Fishy Feelings

“It’s ok to eat fish because they don’t have any feelings.”

-Kurt Cobain


One of the core #behavioral principles in Jonah Berger’s Contagious is emotion. You need to make people feel something. And that something can be positive or negative, provided that it delivers what he calls “high arousal.” Awe, Amusement, Anger, and Anxiety (pg 109) will all do the trick.


Fishy Feelings - shark


Whether it was Janet Yellen telling you she is “extraordinarily committed” to burning your currency or Michael Lewis proclaiming his book is for the “little guy,” it was all out there yesterday.


So let’s do it for the children. Let’s keep the risk free rate of return on American Savers at 0% forever and have the FBI raid high-frequency-tweeters. We commoners of capitalism don’t have any feelings anyway.


Back to the Global Macro #Grind


On literally no volume yesterday, the SP500 made its best attempt to bubble itself back up to her all-time-closing high of 1878. Just wait until they ban all technology and bring back the NYSE dinosaurs – when you get squeezed, you’ll feel no volume at all.


I better be careful about calling anything we do innovative, or the fun-cops are going to come after me too. The “little guys” (read big lazy guys at bailed out #OldWall banks that can’t compete with math) have their biggest lobby yet.


At the risk of explaining how fractal math helps investors reading this note front-run the machines, let’s just keep our market update to a simple 3-factor model this morning instead:

  1. PRICE

And let’s score the US stock market (SP500) on all three:

  1. PRICE - making higher-lows, but not yet higher-highs (vs. the all-time closing high)
  2. VOLUME – decelerating on up days; accelerating on down days
  3. VOLTILITY – front-month VIX continues to signal higher-lows and that the term-structure of VIX is way too complacent

Notwithstanding Biotech and Social Media stocks dropping 15-35% in 2-weeks, what could possibly go wrong in Q2?

  1. FX – the US Dollar continues to signal long-term TAIL risk (trading below our TAIL risk line of $81.17 on the US Dollar Index)
  2. 10YR – continues to signal a series of lower-highs and remains below @Hedgeye TREND resistance of 2.81%
  3. SECTOR VARIANCE – Consumer Stocks (XLY) -3.2% vs slow-growth #YieldChasing Utilities (XLU) +9.2% YTD

I know. I know. Yellen has an implicit policy to Devalue the Dollar, let #InflationAccelerating (Food Prices +19% YTD) rip America’s poor a new one, and slow 71% of the US economy (Consumption), but you can go eat a REIT (+8% YTD), and like it.


If inflation slowing real US consumption growth wasn’t enough, now we have a series of non-weather related #GrowthSlowing data points interconnecting around the world. Here’s this morning’s macro data:

  1. CHINA – HSBC PMI (producer manufacturing index) slowed yet again in March to 48.0 vs 48.5 in February
  2. JAPAN – PMI slowed again in MAR to 53.9 vs. 55.5 in FEB
  3. UK – PMI finally slowed sequentially to 55.3 MAR v. 56.9 in FEB

Yep, in spite of its strong (relative) fiscal, monetary, and currency policy, even the United Kingdom is subject to gravity (i.e. at some point the rate of change in the economic acceleration slows). But, don’t worry, Keynesian economic policy makers say you don’t have to feel that.


They’ll smooth it out. You know, rig gravity. Right, right. And Larry Summers is my uncle.


Amused or anxious yet? No worries - all the backward looking political economists will not be writing about any of this today, because they’re still trying to fit the #weather data to a real consumption #GrowthSlowing narrative that they have once again missed.


If you’re in the 10% of America who gets rich on government spending, money printing, and selling books to mediocre minds in the media, you don’t have to have any feelings about that either. Remember, it’s for the children.


Our immediate-term Global Macro Risk Ranges are now:



Nikkei 14098-14887

VIX 13.56=15.58

USD 79.81-80.44

Pound 1.65-1.67

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fishy Feelings - Chart of the Day


Fishy Feelings - Virtual Portfolio


TODAY’S S&P 500 SET-UP – April 1, 2014

As we look at today's setup for the S&P 500, the range is 24 points or 0.98% downside to 1854 and 0.30% upside to 1878.                            










