discussion.


Frankly, compared to some of the presentations, I’m guessing my presentation on the U.S. economy was a tad boring.  In my presentation, I gave a quick update on our Q1 Themes and the view that economic growth in the U.S. may be slower than consensus expectations in 2014.   Rightfully so, my prognostication, if you want to call it that, raised some questions.


The 4% Economy? - dj


The first question related to the cover of Barron’s this weekend which heralded the potential return of 4% growth in an article titled, “Why the Economy Could Grow by 4%”.  The article was, in effect, an interview with a group called Applied Global Macro Research (AGMR), and to be fair they sounded like thoughtful guys, who are clearly an outlier with a 4% growth projection for the U.S. economy.


The question poised to me related to how the Hedgeye view differed from the view on the cover of Barron’s.  My response was simple: housing.  The economists from AGMR expect housing to be a massive tailwind.  In the long run, we get their thesis, but in the short run we see headwinds to housing and this more tepid view on the U.S. economy may, sadly, keep us off the cover of Barron’s this year.


Back to the Global Macro Grind . . .


Speaking of housing, I wanted to touch on a few points that make us incrementally more cautious:

  • Mortgage Purchase Applications - This point is highlighted in the Chart of the Day, but at a reading of 171.5 in the MBA purchase index, we are now -22% below the May 2013 peak.  Mortgage applications are a direct leading indicator of home purchases and this implies that home purchase are likely to fall a commensurate amount from the peak;
  • Pending Home Sales – We view housing as a giffen good and our demand driven model was fairly accurate in modeling the acceleration in housing activity.  Alongside the decline in purchase apps, pending home sales are down ~9% year-over-year, which is decidedly negative for forward home price appreciation if price continues to follow the slope of demand;
  • Home Price Deceleration - Corelogic home price data show that after last year’s parabolic rise, home price growth has now decelerated for 3 consecutive months; and
  • Qualified Mortgages - The new “QM” (Qualified Mortgage) rules that went into effect in January tighten standards and increase culpability for both lenders and servicers.   Tighter lending standards will be a drag on aggregate housing activity on the margin – particularly for 1st time home buyers and others with irregular incomes.  First time home buyers are ~35% of the market.  

In the long run, the housing recovery likely does have legs given the nature of the massive over build and then years of inventory drawdown, but in the short run the headwinds noted above will be important to monitor.  The caveat to any view of housing, either negative or positive, is that interest rates will be the biggest driver and if interest rates head meaningfully lower from here (hard to believe that will happen  if the taper is in) then our cautious view on housing would likely become more positive.


Speaking of becoming more positive, and I’m not saying we are just yet, but Merrill’s Global Fund Manager Survey came out this weekend and had some interesting contrarian data points.  First, cash levels have risen from 4.5% to 4.8%, the highest since July 2012.  Second, emerging markets and global energy allocations are at record lows, while global bank allocations are at record highs.  Finally, global staples allocations are at the lowest levels since September 2003 (ahead of CAGNY). 


It is difficult to put too much credence in a set of data we didn’t create or collect ourselves, but it is certainly worth noting the extremes in the Merrill survey.   Much easier to discern is the market based indicators of inflation, which continue to percolate.   An extreme example of commodity based inflation domestically is natural gas, which is up almost 30% for the year-to-date.


Less extreme is the pervasive use of natural gas in the domestic U.S. economy.  According to the Energy Information Administration, there is almost 25 million MMcf used domestically on an annual basis.  If my math is correct that is an almost ~$125 billion input cost into the U.S. economy every year, which is split broadly between heating, residential use and industrial use. 


The bottom line is that if one of the key commodity input costs into the U.S. economy is up almost 30% in the year-to-date that, my friends, is inflationary.  Although perhaps not quite as bad to the economy, even worse is that a coffee addict like myself has to endure Arabica coffee bean prices up 10% this morning!


Our immediate-term Risk Ranges are now:


SPX 1 

VIX 11.89-15.95

USD 80.02-80.76 

Brent 107.99-110.51 

Gold 1 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The 4% Economy? - Chart of the Day


The 4% Economy? - Virtual Portfolio

February 18, 2014

February 18, 2014 - Slide1


February 18, 2014 - Slide2

February 18, 2014 - Slide3

February 18, 2014 - Slide4

February 18, 2014 - Slide5

February 18, 2014 - Slide6 

February 18, 2014 - Slide7

February 18, 2014 - Slide8


February 18, 2014 - Slide9

February 18, 2014 - Slide10

February 18, 2014 - Slide11
February 18, 2014 - Slide12

February 18, 2014 - Slide13


Takeaway: As we look at today's setup for the S&P 500, the range is 43 points or 1.83% downside to 1805 and 0.51% upside to 1848.

