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Long-Wave Rope

“When we hang the capitalists, they will sell us the rope.”

-Joseph Stalin


That wasn’t a very nice thing to say. But Stalin wasn’t nice; especially to economists! “In 1930, Stalin arrested Nikolai Kondratieff and shipped him off to Siberia. His crime: daring to defy the most linear of ideologies – Marxism – by suggesting that the long-term performance of market economies is cyclical.” (The Fourth Turning, pg 110)


Kondratieff died in the gulag, but his “long wave” cycles will live on for as long as gravity does (let’s hope someone isn’t empowered to centrally plan that away!). For longer-term risk managers, they are also called super-cycles (45-50 years). They are a tad longer than the monthly performance chasing thing you see your peers wrestling with in an oversupplied asset management industry today.


If you aren’t into the 45-50 year thing, how about 20-25 years? This is what demographer and economic historian Neil Howe calls a “turning” within your saeculum (lifetime). Like the Four Seasons, there are roughly four turnings in your life. I had a Real Conversation @HedgeyeTV with Neil about this recently that you can watch here: https://www.youtube.com/watch?v=h6vYv9O0dEM


Long-Wave Rope - EL chart 2 


Back to the Global Macro Grind


Now if you don’t want to think about a long-term US economic cycle (which is 62 months into an expansion) rolling over, you can always ditch the 25 yr demographic reading for a 50-day moving monkey (chart). When those break, oh baby do the emotions kick in!


Obviously, using a 1-factor point-and-click model that my 4 year old daughter could figure out isn’t a multi-duration, multi-factor, interconnected Global Macro risk management process, so let’s move on…


What I wake up trying to do every morning is identify the intermediate-term-cycles within longer-term ones. Trust me, I don’t read a non-fiction book every 10-days for kicks and giggles. I do it in order to make myself less dumb. And that’s not an easy thing to do!


Not to be confused with an economic cycle, when considering the shorter-term market cycle within the “long-wave”, a really basic 3-factor model I use is:


  1. PRICE


Therefore, if I am looking at something like the Russell 2000 (IWM)


  1. PRICE – is -7.0% in the last 2 months and below my intermediate-term TREND resistance line of 1175
  2. VOLUME – accelerates on the DOWN days and decelerates on the UP ones (yesterday’s was -18% vs its 3 mth avg)
  3. VOLATILITY – is breaking out on the front-month, undergoing what we call a bearish to bullish phase transition


And if I want to be long the upside down of that #GrowthSlowing message (long the Long Bond):


  1. US Treasury 10yr Yield of 2.49% this morning remains well below my intermediate-term TREND level of 2.81%
  2. Fund Flows have turned back to bullish on the “safe” side of Fixed Income (after being bearish in 2013)
  3. Implied volatility in being long TLT (+12.5% YTD) vs Russell 2000 (IWM) -3.4% YTD is as low-stress as it gets


If you want a proverbial rope to hang yourself with in this game, start calling your best performing long ideas (on a lag) “low-stress.” Before you know it, you’ll be having a nervous breakdown.


One thing that starts to stress me out is being bullish on something macro that the crowd starts to dog pile (50-day moving avg is intact, bro!). So one place I watch very closely on that sentiment score is futures and options positioning.


Yesterday I wrote about how there was a net SHORT position of -41,210 contracts SP500 (SPX Index + Emini) that consensus short sellers (those who cover high and short low) built into Friday’s close being a catalyst for a bullish no-volume “bounce.”


We got that. But how about in the things I like (like Gold, Pounds, and Bonds)?


  1. Gold = net LONG position of +122,092 contracts (vs. its 6 month avg of +100,747)
  2. British Pound = net LONG position of +31,046 contracts (vs. its 6 month avg of +34,681)
  3. UST 10yr = net LONG position of +7,090 contracts (vs. its 6 month avg of -40,094)


In other words, Consensus Macro is:


  1. Too long Gold (after it’s up +7.4% YTD) so I should sell some
  2. Too bullish on what’s been the best major FX position vs USD for the last year, but not wacky bullish
  3. No longer short, but not yet Bullish Enough on longer-term UST Bonds


So, provided that our longer-wave economic cycle call is giving us confirming evidence (both sequential data and market prices), we just say “buy more” long-term bonds on all pullbacks to @Hedgeye TRADE and TREND lines of support.


As far as the history of socialists vs. capitalists is concerned, Stalin’s followers can eat their own ropes. One of the few things I agree with him saying is that “print is the sharpest and strongest weapon of our party.” That’s why I like to print our #process, every day.


