Time's Inner Logic

“Without cycles, time would literally defy any kind of description.”

-The Fourth Turning


From a performance reporting perspective, it’s both month and quarter end today. As William Straus and Neil Howe recently reminded me in The Fourth Turning, “The words year and hour come from the same root as the Greek horos (solar period)… and the word month is a derivative of moon.”


Time and price put more pressure on us than most things in this profession. We just need to take a few deep breaths every once in a while to contextualize both. “We need to recall that time, in its physical essence, is nothing but the measurement of cyclicality itself.” (The Fourth Turning, pg 13)


After one of the lowest volume months in US equity market history, where are market prices within the context of the future? What is the US economic cycle (and bond market) telling you vs. the US stock market’s last price? Does history matter?


Back to the Global Macro Grind


Straus/Howe do a good job arguing that most academics who are trying to become famous in the social sciences with “it’s different this time” are disrespecting time and space. “This scholarly rejection of time’s inner logic has led to the devaluation of history throughout our society” (pg 12).


While it might work in disruptive technologies, devaluing history, time, and cycles rarely works in Macro… “so”, let’s embrace the uncertainty born out of these measurable risk factors and get on with Q3.


One of the Top 3 Global Macro Themes we’ll roll with for Q314 (we’ll be hosting our Institutional Investor conference call next week) is simply going to be #Q3Slowing. US growth slowing, that is.


Nope, God didn’t call us this weekend. Here’s where we’re finding conviction in this out-of-consensus view:


  1. The Currency Market
  2. The US Bond Market
  3. The US Equity Market




  1. FX – US Dollar Index (down for 2 straight weeks) remains below both our TREND ($80.84) and TAIL ($81.19) risk lines of resistance
  2. TREASURIES – 10yr Yield -7bps last week (-49bps YTD) remains below both our TREND (2.81%) and TAIL (2.65%) risk lines of resistance
  3. US EQUITIES – slow-growth Utilities (XLU) were up another +1% last week to +15.6% YTD (Consumer Discretionary is still down YTD)


And those are just the quantitative signals (time/price) augmenting our baseline research views that:


  1. The Fed is perpetuating inflation via its #DownDollar Policy To Inflate
  2. As the Dollar declines, #InflationAccelerates and real-consumption growth slows
  3. As real-growth slows, inflation + slow-growth #YieldChasing strategies (long Bonds, Utilities, etc.) #win


Who cares if an ideological and un-elected central planning committee doesn’t get paid to acknowledge time and space? All you have to do is listen to Mr. Macro Market’s inner logic and you’ll beat your peers in generating risk adjusted returns.


Food prices (CRB Foodstuffs Index) were up another +0.5% to +23.5% YTD last week. Cattle led the charge on that front, closing up another +3.6% on the week to +25.9% YTD. Being long of that and short Del Frisco’s (DFRG) cost of goods sold (and traffic slowing) works for us.


Or how about being long the lover of all things slow-growth-#YieldsFalling, Gold?  Gold was up another +0.3% last week to +9.6% YTD (vs. the Dow +1.7% YTD). But, after 4 consecutive up weeks, you want to be buying ze #GrowthSlowing Gold on red, not green!


In a Fed Easing, Down Dollar, and #InflationAccelerating environment, there are so many places to put your money that I’ll run out of time and space in this morning’s rant. To recap, here are some of the bigger asset allocations we continue to like:


  1. Fixed Income (still loving TIPs and Treasuries)
  2. Foreign Currencies (still loving the Canadian, Mark Carney, at the Bank of England #StrongPound)
  3. Commodities (Gold, Oil, Food, etc.)
  4. International Equities (India, Brazil – i.e. most of the markets we didn’t like last year)
  5. US Equities (Utilities, Energy Stocks, Healthcare Stocks, Semis, etc.)


In other words, without embracing the uncertainty of where we are going in the macro cycle, my writing to you every market morning would literally be useless. #History teaches us that knowing where you are going in markets requires contextualizing where you’ve been.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.51-2.60%


BSE Sensex 242

USD 80.01-80.37

Pound 1.69-1.71

WTI Oil 105.16-106.99

Gold 1

Copper 3.12-3.20


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Time's Inner Logic - Chart of the Day

Messi Week

This note was originally published at 8am on June 16, 2014 for Hedgeye subscribers.

