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Process & Spot

This note was originally published at 8am on July 28, 2014 for Hedgeye subscribers.

“Very simple. It’s going to be a big letdown for everyone. It was process and spot.”

-Rory Mcilroy


I don’t know about yours, but my multi-factor, multi-duration analysis this summer has revealed that my golf game needs some serious work. The hottest hand on the Hedgeye Research Tour, Howard Penney, reminded me that I need to get Rory’s #process.


After his British Open win, Mcilroy explained “with my long shots, I just wanted to stick to my process and stick to making good decisions… I just wanted to roll that ball over that spot. If it went in, then great. If it didn’t, then I’d try it the next hole.”


Process & Spot - #love that. If we can execute it, consistently, on the Global Macro course of interconnected risk, we’ll make less double bogeys. Remember, it’s those of you who don’t have a lot of blow-up holes that have the best performance track records.


Process & Spot - golf


Back to the Global Macro Grind


In Hedgeye-speak, making our tee-to-fairway swing (process) repeatable means embracing the uncertainty of Mr. Macro Market’s intermediate-term TREND signals:


  1. If something like Chinese Stocks or Copper signal a bearish to bullish TREND reversal, we buy/cover
  2. If something like the Russell 2000 or Bond Yields signal a bullish to bearish TREND reversal, we sell/short


In long-bond speak, when we sell bond yields, we buy bonds. And we like it.


When it comes to our shorter-term duration game (putting), we try to manage what we call the immediate-term TRADE risk of the range. In other words, we respect the breaks and try to take the highest probability line of the proverbial putt by:


  1. Selling if the price is at the high end of the range
  2. Buying if the price is at the low-end of the range


Yep. So easy a Mucker can do it. What’s differentiated in this process is that I’m consistent in being inconsistent:


  1. My long shots are playing with the wind (bullish or bearish TREND)
  2. My putts are playing the breaks (fading last price)


Consensus Macro tends to do the opposite:


  1. Longer-term – consensus tends to be late in acknowledging bullish and bearish TREND reversals
  2. Shorter-term – consensus tends to chase, rather than fade, last price


Across both short and longer-term durations, you can see this on the most emotional strokes the Consensus Macro takes (net long or short futures and options bets in Big Macro positioning):


  1. LONG BOND (10r Treasury) saw a +26,023 wk/wk swing to a net LONG position in bonds now of +5,282 contracts last wk
  2. SPX (Index + Emini) saw a +37,728 wk/wk swing to a net LONG position in SP500 of +614 contracts last wk


Now, if you only look at these putts in isolation, you’d say that week over week, these were the right lines to take. But if you look at all the swings it took to get to the green, this was the score:


  1. LONG BOND – consensus net SHORT bet on average of -21,204 and -43,289 contracts for the last 3 and 6 months, respectively
  2. SPX – consensus net SHORT bet on average of -65,318 and -44,327 contracts for the last 3 and 6 months, respectively


In other words, for the last 3-6 months, Consensus Macro was A) shorting 10yr Treasuries and B) shorting SPY (and C) making double bogeys). You don’t want to be doing that.


And now you don’t want to be getting net long US Equity beta A) after consensus hedge funds have covered SPX shorts, B) Russell 2000 continues to signal bearish TREND, and C) front-month VIX is testing an intermediate-term TREND bearish to bullish reversal.


Or at least my process says you wouldn’t…


With the CRB Food Index and Energy Stocks (XLE) both up another +0.9% last week to +19.7% and +12.8%, respectively (Coffee and Cattle prices are +52.9% and +28.2% YTD), you probably want to stay net LONG our 2014 #InflationAccelerating Theme and short US Consumers (discretionary and housing stocks) too.


In golf sometimes it’s the shots you don’t take that make all the difference. #Process, spot, #process. Rinse and repeat.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.44-2.54%

SPX 1966-1987

RUT 1133-1161  

VIX 11.94-14.29

Gold 1299-1323

Copper 3.20-3.28  


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Process & Spot - Chart of the Day


TODAY’S S&P 500 SET-UP – August 11, 2014

As we look at today's setup for the S&P 500, the range is 57 points or 2.00% downside to 1893 and 0.95% upside to 1950.                                         













  • YIELD CURVE: 1.99 from 1.98
  • VIX closed at 15.77 1 day percent change of -5.34%


MACRO DATA POINTS (Bloomberg Estimates):

  • No major economic data expected
  • U.S. Rates Weekly Agenda
  • FX Weekly Agenda



    • Senate, House on Aug. recess
    • Fed Vice Chairman Stanley Fischer delivers speech on “The Great Recession: Moving Ahead” at conference in Stockholm; 3:15am
    • Washington Week Ahead



