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Daily Trading Ranges, Refreshed [Unlocked]

Takeaway: Below are Hedgeye's proprietary buy and sell levels on major markets, commodities and currencies.

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BULLISH TRENDS

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BEARISH TRENDS

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VIX BREAKOUT?

Client Talking Points

CHINA

The big breakout off our signal continued overnight with the Shanghai Comp up another +2.4% (it’s up +6% since @Hedgeye TREND breakout on 7/21). We published an institutional research note last week outlining our #bullish view on China. Both our quantitative signals and fundamental research now support buying China. This stance is in stark contrast to our previous view.

DAX

Potential for a sustained bullish to bearish TREND reversal here is real. The DAX is down -0.3% this morning, but below @Hedgeye TREND resistance of 9789 is the more important risk management point. Most European Equity markets look no different.

VOLATILITY

Front month VIX snuck back above @Hedgeye TREND support of 11.94 on Friday. We’re watching that closely as the asymmetry in volatility, across asset classes, is epic by any historical measure. This is in line with our third Q3 Theme:  #VolatilityAsymmetry. Meanwhile, the Russell 2000 is down -5.3% since July 7.

Asset Allocation

CASH 28% US EQUITIES 4%
INTL EQUITIES 16% COMMODITIES 18%
FIXED INCOME 22% INTL CURRENCIES 12%

Top Long Ideas

Company Ticker Sector Duration
HOLX

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.

OC

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.

LM

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

TWEET OF THE DAY

RUSSIA: trading system down another -1.9% this morn to -12.2% YTD $RSX

@KeithMcCullough  

QUOTE OF THE DAY

In looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don't have the first, the other two will kill you.

-Warren Buffett

STAT OF THE DAY

The CRB Food Index is up +19.7% year-to-date with Coffee up +52.9% year-to-date.


Young Gotze's Got Game!

This note was originally published at 8am on July 14, 2014 for Hedgeye subscribers.

“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 1946-1964) 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%

SPX 1953-1985

RUT 1149-1175

DAX 9599-9868

VIX 11.51-12.67

USD 79.71-80.31

WTIC Oil 100.03-104.13

Gold 1316-1342

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

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


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July 28, 2014

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BULLISH TRENDS

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BEARISH TRENDS

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Process & Spot

“Very simple. It’s going to be a big letdown for everyone. It was process and spot.”

-Rory Mcilroy

 

I don’t know about yours, but my multi-factor, multi-duration analysis this summer has revealed that my golf game needs some serious work. The hottest hand on the Hedgeye Research Tour, Howard Penney, reminded me that I need to get Rory’s #process.

 

After his British Open win, Mcilroy explained “with my long shots, I just wanted to stick to my process and stick to making good decisions… I just wanted to roll that ball over that spot. If it went in, then great. If it didn’t, then I’d try it the next hole.”

 

Process & Spot - #love that. If we can execute it, consistently, on the Global Macro course of interconnected risk, we’ll make less double bogeys. Remember, it’s those of you who don’t have a lot of blow-up holes that have the best performance track records.

 

Process & Spot - golf

 

Back to the Global Macro Grind

 

In Hedgeye-speak, making our tee-to-fairway swing (process) repeatable means embracing the uncertainty of Mr. Macro Market’s intermediate-term TREND signals:

 

  1. If something like Chinese Stocks or Copper signal a bearish to bullish TREND reversal, we buy/cover
  2. If something like the Russell 2000 or Bond Yields signal a bullish to bearish TREND reversal, we sell/short

 

In long-bond speak, when we sell bond yields, we buy bonds. And we like it.

 

When it comes to our shorter-term duration game (putting), we try to manage what we call the immediate-term TRADE risk of the range. In other words, we respect the breaks and try to take the highest probability line of the proverbial putt by:

 

  1. Selling if the price is at the high end of the range
  2. Buying if the price is at the low-end of the range

 

Yep. So easy a Mucker can do it. What’s differentiated in this process is that I’m consistent in being inconsistent:

 

  1. My long shots are playing with the wind (bullish or bearish TREND)
  2. My putts are playing the breaks (fading last price)

 

Consensus Macro tends to do the opposite:

 

  1. Longer-term – consensus tends to be late in acknowledging bullish and bearish TREND reversals
  2. Shorter-term – consensus tends to chase, rather than fade, last price

 

Across both short and longer-term durations, you can see this on the most emotional strokes the Consensus Macro takes (net long or short futures and options bets in Big Macro positioning):

 

  1. LONG BOND (10r Treasury) saw a +26,023 wk/wk swing to a net LONG position in bonds now of +5,282 contracts last wk
  2. SPX (Index + Emini) saw a +37,728 wk/wk swing to a net LONG position in SP500 of +614 contracts last wk

 

Now, if you only look at these putts in isolation, you’d say that week over week, these were the right lines to take. But if you look at all the swings it took to get to the green, this was the score:

 

  1. LONG BOND – consensus net SHORT bet on average of -21,204 and -43,289 contracts for the last 3 and 6 months, respectively
  2. SPX – consensus net SHORT bet on average of -65,318 and -44,327 contracts for the last 3 and 6 months, respectively

 

In other words, for the last 3-6 months, Consensus Macro was A) shorting 10yr Treasuries and B) shorting SPY (and C) making double bogeys). You don’t want to be doing that.

 

And now you don’t want to be getting net long US Equity beta A) after consensus hedge funds have covered SPX shorts, B) Russell 2000 continues to signal bearish TREND, and C) front-month VIX is testing an intermediate-term TREND bearish to bullish reversal.

 

Or at least my process says you wouldn’t…

 

With the CRB Food Index and Energy Stocks (XLE) both up another +0.9% last week to +19.7% and +12.8%, respectively (Coffee and Cattle prices are +52.9% and +28.2% YTD), you probably want to stay net LONG our 2014 #InflationAccelerating Theme and short US Consumers (discretionary and housing stocks) too.

 

In golf sometimes it’s the shots you don’t take that make all the difference. #Process, spot, #process. Rinse and repeat.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.44-2.54%

SPX 1

RUT 1133-1161  

VIX 11.94-14.29

Gold 1

Copper 3.20-3.28  

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Process & Spot - Chart of the Day


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