“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 1914-1951

RUT 1124-1175

VIX 10.73-13.21

Brent Oil 109.87-113.11

Natural Gas 4.65-4.83

Gold 1257-1286


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Messi Week - chartofday

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the macro show

what smart investors watch to win

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.


TODAY’S S&P 500 SET-UP – June 30, 2014

As we look at today's setup for the S&P 500, the range is 25 points or 0.86% downside to 1944 and 0.41% upside to 1969.                                                  













  • YIELD CURVE: 2.06 from 2.07
  • VIX closed at 11.26 1 day percent change of -3.18%


MACRO DATA POINTS (Bloomberg Estimates):            

  • 9am: ISM Milwaukee, June est. 60.0 (prior 63.49)
  • 9:45am: Chicago Purch. Mgr Index, June., est. 63 (prior 65.5)
  • 10am: Pending Home Sales m/m, May, est. 1.2% (prior 0.4%)
  • 10:30am: Dallas Fed Mfg Activity, June., est. 10.0 (prior 8.0)
  • Noon: USDA quarterly grain inventories
  • 1:10pm: Fed’s Williams speaks in Sun Valley, Idaho



    • President Obama welcomes Chilean president Michelle Bachelet to White House
    • House, Senate on recess until July 8
    • 10am: Supreme Court issues last decisions of term; likely to hand down decision on Hobby Lobby case
    • 10am: Kenneth Feinberg, a victims compensation lawyer hired by General Motors, holds news conf. on details of program to compensate victims or family members of victims killed in accidents connected to faulty ignition switch that prompted recall of 26m vehicles



  • BNP dollar-clearing ban said to start in 2015 as plea looms
  • ‘Transformers’ debut of $100m sets high mark for 2014
  • Aereo halts service after Supreme Court loss to broadcasters
  • Al-Qaeda offshoot declares Islamic caliphate as Iraq fights back
  • Tencent to buy $736m stake in Craigslist-like
  • Japan output rebounds in sign companies enduring tax rise
  • Hollande, Merkel urge Ukraine talks to Putin, Poroshenko
  • Former P&G CEO McDonald is Obama’s pick to head Veterans Affairs
  • American Apparel adopts stockholder rights plan
  • GM compensation fund details to be released
  • Caesars vies w/ Genting as bids due for N.Y. casino licenses



    • No earnings expected from S&P 500 cos.



  • Daily Iron Ore Mine Closures in China Mean Citigroup Is Bullish
  • Brent Pares Biggest Monthly Gain Since August on Iraq; WTI Falls
  • Wheat Bears Multiply as Prices Slump Most Since ’11: Commodities
  • Rebar Posts Longest Quarterly Slump Since 2011 on Ore, Property
  • Tin Seen Rising 21% by ICDX as Indonesian Exports Reach 8-Yr Low
  • Palm Oil Posts Biggest Quarterly Decline Since September 2012
  • Gold Holds Below 2-Month High as Prices Head for Quarterly Gain
  • Hedge Funds Boost Gasoline Bets as July 4 Holiday Nears: Energy
  • China Iron Ore Port Inventory Falls From Record: Steelhome
  • Japan Refiners May Cut Capacity to Meet New Efficiency Rules
  • Zinc-to-Lead Balance Flips by Most Since 2010: Chart of the Day
  • Second Asia-Bound VLCC Since April Heads for Hound Point: Track
  • ARA Gasoil Stockpiles Hold at Record for Fourth Week: Genscape
  • Chinese Steel Mill Protesters Lay on Rail Tracks as Pays Frozen


























The Hedgeye Macro Team

















The Best of This Week From Hedgeye

Takeaway: Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.


What's Happening in Macau and What it Means for Key Gaming Stocks

Todd Jordan, Managing Director of Hedgeye's Gaming, Lodging and Leisure team, talks with fellow analyst David Benz about business conditions in Macau and the impact on these five stocks.



US GDP contracted 2.9% in the first quarter, the government reported earlier this week. That took many on Wall Street by surprise but not the team at Hedgeye who had been telling you for months that growth was slowing.


Click here to subscribe to Cartoon of the Day. 


The Best of This Week From Hedgeye - GDP skunk 6.25.2014


The Best of This Week From Hedgeye - Chart of the Day pinch


Mortgage purchase applications are down 18% year-over-year. The only recovery in housing at this point is the new and high end market ($1M+). Hedgeye's expectation remains that the back half of this year, and the first half of 2015, should see steady downward pressure on the rate of home price appreciation.


