Fleeting Emotions

This note was originally published at 8am on July 30, 2014 for Hedgeye subscribers.

“Fleeting emotions tempt us to make decisions that are bad in the long term.”

-Chip & Dan Heath


That’s another important quote from the recent #behavioral book I finished this week – Decisive, by Chip & Dan Heath.


How do you overcome your short-term emotions in markets? Does loss aversion drive your decision making? How does mere exposure to something going against you affect your #process?


The Heath boys suggest that “our decisions are often altered by two subtle short-term emotions: 1. Exposure to what’s familiar to us; and 2. Loss aversion.” (pg 174) Both 1 and 2 sound like a market’s last price to me.


Fleeting Emotions - 4v


Back to the Global Macro Grind


Real-time prices are very familiar to us. Unless you’re someone who doesn’t do #timestamps (in Independent Research terms) or have a buy-side P&L, so is loss aversion. Which brings me to the one major macro position that is currently going against me – the US Dollar.


If you pull up a 2 year chart of the US Dollar Index, you’ll note that:


  1. It made a long-term higher-low in Q4 of 2012 around $79 when we made the US #GrowthAccelerating call
  2. It made a #GrowthAccelerating cycle peak around $85 in Q3 of 2013 (Q313 GDP = +4.1%)
  3. As #GrowthSlowing took hold from Q413 to Q214, it retraced all of those gains back to $79 and change


If you only look at a 6-7 month (YTD) chart of the US Dollar Index:


  1. It dropped from $81.5 in January back down to $79.5 in May
  2. Then it bounced hard off that May low when Draghi devalued the EUR/USD
  3. And now it’s right back to where it was in January


In other words it really hasn’t done anything. That said, it could go up or down a lot from here. If it continues to track both Fed Policy and the rate of change (slope of the line) in US Growth, there’s no reason why it can’t go straight back down to $79.5.


But what if US growth continues to slow, the Fed gets incrementally dovish, and Draghi gets even more dovish? Unfortunately, God didn’t call me this morning with that answer – so I don’t know.


Rather than be wed to any particular macro theme, I’ll let Mr. Macro Market give me hints as to what I should do next. If the Fed does what consensus has been looking for all yr (continues to taper/tighten), and USD heads higher, that would be bearish for Commodities (and bullish for the US consumer). Everyone in America (other than the guys running #YieldChasing MLP schemes) should want that.


In other news that is un-related to my current macro mistake:


  1. Industrial Stocks (XLI) were -1.3% yesterday (-2.2% for July) and are now signaling bearish TREND @Hedgeye
  2. Equity Volatility (VIX) was up again yesterday to 13.28 (+19% since 1st wk of July) = bullish TREND @Hedgeye
  3. Both the Russell 2000 and UST 10yr Bond Yield continue to signal bearish TRADE and TREND @Hedgeye


What’s most interesting to me about the Industrials (XLI) joining the US Consumer and Housing stocks (XLY and ITB are down 2014 YTD too) is that some of them are classic early-cycle indicators.


“So,” setting aside my own personal US Dollar baggage, what if the bigger picture here is that the entire US economy is heading into an early cycle recession? Wouldn’t that be just peachy?


Don’t forget that we are 62 months into a US economic “expansion.” Both that and the SP500 not having had a 10% correction in 33 months (hasn’t happened since 1990) might just be a tad longer in the tooth than a 2-3 month US Dollar dead cat bounce.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.44-2.54%

SPX 1960-1978

RUT 1131-1154

VIX 11.94-14.41

USD 80.61-81.39

EUR/USD 1.33-1.35

Gold 1292-1321


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fleeting Emotions - Chart of the Day


Client Talking Points


We learn a lot more from bounces within bearish TRENDs @Hedgeye than from the selloffs. The weakest (Portugal and Greece) are leading today’s bounce +1.1-1.2%, but are well below every line of resistance that matters.


Interesting breakdown in Copper given that Chinese and Hong Kong listed stocks acted well on the Chinese data (Hang Seng up another +0.8% to +10.1% year-to-date). The TREND line for Copper is $3.15, and we’re looking at $3.12 last after lots of shorts covered (there’s a net long position now of 7,439 CFTC futures/options contracts vs the 6 month average net short position of -10,000 contracts.


The UST 10YR bounced to 2.47% - hooray – now you can buy more long term Treasuries as the risk range continues to signal a series of lower-highs and lower-lows (for yields) for the best looking bullish TREND @Hedgeye (long the Long Bond).

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.


Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.

Three for the Road


RUSSIA: +0.9% on the bounce (+4.5% from the AUG low), but still bearish TREND -13.2% YTD




Life has many ways of testing a person’s will, either by having nothing happen at all or by having everything happen all at once.

