CHART OF THE DAY: Harbinger? China's Bearish-to-Bullish Reversal

CHART OF THE DAY: Harbinger? China's Bearish-to-Bullish Reversal - Chart of the Day


Chinese Stocks (Shanghai Composite) closed up another +1.3% last night after China’s best PMI in 18 months.

Getting Out Of The Way

“Why would we ever predict when we can know?”

-Dan Heath


Great question. I guess that’s why some people like to trade on inside information.


In Global Macro Risk Management, there is no inside information. Or at least not the hard core stuff like Galleon used to get. Maybe there was back in the day when someone could literally call their boy at the Bank of England and just get the next rate move prior to it being announced. But even the biggest bureaucrat on the planet is scared of orange-jump-suit-risk #accelerating at this stage of the game.


As the game changes, our #process does. We believe that the best prediction of the future is based on what we already know. I’ve spent a lot of time talking to investors about how our models work. Sometimes at least 2/3 of our forecast is based on what we already know. In other words, we use real-time data and measure its rate of change vs. historical data in order to gauge a forward looking probability.


Getting Out Of The Way - wallstreet 120370032


Back to the Global Macro Grind


Thinking in rate of change (slope) and probability terms works a heck of a lot better than the ‘I’m smart and it feels like’ this is going to happen approach. Most of that spew anchors on what already happened – not on the measurable factors underneath the hood that could cause whatever happened to undergo a phase transition.


There are those two thermodynamic risk management words again – phase transitions. To put that in the most simpleton speak I can, there are two types of phase transitions I really care about:


  1. Bearish to bullish TREND reversals
  2. Bullish to bearish TREND reversals


While always considering our intermediate-term TREND duration within the context of our other durations (TRADE and TAIL) is critical, when something undergoes a phase transition on our TREND duration, that something often ends up becoming the best calls we make.


Don’t forget that if you go both ways like I do (don’t think dirty – think hockey: back-check, fore-check, paycheck), sometimes the most important call to make is to get out of the way.


How do you do that?


  1. If you’re short and something is going from bearish to bullish = COVER
  2. If you’re long and something is going from bullish to bearish = SELL


If you’re a longer-term investor, just cover or sell some. Only average players take coaching personally.


If you analyze your P&L across your entire career, what you’ll realize is that your performance distribution has big tails (i.e. your biggest losers kill you). Since risk management Rule #1 is don’t lose $$, that makes getting out of stuff really important.


Who gets you out?


We know who gets you in. Every bank, broker, and buds out there is trying to get you into what they get paid on next. This is Wall Street don’t forget. But getting you out of your “best idea” (might be your marriage too!) before it’s about to go really bad, #priceless.


I didn’t know what I was going to write about this morning (I usually don’t – I have 45 minutes to write something before it gets edited), so I certainly hope you can poke holes at this. I can.


I can poke holes at every single idea we have; especially if my intermediate-term TREND signal is reversing versus the desired direction of the position. Maybe that’s why a lot of PM’s ask me to scrub their portfolios (we call it a Ticker Scrub). It’s so easy a Mucker can do it.


What looks greasy dirty out there right now? (i.e. what is signaling a bearish to bullish TREND reversal):


  1. Chinese Stocks (Shanghai Comp) which closed up another +1.3% last night after China’s best PMI in 18 months
  2. Copper prices are up another +1.2% this morning to $3.24/lb after breaking out above @Hedgeye TREND
  3. US Equity Volatility (VIX) as the front month makes a series of higher-all-time-lows


Greasy? Yeah, you know – like when I score a goal in men’s league hockey off my elbow. I’m getting older and slower, so I love those. And I really love seeing something breakout for fundamental reasons that neither I nor my analysts can see. Those are beauties.


Is there anything better in this business than that? When all of the super smart people in this world are all wrong, at the same time, for the wrong reasons? Most of the time no super duper slide deck can arrest gravity.


Embrace the uncertainty out there. I can guarantee you’ll be really wrong less times. And you’ll smile more often too. After all, playing this game is a lot more fun when you can know how to be right by not being really wrong. You just have to know when to get out of the way.


