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Client Talking Points


The yield faded fast on yesterday’s no-volume US equity squeeze (total US Equity market volume down -29% versus its three-month average) and has ticked down again this morning to 2.50% (down -20 basis points month-over-month) ahead of the 2014 US GDP consensus forecasts that need to come down. Stay long bonds. 


Forcing consensus to cover/chase, the II Bull/Bear Spread is now re-testing five-year highs (to the bullish side) at +4,100 basis points wide (58.3% Bulls, 17.3% Bears). That and front month VIX with an 11-handle on it is not the all systems go chase-high signal. Sell/short IWM and KRE.


As the Swiss Franc ripped, so did Swiss Exports and GDP (Swiss exports and GDP up +2% year-over-year in Q1 – but what about the weather?). It’s a good thing Keynesian policy makers begging for weak currencies aren’t held accountable to data like this or the UK’s.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road


COMMODITIES: correction day (yesterday) sees no follow through selling this morning @KeithMcCullough


"Being challenged in life is inevitable, being defeated is optional." - Roger Crawford


40 and 10, the number of points and assists, respectively, from Oklahoma City Thunder basketball star Russell Westbrook last night in his team’s 105-92 victory over the San Antonio Spurs in the NBA’s Western Conference Final. That best-of-seven series is now tied at two games apiece.

Truth and Good?

This note was originally published at 8am on May 14, 2014 for Hedgeye subscribers.

“Today, I want to tell you about an investment opportunity with potential high cash flow, a superior structure, a unique sharing agreement, and low risk.” 1983 Prudential-Bache Energy Income Fund marketing video

Between 1983 and 1991 Prudential-Bache Securities raised $1.4 billion from the sale of 35 “energy income fund” limited partnerships to more than 130,000 individual investors.  The yield chase was on as interest rates fell in the wake of the early ‘80s inflation scare, and Wall Street was eager to fill the demand with new products that commanded high fees and commissions.  Prudential-Bache brokers touted the limited partnerships to their retail clients as high-yielding, tax-advantaged, low-risk investments…


Truth and Good? - kevpru


Of course, what seems too good to be true proved to be just that.  By the late ‘80s distributions began to trail false promises as hefty fees ate into the income and asset values fell.  Some of the partnerships borrowed money to maintain the payouts, but it wasn’t a sustainable solution.  Eventually, most of the partnerships slashed distributions and collapsed.


In the class action lawsuits that followed, the plaintiffs alleged that Prudential-Bache “misrepresented and omitted material facts concerning cash distributions to investors by creating the appearance that the partnerships were distributing monies derived from operating income when in reality the distributions were returns of capital…




I traveled to Omaha, Nebraska two weeks ago to pitch the bear case on Master Limited Partnerships to a group of value investors.  Buffett couldn’t fit me into his schedule, but I was lucky enough to meet with seasoned money managers cut from the same cloth. 


These guys understood the MLP basics – tax-exempt energy companies with high current yields, etc. – but not much more.  So I walked through a few of the more surreptitious aspects of the story: the enormous “incentive” fees that many MLPs pay to their General Partners; the conflicts of interest and limited fiduciary duties; the gimmicky accounting; the serial capital raising; and the valuations.


I was showing the group how, since its inception, retail-favorite LINN Energy (LINE) has lost more than $1.4 billion while paying out $3.1 billion in distributions, when a salty Australian in the back blurted out, “The whole thing seems like a big Ponzi scheme to me.”  I shrugged, “My compliance officer doesn’t let me use that word.”


MLPs are essential to the build-out of energy infrastructure that’s needed to support the recent US hydrocarbon production boom – the story is real – but that doesn’t mean all will profit.  The building of the American railroads in the late 19th century was ripe with self-dealing and stock schemes.  James Surowiecki of “The New Yorker” called it, “one of the biggest cons the country has ever seen, with huge losses for investors and huge fortunes for the moguls.  Still, we ended up with a national transportation system.”


It’s been said that there are no new eras, only new errors – most things in finance are cyclical.  We look at the fees that some of the largest MLPs are paying to their GPs today and wonder if this time will be different.  How long can a business that pays two-thirds of its income to its manager survive?

It’s a unique instance of information asymmetry.  MLPs are mostly owned by retail investors – not surprising given the exorbitant fees that they hand over to the wealthy individuals and institutions that own their GPs.  A well-informed investor is unlikely to give his money to a hedge fund manager who defines his own performance, collects a 50% performance fee, and owes limited fiduciary duties to his investors.  Would you invest in that fund?  I hope not.  Giving your money to that hedge fund is a liability, but with the Alerian MLP Infrastructure Index currently trading at 2x the earnings multiple of the S&P 500 (see the Chart of the Day below) despite lower returns on equity (~8%) and higher leverage (~42% debt/capital), that’s still way out-of-consensus.


But we’re OK with that.  It’s a lonely view but we’re not contrarian merely for the sake of it – there’s ample justification for being negative on certain MLPs, and perhaps the timing is right as we enter the later innings of the US infrastructure growth boom, and the Federal Reserve weans markets off of the morphine drip.


