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It Never Gets Old

This note was originally published at 8am on May 27, 2014 for Hedgeye subscribers.

“Although I’ve made this walk thousands of times, it never gets old.”

-Ed Catmull

 

That’s how the President of Pixar Animation Studios, Ed Catmull, describes his life in the introduction to an excellent book I started reading this weekend called Creativity Inc. Catmull is a computer scientist who was hired in the late 1970s by a 32 year old by the name of George Lucas.

 

Catmull went on to run Pixar alongside another American capitalist by the name of Steve Jobs. He is 69 now and his book isn’t as much a memoir as it is a lesson in learning how to be creatively destructive, as a team.

 

The book’s early chapters will sound quite familiar to those of you who embrace the principles of transparency and trust alongside practical applications of  #math and #behavioral economics: “Honesty and Candor”, “Fear and Failure”, and “Change and Randomness.” #Solid summer time read.

 

Back to the Global Macro Grind

 

Walking onto the independent research platform we built 6 years ago never gets old. It gets more interesting and exciting the more we empower new players on our team to be the change. All the while, as my hair gets greyer, I’m still banging out this Early Look note just trying to keep up!

 

Trying to keep up with no-volume rallies in the preferred hedging instrument of thousands of hedge funds (SPX and E-minis) never gets old either. “Why are we up?”, “Why can’t we go higher?”, “Why can’t I beat beta?” – the underlying whine to this whole thing can make a man want to go on vacation.

 

Setting aside that we have not been recommending short SPY (we’ve been making the call to short US Growth – i.e. the Russell 2000) here’s what’s going on with the emotion of it all:

 

  1. Friday’s no-volume-ramp to an all-time closing SPY high of 1900 came on one of the lowest volume days of the year
  2. Total US Equity Market Volume was -23% and -41%, respectively, versus its 1 and 3 month averages
  3. CFTC futures and options contracts in SPX (Index + E-mini) ended with a net SHORT position of -114,248 contracts

 

In other words, with almost 9,000 hedge funds trying to manage an all-time high in AUM (assets under management) of $2.7 TRILLION in a no-volume market that goes straight up after they shorted it in April-May, the short-term game gets tougher.

 

Putting the -114,248 net short contract position (SPX Index + E-mini) in context is critical:

 

  1. That’s -73,347 contracts week-over-week (almost 60% shorter)
  2. Versus the 6 month average of +9,810 net LONG position, that’s bearish positioning
  3. Versus the 1 year average of +62,224 net LONG position, that’s really really bearish


Where time, price, and positioning is relative to where it was, across multiple-durations, is how we analyze things here @Hedgeye. It’s all about the rate of change. And it changes, both fast and slow.

 

Why would consensus be getting bearish on US Growth?

 

  1. 10yr US Treasury Yield was only up 1 basis pt last wk to 2.53% = down -50bps YTD and signaling US #GrowthSlowing
  2. Despite its no-volume +2.1% bounce to lower-highs last wk, the Russell2000 is still -6.8% since March and -3.2% YTD
  3. US GDP for Q114 could be revised to NEGATIVE (from its preliminary +0.11%) when it’s reported this Thursday

 

I know. Everyone nailed it. Everyone you read every morning made the call that US GDP would be negative in the first quarter (it would have been -2% btw if the US government used MIT’s Billion Prices Project measurement of +3.9% inflation) and the 10yr yield would be -17% YTD.

 

But that doesn’t matter this morning, because the name of the game isn’t intermediate-term TREND investing – it’s short-term performance chasing, baby! So what would get me to saddle up and ride the spooo-hoo bull?

 

  1. US Dollar Up
  2. Interest Rates Up
  3. Commodity and Cost of Living Inflation Down

 

Ex #3 (US rents hit an all-time high last week and the CRB Commodities Index was up another +0.8% to +10% YTD), we actually got some of that last week:

 

  1. US Dollar Index +0.4% last week to back in the black (of +0.4%) YTD
  2. 10yr Yield up a beep (1 basis point) to 2.53%

 

Buying the all-time-high price in anything just isn’t how I roll. But if that’s the sort of thing you are into from a “long-term investing” perspective, here’s some short-term positivity that Mr. Macro Market looks like he might chase – on a 15-day duration, the SPX and USD have POSITIVE correlation of +0.60.

