March 24, 2014

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Quiet Is Not Safety

“Quiet is no certain pledge of permanence and safety.”

-James A. Garfield


From the innovation that flowed from the US Centennial Exhibition Fair in Philadelphia in 1876 to the uncertainty associated with the Republican Convention in Chicago in 1880, Destiny of The Republic (by Candice Millard) ranks at the top of my #history reading list YTD.


Garfield may be one of the lesser known US Presidents, but the prescience and leadership embedded in some of his quotes are quintessentially free-market American. #timeless


He embraced uncertainty; he encouraged winning and losing. He didn’t prey on the ignorance of The People; he encouraged its education. He was as progressive as any President before him. He was nothing like the politicians you have to endure today.


Back to the Global Macro Grind


Today you have to deal with a US government (both Republicans and Democrats) that is either lying to you about real-world economics (inflation) or isn’t market-literate enough to be able to tell you the truth if it tried. I’m not sure what’s worse.


However, I am sure that whatever is left of free-markets will front-run the government’s proactively predictable behavior. While they may not be acknowledged in D.C., Burning The Buck and never calling a devalued currency inflationary are core market beliefs.


For a few days last week (actually for a day and a half), the market suspended this belief and:

  1. Bought US Dollars
  2. Sold Gold
  3. Sold Bonds



That’s what you should have done for literally all of Q1 of 2013 though. It’s Q1 of 2014, and the 2013 @Hedgeye TREND is over.


On Friday, everything reverted to the mean (towards the 3 month TREND):

  1. Dollar made another lower-YTD-high and went back down
  2. Gold made another higher-YTD-low and went back up
  3. Bonds had another great day, after v-bottoming from their Wednesday #RatesRising headfake

All the while, with the Dow Jones Industrials Index banging its head against the #OldWall to try to get itself to “up” for 2014 YTD (it’s -1.7%), food #InflationAccelerating continued with the CRB Foodstuffs Index up another +1.8% to +18.1% YTD.




Sure, oil remained under pressure (Brent Oil -1.2% last week) and that remains a bearish TREND signal @Hedgeye this morning (don’t be long oil with +406,967 net long futures/options contracts outstanding!), but that didn’t offset more of the same in terms of what components of the US equity market are delivering you the absolute return bacon YTD.


Mmm, #bacon (lean hog prices +31% YTD)…


From a sub-sector perspective in the SP500 YTD, this is what I mean by that:

  1. US Consumer Discretionary Stocks (XLY) -0.3% last wk (with the SP500 +1.4%) to -1.7% YTD
  2. Slow-growth-yield-chasing Utilities (XLU) +0.1% last wk to +6.7% YTD

In other words, whether your government calls it inflation or not, inflation slows real-consumption growth in America. So don’t get frustrated by it – just own it. #InflationAccelerating is a position that at least 10-20% of Americans can profit from.


No, that’s not a US political leadership message. It’s the winning market message – and, sadly, that is a losing one for at least 80% of America. The quiet and safety of the world buying US Dollars last year is ending. The 1-year average net long position in the USD (CFTC futures and options contracts) is +16,540 contracts, but:

  1. 3 months ago, the net long position went to flat
  2. 2 weeks ago, it moved to modestly net short
  3. Last week it dropped to a 1yr low of -12,167 net short

Yep, as Hemingway would say, at first the risk of your currency losing credibility happens slowly, then it happens all at once. The pledge of permanence of a #StrongCurrency advocated by Presidents like Garfield may be as worn out as (pre-1913 Fed Act days) free-market capitalism itself.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.62-2.82%


VIX 13.38-17.42

USD 79.11-80.49

EUR/USD 1.37-1.39

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Quiet Is Not Safety - Chart of the Day


Quiet Is Not Safety - Virtual Portfolio

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


TODAY’S S&P 500 SET-UP – March 24, 2014

As we look at today's setup for the S&P 500, the range is 27 points or 0.83% downside to 1851 and 0.62% upside to 1878.                                      










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.31 from 2.32
  • VIX closed at 15 1 day percent change of 3.31%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Chicago Fed Natl Activity, Feb., est. 0.10 (pr. -0.39)
  • 9am: Fed’s Stein speaks in Washington
  • 9:45am: Markit U.S. PMI Prelim., March, est. 56.5 (prior 57.1)