Our immediate-term Global Macro Risk Ranges are now as follows:


UST 10yr Yield 2.45-2.51%


RUT 1134-1164

Shanghai Comp 2051-2099

VIX 10.32-12.51  

WTI Oil 101.75-104.15

Gold 1

Copper 3.17-3.28


Best of luck out there today,




Keith R. McCullough
Chief Executive Officer


Getting Out Of The Way - Chart of the Day

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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.


TODAY’S S&P 500 SET-UP – July 24, 2014

As we look at today's setup for the S&P 500, the range is 28 points or 1.16% downside to 1964 and 0.25% upside to 1992.             













  • YIELD CURVE: 2.01 from 2.00
  • VIX closed at 11.52 1 day percent change of -5.88%


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Init. Jobless Claims, July 19, est. 307k (prior 302k)
  • Continuing Claims, July 21, est. 2.510m (prior 2.707m)
  • 9:45am: Bloomberg Consumer Comfort, July 20 (prior 37.5)
  • 9:45am: Markit US Mfg PMI, July prelim, est. 57.5 (prior 57.3)
  • 10am: New Home Sales, June, est. 475k (prior 504k)
  • 10:30am: DOE Energy Inventories
  • 11am: Kansas City Fed Mfg Activity, July, est. 6 (prior 6)
  • 1pm: U.S. to sell $15b 10Y TIPS



    • 7:30am: RNC’s Priebus speaks at Nat’l Urban League Conf.
    • 9:30am: House Veterans Affairs Cmte hears from Acting VA Secretary Sloan Gibson on restoring agency trust
    • 10am: House Rules Cmte considers resolution providing authority to sue President Obama
    • 11:30am: House Speaker John Boehner holds press briefing
    • 12pm: Senate and House Democrats holds news conference to call on Congress to raise national minimum wage
    • U.S. ELECTION WRAP: Georgia Turnout; Ads; Walsh’s Thesis



  • Dimon, JPMorgan board win dismissal of investor Madoff suit
  • SEC sends McGraw Hill Wells notice on CMBS graded by S&P
  • Hamas says no sign of breakthrough in Gaza cease-fire talks
  • FAA ends ban on U.S. airlines’ flights to Israel’s airport
  • Bombardier to cut 1,800 jobs amid struggle to sell CSeries jet
  • Wal-Mart told by Delaware court to provide bribery probe files
  • Euro-area PMI surveys signal economic activity is picking up
  • Nokia boosts margin forecast after earnings beat ests.
  • Unilever 2Q underlying sales growth misses estimates
  • Reckitt Benckiser said to move toward spinoff of Suboxone unit
  • Record student-loan debt prompts Treasury to stem defaults
  • House Rules Cmte considers lawsuit against President Obama



