Living the Dream

This note was originally published at 8am on June 24, 2014 for Hedgeye subscribers.

“The very substance of the ambitious is merely the shadow of a dream.”



I’m in the throes of the Nevada desert with some colleagues and friends of Hedgeye. Later today, we will be attending the 2014 NHL Awards at the Wynn Casino.   For the hockey players receiving awards, this is the epitome of their success and acknowledgment of their ability to fulfill their lifelong dreams.  They have reached the pinnacle of their chosen profession. In hockey speak, they are #LivingTheDream.


Incidentally, Las Vegas, as much as any city in America, also epitomizes a dream - the American dream.   From 1940 to the last census in 2012, the self-proclaimed “entertainment capital of the world” grew its population from some 8,000 inhabitants to almost 2 million, for a CAGR of north of 8%.  This growth rate well outpaced the overall population growth rate in the United States, which increased by only about 1.5x during the same period.


Living the Dream - wl5


As a function of this massive growth, 18 of the world’s largest 25 hotels are now in Las Vegas, the strip is the brightest place on earth that can be seen from space, and almost 40 million people annually visit Clark County (the home of Las Vegas).  Despite these staggering statistics, on many metrics Vegas actually peaked in 2007.  In that year, according to the Las Vegas Visitors and Convention Bureau, total gaming revenue in Clark County was $10.9 billion versus $9.7 billion in 2013.


Admittedly, gaming revenue in Clark County has recovered a fair bit off the recent bottom when it troughed at $8.8 million in 2009.  Regardless, the fact remains that Las Vegas gaming revenue is still well off the peak and hasn’t grown since 2005.  So, is this Las Vegas dream dead? Is the American dream dead?


On both questions, the answer is likely no. But whether we use the term the “new normal,” or some other cutesy name to describe the prospect for American domestic economic growth, the next five plus years will likely continue to be a normalizing of the excesses of the early 2000s.  In many ways, Las Vegas remains the poster child for the boom and subsequent bust of that period.


Of course, as investors, we can always dream of a rampant reacceleration of economic growth, but as Shakespeare also wrote:


“And this weak and ideal theme, no more yielding than a dream.”




Back to the Global Macro Grind...


In the category of “more nightmare than dream” is the under-allocation of corporate pension funds and university endowments to the U.S. equity allocation rally that began in 2009.  According a report out late yesterday, the average college endowment had a 16% allocation to equities in June 2013, versus 23% in 2008 and 32% a decade ago. Meanwhile, corporate pension funds on average had 43% of their portfolios allocated to equities versus 61% in 2003.   Given the outperformance of U.S. equities over that time, it is likely that many of these institutions have been notable laggards in performance.


One clear threat to the equity bears is the potential that these large institutions begin to chase performance in unison.  For a broad based allocation to equities to occur, these institutions would generally have to be of the view that GDP growth is set to accelerate and likely meaningfully so. If history is any indication, this is unlikely to occur. 


In the Chart of the Day below, we’ve looked at annual GDP growth in the United States going back to 1950 charted against the 10 year rolling average of growth. The takeaway from the chart is simply that U.S. GDP growth has been steadily coming down over time, and has had a sharp step down following the last recession. The U.S. economy seems to have now entered a phase of lower growth.  Absent any evidence of acceleration of this trend, it will be difficult to compel large asset allocators to over allocate to the growth asset class of equities.


Speaking of not normal, according to Xinhua yesterday, noted Chinese economist Li Yining, “refuted the notion the Chinese economy is in decline saying that the previous high growth rates were not normal”.  According to Yining’s analysis, China’s GDP should be higher than the released figure based on the fact that housing construction in rural areas is not included in the Chinese GDP calculation while it usually is in other regions.


Perhaps the Chinese government will take a page out of the U.S. government’s playbook and change the calculation as the economic statistics becomes less suitable to its needs.  This is, of course, a page right out of the U.S. government’s playbook as the U.S. government has changed how the Consumer Price Index is calculated several times over the last few decades. (Ironically, this was also a period when the U.S. government had increasing obligations that were tied to inflation / CPI.)


To her credit, this ever changing methodology of changing inflation may in fact be the reason that Federal Reserve Chair Janet Yellen said last week, “recent readings on, for example, the CPI index have been a bit on the high side but the data are noisy.” 


“Noisy” is an interesting characterization as the government’s own measure, CPI, actually jumped above 2.0% last month.  Meanwhile, what is not noisy to those of us who eat, fuel our vehicles, or consume goods that have commodity inputs (read: most goods) is that the CRB Index is now up almost 12% year-to-date.  We tend to agree with Yellein, that is noisy!


