Rates of Change

“The future is not a point – a single scenario that we must predict. It is a range.”

-Chip & Dan Heath


In Chapter 10 of Decisive, “Prepare To Be Wrong”, the Heath boys nail it with that risk management thought. Translating it into Hedgeye-speak: market tops and bottoms are processes, not points.


Price, volume, and volatility are all dynamic but measurable beasts. You don’t have to be a rocket scientist to be able to visualize their patterns. All you need is a process to score them. It’s rarely an absolute price level that matters – it’s almost always about its rate of change.


Measuring rate of change (slope of the line) won’t help you much unless you contextualize it across multiple durations. We strongly advise that you stand outside your western academic confirmation biases and consider rates of change across multiple factors as well.


Rates of Change - 78


Back to the Global Macro Grind


Multi-factor, multi-duration macro. Yep. That’s how we roll. And after a +64% rip in front-month US stock market volatility (since July 7th) we’re not only going to stick with that process this morning, but also remind you that it’s not Q2. It’s Q3.


They can blame Argentina or my cousin’s neighbor’s brother for yesterday’s levered-long-beta-belly-flop in US Equities (worst down day of the year), but they can’t change that the USA’s PMI print got powdered (rate of change) down to 52.6 in JULY vs 62.6 in JUNE.


They may very well have built inventories into the USA growth-hope narrative in Q2, but in Q3 the PMI (purchasing manager index) looks almost identical to the Industrial Stocks (XLI). Since US Equity volatility bottomed late June, early July:


  1. Industrials (XLI) are down -7.2%
  2. And the Russell 2000 (IWM) is down, well, -7.2%


Forget our #VolatilityAsymmetry Q3 Macro Theme. How symmetric is that?


More importantly, who gets what it’s been signaling? Who is writing about an early-cycle slowdown? These rates of change didn’t start yesterday. Depending on which factor in the US economy you have been measuring, they have been in motion now for 7 months!


What are the early-cycle slowdown sectors of the US stock market?


  1. Housing (ITB)
  2. Consumer Discretionary (XLY)
  3. Industrials (XLI)


All three of these early-cycle sectors are down now for 2014.


“So”, if god called you and said ‘hey, here’s my survey of the US economy’:


  1. Long-term Bond Yields are down -15% YTD (10yr UST Yield)
  2. The Russell 2000 is down -3.7% YTD… and
  3. Housing (ITB) is down -10.5% YTD


What would you say back if you were bullish on something like +3-4% US GDP growth? I think Bill Ackman would say, “my bad.”


I’m not trying to be snarky about this. I’m actually trying to drive my Scottish-Canadian flag right into the front-line of this ongoing culture war I’ve been fighting vs. #OldWall since we started the firm in 2008. You know, and wiggle the Braveheart kilt at them.


Let’s have some bull/bear battles already. At some point, someone out there in Consensus Macro land needs to man-up and just say ‘hey, I’ve missed calling every early-cycle slowdown since 1999, and I’m tired of this Canadian-mutt doing the rate of change thing.’


Now many would argue that consensus economists and strategists in Washington and on Wall Street would rather all be wrong together than wrong all on their own (#JobSecurity). But I think our profession is better than that.


I’m betting someone who is a lot smarter than me is going to change what they are doing and fight me, Red-White-And-Blue style! In every profession in America, there’s always been a progressive rate of change in that too.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.43-2.59%


RUT 1111-1145


VIX 13.12-17.91

Brent Oil 105.54-108.79

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Rates of Change - Chart of the Day

August 1, 2014

August 1, 2014 - 1



August 1, 2014 - Slide2

August 1, 2014 - Slide3

August 1, 2014 - Slide4

August 1, 2014 - Slide5




August 1, 2014 - Slide6

August 1, 2014 - Slide7

August 1, 2014 - Slide8

August 1, 2014 - Slide9

August 1, 2014 - Slide10


TODAY’S S&P 500 SET-UP – August 1, 2014

As we look at today's setup for the S&P 500, the range is 41 points or 0.35% downside to 1924 and 1.78% upside to 1965.