Over the past year, we’ve expressed this view with reasonable success with negative calls on the E&P MLPs (most notably, LINN Energy), Kinder Morgan Energy Partners (KMP), and Boardwalk Pipeline Partners (BWP), while the MLP indices marched to new all-time highs.  Our most recent work delves into the numerous issues of Atlas Energy LP (ATLS) and its limited partnerships (ping sales@hedgeye.com to see that research).  In the first conference call after we published our note, one Atlas executive declared that because his stock has not fallen, “Truth and good have prevailed!” 


Of course, I’m the bad guy.  Well, for now at least…


Kevin Kaiser

Managing Director


Truth and Good? - Chart of the Day


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.56-2.65%

SPX 1873-1901

RUT 1094-1133

VIX 11.99-14.32

Pound 1.67-1.69

WTIC 100.85-102.81

Gold 1280-1315 


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What We Don't Know

“Only when we admit what we don’t know can we ever hope to learn it.”

-Ed Catmull


That’s another fantastic leadership quote from a new book I introduced in yesterday’s Early Look – Creativity Inc. Overcoming The Unseen Forces That Stand In The Way of True Inspiration.


“The best managers acknowledge and make room for what they do not know – not just because humility is a virtue but because until one adopts that mindset, the more striking breakthroughs cannot occur… They must accept risk… and engage with anything that creates fear.” –Ed Catmull


I can tell you that I wake up every morning living in fear of one simple thing – losing. I hate losing. And I refuse to allow my team to lose for extended periods of time. If and when we are wrong, we either double down or change our mind. We get paid to take a line and be held accountable to it.


Back to the Global Macro Grind…


Being long slow-growth and #YieldChasing in 2014 (i.e. being long bonds and/or anything equities that looks like a bond) has not only been the winning position YTD, but it was yesterday too.


With SP500 busting out (on no volume – US Equity Volume -29% vs the 3mth avg) to all-time-bubble highs intraday, bonds reversed from opening down to closing at their highs of the day. The 10yr UST Yield has ticked down yet again this morning to re-test a fresh 2014 low of 2.49%. Bond bears are losing.


But, but, Biotech (IBB) +2.5% yesterday was winning. Yep, nice trade. I just hope you didn’t own it the whole way down, because that “growth” sub-sector of the SP500 has been a certified train wreck this year. Most things high-multiple, high-beta have been.


“So” do we buyem because they were up?


Let’s get real here folks. I left Career Risk Management Inc. in 2007 so that on days like this I could double-down on my team’s hard work and process. If you want to beat a monthly bogey, great – chase the wabbit. If you want to win a championship in 2014, stay with the fundamental trends.


In the US, here are the big intermediate-term TRENDs that have been winning for the last 5-6 months:


1. US #InflationAcclerating

2. US #ConsumerSlowing

3. US #HousingSlowdown


Winning being defined as the score:


1. CRB Commodities Index, Food, and Oil +8-22% YTD #InflationAcclerating

2. US Consumer Discretionary Stocks (XLY) = DOWN -2.1% YTD #ConsumerSlowing

3. US Housing Stocks (ITB)= DOWN -3.0% YTD #HousingSlowdown


That’s not to say that I didn’t feel like the NY Rangers last night. However magical a playoff run they’ve had, getting lit up for 7 goals in Montreal feels like I did at yesterday’s market close. Kreider went to de penalty box in the first minute of the game. Canadiens scored. He felt shame.


“So” why shouldn’t I change our entire Macro Theme Deck (6-12 month view) and positioning this morning?


1. Why isn’t it “different this time” (i.e. bond yields going down aren’t an explicit sign of US growth slowing)?

2. Why isn’t it time to giddy up and buy stocks like Facebook, Twitter, and Yelp that blew up into the thralls of April?

3. Why isn’t it time to pretend that no-volume and an 11 VIX doesn’t matter as a risk management signal anymore?


Why Mucker? Why can’t you just change everything you and your team have done YTD and join a crowded consensus long-growth US Equity Multiple Expansion (and bearish on inflation and bonds) view that almost everyone else on the sell-side has?


What would change my mind? That’s easy. Going back to what we loved about our US #GrowthAccelerating call in 2013:


1. #StrongDollar

2. #RatesRising

3. #DeflatingTheInflation


In fact the Swiss have some of that this morning. As the Swiss Franc ripped to new highs, Swiss Exports ramped +2% year-over-year and so did Switzerland’s GDP growth rate. Sound familiar, Mr. Krugman? Same thing happened this year in the UK. #StrongCurrency tax cuts for The People.


“So”, other than a lot, what else don’t we know that could be driving spooos higher with the Russell 2000 -1.9% YTD?