    • President Obama attends Nuclear Security Summit in The Hague, meets with G-7 leaders to discuss Ukraine
    • Senate meets to consider S.2124, its Ukraine aid bill, at 2pm, votes expected 5:30pm
    • 9:30am: Supreme Court lists cases it plans to consider
    • U.S. ELECTION WRAP: Chemical Group Is Third-Biggest in 2014 Ads


  • Advent, Bain to buy Nordic payment firm Nets for $3.1b
  • Apple said in talks with Comcast on streaming-TV service: WSJ
  • Nokia says completion of Microsoft deal is delayed until April
  • China manufacturing gauge unexpectedly falls in March
  • Chinese jet spots objects in search area as weather worsens
  • JPMorgan’s China investment banking CEO Fang Fang to leave
  • CFTC issues warning of possible legal action in swaps probe: FT
  • U.S., EU free trade deal to limit investor protection: FAZ
  • Euro-area March PMI falls to 53.2 vs 53.3, matches est.
  • Obama in Europe, Stress Tests, Microsoft: Wk Ahead March 22-29


    • Sonic (SONC) 4:01pm, $0.06


  • Gold Declines on Fed as Palladium Reaches Highest Since 2011
  • Korea Seeks Cut of $3 Billion Illegal Gold Trade With New Market
  • Hedge Funds Defy Goldman as Gold Bears Thank Yellen: Commodities
  • China to Restart Copper Recycling Tax Rebate, Metals Group Says
  • Copper Drops in London as China’s Slowdown Seen Curbing Demand
  • Brent Oil Slips for First Time in Three Days on China; WTI Holds
  • Silver Vault for 600 Tons Starting in Singapore as Demand Climbs
  • Rubber Drops to 2-Week Low as China’s Slowdown May Weaken Demand
  • Corn Climbs as Demand Growing for U.S. Supplies; Soybeans Drop
  • Japan’s Copper-Alloy Demand Seen Little Changed as Tax Increases
  • Houston Channel Closed to Contain 4,000-Barrel Oil Spill
  • Ukraine Billionaire Sought by U.S. Has Key to Putin Gas Cash
  • Indonesia Commando Turns Rancher in Would-Be Path to Leader
  • Tin at $24,000 Is Seen as ‘Ideal Level’ for Indonesia’s ICDX

























The Hedgeye Macro Team















Takeaway: *Reminder - We will be hosting a call titled LULU: Our Thesis vs. Consumer Opinion - Round 2 today at 11:00 am ET

We will be releasing our new BLACKBOOK and hosting a call detailing our latest work on Lululemon (LULU)  today at 11:00am ET.


We turned bearish on LULU in the Fall and conducted a consumer survey on key issues impacting demand in December. The results flashed major warning signals. So we pressed our short the week before the company preannounced and guided down.


We are currently re-running our survey to reassess the health of the brand from the consumers' vantage point. We will be asking many of the same questions that we did a quarter ago, which will allow us to look at the incremental change over the past few months. Rate of change matters to us more than anything with this name. The company is set to report earnings three days later on Thursday March 27th.




We'll explore in detail the following topics:

  1. Does LULU need to begin a more aggressive discounting strategy?
  2. New brands are encroaching on LULU's turf, is that rate slowing or accelerating?
  3. What is LULU's perceived price/value equation relative to other brandsand how is that changing?
  4. Growth in points of distribution for Yoga product - a key competitive threat for LULU.
  5. Insight into our store overlap analysis between Athleta and Lululemon
  6. UnderArmour scored so close to Nike in our last survey - which was a big surprise. Nike has been fighting back. Is it working?
  7. Is the 'I hate LULU Management!' factor (present in 58% of people responding last time) - still as severe? Any improvement?        


  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 154675#
  • Materials: CLICK HERE


The call will be held on Monday, March 24th at 11:00am ET. Please contact for more information.

#PROCESS: A Summary of Our Current Market & Economic View

Takeaway: We became incrementally more bearish on growth at the beginning of 1Q alongside the breakdown in the USD & 10Y Yields and the VIX breakout.