 

Yep, that was last year’s risk management call on being long growth (Dollar Up, Rates Up, Equity Growth Multiples Up – Bond Bulls smoked). The 2014 call is much more aligned with the 90-day INVERSE correlation between SPX and USD of -0.62.

 

Right now, USD is overbought and the bond market couldn’t care less about no-volume stock market rallies. Get USD and Rates right, and you’ll probably get the TREND calls in long growth vs slow-growth right. Although I feel like I have written about this on 1,000 macro mornings – it never gets old.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.47-2.61%
SPX 1878-1906

RUT 1089-1135

Nikkei 13885-14658

USD 79.99-80.49

WTIC Oil 102.67-104.77

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

It Never Gets Old - Chart of the Day


June 10, 2014

June 10, 2014 - Slide1

 

BULLISH TRENDS

June 10, 2014 - Slide2

June 10, 2014 - Slide3

June 10, 2014 - Slide4

June 10, 2014 - Slide5

June 10, 2014 - Slide6

June 10, 2014 - Slide7

 

BEARISH TRENDS

 

June 10, 2014 - Slide8

June 10, 2014 - Slide9

June 10, 2014 - Slide10

June 10, 2014 - Slide11
June 10, 2014 - Slide12

June 10, 2014 - Slide13


Refreshed, China Property Market Monitor

Takeaway: To quote Hedgeye senior macro analyst and Asia wizard Darius Dale, “lots of red indeed.”

Click to enlarge image below.

Refreshed, China Property Market Monitor - q1

 

Copper Inventories

Inventories of copper and iron ore have moved in different directions. Chinese metal-for-credit schemes may be complicating the data. The expected copper supply growth in coming years appears significant, although prices have firmed since March, in part due to inventory trends.

 

Refreshed, China Property Market Monitor - q2

 

Iron Ore Inventories

Seaborne iron ore prices continue to decline, reaching the lowest levels since 3Q 2012.

 

Refreshed, China Property Market Monitor - q3

 

Chinese Construction Materials

Nominal China Rebar prices have hit a 5-year low, which is likely not a positive sign for construction activity.  

 

Refreshed, China Property Market Monitor - q4


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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – June 10, 2014


As we look at today's setup for the S&P 500, the range is 26 points or 1.09% downside to 1930 and 0.24% upside to 1956.                                                       

                                                                        

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.20 from 2.18
  • VIX closed at 11.15 1 day percent change of 3.91%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Business Optimism, May, est. 95.8 (prior 95.2)
  • 7:45am: ICSC weekly sales
  • 8:55am: Redbook weekly sales
  • 10am: JOLTs Job Openings, April, est. 4.05m (prior 4.014m)
  • 10am: Wholesale Inventories, April, est. 0.5% (prior 1.1%)
  • Wholesale Trade Sales, April, est. 0.9% (prior 1.4%)
  • 4:30pm: API weekly oil inventories

 

GOVERNMENT:

    • Primaries held in Va., Nev., Maine, S.C.
    • President Obama hosts Tumblr Q&A on college affordability
    • 8:45am: House Approps. energy, water spending bill markup
    • 9:30am: House Appropriations Cmte marks up defense spending bill
    • 10am: Senate Armed Services Cmte gets briefing on prisoner exchange for Army Sgt Bowe Bergdahl
    • 10am: World Bank issues Global Economic Prospects report
    • 10:30am: Senate Banking Cmte receives semi-annual report on CFPB from Director Richard Cordray
    • 10:30am: PCAOB  open meeting to consider auditing standard
    • 1:25pm: Vice President Joe Biden delivers keynote remarks at the National Association of Manufacturing 2014 summi

 

WHAT TO WATCH:

  • ICE says Euronext IPO values exchange at up to $2.4b
  • PPL to spin off some U.S. power plants into new firm w/fund
  • Merkley urges Fed to restrict bank ownership of commodities
  • High-speed trading to be examined by Levin at hearing next wk
  • Apollo Global said to raise $1.5b CLO fund with JPMorgan
  • Time Warner said to be in talks for stake in Vice Media
  • GM faces punitive damages over switch defect, lawyers warned
  • Berkshire to expand energy wager as far as ’eye can see’
  • China inflation quickens to fastest pace since Jan. on food
  • U.K. industrial output posts biggest annual increase since ’11
  • LG Display said in talks to supply OLED TV panels to Panasonic
  • Sony says PS4 users will get early look at Destiny video game
  • China auto sales climb 13% as Ford surges, Great Wall slumps
  • Hillary Clinton’s book, “Hard Choices,” released
  • CFPB delivers semi-annual report to Senate Banking Cmte
  • MSCI index classification review announced ~5pm