Our Immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.43-2.54%


RUT 1109-1139

VIX 13.84-17.82

Pound 1.68-1.70

Gold 1


Best of luck out there today (and Happy Anniversary, Laura),



Keith R. McCullough
Chief Executive Officer


Long-Wave Rope - Chart of the Day


TODAY’S S&P 500 SET-UP – August 5, 2014

As we look at today's setup for the S&P 500, the range is 44 points or 1.19% downside to 1916 and 1.08% upside to 1960.                                              













  • YIELD CURVE: 2.02 from 2.02
  • VIX closed at 15.12 1 day percent change of -11.22%


MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am: ICSC weekly sales
  • 8:55am: Redbook weekly sales
  • 9:45am: Markit US Services PMI, July final, est. 60.8 (pr 61)
  • 9:45am: Markit US Composite PMI, July final (prior 60.9)
  • 10am: ISM Non-Mfg Composite, July, est. 56.5 (prior 56)
  • 10am: Factory Orders, June, est. 0.6% (prior -0.5%)
  • 10am: IBD/TIPP Economic Optimism, Aug., est 47.3 (prior 45.6)
  • 11:30am: U.S. to sell $40b 4W bills
  • 4:30pm: API weekly oil inventories



    • Senate, House on August recess
    • Africa Summit Day 2:
    • 9am: Commerce Sec. Pritzker, former New York City Mayor Bloomberg deliver opening remarks
    • 9:15am Former President Clinton moderates session including CEOs from GE, DOW, WMT, Dangote Group Shanduka Group
    • 10:15: African Union Chair Nkosazana Clarice Dlamini Zuma
    • 10:20: Treasury Sec. Lew remarks at open of panel featuring African Development Bank President Kaberuka, CEOs or Chairmen from MasterCard, Heirs Holdings, Carlyle Group, Standard Bank
    • 11:05am: World Bank President Kim opens session moderated by National Security Advisor Rice; session includes CEOs from: IBM, KO, BX, Harith Fund Managers, Econet Wireless Founder/Chair
    • 1:50pm: Secretary of State Kerry remarks at Africa future moderated by Charlie Rose; Presidents of Rwanda, Senegal, South Africa, Tanzania, Tunisia participate
    • U.S. ELECTION WRAP: Mich., Kansas Primaries; Defense Donations



  • Gannett said to agree to buy rest of Cars.com for $1.8b
  • IBM said to have offered Globalfoundries cash to take chip unit
  • Toyota posts surprise record profit as U.S. SUV sales surge
  • Israel pulls its troops from Gaza as cease-fire under way
  • Telefonica offers $9b for Vivendi’s Brazil unit GVT
  • Euro-area services grew less than initially estimated in July
  • China services expansion stagnates as HSBC gauge drops
  • BMW posts best carmaking profitability in 3 yrs on SUVs
  • GM subprime auto lending draws attention of U.S. investigators
  • Eurozone June retail sales up 0.4% m/m; est. up 0.5% m/m
  • U.K. services growth accelerates to fastest in 8 months
  • Samsung wins back Apple’s advanced chip order, Maeil says
  • Goldman makes changes at hedge fund services unit, WSJ says



    • Western Refining (WNR) 6am, $1.31
    • Actavis (ACT) 7am, $3.38
    • Aecom Technology (ACM) 7am, $0.64
    • Akorn (AKRX) 7am, $0.20
    • Ameren (AEE) 8am, $0.58
    • Ametek (AME) 7am, $0.59
    • Ansys (ANSS) 7:09am, $0.80
    • Archer-Daniels-Midland (ADM) 7am, $0.76
    • Arcos Dorados (ARCO) 8:30am, $(0.11)
    • Ares Capital (ARCC) 8am, $0.38
    • Bloomin’ Brands (BLMN) 7am, $0.29
    • Brookfield Infrastructure (BIP) 8am, $0.37
    • Cablevision Systems (CVC) 8:30am, $0.17 - Preview
    • Carrizo Oil & Gas (CRZO) 6:30am, $0.67
    • Coach (COH) 7am, $0.53 - Preview
    • Cobalt Intl Energy (CIE) 7am, $(0.19)
    • CVS Caremark (CVS) 7am, $1.10 - Preview
    • Emerson Electric (EMR) 7am, $1.06
    • FirstEnergy (FE) 8:30am, $0.44
    • Gartner (IT) 7am, $0.59
    • Intl Flavors & Fragrances (IFF) 7am, $1.35
    • Liberty Interactive (LINTA) 7:47am, $0.27
    • Liberty Media (LMCA) 7:30am, $0.22
    • Louisiana-Pacific (LPX) 8am, $0.01
    • Magellan Midstream Partners (MMP) 8:30am, $0.71
    • MGM Resorts Intl (MGM) 8am, $0.10
    • Monster Worldwide (MWW) 7:30am, $0.09
    • Motorola Solutions (MSI) 7am, $0.62
    • Northwest Natural Gas (NWN) 6:30am, $0.09
    • Och-Ziff Capital Mgmt (OZM) 7:30am, $0.18
    • Office Depot (ODP) 7am, $(0.02)
    • Quicksilver Resources (KWK) 7am, $(0.06)
    • Regeneron Pharmaceuticals (REGN) 6:30am, $2.31 - Preview
    • TransDigm Group (TDG) 7:30am, $1.98
    • Vantage Drilling (VTG) 6am, $0.05
    • Vulcan Materials (VMC) 8am, $0.38
    • Westlake Chemical (WLK) 6am, $1.47
    • WP Carey (WPC) 7:30am, $0.63
    • Zoetis (ZTS) 7am, $0.38 - Preview


