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THE FED SAYS THERE’S NO INFLATION…

Client Talking Points

COMMODITIES

CRB Commodities Index (19 commodities) broke out to a fresh year-to-date high of 312 yesterday = +11.4% year-to-date with Silver +5.2%, Gold +3.4%, Sugar +2.3%, Hogs +2.1%, Corn +2.0% - on the day; beats watching paint dry.

GOLD

Consensus has been whining about Gold “not doing what it should” under our U.S. stagflation call, then it does it, all at once; +8.8% Gold price to $1308/oz year-to-date is nothing to whine about; breakout line = $1284 as the Fed’s Policy To Inflate was explicit on Wednesday.

UTILITIES

If inflation slows real growth, you either buy inflation (Energy – XLE = +13.43% year-to-date) and/or slow-growth #YieldChasing Utilities (XLU) which busted out to new highs again yesterday at +16.13% year-to-date.

Asset Allocation

CASH 10% US EQUITIES 6%
INTL EQUITIES 12% COMMODITIES 24%
FIXED INCOME 30% INTL CURRENCIES 18%

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

44 days since the $SPX has had more than a 1% move

@KeithMcCullough 

QUOTE OF THE DAY

“Laughter is an instant vacation.”

-Milton Berle

 

STAT OF THE DAY

Sales of new and existing homes in the U.S. will fall in 2014 for the first time in four years, the Mortgage Bankers Association said in a forecast today. (Bloomberg)


June 20, 2014

June 20, 2014 - 1

 

BULLISH TRENDS

June 20, 2014 - Slide2

June 20, 2014 - Slide3

June 20, 2014 - Slide4

June 20, 2014 - Slide6

June 20, 2014 - Slide6

June 20, 2014 - Slide7

June 20, 2014 - Slide8

 

 

BEARISH TRENDS

 

June 20, 2014 - Slide9

June 20, 2014 - Slide10

June 20, 2014 - Slide11
June 20, 2014 - Slide12

 



the macro show

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Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

The Fed's First Cousin

“Yeah, my wife is my cousin or whatever, but it’s not like what you think.”

-Donnie Azoff

 

In The Wolf of Wall Street, Donnie (whose real name is Danny) is a beauty of a storyteller. In real life, Danny was convicted of securities fraud and money laundering. And, yes, he married his cousin.

 

Jordan Belfort: “Is she like your first cousin?”

 

Donnie Azoff: “Her father is the brother of my mom… and she grew up hot.”

 

The Fed's First Cousin - don1

 

Back to the Global Macro Grind

 

Hot, as in inflation. Yep, but if you ask the sheep at the Fed, it’s not like what you think. Even though commodity inflation accelerated to fresh YTD highs yesterday (CRB 19 component Commodities Index = +11.4% YTD), it’s sort of like the cousin thing.

 

You see, as long as the Fed doesn’t call it what it is, you and I can keep making money buying it. In the meantime, just don’t tell 80% of Americans that they are getting it “jammed down their throat” (Jordan Belfort told his brokers to do that with Steve Madden’s stock):

 

  1. CRB Food Index up another +2.1% this week = +22.8% YTD
  2. Nickel +2.7% this week = +32.3% YTD
  3. Gold +3.1% this week = +9.1% YTD

 

I know. I know. You can’t eat Gold. But instead of whining about it on down days in 2014, you can certainly buy it!

 

Reality is that very few of the world’s savants made Gold one of their top Global Macro LONG positions in 2014. It’s still nowhere in the area code of consensus. And yesterday it broke out above @Hedgeye immediate-term TRADE resistance of $1285/oz.

 

How high can Gold go?

 

  1. If we’re right and the inflation-accelerating-slows US growth setup is similar to 2011, Gold can go a lot higher
  2. From an immediate-term TRADE perspective, the new risk range is $1/oz
  3. From an intermediate-term TREND standpoint, $1381 is resistance

 

Put another way:

 

  1. Gold has immediate-term upside of +2.1%
  2. Gold has intermediate-term upside to +14.9% YTD

 

That sure as heck beats being long something that is going to keep getting eaten by the Fed Policy To Inflate. US Consumer Discretionary stocks (XLY) are down -0.43% YTD. And, all things considered,  being levered long to the recent edition of the US #HousingSlowdown pretty much sucks wind right now too.

