Weak PMI Numbers in Europe, Rising Oil Prices and a Slowing Consumer

Client Talking Points


Sequential slowdowns pretty much across the board in the PMI data for May (Swiss PMI of 52.5 May versus 55.8 April was the biggest miss), and European Equities aren’t doing much on that yet. The EUR/USD down -0.3%.


After taking a breather last week (CRB Index down -0.9% on the week to +9% year-to-date), WTI crude is back up +0.4% this morning to $103.12 and natural gas is testing another TREND breakout = US consumption taxes.


The yield is down 6 basis points in an up (no volume) US Equity tape last week (month-end) as US consumer spending data slowed (again). Falling bond yields and compressing yield spread continue to signal US housing and #ConsumerSlowing.

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


ASIA: Nikkei finally has a real up day of +2.1%; India rips another +1.7% to +16.7% YTD (China closed) @KeithMcCullough


"I've failed over and over and over again in my life and that is why I succeed." - Michael Jordan


Just 36% of Americans under the age of 35 own a home, according to the Census Bureau. That's down from 42% in 2007 and the lowest level since 1982, when the agency began tracking homeownership by age. (CNN)


Heisenberg, Please Explain

This note was originally published at 8am on May 19, 2014 for Hedgeye subscribers.

“Some questions have no answers to find.”

-Niels Bohr


This weekend I changed things up a bit and started re-reading a play called Copenhagen which is based on a meeting of the physics minds of Niels Bohr and Werner Heisenberg in 1941.


Heisenberg, Please Explain - HeisenberBohr1


The timing of the play opening on Broadway (April of 2000 at the top in the US stock market) is interesting. I was a newbie on Wall Street back then. I didn’t know much more than I know now about why this time the bubble is “different.”


Copenhagen’s opening scene starts with four questions exchanged between Bohr and his wife, Margrethe:


Margrethe: “But why?”


Bohr: “You’re still thinking about it?”


Margarethe: “Why did he come to Copenhagen?”


Bohr: “Does it matter, my love? Now we’re all three of us dead and gone”


Back to the Global Macro Grind


But why do bond yields keep going down? Why is Old Wall consensus still expecting 3.32% for the 10yr US Treasury yield for 2014 when it’s currently trading at 2.51? Why did consensus come into 2014 expecting US Growth to accelerate, and inflation to fall? Does it matter, my friends?


These questions obviously have obvious answers – unless you are paid to anchor on estimates that are dead wrong, that is. As #InflationAccelerating slows real US growth expectations for 2014, some serious questions remain as to why Wall Street and Washington have not yet come to agree with gravity.


This is, of course, the upshot of Copenhagen – Heisenberg (not the Breaking Bad dude, but Walter White was named after him):


“No one understands my trip to Copenhagen. Time and time again I’ve explained it. To interrogators and intelligence officers, to journalists and historians. The more I’ve explained, the deeper the uncertainty has become…”


“So” embrace the uncertainty associated with how an unprecedented level of un-elected central planning is affecting the rate of change in both growth and inflation in the US economy. There is nothing linear about this.


In addition to US Bond Yields getting hammered last week, here’s what Mr. Macro Market had to say about US growth:


  1. Growth Stocks (Russell 2000) down another -0.4% last week to -5.2% for 2014 YTD (down -8.8% since March)
  2. Yield Spread (10yr yield of 2.51% minus the 2yr yield of 0.36%) compressed another 8 basis points on the week (-48 basis points YTD)
  3. Financials (XLF) were the worst performing sub-sector of the SP500 at -0.8% on the week to -0.5% YTD


In other words, as the long-end of the curve (10yr yield) dropped -10 basis points on the week (-51 basis points YTD), not only is that a leading indicator for US #GrowthSlowing, but it’s as good a proxy as any for bank earnings (net interest margin tracks the Yield Spread).


But why?


Everyone who has followed market history knows why. There isn’t a person in this profession who can tell you with a straight face that growth stocks, financials, and bond yields all declining at the same time is a bullish growth signal.


Neither can they tell you that food and oil prices accelerating is a consumer tax cut. Here’s the update on that:


  1. Oil price up another +2.3% last week (breaking out above @Hedgeye TAIL risk lines of resistance)
  2. Cattle prices up another +1% last week to +13.5% YTD
  3. REITS up another +0.4% last week to +14.6% YTD


Oh, you mean you don’t eat REITS? But you’re still thinking about chasing some slow-growth yield? Obviously cost of living is ripping in this country, and since 1/3 of Americans rent, they can eat that inflation – and like it, because as Heseinberg explained in Breaking Bad, “I say so.”


