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Crushed Spirits

This note was originally published at 8am on July 09, 2014 for Hedgeye subscribers.

“A cheerful heart is good medicine, but a crushed spirit dries up the bones.”

-Proverbs 17:22


Four goals in 400 seconds for Germany, and all of Brazil was #crushed. Sometimes risk happens slowly, then all at once.




Back to the Global Macro Grind


Whether it was the Russell 2000 (-3% in 2 days) or Biotech (IBB) stocks (-5% in 2 days) … or whatever all-time-bubble-high mo mo stock that started blowing up in March that’s re-blowing-itself-up this week, you do not want to be the guy in this game who got crushed.


Been there, done that. If you’ve never been crushed, you will be. This is what people on the buy-side actually talk about. The not so subtle secret about this profession is that almost everyone I know on the buy-side talks about everyone else’s performance.


I had a fair amount of feedback by simply citing AQR’s contention that hedge fund correlation is high right now. To be fair, calling it high isn’t fair though. It’s at all-time highs!


In our Q3 Macro Themes presentation on Friday (11AM EST, ping sales@Hedgeye.com for access), we’ll show you a lot more than just hedge fund historical performance correlations – we’ll show you Volatility’s Asymmetry, across all of Global Macro including:


  1. Fixed Income Volatility at generational lows
  2. Foreign Currency Volatility at all-time lows
  3. Commodity Volatility at cycle-lows


Yep. Somewhere in between the generational low and the all-time low, I think we’ll all agree is pretty low. But not everyone will agree that it’s not different this time (that’s where we differ!).


Not surprisingly, as volatility dries up so does volume. You can ask you friends who work on the Old Wall what trading volumes are like in either FICC or Equities right now. I’m sure their day-to-day flow isn’t going to make you want to run out and build a broker dealer.


The Fed, of course, is who you can blame for this. The Policy to Inflate asset bubbles to all-time-highs (and never call them bubbles) is in and of itself a bubble. At the same time that they’re trying to ban economic gravity, they’ve all but eviscerated volatility (for now).


In an interview Cliff Asness (he runs AQR Capital Management and did the hedge fund beta piece) had with Morningstar a few weeks ago, he made a very simple summary point about all of this: “The average still can’t beat the average.”


So, don’t be average. Fade beta.


#FadingBeta is a very profitable risk management strategy, especially at the immediate-term momentum turns.


We’ve built our own models to signal when those phase transitions are most likely to take place. And I think, across big macro asset classes, we have done a better than bad job at calling lots of big macro turns since 2008.


What is the turn?


  1. When our immediate-term TRADE momentum signal exhausts itself to the upside…
  2. Then you get a sharp move off that high, on accelerating volume and rising volatility…
  3. Then the asset price makes a series of lower-highs, and snaps its intermediate-term TREND


Metaphorically, I call this the #waterfall. In my risk management model, when something does all 3 of the aforementioned things AND I have the research team support the why (as in why it can continue, with catalysts), we have ourselves what we call a short idea.


You can call it #FadingBeta, short selling momentum, or just not being the guy who bought Go-Pro (GPRO) at $48 last week. There are many ways to use this weaponry so that you don’t get crushed.


I’m not saying that being a levered long momentum investor doesn’t work. I’m just reminding you that A) it’s not a new strategy B) lots of funds are using it and C) when it unwinds from it’s all time high in AUM, it gets crushed (see March-May 2014 for details).


Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signal in brackets) are now:


UST 10yr Yield 2.49-2.60% (bearish = bullish on bonds)

SPX 1949-1985 (bullish)

RUT 1167-1190 (bearish)

BSE Sensex 25260-26189 (bullish)

VIX 10.32-12.69 (neutral)

USD 79.73-80.37 (bearish)

Pound 1.70-1.72 (bullish)

WTIC Oil 102.63-104.99 (bullish)

Natural Gas 4.17-4.39 (bearish)

Gold 1312-1331 (bullish)

Copper 3.20-3.30 (bullish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Crushed Spirits - Chart of the Day


Client Talking Points


We had a lot of questions on U.S. equity volume yesterday (there was none) – versus the 1 and 3 month average Total Equity Market Volume, it was down -16% and -19%, respectively – volume comes back on the down days, not the up ones #asymmetry.


