Seeing Stars

This note was originally published at 8am on June 18, 2014 for Hedgeye subscribers.

“Measure what is measurable, and make measurable what is not.”

-Galileo Galilei


According to legendary theoretical physicist Stephen Hawking, Galileo likely bears more responsibility for the birth and development of modern science than anyone. This is a heady compliment from one of the most prominent physicists of the modern era. In terms of measuring accomplishments, Hawking is probably right.


Seeing Stars - 44


While he was well versed in physics and mathematics, Galileo (like the artist Banksy, Galileo was known mononymously) was best known for his work in astronomy.  Among other things, he confirmed the phases of Venus, discovered the four largest satellites of Jupiter, and discovered sunspots.  Galileo could literally see in the stars things that his contemporaries could not.


As insinuated in the quote at the beginning of this note, Galileo was truly one of the first modern thinkers to establish and vigorously defend the idea that laws of nature are governed by mathematics.  In other words, if it could be measured, Galileo measured it. And if it could be counted, Galileo counted it.


This lesson of measuring and counting can also be applied very directly to a less scientific profession, that of investing.  The more we can quantify any investment, the better decisions makers we become.  Anecdotes are convenient shortcut for the less informed.  Math doesn’t lie, people do.  As Galileo also advised:


“If I were again beginning my studies, I would follow the advice of Plato and start with mathematics.”


Wise advice, indeed


Back to the Global Macro Grind...


Speaking of outer space, an increasing macro risk we see, especially heading into the summer driving season, is that oil prices are potentially “going to the moon” due to the heightened conflict in Iraq.  Iraq currently produces about 3.3 million barrels per day, but it is the second largest exporter after Saudi Arabia in OPEC. 


On a percentage basis, over the next five years Iraqi is projected to see the most production growth globally.  Net-net, Iraq is the key global swing producer and also has the fifth largest reserves.  In the world of commodities, what happens on the margin matters and the Iraq oil industry plays squarely on that margin.


Seeing Stars - 06.18.14 Chart of the Day


Of course, to the punditry that is arguing commodity inflation is temporary in nature, this adds fuel to the fire.  The heightened tensions in Iraq are clearly “temporary” in nature.  Currently, the CRB index is up +10.5% in the year-to-date and 16 of 19 of its key components are up as well.  For those of us that, like Galileo, like to count things, that means that 84% of componentry of the CRB index is up on a “temporary” basis this year.


As well, for those of us that work in the hallowed halls of Wall Street, or for those that eat iPhones, this might not matter much.  But for the median American consumer who has pre-tax income of $47,000, you can be damn skippy it does matter.  Assuming those consumers also drive, then accelerating oil prices are only going to accelerate the vise like grip that commodity inflation has on their pocket books.


Coincident with accelerating commodity prices domestically is the fact that real weekly earnings, released yesterday morning, turned back to negative in May.  At down -0.10% year-over, this is the worst reading, assuming you believe negative earnings growth is bad, since January of 2013.  Food, energy and shelter prices are inflating and real income is turning negative.  Clearly, this is an elixir for a strong economy (#SarcasmAlert).


Luckily enough, given the high correlation between many  commodities and the U.S. dollar, our policy makers do have a choice, which is to implement strong dollar policy.  Seemingly, this has worked for the United Kingdom, where its rational, and Canadian, central banker Mark Carney has protected the currency and the pound is now up 8% year-over-year versus the U.S. dollar.  Subsequently, the U.K. economy has outperformed.


Sadly, about the only meaningful move we can expect out of the Federal Reserve later today is that they will once again have to take down their U.S. GDP estimates.  Nothing new there though as the Federal Reserve’s economic projection have been about the best lagging, or some instances just wrong, economic projections that devalued U.S. dollars can buy.


Clearly, though, any concerns we may have are misplaced.  In fact, this morning, Portugal is selling 12-month t-bills at 0.364% versus the prior level of 0.617% and 3-month t-bills at an average yield of 0.18% versus the prior yield of 0.432%.  The Spanish government even got a better deal, selling five year paper at a yield of 1.402% with a bid-to-cover of, are you ready for this, 2.32x!  Aye carumba!


Meanwhile, in the most recent U.S. Investor’s Intelligence poll, a mere 22.3% of respondents expect a correction in U.S. equity markets . . . but, hey,  the Utility subsector of the SP500 is up +12.7% on the year-to-date, that must be healthy for the U.S. economy.  Right? Or maybe the hockey heads at Hedgeye are just seeing stars.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.44-2.66%

SPX 1914-1955

VIX 10.73-13.21

Pound 1.68-1.70

Brent Oil 110.23-113.98

Gold 1259-1290 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research

July 2, 2014

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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

















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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 normal


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.

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


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