Self-Confirming Info

This note was originally published at 8am on July 21, 2014 for Hedgeye subscribers.

“Because we naturally seek self-confirming information, we need discipline to consider the opposite.”

-Chip Heath


That quote comes from a block and tackle #behavioral chapter in Decisive titled Consider The Opposite (pg 114). If I was ever seeking self-confirming evidence of US GDP #GrowthSlowing, this morning I’ve got plenty of headlines on that.


The cover of this week’s The Economist has a picture of an American jockey riding a turtle with a header that reads: “America’s Lost Oomph – Why It’s Long-Term Growth Rate Has Slowed.” And on Friday, the WSJ ran a story titled “Survey Shows Economists Trimming Growth Forecasts.”

Self-Confirming Info - cart

#Trimming? With both bond yields and the Russell 2000 US growth index falling back toward their YTD lows, isn’t the market telling us to go all-in US growth investing? No thanks. The only discipline that matters in considering the opposite of our research view is delivered to us daily via real-time market signals.


Back to the Global Macro Grind


The best part about The Economist and Wall Street Journal articles is that they attempt to explain US #GrowthSlowing with the wrong reasons. The Economist, in its classic Keynesian style, suggests that the Fed keeping rates at 0% remains critical to growth and that the government needs to both spend more and expand immigration. #MustPrintAndSpendMoarrr


My colleague Darius Dale comically summarized the WSJ article this way on Friday: “Net Exports are a solid negative ~2% of US GDP… not sure how “negative international events” can ever be the largest downside risk to US GDP growth. Consensus Macro can’t even get their story straight at this point.” #BlameTheWeather


In other words, those who were looking for +3-4% 1990s style US GDP growth 6 months ago should cite anything but what’s slowing 70% of the number (US Consumption = 70% of GDP). And, whatever they do, they shouldn’t blame The Policy To Inflate’s impact on real cost of living in America either.


In other self-confirming USA #Q3Slowing news, here’s what big macro markets signaled last week:


  1. Russell 2000 lost another -0.7% on the week, falling back to -1.0% for 2014 YTD
  2. US 10yr Treasury Yield dropped another -4bps on the week, and is down -55bps YTD
  3. Yield Spread (10yr minus 2yr) compressed another -7bps on the week to fresh YTD lows


Don’t kid yourself, the economists who are now cutting their GDP forecasts know exactly what falling bond yields and a compressing yield spread means. On the other side of that, this is what consumption growth bulls are saying:


  1. Food prices dropped -0.1% last week
  2. Natural Gas dropped -4.7% last week
  3. Gold dropped -2.1% last week


Too bad you can’t eat Gold. If you contextualize those three data points however:


  1. Food Prices (CRB Food Index) is still up +19.1% YTD
  2. Natural Gas has round tripped back to flat YTD
  3. Gold made another higher-low and is up again this morning to +9.3% YTD


So, from an asset allocation perspective, what would you rather be long YTD – Gold or the Russell? That one is too easy to answer. How about The Dow, Coffee, or Cattle?


  1. Dow Jones was +0.9% last week to +3.2% YTD
  2. Live Cattle prices were up +1.8% last week to +17.7% YTD
  3. Coffee prices were up another +6.8% last week to +47.2% YTD


I know. Instead of citing the all-time high in both US rents (34% of the country rents) and meat prices during BBQ season, let’s talk about the corn chart rolling over from its all-time bubble highs as a “deflationary force” when the Food Index is +19% YTD.


As for the SP500, which hasn’t been as much a focus for us in 2014 as the #GrowthSlowing style factors within the market, there are plenty of components that we like on the #InflationAccelerating (Energy, XLE +11.8% YTD) and slow-growth #YieldChasing (Utilities, XLU +12.6% YTD) front.


I even went smart beta last week and sent out the buyback signal on AAPL during its correction to what we call immediate-term TRADE oversold (within a bullish intermediate-term TREND). While I can’t feed my kids iPads, apples are eatable – and, compared to a $12 “gourmet burger”, relatively “cheap” too!


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.46-2.54%

SPX 1959-1985

RUT 1133-1155

VIX 10.32-13.70

WTI Oil 100.50-103.41

Gold 1308-1345


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Self-Confirming Info - Chart of the Day

Chart of the Day: Fade Buy-Side Consensus

Chart of the Day: Fade Buy-Side Consensus - Chart of the Day

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.

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


GOLD: +0.1% to $1294 - immediate-term risk range tight at $1281-1304 $GLD



It wasn't raining when Noah built the ark.

-Howard Ruff


Cattle and Coffee were up another +0.9-7.4% last week to +29.3% and +64.2% year-to-date, respectively.

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#Behavioral Front-Running

“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:

  1. Dow Jones Industrial Index -2.8% to -0.5% YTD
  2. Industrials (XLI) were down -3.7% to -0.9% YTD
  3. Consumer Discretionary (XLY) was down another -1.8% to -1.8% YTD
  4. European Stocks (EuroStoxx600) were down -2.9% to +1.1% YTD
  5. German Stocks (DAX) got tagged for a -4.5% loss (-3.6% YTD)
  6. Portuguese Stocks (PSI 20 Index) dropped -10.1% to -11.6% YTD
  7. Commodities (CRB Index) dropped -2.0% on the week to +4.4% YTD
  8. Oil (WTIC and Brent) was down -3.3-4.1% to +3.3% and -2.8% YTD, respectively
  9. Gold corrected -0.8% to +7.4% YTD
  10. 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?

  1. Gold’s intermediate-term TREND line of support = $1271, so we’ll stay with that
  2. Cattle and Coffee were up another +0.9-7.4% last week to +29.3% and +64.2% YTD, respectively #StrongSide!
  3. 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:

  1. Shanghai Composite Index +2.8% last week (and +1.7% this morning) to +8.2% YTD
  2. Hong Kong Stocks (Hang Seng) +1.3% last week (and +0.3% this morning) to +8.7% YTD
  3. 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%


RUT 1110-1141

Shanghai Comp 2156-2241

USD 80.79-81.69

WTIC Oil 96.99-100.61

Gold 1

Copper 3.19-3.26


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


#Behavioral Front-Running - Chart of the Day

August 4, 2014

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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.                                                













  • 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



  • 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



  • 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

















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