-Paulo Coelho


People in Germany work just under 1,400 hours a year, compared with nearly 1,800 in the U.S.

CHART OF THE DAY: Take the Fed's Growth Forecasts At Your Own Risk

Takeaway: “Year after year we have had to explain why the global growth rate has been lower than predicted.” -Fed vice chairman Stanley Fischer

CHART OF THE DAY: Take the Fed's Growth Forecasts At Your Own Risk - Chart of the Day

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Sympathizing With Q3 Slowing

“Year after year we have had to explain why the global growth rate has been lower than predicted.”

-Stanley Fischer


That’s a quote from earlier this week where the new vice chair of the un-elected-central-economic-planning-committee (Federal Reserve), Stanley Fischer, was way too honest about the Fed’s growth forecasting track record.


Since I was seeing Institutional investors in Boston for the last few days, I kept suggesting  that there was no irony in Fischer’s timing – with Q3 GDP Slowing in the USA, the Fed is getting ready to get more dovish.


Janet Yellen followed Fischer’s lead (Reuters article yesterday) saying that she is “resolved to not raising rates too soon.” That’s code for push out the dots (Hatzius). As an early-cycle slowdown manifests in the US, you’ll be looking at 2016 (or beyond) for a rate hike.


Sympathizing With Q3 Slowing - Yellen bubbles 07.29.2014


Back to the Global Macro Grind


Here’s an abbreviated summary of investor Q&A that the big man, Darius Dale, and I answered in Beantown for the last two days:


Q: If the rate of change in real US economic growth continues to slow, what are the odds of Yellen’s Fed getting more hawkish than the Bernanke Fed was forced to become in the face of 2013’s US #GrowthAccelerating?


A: low


If they did, wouldn’t that be interesting! There was this non-linear strategist by the name of Volcker who did that. Janet won’t.


Q: if the Fed eases (if only rhetorically), do you buy or sell long-term Treasuries?


A: buy


But, but, ‘I can’t buy the long bond (like I did during 2011 #GrowthSlowing when the 10yr went to 1.7% because it’s expensive…’ Right, right. And, as an alternative to “expensive” safety, the Russell is “cheap”…


Q: If the US goes into a recession, do you buy the Russell 2000 here?


A: no


After over 5 years (62 months) of US economic expansion, it’s pretty clear to us that Consensus Macro isn’t anywhere in the area code of being set up for an early cycle US consumer recession. The main reason for that, of course, is that after they missed calling the 2007 top and 2008 decline, most of consensus didn’t come out from under the Old Walls and realize the US was in an expansion until 2013!


Q: How dare gravity (the cycle) surprise both backward-looking-linear-economists who are looking for 3% GDP growth (every quarter for the next 6 quarters) and consensus all at the same time?


A: At first, slowly – then all at once


With bond yields at the long end of the curve falling, US Housing stocks (ITB) leading yesterday’s losers (-0.9% on the day to -9.5% YTD), and the Russell 2000 failing @Hedgeye intermediate-term TREND line of resistance again (-0.8% to -2.7% YTD), this early-cycle slowdown is starting to look, well, like a classic economic cycle.


Q: When does Consensus Macro fold on growth expectations?


A: By year-end


The real smart money (the macro money that’s actually been making money) gets that economic cycles are always testing us to hear Mr. Macro Market’s message – and, as Ray Dalio would say, they are not that sympathetic.


This morning I’ve outlined our immediate-term TRADE risk ranges with @Hedgeye’s proprietary intermediate-term TREND signal in brackets (you can get all 12 relevant macro ranges in this format in our popular Daily Trading Ranges product):


UST 10yr Yield 2.39-2.48% (bearish)

SPX 1 (bearish)

RUT 1107-1148 (bearish)

DAX 8 (bearish)

VIX 13.82-18.18 (bullish)

USD 81.17-81.66 (neutral)

EUR/USD 1.33-1.34 (bearish)

Pound 1.67-1.69 (bullish)

Brent Oil 102.32-104.95 (bearish)

Natural Gas 3.74-4.03 (bearish)

Gold 1 (bullish)

Copper 3.12-3.20 (neutral)


Best of luck out there today,


Keith R. McCullough
Chief Executive Officer


Sympathizing With Q3 Slowing - Chart of the Day


TODAY’S S&P 500 SET-UP – August 13, 2014

As we look at today's setup for the S&P 500, the range is 57 points or 2.31% downside to 1889 and 0.63% upside to 1946.                                                    













  • YIELD CURVE: 2.03 from 2.02
  • VIX closed at 14.13 1 day percent change of -0.70%


MACRO DATA POINTS (Bloomberg Estimates):

