Client Talking Points


It’s Canada Day! And the Loonie is starting to breakout vs Burning Bucks ($1.08 USD/CAN is the TREND breakout line). Being long #InflationAccelerating via the Canadian Stock Market (TSX +12.9% year-to-date) beats being long U.S. growth too.  


WTI kicks off Q3 with another +0.4% bounce to $105.77/barrel; no immediate-term TRADE resistance to $106.94, then a lot higher if the U.S. Dollar continues to break down. Big U.S. #ConsumerTax remains intact as real wages in the US go negative for the 1st time in 2 years.


DAX trying to bounce this morning after a soggy end to Q2, but the 2nd derivative of the German economy data is starting to slow (PMI 52.0 JUN vs 52.4 MAY) as the DAX falls below its immediate-term TRADE line of 9902 – something new to monitor.

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


TREASURIES: 2.55% 10yr Yield continues to confound consensus growth bulls



“He who will not economize will have to agonize.”



75% of U.S. businesses make under $100K in annual revenue.

Burger Time!

“I still eat a burger at a counter with ketchup dripping down my face.”

-Scarlett Johansson


Like being long #InflationAccelerating and slow-growth #YieldChasing in 2014, that sounds #tasty.


My Mom makes yummy burgers on the barbee too. Today we’ll be pounding those back (amongst other things) as we celebrate Canada Day out here on the Big Lake they call Gitchee Gumee in Thunder Bay, Ontario.


Back in Connecticut, it’s going to be Berger Time as well. The Craig Berger, that is – our long-awaited head of Technology Research @HedgeyeBerger who will be launching his Best Semiconductor Ideas  today at 11AM EST (Dial-in: ; Conference Code: 859426#).


Burger Time! - HE SC launch


Back to the Global Macro Grind


We surprised some of our Institutional Subscribers when we added Semiconductors (SMH = +16.6% YTD) to the long side of our Global Macro Themes deck in Q2. With Berger on board, we’ll really be able to augment our top-down macro call. It goes something like this:


  1. As US growth slows (and European + Emerging Market + Asian demand stabilizes/strengthens), we like global instead of local demand
  2. With the US Federal Reserve fear-mongering disinvestment (0% rates), US capex and inventory growth will continue to disappoint
  3. With tight inventory and low-capex, obvious ways for companies to grow faster are through A) pricing and B) M&A


Yep, just one more way you can be long a slowing US domestic consumption cycle.


There’s a solid article in the FT today reminding you that those who were bullish on the “US capex cycle” have been direly disappointed in 2014 YTD. Newsflash: you aren’t going to get a real mid-1990s capex cycle until you let interest rates rise.


Ideological central-planners don’t get the career-risk adjusted decision making process of execs inasmuch as their Keynesian textbooks don’t get how a country like the UK can see manufacturing demand accelerate (PMI for June 57.5) as the value of the UK currency does (Pound $1.71 vs USD today).


Why on earth would a public CFO sign off on his or her CEO ramping capex (and hurting peak margins, because that’s what happens in the short-term when you invest) when he or she can just fire people (cut costs), take price, and/or buy someone and do the same all over again?


Back to Berger time…


He and I are going to have some fun together creatively destructing some of the old ways of #OldWall research. You see, our edge isn’t what some of NYC and CT’s finest hedgies went to jail for. It’s working as a team, using a differentiated top-down and bottom-up research process.


If you’re still reading my rants, you probably have a feel for what I do. What Berger does is born partly out of his industry experience (worked at Intel, INTC) and partly from doing his time working for firms that also loved doing banking and brokering (we don’t plan on doing either).


We do un-conflicted, un-compromised, independent research. If we don’t have Research Edge that helps investors generate alpha, we don’t get paid. We’re really looking forward to marrying the top-down signaling process of Global Macro with Craig’s detailed financial models and industry analysis.


Here’s a looksy at slide 10 of Berger’s 52 slide Global Semis deck:


1.       Chip Sector now a Dividend + Cash Return Story: Div yield leaders include STM (4.2%), INTC (3.0%), MXIM (3.0%), MCHP (2.9%), ADI (2.7%)


2.       Large Dividend Hikes (and/or share buybacks) Possible: from SNDK, QCOM, BRCM, NVDA, MRVL, ALTR, AVGO, POWI, VSH, SWKS


3.       Acquisitions in Chip Sector Heating Up: Consolidation trends should continue with CAVM, ISIL, SLAB, POWI, MLNX, AMCC, IPHI, EZCH our top acquisition targets


In other words, if you’re into slow-growth #YieldChasing + M&A, you should still be into semis.


