Getting Out Of The Way

This note was originally published at 8am on July 24, 2014 for Hedgeye subscribers.

“Why would we ever predict when we can know?”

-Dan Heath


Great question. I guess that’s why some people like to trade on inside information.


In Global Macro Risk Management, there is no inside information. Or at least not the hard core stuff like Galleon used to get. Maybe there was back in the day when someone could literally call their boy at the Bank of England and just get the next rate move prior to it being announced. But even the biggest bureaucrat on the planet is scared of orange-jump-suit-risk #accelerating at this stage of the game.


As the game changes, our #process does. We believe that the best prediction of the future is based on what we already know. I’ve spent a lot of time talking to investors about how our models work. Sometimes at least 2/3 of our forecast is based on what we already know. In other words, we use real-time data and measure its rate of change vs. historical data in order to gauge a forward looking probability.


Getting Out Of The Way - wallstreet 120370032


Back to the Global Macro Grind


Thinking in rate of change (slope) and probability terms works a heck of a lot better than the ‘I’m smart and it feels like’ this is going to happen approach. Most of that spew anchors on what already happened – not on the measurable factors underneath the hood that could cause whatever happened to undergo a phase transition.


There are those two thermodynamic risk management words again – phase transitions. To put that in the most simpleton speak I can, there are two types of phase transitions I really care about:


  1. Bearish to bullish TREND reversals
  2. Bullish to bearish TREND reversals


While always considering our intermediate-term TREND duration within the context of our other durations (TRADE and TAIL) is critical, when something undergoes a phase transition on our TREND duration, that something often ends up becoming the best calls we make.


Don’t forget that if you go both ways like I do (don’t think dirty – think hockey: back-check, fore-check, paycheck), sometimes the most important call to make is to get out of the way.


How do you do that?


  1. If you’re short and something is going from bearish to bullish = COVER
  2. If you’re long and something is going from bullish to bearish = SELL


If you’re a longer-term investor, just cover or sell some. Only average players take coaching personally.


If you analyze your P&L across your entire career, what you’ll realize is that your performance distribution has big tails (i.e. your biggest losers kill you). Since risk management Rule #1 is don’t lose $$, that makes getting out of stuff really important.


Who gets you out?


We know who gets you in. Every bank, broker, and buds out there is trying to get you into what they get paid on next. This is Wall Street don’t forget. But getting you out of your “best idea” (might be your marriage too!) before it’s about to go really bad, #priceless.


I didn’t know what I was going to write about this morning (I usually don’t – I have 45 minutes to write something before it gets edited), so I certainly hope you can poke holes at this. I can.


I can poke holes at every single idea we have; especially if my intermediate-term TREND signal is reversing versus the desired direction of the position. Maybe that’s why a lot of PM’s ask me to scrub their portfolios (we call it a Ticker Scrub). It’s so easy a Mucker can do it.


What looks greasy dirty out there right now? (i.e. what is signaling a bearish to bullish TREND reversal):


  1. Chinese Stocks (Shanghai Comp) which closed up another +1.3% last night after China’s best PMI in 18 months
  2. Copper prices are up another +1.2% this morning to $3.24/lb after breaking out above @Hedgeye TREND
  3. US Equity Volatility (VIX) as the front month makes a series of higher-all-time-lows


Greasy? Yeah, you know – like when I score a goal in men’s league hockey off my elbow. I’m getting older and slower, so I love those. And I really love seeing something breakout for fundamental reasons that neither I nor my analysts can see. Those are beauties.


Is there anything better in this business than that? When all of the super smart people in this world are all wrong, at the same time, for the wrong reasons? Most of the time no super duper slide deck can arrest gravity.


Embrace the uncertainty out there. I can guarantee you’ll be really wrong less times. And you’ll smile more often too. After all, playing this game is a lot more fun when you can know how to be right by not being really wrong. You just have to know when to get out of the way.


Our immediate-term Global Macro Risk Ranges are now as follows:


UST 10yr Yield 2.45-2.51%

SPX 1964-1992

RUT 1134-1164

Shanghai Comp 2051-2099

VIX 10.32-12.51  

WTI Oil 101.75-104.15

Gold 1286-1324

Copper 3.17-3.28


Best of luck out there today,




Keith R. McCullough
Chief Executive Officer


Getting Out Of The Way - Chart of the Day


Client Talking Points


Vladimir Putin trying to steal Mario Draghi’s thunder this morning by banning U.S. and EU (even Canadian!) food imports. The Russian stock market doesn’t like it, down another -1% to -17.3% year-to-date #TrainWreck.