TODAY’S S&P 500 SET-UP – February 18, 2014

As we look at today's setup for the S&P 500, the range is 43 points or 1.83% downside to 1805 and 0.51% upside to 1848.               










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.42 from 2.43
  • VIX closed at 13.57 1 day percent change of -4.03%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Empire Manufacturing, Feb., est. 9.00 (prior 12.51)
  • 8:30am: CPI benchmark revisions
  • 9am: Net Long-term TIC Flows, Dec. (prior -$29.3b)
  • 10am: NAHB Housing Market Index, Feb., est. 56 (prior 56)
  • 3:15pm: Fed holds open board meeting on bank supervision


    • President Obama scheduled to give remarks on the economy
    • Washington Week Ahead


  • Actavis said to near $25b deal to buy Forest Laboratories
  • Starr, Partners buy MultiPlan in purchase said at $4.4b
  • German investor sentiment falls a 2nd month on growth caution
  • China said to plan tighter rules for direct-sales cos.
  • Yahoo seeks to focus on mobile, contextual search
  • Apple to introduce iPhone 6 in 3rd quarter: Economic Daily
  • BOJ boost to lending programs signals room for further easing
  • Car sales in Europe rose a fifth consecutive month in January
  • Shanghai Fosun, TPG to buy hospitals operator Chindex
  • Tyson Foods said to buy Goldman Sachs’s Michael Foods
  • Novartis buys CoStim to boost immunotherapy capability
  • Philip Falcone’s Lightsquared files new reorganization plan
  • Google buys Israeli login-security firm SlickLogin
  • Total, Hellman & Friedman may raise $1b in cryogenics IPO
  • Blackstone said in talks to buy some Encana assets: NY Post
  • Starwood Capital Group said to consider IPO, WSJ reports
  • Fed district chief expects tapering to continue: L.A. Times
  • HP got Autonomy audit reports showing hardware sales: FT
  • Banks review rules on FX traders making bets with own cash: FT
  • Auto union regrouping after losing vote at Volkswagen plant
  • Wanxiang wins Fisker Automotive asset auction with $149m bid
  • China provinces/natl data gap narrows as Xi changes metrics
  • China’s Goldleaf Jewelry to pay $665m for ERG Resources


    • Coca-Cola (KO) 7:30am, $0.46 - Preview
    • Cumulus Media (CMLS) 9am, $0.08
    • Dentsply Intl (XRAY) 6:31am, $0.61
    • Diana Shipping (DSX) 7:45am, $(0.06)
    • Duke Energy (DUK) 7am, $0.95
    • Genuine Parts (GPC) 8:49am, $0.91
    • Medtronic (MDT) 7:15am, $0.91
    • NiSource (NI) 6:30am, $0.47
    • Norwegian Cruise Line (NCLH) 6am, $0.18
    • Rona (RON CN) 7am, C$0.10
    • Waste Management (WM) 7:30am, $0.61
    • Wolverine World Wide (WWW) 6:30am, $0.20


    • Access Midstream Partners (ACMP) 4:15pm, $0.54
    • Analog Devices (ADI) 4:01pm, $0.49
    • CF Industries (CF) 4:01pm, $4.41
    • Community Health Systems (CYH) 4:15pm, $0.56
    • Fluor (FLR) 4:05pm, $0.98
    • Healthcare Trust of America (HTA) 5:19pm, $0.04
    • Herbalife (HLF) 4:10pm, $1.28
    • KAR Auction Services (KAR) 4:15pm, $0.27
    • La-Z-Boy (LZB) 4:05pm, $0.35
    • MannKind (MNKD) 4pm, $(0.13)
    • Nabors Industries (NBR) 4:01pm, $0.20
    • NPS Pharmaceuticals (NPSP) 4:01pm, $0.03
    • Oceaneering Intl (OII) 5pm, $0.84
    • Panera Bread (PNRA) 4pm, $1.94
    • Photronics (PLAB) 4:30pm, $0.05
    • Retail Properties of America (RPAI) 4:17pm, $0.03
    • SM Energy (SM) 5pm, $1.45
    • Terex (TEX) 4:15pm, $0.49
    • Yamana Gold (YRI CN) 4:20pm, $0.07


  • Arabica Coffee Jumps Most Since 2004 After Brazil’s Dry Weather
  • Vitol Says Brent Oil Benchmark Needs African Fix as Output Drops
  • Top Gold Forecasters Still Bearish After 2014 Rally: Commodities
  • BHP Joins Rio Tinto in Seeing Iron Ore Price Dropping on Supply
  • Gold Drops From 3-Month High as Buying Seen Deterred After Rally
  • WTI Oil Rises Amid Speculation U.S. Snowfall Will Bolster Demand
  • Copper Declines as Top User China’s Central Bank Drains Funds
  • Corn Rises to 4-Month High as Brazil’s Dry Weather May Hurt Crop
  • Iraq Grain Board to Meet Thai Officials Soon on Rice Import Ban
  • China Steel Demand Poised to Plunge as PMIs, Indexes Show Slump
  • Gold Demand in Japan Tripled Amid Abenomics as Prices Slumped
  • Snow Snarls Travel as Another Storm Strikes U.S. Northeast
  • Iron Ore Bests Metals as Prices Have Gone Nowhere Since 1913
  • Rusal Sees Least Output in at Least 8 Years as Smelters Shut

























The Hedgeye Macro Team














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.