1. How many hedge funds came into 2014 levered long growth, got smoked, then shorted the April lows?

2. How many people have Yellen and Bernanke whispered to that if growth continues to slow, that they go Qe6?

3. How many one-legged ducks can avoid swimming in a circle?


What we do know is that with the VIX at 11.51 (testing YTD lows) and the II Bull/Bear sentiment spread at its YTD highs (58.3% Bullish, 17.3% Bearish = +4100bps wide to the Bull side) that the buy in May, chase performance, and pray thing is alive and well.


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


UST 10yr Yield 2.48-2.60%


RUT 1089-1144

VIX 11.09-13.79

WTIC Oil 102.99-105.27

Gold 1


Best of luck out there today,



Keith R. McCullough

Chief Executive Officer


What We Don't Know - Chart of the Day

May 28, 2014

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May 28, 2014 - Slide13


TODAY’S S&P 500 SET-UP – May 28, 2014

As we look at today's setup for the S&P 500, the range is 36 points or 1.25% downside to 1888 and 0.63% upside to 1924.                                                            














  • YIELD CURVE: 2.13 from 2.17
  • VIX closed at 11.51 1 day percent change of 1.32%


MACRO DATA POINTS (Bloomberg Estimates):


  • 7am: MBA Mortgage Applications (prior 0.9%)
  • 7:45am/8:55am: ICSC/Redbook weekly sales
  • 4:30pm: API weekly oil inventories
  • 9:30pm: BOJ’s Shirai speaks and holds press conference



    • House in session; Senate out
    • 10am: Northrop Grumman holds a briefing on state of global logistics in aerospace, defense industries
    • 10am: FDIC Chairman Martin Gruenberg holds briefing on bank and thrift industry 1Q earnings
    • 11am: President Obama to give commencement address at West Point
    • 2pm: House Veterans Affairs Cmte seeks testimony from three VA officials about Phoenix VA Health Care System
    • John Ratcliffe defeats Rep. Hall in Texas’ 4th district




  • GE’s Immelt strengthened offer for Alstom in Hollande meeting
  • GE said to pledge 1,000 new jobs in France
  • RBS to eliminate hundreds of U.S. jobs ahead of Fed’s new rules
  • Nestle to buy skincare rights from Valeant for $1.4b
  • Valeant hosts investor call; watch for change in Allergan bid
  • Citigroup’s head of centralized risk trading said to leave bank
  • Amazon says not optimistic on dispute with publisher Hachette
  • Hachette hoping to solve Amazon dispute in “few weeks”: CEO
  • China banks’ bad-debt ratio seen climbing to most since 2009
  • Microsoft touts new opportunities, unveils Skype translation
  • Google unveils company-designed driverless vehicle prototypes
  • Morgan Stanley sues convicted ex-broker to recoup legal fees
  • GM poised for more recalls as 2 million vehicles probed
  • President Obama to give commencement address at West Point
  • Credit Agricole said to accuse EU of bias in rate-rigging probe
  • Exchanges can ruin high-frequency trading benefits, study finds
  • Sands China falls as investor moves stake to parent company
  • Credit Suisse’s Dougan says he won’t quit over fine: L’Hebdo
  • Euro-area economic confidence climbs more than expected in May
  • German unemployment unexpectedly rises for 1st time in 6 months
  • Ukraine prolongs anti-rebel operation after dozens killed



    • Bank of Montreal (BMO CN) 7:30am, C$1.52 - Preview
    • Brown Shoe (BWS) 7am, $0.31
    • Chico’s (CHS) 7:31am, $0.28
    • Copart (CPRT) 4:45pm, $0.48
    • Cracker Barrel (CBRL) 7am, $1.22
    • DSW (DSW) 7am, $0.48
    • EnerSys (ENS) 4:01pm, $1.18
    • Michael Kors (KORS) 7am, $0.68 - Preview
    • Palo Alto Networks (PANW) 4:03pm, $0.10




  • Corn Extends Decline to 12-Week Low as U.S. Planting Accelerates
  • Brent Gains for First Day in Three on Libya, Ukraine; WTI Steady
  • Gold Sinking as ETP Assets Drop to Lowest Since ’09: Commodities
  • Palladium Climbs to Highest Since 2011 as Gold Near 15-Week Low
  • Copper Trades Near 11-Week High Amid Advancing Global Equities
  • Robusta Coffee Falls After USDA’s Vietnam Forecast; Sugar Climbs
  • Steel Rebar Drops With Iron Ore as China’s Steel Supplies Climb
  • Iraq Oil Revival Stalls Again as Violence Pinches Growth: Energy
  • El Nino Risk Seen Spurring Rice Importers to Advance Purchases
  • Ukraine Gas-Price Risk Premium Remains for Europe as Gap Widens
  • Gold Premiums in India Seen at 10-Month Low as Curbs Eased
  • Japanese Lawmakers to Lobby Abe for Russian Gas Pipeline
  • Weather, LNG Exports Pace Near-, Long-Term Gas Demand: Bull Case
  • West Australian Court Dismisses Organic Farmer Action in GM Case


























The Hedgeye Macro Team














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