The Old Smoke Wall

This note was originally published at 8am on May 20, 2014 for Hedgeye subscribers.

“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%

SPX 1865-1897

RUT 1089-1125

USD 79.31-80.21

Brent 108.60-110.45

Gold 1281-1305


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Old Smoke Wall - Chart of the Day

Shoe Shine?

“Dude, look at your dirty shoes – you need a shine!”

-Joe (NYC)


Yesterday I was getting my shoes shined in NYC at one of my favorite spots – on the corner of Avenue of the Americas and 46th Street, right across from the building where I got fired.


Not that I keep track of the when and the why, but I wrote a book about it so it’s out there. Carlyle fired me for being “too bearish” on the US #ConsumerSlowing on November 2, 2007. My 1st son was born on November 7th. And the SP500 dropped 6% by the end of the month.


Yep, risk happens slowly, then all at once. You know when your shoes are dirty too. If you go to my spot, tell Joe I sent you. He’ll chirp anyone who is looking NYC serious with dirty shoes. Within a block, they all look down. They may not like it, but the truth is staring at them from their feet.


Shoe Shine? - boston shoe shine kids archive 66761 600x450


Back to the Global Macro Grind


Our preferred US Equity Growth index to be short of in 2014 remains the Russell 2000. In addition to being down -0.5% on Friday, it dropped another -0.7% yesterday to -3.1% YTD.


BREAKING: SP500 hits all-time highs –CNBC


Yep, as bond yields crash YTD (peak-to-trough decline in the 10yr Treasury Yield = 20%) and the Russell delivers negative returns, the world’s most consensus short position (SPX Index + E-mini) hit another new high on no volume yesterday. #hooray


Whatever you do, don’t look at your shoes yet.


Total US Equity Market Volume was -28% versus its 3-month average (and the average continues to crash!) and the US Equity market’s breadth (advancing vs. decline stocks) was negative yesterday too (46% gained in price, 50% declined). #dirty


But, but, you have to buy the SP500 … because it’s up, right?


As long as you buy SPX vs short Russell (IWM), I’m into that. From a risk Style Factoring perspective, the SP500 is not the Russell:


  1. SP500 has plenty of #InflationAccelerating components (like Energy and late-cycle Industrial companies taking price)
  2. SP500 has many more slow-growth #YieldChasing components (Utilities, REITS, Telecom, etc.)
  3. SP500 has way more consensus short sellers who tend to short low and cover high


Like the FTSE in the UK, the SP500 is much more multinational too. If you want the pure play on short US domestic growth, it’s the Russell.


While there’s no doubt that it’s a lot easier to call the macro game from the seat I have today than the one I used to be in, that doesn’t mean that market truths cease to exist. #OldWall hasn’t been there to help coach Portfolio Managers through US growth slowdowns. We have been.


Being right in an environment with Rising Variance at both the country and sector level gets easier if you know the macro economy we are in. With US #InflationAccelerating perpetuating US #ConsumerSlowing, here are the Top 3 US Equity Sectors you still want to be long:


  1. Energy (XLE)
  2. Utilities (XLU)
  3. REITS (VNQ)


To reiterate the Sector Style Factors you do not want to be long:


  1. Consumer Discretionary (XLY)
  2. Housing (ITB)
  3. Financials (XLF)


If you leave being US Equity market centric (life is easier that way), buying currencies and stocks in countries who had what the USA had last year (#StrongCurrency + #RatesRising and inflation deflating), current equity markets we still like on the long side are:


  1. United Kingdom (EWU)
  2. India (INP)
  3. Brazil (EWZ)


In addition to being long Bonds (TLT), Inflation Protection (TIP), and Commodities in 2014, it’s what you aren’t long when growth slows (bubble multiple stocks) that has made all the difference too.


My call wasn’t consensus in November 2007, and it wasn’t in January of 2014 either. While we need to be loud about seeing something that we don’t think the Street is paying attention to, we don’t want that to feel dirty to you. We want to help augment your process and keep your shoes shiny.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.42-2.57%

RUT 1089-1155

VIX 10.94-13.59

USD 80.05-80.75

British Pound 1.67-1.69

Brent Oil 108.42-110.76


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Shoe Shine? - SPX

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Positive catalysts in place for BYD, PENN, PNK




State gaming regulators will start reporting May gaming results later this week.  We expect sequentially improving trends with May’s regional gaming results and again in June (relative to Q1), which we believe will put a base under conservative Q2 regional casino estimates.  Regional gaming stocks have not performed well as of late so the release of better monthly numbers and a strong Q2 earnings season (relative to current projections) could provide a nice bounce in these stocks.



Best May weather ever - sunny, blue skies and very few thunderstorms/tornados coupled with one extra Saturday provide a base for accelerating (less bad) regional results for May and June – and a potentially positive revision of estimates as the year develops. 


State gaming regulators will begin to report May gaming results later this week.  Our proprietary regional gaming model forecasts May 2014 same store gaming revenue declines of only -2% as compared to -5% in April and -7% in March.  Insight into Missouri and Pennsylvania yields surprisingly decent May results.


Additionally, we call investor attention to the developing El Niño.  If the El Niño fully develops this fall/winter (Nov thru Feb), the milder weather condition will provide lower energy bills against an easy and super brutal comp of last year's polar vortex and thus, provide consumers with increased discretionary spending power. 


As we view regional gaming estimates, Q2 estimates should not be revised lower and could have an upside bias for BYD, PENN, and PNK.



A sneak peek into Missouri’s numbers tells us a flat to up slightly May YoY is in the cards – better than expected.  We’re pretty sure PA will come in much better than previous months as well.  These two months provide support for our thesis that May will show nice improvement from the rest of 2014. 


