Long-Wave Rope

This note was originally published at 8am on August 05, 2014 for Hedgeye subscribers.

“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:


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%

SPX 1916-1960

RUT 1109-1139

VIX 13.84-17.82

Pound 1.68-1.70

Gold 1281-1303


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



Keith R. McCullough
Chief Executive Officer


Long-Wave Rope - Chart of the Day

Italy, Commodities and the Russell 2000

Client Talking Points


The first major European Equity market to snap my 21,311 (MIB Index) TREND line in June is the first to roll over at lower-highs this morning – in Real-Time Alerts I haven’t signaled re-short Italy, France, and Portugal (yet) but if they fail here, that call is coming.


Best consumption news of the last month is deflating what was our #InflationAccelerating call from JAN-JUN; CRB Index is now only +3% YTD and bearish TREND (295 resistance); only commodity I like long side right here is Gold w/ upside to $1321 resistance

Russell 2000

It’s now only -0.5% YTD so everything is fixed, right? Sell it. Consensus hedge funds shorting the lows and covering the highs is providing for quite the year of fading beta. Sell the high end of my risk range and cover the low (1115-1161); stay with the process 

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.


The level of activism in the restaurant industry has never been more rampant.  In the past year alone, we’ve seen CBRL, DAVE, DRI, BJRI and BOBE attract largely uninvited attention from these investors. BOBE has a long history of mismanagement, evidenced by flawed strategic rationale, an excessively bloated cost structure and severe underperformance relative to peers.  Fortunately, its poor operating performance presents a tremendous opportunity. We believe activist investor Sandell has identified significant, largely feasible, opportunities to enhance shareholder value.  Particularly, we see tremendous upside value in selling the foods business, transitioning to an asset light model and refocusing capital allocation.



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


“ASIA: another strong session for stocks - China and India remain two that we like, long side” -- @KeithMcCullough


Success is liking yourself, liking what you do, and liking how you do it. -- Maya Angelou


65, The number of yards Cleveland Browns’ quarterback Johnny Manziel threw for in last night’s highly anticipated preseason NFL game against the Washington Redskins.

August 19, 2014

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Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

CHART OF THE DAY: Painful Market Moves Happen Hombre $DJIA

CHART OF THE DAY: Painful Market Moves Happen Hombre $DJIA - Chart of the Day


Q: How many US equity only PMs live in fear of missing the last 3% of a 5 year rally in the US stock market? A: lots

Panic! Market Up

“Panic! Dow Plunges Through Floor”



The 1980s were awesome. From big hair bands to Boesky getting bagged, there was a lot going on. A straight up stock market went straight down. The Dow dropped -22.61% in a day (October 19th, 1987)… but, if you ask the perma bulls, “the market was flat that year.”


It’s already August and the Russell 2000 is still trying to get back to flat for the year. With the 10yr Bond Yield having crashed alongside fanciful 1980s like +3-4% US GDP growth expectations, in Greenwich meetings yesterday I was told that GDP “doesn’t matter anymore anyway.”


Yep. This time is different. Roger that.


Panic! Market Up - Black Monday the Stock Market Crash of 1987 NYT


Back to the Global Macro Grind


The rate of change in US economic growth may not matter to long-short stock pickers, but it matters, big time, to both the bond market and the sector asset allocations that are driving performance in the US stock market. As growth slows, big-cap-slow-growth #YieldChasing stocks & sectors outperform.


They didn’t yesterday though. My Connecticut investor meetings were great, but my recommended positioning sucked:


  1. Housing (ITB) led gainers at +2% on the day
  2. Regional Banks (KRE) were right behind the builders at +1.7%


The only thing that has sucked more than having that short position yesterday, has been having it as a long position all year.


BREAKING:Wall St Rallies on M&A Blitz and Home Builder Data” –Yahoo


Yahoooo! Everyone is going to buy everyone as US growth slows. Why not? And I’m not being sarcastic about that either. That said, there’s also a greater chance of Big Alberta Cows jumping over the moon than the US economy accelerating as US Housing and consumption slows.


Another US equity only manager told me yesterday that if I was right on #Q3Slowing (and that Janet Yellen gets more dovish, in kind), that “oh, the stock market is going to go higher on that.”


In other words:


  1. If growth accelerates, as Consensus Macro has been calling for since January, stocks are going to rip
  2. If growth slows, stocks are going to rip too




It’s a good thing everyone is going to be a winner under any scenario with Global Macro volatility (across Equities, Currencies,  Commodities, and Fixed income – ping for our Q3 Macro Theme of #VolatilityAsymmetry) at all-time lows.


That hasn’t happened before, but neither did 1987.


