This chart shows that consensus is now net short the SPY.
Client Talking Points
China was leading the East (in Equities) at +2.8% last week (vs Russell -2.6%). The Shanghai Composite rips another +1.7% this morning to +8.2% year-to-date after a Chinese Services PMI that slowed a touch month-over-month from 55.0 JUN to 54.2 JUL – we like China and India on the long side.
German stocks are leading losers this morning, down another -0.6% on the DAX to -4.2% year-to-date as every European equity market continues to signal bearish on our TREND signal. DAX risk range is 9150 to 9599, so testing the low-end of the range now.
If the CRB Index can’t bounce and recover 295-297 zone, we see no reason why we need to stay with the long commodities call we’ve had since the beginning of the year. Gold and Copper look fine; Oil doesn’t.
|FIXED INCOME||26%||INTL CURRENCIES||10%|
Top Long Ideas
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
TWEET OF THE DAY
GOLD: +0.1% to $1294 - immediate-term risk range tight at $1281-1304 $GLD
QUOTE OF THE DAY
It wasn't raining when Noah built the ark.
STAT OF THE DAY
Cattle and Coffee were up another +0.9-7.4% last week to +29.3% and +64.2% year-to-date, respectively.
“I am trying to understand the origins of every form of front-running in the history of the United States.”
-John Schwall (Flash Boys)
John, sorry buds - you’re going to have to look a lot deeper than high-frequency-trading. Front-running proactively predictable #behavior on Wall Street is entirely legal, and it can be quite profitable at that!
How do you think about the #behavioral side of this game? Do you spend a lot of time thinking about the other side of your ideas? And/or do you have a process to cleanse the confirmation biases and emotions naturally embedded in your positions?
Front-running what my process is going to tell me to do next is a big part of what I do. I guess I can call it front-running myself. #fun
Back to the Global Macro Grind…
After dropping another -2.6% last week, the Russell 2000 is -4.3% for 2014 while one of our favorite ways to be long #Q3Slowing in the USA (long the Long Bond in TLT terms) is +12.8%. It’s definitely a bull market, in long-term Treasury Bonds!
But it wasn’t just early-cycle US stocks that got tagged last week – the selling in most things beta was broad based:
- Dow Jones Industrial Index -2.8% to -0.5% YTD
- Industrials (XLI) were down -3.7% to -0.9% YTD
- Consumer Discretionary (XLY) was down another -1.8% to -1.8% YTD
- European Stocks (EuroStoxx600) were down -2.9% to +1.1% YTD
- German Stocks (DAX) got tagged for a -4.5% loss (-3.6% YTD)
- Portuguese Stocks (PSI 20 Index) dropped -10.1% to -11.6% YTD
- Commodities (CRB Index) dropped -2.0% on the week to +4.4% YTD
- Oil (WTIC and Brent) was down -3.3-4.1% to +3.3% and -2.8% YTD, respectively
- Gold corrected -0.8% to +7.4% YTD
- Food (CRB Food Index) corrected -1.1% to +18.5% YTD
I’m not going to surprise you this morning in reiterating why I’d be selling early-cycle US Equities and/or European ones. We’ve been making the call on the former for the better part of the year, and on the latter we have been crystal clear on since the beginning of July.
Where I might surprise you is in taking down our asset allocation to the Commodities component of our 2014 #InflationAccelerating call. On July 7th, when the Russell 2000 re-tested her all time high (+8% higher at 1208), I had a 24% allocation to Commodities. This morning I have 10%.
Why? How about why not? At the beginning of the year it was a contrarian call that even surprised us to the upside. Now, being long commodity inflation is more of a consensus position that is not only correcting, but in some cases breaking my TREND lines on the downside.
What hasn’t broken TREND?
- Gold’s intermediate-term TREND line of support = $1271, so we’ll stay with that
- Cattle and Coffee were up another +0.9-7.4% last week to +29.3% and +64.2% YTD, respectively #StrongSide!
- And some of the base metals like Copper and Nickel are still bullish TREND
In other words, it’s not so easy that a monkey can do it (like it was in Q1) just buying anything commodities. You need to get into the price/volume/volatility weeds and start front-running some #divergences within the commodities market.
What are #divergences?
They’re risk management-speak for the ole Romper Room, “one of these things is not like the other – one of these things just doesn’t belong…” I.e. China! Yes, Chinese stocks not only flashed a bullish #divergence vs. US and European Equities last week, they did again this morning:
- Shanghai Composite Index +2.8% last week (and +1.7% this morning) to +8.2% YTD
- Hong Kong Stocks (Hang Seng) +1.3% last week (and +0.3% this morning) to +8.7% YTD
- Indian Stocks (BSE Sensex) up another +1% this morning to +23.1% YTD
India isn’t China. Silly Mucker. I know (but we still like India too!). That’s why the Hedgeye Asset Allocation model has a higher allocation to International Equities than it does to Commodities today. While it’s weird to be buying Chinese+ Indian stocks and liking Dr. Copper on the long side vs. short the Russell 2000 (after they bounce it), sometimes weird is what works.
Another thing to think about in #behavioral front-running terms is that the NET SHORT position in SP500 (SPX + Emini) is back, baby! After tilting to a NET LONG position for the first time since Q1, the CFTC Non-Commercial net short position moved back to -41,210 contracts on Friday.