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.47-2.64%

SPX 1924-1971

VIX 10.11-13.12

USD 80.16-80.43

Brent 113.11-116.67

Gold 1288-1332



Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Living the Dream - Chart of the Day


Client Talking Points


Both the EuroStoxx50 and the DAX are breaking our immediate-term TRADE lines of support this morning (3265 and 8999, respectively). Pay attention, because it’s new.  


The RUSSELL 2000 wandered on up to its March 2014 closing high of 1208 and stopped there, abruptly (-1.7%) – since the SPX hasn’t had a +/- 1% day in 55 trading days, we are certain that risk exposure mattered to many yesterday.


One up day on a lagging indicator (jobs report last week) does not a TREND @Hedgeye make. UST 10YR drops straight back down to 2.59% and had no immediate-term support to 2.50%, then 2.42% - we remain Bond Bulls.

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


Semiconductor dividend & buyback investor theme reinforced this morn as $KLAC raises dividend by 11% and authorizes $1B buyback.



“Pearls don’t lie on the seashore.  If you want one, you must dive for it.”

-Chinese Proverb


125, the number of years ago the Wall Street Journal published its first issue. That was all the way back on July 8, 1889.

July 8, 2014

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July 8, 2014 - Slide11

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

CHART OF THE DAY: Consensus Macro La-La-Land


CHART OF THE DAY: Consensus Macro La-La-Land - Chart of the Day

Delaying Time

“With physical time, there is no need to know why a cycle exists – only that it does.”

-The Fourth Turning


If there’s one quote that links cycles to the behavioral side of markets in The Fourth Turning, that’s it. With the Old Wall bearish on interest rates in 2013 (and bullish on them in 2014), never have so many told macro stories about growth that have gotten so few paid.


Delaying Time - p7


You can call it framing data, confirmation bias, emotional baggage – or some combination of all three. It’s all there, all of the time. And it’s your job to fight it’s behavioral gravity.


Sounds easy, right? Not so much. That’s why process matters. The best we can do each and every morning of our macro day is accept what is – not what we need it to be.


Back to the Global Macro Grind


If only consensus could delay the 3rd quarter due to the 1st quarter’s “weather”…


In other news, it’s Q3 and US growth, as an investment style, got pounded yesterday. If you don’t want to acknowledge that Biotech Stocks (IBB) and the Russell 2000 (IWM) were down -2.6% and -1.7%, respectively, just quote the slow-growth Dow. It was -0.26%.


If I go all interconnected macro on you, and move beyond the typical US stock market centric naval gazing  that is the Dow or the SP500, you’ll also note that yesterday’s US #Q3Slowing signals were manifest:


  1. Bond Yields – 10yr UST Yield failed, hard, at yet another lower high (2.81% TREND resistance intact)
  2. US Dollar – remained no bid within the context of a bearish TAIL risk view ($81.17 USD Index resistance)
  3. Volatility – front-month fear (VIX) once again ripped off the Braveheart line of 10, closing at 11.33


But, but, the Russell is still “up” this year. Yep, a whopping +1.8% YTD (and it’s July).


Instead of trying to justify why an equity market “should see multiple expansion”, we say you deal with what you have. US Equities trade at 16x earnings because we have boomer-style-stagflation. In that part of the cycle, bonds get multiple expansion, not stocks.


As you try to navigate this mess of “it’s different this time” narratives, always know where the other players positions are. Here are the most recent net long/short positions in macro from a CFTC Futures/Options perspective:


  1. BONDS – 10yr Treasury still has a net SHORT position of -27,891 contracts (that’s -25,538 shorter wk-over-wk)
  2. US STOCKS – SPX (Index + Emini) has a net SHORT position of -53,081 contracts (that’s +39,668 LONGER wk-over-wk)
  3. US DOLLAR – ramped to its biggest net LONG position of 2014 last week = +20,197 contracts


In other words, post the lagging economic indicator (i.e. old news of US #GrowthAccelerating that you should have been long of, in size, last year) that was US “jobs recovery” on Thursday:


  1. Consensus kept shorting bonds thinking rates will rise (consensus has had this view all year)
  2. Consensus hedge funds did what they usually do in US Equities (covered shorts high, after shorting low in May)
  3. Consensus ramped up the long rates, long USD bet that it should have had on in Q1 of 2013 as growth was accelerating


The hedge fund net positioning part is important. Whether or not you agree with AQR’s recent research view that hedge funds have a +0.93 correlation to beta right now or not, reality is that hedge funds are highly correlated to the levered long side of growth.


Hedge fund assets under management are also at all-time highs (approximately $2.7T), so the confirmation bias and emotion you see in the futures and options markets is important to monitor. It’s a collective snapshot of behavior.