    • 3M (MMM) 7:30am, $1.91
    • Airgas (ARG) 7:30am, $1.18
    • Alaska Air Group (ALK) 6:01am, $1.11
    • Alexion Pharmaceuticals (ALXN) 6:30am, $1.07 - Preview
    • American Airlines (AAL) 8am, $1.96 - Preview
    • AmerisourceBergen (ABC) 7am, $0.92 - Preview
    • BankUnited (BKU) 7:30am, $0.45
    • Bemis (BMS) 7am, $0.64
    • Boston Scientific (BSX) 7am, $0.19 - Preview
    • Bristol-Myers Squibb (BMY) 7:30am, $0.45 - Preview
    • Brunswick (BC) 7:39am, $0.91
    • Cameron Intl (CAM) 7:30am, $0.87
    • Caterpillar (CAT) 7:30am, $1.51 - Preview
    • Celgene (CELG) 7:33am, $0.89 - Preview
    • CMS Energy (CMS) 8am, $0.27
    • Coca-Cola Enterprises (CCE) 7:30am, $0.88 - Preview
    • Dana Holding (DAN) 7am, $0.51
    • Diamond Offshore Drilling (DO) 6am, $0.56 - Preview
    • DR Horton (DHI) 7am, $0.49 - Preview
    • Dr Pepper Snapple (DPS) 8am, $0.91 - Preview
    • Dunkin’ Brands (DNKN) 6am, $0.47
    • Eli Lilly & Co (LLY) 6:30am, $0.65 - Preview
    • Encana (ECA CN) 6am, $0.24 - Preview
    • EQT (EQT) 7am, $0.85
    • FLIR Systems (FLIR) 7:30am, $0.34
    • Ford Motor Co (F) 6:30am, $0.36 - Preview
    • General Motors (GM) 7:35am, $0.59 - Preview
    • Gentex (GNTX) 9:15am, $0.47
    • Graphic Packaging (GPK) 7:30am, $0.17
    • Hershey (HSY) 7am  $0.76
    • Husky Energy (HSE CN) 7am, C$0.70 - Preview
    • Jarden (JAH) 7:05am, $0.90
    • JetBlue Airways (JBLU) 7:30am, $0.19
    • KKR (KKR) 8am, $0.65
    • Lazard (LAZ) 7am, $0.57
    • Loblaw (L CN) 6:30am, C$0.67 - Preview
    • Marriott Vacations (VAC) 8am, $0.75
    • NASDAQ OMX Group (NDAQ) 7am, $0.68
    • National Penn Bancshares (NPBC) 6:50am, $0.18
    • Noble Energy (NBL) 7:27am, $0.79
    • Nucor (NUE) 9am, $0.40 - Preview
    • Patterson-UTI Energy (PTEN) 6am, $0.32
    • Pinnacle Entertainment (PNK) 6:30am, $0.46
    • Popular (BPOP) 7am, $0.70
    • Potash of Saskatchewan (POT CN) 6am, $0.45 - Preview
    • Precision Drilling (PD CN) 6am, C$(0.00) - Preview
    • PulteGroup (PHM) 6:30am, $0.25 - Preview
    • Quest Diagnostics (DGX) 7am, $1.06
    • Raytheon (RTN) 7am, $1.59 - Preview
    • Realty Income (O) 9:15am, $0.23
    • Reliance Steel & Aluminum (RS) 8:50am, $1.38
    • Rogers Communications (RCI/B CN) 6:50am, C$0.84 - Preview
    • Royal Caribbean Cruises (RCL) 8:36am, $0.53
    • Sigma-Aldrich (SIAL) 8am, $1.10
    • Southwest Airlines (LUV) 6:30am, $0.61
    • Starwood Hotels & Resorts (HOT) 6am  $0.76
    • Supervalu (SVU) 8am, $0.17 - Preview
    • T Rowe Price (TROW) 7:30am, $1.12
    • Under Armour (UA) 7am, $0.07 - Preview
    • Union Pacific (UNP) 8am, $1.43
    • United Continental (UAL) 7:30am, $2.19 - Preview
    • USG (USG) 8:30am, $0.42
    • Wyndham Worldwide (WYN) 6:30am, $1.14
    • Zimmer Holdings (ZMH) 7am, $1.49



    • Align Technology (ALGN) 4pm, $0.39
    • Altera (ALTR) 4:15pm, $0.37
    • (AMZN) 4:05pm, $(0.15) - Preview
    • Baidu (BIDU) 4:30pm, $8.66
    • Cerner (CERN) 4:01pm, $0.40 - Preview
    • Chicago Bridge & Iron (CBI) 4:01pm, $1.28
    • Chubb (CB) 4:02pm, $1.90
    • CR Bard (BCR) 4:05pm, $2.01
    • Deckers Outdoor (DECK) 4:05pm, $(1.29)
    • Flextronics Intl (FLEX) 4:01pm, $0.23
    • Freescale Semiconductor (FSL) 4:05pm, $0.37
    • Ingram Micro (IM) 4:04pm, $0.52
    • KLA-Tencor (KLAC) 4:15pm, $0.86
    • Leggett & Platt (LEG) 4:05pm, $0.46
    • Maxim Integrated (MXIM) 4:01pm, $0.47
    • NetSuite (N) 4:08pm, $0.03
    • Olin (OLN) 5:05pm, $0.45
    • Pandora Media (P) 4:02pm, $0.03
    • Principal Financial (PFG) 4pm, $1.01
    • Regal Entertainment (RGC) 4:01pm, $0.27
    • Republic Services (RSG) 4:05pm, $0.49
    • RF Micro Devices (RFMD) 4pm, $0.17
    • Riverbed Technology (RVBD) 4:05pm, $0.26
    • SBA Communications (SBAC) 4:01pm, $0.02
    • Sensient Technologies (SXT) 5:29pm, $0.79
    • SolarWinds (SWI) 4:01pm, $0.37
    • Starbucks (SBUX) 4:05pm, $0.66 - Preview
    • Stericycle (SRCL) 4:02pm, $1.03
    • Swift Transportation (SWFT) 4:02pm, $0.33
    • Tempur Sealy Intl (TPX) 4:05pm, $0.41 - Preview
    • Universal Health (UHS) 5:01pm, $1.25
    • Validus (VR) 4:39pm, $1.47
    • VeriSign (VRSN) 4:05pm, $0.65
    • Visa (V) 4:05pm, $2.10