  • YIELD CURVE: 2.05 from 2.03
  • VIX  closed at 16.95 1 day percent change of 27.16%


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Change in Nonfarm Payrolls, July, est. 230k (prior 288k)
  • Unemployment Rate, July, est. 6.1% (prior 6.1%)
  • 8:30am: Personal Income, June, est. 0.4% (prior 0.4%)
  • Personal Spending, June, est. 0.4% (prior 0.2%)
  • 9:45am: Markit US Manufacturing PMI, July, est. 56.5 (prior 56.3)
  • 9:55am: University of Michigan Confidence, July final, est. 81.7 (prior 81.3)
  • 10am: ISM Manufacturing, July, est. 56 (prior 55.3)
  • 10am: Construction Spending m/m, June, est. 0.5% (prior 0.1%)
  • 1pm: Baker Hughes rig count



    • Republic of Congo President Denis Sassou-Nguesso speaks about stability, security, oil investments in central Africa region
    • 9am: House Republicans meeting at 9am to discuss border plan
    • 2pm: DNC Chair Debbie Wasserman Schultz speaks at Natl Assn of Black Journalists conference in Boston
    • U.S. ELECTION WRAP: Farmers on Immigration; Koch-Funded Groups



  • U.S. employers may have added 230,000 workers last month
  • Ford, GM, others report U.S. auto sales; SAAR may be 16.7m
  • Argentina doesn’t oppose deal sought by JPMorgan, other banks
  • Argentina outlook revised to negative at Moody’s
  • ICE said to seek mortgage role through talks with data service
  • China HSBC PMI jumps to highest in 2 yrs
  • Societe Generale 2Q net rises 7.8% as loan-loss provisions fall
  • RBS trims lending ties with Russia
  • No-exit strategy may be Fed’s burden as record stimulus unwinds
  • Lions Gate to refile proxy after underreporting Feltheimer’s pay
  • Cisco localizes production in Russia amid tensions: Kommersant
  • Rosneft closes deal for Weatherford assets in Venezuela, Russia
  • ArcelorMittal increases European, U.S. steel demand forecast
  • Macau July casino rev. falls 3.6%, beats est.
  • Israel, Hamas stop Gaza fighting as 3-day truce begins
  • Flights over Iraq restricted by FAA due to armed conflict



    • Allete (ALE) 8:30am, $0.44
    • American Axle & Mfg (AXL) 8am, $0.72
    • Bell Aliant (BA CN) 6am, C$0.41
    • Burger King (BKW) 7am, $0.23
    • Calpine (CPN) 6am, $(0.02)
    • Catamaran (CCT CN) 6am, $0.50
    • CBOE (CBOE) 7:30am, $0.50
    • Chevron (CVX) 8:30am, $2.63 - Preview
    • Clorox (CLX) 8:30am, $1.35 - Preview
    • Enbridge (ENB CN) 7am, C$0.39 - Preview
    • Exelis (XLS) 6:30am, $0.35
    • Fortis (FTS CN) 7am, C$0.28
    • Genesee & Wyoming (GWR) 6am, $1.11
    • Hilton Worldwide (HLT) 6am, $0.19
    • ImmunoGen (IMGN) 6:30am, $(0.34)
    • PBF Energy (PBF) 7am, $0.65
    • Procter & Gamble (PG) 7am, $0.91 - Preview
    • Spirit AeroSystems (SPR) 7:30am, $0.68
    • Targa Resources (TRGP) 7:17am, $0.63
    • Telephone & Data Systems (TDS) 7:56am, $(0.05)
    • United States Cellular (USM) 7:57am, $(0.06)
    • WisdomTree (WETF) 7am, $0.07