Either European stocks know Mario Draghi isn’t going to deliver more cowbell, or everyone will be surprised when he does. The EUR/USD hasn’t budged and Portugal is down another -1%. The DAX has no bid (yet) either.


Oil continues to break down (both Brent and WTIC) as the #InflationAccelerating consumption tax of 1H 2014 loses some of its momentum – doesn’t mean U.S. CPI is going to collapse; just goes up at a slower rate as U.S. GDP #Q3Slowing continues.

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


While Mass deceleration has been our theme for the Macau stocks since 6/13/14 we were definitely surprised it happened so drastically



I am not a product of my circumstances. I am a product of my decisions.

-Stephen Covey


The secular decline in Casual Dining continues July same-store sales -1.1% (2YR down 90 bps to -2.5%) July Traffic -3.2% (2YR dwn 110 bps to -4.2%).

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Chance of a Crash?

“We are taking a greater chance of having another crash at a time when the world is less capable of bearing the cost.”

-Raghuram Rajan


Crash? Yep. My man Dr. Raj doesn’t consider it improbable. Do you? The aforementioned quote comes from an interview the former Chief Economist of the IMF (2003-2006) and now Governor of the Reserve Bank of India just gave to the Central Banking Journal.


“Investors are counting on easy money – they put the trades on even though they know what will happen as everyone attempts to exit positions at the same time… there will be major market volatility if that occurs.”


I can assure you that “everyone” has not attempted to get out of the US stock market, yet. Just think, all we needed was a 2% down day (and a -3.5% correction from the all-time bubble highs), and volatility (VIX) ripped +65%! That’s called some wicked asymmetry.


Chance of a Crash? - EL chart 2


Back to the Global Macro Grind


I have no love lost for those who think that they can centrally plan things like gravity, economic cycles, etc. But if I had to pick one modern central planner to help me run money, it would be Dr. Raj. When it comes to real-time interconnected market risk, sorry Janet, but you wouldn’t make it past the first interview at a performance based fund.


Not only did Rajan tell linear-economist Larry Summers to go flower himself circa 2006 (Summers called Rajan’s views of market risks “misguided”), but he’s taken India on a path that American, European, and Japanese bureaucrats seemingly do not have the spine to traverse – that of raising interest rates in order to tone down the real cost of living (inflation).


India’s stock market (one of our favorite long ideas in 2014 – the Wisdom Tree India Earnings Fund (EPI) in Real-Time Alerts) not only took the rate hikes and inflation fighting policy from Dr. Raj in stride, they celebrated them. India’s BSE Sensex is up another +0.4% this morning to +23.2% for the YTD as these wacky things called investment and capex cycle expectations in India take hold.


Raising rates?


Sadly, if we’re right on both US Housing and GDP continuing to slow here in Q3, there isn’t a chance on this side of central planning hell that Janet Yellen is going to raise interest rates in the 1st half of 2015.


Being the bear on both US growth and rates this year, I get a lot of questions on Fed timing. I spent all of yesterday seeing Institutional Investors in NYC (8 meetings) and by the end of the day I came to the realization that the biggest risks to our current views are:


  1. We aren’t bearish enough on US growth
  2. We aren’t bullish enough on long-term Treasuries


Sounds a little crashy, but just fyi, markets do crash after making all-time bubble highs on no-volume.


Again, what I just wrote is that the risk to our current view is that we’re not bearish enough on the US stock market. Since we don’t do the “year-end bonus-target” thing for stock and bond market levels, here’s that current view:


  1. US Treasury 10yr Yield tests 2.21-2.41%
  2. SP500 corrects towards 1829


Yeah, on that 2.41% level for the 10yr, I know. What a leap that forecast is with the 10yr at 2.45% this morning! As my friends from Thunder Bay would say though, “the thing of it is” we’ve been looking for 2.41% since the 10yr was at 3%.


On the SP500 though, my current views are finally shifting to the bear side.


As most of you who have been following my team and my levels know, I have been more focused on having you sell the Russell 2000 than the SP500 YTD, primarily because the SP500 has many more slow-growth #YieldChasing components that I like(d).


Provided that the SP500 remains bearish on my intermediate-term TREND signal (1930 resistance), I see my long-term TAIL risk line of 1829 support as probable. What does probable mean in risk management speak? Well, it doesn’t mean improbable.


Other than a certified train wreck for whoever bought SPX 1987, what would 1829 look like?


  1. A -4.7% correction from yesterday’s closing price of 1920
  2. A -8% correction from the all-time high (1987) – the Russell 2000 has corrected -7% since July 7th


Oh, and about 1987… if you want to go all crashy in your investment meeting today, how ominous of a date/level is that?


