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The Old Smoke Wall

“You might as well hit a brick wall as hit that man on the head.”

-Yankee Sullivan


Yep. They used to settle things in this country the old fashioned way. More commonly called “Old Smoke” by NYC’s finest mid-19th century gang members, John Morrissey (Member of Congress), could deflate #MoBro Twitter muscles, fast.


In 1864, a crowd of con men from Manhattan (three-card-monte artists) stepped off the train at Saratoga. Morrissey sauntered up to them with his white flannel suit and quietly told them to leave town. They did.” (The First Tycoon, pg 399)


150 years later, the US stock market’s volume feels like that. After indicting some of our hedgies for insider trading and then going after the machines, central planners are quietly telling people to not trust a game they perpetuated. Evolution, baby.


Back to the Global Macro Grind


It was Victoria Day in my homeland yesterday, so I guess half of America decided to take another Monday off. Who needs to work full-time in an industry where losers who lie and cheat only have to pay a fine with other people’s money anyway?


Total US Equity Volume was down -21% and -41% versus its 1 and 3 month averages, respectively, yesterday. We’ve been hitting you with this DOWN-volume-UP-day thing square in the head this year. Contrary to popular “there’s been no volume for 5 years” thing, the complexion of 2014’s US stock market volume is signaling serious liquidity risk.


To review how we think about liquidity (volume) risk:


  1. Like most things we analyze, rate of change is what matters most
  2. When DOWN-day (down price) volume is accelerating and…
  3. UP-day (up price) volume is decelerating across multiple durations (1 month, 3 month, etc.)

That is not good.


There is a subtlety to analyzing a body of non-linear interconnected risk this way – it’s called hard work. You have to mundanely write down and/or register every day’s PRICE/VOLUME data, then overlay it with implied volatility assumptions across multiple durations.


I know. If you do math, it’s not as complicated as having a strategist tell you “but the market is up.” But we Street fighters on 2.0 weren’t born into just knowing what markets are going to do next, so we have to #grind for each and every data point. #process


“So” what if this PRICE/VOLUME signal is doing this and the market isn’t “up”?


  1. The Russell 2000 bounced on no-volume to yet another lower-high of 1114 yesterday
  2. At -4.3% YTD, the Russell2000 is still bearish on both our immediate-term TRADE and intermediate-term TREND durations

That’s really not good.


And if you dare saunter on over to the three-card-monte-perma-bulls and tell them that the Russell 2000 breaking down is a bearish growth signal, prepare for them to:

  1. Get a little uncomfortable as they rattle off lagging economic indicators
  2. Make a few snide remarks about what the market has done since they missed calling the last 10-20% decline
  3. Then leave the room before you show them a chart of bond yields

*hint (the charts of the Russell growth index and growth-slowing 10yr bond yields are the same)


Once we get rid of those guys, the real debate starts (the one between real-time market price, volume, and data). What is causal to driving slow-growth in both the Russell and bond yields? What’s causal and correlating? What is neither?


Almost 6 months into 2014, what is clearly causal to slowing US consumption growth is #InflationAccelerating. But if you live in the real-world, you already know that. What’s less obvious are the 6 month correlations between currency and commodities:


  1. CRB Commodity Index (19 commodities) inverse correlation to US Dollar Index is -0.77
  2. Soybeans have a 6 month inverse correlation to the USD of -0.75
  3. Corn and Wheat have 6 month inverse correlations to USD of -0.74 and -0.70, respectively
  4. WTI Crude Oil has a 6 month inverse correlation to USD of -0.66
  5. Gold has a 6 month inverse correlation to USD of -0.64

In other words, if you get the purchasing power of The People (USD) right, you’re probably going to get the rate of change in inflation/deflation right. And if you get the slope of inflation right, you’re probably going to get the rate of change in real-growth right.


As to why traditionally trained Keyensian economists who have missed calling every US consumption slowdown since Q1 of 2000 don’t get these very basic points right, no worries. You may as well bang your head against the Old Wall.