Editor's note: This research note was originally published March 20, 2014 at 11:24 in Macro. For more information on how you can subscribe to Hedgeye click here.

"If I see an ending, I can work backwards."

- Arthur Miller


#PROCESS: A Summary of Our Current Market & Economic View - process2 

Hedgeye CEO Keith McCullough outlined the thought process behind our view of yesterday’s Fed announcement and the how/why of our subsequent positioning in this morning’s strategy note (Early Look: Fade The Fed's Forecast). 


Below we summarily recapitulate that thought process in the context of both our research and risk management views.   


#PROCESS: A Summary of Our Current Market & Economic View - drake1


1Q14 Macro View Redux:  We became incrementally more bearish on growth at the beginning of 1Q alongside the breakdown in the $USD and 10Y Yields and the breakout in the VIX. 


From a positioning perspective, we increased our cash allocation and shifted away from pro-growth consumer leverage towards slower-growth (bonds, gold, slower growth equities, inflation hedge commodities) exposure.


The subsequent and significant deceleration in the preponderance of fundamental macro data served to confirm the price signals. 


Recall, we love the pro-growth, factor constellation of #StrongDollar + #RatesRising that characterized most of 2013,  


A return to the Dollar Up/Rates Up/Stocks Up regime, confirmed by both the price and research signals, would certainly shift our intermediate term growth outlook upward but the data doesn't support that shift in view here (yet). 



#PROCESS: A Summary of Our Current Market & Economic View - bada


THE RISK MANAGEMENT:   Inclusive of yesterday’s price action, the $USD and 10Y Yields remain broken Trend while the VIX and Gold remain bullish on a Trend basis.   


In the context of our view of the Risk Management Signal as a leading indicator of fundamentals, from a quantitative perspective, we’d need to see the following occur for us to get back behind the growth trade 

  1. US Dollar Index breaks out > $81.14 TREND resistance
  2. US 10yr Yield breaks out > 2.81% TREND resistance
  3. Gold snaps $1278 TREND support


#PROCESS: A Summary of Our Current Market & Economic View -  USD


#PROCESS: A Summary of Our Current Market & Economic View - Gold


#PROCESS: A Summary of Our Current Market & Economic View - 10Y

THE FUNDAMENTAL:  The fundamental data decelerated materially in 1Q14.  We saw some multi-decade/record sequential drops in various ISM sub-indices (for example) and while the weather did have some impact, we’d argue the slope of growth was negative vs 2H13 levels even if you discount for the weather distortion. 


Indeed, it’s likely we get a post-weather distortion bounce in the reported data over the next couple months – the question, however, will be whether we can recover to a positive slope of growth from a trend perspective. 


Growth math, after all, is geometric – you have to go up more than you went down on a percentage basis to get back to breakeven.


In the context of the summary table below, we expect the “latest data” column to improve from the homogenous sea of “Worse” that existed in February to a more heterogenous mix of “Better”/”Worse” as we comp exaggerated Jan/Feb declines.   


From a fundamental perspective, we’ll be looking for the TREND data  (3M/6M/TTM Ave) to reflect a re-acceleration.  


#PROCESS: A Summary of Our Current Market & Economic View - Eco Summary 031914



THE COMPS In short, the comp setup gets progressively tougher for two more quarters as Growth Comps get increasingly difficult while inflation comps ease into 3Q14. 


At the least, progressively harder top line comparisons alongside increasingly harder margin comparisons is a comp dynamic to be wary of on the long side – particularly when both the quant and fundamental data aren’t yet confirming the pro-growth call.   


#PROCESS: A Summary of Our Current Market & Economic View - UNITED STATES


THE PLAN IS THE PLAN WILL CHANGE:  The above highlights the summary output of our integrated research-risk management process post the hawkish lean out of Yellen et al. 


The process isn’t perfect, but it’s dynamic, quantified and repeatable and its happened to work a good deal more than not over the last 6 years.  


Of course, the process also dictates we change our view/positioning alongside the collective change in the price signals and fundamental data.  The above outlines the primary metrics and levels we’ll be using to manage our exposure from here.


Fascinating and frustrating, but definitely not boring.  


Current Positioning:  15 Longs, 5 Shorts 



Christian B. Drake



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