Client Talking Points


Bounced to lower-highs late last week, but all of the majors failed @Hedgeye TREND resistance. DAX is down  -0.9% this morning and its TREND line = 9759; Italy’s MIB Index down -1.1% (TREND resistance = 21192).


After correcting to higher-lows last week = +0.3% this morning to $1314 with no resistance to $1324, then $1345 – the best way to play our inflation slowing U.S. growth theme in Q3 is long Gold, TIP, and the long bond.


UST 10YR yield ticks down to 2.47% this morning as our model signals a series of lower-highs. The Yield Spread (10yr – 2yr) is dipping below 200bps for the first time in 2014 today, new lows (another #Q3Slowing signal for USA).

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.


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.

Three for the Road


INDIA: our favorite equity market in the East = +23% YTD



Gratitude is the sign of noble souls.



Despite dropping -0.1% last week, Food Prices (CRB Food Index) are still up +19.1% YTD.

Moments of Discontinuity

This note was originally published at 8am on July 07, 2014 for Hedgeye subscribers.

“Each circle of time has a great moment of discontinuity.”

-The Fourth Turning


No, the stock market is not the economy. And the bond market is not the stock market. Everything is relative to its own rate of change. On that score, I think the US economic cycle is about to meet another great moment of discontinuity.


In the ancient view, a new round of time does not emerge gradually from the last but only after the circle experiences a sharp break” (The Fourth Turning, pg 31). The Hedgeye Macro Model is hardly ancient, but Mr. Market’s respect for mean reversion within long-term cycles is.


Moments of Discontinuity - clock2


After a -2.9% GDP print in Q1, the Old Wall’s latest victory lap on US growth came in the form of a classic lagging economic indicator last week – headline employment data. Since our models focus primarily on rate of change, it wasn’t surprising to see the slope of private wage growth remain negative. #InflationAccelerating and real-wages tracking negative for the first time in two years should ensure #Q3Slowing.


Back to the Global Macro Grind


On Thursday afternoon, we shorted SPY for the 1st time (in Real-Time Alerts terms) since February 10th, 2014, on that. Well, maybe not only on that. You see, having a view on an economy within the Global Macro marketplace is pretty much useless unless you have some repeatable mechanism (read: #timing signal) that tells you when the probability of acting is falling into your favor.


With literally no volume trading in US Equities on Thursday (at the all-time highs), here’s the multi-factor, multi-duration, risk management signal I was looking at:


1. US DOLLAR – bouncing to lower-highs for the 1st time in 2 weeks, but still well below $81.17 TAIL risk line (USD Index)

2. US RATES – bouncing to lower-highs for the umpteenth time in 2014, but well below 2.81% TREND line resistance

3. VOLATILITY – front month VIX testing its all-time lows, closing at 10.32 (it has never held below 10, sustainably)


Yes, never (in mean reversion terms) remains a very long time. So it’s a lot easier to make the SELL call on US domestic consumption growth today than it was when the Old Wall didn’t agree with us 6 months ago.


But consensus wouldn’t want to do that now, would it? How about you? If I’m right, you are going to crush your competition (newsflash: your competition in US Growth Equities is called levered long beta), just like you did from January 1st to the May 2014 lows.


If I’m wrong, well, consensus is going to be really right.


Strapping on the accountability pants is fun right here and now because the more bearish you are on US growth in Q3, the more you can get invested (on the long side) in what is going to be perpetuating outflows from US domestic equity funds:


1. Long Inflation (Commodities, Energy Stocks, Gold, etc.)

2. Long Bonds + Anything That Looks Like A Bond (love those #GrowthSlowing Yield Chasers!)

3. Long Foreign Currencies + Emerging Market Stocks (vs USD short)


This is when making a macro call matters – when you get those rare Moments Of Discontinuity in markets where you can put a lot of money to work. Sounds crazy, but this is much like the moment you had on JAN 1 to buy Gold and Utilities (+10% and +12% YTD, respectively).


To be crystal clear on this, we aren’t calling for the next Lehman – we are using our process to make an ole school consumption-cycle call. When the cycle is in phase transition, you get paid to shift your Style Factoring for the part of the cycle that you are entering.


In our process-speak we call this moving from the 2nd quadrant to the 3rd (within a 4 quad model using 2-factors, Growth & Inflation). Not unlike how Strauss and Howe explain “four-phase time” of the seasons, this risk management framework helps us simplify the complex.


“Time’s circle moves not only from cold, to hot, to cold but also from growth to maturity to decay to death.”