  • 5:30am: Bank of England’s Carney presents inflation report
  • 7am: MBA Mortgage Applications, Aug. 8 (prior 1.6%)
  • 8:30am: Retail Sales Advance m/m, July, est. 0.2% (prior 0.2%)
  • 9:05am: Fed’s Dudley speaks in New York
  • 9:20am: Fed’s Rosengren speaks in New York
  • 10am: Business Inventories, June, est. 0.4% (prior 0.5%)



  • House/Senate on Aug. Recess; President Obama on Martha’s Vineyard
  • 10am: National Business Group on Health briefing on large employers 2015 health plan design changes
  • 11:30am: Bloomberg Intelligence holds webinar on corporate inversions, Washington backlash
  • U.S. ELECTION WRAP: Ad Wars; Game Changers in Mich., Alaska



  • Yahoo ordered to face user privacy claims over scanned e-mail
  • Cisco CEO pressured by Verizon, Goldman to adopt software
  • Amazon prices seen holding regulators at bay in Hachette spat
  • Amazon to challenge Square w/credit-card reader, mobile app
  • Alibaba said to target IPO roadshow starting Sept. 3 in Asia
  • Alibaba sells loan unit to Alipay parent in pre-IPO shuffle
  • WellPoint to change name to Anthem as consumer mkting rises
  • Ocwen, Altisource, HLSS put on review for downgrade at Moody’s
  • Consumer activists put pressure on retailers to drop Triclosan
  • Indiana suit challenging Obamacare tax-credit rule goes ahead
  • Cotton extending rout as inventories climb most since 1986
  • Former U.S. attorney to monitor Toyota’s safety practices
  • China credit gauge plunges as industrial-output growth slows
  • U.K. wages post first drop since 2009 as jobless rate falls
  • Iran joins U.S. in backing replacement for Iraq’s Maliki
  • Russia convoy nears border as Ukraine, Red Cross set demands
  • Israel primes for more Gaza fighting as cease-fire winds down



  • Bankers Petroleum (BNK CN) 7am $0.10
  • CAE (CAE CN) 8:44am, C$0.18
  • Canadian Solar (CSIQ) 6am, $0.58
  • Crescent Point Energy (CPG CN) 8am C$0.38
  • Deere & Co (DE) 7am, $2.20 - Preview
  • EZchip Semiconductor (EZCH) 8am $0.34
  • First Majestic Silver (FR CN) 7am, $0.06
  • InterOil (IOC) 6am, $0.11
  • Macy’s (M) 8am, $0.86 - Preview
  • Metro (MRU CN) 7am, C$1.64
  • Onex (OCX CN) 7am $0.94
  • Pinnacle Foods (PF) 8:15am, $0.33
  • SeaWorld Entertainment (SEAS) Bef-mkt, $0.58



  • Aegean Marine Petroleum (ANW) 4:15pm $0.20
  • Aimia (AIM CN) 6:28pm C$0.25
  • Aspen Technology (AZPN) 4:10pm $0.21
  • Cisco Systems (CSCO) 4:05pm $0.53 - Preview
  • Energy XXI Bermuda (EXXI) 4:15pm $0.24
  • Iamgold (IMG CN) 5:04pm $0.03
  • NetApp (NTAP) 4:01pm, $0.57
  • NetEase (NTES) 5pm $1.46
  • Real Goods Solar (RGSE) 4:05pm, ($0.10)
  • Silver Wheaton (SLW CN) 5:06pm $0.20
  • Vipshop Holdings (VIPS) 4:01pm, $0.63
  • WuXi PharmaTech Cayman (WX) 4:30pm $0.47



  • World Awash in Oil Shields Markets From 2008 Price Shock: Energy
  • Indonesia to Retain Ore Export Ban Amid $18 Billion Investment
  • Sumitomo Joins Goldman Seeing Aluminum Market Swing Into Deficit
  • Blue $25.6 Million Diamond Hints at Earth’s Origins: Commodities
  • EU Milk Producers Squeezed as Russian Cheese Ban Cuts Top Market
  • Brent Falls to 13-Month Low Amid Signs China Slowing; WTI Steady
  • Copper at Six-Week Low as Metals Slide on China Growth Concern
  • Kazakhs to Hoard Food as Putin’s Sanctions Rattle Trade Alliance
  • China’s Henan Said to Ask Banks to Support Coal, Solar Companies
  • Sugar Rises in London on Brazil Harvest Concern; Coffee Gains
  • LNG Spot Price in NE Asia Rises on Australia Tender Award: WGI
  • Gold Imports by India Seen Dropping 15% as Rajan Protects Rupee
  • Gold Is Little Changed Below 3-Week High on U.S. to Ukraine
  • Europe’s Green Energy Rules Cost U.K. $156 Billion, Group Says


























The Hedgeye Macro Team
















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