  • Kinder Morgan buys KMP, KMR, EPB in $44b deal
  • TPG said to match KKR’s $3.2b offer for Treasury Wine
  • Wall St. said to seek clarity on regulators’ loan guidelines
  • GM loses bid to throw out ignition suit that spurred recalls
  • Sanofi to pay MannKind as much as $925m for insulin
  • Amazon takes on Disney’s superheroes in online pricing fight
  • Lions Gate wins injunction over ‘Expendables 3’ Web downloads
  • Microsoft introduces Nokia 130 mobile phone at EU19
  • Putin praises alliance w/Exxon as Arctic drilling starts
  • LinkedIn sees marketing solutions as $1b business by 2017
  • Maliki deploys troops in Baghdad as govt talks fail
  • Israel, Palestinians observe new truce as longer accord sought
  • China monetary loosening tests effectiveness of credit



    • Dean Foods (DF) 8am, $(0.06)
    • Gogo (GOGO) 7:30am, $(0.23)
    • Hawaiian Electric (HE) 6am, $0.38
    • Opko Health (OPK) 9:02am, $(0.09)
    • Priceline (PCLN) 7am, $12.02 - Preview
    • Sysco (SYY) 8am, $0.50
    • Ventas (VTR) 7:37am, $0.45



    • Caesars Entertainment (CZR) 4:01pm, $(1.27)
    • Forest Oil (FST) 5:02pm, $(0.02)
    • Globalstar (GSAT) 4:05pm, $(0.04)
    • Halozyme Therapeutics (HALO) 4:15pm, $(0.16)
    • Inter Parfums (IPAR) 4:05pm, $0.22
    • Legacy Oil + Gas (LEG CN) Aft-Mkt, C$0.09
    • MannKind (MNKD) 4pm, $(0.11)
    • MasTec (MTZ) 4:58pm, $0.40
    • Mindray Medical Intl (MR) 5pm, $0.55
    • Nuance Communications (NUAN) 4:01pm, $0.27
    • ParkerVision (PRKR) 4:01pm, $(0.03)
    • PDL BioPharma (PDLI) 4:02pm, $0.52
    • Rackspace Hosting (RAX) 4:01pm, $0.16
    • Resolute Energy (REN) 5:51pm, $0.01
    • Towerstream (TWER) 4pm, $(0.10)



  • Brent Trades Near 9-Month Low After U.S. Iraq Strike; WTI Steady
  • Gold Falls in London as Investors Weigh Signs Tensions Easing
  • Wheat Bears Retreat as Black Sea Supply Risks Mount: Commodities
  • Hedge Funds Snub Natural-Gas Rally as Supply Gains Loom: Energy
  • Rubber in Tokyo Extends Drop on Concern Supply Outpacing Demand
  • Palm Oil Inventories Climb From One-Year Low as Output Increases
  • Nonghyup Feed Tenders to Buy as Much as 140,000 Tons of Corn
  • Aluminum Advances to Two-Week High as Stockpiles Shrink Further
  • U.S. Steel Rebound Undermined by China Exports: Chart of the Day
  • Australia Seeks Clarity on Goods Heading to Russia After Ban
  • U.S. Gasoline Declines to $3.5206 a Gallon in Lundberg Survey
  • California Drought Transforms Markets as Growers See Dry Future
  • JPMorgan Skeptical as CSN Pledge Spurs Bond Surge: Brazil Credit
  • Copper Good Buy on Limited Aluminum Substitution: Morgan Stanley


























The Hedgeye Macro Team
















August 11, 2014

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Commodities: Weekly Quant

Commodities: Weekly Quant - chart1 divergences


Commodities: Weekly Quant - chart 2 wow delta


Commodities: Weekly Quant - chart 3 USD correls


Commodities: Weekly Quant - chart 4 S P correls


Commodities: Weekly Quant - chart 5 volume metrics


Commodities: Weekly Quant - chart 6 implied vols


Commodities: Weekly Quant - chart 7 sentiment


Commodities: Weekly Quant - chart 8 1 mth correls


Commodities: Weekly Quant - chart 9 3 mth correls


Commodities: Weekly Quant - chart 10 6 mth correls


Commodities: Weekly Quant - chart 11 1 yr correls


Commodities: Weekly Quant - chart 12 3 yr correls


The Week Ahead

The Economic Data calendar for the week of the 11th of August through the 15th of August is full of critical releases and events.  Attached below is a snapshot of some of the headline numbers that we will be focused on.


The Week Ahead - 08.08.14 Week Ahead

Investing Ideas Newsletter

Takeaway: Current Investing Ideas: BOBE, GLD, HCA, HOLX, LM, OC, OZM, RH and TLT.

