CHART OF THE DAY: Coffee Up Over 64% YTD

CHART OF THE DAY: Coffee Up Over 64% YTD - COD 08.20.14


In terms of asset price leadership this year, one of the more outstanding performers has been coffee, which is up more than 64% on the year-to-date.  Tomorrow, August 21st at 11am, our commodities macro analyst Ben Ryan is hosting a conference call on the outlook for coffee, which postulates, “Coffee Prices May Move Much Higher From Here” with expert Judith Ganes-Chase. 


The call is obviously relevant for a lot of different equities, including CAFE, JO, SBUX, DNKN, MCD, MDLZ, GMCR, THI.  


Contact to learn how to get access. 

Follow the Leaders

“Leadership is solving problems. The day soldiers stop bringing you their problems is the day you have stopped leading them.  They have either lost confidence you can help or concluded you do not care.  Either case is a failure of leadership.”

-Colin Powell


Compared to many of our Wall Street counterparts, Hedgeye is a relatively young and smallish firm.  We’ve been around just over six years, have right around 60 employees, and still have our growing pains at times.   If we’ve learned anything over those six plus years, it's this: leadership matters.


Leadership, of course, comes in many different stripes.  It can be the proverbial “foot soldier” owning his actions and going above and beyond the call of duty.  Or it can be top down leadership in which the “generals” enable the “soldiers” to do their job more effectively, through encouragement, teaching, and also making sure they are transparently held accountable to their goals and objectives.


Last week, we wrote about Kinder Morgan and even though we tend to disagree with the long term prospects for the company, we readily admitted that CEO Rich Kinder continues to show preeminent leadership in the realm of financial structuring. 


As stock market operators frequently evaluating companies, a key question we ask ourselves is: what makes a good leader?  In January 2004, internationally known psychologist  Daniel Goleman did a groundbreaking study of some 188 companies that quantified leadership success and concluded the following:


“When I analyzed all this data, I found dramatic results. To be sure, intellect was a driver of outstanding performance. Cognitive skills such as big-picture thinking and long-term vision were particularly important. But when I calculated the ratio of technical skills, IQ, and emotional intelligence as ingredients of excellent performance, emotional intelligence proved to be twice as important as the others for jobs at all levels.”


More than ten years later, Goleman’s findings apply now more than ever.


Follow the Leaders - DJ2


Back to the Global Macro Grind...


Across the global macro landscape this morning, we are witnessing all sorts of leadership.  Both perceived and actual.  


In the "actual leadership" category, European equities are leading and so are the central bankers in England.  The BOE released minutes from their most recent meeting and for the first time in more than three years, there were votes to increase interest rates.  Specifically, two policymakers voted to raise interest rates by 25 basis points.  Strong pound equals strong England.


In the "perceived leadership" category, we will have Fed minutes out today as well as a briefing from Jackson Hole. We’ve been decidedly contrarian in our view of bonds and rates this year. And we continue to believe that anything that comes out of Jackson will be incrementally dovish.   In our quantitative model, the ten year yield has immediate term downside risk to 2.34% in advance of Yellen "pushing out the dots" this week.


Finally, in the category of "lack of leadership," the Argentine Economic Minister Alex Kicillof will hold a press conference today after announcing a sovereign debt restructuring plan.  In conjunction with that, he will immediately submit a bill that will pay foreign currency bonds locally, lets overseas debt holders swap into new bonds, and create a separate account for holdouts.   So much for being pulled to par!


In terms of asset price leadership this year, one of the more outstanding performers has been coffee. It's up over 64% year-to-date.  Tomorrow, August 21st at 11am, our commodities macro analyst Ben Ryan will host a conference call on the outlook for coffee, which postulates, “Coffee Prices May Move Much Higher From Here.”