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.31 from 2.30
  • VIX closed at 13.88 1 day percent change of -3.68%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am: ICSC weekly retail sales
  • 8:55am  Redbook weekly sales
  • 9:45am: Markit U.S. Manufacturing PMI, March final, est. 56 (prior 55.5)
  • 10am: ISM Manufacturing Index, March, est. 54 (prior 53.2)
  • ISM Prices Paid, March., est. 59.5 (prior 60)
  • 10am: Construction Spending, m/m, Feb., est. 0% (prior 0.1%)
  • 10am: IBD/TIPP Economic Optimism, April, est. 46.0 (prior 45.1
  • TBA: Domestic Vehicle Sales, March., est. 12.4m (prior 11.98m)
  • Total Vehicle Sales, March., est. 15.8m (prior 15.27m)
  • 4:30pm: API weekly oil inventories


    • House may take up Senate-passed measure w/Ukraine aid, Russia sanctions
    • 9:30am: Caterpillar’s Chief Tax Officer Robin Beran, Financial Svcs Division VP Julie Lagacy, former Senior Intl Tax Manager Rodney Perkins scheduled to testify before Senate Homeland Security and Govt Affairs panel on offshore tax strategy
    • 10am: Supreme Court may issue opinions
    • 12pm: FCC Commissioner Michael O’Rielly delivers remarks at Federal Communications Bar Assn
    • Budget panels/hearings
    • House Budget Cmte’s Ryan plans FY15 budget resolution release
    • 3pm: House Appropriations panel on financial services with Chairman Mary Jo White
    • U.S. Election Wrap: Obama Backs Schatz in Hawaii


  • GM CEO Mary Barra testifies before House Energy panel on recalls
  • FBI probes high-frequency traders for abuse of nonpublic information
  • NATO ministers meet on Ukraine as Russia starts troop pullback
  • Automakers incl. Chrysler, Ford, GM report March auto sales
  • HP reaches $57m settlement in shareholder lawsuit
  • Yahoo said to be in talks for News Distribution Network: WSJ
  • OCBC bids $5b in biggest Hong Kong bank offer since 2001
  • Obamacare sign-up ends as it began with crashes, new challenges
  • Euro-area manufacturing stays near 3-year high
  • Euro-area unemployment stays at 11.9%, Italy jobless at record
  • China HSBC March manufacturing PMI 48.0; est. 48.1
  • Macau March casino rev. climbs 13.1%, est. 13%
  • CAT’s Robin Beran at Senate panel on offshore tax strategy
  • House Budget Cmte Chairman Paul Ryan releases budget plan
  • North Korea shows no signs of missile launch, South says
  • Bouygues extends its offer for SFR by two weeks
  • Malaysia plane hunt may take long as start point uncertain


    • Apollo Education Group (APOL) 4:01pm, $0.19


  • Commodities Defy Citigroup ‘Death Bells’ With Quarter’s Best
  • China Milk Thirst Hands U.S. Dairies Record Profits: Commodities
  • WTI Drops for Second Day on China Economy Concern; Brent Steady
  • Japan Traders Seen Returning $3 Billion on Commodities Fall
  • Soybeans Rise to Nine-Month High as U.S. Reserves at 10-Year Low
  • Gold Trades Near 7-Week Low as Investors Weigh Stimulus Outlook
  • Copper Trades Near Three-Week High on China Stimulus Speculation
  • Rebar in Shanghai Advances as Iron Ore Surges Most Since August
  • Sugar Exports From Pakistan Seen Dropping as Inventories Shrink
  • Pecora Sees Gold Bottom This Year Before Rebound Toward Record
  • Gazprom Raises Ukraine Gas Price as Government Seeks Cash
  • Hong Kong Property Tycoon Making $533 Million Solar Bet: Energy
  • European Gas Prices Plunge on High Storage Levels, Mild Weather
  • Iron Ore Trims Quarterly Loss as China Seen Countering Slowdown

























The Hedgeye Macro Team














April 1, 2014

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Early Look

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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.

How Do You Spell Denial? T-A-R-G-E-T

Takeaway: Target brass is living in denial.

Editor's Note: This is a complimentary research excerpt from Retail Sector Head Brian McGough. For more information on our services, click here.

How Do You Spell Denial? T-A-R-G-E-T - tar5


Standard & Poor's Cuts Target's Debt Rating

  • "Ratings agency Standard & Poor’s has cut the debt rating of Target Corp. by one notch to 'A' from 'A+,' and the outlook is 'stable.'”
  • "The agency said it expected a 'lingering effect' on customer traffic through the first half of 2014, adding too that expenses related to the breach are likely as well."


We rarely call out a ratings change by Standard & Poor's as newsworthy. But this is Target we're talking about here. There's nothing wrong with this downgrade as it's grounded in a real world event. (If you've been living under a rock the past 3-4 months, and don't know what we're referring to, click here.)  But here's the problem: Target still does not see it. They don't get it. Its guidance for positive comps and gross margin improvement screams 'denial.'

Learn more about Hedgeye.

Poll of the Day Recap: Rig Her Up, Flash Boys!

As most of the financial world knows by now, author Michael Lewis appeared on 60 Minutes last night to promote his new book “Flash Boys: A Wall Street Revolt.” What made the headlines was Lewis’ remarks that the U.S. stock market is rigged to hurt average investors to the benefit of high frequency traders, stock exchanges and large Wall Street banks.