Below are Hedgeye analysts’ latest updates on our nine current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.


We also feature three recent institutional research notes that offer valuable insight into the markets and the global economy.


Investing Ideas Newsletter - ranges1

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less




BOBE: More of the same at Bob Evans Restaurants.  The company and activist Sandell Asset Management continue to trade blows through the likes of presentations and letters to shareholders.  While both sides have made credible points, we’d argue that Sandell has the upper hand.  The reality is, Bob Evans’ Board, as it stands, doesn’t appear open to any of the suggestions Sandell has made to improve shareholder value.  It is precisely this stubbornness, and inflexibility, that has led to the current disastrous state of the company. 


To be clear, Sandell’s “economic agenda” is not unsustainable, as there are vast operational improvements to be made.  In our view, the Board nominees put forth by the activist have more experience in the restaurant industry and are far better equipped to lead a turnaround at the company.  For this reason, among others, we’re willing to bet they successfully get majority control of the Board.  Bob Evans’ will hold its Annual General Meeting on August 20. 


GLD: After a pullback last week, we are sticking with Gold on the long-side. As of now it remains in a bullish @Hedgeye intermediate-term TREND with support at $1271. The long-term TAIL Line remains $1323. You guessed it. The narrative remains the same:


  1. Growth expectations slow
  2. US interest rates will fall
  3. Both Gold and Long-term Treasury Bonds will rise (holding the monetary policy of other reserve currencies constantà a very important factor to our gold thesis that we are watching intently right now).



Ten-year yields touched YTD lows Friday reflecting skepticism around a real recovery despite an initial +4.1% Q2 GDP bounce off the -2.1% Q1 print. After breaking @Hedgeye long-term TAIL support, there is no support for the ten-year yield to 1.70%. Our risk management signals suggest the momentum embedded in this trend makes further downside to 1.70% a more probable scenario than the consensus 3%+ expectation.


Although this narrative for the USD outlook works both for and against the price of gold under certain scenarios, we continue to believe real growth expectations in the U.S. for the second half of 2014 remain too high. Right now there are two big headwinds to our theme regardless of how domestic growth materializes:  


  1. The quant signals suggest upside for the dollar and downside for the Euro (Gold is bought with, and priced in dollars): The @Hedgeye quantitative breakout in the dollar to the upside coupled with an incrementally more dovish Draghi is a headwind for Gold. The Euro is at nine month lows currently after topping in March of this year. Also the USD is breaking out, European data is slowing, and a majority of European equity indices are breaking down.


  1. Weak Europe, Dovish Draghi: European economic data has slowed. This expectation from the market has been somewhat priced-in with expectations that some form of easing from the ECB is right around the corner. The outlook in the U.S. is more uncertain. If growth does miss in the U.S., the fed may get more dovish but so may the ECB. There were two comments in particular that caught our attention yesterday in Draghi’s address:   


  • Readiness to pull the trigger on an asset purchase program. Mario Draghi’s tone this week reflected his willingness to stand ready for an ABS purchase program. In fact, he more or less said that he would implement an asset-backed purchase program (QE without the government bond and public asset purchase program). Not a single economist surveyed by Bloomberg expected a change in interest rates from Draghi this week, but the Gold bounce this week suggests the market may have expected some kind of easing out of Draghi Thursday.
  • Allusion to divergent policies in the U.K. and U.S. moving forward: by more or less saying the ECB cannot be outdone with regards to implementing easy-money policy. We interpreted his comments as a confident gesture that the Euro will continue to weaken against the USD and Pound over the intermediate to long-term.  


HCA: HCA strength continues on the heels of an excellent quarter despite the recent market decline and increase in volatility.  HCA is up approximately +5% over the last two weeks versus the S&P 500 which has declined by approximately -3% as we write this note on Friday afternoon.  We continue to believe that stock has upside into $71-81 range as 2015 consensus estimates move higher and more in line with our model.


July results of our monthly Physician survey are in, and the results show that maternity trends appear to be in a sustainable recovery.  Over the last several months, both deliveries and pregnancies are accelerating among our surveyed physicians. Commercially insured, higher income, as well as Western states show the greatest improvement while low income and the Northeast remain weak.  The Current Population Survey (US Census) supports the survey work through data supplied through June with the next update arriving for July by the end of the month. 


Improving birth trends is a major tailwind for HCA.