If you’d like to throw some more inflation ketchup on that tasty Hedgeye-Style factored burger, stay with long inflation via my homeland too. Largely a play on commodity #InflationAccelerating, Canadian Stocks (TSX) are +12.9% YTD. Beats banging your head against that Old Wall Dow, doesn’t it?


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.49-2.59%


VIX 10.61-12.79

Pound 1.69-1.71

WTIC Oil 104.76-106.94

Gold 1

Copper 3.13-3.21


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Burger Time! - Chart of the Day

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Forcing 0%

This note was originally published at 8am on June 17, 2014 for Hedgeye subscribers.

“The Fundamental Force for Divergence: r > g”

-Thomas Piketty


I’m about a third of the way through Piketty’s 685 page NYT “Best Seller,” Capital In The 21st Century, and I have to admit that I don’t think I’m going to make it to the end. Like most Keynesian and/or Marxist economic diatribes written from a loft in Europe, there’s a lot more text than teeth.


That said, if Piketty had any experience risk managing markets, he’d have been able to hammer home why one of his core arguments is accurate. The aforementioned quote points to a simple relationship between growth (g) and returns (r). It explains the widening divergence between rich and poor.


True or False? “When the rate of return on capital significantly exceeds the growth rate of the economy, then it logically follows that inherited wealth grows faster than output and income” (Piketty, pg 26). True; especially when real growth is 0%. That’s when only those long inflation and/or #YieldChasing get paid.

Forcing 0% - 567

Back to the Global Macro Grind


The main issue most mainstream “economists” educated in the West tend to have is taking the government’s word for it on inflation. If you don’t know what real world inflation is, there’s absolutely no way you can have a real forecast for real (inflation adjusted) consumption g (growth).


It took Piketty to page 102 to address “The Question of Inflation”, but using multi-century government data sets he was still able to discern a very basic trend in made-up government inflation data: “the first crucial fact to bear in mind is that inflation is largely a twentieth-century phenomenon.


“More precisely, if we look at average price increases over the periods 1700-1820 and 1820-1913, we find that inflation was insignificant in France, Britain, the United States, and Germany: at most 0.2-0.3% per year. We even find periods of slightly negative price movements.” (Piketty, pg 103)


Negative price movements?


Oh the horror. Commonly fear mongered in 3-card Keynesian Monte as the great threat of “deflation”, most humans have got along just fine when the prices of primitive things like food and shelter have fallen in price.


Forget getting lost in the weeds on why there’s no way the 0.2-0.3% inflation reading is precise. It’s the forest (i.e. long-term and secular slope of the line in general prices and/or cost of living) that has been straight up into the right since 1913.


What happened in 1913?


Oh, right. That was the Federal Reserve Act of 1913 – when the US allowed an un-elected body of central planners begin with their Policies to Inflate via destruction of the purchasing power of The People (i.e. the value of their hard earned currency and savings).


Back to the relationship between real growth (g) and returns (r):


  1. If real-growth is +3-4% (1983-1989, or 1993-1999), lots of people are getting paid (savers too!)
  2. If real growth is 1.7% (Bush and Obama decade), less people are getting paid (not the savers though)
  3. If real growth is -1% (US GDP growth in Q1 of 2014), people who are long inflation and/or #YieldChasing get paid


If you have nothing, you can’t make a return on nothing. That’s a simple concept. What’s less obvious is that if you have something, and save it  (during this Federal Reserve Regime) you still get nothing, minus inflation.


“So”, when growth slows, you’re forced to buy asset price inflation (commodities, REITS, etc.) so that you can earn what you need (something greater than 0%) just to keep up with the cost of living.


When growth accelerates and the central planning agency RAISES rates, you get paid to both save and invest. (hint: you can’t grow unless you have savings to invest, unless you start levering yourself up).


