Time's Inner Logic

This note was originally published at 8am on June 30, 2014 for Hedgeye subscribers.

“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%

SPX 1944-1969

BSE Sensex 24976-25652

USD 80.01-80.37

Pound 1.69-1.71

WTI Oil 105.16-106.99

Gold 1305-1345

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


Client Talking Points


If you ask bond yields about bouncing, they won’t – a 2.53% 10yr yield is only up a beep after dropping 12 basis points last week; down -51 basis points year-to-date. We still think the bond market and S&P Sector Variance has it right, #Q3Slowing for U.S. GDP versus the Q2 bounce.  


European stocks opened higher on the German win, but have faded since. Italy’s MIB Index was one of the 1st majors to go red on the day and remains bearish TREND on the @Hedgeye signal (21,383 TREND resistance).


After a -3% down week, what oil does from here matters to global consumption. Russian headlines have Brent bouncing small within its immediate-term $106.39-110.81 risk range and Gold’s refreshed range is now $1314-1345 – we still like both, long side.

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


India continues to fight inflation w/ a stronger currency - JUN inflation down to 5.4% vs 6% MAY

@Keith McCullough


A nation or civilization that continues to produce soft-minded men purchases its own spiritual death on an installment plan.

-Martin Luther King Jr.


Germany’s 2013 current account surplus of $260 billion was the largest in the world, breaking its own record high.

CHART OF THE DAY: Consensus Macro Playing Catch-Up


CHART OF THE DAY: Consensus Macro Playing Catch-Up - Chart of the Day

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Young Gotze's Got Game!

“Football is a simple game; 22 men chase a ball for 90 minutes and at the end, the Germans always win.”

-Gary Lineker


I’m flying to London this morning, so I figure that if North Americans reading this don’t know who Gary Lineker is, the investors I am meeting with in the UK tonight will! Lineker still holds the English record for goals at the World Cup with ten.


The OT winner yesterday was only Mario Gotze’s 2nd career goal at the World Cup, but that’s because he is only 22 years old. He and his sniper teammate Andre Schurrle were the only two players on the team who were born after Germany’s unification.


As times change, people and countries do. The spirit of selfless teamwork displayed by the German side was something all of Germany should be proud of this morning. Alongside a passionate veteran effort, Germany empowered its youngest players to lead. There’s a lot to learn from that.


Young Gotze's Got Game! - goal


Back to the Global Macro Grind


Who are your best up and coming people? Do you foster a meritocracy where they can thrive? Or are you more or less set with a traditional hierarchy? How about your investment process? How often does it evolve? Does it embrace change?


If the boomer generation’s US political establishment was a soccer team, here’s how some of its media represents it:


"Ever since Cantor lost his primary, a lot of people are scouring the map, saying: Which House incumbent will be next to fall? Well, don't hold your breath. I was checking in with sources in both parties this week and Democrats say they don't think any of their incumbents will lose primaries.” –John King, CNN


It’s a good thing that politicians in both the Republican and Democrat party who have lost the trust of The People have it all figured out. But what if Hedgeye’s forecast for #Q3Slowing takes hold, both the US Dollar and Bond Yields fall, and domestic growth expectations fall alongside them?


Do you think 2015 will look any different from a political perspective? Or do you think America’s younger people (my generation and Millenials) will let un-elected bureaucrats at places like the Fed (and the IRS) continue with these tired, old, slow-growth Policies To Inflate?


Right when everyone didn’t think it could happen, that’s precisely what happened last week:


  1. US Dollar Index was down for the 3rd out of the last 4 weeks and remains below our TAIL risk line of $81.19
  2. US 10 Year Treasury Yields fell another 12 basis points to 2.52% (that’s -51 basis points for the YTD)
  3. US Domestic Growth Stocks (Russell 2000) got tagged for a -4% loss, putting it back in the red for the YTD


I know. When it’s mid-July and the Russell 2000 is down YTD, that means everything growth is ripping. Right. Got it. And Brazil looked mint against Germany too.


Back to reality… On the other side of domestic growth expectations being marked down last week:


  1. Slow-growth Utilities (XLU) had another up-week in a down equity market, closing +0.8% to +12.8% YTD
  2. #YieldChasing REITS jammed Americans with new all-time highs in rents, +1% on the week to +16.3% YTD
  3. Gold and Silver were up another +1.4-1.7% to +11.2% and +10.4% YTD, respectively


Yep, we’re talking big time bull market now – in growth slowing expectations!


