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Managing the Eccentric

This note was originally published at 8am on July 10, 2014 for Hedgeye subscribers.

“Prepare. Perform. Prevail.”

-Dave Tate, EliteFTS 


In what feels like a lifetime ago now, I owned a human performance and nutritional consultation company.  The work was rewarding, but not from a pecuniary perspective.   


Designing transformative programs for dedicated collegiate athletes and prospective professional athletes, bodybuilders and Olympians was certainly gratifying.   Rep counting for middle-aged housewives (in what invariably devolved into pseudo-therapy sessions)…not so much.   


Unfortunately, only one of those demographics generally had the discretionary dollars to spend to keep us a going concern. 


Because broke college kids don’t have much in the way of a food or supplement budget and certainly can’t afford high frequency, hormonal profiling, we had to resort to a little empirical “bro-science” to gauge recovery and the subsequent prescription of workout intensity.


Q:  How do you know if cortisol levels are muted, the central nervous system is piqued, and the overall hormonal milieu is primed for hardcore training and positive physiological adaptation…in ~5s and at no cost?

A:  Wake up and pick up something heavy.


If your grip strength is there right out of bed, it’s almost assured the body is recovered and ready for positive stress.  


Another underused training technique effective at jumpstarting progress in advanced lifters is targeted use of eccentric training.  The eccentric part of a lift can generally be thought of as the “down” part of the lift  (think lowering the bar when bench pressing)  


Managing the Eccentric - bench

Muscle contraction during the eccentric portion is stronger, allowing you to use more weight – resulting in greater muscle soreness and, if employed correctly, faster strength & hypertrophy gains.  


The majority of lifters and coaches only focus on the concentric portion of the lift – which, in investment speak, is analogous to simply being long beta.  Learning when and how to manage the eccentric (down) part of the lift cycle is where training alpha is generated. 


Back to the Global Macro Grind...


In our 3Q Macro Themes call tomorrow we’ll lay out the detailed case under our expectation for a sequential slowdown in consumption growth in 3Q.   The punditry of the Early Look prose typically carries a tendency towards intentional overstatement, so it’s worth emphasizing that we’re not making a recession call or even a call for an overly protracted deceleration (yet).   


As the current expansion matures, however, occasional detachment from the myopia of every market moment and consideration of where we are in the longer cycle can be a useful exercise. 


Because we have a self-imposed 900 word limit on the morning missive and alliteration has yet to steer me wrong, we’ll use the 3-D’s of Duration, Demographics, & Deleveraging as the conceptual framework for contextualizing the prospects for the present cycle:


Duration (of Expansion):   The mean duration of expansions over the last century is 59 months.   Inclusive of July, the current expansion stands at 62 months.  We continue to think the reality of the ticking expansion clock weighs into the Fed’s current policy calculus  – they need to get out of QE if only to give themselves the opportunity to (credibly) get back in if need be.   Stopping QE while the fundamental data is supportive implies that QE was (at least in part) effective in its objective.  Perma-QE, however, is a de facto admission to the market of its ineffectivenss, leaving it largely impotent as a forward policy tool. 


Demographics:  Growth in the working age population peaked circa 2000 and won’t turn again for another ~10 years and the aged dependency ratio (the >65YOA population in relation to the 16-64YOA population) will continue to rise well beyond that.  With labor supply in secular deceleration, productivity gains will have to shoulder an increasing share of the load to support trend growth in real gdp/potential gdp.  Real Wage Growth may benefit from tighter labor supply and productivity driven demand for labor - but that remains an “if” and, either way, higher entitlement spending and debt service costs will likely sit as an offset to gains in real income.


Deleveraging:  Household debt-to-GDP currently sits at 77.2%, down from the March 2009 peak of 95.6% according to the latest Fed Flow of Funds data.  Rates remain pinned at historic lows, for now, and debt growth remains below income growth so (assuming borrowers want to borrow and creditors lend) credit could support consumption growth over intermediate term.  However, given the initial debt position and zero bound rates, we certainly aren’t in position to jumpstart a repeat of the prior credit based consumption cycle. 


The simple reality of the last 30+ years is that, with the Baby Boomers (born 1946-1964) entering prime working age (24 – 54) alongside the secular increase in female labor force participation, we had the largest bolus of people ‘ever’ matriculating through their peak years of discretionary income with peak leverage on that (peak) income – all of which also happened to occur on the right side of a multi-decade interest rate cycle which provided a steady tailwind to asset values (via lower discounting) and offered self-reinforcing support to the credit cycle as rising collateral values supported capacity for incremental debt. 


No central bank liquidity deluge can effectively replicate that.


So, is it time to start managing the eccentric part of the macro cycle? 


Probably not quite yet.  Viewing economic cycles as periodic functions, balance sheet recessions are generally characterized by longer periods (slower recoveries) with lower amplitude.    So, it’s probable the muddle continues for a while longer with recurrent, short-cycle oscillations in growth for the Macro Marauders of Hedgeye to continue to attempt to front run.   


The “3D” style thinking above isn’t particularly new or novel,  but there’s a lot of economic gravity embedded in those realities.  Their recapitulation also provides an effective counterbalance to the latest Fed projections which call for GDP to grow in excess of potential output for the next 2.5 years – which is effectively a call for an accelerating recovery over the next 30 months and an implicit expectation for the 3rd longest expansionary period in a century.  


Do you take their word for it or are we #PastPeak in the current cycle?


We don’t know, exactly, but our model is dynamic and data dependent… and our 4Q Macro themes are still up for grabs.


In the meantime, we’ll continue to work to evolve and fortify our process for risk managing the eccentric.


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


UST 10yr Yield 2.49-2.59% (bearish = bullish for bonds)

RUT 1165-1189 (bearish)

USD 79.64-80.19 (bearish)

Pound 1.70-1.72 (bullish)

Brent Oil 107.23-111.37 (bullish)

Gold 1315-1346 (bullish)


Winter is Coming!  Prepare. Perform. Prevail.


Christian Drake

Macro Analyst


Managing the Eccentric - Boomer Dependency


Client Talking Points


The @Hedgeye TREND resistance at 2051 for the Shanghai Composite Index is now support. Chinese stocks followed through on the breakout signal we issued earlier this week with a +1.3% move overnight post a sequential acceleration in PMI from 50.7 to 52.0.


Call it China or call us lucky, we’re indifferent on why pucks go in the net; Copper leading commodity gainers this morning +1.2% to $3.24/lb after holding @Hedgeye TREND support of $3.17/lb (Nickel was +1.5% yesterday to +37.6% year-to-date).


Germany’s Service PMI accelerated to 56.6 (World Cup), but France’s PMI dropped to 47.6 – not a straight shot economic acceleration across Europe in July, so be careful here; especially if DAX, CAC, PSI etc can’t recapture TREND supports.

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


TREASURIES: 10yr 2.48% doesn't care much for the no-volume mo bro chasing in US Equities




Don't judge each day by the harvest you reap, but by the seeds you plant.

-Robert Louis Stevenson


Putin’s Russia is leading losers today down -0.9%; year-to-date, it’s down -9.4%.


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.

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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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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
    • Amazon.com (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
















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