Two real-time examples of countries going opposite way on this right now are the USA and the UK:


  1. The British Pound is +4.2% in the last 6 months vs the US Dollar
  2. As the Pound strengthens, UK inflation has weakened to its lowest level since 2009 (+1.5%)
  3. As US inflation accelerates (vs. decelerating at this time last year when the USD was strengthening), real-growth is slowing


What the US and UK bond markets are expecting are two different policy paths:


  1. US rates are falling again as the world anticipates Yellen gets less hawkish (less tapering, more dovish)
  2. UK rates are rising as the world expects the Bank of England to get more hawkish and get off 0%


I could ground myself in an academic hole and write a doctoral thesis on how the divergence between rich and poor is being perpetuated by Fed Policies to Inflate. But I won’t. Too expensive. The inflation of a Western Economics Education is hitting all-time highs too.


Our immediate-term Global Macro Risk Ranges are now:


SPX 1916-1951

RUT 1136-1175

VIX 10.73-13.29

Pound 1.68-1.70
Brent Oil 110.13-113.78

Gold 1259-1286


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Forcing 0% - Chart of the Day

July 1, 2014

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TODAY’S S&P 500 SET-UP – July 1, 2014

As we look at today's setup for the S&P 500, the range is 29 points or 1.13% downside to 1938 and 0.35% upside to 1967.                                             













  • YIELD CURVE: 2.09 from 2.07
  • VIX closed at 11.57 1 day percent change of 2.75%


MACRO DATA POINTS (Bloomberg Estimates)               

  • 7:45am: ICSC weekly sales
  • 8:55am: Redbook weekly sales
  • 9:45am: Markit US Manufacturing PMI, June final, est. 57.5 (prior 57.5)
  • 10am: ISM Manufacturing, June., est. 55.9 (prior 55.4)
  • 10am: Construction Spending m/m, May, est. 0.5% (prior 0.2%)
  • 10am: IBD/TIPP Economic Optimism, July, est. 48.0 (prior 47.7)
  • 4:30pm: API weekly oil inventories



    • House, Senate on recess until July 8
    • President Obama holds cabinet meeting, speaks on economy
    • 8:30am: Treasury Sec. Jack Lew speaks at U.S.-China Business Council event ahead of his trip
    • *U.S. ELECTION WRAP: McAllister to Seek Re-Election; Obamacare



  • U.S. June vehicle sales starting ~8:30am - Preview
  • Iraqi lawmakers meet amid rifts on Maliki’s political future
  • China June Purchasing Mgrs at 51.0, matching estimates
  • BNP agrees to pay $8.97b to End U.S. sanctions probe
  • BNP Paribas seen rerouting dollar clearing to retain customers
  • Macau casino revenue falls 3.7%, first drop in 5yrs
  • Job gains fail to lower U.S. office-vacancy rate stuck at 16.8%
  • Global equities may rise 8-9% in 12 months, UBS’s Haefele says
  • Russell offers final member lists for Russell 1000, Russell 2000
  • U.K. manufacturing unexpectedly strengthens on demand surge
  • German joblessness unexpectedly increases for second month
  • Poroshenko says Ukraine ends cease fire in Eastern regions
  • U.S. foreign account tax compliance act takes effect



    • A Schulman (SHLM) 4:30pm, $0.66
    • Acuity Brands (AYI) 9:15am, $1.12
    • Paychex (PAYX) 4:01pm, $0.40



  • Iraq’s Kurds Vow to Keep Kirkuk Oil Fields Until Referendum
  • Gold Rally Obscures Fund Outflow as Investors Target Shares
  • Raw Materials’ Resurgence Follows Record Fund Exit: Commodities
  • Zinc Drops From 16-Month High as Rally Is Judged to Be Excessive
  • Soybeans Extend Slump on USDA Data as Corn Drops to 5-Month Low
  • Cocoa Drops as Supplies From Ivory Coast Increase; Sugar Falls
  • Gold Investor Index Falls to 4-Year Low as Rally Spurs Selling
  • Steel Rebar Extends Quarterly Slump as China Steel Output Climbs
  • Europe’s Seven Months of Warm Weather Set to Finish in July
  • South Africa Close to Starting Yellow-Corn Exports to China
  • Fuel Oil Shipments to Asia for July Arrival Increase to 3.3M Mt
  • Uganda Seen Boosting Sugar Production 32% With New Factories
  • Shutdown Threatening to Cost U.S. Ports $2 Billion Spurs Talks
  • Gold Trades Near Three-Month High as Holdings to Economy Weighed


























The Hedgeye Macro Team
















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