In the immediate to intermediate-term (3 weeks to 6 months) most hedge funds are forced to chase performance – and the best way to play catch-up when you aren’t beating your bogey is to get long, with leverage.


Yes, from the asymmetric point that is the Russell 2000’s all-time high of 1208 (March 2014), that is scary.


So is the concept that an un-elected-central-planning-committee can delay things like economic cycles and time. As Ray Dalio appropriately says, most successful risk managers realize that nature is testing us, and she’s not that sympathetic.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.50-2.64%


RUT 1168-1208

VIX 10.32-12.61

USD 79.71-80.43

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Delaying Time - Chart of the Day


TODAY’S S&P 500 SET-UP – July 8, 2014

As we look at today's setup for the S&P 500, the range is 19 points or 0.59% downside to 1966 and 0.37% upside to 1985.                                                   













  • YIELD CURVE: 2.09 from 2.10
  • VIX closed at 11.33 1 day percent change of 9.79%


MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Business Optimism, June, est. 97.0 (prior 96.6)
  • 7:45am: ICSC weekly sales
  • 8:55am: Redbook weekly sales
  • 10am: JOLTs Job Openings, May, est. 4.35m (prior 4.455m)
  • 1pm: Fed’s Lacker speaks in Charlotte, N.C.
  • 1:45pm: Fed’s Kocherlakota speaks in Minneapolis
  • 3pm: Consumer Credit, May, est. $20b (prior $26.847b)
  • 4:30pm: API weekly oil inventories



    • House returns from recess, Senate in session
    • 6am: Quinnipiac releases survey focusing on public opinion of 2016 presidential race, 2014 congressional races
    • 10am: ICE CEO Sprecher, Citadel CEO Griffin, BATS Global CEO Ratterman scheduled to appear before Senate Banking Cmte on regulation’s role in mkt structure,  electronic trading
    • Comments close on proposed Fed rule prohibiting one financial co. combining with another where resulting co.’s liability ratio is >10% aggregate consolidated liabilities of all financial cos.
    • U.S. ELECTION WRAP: Libertarian Effect; Outside Attacks, Money



  • Commerzbank said next to face penalties in U.S. sanctions probe
  • GM refrains from recalling rusted brake lines; complaints rise
  • Deutsche Bank’s Jeffrey Mayer said leaving for role at Cerberus
  • Macquarie buys U.S. terminals business in commodities expansion
  • Tesla sued in China by businessman in dispute over trademark
  • Treasury 3-year note slide boosts yield before $27b sale
  • Samsung sees smartphone rebound as profit misses estimates
  • Intel takes on Qualcomm with rival connected-devices standard
  • Banks dreading drained accounts call for U.S. cyber war council
  • Air France-KLM cuts profit goal on overcapacity, weak cargo
  • Philips Healthcare chief leaves after “disappointing” profit
  • ICE, Citadel, BATS CEOs appear before Senate committee
  • Apple CEO Cook said seeking to expand board of directors: WSJ
  • S&P says Boeing faces L/T credit risk if Ex-Im shuts: WSJ
  • Maersk takes $1.7b writedown on Brazilian oil assets
  • Japan posts fourth straight current-account surplus in May
  • U.K. manufacturing unexpectedly slumps most since Jan. 2013
  • Israel strikes Gaza by air, sea in operation to halt rockets



    • Aerovironment (AVAV) 4:10pm, $0.22
    • Alcoa (AA) 4:03pm, $0.12
    • Bob Evans Farms (BOBE) 4pm, $0.41
    • Container Store (TCS) 4:05pm, ($0.06)
    • Jean Coutu Group (PJC/A CN) 7am, C$0.30



  • Brent Oil Erases Iraq Rally With Price Below When Mosul Seized
  • Soybeans Hurt by Weak Indian Rains to Boost Cooking Oil Imports
  • Gold Industry Seen Wanting Independent Administrator for Fixing
  • Soybeans Slide as Crop Conditions Indicate Record U.S. Harvest
  • Rubber Recovers From Three-Week Low on Optimism Demand to Rise
  • Metals May Benefit From China Easing, Morgan Stanley Says
  • Challengers Pledge to Do More for Indonesia’s Shrinking Forests
  • Egypt Plans Tax on Crops Such as Rice That Consume More Water
  • Indon Ore Ban Seen Remaining After Presidential Poll, ANZ Says
  • Panoramic May Restart Nickel Mine After Six-Year Halt
  • Citic Resources Starts Legal Action to Recover Port Material
  • Japan Seeks to Buy 109,303 Tons Milling Wheat in Tender July 10
  • Ivory Coast Floods Keep Some Cocoa Farmers From Delivering Beans
  • Gold Shines Again as Hedge Funds Increase Holdings: Commodities


























The Hedgeye Macro Team
















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