Got A Shovel?

This note was originally published at 8am on February 04, 2014 for Hedgeye subscribers.

“In the real world, action and reward go together.”

-Greg Berns


Greg Berns is part of a stealth movement in America – he’s a neuroeconomist working in the Department of Psychiatry and Behavioral Sciences at Emory University in Atlanta, GA.


John Coates introduced me to Berns in a chapter called Thrill of The Search in The Hour Between Dog and Wolf. Coates went on to suggest that “when the Theory of Relativity dawned on Einstein, he must have had the mother of all dopamine rushes… dopamine, like noradrenaline, does a lot more than motivate the brain: it prepares the body for action” (pg 139).


Was your mind and body prepared for this selloff in US and Japanese equities? I can tell you one thing, my back is in spasm. But I think that has more to do with shoveling snow than being long Japan’s Mother’s Index (-18% in two days). Through action and reward, #History, #Math, and #Behavorial economics continue to be the three pillars of our learning process. Risk happens fast.


Back to the Global Macro Grind


In addition to the crash in Japan’s widely held brokerage index, the Nikkei got crushed for another -4.2% lost last night, taking it to -14% for 2014 YTD. How many hedge funds were snowed into the short Yen, long Nikkei trade last year? Lots.


How many stayed long the Russell 2000 at the all-time high? That was only 9 trading days ago, don’t forget. And while I am certain that everyone on CNBC nailed it, for the rest of us a -7.4% nine day correction from an all-time peak provides a bit of a rush too!


The last time the US stock market had this sharp of a 9-day decline (Russell2000 = down -9.1% in 9 days in November of 2011), Ben Bernanke’s resolve was simple – print, print, print. So remind me why Janet Yellen won’t do the same?


If we get one more economic data point that crashes like yesterday’s New Orders component of the ISM did, remind me why the Mother of All Doves won’t:


A)     Stop the tapering

B)      Talk up more quantitative easing


Setting aside the eureka reality that commodity markets inflating and slowing real-consumption growth don’t give the Fed or the Bank of Japan what they are promising The People (sustainable growth), why won’t Yellen go back to the same old saw?


Maybe, just maybe, Mr. Macro Market is already front-running her on this. I know, while markets front-running our central planning overlords has been the only game in town now for the last half-decade, why would they be doing so again?


Humor Mr. Macro Market for another minute and play this probable (not to be confused with definite) scenario out:

  1. US #InflationAccelerating continues to slow real-inflation adjusted growth
  2. As US #GrowthSlowing freaks out the Fed, they whisper “no-more-taper” to Hilsenrath
  3. Whispers start to bury the Dollar again, Food and Gold prices continue higher yet again, and …

Growth slows even faster!


Oh, and by summer time they’ll be whining about “inequality” at Jackson Hole without accepting that Policies to Inflate only pay those who are long of coffee futures and mortgage-backed-securities, while they pulverize the poor.


Back to how bad that Institute for Supply Management’s (ISM) manufacturing report was yesterday:

  1. Headline ISM dropped -10% sequentially (month-over-month) to 51.3 JAN vs 57 DEC
  2. New Orders in the ISM crashed -20% month-over-month to 51.2 JAN vs 64.4 DEC
  3. Prices Paid in the ISM (inflation in costs) ripped +13% from 53.5 in DEC to 60.5 in JAN  

Yes, since I’m so plugged in politically, I rigged the numbers to fit our Top Global Macro Theme of #InflationAccelerating like a glove. But don’t tell anyone I get this inside info or I’ll have to change the name of my firm.


Again, to review, this wasn’t all about the “weather”:

  1. Inflation (prices) rose, fast, month-over-month… and…
  2. Growth (orders) fell, even faster in kind

So enjoy the “green arrows” this morning. I am sure this market will bounce on no-volume again until we get the next US consumption #GrowthSlowing data point (tomorrow) in the ISM Services report for January.


With the CRB Commodities Index +1.4% vs. Consumer Discretionary (XLY) stocks -8.7% YTD, bulls can blame the weather. But that is the score. In the real world, if you don’t shovel your driveway and get to work, you probably won’t get paid that way either.