Q: How many US equity only PMs live in fear of missing the last 3% of a 5 year rally in the US stock market? A: lots


Or at least a lot more than there are PMs, strategists, and (god forbid) economists, who are in print like this Canadian mutt writing about the US economic cycle similarities between Q3 of 2007 and 2014.


Enough of the ranting – here are some #timestamped short ideas for this morning’s “futures are up” to sell into:


  1. Russell 20000 (IWM)
  2. Housing (ITB)
  3. Toll Brothers (TOL)
  4. Target (TGT)
  5. Brinker (EAT)


Yep. On the no-volume bounce (Total US Equity Market Volume was -15% and -39% vs. its 3 month and YTD averages yesterday), I’m going right back to the wood (i.e. the SELL calls that worked for me in both 2007 and 2014). They are early-cycle slowdown housing and consumption shorts.


And no, I don’t think that what’s going on in Ferguson, Missouri right now is a bullish catalyst for the 80% of this country being smoked by the all-time highs in Fed-inflated cost of living. Neither would I be surprised if the US stock market had a 3-6% down day in the next 3 months. Then you’ll see panic.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.34-2.42


RUT 1115-1161

MIB Index 186

VIX 11.14-17.29

USD 81.31-81.72

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Panic! Market Up - Chart of the Day


Galaxy in line with Street and us for Q2. More chatter regarding higher rebates in the QA and while Galaxy wouldn't deny it is happening in the market, they are not participating.




  • Headwinds: soft landing in China, World Cup and poor VIP luck negatively impacted results by HKD225 million
  • Pursuing opportunities beyond Macau
  • Additional special dividend in October 2014 of HKD0.45/share 
  • GGR +16% YoY, market leading VIP +15% revenue growth, hold 2.9%, bad luck HKD225 million
  • Mass +16% YoY
  • Management is focused on balancing margin against achieving the highest possible absolute HKD EBITDA
  • Manage table mix every day

Galaxy Macau

  • EBITDA up due to VIP strength, VIP +40%, hold 3.16%; lower VIP hold given historical property performance had a HK$75m impact on EBITDA
  • Mass +19% despite table shift to VIP
  • Hotel occupancy 98% 
  • 31% US GAAP margin
  • Opened two new VIP rooms in April, will add 2 VIP rooms in October 


  • 5% decrease QoQ due to worst VIP luck in company history
  • VIP revenues -11%, hold 2.53%, if hold adjusted at 2.98% then +HKD150 million higher EBITDA
  • Mass +28% 
  • Hotel occupancy 98%
  • EBTIDA margin 24% US GAAP 
  • Will relaunch new VIP room before year end


  • Cotai Phase 2: on budget and timeline mid 2015
  • CapEx spend HKD7.3 billion of total plan HKD19 billion, spent HKD1.4b in Q2
  • P3 and P4 finalized in late 2014 will double space
  • Grand Waldo: moving forward plans in Q4 2014 and relaunch in 2015
  • Henquin still working on plans, will support Macau and Cotai plans
  • Pursuing opportunities across Asia, respectful of cultures
  • Balance sheet end of Q2: Cash 14.4 billion; Debt 348m



  • VIP Market today, real time - turning around?  Feel growth of VIP business was as expected for GEG, remain confident VIP market will continue to grow at high single digit rate.
  • HKD125 million tax expense was dividend related. Is also a four-year prepayment, will be HKD120-130 million and accrue over four years
  • Accrual for employee bonuses - paid normal wage increases, plus incremental one month, plus share award for staying over three years, then receive three months salary in stock = +/- 10% to 15% of base wage increase.  But cash and non-cash component so 100-150bps impact to margin.  Approx HKD700 million impact per year, so about HKD150 million per quarter, no catch up.
  • Charitable Foundation accounting - HKD 300 million commitment this year and add'l 100m in subsequent years.  Cash would be a charge to P&L.
  • Margins increase due to optimization of segments on the floor
  • VIP business - look to grow with high quality partners; will add before year end
  • Starworld - current reposition of VIP room and new restaurant will be completed before year end 2014. 
  • Grand Waldo relaunch will include gaming tables and will target mass market.  Plans will be presented in Q4, will be a unique offering and very exciting.
  • Operators increasing rebate in premium mass? - Galaxy not involved in driving incentive, rebates or other programs which reduce margin.
  • Smoking ban changes - rules debuted on October 6 and expect their properties will be fully compliant with smoking rooms on mass floors as well as smoking areas in private areas.   Expect marginal impact and not long lasting negative impact.
  • Phase 2 headcount - will need 7,000 to 8,000 additional people. 
  • Mass Market trends - saw a pick up following World Cup, but still seeing a negative economic impact to growth, optimistic for October Golden Week. 

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