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Boy Band

This note was originally published at 8am on July 25, 2014 for Hedgeye subscribers.

“Shot everytime Janet says “Slack””.

-Hedgeye FOMC drinking game


I was trained as a research scientist, not as an economist.  Given that I’m charged with front running the flow of the domestic macro economy, that could be viewed favorably or not – and is probably most dependent on one’s particular ivory tower predilection. 


Truthfully, in a debate with an econ PhD scored on the use of technical jargon and unnecessarily complicated verbiage to describe largely pedestrian macro concepts – I’d probably bet on the other guy.


Generalize the contest to one scored on general cerebral alacrity and proficiency in information processing and contextualization – I bet on myself.  I’m cool with that tradeoff. 


The “Yin” thing about hours of toil in grad school biochem labs and research libraries is that it builds transferable analytical skills. 


The “Yang” - when comparing science with investing –  is that the conclusiveness of the output and the manner in which the research is applied is almost antithetical. 


Generally, the goal of scientific research is to arrive at a definitive, singularly right answer.  In investing, such a thing rarely exists.  Even if a hard conclusion is, in fact, reachable, bandwidth and time constraints often limit the ability to fully distill the available data.   


For someone trained as a scientist, big-time decision making based on imperfect information, data mosaics, and preponderances of evidence amounts to living in a kind of perma-purgatorial state of cognitive dissonance. 


If the Hedgeye Macro team was a Boy Band, I would probably be “the overly analytical, loveable one.


Boy Band - 11


Back to the Global Macro Grind


Hard hat utilization among the domestic construction bulls continues to run at peak capacity with the housing market throwing up nothing but bricks in 2014. 


Wednesday’s Mortgage Application data showed housing demand to start 3Q is running -3.6% QoQ with the purchase index sitting just 6% above the 10Y lows recorded during the peak weather distortion back in February. 


Yesterday’s New Home Sales data for June was equally uninspiring, declining -8.1% MoM and -12% YoY.  Notably, the June decline was on top of a -12% downward revision to the May data.


To quickly review the evolution of our housing call:   After being discretely bullish on housing for the better part of a year beginning in 4Q12, we turned increasingly negative at the beginning of 2014 and elevated #HousingSlowdown to a top Macro theme for 2Q14. 


With demand flagging, home prices in conspicuous deceleration and the ITB down -6% YTD (vs. the SPX +7.5%), that call has played out rather well. 


Does it still have legs?   We think so.


THE SECRET SAUCE:  There’s endless housing data available and enough moving parts across the industry to build as much nuance into a housing call as one would like.   Where we can, however, we prefer to keep it simple.  


Two core, empirical realities sit underneath our base contextual framework for modeling the housing market and the resultant impact on market prices


I won’t keep the sauce secret, but I will make you work for it, kinda   You’ll internalize it too if you actually go through this 2 step exercise – Pop-tarts have more directions than that!


  1. Plot housing demand (pending home sales Index)  vs. price (Case-shiller 20 City HPI Index) with demand leading price by 18-months
  2. Plot Home Price change vs. ITB (U.S. Home Construction ETF)


What you’ll observe is that demand leads price by 12-18 months and housing related equities track the 2nd derivative of price like a glove.  


In other words, current demand trends tell you what home prices will do about a year from now and, if the model holds as it has for numerous cycles, equities will follow the slope in HPI. 


“RIDING THE SHORT BUS”:   The Corelogic HPI data for June showed home prices growing +7.7% YoY – a sequential -110bps deceleration in the rate of home price change vs. the +8.8% recorded in May.  In fact, we have seen approximately 100bps of deceleration in HPI in each of the last four months since the February peak of +11.8% YoY growth.   Housing demand trends in 2H13 suggest the home price deceleration should continue over the back half of 2014 – implying there’s still some runway left on the short side.       


CAPTAIN OBVIOUS:  “Everyone expects HPI to decelerate at this point, isn’t that priced in?”…we’ve heard some version of that reasoning multiple times this year and at multi-points along the recurrent housing cycle.  We get that sentiment and, intuitively, it feels more right than not, but the data argues otherwise.   We’re inclined to stick with the data.  With more downside in HPI, demand listing alongside weak income growth and regulation dragging on credit availability, we think sideways represents the bull case for housing related equities over the intermediate term.  


GOING BOTH WAYS:    A flattening and inflection in the 2nd derivative on HPI will be a key signal for us in terms of shifting off our bearish view.  Who knows….by then, maybe the labor data will have held positive, incomes will be growing at a multiple to HPI, comps will be easy, we will have annualized the implementation of the QM regulations and we can get back on the long side.        


DRINKING GAMES:  I’m on vaca with the fam next week, so I’ll miss the non-event that will be the official reporting of growth accelerating in 2Q off the easiest, non-recession comp ever. 


I will, however, try to rally the beach brigade for a ‘spirit’-ed searching of the FOMC announcement for “slack” mentions.