 

Where the real pin action has been since the Fed cut its US Growth estimates on Wednesday is in:

 

  1. INFLATION stocks like Energy (XLE) +13.43% YTD
  2. SLOW-GROWTH #YieldChasing stocks like Utilities (XLU) +16.13%

 

But, whatever you do… and no matter what you hear from Consensus Macro… don’t call any of these investment Style Factors inflation’s cousin.

 

Jordan Belfort: “I heard some stupid $h-t. I … I didn’t even want to bring it up. It’s just stupid.”

 

Donnie Azoff: “$h-t with me?”

 

Jordan Belfort: “You know, just… people say $h-t. I don’t even know. I don’t even listen to it…”

 

Donnie Azoff: “What do they say?”

 

When an un-elected-central-planner devalues the Dollar, it’s inflation, stupid.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.47-2.67%

SPX 1

RUT 1155-1189

USD 80.28-80.63

Brent 112.12-116.42

Gold 1

 

Best of luck out there today and have a great weekend,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Fed's First Cousin - Chart of the Day


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – June 20, 2014


As we look at today's setup for the S&P 500, the range is 37 points or 1.66% downside to 1927 and 0.23% upside to 1964.                                                 

                                                                              

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: 2.19 from 2.17
  • VIX closed at 10.62 1 day percent change of 0.09%

 

MACRO DATA POINTS (Bloomberg Estimates):

               

• No major economic reports scheduled

• 1pm: Baker Hughes rig count

 

GOVERNMENT:

    • House in session; Senate schedule TBA
    • President Obama meets with New Zealand PM John Key
    • SEC Chairman Mary Jo White speaks at Economic Club of N.Y.
    • 9am: House Judiciary hearing on net neutrality/antitrust law, w/FTC Commissioner Joshua Wright
    • 9am: House Ways/Means Cmte hearing on IRS treatment of tax-exempt orgs.
    • 9am: House Maj. Whip Kevin McCarthy, Rep. Paul Ryan, N.J. Gov. Chris Christie speak at Faith and Freedom Coalition
    • 9:30am: House Nat. Resources panel  Nat. Gas Gathering Enhancement Act (H.R. 4293), Energy Infra. Improvement Act (H.R. 1587)
    • 9:30am: House Veterans’ Affairs Cmte hearing on Sr. Exec. Service performance subpoena

               

WHAT TO WATCH:

  • Shire rejects AbbVie’s $46.5b takeover bid as too low
  • Siemens lifts Alstom Energy bid to $19.9b, defying GE
  • Obama sending advisers to give Iraq time to form govt.
  • Energy Transfer “high level” talks to acquire Targa terminated
  • BofA must face U.S. suit claiming mortgage-securities fraud
  • Oracle sales, profit miss estimates amid transition to cloud
  • Icahn urges Family Dollar CEO to seek sale “immediately"
  • Revel casino files for bankruptcy, seeking savior at auction
  • U.K. May budget deficit little changed after 1-time 2013 boost
  • NYC Fifth Avenue tower sells to Thor-led group for $595m
  • Verizon said meeting with Dish on possible spectrum sale: NYPost
  • U.S. GDP, Housing Data, Nike, Wimbledon: Week Ahead June 21-28

 

EARNINGS:

    • CarMax (KMX) 7am, $0.67
    • Darden Restaurants (DRI) 7am, $0.94

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Gold Options Signal Sustained Rally as Yellen Shakes Out Boredom
  • Brent Heads for Second Weekly Gain on Iraq Violence; WTI Steady
  • China Miners’ Loss Is BHP Gain as Iron Slumps 44%: Commodities
  • LNG Rally Fading on New Supply as Nukes Set to Restart: Energy
  • Copper Gains Most in Three Weeks as Zinc Trades at 16-Month High
  • Gold Falls With Rally Seen Overdone as Investors Close Positions
  • Soybeans Slide on Expectation U.S. Farmers Expanded Planting
  • Asia’s WAF Purchases for July Stable; Nigerian Imports to Rise
  • Digital Shipping Platforms Cutting $684 Million Errors: Freight
  • Rising German Coal Use Imperils Emissions Deal: Carbon & Climate
  • Kansai Electric Said to Agree With Cheniere to Purchase U.S. LNG
  • RBI, Finance Ministry Said to Work on Iran Oil Payment Process
  • Energy Traders Pay More Than 100 Million Euros to Meet New Rules
  • China Metal Probe to Push Copper to LME Depots: Chart of the Day

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 


ALL-TIME HIGHS: Can Livestock and Poultry Prices Go Higher?

We continue to field arguments against the inflationary read-through on the commodity squeeze. Sharp increases in livestock and poultry prices over the last ten years in the face of stagnant wage growth, a decline in savings rates, and a declining U.S. dollar illustrate this reality in staggering fashion.

 

If Janet Yellen’s commentary yesterday is any indication, the fed will continue to promote yield-chasing from financial intermediaries and those lucky enough to hold equities and fixed assets. The PCE survey from the BLS reports the top quintile of income earners takes 66% of the aggregate income in the basket from interest, dividends, and investment related income. Needless to say, a majority of Americans consume meat.

 

2013 Meat Consumption Per Capita (KG/Person):

  • United States: 106.9
  • China: 53.5
  • World Average: 34.9

The average consumer we have continuously highlighted is reaching insolvency. Median net income margins have consistently compressed over the last five years to about 1.38% with savings rates decreasing over the same period.

 

Last Ten Years:

  • USD Index: -9.8%
  • Trailing 1-year U.S. Personal Savings Rate: -9%
  •  S&P GSCI Livestock Index: +69%
  • U.S. Private Sector Avg. Hourly Earnings (Real): -43% 

 

ALL-TIME HIGHS: Can Livestock and Poultry Prices Go Higher? - 10 year chart usd vs. gsci vs. savings rate

 

A survey from both the USDA and the University of Oklahoma’s Department of Agricultural Economics this week provide evidence that people are eating the higher price tags (adding to the pain, they drove to the store --> WTI and Brent hovering at 9-month highs).

  • “This month’s survey shows consumers are willing to pay 11-35% more for steak, pork chops, and chicken wings"

-       Food Demand Survey from the University of Oklahoma’s Department of Agricultural Economics

 

  • The USDA’s Weekly Retail Beef Feature Activity Report highlighted a sharp decline in the number of food retail outlets featuring beef

 

ALL-TIME HIGHS: Can Livestock and Poultry Prices Go Higher? - 10 yr. price chart

 

Last Ten Years:

  • Live Cattle: +71%
  • Lean Hogs: +65%
  • Chicken Breast: +40%

 

 ALL-TIME HIGHS: Can Livestock and Poultry Prices Go Higher? - 06.19.14 Performance Table

 

Disease or not contributing to the advances YTD, this kind of headline inflation is tangibly relevant on the wallet. Unfortunately most people were not granted the opportunity to add to their inflation hedges out of the FOMC statement yesterday where the Fed provided a downward revision to its 2014 GDP estimate for the SEVENTH year in a row:

  • Headline CPI printed at +0.4% Tuesday vs. +0.2% expected (Inflation surprises)
  • Full-year growth estimates cut to 2.1-2.3% from 3% at the Fed (coincident response as growth misses)
  • 16 of 19 commodities in the CRB in positive territory on the year (prospect for future dollar devaluation increases; dollar down, cost of living up)

 ALL-TIME HIGHS: Can Livestock and Poultry Prices Go Higher? - 05.27.14 Median Consumer Overview  2

 

 

Ben Ryan

Analyst


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