In one of our polls from this week, we asked if you thought the housing market was headed higher or lower. More than half of you (54%) told us that you expected housing to head lower.


In the video below Financials Sector Head Josh Steiner says that various aspects of the U.S. housing market are deteriorating and describes how changes in housing prices and volumes are causing a major inflection point in this $18-19 trillion asset class.


Investing Ideas Newsletter

Takeaway: Current Investing Ideas: GLD, HCA, HOLX, LM, LO, OC, OZM, RH, and TIP

Below are Hedgeye analysts' latest updates on our NINE current high-conviction investing ideas and CEO Keith McCullough's updated levels for each.


We also feature two institutional research notes from earlier this week, as well as a brief video presentation from two of our gaming analysts focusing on five stocks in their research universe.

 Investing Ideas Newsletter   - boom1


Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less


Investing Ideas Newsletter   - GDP skunk 6.25.2014 


GLD –  Despite a slight correction in the CRB Index, Gold still grinded higher (again) on the week.  


Investing Ideas Newsletter   - gold


From our perspective on how high-frequency data points curbing growth and inflation have changed from last week, the revised -2.9% Q1 GDP report likely contributed to divergence against the CRB Index. The Economic Times had a report yesterday about the symmetry between Gold and Brent coming apart, and financial media has published no shortage of arguments on weather, disease, and geopolitical tension attributing to the run-up across the commodity complex.

  • Gold: +9.3% YTD
  • Brent Crude Oil: +2.3% YTD  
  • CRB: +11.4% YTD
  • CRB Food Index: +23.5% YTD

All weather-related and geopolitical arguments aside, the article from the Economic Times confirms our views on Gold’s footprint. When growth surprises to the downside and a run-up in everyday necessities that people actually consume increases, individuals have less money to spend. Therefore Gold’s breakaway from the broader commodity complex and stronger linkage to the dollar and forward looking monetary policy makes intuitive sense.

  • Core CPI (Fed’s preferred measure): +0.3% (+0.2% expected)
  • Headline CPI: +0.4% for May (+0.2% expected)
  • Fed’s full-year GDP forecast: +2.1-2.3% (revised downward from 3.0%)à pre-revision

Factoring in a -2.9% revision this week (and a likely second downward revision in 2H comps) makes for a more dovish outlook (relative to expectations). In this environment, we continue to like Gold in the intermediate-term on the long-side.


HCA – Our update of our birth model continues to show a decent increase in births through the May 2014 update.  The key here (as we have said before) is the link between births and 25% of inpatient admissions. Note: A value over 50 is positive; under 50 is negative. 

Investing Ideas Newsletter   - OB Survey Preg and Deliv


There are glimmers of hope in our OB/GYN monthly survey as well.  Deliveries and Pregnancy trends are picking up in some pockets, particularly in the West and among Medicaid focused practices.  

Investing Ideas Newsletter   - data ferret births

HOLX ­­– A study was released showing the benefits of 3D Tomosynthesis over conventional 2D Digital Mammography this week. Both the New York Times (see NYT story here)  and Bloomberg carried stories about the results.  The key chart is below and for us, the reason we believe 3D Tomo will receive a higher payment per scan than facilities currently get for a digital mammography.  


In the JAMA study, the authors compared results with conventional 2D Digital mammography (open circle) in terms of cancers detected and the  number of patients called back for  more detailed analysis, to patient exam results when facilities switched to 3D tomosynthesis (blue circle).  3D  found more cancer while recalling fewer women for a second more thorough and anxiety producing diagnostic exam. 

Investing Ideas Newsletter   - tomo JAMA chart


Our view is that even if CMS posts a preliminary reimbursement rate equivalent to 2D, the reimbursement for tomosynthesis is unlikely to remain at that level.  The evidence and the experience of radiologists (who we have spoken to so far) is strong at this point that 3D tomosynthesis is indeed better.  By keeping 3D payments low, CMS will create a political problem for themselves where they will be demonized for denying women access to lifesaving technology.  


