Quiet Is Not Safety

This note was originally published at 8am on March 24, 2014 for Hedgeye subscribers.

“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%

SPX 1851-1878

VIX 13.38-17.42

USD 79.11-80.49

EUR/USD 1.37-1.39

Gold 1316-1354


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

Destiny's Coincidence

“A thin line separates destiny from coincidence.”

-T.J. Stiles


That’s a great quote about a great capitalist by T.J. Stiles in The First Tycoon. Cornelius Vanderbilt was a Dutch boy who learned the ways of one of the most important waterways in world commerce from his family’s waterside farmhouse.


Farm life has always tended to erode the line between childhood and adulthood. Cornele (his childhood name) lived a life of work and responsibility, hoeing and milking, piling and shoveling. There was church too.” (The First Tycoon, pg 19)


In other words, one of America’s most important self-made capitalists of the early 19th century was a #grinder. He didn’t borrow to spend. He built things that made money. And he bought companies that he didn’t have time to build. He wouldn’t have been long of bubbles in social media terms.


Back to the Global Macro Grind


What is the destiny of a bubble that #OldWall media refuses to call a bubble? With 74% of companies who have come public in the last 6 months not making any money (only eclipsed by the Nasdaq bubble of 1999 when that number was 80%), what could possibly go wrong?


Destiny's Coincidence - Bubbles floating in the a 007


BREAKING: Nasdaq -2.6% on Friday, snapping @Hedgeye TREND support of 4203


Risk happens fast. With the social media stock bubble crashing (single stock moves have been -20-45% from their all-time peak), the Nasdaq is already -5.3% off its YTD high. Since the SP500 is only -1.3% from her all-time-bubble closing high, it must be a bargain!


To review what last weeks snappy correction in the Nasdaq looked like within the context of everything else:

  1. Nasdaq -0.7% on the week to -1.2% YTD
  2. Dow (which we signaled SHORT on Thursday in #RealTimeAlerts) +0.5% last week, but -1.0% YTD
  3. US Consumer Discretionary stocks (XLY) down another -0.1% last wk to -3.3% YTD

This all makes sense to us as our Top Q1 Global Macro Theme was #InflationAccelerating, which:

  1. Slows real consumption growth (short consumer stocks)
  2. Pays those who are long of inflation, in inflation terms

How does one own 2011 style stagflation?

  1. Utilities (XLU) up another +1.1% last week to +9.2% YTD
  2. REITS (MSCI Index) up another +1.3% last week to +9.5% YTD
  3. Gold up +0.7% last week to +8.3% YTD

That boring #GrowthSlowing setup sure beats being long Yelp (-32% since it’s 1st wk of March social media-bubble high)! See our new Internet Analyst, Hesham Shabaan’s, bearish note on YELP from last week. The growth expectations embedded in that stock are scary.


Away from being long #YieldChasing, you can also be long things like inflation via:

  1. CRB Commodities Index +0.6% on Friday vs Nasdaq -2.6% (CRB Index = +8.8% YTD)
  2. CRB Foodstuffs Index up another +0.6% last week to +19.8% YTD
  3. Coffee up another +2.4% last week to +63.8% YTD

I know, I know. Some of the smartest hedge funds on the planet are not long Coffee – they are long Twitter (TWTR) and Facebook (FB)! Why would you buy something like Pigs (+20.4% YTD), Soybeans (+15.4% YTD), or what Vanderbilt loved to get long of in his early days (Cotton +9.5% YTD)?


Smart in this game is as smart does. That’s capitalism. And so is reminding people of the score. This time won’t be different. Market history says that if A) Inflation Accelerates and B) Growth Slows, equity markets see multiple compression.


Two points of multiple compression on the SP500 (to 14x an earnings number that is too high) gets you 1638. Consensus is still looking for what it should have been looking for at this time last year (multiple expansion as inflation fell and growth accelerated). SP500 consensus for 2014 is still 1928.


Growth, as an investment style factor, looks like this for the last month:

  1. Top 25% Sales Growth (top quartile in the SP500) is -2.8%
  2. Top 25% EPS Growth is -2.6%
  3. High Beta -1.2%

So, is this the beginning of the end for growth stocks, or is it the end of the correction?


Consensus (measured by the net long or short position in futures and options contracts) seems to think the latter. SP500 Index and E-mini moved to a NET LONG position of +38,651 contracts into Friday’s close. That’s the longest the the Street has been of beta since late December.


In other words, right as the front-month of US Equity Fear (VIX) made another higher-low last week, consensus hedge funds covered high and got longer. In our playbook that’s no coincidence. The destiny of bubble prices confirming lower-highs on accelerating down-day volume isn’t either.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.66-2.81%


Nasdaq 4090-4203

USD 79.96-80.66

Gold 1


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Destiny's Coincidence - Chart of the Day


Destiny's Coincidence - Virtual Portfolio

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April 7, 2014

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Takeaway: If we had five minutes or less with TGT’s CEO, here’s what we’d ask.

Here’s the deal…you have five minutes alone with the CEO of a company, leaving time for maybe three questions. If you value your time you’re likely to focus on the key critical uncertainties that exist in the market. And make no mistake, they exist for every company out there.


We’re going to explore these key questions one company at a time, and we’re going to start with Target – which we think is one of the better shorts in retail.


Here’s what we’d ask CEO Gregg Steinhafel if we had five minutes or less.


