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MANAGING ALL-TIME-BUBBLE-HIGHS IN U.S. EQUITIES

Client Talking Points

#INFLATIONACCLERATING

CRB Commodities Index (19 Commodities) was up another +1.5% last week to +10.6% year-to-date. WTI Crude Oil led the inflation melt-up at +4.2% on the week to +10.8% year-to-date. Natural Gas and Coffee prices were up another +1% last week to +14.8% and +50.6% year-to-date, respectively.

VOLUME

While Total U.S. Equity Market Volume was down -34% (vs. the 3 month average) on Friday’s +0.3% SPX negative breadth up-day, we finally got some real equity and commodity market volatility last week; oil volatility (Oil VIX) was +34.3% last week to 19.47 and U.S. Equity volatility (VIX) was +11.8% last week to 12.18.

U.K.

Bank of England getting two big thumbs up from us on discussing why rate hikes are good.  As the Bank of England builds currency credibility the British Pound continues to power forward. Strong currency, strong policy equates to stronger policy and stronger consumption. 

Asset Allocation

CASH 15% US EQUITIES 0%
INTL EQUITIES 10% COMMODITIES 20%
FIXED INCOME 30% INTL CURRENCIES 25%

Top Long Ideas

Company Ticker Sector Duration
HOLX

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.

OC

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.

LM

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

TWEET OF THE DAY

TREASURIES: 10yr back down to 2.58% as inflation continues to slow real U.S. Growth expectations @KeithMcCullough

QUOTE OF THE DAY

“Either you run the day or the day runs you.”

-Jim Rohn

STAT OF THE DAY

China overtakes the U.S. in company debt issued, with non-financial corporate debt in China reaching $14.2 trillion. (Financial Times)


Force Rapid Learning

This note was originally published at 8am on June 02, 2014 for Hedgeye subscribers.

“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

 

#fun

 

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%

SPX 1888-1932

RUT 1090-1154

EUR/USD 1.35-1.37

WTIC Oil 102.19-104.95

Gold 1240-1294

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Force Rapid Learning - Chart of the Day


June 16, 2014

June 16, 2014 - Slide1

 

BULLISH TRENDS

June 16, 2014 - Slide2

June 16, 2014 - Slide3

June 16, 2014 - Slide4

June 16, 2014 - Slide5

June 16, 2014 - Slide6

June 16, 2014 - Slide7 

BEARISH TRENDS

 

June 16, 2014 - Slide8

June 16, 2014 - Slide9

June 16, 2014 - Slide10

June 16, 2014 - Slide11
June 16, 2014 - Slide12

June 16, 2014 - Slide13


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THE HEDGEYE DAILY OUTLOOK

THE HEDGEYE DAILY OUTLOOK

 

TODAY’S S&P 500 SET-UP – June 16, 2014


As we look at today's setup for the S&P 500, the range is 37 points or 1.14% downside to 1914 and 0.77% upside to 1951.                                                              

                                                                 

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: 2.12 from 2.15
  • VIX closed at 12.18 1 day percent change of -3.03%

 

MACRO DATA POINTS (Bloomberg Estimates):           

  • 8:30am: Empire Manufacturing, June, est. 15 (prior 19.01)
  • 9am: Net Long-Term TIC Flows, April, est. $37.5b (prior $4b)
  • 9:15am: Industrial Production m/m, May, est. 0.5% (prior -0.6%)
  • 10am: NAHB Housing Market Index, June, est. 47 (prior 45)

 

GOVERNMENT:

    • House not in session; Senate returns at 2pm
    • Treasury Sec. Jack Lew on trip to Abu Dhabi, UAE, Saudi Arabia, Jerusalem and Berlin
    • House Transportation Cmte’s panel holds meeting on role of financial sector in infrastructure, with JPMorgan’s Jamison Feheley, Macquarie’s Karl Kuchel, IFM Investors’ Tom Osborne, Barclays’ Steve Howard among participants
    • 10am: Supreme Court to issue decisions
    • Washington Week Ahead
    • U.S. ELECTION WRAP: Tea Party’s Reach; Coal Electorate              

               

WHAT TO WATCH:

  • Medronic agrees to buy Dublin-based Covidien for $42.9b
  • Williams buys control of Access Midstream Partners for $6b
  • Siemens said to prepare bid for Alstom’s energy unit
  • Mitsubishi offering to buy ~10% Alstom stake: Nikkei
  • Russell makes Egypt frontier mkt, lists Russell 3k changes
  • Intel, county in talks that may save $1b in taxes: Oregonian
  • American Express, Citi, others report May charge-offs
  • American Tower to buy BR Towers for $978m; sees $131m/y rev.
  • ‘22 Jump Street’ tops ‘How to Train Your Dragon 2’ in sales
  • Iraq attacks militants north of Baghdad; U.S. Emb. cuts staff
  • Russia, Ukraine fail to reach gas payment deal

