TODAY’S S&P 500 SET-UP – July 2, 2014

As we look at today's setup for the S&P 500, the range is 27 points or 1.23% downside to 1949 and 0.14% upside to 1976.                                                           













  • YIELD CURVE: 2.10 from 2.10
  • VIX closed at 11.15 1 day percent change of -3.63%


MACRO DATA POINTS (Bloomberg Estimates):           

  • 7am: MBA Mortgage Applications, June 27 (prior -1.0%)
  • 7:30am: Challenger Job Cuts y/y, June (prior 45.5%)
  • 7:30am: RBC Consumer Outlook Index, July (prior 51)
  • 8:15am: ADP Employment Change, June., est. 205k (prior 179k)
  • 9:45am: ISM New York, June (prior 55.3)
  • 10am: Factory Orders, May, est. -0.3% (prior 0.7%)
  • 10:30am: DOE Energy Inventories
  • 11am: Fed’s Yellen speaks in Washington
  • 2pm: Fed board discusses semiannual monetary policy report to Congress, board oversight and assessment of reserve bank



    • House, Senate on recess until July 8
    • 6am: Quinnipiac releases survey on public opinion of Obama, best and worst presidents since WWII
    • U.S. ELECTION WRAP: Rand Paul’s Hedge Fund Ties; Repub. Ads



  • JPMorgan CEO Dimon will undergo treatment for throat cancer
  • Facebook’s news feed experiment probed by U.K. data regulators
  • Motorola Mobility gets second chance at antitrust appeal
  • SolarWorld seeks U.S. investigation of China cyber-hacking
  • Goldman ‘Boy’s Club’ accused of mocking, underpaying women
  • Fastest hiring since 1999 in U.S. as companies’ confidence rises
  • GM judge to review rules for multibillion-dollar recall fight
  • Dow approaches 17,000 as record transports join small-cap rally
  • Apartment rents climb at faster pace as U.S. demand tops supply
  • U.S. sale to Iraq of 4,000 Lockheed missiles said to be readied
  • Nestle sells Juicy Juice brand to buyout firm Brynwood, WSJ says
  • Fed Chair Janet Yellen speaks at International Monetary Fund



    • Constellation Brands (STZ) 7:30am, $0.93; preview
    • Greenbrier Cos/The (GBX) 6am, $0.74
    • SYNNEX (SNX) 4:05pm, $1.36
    • UniFirst/MA (UNF) 8am, $1.42



  • Vanishing Coal-Mine Jobs Squeeze Pension at Risk of U.S. Rescue
  • Brent Falls to Three-Week Low as Libya Rebels Say Ports Reopen
  • More South African Strikes Erupt After Mining Gains: Commodities
  • Platinum Reaches 10-Month High as Gold Near Highest Since March
  • Corn Falls to Near 5-Month Low as Record U.S. Crop Predicted
  • Coffee Gains as Investors Await Brazil Crop Details; Cocoa Falls
  • Electronic Devices Waste $80 Billion of Power a Year, IEA Says
  • Citigroup Says Growing Commodity Market Share as Rivals Retreat
  • Gold’s Rally Will Reverse as Recovery Quickens, Says OCBC’s Gan
  • Euromar Slows Cocoa-Bean Processing on Struggle to Sell Powder
  • Oil Risk Flares in Iran Nuclear Talks Amid Iraqi Unrest: Energy
  • Storm Arthur to Threaten North Carolina by Fourth of July
  • Komatsu CEO Flags China Slump as Mining Market Nears Bottom
  • Copper Trades Near 16-Week High Before U.S. Employment Report


























The Hedgeye Macro Team
















Poll of the Day Recap: 58% Don't See Gas Reaching $5 A Gallon

Takeaway: 58% voted NO, 42% voted YES

If you follow Hedgeye, you know that one of Keith’s key themes has been #InflationAccelerating. That’s very evident when it comes to oil prices, which have been climbing.


In the video below Macro Senior Analyst Darius Dale discusses the Fed’s monetary policy and geopolitical risks that are impacting on oil prices and the energy sector.



Now, as the summer driving season gets into full swing ahead of the July 4 holiday, we want to know: Will gas prices hit $5 a gallon in your area this year?


At the time of this post, 58% voted NO, 42% voted YES.


Those who voted NO gas prices will not hit $5 a gallon in their area this year reasoned:

  • I think we'll ramp slightly this summer, but not too much -- don't think we'll hit $5 a gallon. I also think that Middle East pressure on prices will recede, and those worries already are priced into the market.


Voters who said YES gas prices will reach $5 had this to say:

  • Things look perilous in the Middle East, which will pressure prices. The weaker dollar and the Fed's policy to inflate won't help matters. This has $5 gas written all over it.
  • At about $5.xx we reach the tipping point for e-vehicles adoption. Many are pushing for this price level. Plus, who would dare add more gas tax with prices at this level.

Housing: Price Increases Decelerating

Editor’s Note: Below is an excerpt of an institutional research note written earlier today by Josh Steiner and Christian Drake, who run our Housing coverage.