2.46% puts the UST 10yr at fresh new lows for Q3 and that fits the complexion of our U.S. economic slowing call much more so than no-volume U.S. equity market squeezes; regional bank stocks (KRE) saw this in yield spread compression yesterday #weak.


We learn a lot more from bounces within bearish TRENDs than the selloffs; Italy’s MIB Index was the 1st major European Equity market to fail at 21,138 TREND resistance this morning and go red #watching.

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


2 downgrades on $MCD today... #Fascinating



If you must play, decide upon three things at the start: the rules of the game, the stakes, and the quitting time. 

-Chinese Proverb


49.3%, is the amount Lean Hogs are up year-to-date, up +2% yesterday.


TODAY’S S&P 500 SET-UP – July 23, 2014

As we look at today's setup for the S&P 500, the range is 23 points or 1.09% downside to 1962 and 0.07% upside to 1985.                                               













  • YIELD CURVE: 1.99 from 1.99
  • VIX closed at 12.24 1 day percent change of -4.45%


MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, July 18 (prior -3.6%)
  • 10:30am: DOE Energy Inventories



    • 8:45am: FDIC Advisory Cmte on Community Banking meets
    • 9am: Treasury Sec. Lew speaks on multilateral develp. banks
    • 9am: Bipartisan Policy Center forum on energy, Tom Fanning, CEO of the Southern Co. (11am keynote), Energy Sec. Ernest Moniz, Bank of America Chairman Chad Holliday among speakers
    • 9:30am: Senate Environment Cmte hearing on EPA proposed carbon pollution standards for existing power plants
    • 10am SEC meeting on potential money market fund rule change
    • 10am: State Dept.’s Brett McGurk at House Foreign Affairs Cmte on Iraq terrorism response
    • 10am: House Homeland Security Cmte holds hearing on unfulfilled recommendations after Sept. 11 attacks
    • U.S. ELECTION WRAP: Kingston Versus Perdue; Obamacare Ruling
    • Perdue wins Georgia U.S. Senate Republican runoff to face Nunn



  • Rebel stronghold holds breath as shellfire escalates in Donetsk
  • Daimler 2Q earnings rise 12% on S-Class Sedan
  • EU said to weigh extra Google concessions in antitrust probe
  • Apple hints new products near with bigger iPhones looming
  • Japan blocks imports from supplier as China meat scare spreads
  • LinkedIn to buy Bizo for $175m to expand marketing tools
  • Money-market funds getting new regime aimed at preventing runs
  • Deutsche Bank drops on report N.Y. Fed faulted oversight
  • Calstrs asked Pepsi to give Nelson Peltz seat on board: FT



    • Air Products & Chemicals (APD) 6am, $1.45
    • Amphenol (APH) 8am, $1.05
    • Biogen Idec (BIIB) 7am, $2.83
    • Boeing (BA) 7:30am, $1.98 - Preview
    • Delta Air Lines (DAL) 7:30am, $1.03 - Preview
    • Dow Chemical (DOW) 7am, $0.72
    • EMC (EMC) 6:52am, $0.43 - Preview
    • Freeport-McMoRan (FCX) 8am, $0.52 - Preview
    • General Dynamics (GD) 7am, $1.77
    • Hercules Offshore (HERO) 7am, $0.01 - Preview
    • Janus Capital Group (JNS) 7am, $0.18
    • New York Community Bancorp (NYCB) 8am, $0.26
    • Norfolk Southern (NSC) 8am, $1.74 - Preview
    • Northrop Grumman (NOC) 7am, $2.22 - Preview
    • Owens Corning (OC) 7:28am, $0.44
    • PepsiCo (PEP) 7am, $1.23 - Preview
    • Praxair (PX) 6:02am, $1.59
    • Ryder System (R) 7:55am, $1.39
    • SEI Investments Co (SEIC) 8:30am, $0.42
    • Simon Property Group (SPG) 7am, $0.94 - Preview
    • TE Connectivity (TEL) 6am, $0.99
    • Thermo Fisher Scientific (TMO) 6am, $1.62
    • Tupperware Brands (TUP) 7am, $1.47
    • Whirlpool (WHR) 6am, $2.91