  • Trafigura Unit Seeks to Limit Metals Liability at Qingdao Port
  • Cotton Crop in India Set for Record as Farmers Shun Oilseeds
  • Coffee Growers in Vietnam Seen Harvesting Bigger Crops on Yields
  • Butter at 16-Year High as U.S. Exports Cut Reserves: Commodities
  • Potash Corp. Raises Profit Forecast as Fertilizer Buyers Return
  • Gold Declines to One-Week Low as U.S. Outlook Curbs Haven Demand
  • Japan-Indonesia Power Plant Said to Miss Finance Deadline Again
  • Rebar Retreats to Five-Week Low in Shanghai as Iron Ore Slumps
  • WTI Oil Declines After U.S. Gasoline Supplies Rise; Brent Steady
  • Palladium Gain Sets Up Platinum Switch in Cars: Chart of the Day
  • India to Sell 25% of State Wheat Stockpiles to Cool Prices
  • Albany Nears Oil-Hub Status as 100-Car Trains Jam Port: Freight
  • Palm Oil Climbs From 11-Month Low as Soybeans Extend Rebound
  • Australian Southeast Seen Drier as El Nino Predicted for Harvest


























The Hedgeye Macro Team
















FLASHBACK | Rickards: 'Everything That Was Wrong In 2008 Is Worse Today'

Controversial best-selling author James Rickards sits down with Hedgeye CEO Keith McCullough and explains why he believes 2014 is worse than 2008.


We are removing long YUM from our Investment Ideas list.


We like YUM for many reasons, including its strong management team, its asset-light model and its exposure to emerging markets.  We really liked YUM, however, due to its easy same-store sales comparisons in China and its ability to deliver 40%+ operating profit growth in the region in 2014.  We thought YUM was ready to turn things around in China and we made it explicitly clear that our bull thesis hinged on this.  Unfortunately, we no longer believe this to be the case.


On Sunday, news hit that the Shanghai FDA launched an investigation into meat supplier Husi Food (Osi Group Inc.) after reports surfaced alleging the firm of selling expired meat products.  YUM is only one of several Western food companies linked to Husi (MCD, SBUX, BKW highlight others), but it is by far the most vulnerable to this negative event, with approximately 6,400 restaurants in China.  Everyone knows what happened the last time YUM had a food issue and, the fact of the matter is, Chinese consumers are still fragile.  YUM had just begun regaining their trust.


All told, this is a huge blow to the company, no matter how they try to spin it.  Today, the South China Morning Post published a disturbing report, featuring a Sina survey (with up to 25,000 respondents), that indicated severe damage has been done.  According to the article:


"77 percent of people in the poll said they believed the affected Western fast-food restaurant brands had been aware of Husi's faulty practices.  Also 69 percent said they would no longer dine at the restaurants run by the Western companies."


It is pretty clear, to us, that YUM will once again face an uphill battle in its most important region.  Are we overreacting to this news?  Maybe.  But we don't recommend stocks, long or short, that we lack conviction in.  It is now unlikely YUM will hit its numbers this year and management may have hinted at that on the 2Q14 earnings call by guiding down FY14 same-store sales estimates in China.  We're much happier on the sidelines, at this point, because something tells us this won't be the last we hear of this episode.


We've previously pegged YUM shares at a fair value range of $90 to $100.  This estimate assumed a full-blown recovery in China.  We don't see this happening, for a while, and expect shares to muddle along similar to the way they did for the majority of 2013.


Call with questions.


Howard Penney

Managing Director


Fred Masotta


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