LM – Legg Mason was out in the debt markets this week amending and extending its current credit facilities. The company was able to place various categories of 5, 10, and 30 year funding, replacing some shorter term bank facilities and also a convertible bond issue. The ability to secure longer term funding and replace these lower quality sources of capital (the convert and shorter term bank lines) is a great benefit for shareholders as LM's capital base is now secured for a much longer period of time with higher quality capital.

Investing Ideas Newsletter   - lm

We continue to estimate, Legg may be shoring up capital to make acquisitions which historically has resulted in a positive reaction for the stock as asset management deals can be accretive to earnings within a short period of time.


LO – Lorillard gave up its 6.5% pop last week, reflecting the roller coaster ride of a stock that is being driven on sentiment (a possible acquisition target of Reynolds American) and a lack of news. We, however, suggest remaining long of the stock.  

Our thesis has not changed. While its competitors like Philip Morris are dealing with international headwinds, we remain bullish on LO’s U.S.-based portfolio of premium menthol.


We continue to outline the long-term fair value price of the stock at $80/share.  We do not think LO will be imminently purchased and are staying long the stock that we added to Investing Ideas on 3/7/14. 

OC –  Last week, management guided earnings down on the back of a weak roofing segment. While the announcement was disappointing, we still continue to expect shares to perform well in the longer-term as Owens Corning improves margins in its two other segments that combine for 70% of its sales. News this week is quiet out of the Owens Corning camp as we approach the end of 2Q. We will highlight a couple of quick notes:


  • APOG, an architectural glass product company, posted a 47% year-over-year in its 1Q FY2015 profit. The company also expected its revenues to grow between 15% and 20% year-over-year.
  • Saint-Gobain, a European building products company that competes with OC in roofing and insulation, reports results for first half of 2014 on July 30.
  • McGraw Hill non-residential buildings construction starts fell 5% in May after a 15% increase in April. However, when looking further into the numbers commercial buildings by office and hotels increased by 31% year-over-year an encouraging sign for Owens Corning.
  • The Architecture Billings Index (ABI), in the chart below, posted its largest month-over-month increase in 8 months. The ABI index typically leads industry non-residential construction activity by 11 months – another positive for Owens Corning. Investing Ideas Newsletter   - 99



OZM –  We published a note on Och-Ziff on Friday. Click here to read.


RH – This week Restoration Hardware unveiled its latest Design Gallery, in the Flatiron district in New York City. We would actually call the  22,000 square foot store ‘the mother of all renovations’ more than a completely new store. RH took the existing 9,000 square foot store and added 13,000 feet to make it a temporary flagship. We say ‘temporary’ because RH is in the process of securing the location for its true NYC flagship, which we think will rival the Ralph Lauren mansion in allure.


Investing Ideas Newsletter   - rh


The lease on the Flatiron store only takes RH out another two years. But given that this is the most profitable location in the entire fleet, the economics made sense to build the extension for just another 24 months. One notable point, when a store gets remodeled, it gets pulled out of the ‘comp’ equation until it is open for 14 months. This could have a slight negative impact on the RH reported comp (maybe a point or two), but will be accretive to earnings immediately. That’s what we care about most.


TIP – Hedgeye's macro team added the iShares TIPS Bond ETF TIP to Investing Ideas list on June 6th. It has outpaced the S&P 500 by over 100 basis points since then.


Macro analyst Darius Dale penned a particularly powerful institutional research note on the economy and Fed (see below) earlier this week which has obvious ramifications for our bullish TIP thesis.


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Click on each title below to unlock the content.


US Growth: When Doves Cry

Hedgeye macro analyst Darius Dale channels iconic rock superstar Prince and observes that while our GDP estimates are coming down, consensus macro remains out to lunch with theirs. In other words, stick with our year-to-date game plan.

Investing Ideas Newsletter   - purple rain1


ICI Fund Flow Survey: Significant U.S. Equity Outflows

The combined equity mutual fund complex shed almost $1 billion in outflows with significant domestic equity outflows offset by a slight international equity fund inflow. The broad take away is that the U.S. retail investor has been retrenching for most of the first half of the year.

Investing Ideas Newsletter   - wall street rotator 620x250


What's Happening In Macau (and What It Means for Five Gaming Stocks)

In this video, Todd Jordan, Managing Director of Hedgeye's Gaming, Lodging and Leisure team, talks with fellow analyst David Benz about business conditions in Macau and the impact on these five stocks.

Investing Ideas Newsletter   - b7

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