Back in the day, the FOMC “shot” word was “dollar”, but somewhere along the way we had to switch it up...you’d think the man whose lone job was to control the supply of money would have mentioned “the dollar” or “currency” at least once in 8 years…


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.45-2.55%

SPX 1964-1995

Shanghai Comp 2091-2146

VIX 10.32-14.11

USD 80.32-81.07

Gold 1288-1322

Copper 3.20-3.29 


To Growth,


Christian B. Drake

Macro Analyst


Boy Band - Compendium 072414


Client Talking Points


The DAX is down another -0.8% this morning, making the correction -10.5% since it topped on July 3rd (the Russell 2000 topped July 7th, and is -7.4% since); with no Draghi drugs, we don’t see the catalyst for a bounce that gets back above TREND resistance.


Gold is up +0.3% to +9.6% year-to-date. It  is beating every major U.S. Equity Index year-to-date and making another bid to breakout above my long-term TAIL line of $1323 – watching this one closely; consensus is a lot longer of Gold than it was 8 months ago.


UST 10YR yield is slamming into an oversold signal down at 2.36% this morning, so you can sell some l-term bonds, but there’s absolutely no reason to change the Long Bond as our best macro long idea in 2014 (TLT +15% year-to-date).

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


Long Bond, in $TLT terms, moving towards +15% YTD - huge relative and absolute move #GrowthSlowing



When everything seems to be going against you, remember that the airplane takes off against the wind, not with it.

-Henry Ford


66, world number one golfer Rory McIlroy’s score in the first round of the PGA Championship, which puts him one shot behind the leaders entering today’s second round.

CHART OF THE DAY: #GrowthSlowing, Net Interest Margin and Regional Banks


CHART OF THE DAY: #GrowthSlowing, Net Interest Margin and Regional Banks - Chart of the Day

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Observable Theories

“It is the theory that decides what can be observed.”

-Albert Einstein


I have a theory about performance that I developed running my own fund: it’s the score in your P&L that counts. I also have a theory about market theories: your positions reflect your theories.


We can theorize about the relationship between inflation and growth. We can highlight immediate-term market observations within their longer-term trends. We can write and rant too – but, at the end of the day, taking your position in macro is what matters.


In 2014, we’ve had a contrarian theory that as US growth expectations slow, US interest rates will fall, and both Gold and Long-term Treasury Bonds will rise. We’re not changing that theory this morning. We’d like you to keep that position.


Observable Theories - EL chart 2


Back to the Global Macro Grind


But, but… you said that if the Dollar goes up and inflation expectations fall, the consumer gets a tax cut and consumption growth can accelerate. Yep, but I said that before we were 62 months into an economic expansion (in 2009 and again in 2013), not at the end of it.


Year-over-year, the US Dollar is down -0.4%. With US cost of living barely coming off her all-time highs, that isn’t going to make me tell you to run on out there and buy-the-damn-bubble in US stocks. Sorry.


If the US Dollar were to breakout from here, and crude oil were to drop to $80/barrel – now that might get me interested. But there’s this thing called #timing that we need to consider when we theorize about getting long.


In the meantime (we’re net short in Real-Time Alerts terms) and here’s the score:


  1. US Dollar Index stopped going up this morning (because the Euro stopped going down)
  2. US 10yr Yield of 2.36% is hitting a fresh YTD low of 2.36% (crashing -22% YTD)
  3. US Equities (SPX) have only had 1 up day in the last 11 (dip buyers #underwater)


Bull market, baby (in the Long Bond)! 2014 Score: Long Bond (in TLT terms) +15.1% vs Gold +9.6% vs Russell 2000 -3.9%.


Digging into the Sector Style performance of the SP00:


  1. Consumer Discretionary (XLY) leads losers at -2.2% YTD
  2. Industrials (XLI) aren’t far behind at -1.6% YTD
  3. Financials (XLF) are 3rd worst (of 9 Sectors) at +1.4% YTD


Digging deeper, you can see the real wins and losses (sub-sectors within the S&P’s major sectors):


  1. Housing (ITB) is -10.6% YTD
  2. Regional Banks (KRE) are -7.4% YTD
  3. REITS (VNQ) are up +15.3%


REITS are a way to be long A) slow-growth #YieldChasing and B) US Rents hitting all-time highs. Yep, we have a theory that you can check with your landlord on that too: he’s not reducing your rent tomorrow due to Russia or ebola.


You see, in theoretical-land, as our #InflationAccelerating theme from Q114 stops going straight up into the right (Coffee prices dropped -3.6% yesterday, but are still +66.2% YTD), real-world inflation still sticks. Starbucks (SBUX) isn’t cutting prices today.


Inflation (especially the cyclical stuff like wage inflation and rent), is a late-cycle economic indicator. So is unemployment. Got early cycle? That’s easy. Consumer, Housing, some Industrials, and Regional Banks.


The reason on Regional Banks is really simple. As the bond market prices in slower growth, the long-end of the bond yield curve falls, and net interest margins (i.e. how banks make money off your deposits - long-term rates minus shorter-term ones) compress.