CoreLogic released its monthly home price report for May/June earlier this morning. Unlike S&P/Case-Shiller, which is a rolling three-month average repeat sales index,CoreLogic is a single month index released on almost no lag. Essentially, it gives you information three months more current than what you get from Case-Shiller. 


Housing: Price Increases Decelerating - Corelogic NSA YoY TTM


CoreLogic estimates that home prices rose +7.7% YoY in June, a deceleration vs the +8.8% in May and +10.0% in April. We show this in the first chart below.


Interestingly, in the past few months we've seen material upward revisions to the preliminary estimates for the most recent month-ended. This month, however, the revision was almost non-existent and actually was revised lower. The preliminary estimate for May was +8.9% and the final number came in at +8.8%.


Its also worth noting that while sales comps begin to ease through 2H14, price comps don’t really begin to ease until Feb 2015 (hardest near-term comp is Oct which was +11.8% YoY). As such, we think the next 8 months of worsening pricing data will weigh on the housing complex.

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DEO – The Push to Change

We are adding LONG Diageo (DEO) to our Hedgeye Best Ideas list.


In July 2013, newly appointed CEO Ivan Menezes established a new vision for Diageo: “To create one of the best performing, most trusted and respected consumer product companies in the world.”  In our view, Diageo is a strong company that has the brands, margins and returns to achieve this.  However, we believe Mr. Menezes plan and timeline is inadequate.  Diageo is struggling to translate its industry leading position into shareholder value and, as a result, its stock has significantly lagged its consumer product peers.  DEO is up +6.5% over the past year, while its peer group is up +37%.


To get Diageo to the next level as a leading consumer product company, it will likely need to be 1) pushed by an activist or 2) taken out in the global M&A wave. 


We’ve been working on the Diageo story closely for a couple of months now and our timetable for launching on the name has been accelerated by current rumors.  This morning, speculation hit the tape that SABMiller may launch a defensive bid for Diageo in order to fend off Anheuser-Busch InBev.


Our thesis on Diageo is very straightforward – the company’s global beer business is not consistent or aligned with management’s aforementioned vision.  Diageo’s global spirits business is dominant and holds the number one market position in a number of key categories, but its beer business will never see this type of penetration.  We believe the current M&A environment in consumer staples, particularly in global alcohol, represents an ideal environment for Diageo to sell Guinness.  A divestiture of this nature would properly align DEO’s business and allow for a substantially stronger growth profile.


Currently, Diageo’s global beer business, which is primarily the Guinness brand, represented 16.3% of the company’s total volumes in 2013 and has a significant presence in Africa and the emerging markets.  Diageo’s business in these markets was initially jumpstarted by the acquisition of Meta Abo Brewery from the government of Ethiopia in late 2010.  It was therefore a key milestone in the company’s strategy to participate in each of the growth markets of Africa.  As good as the acquisition looked in 2010, the current performance of the beer business in this market is dragging down Diageo’s consolidated results.  Furthermore, beer is roughly 6% in Diageo’s most profitable market, North America, and will never see significant market share or organic growth.


There has recently been speculation that worldwide brewing M&A is poised to accelerate, centered largely on exposure to emerging markets.  Brewing assets in emerging markets (Africa, China and other markets in Southeast Asia) are in high demand as they are likely to offset the slower growing markets in the U.S. and Europe.  With that being said, we believe Diageo’s brewing assets in the emerging markets, particularly Africa, would be a nice addition to the SABMiller portfolio.


We will provide more details on Diageo and our long thesis in the coming weeks.


DEO – The Push to Change - deo


Howard Penney

Managing Director


Matt Hedrick



Fred Masotta


Cartoon of the Day: Happy Canada Day!

The Canadian dollar is enjoying the national holiday.


Cartoon of the Day: Happy Canada Day! - Oh  Canada cartoon



Selling: Russell Levels, Refreshed

Takeaway: As you think about how painful it might be to short the domestic growth style factor right here, it probably felt the same in March too.



I #timestamped my most recent cover signal on the Russell 2000 on June 12th, so there’s been a lot of waiting and watching going on for the better part of the last 3 weeks. While not perfect, over the years I have had to teach myself to act on my signals, not my emotions.


Being bearish on US consumption growth (and the highest multiple growth stocks within the Russell that are tied to US demand) doesn’t have to be accepted at every time and price. Hedge fund consensus dog piled the short side of the market in May. I think June’s meltup had a lot to do with that.


Which brings us to today – Happy Canada Day! And a fresh SELL signal at 1208.


There are a few things to note about the 1208 line. Most importantly, it’s where you could have sold the Russell before its 10% draw-down. And maybe as importantly, now it’s easier to see all the reasons why you’d have sold growth in March (and bought inflation and slow-growth #YieldChasing).


For now, across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE overbought = 1208
  2. Intermediate-term TREND support = 1169


In other words, my risk management model considers a -3% correction from this level more than improbable. And as you think about how painful it might be to short the domestic equity style factor of the market right here and now, it probably felt the same way in March too.


From a fundamental research perspective, we still think #Q3Slowing will be the story Consensus Macro will have to re-adjust for from now until September. We’ll host our Q3 Macro Themes call on why next Friday.




Keith R. McCullough
Chief Executive Officer


Selling: Russell Levels, Refreshed - Slide1

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