The only good news I can give you on the US stock market is that buy-side consensus is starting to figure out the #InflationAccelerating slows US consumption growth theme. Here’s the updated CFTC Non-Commercial net long/short positions in the Big Macro stuff that matters:


  1. SPX (Index + Emini) closed the wk with a net short position of -40,901 contracts (vs. an avg NET LONG position of +16,256 contracts over the last 6 months)
  2. 10YR Treasury has a net long position now of +23,948 contracts (vs an avg NET SHORT position of -81,337 contracts over the last 6 months)


Put another way:


  1. If you were long growth equities and short bonds 6 months ago, you were killing it (but about to get killed)
  2. If you made the turn (out of growth stocks into slow-growth bonds) in the last 6 months, you are still killing it


Just because consensus is moving the way of economic gravity doesn’t mean the move is done. In Breaking Bad, Walter White explained this reality quite effectively to Saul too: “We’re done when I say we’re done.” And that’s all Mr. Macro Market is going to have to explain about that.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.48-2.61%

SPX 1861-1882

RUT 1089-1111

USD 79.16-80.21

WTIC Oil 101.05-102.97

Gold 1281-1318


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Heisenberg, Please Explain - Chart of the Day

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Force Rapid Learning

“There is nothing quite like ignorance combined with a driving need to succeed to force rapid learning.”

-Ed Catmull


With three kids, I’d say that quote pretty much sums up my life right now. It’s also the opening line to chapter 3 of the book I have my nose in these days – Creativity Inc., by one of the founders and leaders at Pixar Animation Studios, Ed Catmull.


When it comes to the market side of my life, it isn’t what it used to be. I have the dubious task of running both my mouth and a company. On the latter, I can assure you that there is no driving force greater than owning it. If Hedgeye isn’t constantly evolving, we’re failing. And that’s not an option.


We’ve built both the risk management process and firm on the same principles. We wake up every morning with our eyes wide open to the reality that we do not know what is going to happen next. Embracing uncertainty forces rapid learning. And we like that.


Back to the Global Macro Grind


If all you did at the start of last week was get rid of the most consensus short position on the planet (short SPX Index + E-minis),  and focused on expressing slow-growth #YieldChasing where at least 66% of hedge funds out there haven’t yet, you’d have liked that too.


With the net SHORT position (CFTC non-commercial futures and options contracts) in the SP500 dropping week-over-week from -114,248 contracts (1yr high) to a net SHORT position of -57,737 this morning, I still wouldn’t be using that consensus “hedge.” Use the Russell.


What is the Russell?


  1. The Russell 2000 is a much purer read-through on US domestic growth than the multinational Dow or SP500
  2. The Russell 2000 (IWM) was down -0.5% in an “up tape” on Friday (SPX closed +0.18% at an all-time bubble high)
  3. The Russell 2000 is down -6.1% from its March 2014 high and -2.5% YTD


The alternative to being levered long US growth and/or social bubble stocks (i.e. the alternative to being down YTD) is:


  1. Being long #InflationAccelerating (CRB Commodities and Food Indexes are +9% and +22% YTD, respectively)
  2. Being long slow-growth via the long bond (10yr yield down another -6bps last wk and -55bps YTD at 2.48%)
  3. Being long anything US Equity #YieldChasing that looks like a bond (Utilities up another +2.3% last wk = +12.6% YTD)


“So” why bang your head against the #OldWall shorting spooos and trying to pick no-volume-v-bottoms in bubble stocks that blew up in March-April, when you can just keep doing more of what’s been a relatively low volatility position to keep?


A: it’s not consensus (yet)


No worries though, as time, price, and economic data change, consensus futures/options positioning changes:


  1. SPX Index + E-mini net SHORT position of -57,737 contracts today (vs. -19,488 net SHORT 3 month avg)
  2. 10YR US Treasury bond net LONG position of +22,876 contracts (vs. -59,080 net SHORT 3 month avg)
  3. Gold net LONG position of 68,393 contracts (vs. +103,404 net LONG 3 months ago)


In other words, 3 months ago (on March 1st):


  1. Hedge funds started getting short the consensus SPX hedge  (after the JAN-FEB drawdown in the SP500)
  2. Consensus still didn’t think bond yields could go down in 2014 (so the 10yr yield crashed)
  3. And consensus momentum players chased being long Gold at $1350




Nothing forces rapid learning faster than doing precisely the same thing (at the same time) as thousands of other money managers and getting plugged.


But please don’t confuse consensus getting whipped around in an oversupplied asset management industry with the US or global economy. They are nowhere in the area code of the same thing.