This is called Yield Spread Compression. And it’s part of this fancy theory called gravity. I have a perverse theory that as the Q3 US Growth data slows, the Fed will get easier (on the margin), and that the long-end of the curve will perpetuate moarrr compression.


As growth slows, not only do net interest margins at banks compress, but equity market multiples do. All the while, you’ll see multiple expansion on long-term Treasury bonds.


Since there’s no long-term support to 1.70% on the 10yr, maybe we should all start theorizing about that. The observable score says that’s more likely than seeing the consensus theory of 3.25% anytime soon.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.35-2.51%


RUT 1105-1128

VIX 15.45-18.89

USD 81.06-81.73

Gold 1


Best of luck out there today and have a great weekend,



Keith R. McCullough
Chief Executive Officer


Observable Theories - Chart of the Day


TODAY’S S&P 500 SET-UP – August 8, 2014

As we look at today's setup for the S&P 500, the range is 36 points or 0.97% downside to 1891 and 0.91% upside to 1927.                                             













  • YIELD CURVE: 1.96 from 1.98
  • VIX closed at 16.66 1 day percent change of 1.77%


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Non-farm Productivity, 2Q preliminary, est. 1.6% (prior -3.2%)
  • Unit Labor Costs, 2Q preliminary, est. 1.1% (prior 5.7%)
  • 10am: Wholesale Inventories m/m, June, est. 0.7% (prior 0.5%)
  • 1pm: Baker Hughes rig count



    • Senate, House on August recess
    • RNC holds annual summer meeting in Chicago
    • Last day to file comments on FDA e-cigarette/cigar regulations
    • 10:30am: FCC holds open meeting
    • U.S. ELECTION WRAP: Walsh Drops Out; Primaries Tonight; Hawaii



  • Obama pulled back into Iraq as militants threaten genocide
  • Dresser-Rand said to hire Morgan Stanley to prepare for bids
  • Ebola outbreak is public health risk to other nations, WHO says
  • Tekmira says U.S. may allow experimental Ebola drug
  • China said to remove Apple from buy list after pledge not made
  • Rockets fired at Israel as Hamas said to reject longer truce
  • News Corp. misses profit estimates as advertising sales decline
  • CBS profit beats estimates on buybacks as dividend is boosted
  • Zynga tumbles after cutting 2014 outlook on delays to new games
  • Lululemon founder Wilson sells half his stake, ending fight
  • Ukrainian bonds extend world’s worst selloff as NATO warns Putin
  • Wal-Mart denies claims used expired meat in China cooked food
  • China has record trade surplus as exports accelerate
  • Goldman, JPMorgan may appear at Levin hearing in Sept: Reuters
  • Yahoo to implement e-mail encryption next year: WPost
  • U.S. Retail Sales, Wal-Mart, Cisco: Week Ahead Aug. 9-16



    • Brookfield Asset Mgmt (BAM/A CN) 7:56am, $0.50
    • DiamondRock Hospitality (DRH) 8am, $0.25
    • Enerplus (ERF CN) 8:47am, C$0.30
    • EW Scripps (SSP) 7:30am, $0.05
    • HMS (HMSY) 7:30am, $0.12
    • Magna Intl (MG CN) 8am, $2.22
    • Magnum Hunter (MHR) 7am, $(0.17)
    • Pembina Pipeline (PPL CN) 4:50pm, C$0.27
    • Power Corp. of Canada (POW CN) 11:12am, C$0.70
    • Sirona Dental Systems (SIRO) 7am, $0.96
    • SNC-Lavalin (SNC CN) 8:29am, C$0.66
    • Sotheby’s (BID) 8am, $1.43



  • Crude Prices Rise as Obama Authorizes Airstrikes in North Iraq
  • Hermes Betting Against Zinc as Smelters in China to Boost Supply
  • Hambro’s Russian Gold Dream Runs Into Debt Mountain: Commodities
  • Gold Climbs to Three-Week High as Iraq Crisis Spurs Haven Buying
  • Industrial Metals Drop as Unrest Seen Threatening to Curb Demand
  • Pacific Hurricane Iselle Downgraded to Tropical Storm: Center
  • Dam Burst Threatens Canadian Mines Over Environmental Concerns
  • China Aluminum Exports at 3-Year High on Rising Overseas Prices
  • Gold Traders Most Bullish in 7 Months on Standoff Over Ukraine
  • Wheat Trims Weekly Advance as Investors Assess Supply Outlook
  • Iron Ore Busting 1.3 Billion Tons Spurs Boom for Ships: Freight
  • Gas Price Swings Signal Ukraine Supply Threat: Chart of the Day
  • Coffee Farmers in Vietnam Selling Inventories as Prices Advance
  • Gold Open Interest Points to 12% Price Decline: Chart of the Day
  • Coal’s Price Seen Stunted at Year-End Amid Supply Glut: Energy

























The Hedgeye Macro Team
















August 8, 2014

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