 

EARNINGS:

    • Burlington Stores (BURL) 6:12am, $0.22
    • Francesca’s Holdings (FRAN) 7:30am, $0.22
    • HD Supply Holdings (HDS) 6am, $0.17
    • NCI Building Systems (NCS) 4:01pm, ($0.03)
    • Oxford Industries (OXM) 4pm, $0.87
    • RadioShack (RSH) 7am, ($0.51)
    • Science Applications Int’l (SAIC) 4:05pm, $0.67
    • Ulta Salon Cosmetics (ULTA) 4pm, $0.74
    • United Natural Foods (UNFI) 4:05pm, $0.73

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Palladium Reaches 3-Year High as South Africa Strike Talks Fail
  • Brent Oil Premium to WTI Narrows to Two-Month Low on Inventories
  • Soy Farmers See Rally Ending on Record U.S. Harvest: Commodities
  • Copper Falls Amid Concern Banks Might Further Restrict Financing
  • Wheat Rebounds on Speculation Slump May Spur Demand; Corn Drops
  • Rubber Climbs by Most in 3 Weeks as Thailand May Support Prices
  • China’s Commodity Financing Seen Unwinding by Goldman Amid Probe
  • Platinum Jobs Threat Seen Rising by Minister as Strike Persists
  • Coffee Harvest in Vietnam Set to Drop From Record as Yields Fall
  • Port Hedland Engineers Join Tugboat Workers in Approving Strikes
  • China’s Clean-Fuel Focus Tests U.S. Coal-Export Lifeline: Energy
  • USDA’s Glauber Says China Grain Trade Disruption Seen Temporary
  • LNG Imports Drop 45%, Risking Future Utility Returns: Bear Case
  • Some Chinese Banks Said to Limit Credit for Iron Ore Financing

 

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 


IGT BLACK BOOK CALL TOMORROW: THE CASE FOR GOING PRIVATE

IGT BLACK BOOK CALL TOMORROW: THE CASE FOR GOING PRIVATE - IGT COVER

 

Please join the Hedgeye Gaming, Lodging, and Leisure Team led by Sector Head Todd Jordan for a Black Book call on International Game Technology (IGT) - the case for going private. This insightful call is scheduled for tomorrow, Tuesday, June 10th at 1:00pm EDT.   

 

We are fast tracking this call due to this afternoon's news headline relating to IGT retaining a financial advisor to explore strategic alternatives.  A call had previously been planned for later this week to discuss Hedgeye's long term investment thesis on IGT.

 

Todd Jordan previously served as Audit Chair on the Shuffle Master Board of Directors.  As such he was licensed in many jurisdictions and is able to provide invaluable insight into any go private transactions.

 

CALL DETAILS

Attendance on this call is limited. Please contact for the dial in information and presentation slides. 


Poll of the Day Recap: 56% Are Concerned About The 'Crash' in Volatility

Takeaway: 56% said YES; 44% said NO.

As Hedgeye CEO Keith McCullough observed in today’s Morning Newsletter, the VIX officially crashed last week, down -5.7% to -21.6% YTD. “If you want to fail really, really, fast in this business,” McCullough wrote, “get your clients levered-long the US stock market at 10 VIX (US Equity Volatility Index).”

 

We asked: Are you concerned about the ‘crash’ in volatility? Here’s what you thought.

 

Poll of the Day Recap: 56% Are Concerned About The 'Crash' in Volatility  - concerned 

 

At the time of this post, 56% said YES; 44% said NO.

 

A voter who is concerned about the ‘crash’ in volatility answered YES because:

  • My timeframe is intermediate to longer term. The way I read it, extreme low levels on the VIX are, at a minimum, bearish intermediate term. Extreme highs are bullish same timeframe. Margin debt, Investors Intelligence bullish %, Speculation in penny stocks, and the length of time without a moderate correction of 8 - 10% only add to that concern.

 

Conversely, voters who voted NO had this to say:

  • "concerned" implies something has gone wrong. volatility is increasingly... well..,. volatile and has become an independent factor in the marketplace.  if it "crashed," it will be back
  • Who's buying? HM's PM's - as long as they are, little else matters except a news catalyst. Therein lies the rub. Low volume and you could knock this market over with a feather.

 


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