  • WTI Heads for Biggest Weekly Decline in 7 Months; Brent Steady
  • Gold Trades Near Six-Week Low Before U.S. Employment Report
  • Copper Set for Weekly Drop on Speculation U.S. to Curb Stimulus
  • Twin Corn Ears Push U.S. Yields to Bin-Busting Crop: Commodities
  • Arabica Coffee Extends-Bull Market Run as White Sugar Declines
  • Sugar Seen Needing Further Drop to Attract Demand Amid Glut
  • Milling Wheat Slides to Four-Year Low in Paris on Rising Supply
  • AngloGold Sees More Mine Sales as Producers Chase Margin Gains
  • WTI Crude Seen Rising in Survey on U.S. Economic Growth
  • Rubber Sales From Vietnam Set for First Drop Since ’08 on China
  • U.K. Winter Power Prices Advance After SSE Fire in England
  • Shipping Rates Suffer as China Hydro Curbs Coal Imports: Freight
  • As One Kurdish Crude Tanker Waits, Another Heads to New Jersey
  • Europe Set for Hottest Summer Since 2006 as Warm August Seen
  • Steel Rebar Has First Weekly Advance in Three on China PMI


























The Hedgeye Macro Team

















Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.47%
  • SHORT SIGNALS 78.71%


Guidance again disappointing especially after factoring in the property tax benefit. And the real flow through on higher YoY Borgata revenues was actually not good




  • Clearly did not meet expectations.  Weak spending among casual customers.
  • Q2 results not acceptable
  • Revenue shortfall:  Regional properties weakness accounted for $23m of $25m shortfall
  • LV Locals:  top line trends similar to 1Q; excluding low hold and higher utility expenses, EBITDA would have been on par with prior year
  • Southern NV economy still recovering
  • Borgata continues to outperform competition.  For 3 out of last 4 quarters, Borgata has gained share in greater Atlantic market (DE, PA, NJ, NY)
  • Lowered FY 2014 EBITDA guidance:  assumes 3Q/4Q will be similar to 2013
  • Orleans and Gold Coast:  Higher rates and expanding audience
  • Updating room products at Orleans and IP.
  • Updating F&B products (new restaurants) at LV Locals properties
  • B-Connected:  opportunity to enhance topline results.  Near completion of rollout at 5 Peninsula properties.  Still early but results have shown progress.
  • Online gaming:  early results from NJ have fallen short of expectations.  75% of accounts created were not active customers at Borgata.  Seasonality accounted flatness in online gaming trends.  As colder weather returns, online gaming visitation will increase.
  • Online gaming business in 2Q:  $1.8m loss; in July, they broke even
  • Will launch a mobile sports gaming app in Nevada
  • Remain on track for $200m debt reduction in 2014
  • Continue to benefit from $1.1bn in tax carryforwards
  • LV Locals:  lower hold reduced EBITDA by $1m.  Absent low hold, revs would have been flat.  Two utility cost hikes resulted in $1m.  Orleans had rev and EBITDA growth.
  • Downtown:  May/June was slow but recovered in July.  Market share grew by 40bps.  Optimistic on long-term outlook.  
  • Room upgrade at SunCoast in coming months
  • Midwest/South:  Biloxi/Shreveport/Central Illinois (2/3 of EBITDA shortfall).  At other properties, performance was flat YoY.  Delta Downs set new EBITDA/revenue records.
  • Blue Chip:  grew 40bps in market share.  
  • Kansas Star EBITDA grew YoY.  Kansas Star hotel expansion on schedule...will double room count
  • Borgata:  market share grew by 240bps.  2Q share- highest in 2Q record history.  Lower property taxes will benefit EBITDA by $6m per quarter.
  • Borgata:  holds 10% share lead over nearest competitors
  • YTD, total debt reduction has been $100m
  • 2Q capex:  $35m ($8m Peninsula, $7m Borgata); YTD capex:  $54m;  for 2014, $120m capex btw Boyd and Peninsula, $25m Borgata 
  • 2H Guidance:  
    • LV Locals/Downtown:  will be even with 2H 2013
    • Midwest/South:  excluding Blue Chip benefit, EBITDA would be higher
    • Borgata:  EBITDA even or slightly better than 2H 2013
    • Corp expense:  $27m
    • Borgata:  2 tax appeals pending
      • One-time cash payment of $88m; no concerns here; timeline:  probably year-end
      • 2009/2010 tax refunds:  currently being appealed by City of Atlantic City