If I am right in that I am not bearish enough on the SP500 (yet), and my long-term TAIL risk line of 1829 snaps. Oh snap, they will. That’s the point about my definition of TAIL risk – once it’s on, the only support strategy (level) I’ll be recommending is prayer.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.43-2.53%


RUT 1107-1131

India’s BSE Sensex 251

VIX 14.92-18.59

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Chance of a Crash? - Chart of the Day

August 7, 2014

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TODAY’S S&P 500 SET-UP – August 7, 2014

As we look at today's setup for the S&P 500, the range is 30 points or 1.11% downside to 1899 and 0.46% upside to 1929.                                                        













  • YIELD CURVE: 2.00 from 2.01
  • VIX closed at 16.37 1 day percent change of -2.96%


MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: BOE rate decision
  • 7:45am: ECB rate decision
  • 8:30am: Draghi press conference
  • 8:30am: Initial Jobless Claims, Aug. 2, est. 304k (prior 302k)
  • Continuing Claims, July 26, est. 2.512m (prior 2.539m)
  • 9:45am: Bloomberg Consumer Comfort, Aug. 3
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 3pm: Consumer Credit, June, est. $18.650b (prior $19.602b)



    • President Obama signs VA bill, speaks in Fort Belvoir, Va.
    • 2pm: House Foreign Affairs panel hearing on Ebola outbreak with CDC Director Tom Frieden among the witnesses
    • 2pm: Treasury Dept’s Federal Advisory Cmte on Insurance mtg w/Federal Insurance Office Director Michael McRaith
    • Africa Summit:
    • 8am Discussion w/ E. African community presidents including Rwanda, Kenya, Tanzania, Uganda, Burundi hosted by U.S. Chamber
    • 8am: Guinea, Kenya, Congo, Ghana presidents at seminar on growth models
    • 9am: CSIS Mali/regional security forum w/ Mali president
    • 5pm: Burkina Faso president at news conf. on his role as regional mediator
    • U.S. ELECTION WRAP: Tenn. Primary Tmrw; Walsh Weighs Future



  • BofA said to near mortgage-probe settlement of up to $17b
  • July U.S. comp. sales may gain as retailers discount summer merchandise
  • Russia bans array of U.S., EU food in retaliation for sanctions
  • Fox tops earnings ests. with film, cable units spurring gain
  • Symantec 1Q rev. tops estimates on security demand
  • Draghi outlook menaced by Putin as Ukraine hurts recovery
  • Germany’s bond advance sends note yield below zero before ECB
  • German industry output grows less than forecast on Ukraine
  • Boeing weighs buying parts recycler to profit from junkyard jets
  • Nestle plans share buyback as sales beat analysts’ estimates
  • Rio to bolster returns after first-half profit advances 21%
  • Iliad doesn’t plan to increase T-Mobile US bid: Les Echos
  • Google to boost encrypted websites in rankings, WSJ says
  • Range Resources faces Pennsylvania fracking water fine: Reuters
  • Google, Barnes & Noble in online shopping pact, NYTimes says