Sustainable Recovery in Birth Trends

Investing Ideas Newsletter - hca




Our 3D Tomo Facility Tracker update shows that placements accelerated in July 2014 (35) versus a soft June (22).  Prior to seeing the July Tomo Facility count, we were having trouble modelling revenue much above the low end of Hologic’s F4Q14 guidance range of $ million using only data from the 10-Q and from the earnings call.  However, if July pace holds throughout the rest of the quarter, it will be a new placement record, providing adequate 3D system revenue to drive total revenue toward the high end of the guidance range, or better.


Hedgeye PAP Survey Results

Investing Ideas Newsletter - hols


Our monthly physician survey results indicate a pickup in Patient volume in July after a weak May-June period.  There appears to have been a spike among Medicaid practices during 1H14 associated with the rollout of the ACA.  At least through July, the upswing has abated somewhat.  Commercial volume is running flat after a very weak Q1 and subsequent rebound.  As it relates more specifically to HOLX, pap trends continued to improve in July.  The forecasted decline PAP volume to reach compliance slowed to a CAGR of -7.5% in July from -10.0% in June.


LM: We have no specific update this week on our long recommendation of Legg Mason stock. That said, the largely institutional fixed income manager is a defensive investment in the current volatile, geopolitical sensitive environment and shares should continue to be more steady than the rest of the asset management sector.


OC: This past Thursday we hosted our expert call with Bill Carlin. Bill spent decades in Owens Corning’s roofing division and now is an industry consultant. The pie chart below is from Bill’s presentation outlining the North American roofing market share by company. Here are a couple of quick takeaways from the call:


  • Volumes are hovering around historical lows in part due to lack of storm activity and a weak economic environment.
  • Owens Corning has an advantage in controlling its raw material costs. Due to the volatile nature of oil prices, asphalt prices are a significant focus for the roofing industry. Unlike the other competitors, Owens Corning has asphalt plants to buy asphalt volume in advance to help anticipate and control its asphalt costs.
  • The industry is intact and has seen the industry leader, GAF/ELK, announce a recent price increase for September. This suggests that a) there is no price war in the industry as the rest of companies will follow and increase prices in response and b) industry margins receive a tailwind from these price increases.


The bottom line is that the roofing industry is cyclically depressed mainly due to volumes versus a dynamic shift in the roofing industry, as we have noted in previous notes. We reiterate the best time to buy cyclicals is when they are depressed and sell when they are high and loved by consensus.

Investing Ideas Newsletter - Capture



OZM: Och Ziff Capital Management reported in line earnings this week producing $0.18 per share in distributable cash earnings (in line with the Street) and declaring a $0.17 per share dividend (they dividend out over 90% of their distributable cash flow). This distribution alone creates a dividend yield of 4.9% which is partly why we like OZM stock with a much higher yield relative to market averages.


In addition, if Och Ziff ends the year with any performance related gains on the $45.7 billion it manages for clients, 20% of those gains will source another earnings stream which could total up to $0.50 in distributable earnings per share, or another dividend distribution of over 4.0%.


Hence OZM shareholders have the opportunity to collect total annual dividends of up to 9.0% of the current stock price which also has the chance of appreciating with industry leading organic growth rate and very strong performance.


The Barclays Hedge Index is up just 0.60% year-to-date in 2014 versus OZM’s main Multi-Strat fund which is up over 2.0%, displaying the company’s ability to assist investors and shareholders with strong investment management performance.


RH: The prevailing viewpoint with RH is that the company is already in all of the markets it can possibly penetrate, but simply has an opportunity to build larger-format stores. We think that’s wrong. Our analysis suggests that there are 19 new markets in the US and Canada where RH can not only build stores, but build over half of them in the 50,000 square foot range (compared to 9,000 on average today). The bottom line – there’s more square footage growth opportunity here than most people think.

Investing Ideas Newsletter - rh


TLT: We added TLT (iShares 20+ Year Treasury Bond ETF) to our high conviction list earlier this week. In conjunction with Hedgeye’s overall #Q3Slowing theme, we think that the slope of domestic economic growth is set to roll over here in the third quarter.


In the context of what might be flat-to-decelerating reported inflation, we think the performance divergences between Treasuries, stocks and commodities may actually be set to widen over the next two to three months.


The view remains counter to consensus expectations, which is additive to our already high conviction in this position.


Click on each title below to unlock the content.


ICI Fund Flow Survey  

Our Financials team looks at the latest  trends in fund flows for both stocks and bonds.

Investing Ideas Newsletter - stock


Frothiness in the Semiconductor Sector

Hedgeye Technology sector head Craig Berger dives deep into stocks in the semiconductor sector.

 Investing Ideas Newsletter - semiconductors


Macau: Under the Hood

Our Gaming, Lodging and Leisure team tells us why the mass gaming business is pressuring casinos in Macau.

Investing Ideas Newsletter - macau



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