Following an awful December, January and February on April 16th, we published a note “Regionals: April Flowers” then on May 14th we wrote “Regional Gaming: Trend Friend” wherein we noted we were hearing May was showing improvement from April (which improved from March).  Today, we are again calling investors to action as we believe PENN and BYD are positioned to exceed company guidance as well as investor expectations. 



As seen below, our early regional forecasting algorithm predicts May regional gaming revenues will decline 2%.  If we are correct regarding the developing El Niño weather pattern, 3Q and 4Q results could surprise to the upside. 







Bad demographics should continue to pressure regional gaming revenues. Younger generations are simply not interested in slot machines.  We’ve written extensively about this secular headwind so we won’t rehash here.  However, these volatile stocks can move significantly on data points – especially negative, reversal or contra-psychology inflections. 





With confirmation from MO and PA, we’re pretty sure the May state releases beginning this week are going to look better.  Investors should begin to feel more comfortable with Q2 estimates and possible upside which could catalyze the stocks.  Over the near term, PENN looks to have the most upside given it has a beaten down stock price and overly conservative guidance.

June 3, 2014

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TODAY’S S&P 500 SET-UP – June 3, 2014

As we look at today's setup for the S&P 500, the range is 46 points or 1.71% downside to 1892 and 0.68% upside to 1938.                                             














  • YIELD CURVE: 2.17 from 2.14
  • VIX closed at 11.58 1 day percent change of 1.58%


MACRO DATA POINTS (Bloomberg Estimates):


  • 7:45am/8:55am: ICSC/Redbook weekly sales
  • 9:45am: ISM New York, May (prior 50.6)
  • 10am: Factory Orders, April, est. 0.5% (pr 1.1%, rev. 0.9%)
  • 10am: IBD/TIPP Economic Optimism, June, est. 46.8 (pr 45.8)
  • 1:50pm: Fed’s George speaks in Breckenridge, Colo.
  • 4:30pm: API weekly oil inventories



    • President Obama meets with Polish President Komorwoski, Prime Minister Tusk; later meets with other Central, Eastern European leaders
    • Senate in session; House out
    • 9:30am: Senate Commerce panel hearing on Suface Transportation Reauthorization
    • 10am-5pm: CFTC’s Technology Advisory Cmte meets to discuss high-frequency trading, CFTC surveillance program, swap execution facilities
    • 10am: Senate Banking Cmte considers S. 2244, reauthorization of Terrorism Risk Insurance Program
    • 10:30am: Senate Judiciary Cmte hearing on proposed constitutional amendment that would let Congress try to reverse Supreme Court’s 2010 Citizens United ruling, which removed limits on corporate, labor union campaign spending
    • Voters in Calif., N.J., Ala., Iowa, Miss., Mont., N.M., S.D. select candidates
    • U.S. ELECTION WRAP: Primaries Preview: Miss., Calif., Iowa



  • Pilgrim’s Pride said to raise Hillshire bid to $55 a share
  • Travelport said planning to file for IPO as soon as this wk
  • Fidelity said to be competing to lead Uber round at $17b
  • May auto sales: SAAR may be 16.1m
  • Bank of America says mistake inflated reported dark pool size
  • Pimco’s record withdrawals at Total Return extend to 13th month
  • GM filed 2,004 injury reports on recalled cars, group says
  • Staples shareholders vote against executive-compensation plan
  • Microsoft names Office unit’s Teper to head corporate strategy
  • Obama said to unveil $1b European security fund in Poland
  • Avastin use for eye disorders may save U.S. $3b annually
  • Euro-area inflation slowed more than economists forecast in May
  • China HSBC manufacturing index rises to 4-month high in May
  • Rajan holds key India rate, signals easing if inflation slows
  • Energy supply requires $40t investment to 2035, IEA says
  • S&P censured by regulators on false French credit-rating gaffe
  • Chicago sues drug companies for pushing prescription opiate
  • Macau May casino rev. rises 9.3% y/y; est. 14.5%
  • World Bank rules out major changes in global GDP forecasts
  • GW Pharma, New York State plan trials for cannabidiol: WSJ



    • ABM Industries (ABM) 5pm, $0.40
    • Ambarella (AMBA) 4:05pm, $0.21
    • Ascena Retail (ASNA) 4:05pm, $0.19
    • Dollar General (DG) 7am, $0.73 - Preview
    • FuelCell Energy (FCEL) 6:06pm, $(0.03)
    • Hudson’s Bay (HBC CN) 7am, C$0.00
    • Mattress Firm (MFRM) 4pm, $0.35




  • Brent Trades Near Three-Week Low on European Demand; WTI Steady
  • Gold Near 4-Month Low as Investors Weigh Stocks Against Dollar
  • China Builds Sulawesi Smelters as Ore Ban Cuts Jobs: Commodities
  • Copper Declines as Factory Orders Seen Slowing Down in U.S.
  • Corn Extends Decline as Planting of U.S. Crops Almost Complete
  • Coffee Gains as Volcafe Forecasts Shrinking Stocks; Cocoa Falls
  • Rebar in Shanghai Near Record Low as Iron Ore Inventory Climbs
  • Obama Climate Proposal Will Shift Industry Foundations: Energy
  • Japan Aluminum Buyers Said to Pay Record Fee as Demand Grows
  • Oil Tanker Hauling Disputed Kurd Crude U-Turns in Atlantic Ocean
  • Energy Supply Requires $40 Trillion Investment to 2035, IEA Says
  • Coal to Survive Obama ‘War’ as Efficient Plants Boost Demand
  • Asia Oil Demand, Global Prices May Suffer as GDP Estimates Fall
  • Arabica Coffee Heading for Bear Market as Rains Aid Brazil Crop


























The Hedgeye Macro Team