And I suspect there will be nothing normal about the next three months in global macro risk management either. So have another coffee. It’s Monday June 2nd (Happy Birthday Dad!). Prepare to embrace the uncertainty of what tomorrow will inevitably bring.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.42-2.51%


RUT 1090-1154

EUR/USD 1.35-1.37

WTIC Oil 102.19-104.95

Gold 1


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Force Rapid Learning - Chart of the Day

June 2, 2014

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TODAY’S S&P 500 SET-UP – June 2, 2014

As we look at today's setup for the S&P 500, the range is 44 points or 1.85% downside to 1888 and 0.44% upside to 1932.                                             














  • YIELD CURVE: 2.11 from 2.10
  • VIX closed at 11.4 1 day percent change of -1.47%


MACRO DATA POINTS (Bloomberg Estimates):


  • 9:45am: Markit US Mfg PMI, May final, est. 56.2 (prior 56.2)
  • 10am: ISM Manufacturing, May, est. 55.5 (prior 54.9)
  • 10am: Construction Spending, April, est. 0.7% (prior 0.2%)
  • 11:00am: U.S. to announce plans for auction of 4W bills
  • 11:30am: U.S. to sell $25b 3M, $23b 6M bills



    • Obama’s deputies defend deal with Taliban that freed soldier
    • Obama in Europe this week, with talks in Poland about Russia and Ukraine
    • Supreme Court may issue orders
    • 8:40am: Treasury Sec. Jack Lew, Undersecretary David Cohen speak at CSIS on department’s role in national security
    • Washington Week Ahead
    • U.S. ELECTION WRAP: GOP Obamacare Retreat; Romney in Iowa



  • Det Norske buys Marathon’s Norwegian assets for $2.7b
  • Dai-ichi Life said in talks on $4.9b Protective Life deal
  • Obama said to propose deep cuts to power-plant emissions
  • KKR liquidates equity hedge fund led by Ex-Goldman’s Howard
  • ASCO winners & losers: Roche, Merck, Lilly, Clovis, AstraZeneca
  • Icahn denies giving inside info in probe involving Mickelson
  • "Malificent" casts spell, wins N.A. box office with $70m
  • Europe manufacturing cools more than estimated
  • Japan’s 1Q capital spending rises most since 2Q 2012
  • China manufacturing gauge rises to highest in 5 months
  • U.K. May manufacturing PMI 57 vs. 57.3 in April; est. 57
  • Lewis Katz, co-owner of Philadelphia Inquirer, dies in crash
  • New York Woolworth tower penthouse priced at record $110m
  • Airline profit surge led by U.S. masks thin margins, IATA says
  • Companies must file conflict mineral disclosures with SEC
  • Apple Worldwide Developers Conf. begins, keynote 1pm
  • China trades barbs with U.S., Japan on islands at forum
  • Google said to spend $1b on satellites for Internet access: WSJ
  • Shire lines up $5b in funding for NPS Pharma bid: Times
  • Pacific Equity Partners may pull $1b SAI Global offer: Reuters



    • Conn’s (CONN) 7am, $0.73
    • Guidewire Software (GWRE) 4:05pm, $0.03
    • Krispy Kreme Doughnuts (KKD) 4:02pm, $0.23
    • Quiksilver (ZQK) 4:01pm, $(0.02)




  • Obama Said to Seek Power-Plant Emissions Cuts Republicans Oppose
  • WTI Rises From One-Week Low on China Factory Data; Brent Steady
  • Hedge Funds Cut Bullish Gold Wagers Most This Year: Commodities
  • Gold Falls to Four-Month Low as Advance in Stocks Curbs Demand
  • Copper Advances Most in Two Weeks on China Factory Expansion
  • Wheat Slides to Three-Month Low as U.S. Crop Prospects Improve
  • Sugar Rises as Brazil Dryness Seen Cutting Surplus; Cocoa Drops
  • Europe’s Gas Power Capacity Seen at Risk as Utilities Burn Coal
  • Gas Speculators Least Bullish of ’14 as Prices Retreat: Energy
  • Global Rubber Market Seen in Balance in 3-4 Years: Sri Trang
  • Indian Steelmakers Restart Iron Ore Mines on New Permits
  • Russia Gives Ukraine Leeway on Gas as Five Rebels Die in Luhansk
  • EC Shale Gas Endorsement Diversifies EU Energy Supply: Bull Case
  • KRG Crude Destined for U.S. Now Heads to Morocco: JBC, Tracking


























The Hedgeye Macro Team














Early Look

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