Q & A

  • Shareholder activism:  nothing to report
  • AC Online gaming:  over time, will see consolidation in online gaming business
  • Suncoast:  no impact from upcoming hotel renovations
  • Borgata:  land-based EBITDA increased by 17% YoY 
    • Yeah, but don't forget they had a $4.3m impairment in Q2 2013 so EBITDA was actually down YoY and flat after excluding the loss from online gaming. There was very little flow through on the YoY increase in land based revenues
  • Closure of competitor casino closures in AC:  capacity goes out in a overcapacity market.  Promotional market should settle down.  No pickup in business from Atlantic Club closing. 
  • Northern NJ possible casino:  not overly concerned in next year or two
  • Not much increase in 2015 capex to complete their many projects
  • 2014 EBITDA guidance includes $11.8m Borgata tax benefit and includes  the lower $6m in property taxes per quarter
  • Borgata promotional allowances: higher because of online gaming; ex online gaming, promotional allowances would have been lower YoY
  • LV:  bigger players have done well but casual players struggle
  • Prior EBITDA guidance did not include property tax credits
  • Increased capacity in Midwest/South: Margaritaville in Shreveport (Q3 will be an apples-to-apples comparison); Biloxi competition- significant casino expansion in Alabama (Native American);  Peoria- IL VGTs affecting performance
  • Continuation of 2Q trends would put them in lower end of FY guidance
  • Regional EBITDA in 2013:  - 20% in September and -25% in December
  • Core player trends:  frequency and spend per visit are flat YoY
  • Lower property taxes going forward at other properties are possible:  Kansas appeals in process (not in guidance this year)


We booked a fifth consecutive gain on the long-side this week in livestock (ETF: COW) after buying on the oversold signal late last week. 


ALL-TIME HIGHS IN JULY: Hogs and Cattle - Levels chartvF2


Between the cattle shortage in the United States, scandal in China, and PedV virus affecting some 4,700 farms nationwide, both markets have skyrocketed to all-time highs this year amid a longer-term trend of much higher meat prices:


Five year changes:

  • USD Index: +5%
  • Live Cattle: +88%
  • Lean Hogs: +115%

While both have run significantly this year, a price divergence has emerged between the two over the last month. Basis between front and 4th,5th,6th contract months suggest the market expects much lower prices for both by next summer:

  • Lean Hogs: +38% YTD but down -11% over the last month. Spot-Feb basis is implying -25% lower prices by February
  • Live Cattle: +19% YTD and up +5% over the last month. The basis between the two months is not quite as high. The Spot-Jun 15’ basis is implying a -5% price decline by next summer

The USDA extended a conditional license to utilize a vaccine for the PedV virus that usually kills 100% of the baby pigs in an infected farm. Harrisvaccines in Ames, Iowa is responsible for developing the vaccine and will be allowed to test its effectiveness. The market has reacted to its positive outlook. Lean Hogs spot contracts are down -12% since the news broke on the 15th of July, and the forward curve flattened. The vaccine is expected to be tested on the sows with the hope that they build the anti-body to disinfect the milk passed along to piglets. Despite the sell-off in hogs:

  • Put implied volatility right at the money is priced relatively flat vs. its 1 and 3 month averages and 15% above its 6-month averages. As expected the upside skew was immediately flatter on the PedV vaccination news (implied vols for the far out of the money call options were selling about 3-5 vol points lower). Sentiment as measured by the net length of futures and options contracts has remained flat on back of the news. 