1. Who Are You Guiding? Who are you talking to with your guidance, Wall Street or Main Street? We’ve never had to ask this question before to a CEO. But the reality is that you’re saying that you are going to comp positive this year, AND Gross Margins will be up (in the US and in Canada). And all of this will happen while you are lowering prices to win back customers who left after the data breach. It seems like an impossible combination. That leads us back to the question – are you giving that guidance to Wall Street or Consumers? This is kind of like what Cruise Companies do during their peak booking season – they generally have positive comments because they’re talking to travel agents, not to Wall Street. If they say that bookings are weak, then agents will discount price more heavily. Similarly, is Target sending out this perplexing message to keep consumer opinion high, even if it means the potential to lower expectations with Wall Street later in the year.


2. Share Loss. Who do you think is gaining the most business from the customers who left? For argument’s sake, let’s assume that it’s Wal-Mart. Do you think that WMT is prepared to let that business go so easily? Will you match Wal-Mart if it comes down to price? In reality, the people that left did not leave because of price. They left because of trust. You might be able to buy back trust, but you’ll have to undercut Wal-Mart on price rather significantly. If that’s true, refer to question #1.


3. What does Target want to be? That sounds like a ridiculous question at face value. But the reality is that it used to be Wal-Mart vs Target – in share of market, share of mind and share of investment dollars. But as bad as Wal-Mart’s rap sometimes can be, it has over 10,000 stores under 71 banners in 27 countries. It has several formats – from Supercenters, to warehouse clubs, to neighborhood markets, and it is even beta-testing C-stores/gas stations. At least it’s trying to evolve. Target has just has one primary format in North America, with a token operation in India. The point is that Target used to be right there with WMT – but now it seems to be somewhere between WMT and Kohl’s. When you look out five to 10 years, what will Target look like?


Bonus Question (if he hung around an extra 2 minutes).

Do you think you fired your customer? JC Penney fired its customer. Ron Johnson said at the time that he did not. Lululemon fired its customer. Chip Wilson said at the time that he did not. Both of those retailers will likely take 2-3 years to get an acceptable portion of customers back. Do you think that you have fired your customer? Your guidance suggests that the answer is No. (Note: we’d give him all the credit in the world if he said Yes – because it would suggest he’s doing something about it).


TODAY’S S&P 500 SET-UP – April 7, 2014

As we look at today's setup for the S&P 500, the range is 50 points or 1.35% downside to 1840 and 1.34% upside to 1890.                                                 










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.31 from 2.31
  • VIX closed at 13.96 1 day percent change of 4.41%

MACRO DATA POINTS (Bloomberg Estimates):

  • 11am: U.S. to announce plans for auction of 4wk bills
  • 11:45am: Fed’s Bullard speaks in Los Angeles
  • 3pm: Consumer Credit, Feb., est. $14b (prior $13.698b)


    • Obama speaks on economy in Prince George’s County, Md.
    • Senate plans vote on unemployment insurance extension
    • IRS Commissioner John Koskinen to testify on FY15 budget request before House Appropriations panel
    • Senate Finance Cmte Chairman Ron Wyden, D-Ore., gives keynote address at BNEF conference on Future of Energy; 1:10pm


  • Tech stocks drop; puts trade most since 2010 flash crash
  • Lawsky said to probe alleged Credit Suisse role in tax shelters
  • Holcim to merge with Lafarge to create biggest cement maker
  • India’s Sun to acquire Ranbaxy in $3.2b stock deal
  • BlackRock boosts top ranks in 2nd reorganization in 2 yrs
  • Wesfarmers to sell insurance broking to Arthur J. Gallagher
  • Billionaire Drahi to buy Vivendi’s SFR in $23b deal
  • Potash Corp. brings Doyle era to a close as Tilk named next CEO
  • Pfizer’s Palbociclib shows trend for improved survival
  • Bogus private-equity fees said found at most firms in SEC exam
  • ’Captain America’ Opens With $96.2m, an April Record
  • German industrial output rose more than forecast in Feb.
  • Global ad spending to rally, grow 5.5% in 2014: ZenithOptimedia


    • A Schulman (SHLM) 4:01pm, $0.33
    • Novagold Resources (NG CN) 4:30pm, C$(0.03)


  • Brent Oil Drops as Libyan Rebels Agree to Open Ports; WTI Slides
  • Copper Titans Gather as Decade-High Glut Overshadows Quakes
  • Speculators Mistime Bearish Gold Bets Before Rally: Commodities
  • Nickel Rises as Biggest Producer Says Supplies Might Run Short
  • Potash Corp. Brings Doyle Era to a Close as Tilk Named Next CEO
  • Palm Oil Reserves in Malaysia Dropping to Lowest in Three Years
  • Coffee Advances on Concern Drought to Curb Supplies; Sugar Drops
  • Gold Trades Below One-Week High as Investors Weigh Fed Outlook
  • Wheat Rises as Report May Show U.S. Dryness Damaging Plains Crop
  • U.S. Gasoline Prices Rise to Eight-Month High in Lundberg Survey
  • Hedge Funds Buy Crude as U.S. Gasoline Pump Prices Jump: Energy
  • Libya Crude Oil Sales to Rise as Rebels Surrender Two Ports
  • China Demand Weighs on Iron Ore Prices, Estimates Mostly Flat
  • JPMorgan’s Ouyang Said to Quit as Head of Asia Commodity Trade

























The Hedgeye Macro Team














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