At the same time, US Equity Volatility (VIX) ripped off its most asymmetric long-term TAIL line of support (VIX 10) closing the week +17.5%. But no worries… Janet Yellen is going to say everything is just dandy at her semi-annual-central-planning testimony to Congress this week.


Or will she?


I don’t think Yellen will be as bullish about the US economy as Old Wall Street’s estimates are for “year-end” bond yields and US GDP growth to accelerate. Don’t forget that at the last Fed meeting she took down her US growth estimates. Since then, real US consumption data has deteriorated.


Yellen isn’t a young baby boomer. She was actually born on the front-end of the boomer cycle (1946). She and I probably think about economics, markets, and risk as differently as Gotze does about Germany, post the Berlin Wall coming down.


I’m not saying that older generations are all wrong. In fact, many of the most thoughtful investors I meet with are boomers (born 1) and are more adamant about changing monetary policy than I am!  If Americans want to start winning again, they need to change the players they have on the field.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.49-2.59%


RUT 1149-1175


VIX 11.51-12.67

USD 79.71-80.31

WTIC Oil 100.03-104.13

Gold 1


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Young Gotze's Got Game! - Chart of the Day

July 14, 2014

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TODAY’S S&P 500 SET-UP – July 14, 2014

As we look at today's setup for the S&P 500, the range is 32 points or 0.74% downside to 1953 and 0.89% upside to 1985.                                 













  • YIELD CURVE: 2.07 from 2.07
  • VIX closed at 12.08 1 day percent change of -4.05%


MACRO DATA POINTS (Bloomberg Estimates):

  • No major economic reports expected
  • 1:30pm: ECB’s Draghi speaks to EU Parliament Committee



    • Sen. Lisa Murkowski plans to meet Commerce Sec. Penny Pritzker this wk to discuss lifting 39-yr-old ban on crude oil exports
    • U.S. Treasury Chief China Coordinator Sharon Yuan, key figure negotiating trade pacts involving banking, securities, travels to Brussels for T-TIP talks
    • 8:45am: U.S. Energy Information Administration begins 2-day 2014 Energy Conf.
    • 5pm: House Rules Cmte meets on H.R. 5021, highway funding bill



  • Shire willing to recommend $53.7b takeover by AbbVie
  • Citigroup said poised to end mortgage-bond probe for $7b
  • Aecom Technology agrees to buy URS Corp. for $4b
  • Whiting to purchase Kodiak for $3.8b to lead Bakken
  • Lindt to buy Russell Stover to expand in N. America
  • GE’s CFM gets $2.6b American Airlines A320 engines order
  • Bank of China leasing unit said to near Airbus, Boeing deals
  • Generali sells Swiss private bank BSI to BTG Pactual for $1.7b
  • KKR is said to buy stake in BlackGold
  • EBay in partnership to stream Sotheby’s sales worldwide: NYT
  • Israel strikes back against fire from Gaza, northern neighbors
  • T-Mobile says potential Sprint review could last 2 yrs: HSBC
  • Singapore GDP unexpectedly shrinks as manufacturing declines
  • U.S. gasoline falls to $3.6699 a gallon in Lundberg Survey



    • Bank of Ozarks (OZRK) 5pm, $0.34
    • Citigroup (C) 8am, $1.05 - Preview
    • Peregrine Pharmaceuticals (PPHM) 4pm, ($0.07)
    • Sirius XM Canada (XSR CN) 4:09pm, C$0.01
    • Wintrust Financial (WTFC) 4:01pm, $0.72



  • Palm Oil Enters Bear Market as U.S. Sees Record Soybean Reserves
  • Standard Chartered Sues Decheng Owner Chen for $35.6 Million
  • Goldman Stays Gold Bear as Bullish Wagers Increase: Commodities
  • Sugar Market Reversal Seen by Rabobank as Demand Tops Supply
  • Oil Contango Close to Incentivizing Storage of Crude on Tankers
  • Zinc Trades at Highest in Almost Three Years as Stocks Shrink
  • East Libya Rebels Commit to Keep Open Largest Crude Export-Port
  • Sugar Rises as Surpluses Seen Ending in 2014-15; Coffee Advances
  • Nickel Market Seen by Citi Depleted Faster Than Expected on Ban
  • Natural Gas Supply Gains Keep Driving Bulls From Market: Energy
  • Gold Drops as Advance to Four-Month High Spurs Investors to Sell
  • Whiting’s $3.8 Billion Kodiak Deal Crowns New Bakken Shale King
  • Iron Ore Seen Rangebound This Half Before 2015 Slump, Citi Says
  • Corn Extends Drop to 4-Year Low as Global Supplies Seen Climbing


























The Hedgeye Macro Team
















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