    • AES (AES) 6am, $0.28
    • Air Canada (AC/A CN) 6am, C$0.47 - Preview
    • AMC Networks (AMCX) 7am, $0.86
    • AmTrust Financial (AFSI) 7am, $1.00
    • Apollo Investment (AINV) 7:30am, $0.22
    • Auxilium Pharmaceuticals (AUXL) 6am, $(0.21) - Preview
    • Brinker Intl (EAT) 7:45am, $0.87
    • Broadridge Financial (BR) 7am, $1.16
    • Canadian Tire (CTC/A CN) 7:40am, C$2.01
    • Chiquita Brands Intl (CQB) 8:03am, $0.62
    • CI Financial (CIX CN) 9:40am, C$0.46
    • Cooper Tire & Rubber (CTB) 7:30am, $0.80
    • Duke Energy (DUK) 7am, $0.98
    • EchoStar (SATS) 6am, $0.17
    • Fifth Street Finance (FSC) 6:45am, $0.26
    • Finning Intl (FTT CN) 8am, C$0.47
    • Foster Wheeler (FWLT) 6:45am, $0.47
    • Harman Intl (HAR) 8am, $1.21
    • Horizon Pharma (HZNP) 6:30am, $0.07
    • Huntington Ingalls (HII) 7:15am, $1.81
    • IGM Financial (IGM CN) 10:08am, C$0.8
    • Inter Pipeline (IPL CN) 11:26am, C$0.24
    • Intercontinental Exchange (ICE) 7:30am, $2.02
    • Lamar Advertising (LAMR) 6am, $0.37
    • Laredo Petroleum (LPI) 7am, $0.18
    • Linn Energy (LINE) 6:45am, $0.42
    • Mallinckrodt (MNK) 6am, $0.87
    • Manulife Financial (MFC CN) 6am, C$0.40 - Preview
    • Mylan (MYL) 7am, $0.72 - Preview
    • NorthStar Realty Finance (NRF) 8am, $0.35
    • NRG Energy (NRG) 6:56am, $0.18
    • OGE Energy (OGE) 7am, $0.52
    • Orbitz Worldwide (OWW) 8:03am, $0.15
    • Radian Group (RDN) 7am, $0.28
    • Sarepta Therapeutics (SRPT) 7am, $(0.77)
    • Scripps Networks (SNI) 7am, $1.13
    • Semafo (SMF CN) 8:23am, $0.03
    • Sempra Energy (SRE) 9am, $1.13
    • Springleaf Holdings (LEAF) 8am, $0.45
    • Stratasys (SSYS) 6:30am, $0.45 - Preview
    • SunEdison (SUNE) 6am, $(0.26)
    • Telus (T CN) 8:45am, C$0.58
    • Teradata (TDC) 6:55am, $0.65
    • TMX Group (X CN) 6am, C$1.01
    • TRI Pointe Homes (TPH) 6:45am, $0.16
    • Wendy’s (WEN) 7am, $0.10
    • WhiteWave Foods (WWAV) 6:30am, $0.22
    • Windstream Holdings (WIN) 7am, $0.08



    • Allscripts Healthcare (MDRX) 4:01pm, $0.09
    • Alnylam Pharmaceuticals (ALNY) 4pm, $(0.52)
    • Alona Energy (ALJ) 5:19pm, $(0.01)
    • Assured Guaranty (AGO) 4pm, $0.41
    • AuRico Gold (AUQ CN) 4:37pm, $(0.04)
    • CareFusion (CFN) 4:02pm, $0.72
    • CBS (CBS) 4:01pm, $0.72 - Preview
    • Computer Sciences (CSC) 4:22pm, $0.94
    • Consolidated Edison (ED) Aft-Mkt, $0.54
    • Credicorp (BAP) 7pm, $7.45
    • Great Plains Energy (GXP) 5:10pm, $0.41
    • Linamar (LNR CN) 4pm, C$1.28
    • Lions Gate Entertainment (LGF) 4:05pm, $0.21
    • Medivation (MDVN) 4:10pm, $0.23
    • MercadoLibre (MELI) 4:03pm, $0.26
    • Monster Beverage (MNST) 4:05pm, $0.75
    • Nvidia (NVDA) 4:20pm, $0.26
    • Pengrowth Energy (PGF CN) 7:41pm, C$0.00
    • Salix Pharmaceuticals (SLXP) 4:01pm, $1.69
    • SolarCity (SCTY) 4:05pm, $(0.99)
    • Spectrum Pharmaceuticals (SPPI) 4pm, $(0.09)
    • Sprouts Farmers Market (SFM) 4:05pm, $0.18
    • Ubiquiti Networks (UBNT) 4:05pm, $0.51
    • Vivus (VVUS) 4pm, $(0.30) - Preview
    • Zynga (ZNGA) 4:04pm, Break-even - Preview



  • World Food Prices Drop to Six-Month Low as Grain Costs Decline
  • Russia Accounts for Less Than 10% of EU’s Agriculture Exports
  • Female Lumberjacks in Japan Boost Abe Growth Plan: Commodities
  • Nickel Rises Most in Four Weeks Amid Deficit View as Mine Halts
  • Japan Buys 154,245 Metric Tons of Milling Wheat Via Tender
  • Wheat Declines in Chicago as Traders Focus on Russia Outlook
  • Raw Sugar Climbs as China Seen Buying From Brazil; Coffee Drops
  • Rubber Rises From One-Week Low as Crude’s Advance Boosts Appeal
  • China Bonded Copper Stocks Fall Further on Qingdao: Macquarie
  • Thailand to Cut Down More Rubber Trees to Reduce Supply
  • Oil Traders Flee Brent as Prices Signal Glut: Chart of the Day
  • Steel Rebar Closes Near 3-Week High Before China Trade Data
  • Noble Says Second-Quarter Profit Gains 5% on Bigger Volumes
  • Freeport Indonesia Ops. Back to Normal; To Finish Loadings 3pm
  • Russia’s Food Ban Seen by UN’s FAO as Tending to Depress Prices


























The Hedgeye Macro Team
















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