Our immediate-term risk ranges are now as follows (we have 12 of Global Macro ranges with a TREND signal overlay in our Daily Trading Ranges product):


UST 10yr Yield 2.47-2.58%


RUT 1089-1125

USD 79.31-80.21

Brent 108.60-110.45

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Old Smoke Wall - Chart of the Day


TODAY’S S&P 500 SET-UP – May 20, 2014

As we look at today's setup for the S&P 500, the range is 32 points or 1.07% downside to 1865 and 0.63% upside to 1897.                                                           













  • YIELD CURVE: 2.19 from 2.20
  • VIX closed at 12.42 1 day percent change of -0.16%


MACRO DATA POINTS (Bloomberg Estimates):


  • 7:45am/8:55am: ICSC/Redbook weekly sales
  • 12:30pm: Fed’s Plosser speaks in Washington
  • 1pm: Fed’s Dudley speaks in New York
  • 4:30pm: API inventories



    • Water Resources bill H.R. 308 may be taken up on House floor as House-Senate conference report
    • Finra annual conf. in Washington; speakers include SEC Commisioner Dan Gallagher
    • 9am: Natural Products Assn CEO Dan Fabricant at BGov conference
    • 9:30am: House Oversight/Govt Reform subcmte hearing on misspent Medicare funds
    • 10am: House Appropriations subcmte FY15 budget bill markup for Agriculture Dept, FDA, related agencies
    • 10am: Senate Appropriations  mark up Military Construction and Veterans Affairs bill spending bills
    • 10:30am: FCC Chairman Tom Wheeler  before House Energy & Commerce panel on agency oversight
    • 3:30pm: House Fin Svs Cmte’s Hensarling at Heritage Foundation
    • U.S. Senate holds procedural vote on Fischer Fed nomination
    • Ark., Ga., Idaho, Ky., Ore., Penn., hold primaries
    • U.S. ELECTION WRAP: Primaries; Senate Outside Ad Buys



  • Cobham to buy Aeroflex for $895m to grow in civil market
  • Pfizer’s $117b AstraZeneca hunt said likely to fail
  • Investcorp said to tap JPMorgan for $1.1b Esmalglass sale
  • Credit Suisse agrees to plead guilty in tax case, pay $2.6b
  • Apple, Samsung blame the other for blocking settlement talks
  • America Movil unable to buy significant part of AT&T stake
  • Visa, MasterCard forced to weigh Russia exit as elections loom
  • Twitter said to be discussing music deals including SoundCloud
  • T. Rowe’s Twitter bullishness wanes; firm dumps 26% of stake
  • LSE in exclusive talks with Russell parent company
  • Cisco, WWE, Jarden CFOs speak at Bloomberg conference
  • BP faces billions in spill payments after court upholds deal
  • RSA to sell Canadian broker to Arthur J. Gallagher
  • U.K. inflation up more than forecast on transport costs
  • China suspends cybersecurity cooperation after U.S. charges
  • Thai military declares martial law, seeks to quell protests
  • Microsoft hosts new product event in NYC
  • BlackRock CEO Fink speaks at ICI meeting



    • Apollo Investment (AINV) 7:30am, $0.21
    • Dick’s Sporting Goods (DKS) 7:30am, $0.52
    • Donaldson Co (DCI) 7am, $0.47
    • Home Depot (HD) 6am, $0.99 - Preview
    • Medtronic (MDT) 7:15am, $1.12 - Preview
    • Stage Stores (SSI) 6am, ($0.38)
    • Staples (SPLS) 6am, $0.21 - Preview
    • TJX (TJX) 8:28am, $0.67 - Preview



    • Analog Devices (ADI) 4:05pm, $0.56
    • Heico (HEI) 5:14pm, $0.40
    • Intuit (INTU) 4pm, $3.50
    • Salesforce.com (CRM) 4:05pm, $0.10 - Preview
    • Tidewater (TDW) 4:03pm, $0.63