-William Strauss and Neil Howe (The Fourth Turning)


And while the “decay to death” part is not what I wake up thinking about in the morning, it does happen. Countries and companies slow too - and so does the confidence The People have in things like central-planning and the stock market’s last price being the economy.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.50-2.67%

SPX 1946-1989

VIX 10.11-11.54

USD 79.73-80.35

Pound 1.69-1.71

Brent Oil 110.03-112.99

Gold 1310-1330


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Moments of Discontinuity - Chart of the Day

CHART OF THE DAY: Trim Those GDP Forecasts Baby!

Takeaway: We'll take the other side of consensus.


CHART OF THE DAY: Trim Those GDP Forecasts Baby! - Chart of the Day

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Self-Confirming Info

“Because we naturally seek self-confirming information, we need discipline to consider the opposite.”

-Chip Heath


That quote comes from a block and tackle #behavioral chapter in Decisive titled Consider The Opposite (pg 114). If I was ever seeking self-confirming evidence of US GDP #GrowthSlowing, this morning I’ve got plenty of headlines on that.


The cover of this week’s The Economist has a picture of an American jockey riding a turtle with a header that reads: “America’s Lost Oomph – Why It’s Long-Term Growth Rate Has Slowed.” And on Friday, the WSJ ran a story titled “Survey Shows Economists Trimming Growth Forecasts.”

Self-Confirming Info - cart

#Trimming? With both bond yields and the Russell 2000 US growth index falling back toward their YTD lows, isn’t the market telling us to go all-in US growth investing? No thanks. The only discipline that matters in considering the opposite of our research view is delivered to us daily via real-time market signals.


Back to the Global Macro Grind


The best part about The Economist and Wall Street Journal articles is that they attempt to explain US #GrowthSlowing with the wrong reasons. The Economist, in its classic Keynesian style, suggests that the Fed keeping rates at 0% remains critical to growth and that the government needs to both spend more and expand immigration. #MustPrintAndSpendMoarrr


My colleague Darius Dale comically summarized the WSJ article this way on Friday: “Net Exports are a solid negative ~2% of US GDP… not sure how “negative international events” can ever be the largest downside risk to US GDP growth. Consensus Macro can’t even get their story straight at this point.” #BlameTheWeather


In other words, those who were looking for +3-4% 1990s style US GDP growth 6 months ago should cite anything but what’s slowing 70% of the number (US Consumption = 70% of GDP). And, whatever they do, they shouldn’t blame The Policy To Inflate’s impact on real cost of living in America either.


In other self-confirming USA #Q3Slowing news, here’s what big macro markets signaled last week:


  1. Russell 2000 lost another -0.7% on the week, falling back to -1.0% for 2014 YTD
  2. US 10yr Treasury Yield dropped another -4bps on the week, and is down -55bps YTD
  3. Yield Spread (10yr minus 2yr) compressed another -7bps on the week to fresh YTD lows


Don’t kid yourself, the economists who are now cutting their GDP forecasts know exactly what falling bond yields and a compressing yield spread means. On the other side of that, this is what consumption growth bulls are saying:


  1. Food prices dropped -0.1% last week
  2. Natural Gas dropped -4.7% last week
  3. Gold dropped -2.1% last week


Too bad you can’t eat Gold. If you contextualize those three data points however:


  1. Food Prices (CRB Food Index) is still up +19.1% YTD
  2. Natural Gas has round tripped back to flat YTD
  3. Gold made another higher-low and is up again this morning to +9.3% YTD


So, from an asset allocation perspective, what would you rather be long YTD – Gold or the Russell? That one is too easy to answer. How about The Dow, Coffee, or Cattle?


  1. Dow Jones was +0.9% last week to +3.2% YTD
  2. Live Cattle prices were up +1.8% last week to +17.7% YTD
  3. Coffee prices were up another +6.8% last week to +47.2% YTD


I know. Instead of citing the all-time high in both US rents (34% of the country rents) and meat prices during BBQ season, let’s talk about the corn chart rolling over from its all-time bubble highs as a “deflationary force” when the Food Index is +19% YTD.


As for the SP500, which hasn’t been as much a focus for us in 2014 as the #GrowthSlowing style factors within the market, there are plenty of components that we like on the #InflationAccelerating (Energy, XLE +11.8% YTD) and slow-growth #YieldChasing (Utilities, XLU +12.6% YTD) front.


I even went smart beta last week and sent out the buyback signal on AAPL during its correction to what we call immediate-term TRADE oversold (within a bullish intermediate-term TREND). While I can’t feed my kids iPads, apples are eatable – and, compared to a $12 “gourmet burger”, relatively “cheap” too!


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.46-2.54%


RUT 1133-1155

VIX 10.32-13.70

WTI Oil 100.50-103.41

Gold 1


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Self-Confirming Info - Chart of the Day


TODAY’S S&P 500 SET-UP – July 21, 2014

As we look at today's setup for the S&P 500, the range is 26 points or 0.97% downside to 1959 and 0.34% upside to 1985.     