“The insiders are able to move faster than you and play it against orders in ways you don't understand,” according to Lewis.


So, we asked in today’s poll:  Do you agree with Michael Lewis' assertion that "the market is rigged?"

At the time of this post, 72% responded YES the market is rigged; 28% said NO.


Besides stating that the market was clearly and obviously rigged, many who voted YES said it’s the only way to win, and can’t remember a time when the stock market wasn’t rigged. Here are some noteworthy comments

  • As someone works with HFT managers and firms I know that they are laughing all the way to the bank.
  • Just look at the action in the market for the past 2 ½ years or so, it is clear as a bell. One would have to be blind not to see it.
  • Stocks in the junior sector I own show constant signs of predatory trading, manipulative moves, naked shorting, bid stack kills, spoofing, etc.  It's endless, perverse, and aggressive.  This never used to exist like this.
  • 60 Minutes didn't even address the futures markets and how the computers are manipulating orders on those exchanges.
  • Ethics, morals and values have no place in the US system anymore (if they ever did) and the means to exploit and yes, steal are so technologically advanced that the system has 99% of us in near complete subjugation.
  • The playing field isn't on the level...  HFT isn't the problem, though... it's only a symptom.  Every leaked market moving "news" item gets to some before everyone skews the price.  Every monetary intervention or expectation of monetary intervention skews price.   This thing is so rigged, we wouldn't know a free market price if it hit us in the head.  Price isn't set by supply/'s supply/denomination/demand.
  • It’s all a big game of regulatory and representative capture.  Insider and rigged trading is alive and well.
  • It’s not the only thing that is rigged in this market!  Please, this market will eventually blow up.

On the opposite end, NO voters said the market is not “rigged” in the normal statutory definition, and that, “it is what it is. Just like Vegas.”


Another NO commenter explained, “Rigged assumes you must lose. Impact HFT doesn't not mean you lose, it simply means you should adjust your risk premium slightly, much like one would do for insider trading in other countries that allow it.  Don’t ignore the liquidity that is provided by these HFT firms and the value it has for all investors.  Should those who invested millions for a faster way not be able to benefit when they are not breaking any rules? Embrace those like IEX who provide an alternative to traditional exchanges.  Let the market solve its own problem, you just need to spread the information.”


As for Hedgeye CEO Keith McCullough, he believes Michael Lewis is merely making hay out of an old issue — five years too late — for monetary gain.


“Michael Lewis has jumped the populist topic shark,” according to McCullough. “The stock market is rigged for the average monkey who hasn't evolved. Lewis takes the side of “horse-and-buggy whip” old Wall Street traders at the advent of the car engine. Note that Lewis had 0% content on the SEC's read-through on evolution.”



BWP: Closing Best Idea Short & Stepping to the Side

We added Short Boardwalk Pipeline Partners (BWP) to our Best Ideas list on 12/2/2013 at $26.34/unit.  After cutting its distribution by 80% in February 2014, BWP’s unit price collapsed (down ~50%), and we feel that our short thesis is largely played out.  With this note we are removing Short BWP from our Best Ideas list.


In our view, BWP neither is fixed nor cheap – thus we simply move to the sidelines instead of turning outright bullish. 


At 18.2x 2014e EV/EBIT and 10.3x 2014e EV/EBITDA, it is certainly screens as inexpensive relative to other pipeline MLPs, but not absolutely.  BWP’s re-contracting risk is significant for several years, particularly in 2018 and 2019.  2014 could be peak earnings for the core businesses, though the out years are naturally difficult to predict.  We also remain concerned with the Company’s high leverage, which looks to be stuck around 5.0x EBITDA; BWP may need to issue equity in 2015 to strengthen the balance sheet.


But from a risk/reward perspective, the setup is no longer asymmetrical to the downside.  What’s already happened (and is priced-in to some degree): narrowed basis differentials crushed BWP’s transportation business; narrowed calendar spreads crushed BWP’s storage and PAL businesses; its G&P ventures (Marcellus and Eagle Ford) have disappointed; it cut the distribution 80%; it guided 2014 below the Street;  consensus has soured on Bluegrass’s prospects; and it got kicked out of the Alerian Index.  We’re concerned that the next catalyst/announcement from BWP could be one to break the losing streak –  repurpose an under-utilized asset?  LNG export investment or deal?  A Loews tender offer?  


Staying short here is not compelling, in our view; our time and effort will be better spent looking for the next BWP.


Research Recap:

Short BWP - New Best Idea (12/02/2013)

Best Idea Short BWP December 2013 (12/10/2013)

Reducing BWP Fair Value to $10/Unit (2/10/2014)


Kevin Kaiser

Managing Director


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