Our immediate-term Global Macro Risk Ranges are as follows:


SPX 1735-1783

Nikkei 13918-15109

VIX 16.98-21.79

USD 80.80-81.45

Nat Gas 4.91-5.41

Gold 1242-1274


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Got A Shovel? - CortisolRising


Got A Shovel? - rtas


The Economic Data calendar for the week of the 17th of February through the 21st is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.



Game Day

This note was originally published at 8am on February 03, 2014 for Hedgeye subscribers.

“Welcome to game day… Now it’s real. The score counts. And you either win or lose.”

-John Hamm


That’s how golf and life coach John Hamm opens Part Two of Unusually Excellent: Competence – Leading on the Field With Skill. Russell Wilson did just that last night. Seahawks 43 vs. Broncos 8.


Credibility, Competence, and Consequence – per Hamm’s framework, that’s the epicenter of leadership skill. And since I can’t argue with that, I like it.


Note that in this game there is no credibility in A) cheating and/or B) making a few big “calls.” Credibility is scored in our profession by repeatable processes. If you can score in both up and down markets, you win. So let’s get at it this morning and try to do more of that.


Back to the Global Macro Grind


What’s winning so far in 2014 is not what was winning for most of 2013. That’s because:


A)     Global Inflation is no longer deflating, it’s re-flating

B)      Growth (particularly in the US and across most of Asia) is slowing, not accelerating


On the Asian #GrowthSlowing scene, China’s manufacturing PMI came in at 50.5 (which is a six month low) and non-manufacturing PMI came in at 53.4, lowest reading since December 2008.


All of this, of course, will be reported to you by the ultimate lagging indicators (your central bankers and consensus economists paid by Big Government), on a lag. So keep it here, where Game Day happens every morning at 4AM.


In terms of our Top Global Macro Theme for Q114, #InflationAccelerating:

  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 wk to +2.8% YTD
  4. Cocoa +4.3% last wk to +7.5% YTD
  5. Coffee +9.4% last wk to +13.1% YTD

So we hope you enjoyed flipping out of some of that long-term Starbucks (SBUX) idea and into some CAFÉ (the coffee ETN). One’s price is winning YTD; one’s is losing.


On the #GrowthDivergences front (Hedgeye Macro Theme #2) YTD:

  1. Russell2000 (IWM) -2.8% vs. Utilities (XLU) +2.98%
  2. Emerging Markets (MSCI Equities Index) -6.6% vs. Europe (EuroStoxx600) -1.7%
  3. Japanese stocks (Nikkei) -10.3% vs. Danish stocks (Copenhagen Index) +5.2%

In other words, being long inflation expectations (particularly via breakevens or food inflation) is crushing it YTD, and so is being long European Equity exposure relative to the slowing growth exposures you could be long in the USA or Japan.


That’s not to say that the score may not continue to trend this way. You can make that change in momentum bet this morning if you’d like. You could have doubled down on the Denver Broncos when they were down 22-0 last night too.


Competence in risk management starts the way Seattle started last night; with their defense scoring a safety! Not getting scored on in this game is easily the best way to win. If your shorts can generate positive P&L, all the better.


From a Style Factoring perspective in US Equities, here’s what’s getting lit up like Denver’s defense did:

  1. Consumer Discretionary Stocks (XLY) -1.1% last wk to -6.0% YTD
  2. High Beta Stocks (by S&P quartile ranking in our model) -4.5% YTD
  3. High Short Interest Stocks (again, by quartile) -4.1% YTD

In other words, if you’re overweight any of these Style Factors in a US Equity only portfolio, that’s bad. This is what we call a bullish to bearish reversal in big beta!


But as the game goes on, the score makes more and more sense. With #InflationAccelerating, who gets hurt the most? The Consumer. But don’t tell the Fed that. If growth continues to slow, Janet Yellen’s 1st move will probably be to stop tapering (i.e. devalue the Dollar) and perpetuate more purchasing power pain on The People.


If you don’t like that game recap, go buy another house – and like it. Because, like Barney Frank, Janet Yellen is big on housing, irrespective of it being the mother of all bubbles that got the US consumer into this savings mess to begin with.


Got Savings? At 3.9% (current US Savings Rate as a % of Disposable Income – see Chart of The Day), Americans are once again dipping into those in order to keep up with their over-spending neighbors (and the government’s understated cost of living).


But no worries, Game Day for the government will include some cochamamy narrative about “inequality” in America while they dream up the next currency devaluation policy to encourage The People to lever up again. If they go for it, the score of that policy will count too – and this time the Keynesians will lose as big as the Broncos did.


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


Nikkei 14532-15222

VIX 15.89-20.41

EUR/USD 1.35-1.37

NatGas 4.57-5.41

Gold 1229-1264


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Game Day - Savings Rate


Game Day - val55

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.