  • YIELD CURVE: 2.00 from 2.00
  • VIX closed at 12.06 1 day percent change of -17.06%


MACRO DATA POINTS (Bloomberg Estimates):


  • 8:30am: Chicago Fed Nat Activity Index, June (prior 0.21)
  • 11:30am: U.S. to sell $26b 3-mo. bills, $24b 6-mo. bills



    • Senate in session; House schedule TBA
    • President Obama meets with Hispanic Caucus on immigration
    • 12:30pm: Transportation Sec. Anthony Foxx at Natl Press Club
    • U.S. ELECTION WRAP: Voter Attitude Shift on Immigration; Kochs



  • Russia’s Severstal sells U.S. steel plants for $2.3b
  • Reynolds loss in $23b smoker verdict likely to be cut
  • Murdoch said to mull Sky proceeds to boost Time Warner bid
  • Elliott Management takes over $1b stake in EMC Corp.: WSJ
  • McDonald’s, Yum suspend orders from Chinese meat supplier
  • Capital Research sells most of Allergan stake, WSJ reports
  • U.K. prosecutors said close to opening FX-rigging probe
  • General Motors tells dealers to halt sales of some Cadillacs
  • Air Force examines anomalies as SpaceX seeks launch work
  • Trinity guardrail whistle-blower case results in mistrial
  • Gilead drug combination cures Hepatitis C in HIV patients
  • Perrigo, Actelion lead tax-relief targets for U.S. drugmakers
  • Putin says MH17 crash shouldn’t be used for political aims
  • Bloody battle spurs diplomatic efforts to end Gaza conflict
  • Court bars Nokia India from Chennai unit sale without approval
  • Google mulls transforming NYC payphones into Wi-Fi hot spots
  • Finance industry bonus suffering in poll as rev. disappoints
  • Tesco replaces Clarke as CEO as grocer warns on profit again



    • BB&T (BBT) 5:45am, $0.75
    • Halliburton (HAL) 7am, $0.91 - Preview
    • Hasbro (HAS) 6:30am, $0.36 - Preview
    • Manpowergroup (MAN) 7:30am, $1.33
    • SunTrust Banks (STI) 6am, $0.77



    • BancorpSouth (BXS) 5pm, $0.33
    • Brookfield Canada Office Properties (BOX-U CN) 5pm, C$0.41
    • Brown & Brown (BRO) 4:30pm, $0.41
    • Cadence Design Systems (CDNS) 4:10pm, $0.20
    • Canadian National Railway (CNR CN) 4:01pm, C$1.00 - Preview
    • Chipotle Mexican Grill (CMG) 4:02pm, $3.09
    • Crown (CCK) 5:03pm, $1.00
    • CYS Investments (CYS) 4:05pm, $0.33
    • Hexcel (HXL) 4:06pm, $0.55
    • Netflix (NFLX) 4:05pm, $1.15
    • Rambus (RMBS) 4:05pm, $0.15
    • Rent-A-Center (RCII) 4:32pm, $0.37
    • Sanmina (SANM) 4:05pm, $0.47
    • Steel Dynamics (STLD) 6pm, $0.30
    • Texas Instruments (TXN) 4:30pm, $0.59
    • Waste Connections (WCN) 4:05pm, $0.52
    • Woodward (WWD) 4pm, $0.60
    • Zions Bancorp (ZION) 4:10pm, $0.45



  • Brent Steady as Supply Seen Safe Amid Russia Standoff; WTI Falls
  • Hedge Funds Cut Bullish Gold Wagers as Rally Snaps: Commodities
  • Corn Slumps to Four-Year Low as Global Supplies Seen Increasing
  • Gold Gains in London as Unrest Weighed Against U.S. Outlook
  • Speculators Cutting Bullish Oil Bets Miss Ukraine Rally: Energy
  • Morgan Stanley Hires Former UBS Commodity Analyst Tom Price
  • China’s Copper Exports Rise to 15-Month High Amid Qingdao Probe
  • Two Indonesian Ore Miners Resume Concentrate Exports After Ban
  • Nickel Reaches Lowest Price in Almost Four Weeks on Supply View
  • McDonald’s, Yum Suspend Orders From Chinese Meat Supplier
  • Gold Diggers Revive French Exploration as Prices Drive Hunt
  • U.K. Gas Extends Declines as Ample Supplies Offset Ukraine Risk
  • Russia Sold 300K Mt of Wheat to Indonesia Since May: Minister
  • Iran Seen Keeping Oil Sales Steady as Nuclear Talks Extended


























The Hedgeye Macro Team
















July 21, 2014

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