That means hedge funds who covered high on the newsy Q2 GDP report last week, shorted low (again) into the weekend. So SPY (and Russell, IWM) should bounce now. Front-running the #behavior of emotional Consensus Macro hedging has become quite profitable as well.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.43-2.54%
Shanghai Comp 2156-2241
WTIC Oil 96.99-100.61
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
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TODAY’S S&P 500 SET-UP – August 4, 2014
As we look at today's setup for the S&P 500, the range is 41 points or 0.22% downside to 1921 and 1.91% upside to 1962.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.02 from 2.02
- VIX closed at 17.03 1 day percent change of 0.47%
MACRO DATA POINTS (Bloomberg Estimates):
- 9:45am: ISM New York, July (prior 60.5)
- 11am: U.S. announces plans for auction of 4W bills
- 11:30am: U.S. to sell $28b 3M bills, $25b 6M bills
- 3-Day U.S.-Africa Summit in Washington, with the theme “Investing in the Next Generation.”
- 8:15am: Secretary of State John Kerry convenes “Civil Society Forum”
- 8:30am: GM hosts “expanding access to power across Africa” with CEO Jeff Immelt, Ghana President John Dramani Mahama, Standard Bank co-CEO Sim Tshabalala, World Bank President Jim Yong Kim
- 8:30am: USTR Michael Froman hosts African Growth and Opportunity Act Ministerial
- 9:30am: South African President Jacob Zuma delivers keynote address at U.S. Chamber of Commerce U.S.-South Africa Business and Investment Forum
WHAT TO WATCH:
- TPG said to start raising $12b fund after boom-era busts
- Buffett waits on fat pitch as Berkshire cash passes $50b
- Evercore to purchase ISI for as much as $406m
- Israel announces 7-hour cease-fire as diplomatic efforts falter
- Portugal announces $6.6b Banco Espirito Santo rescue
- KKR lifts bid for Grange-maker Treasury Wine 11% to $3.2b
- Marvel’s ’Guardians’ prove cinema superhero with $94m
- Goldman Sachs hires former Barclays mergers head Parker
- Crown Resorts pays $280m for Las Vegas Strip site
- McDonald’s to resume full menu in Chinese cities this week
- BARRON’S ROUNDUP: ETF Risks, EMC, D.R. Horton, Twitter, DSW
- China urges Microsoft not to hinder anti-monopoly probe: Xinhua
- Canada equity markets closed for holiday
- Alere (ALR) 7:30am, $0.59
- BroadSoft (BSFT) 7:30am, $0.24
- Cardinal Health (CAH) 7am, $0.81
- CNA Financial (CNA) 6am, $0.82
- Henry Schein (HSIC) 7am, $1.33
- Ironwood Pharma (IRWD) 7:05am, $(0.36)
- Isis Pharmaceuticals (ISIS) 8:30am, $(0.12)
- Kosmos Energy (KOS) 9:15am, $0.13
- Loews (L) 6am, $0.67
- Michael Kors (KORS) 7am, $0.81 - Preview
- Realogy (RLGY) 6:45am, $0.57
- Acxiom (ACXM) 4:05pm, $0.18
- Alleghany (Y) 4:07pm, $7.71
- American Homes 4 Rent (AMH) 5:30pm, $(0.01)
- American Intl Group (AIG) 4:03pm, $1.06
- Avis Budget (CAR) 4:05pm, $0.61
- Concur Technologies (CNQR) 4:15pm, $0.16
- Marathon Oil (MRO) 4:41pm, $0.75
- McDermott Intl (MDR) 4:01pm, $(0.17)
- MDU Resources (MDU) 5:30pm, $0.29
- Mueller Water (MWA) 4:20pm, $0.11
- PHH (PHH) 4:05pm, $(0.18)
- Pioneer Natural (PXD) 4:05pm, $1.28
- RetailMeNot (SALE) 4:02pm, $0.17
- Rosetta Resources (ROSE) 5:05pm, $0.82
- Tenet Healthcare (THC) 4:30pm, $0.01
- Vornado Realty Trust (VNO) 4:52pm, $0.27
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- WTI Trades Near Six-Month Low Before Economic Data; Brent Holds
- Wheat Climbs to Two-Week High Amid Europe Quality Concerns
- Hedge Funds Cut Bullish Gold Wagers Most Since June: Commodities
- Copper Pares Gains as Investors Shun Risk Amid Global Tensions
- Empty Holiday Store Shelves Hinge on Clout of 120 L.A. Truckers
- Palm Oil Drops as Soybeans Slump to Lowest in Almost Four Years
- Shanghai Debuts Iron Ore, Thermal Coal Swaps Handled in Yuan
- World Sugar Price Seen by ISO’s Orive Capped by Ample Inventory
- Oil Bears Bet Right as Futures Retreat to Six-Month Low: Energy
- Jonathan Spall Named Chair for Daily Platinum-Palladium Fixings
- BofA’s Two-Hour Halt in Rosneft Trading Shows Sanction Confusion
- Perth Mint Says Gold Sales Decline in July From Four-Month High
- Africa Oil State Hooked on U.S. Fuel: Chart of the Day
- Wheat Extends Climb to Two-Week High as Crop Prices Advance
The Hedgeye Macro Team
Risk Managed Long Term Investing for Pros
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.