In The Race!

This note was originally published at 8am on June 06, 2014 for Hedgeye subscribers.

“A horse never runs so fast as when he has other horses to catch up and outpace.”  



There are many great metaphors in life and business.  However, tomorrow we have the opportunity to witness a world-class achievement - the Triple Crown of Thoroughbred Racing - when California Chrome runs in the 146th Belmont Stakes.  If successful, California Chrome will become only the 12th winner of the Triple Crown. 


In The Race! - hedrick


The Triple Crown is a test of speed, strength, and stamina.  Winning the Triple Crown takes a special combination of horse, trainer, jockey, owner and veterinarian.  It is incredibly difficult to win the Triple Crown – win the Kentucky Derby at 1 ¼ miles, followed by winning the Preakness Stakes at 1 3/16 mile a mere two weeks later and then a massive 1 ½ miles (a distance not often run in horse racing) three weeks later at the Belmont.  The Belmont Stake will feature a field of 11 thoroughbreds with 10 challengers seeking to unseat the contender California Chrome. 


If you were jockey Victor Espinosa what would be your game plan – break away early and lead from the front, play it slow and keep something in the tank for the grueling one and one-half mile race, or simply let the race unfold as it happens, be flexible and nimble, taking advantage of number 2 post position near the rail, while keeping an open mind to anything that can and will happen – knowing all the while the other 10 jockeys are looking to run you down and spoil the party?


I am old enough to vaguely remember Secretariat win the Triple Crown in 1973. However, I more clearly remember Triple Crown winners Seattle Slew in 1977 and Affirmed in 1978.  My paternal grandmother loved to bet the ponies and she love to gamble as well.  Maybe that’s why I became an analyst covering the gaming industry.  My first horseracing experience occurred in the mid-1970s when I joined my parents and my grandmother for a day at the races on the Club Level Terrace at Arlington Park, now called Arlington International Racecourse.  Ever since then, I love to watch horseracing! 


Back to the Global Macro Grind...


A similar metaphor and strategy can be applied to managing money, and trust me I know, I’ve held the title “Portfolio Manager.” The one thing I learned as an equity analyst and I’ve carried through to my career as a PM is how to filter out the noise while also reading as much topical, salient and actionable literature, data, and related content.  More important than reading, I also spent as much time thinking about what I read – as such I remained flexible and adaptable to new information, new data and changed my outlook, strategy and holdings accordingly.  I did this while running as hard and fast as possible… Similar to Keith McCullough, Hedgeye’s CEO, and most of us on the Hedgeye team, I also hate to lose!


So here we are almost half-way through the race, mid-year 2014, Mr. PM what do you do?  Read more? Think more?  Are you open to new insights and a new strategy? 

The Hedgeye Macro and Industrials team will host a thought leader call today with foreign policy expert, Charles Hill.  Charles Hill is a diplomat in residence and lecturer in International Studies at Yale University. He is a career minister in the U.S. Foreign Service, serving in a variety of roles such as Deputy Assistant Secretary and Chief of Staff for the Middle East at the State Department, and executive aid to former U.S. Secretary of State George P. Shultz.


I am sure Victor Espinoza has a strategy in mind for running California Chrome in Saturday’s Belmont Stakes.  However, I am also sure he remains open to changing and adapting his strategy as the race unfolds.  Likewise, most PMs are suffering under the heavy hand of Mr. Market this year with the S&P 500 +5%, the NASDAQ +2.9% and the Dow Jones Industrials +1.6% –  by comparison nearly any asset class with above average yield are outperforming, namely:  REITs (IYR or VNQ) +15.6% (during my PM years I ran a REIT and Real Estate Fund), Utilities (XLU) +13.8% and Energy (XLE) +8.5%.


In The Race! - Mr Market


Did you know California Chrome’s dam is Love the Chase – a fitting name for our business! Personally, I remain bullish on REITs and I also like California Chrome to win the Belmont Stakes and thus become the 12th Triple Crown Winner because the colt has already outrun six ponies he faces on Saturday and others appear to simply be spoilers. 


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr yield 2.41-2.61%

SPX 1898-1943

RUT 1108-1155 

Nikkei 14333-15210 

VIX 11.20-13.46 

USD 80.17-80.79 

EUR/USD 1.35-1.37

Pound 1.67-1.69 

Brent 108.13-110.87 

NatGas 4.58-4.78 

Gold 1236-1290 

Copper 3.04-3.12


Have a great weekend!


David Benz

Director - Gaming, Lodging & Leisure




Client Talking Points


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.


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.


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


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


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



“Laughter is an instant vacation.”

-Milton Berle



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

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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%


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,



Keith R. McCullough
Chief Executive Officer


The Fed's First Cousin - Chart of the Day


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.                                                 













  • 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



    • 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



  • 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



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



  • 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 Macro Team














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