    • Allison Transmission Holdings (ALSN) 4:05pm, $0.32
    • Angie’s List (ANGI) 4:01pm, ($0.24)
    • Assurant (AIZ) 4:05pm, $1.54
    • AT&T (T) 4:01pm, $0.63 - Preview
    • AvalonBay Communities (AVB) 4:11pm, $0.86
    • Brandywine Realty Trust (BDN) 4:15pm, ($0.01)
    • CA (CA) 4:05pm, $0.60
    • Cheesecake Factory (CAKE) 4:15pm, $0.61
    • Cirrus Logic (CRUS) 4pm, $0.30
    • Citrix Systems (CTXS) 4:05pm, $0.61
    • Core Laboratories NV (CLB) 4:05pm, $1.34
    • CoreLogic (CLGX) 4:10pm, $0.37
    • Crown Castle International Cor (CCI) 4:02pm, $0.15
    • E*TRADE Financial (ETFC) 4:05pm, $0.23
    • Equifax (EFX) 4:15pm, $0.94
    • Everest Re Group (RE) 4:05pm, $5.89
    • F5 Networks (FFIV) 4:05pm, $1.35
    • Facebook (FB) 4:01pm, $0.32 - Preview
    • Fortinet (FTNT) 4:15pm, $0.10
    • Gilead Sciences (GILD) 4:02pm, $1.79 - Preview
    • Graco (GGG) 4:10pm, $1.01
    • Illumina (ILMN) 4:05pm, $0.50
    • Macerich (MAC) 4:30pm, $0.12
    • Polycom (PLCM) 4:05pm, $0.18
    • QUALCOMM (QCOM) 4:01pm, $1.21
    • Raymond James Financial (RJF) 4:16pm, $0.76
    • SLM (SLM) 4:15pm, $0.09
    • Susquehanna Bancshares (SUSQ) 4:30pm, $0.20
    • TAL International Group (TAL) 5:01pm, $0.96
    • Teradyne (TER) 5:01pm, $0.40
    • Torchmark (TMK) 4pm, $1.03
    • Tractor Supply Co (TSCO) 4:01pm, $0.95
    • TripAdvisor (TRIP) 4:02pm, $0.61
    • TriQuint Semiconductor (TQNT) 4:02pm, $0.07
    • Umpqua Holdings (UMPQ) 4:05pm, $0.24
    • Varian Medical Systems (VAR) 4:05pm, $1.09
    • Weatherford International PLC (WFT) 4:40pm, $0.21



  • China’s Gold Demand Drops in First Half as Bars Outweigh Jewelry
  • Rice Harvest in Thailand Seen Dropping on Drought, Subsidy Lapse
  • U.S. Steel Invoking Carnegie Legacy in Revival Plan: Commodities
  • Port Hedland Tug Deckhands Approve Strike Action for Second Time
  • Arctic Ice Melt Seen Freeing Way for South Korea Oil Hub: Energy
  • Aluminum Declines From 16-Month High as Rally Seen Excessive
  • Steel Rebar in Shanghai Falls to 1-Month Low as Demand Weakens
  • Palm Oil Drops to 11-Month Low on Rising Global Oilseed Supplies
  • Gold Holds Above Three-Day Low as Ukraine Weighed Against U.S.
  • Latvia, Slovakia Said to Back Early Carbon Permit Supply Curbs
  • Corn Lingers Near Four-Year Low as Wheat Slips on Global Supply
  • CNPC 2014 Oil-Product Trade With Venezuela to Reach 790,000 B/D
  • BHP Iron-Ore Output Rises 19% on Australia Growth Projects
  • Nickel Deficit Narrowing on China Pig Iron Output, Sumitomo Says


























The Hedgeye Macro Team
















CHART OF THE DAY: $HLF Shorts Aren't the Only Ones Crying

CHART OF THE DAY: $HLF Shorts Aren't the Only Ones Crying - Chart of the Day

As you can see in our Chart of The Day, even the US government’s contortionist reading on US Consumer Price Inflation (CPI) delivers you a fresh new YTD low in NEGATIVE real wages (not good).