     PM EARNS:

    • Acadia Pharmaceuticals (ACAD) 4:01pm, $(0.13)
    • Activision Blizzard (ATVI) 4:07pm, $0.02
    • Cimarex Energy (XEC) 4:45pm, $1.71
    • Continental Resources (CLR) 6:12pm, $1.70
    • Diamondback Energy (FANG) 4:20pm, $0.68
    • DryShips (DRYS) 4:02pm, $(0.06)
    • EOG Resources (EOG) 4:11pm, $1.38
    • Expeditors Intl (EXPD) 4:30pm, $0.47
    • FireEye (FEYE) 4:05pm, $(0.60)
    • First Solar (FSLR) 4:01pm, $0.33 - Preview
    • Frontier Communications (FTR) 4:01pm, $0.05
    • Groupon (GRPN) 4:04pm, $0.01
    • Jazz Pharmaceuticals (JAZZ) 4:05pm, $1.92
    • KAR Auction Services (KAR) 4:15pm, $0.37
    • Liberty Global (LBTYA) 5:12pm, $0.03
    • Oasis Petroleum (OAS) 8:24pm, $0.74
    • Oneok (OKE) 4:10pm, $0.37
    • Saputo (SAP CN) 12:11pm, C$0.77
    • Scientific Games (SGMS) 4:01pm, $(0.28)
    • Take-Two Interactive Software (TTWO) 4:05pm, $(0.27)
    • Trimble Navigation (TRMB) 4:05pm, $0.40
    • Walt Disney (DIS) 4:15pm, $1.16 - Preview
    • WebMD Health (WBMD) 4pm, $0.19
    • WPX Energy (WPX) 4:20pm, $(0.06)
    • Zillow (Z) 4:30pm, $(0.04)
    • Zogenix (ZGNX) 4:01pm, $(0.16)



  • WTI Trades Near 3-Day High Before U.S. Supply Data; Brent Steady
  • Baconholics Undeterred by 30-Year High Pig Prices: Commodities
  • Money Managers Were Net-Long Copper on Aug. 1 in LME Report
  • Gold Rebounds on Speculation of Demand With Prices Below $1,300
  • Soybeans Drop as Rains Forecast for Midwest Seen Easing Dryness
  • Lead Declines as Gauge of Chinese Services Misses Projections
  • BullionVault’s Gold Buyer Index Rebounds as Holdings at Record
  • Coffee Rebounds on Speculation Prices Fell Too Far; Cocoa Rises
  • China Said to Add 10,000 Metric Tons to Rare Earths Stockpiles
  • CME to Start European Gas Futures as Trayport Stays Independent
  • Parnon, Arcadia to Pay $13 Million in Oil Price-Rigging Suit
  • Sugar Researcher Kingsman Retiring After 37 Years in Industry
  • Citi Bearish on Aluminum as Chinese Product Exports Damp Demand
  • Colorado Fracking Opponents Poised to Lose Local Control Battle


























The Hedgeye Macro Team


August 5, 2014

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August 5, 2014 - Slide2

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August 5, 2014 - Slide4

August 5, 2014 - Slide5

August 5, 2014 - Slide6



August 5, 2014 - Slide7

August 5, 2014 - Slide8

August 5, 2014 - Slide9

August 5, 2014 - Slide10

August 5, 2014 - Slide11

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INVITE | New Best Idea

Dear Restaurant Subscribers,


We’re hosting a series of calls next week, including an expert call focused on the organic space and a new Best Idea short call (with Black Book) on a well-liked organic name.


If you have any interest in attending one, or both, of these events please let us know.


Howard Penney

Managing Director


Fred Masotta


(HEDG)EYE-CANDY: Quantifying the QM Drag

The new Qualified Mortgage (QM) regulations that went into effect on January 10th tightened mortgage underwriting standards and were broadly expected to compress credit availability – particularly at the lower end and across non-conforming loan categories. 


While the prevailing expectation was for some measure of credit tightening, there’s been a general dearth of hard data on the impact. 


We received some harder quant today with the release of the Fed’s 3Q Senior Loan Officer Survey (Here) which included a set of special questions on the effects on the approval rates for home-purchase loans of the Ability-to-Repay and Qualified Mortgage Standards under the Truth in Lending Act


Bottom Line:  ~30% of banks indicated that ATR/QM rules have reduced approval rates for borrowers across the FICO score spectrum while ~50% reported reduced approval rates across Jumbo and Nontraditional mortgage loans. 


In short, the new regulatory provisions are, indeed, dragging on loan approval rates and residential real estate transaction volumes by extension.  We expect that drag to continue to impact the reported housing data at least until we annualize the implementation in early 2015. 


(HEDG)EYE-CANDY: Quantifying the QM Drag - QM impact


(HEDG)EYE-CANDY: Quantifying the QM Drag - QM Summary



Joshua Steiner, CFA


Christian B. Drake

Real Conversations with Neil Howe, Historian and Author of "The Fourth Turning"

Hedgeye CEO Keith McCullough sits down with author and historian Neil Howe in our latest edition of Real Conversations.