 

EARNINGS:

    • Korn/Ferry Intl (KFY) 4:15pm, $0.39

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • European Gas Jumps Most Since March as Ukraine Faces Supply Cut
  • Gold Climbs to Three-Week High as Iraq Violence Boosts Demand
  • Hedge Funds Cut Crop Wagers the Most Since January: Commodities
  • Oil Topping $116 Seen Possible as Iraq Conflict Widens: Energy
  • Iraq Crisis: Basrah Output Holds the Key to Global Oil Prices
  • Copper Climbs as China’s Central Bank Moves to Support Growth
  • China Adds to Iron Ore Glut as Record Output Seen This Year
  • Wheat Rebounds From Weekly Slide as U.S. Rain Threatens Quality
  • Sugar Gains With Brazilian Mills Slowing Harvest; Coffee Drops
  • Iraq Oil Exports to Jordan Won’t Resume Soon on Security: Hamed
  • Coal’s Share of World Energy Demand at Highest Since 1970
  • Norwegian Oil Industry Faces Mediation to Avoid Output Halt
  • Iraq Uprising Draws In OPEC Nations, Boosts Oil Price: Bull Case
  • WTI, Brent Pare Gains as Iraq Unrest Seen Sparing Crude Supplies

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 



Messi Week

“Something deep in my character allows me to take the hits and get on with trying to win.”

-Lionel Messi

 

First and foremost, happy belated Father’s Day to all the Dads out there who do what they do when no one is looking. As most of the young men playing in the 2014 World Cup will attest, doing the best that you can do out there, every day, is a grind.

 

For those of you who didn’t know who Messi was until your Dad’s Day dinner last night, what a gem this guy is in the arena that is soccer. Selfless, hard working, and talented, he is everything that the largesse of Argentina’s government is not.

 

At 26 years old, Messi is the Captain of Argentina’s hopes in Brazil. Like many athletes who represent their country, his maturity and leadership are beyond his years. On money, he said it “doesn’t thrill me or make me a better player… I’m just happy with the ball at my feet.”

 

Messi Week - messi

 

Back to the Global Macro Grind

 

With both the NHL and NBA seasons officially over (congrats Kings and Spurs!), it’s time for some World Cup Soccer while you attempt to risk manage what are becoming very thinly traded all-time-bubble-highs in US Equities.

 

In order to look forward, let’s take a step back. Unless you were long #InflationAccelerating last week, it was messy:

 

  1. SP500 and Dow were down -0.7% and -0.9%, respectively, last week (Dow barely up YTD at +1.2%)
  2. Russell 2000 resumed its bearish intermediate-term TREND at -0.1% YTD and -3.8% since March
  3. Industrials (XLI) led losers at -1.5% on the week as energy prices (producer costs) ripped

 

US Consumer Discretionary stocks (XLY) are still -1.6% YTD and continue to eat #InflationAccelerating:

 

  1. CRB Commodities Index (19 Commodities) was up another +1.5% last week to +10.6% YTD
  2. WTI Crude Oil led inflation melt-up at +4.2% on the week to +10.8% YTD
  3. Natural Gas and Coffee prices were up another +1% last wk to +14.8% and +50.6% YTD, respectively

 

While Total US Equity Market Volume was down -34% (vs. the 3 month average) on Friday’s +0.3% SPX negative breadth up-day, we finally got some real equity and commodity market volatility last week:

 

  1. Oil volatility (Oil VIX) was +34.3% last week to 19.47
  2. US Equity volatility (VIX) was +11.8% last week to 12.18

 

From a risk management perspective, rate of change in our model always matters – but it really matters when that directional rate of change (2nd derivative) signal occurs off its most asymmetric long-term TAIL risk point.

 

That’s where US Equity Volatility (VIX) was when it closed at 10.73 on June 6, 2014. While the perma-bulls on US GDP growth may think “it’s different this time”, it’s not. The VIX has never stayed below 10 – ever. And, as you know, never-ever is a very long time.

 

As gas prices rage higher alongside an all-time high in US rents (34% of the country rents and shelter is their #1 cost of living), prepare for another messy week of Consensus Macro expectations meeting their maker (bond market signaling growth is slowing):

 

  1. TUESDAY: US Consumer Prices (unlegislated taxes) for May should continue to accelerate
  2. WEDNESDAY: The Fed should talk down its US Housing and GDP forecasts now that they’re wrong on growth (again)
  3. THURSDAY: Uruguay plays England at 3PM EST #WorldCup

 

If England plays like they did against Italy, that could get messy too. As Spain learned against the Dutch, at first risk happens slowly – then all at once.

 

UST 10yr Yield 2.45-2.64%

SPX 1

RUT 1124-1175

VIX 10.73-13.21

Brent Oil 109.87-113.11

Natural Gas 4.65-4.83

Gold 1

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Messi Week - chartofday


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