ALL-TIME HIGHS IN JULY: Hogs and Cattle - Basis Graph in Hogs 


Supply disruptions in livestock year-to-date have led to a divergence from some of the more observable correlations in the commodity complex our team has flagged to support our big-picture macro themes. The negative correlation to the dollar is not AS pronounced in Hogs and Cattle, but the strength of the dollar is always a catalyst for the consumer (and thus everything priced in dollars).


With a seemingly improving labor market, a pull-back in commodity inflation, and the increase in revolving consumer credit, we need to continue seeing sequential improvement in these three areas for evidence of material improvement in the consumer spending picture. The livestock market is certainly expecting a pullback....   


ALL-TIME HIGHS IN JULY: Hogs and Cattle - Lean Hogs Futures Curve


ALL-TIME HIGHS IN JULY: Hogs and Cattle - Live Cattle Futures Curve


ALL-TIME HIGHS IN JULY: Hogs and Cattle - USD Correls


ALL-TIME HIGHS IN JULY: Hogs and Cattle - 1 Month Correls


ALL-TIME HIGHS IN JULY: Hogs and Cattle - 3 Month Correls


ALL-TIME HIGHS IN JULY: Hogs and Cattle - 6 month correls


Hog prices have outpaced cattle YTD, +38% YTD and +19% respectively, but as mentioned, the market has converged over the last month. Lean Hog spot reached a high of $133.80 USD/lb. on July 15th and has since pulled back over -10%.


Yesterday marked a YTD and all-time high in cattle prices ($159.85 USD/lb.) A few of the outliers potentially fueling the move are included below. (Note: We’re looking to the market for buy signals in these commodities without edge on a fundamental call moving into the fall at this point):

  • July 23rd: OSI Group’s Husi Food Scandal
    • After a Shanghai reporter secretly filmed the packaging practices of a  Shanghai processing plant, the Shanghai Municipal Food and Drug Administration (China’s FDA) investigated and uncovered a number of alarming practices including:
      • Repackaging expired food (at least 4,300 cases)
      • Unsanitary packaging practices
      • The brands affected include McDonalds, Starbucks, and YUM Brands. Most chicken and beef products served at McDonalds in northern and central China are now unavailable. All companies have severed ties with Husi
  • January2014: The USDA reported a cattle herd at a 61 year low, possibly due to a number of factors:
    • Increased demand for organic meat
    • Biggest drought on record in California (spread from to Texas)
    • Supporting younger calves through a major drought and extremely cold winter in the Midwest makes having cattle uneconomical for farmers
  • April 2013: The USDA reported the PEDv virus was now in the U.S. It also estimates over 7M pigs have been killed in the past year, affecting 4,700 farms in 30 states. The mortality rates among young pigs is nearly 100%. Year-over-year, consumers are paying nearly 13% more per year at the super market     


Ben Ryan




Volatility Rips 26% Higher, Just as Hedgeye Has Been Heralding $VIX

Takeaway: We warned you.

Rising global risk and fear rattled markets, body-slammed stocks and sent the VIX soaring up over 26% today.


Volatility Rips 26% Higher, Just as Hedgeye Has Been Heralding $VIX - VIX Chart


The macro team at Hedgeye has been banging the drum on volatility for weeks. As CEO Keith McCullough has said on more than one occasion recently, “volatility basically bottomed on July 7th around 10—it’s never held below 10, ever.”


In fact, this move in volatility was one of our top three quarterly macro themes. See below.


#VolatilityAsymmetry: Across global financial markets, measures of volatility are at historically-depressed levels. While low levels of volatility aren't necessarily a timely harbinger of financial market calamity in and of themselves, other signals - such as the economic cycle rolling over and pervasive complacency among investors and corporations - would seem to suggest we are well into the latter innings of this bull market.


Click below to watch the video on one of our top three quarterly themes #VolatilityAsymmetry:

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