  • Gold Demand in India Seen Climbing as Government May Ease Curbs
  • WTI Trades Near Four-Week High on Cushing Supplies; Brent Steady
  • Stumpy Brazil Cane Crop Signals World Sugar Deficit: Commodities
  • Nickel Drops on Speculation Supplies Are Adequate to Meet Demand
  • Gold Consumption in Thailand Drops in Q1 as Bar Demand Slumps
  • Wheat Rises Most in Two Weeks as U.S. Crop Ratings Deteriorate
  • Palm Oil Drops to 4-Month Low as Malaysian Exports Seen Slowing
  • Port Hedland Engineers Union Set to Continue Talks with Teekay
  • Commodity Assets Said by Barclays to Fall $2 Billion in April
  • U.S. LNG Won’t Replace Russian Gas as Europe Seeks Options
  • Ukraine Must Show Will to Pay Before Gas Talks, Medvedev Says
  • Europe Has 28-Year Shale Gas Rebuff to Russia: Chart of the Day
  • Japan Triples Oil Imports, Boosts LNG 23% on Nuclear Shutdown
  • Gold Demand Little Changed as Jewelry Counters Lower Investment

























The Hedgeye Macro Team














May 20, 2014

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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.

Poll of the Day Recap: 89% Say Gas Prices Not a Factor in Memorial Day Plans

Takeaway: 89% NO; 11% YES.

Oil prices are surging – meaning higher prices at the pump – just in time for Memorial Day weekend when Americans are being taxed six-ways to Sunday from rent to food. It’s just another sign of #InflationAccelerating. So while every car-owning American who fills up the tank may be feeling the pinch, we wanted to know how it’s affecting your holiday.


Today’s poll question was: As a result of rising gas prices, are you planning to change your Memorial Day plans?


Poll of the Day Recap: 89% Say Gas Prices Not a Factor in Memorial Day Plans - flags 891055a

At the time of this post, an overwhelming 89% of voters said NO; 11% said YES.

Of those who voted NO, voters explained their various reasons:

  • “While higher gas prices will not affect my Memorial Day plans, it has definitely affected my normal day to day driving habits.”
  • “Working class travelers have adjusted their monthly budgets to current prices. Gas prices need to be .50 higher to have the same effect as seen in 2008.”
  • “What's a few extra dollars at the pump between friends??”
  • “I am numb to higher gas prices after at least 5 years at these inflated levels.”
  • “Not sure the price of gas is the swing factor, but it will impact how much the average consumer has left over to spend on potato salad and Bud Light!”
  • “We were already planning to not go anywhere.  The price of gas is generally not a factor in our travel decisions.”

Conversely, as one YES voter said, “I'd rather not go anywhere than spend $200 roundtrip on gas. It's pure insanity."


Hedgeye Retail: Target Execs Should Be Afraid for Their Jobs | $TGT

Takeaway: The fact that Target's CMO personally addressed the anonymous letter in public is telling.

Hedgeye Retail: Target Execs Should Be Afraid for Their Jobs | $TGT - 12


The Truth Hurts


Target CMO, Jeff Jones, in response to an article posted by an anonymous employee on Gawker:


• "You’d think that these two incidents alone [Data Breach & CEO resignation] would create enough pain to last a brand a lifetime but one of the most challenging things that has happened, in my opinion, have been reports, some attributed to unnamed team members, that paint a picture of a culture that is in crisis. When a recent post on a well-known blog called me out by name, it only felt right that I should respond."


• "While we would have preferred to have a conversation like this with the team member directly, speaking openly and honestly, and challenging norms is exactly what we need to be doing today and every day going forward."

Takeaway From Hedgeye’s Brian McGough:

Normally we wouldn't characterize the opinion of one disgruntled employee as indicative of the corporate culture, but the fact that Target's CMO, Jeff Jones, personally addressed the anonymous letter in public is telling. Jones was actually the only person called out as being a positive influence in the executive ranks. He's speaking up on behalf of the executive officers of Target, most of whom are afraid for their jobs.  They should be.


*     *     *     *     *     *


Editor's Note: This is a complimentary research excerpt from Hedgeye Retail Sector Head Brian McGough. Follow McGough on Twitter @HedgeyeRetail

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Hedgeye CEO Keith McCullough walks us through what the markets are telling us about growth, inflation, yield spreads and more.

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