Fortunes Fall Short

“To go too far is as bad as to fall short.”

-Callie’s fortune cookie


Last night was a beauty at the McCullough dinner table. My newbie was chirping up a storm with pablum all over her face and my two older kids had a few of the best back-to-back fortune cookies ever.


Jack’s fortune reminded me of a critical risk management lesson: “there is nothing permanent, except change.” So I told him that that’s what my man Bill Ackman was probably thinking at his dinner table last night too.


Picking on the slide-deck guru is just fun and games. So please don’t take offense to my entertaining you with this topic this morning. It’s trending more than Putin/Obama. Fully loaded with the +25% short squeeze in HLF yesterday, I think the guy actually cried (sort of).


Fortunes Fall Short - 90


Back to the Global Macro Grind


There’s no crying in the asset management business. If you are going to well-up in public, I don’t care how much you are “worth” - I am going to give you a time-spanking and an Early Look time-out.


In other US stock market news yesterday…


  1. The Russell 2000 bounced on no-volume to lower-bubble-highs yesterday (1175 TREND resistance)
  2. Total US Equity Market Volume was -16% and -29% vs. its 1 and 3 month averages, respectively
  3. Front-month stock market fear (VIX) sold off to a higher low of 12.24, holding 11.94 TREND support


In other words, “rallies” continue to ramp to lower-highs on lower and lower volumes (not good) as volatility continues to make a series of higher-lows from the VIX’s most asymmetric point (10). All the while, the long bond rallied intraday yesterday and the 10yr yield is hitting fresh Q314 lows of 2.46% this morning.


With the Russell (IWM) still down YTD (not a good return), we’re going to keep you focused on where the real bull markets are in 2014:


  1. Treasuries
  2. Commodities
  3. Emerging Markets


The Treasuries one is easy to understand, provided that you understand that they (the Old Wall) still do not understand the link between inflation and both real wages and consumption growth.


As you can see in our Chart of The Day today, even the US government’s contortionist reading on US Consumer Price Inflation (CPI) delivers you a fresh new YTD low in NEGATIVE real wages (not good).


Now, to be fair, someone who A) hasn’t been long of inflation in 2014 and/or B) believes anything the Fed tells them about inflation will tell you that (if you back out shelter – i.e. rent, which is hitting all-time highs, and represents 30% of cost of living for the average American consumer) “2% inflation feels about right.” #Goldilocks


There were a bunch of 16th century dudes hanging out in officialdom who told Copernicus that Earth was the center of the universe too. But that doesn’t change that nothing is permanent, except change. As time and price changes, real-time risk managers do.


It wasn’t just Chipotle (CMG) taking price above the “goldilocks 2%” inflation rate yesterday:


  1. Hog prices ripped another +2% to +49.3% YTD
  2. Cattle prices popped another +2% to +15.9% YTD
  3. Aluminum prices continued another +1.9% higher to +14.5% YTD


But, those poor CNBC producers naval gazing at Billy probably missed that. Must resuscitate ratings from hitting new lows! I have slide decks too, but I certainly don’t have all the answers to the market universe; Mr. Macro Market does.


And I think that’s one of the main lessons of the last half decade – whether you are a central-planning goddess, hedge fund legend, or just plain wicked smaht… you can try to tell markets, prices, and economies what to do; but they don’t have to listen.


You can try to gussy up the idea as your “best ever.” You can tell all your “smart” friends what you are going to do before you try to do it too. But, eventually, you’re going to jump the shark, go too far, and fall short.


Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signal in brackets) are now as follows:


UST 10yr Yield 2.44-2.53% (bearish = bullish bonds)

SPX 1 (bullish)

RUT 1133-1164 (bearish)

Italy MIB Index 20157-21138 (bearish)

VIX 11.94-14.26 (bullish)

USD 80.29-80.93 (bearish)

EUR/USD  1.34-1.36 (neutral)

Pound 1.70-1.72 (bullish)

WTI Oil 100.15-104.03 (bullish)

Natural Gas 3.73-4.01 (bearish)

Gold 1 (bullish)

Copper 3.17-3.23 (bullish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fortunes Fall Short - Chart of the Day

July 23, 2014

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investing ideas

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Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.