Joining Ben on the call will be Judith Ganes-Chase who has been following the coffee markets for more than twenty years.  They will be looking at such topics as tree scarcity, weather conditions, and scarcity of grades of coffee.  The call is also obviously relevant for a host of different equities, including CAFE, JO, SBUX, DNKN, MCD, MDLZ, GMCR, THI.  Hopefully you will grab a cup of Joe and join us for this call with this commodities leader.


In terms of leadership on Hedgeye's Best Ideas list, our savvy retail vet and Sector Head Brian McGough has had a good run with his long pick on Restoration Hardware (RH).  Given its lofty valuation, RH has become a true battle ground stock.  Since being added to the Best Ideas list just under a year ago, RH is up approximately 36%.  Over the last six months, the stock has mercy crushed the S&P 500 in terms of performance.


As always, though, the key is question is whether RH can continue to lead, or will the short sellers (almost 17% of the float is currently short) prevail.  If we are correct, the short sellers may be grossly underestimating the real estate opportunity.  As McGough wrote last week:


“We’ve spent a lot of time on the road discussing RH over the past three weeks, and most specifically, our recent 45-page deep dive on RH’s real estate. The punchline of our analysis is that a) RH stores could (and probably should) get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. This analysis supports our $11 earnings power in five years (double the consensus), as well as our view that that this stock is headed well above $200.”


As always, contact to learn how to get access to McGough’s deep dive.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.34-2.42%


RUT 1117-1167

DAX 8 

USD 81.33-81.97 

WTI Oil 94.56-96.91

Gold 1 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Follow the Leaders - COD 08.20.14

The Hedgeye Daily Outlook

TODAY’S S&P 500 SET-UP – August 20, 2014

As we look at today's setup for the S&P 500, the range is 35 points or 1.49% downside to 1952 and 0.27% upside to 1987.                                                                                                                             



The Hedgeye Daily Outlook - Chart 1 Macro risk ranges


The Hedgeye Daily Outlook - Chart 2 ETF Risk Ranges




The Hedgeye Daily Outlook - Chart 3 Equity Sentiment




  • YIELD CURVE: 1.97 from 1.97
  • VIX closed at 12.21 1 day percent change of -0.89%


MACRO DATA POINTS (Bloomberg Estimates):




• Argentina to pay foreign-currency bonds locally

• GE to invest $3.5b in aircraft engine operations: Nikkei

• Samsung developing smartphone chip to replace Qualcomm: Maeil

• Chinese hackers use Heartbleed to enter Community Health

• Apple rises to record amid optimism around new products

• Citigroup said to weigh sale of Japan consumer bank unit

• U.K. FCA seen unlikely to cap fund manager pay

• AT&T seeks to offer faster high-speed Internet vs Google

• Walgreens CFO pressured to exit after forecast error: WSJ

• Dodgers TV blackout fuels unease over Comcast-Time Warner

• Elon Musk’s SpaceX says not raising private capital

• Softbank’s Son says considering next move after T-Mobile

• Amazon may start drone delivery in India: Economic Times

• Petsmart exploring options including possible sale

• U.S. Coast Guard responds to Duke Energy diesel spill in Ohio





• 7am: MBA Mortgage Applications, Aug. 15 (prior -2.7%)

• 10:30am: DOE Energy Inventories

• 2pm: Fed releases July FOMC minutes




  • President Obama on vacation on Martha’s Vineyard
  • Senate, House out on August recess
  • 2pm: Brookings Institution discussion “Ukraine Crisis and Russia’s Place in the Intl Order”
  • U.S. ELECTION WRAP: Reid on Mont., S.D.; Alaska; Obamacare




• Lowe’s (LOW) 6am, $1.03 - Preview

• Staples (SPLS) 6am, $0.12

• GasLog (GLOG) 6:02am, $0.11

• JM Smucker (SJM) 7am, $1.37

• Madison Square Garden (MSG) 7:30am, $0.18

• Target (TGT) 7:30am, $0.78 - Preview

• American Eagle Outfitters (AEO) 8am, $0.00 - Preview

• Eaton Vance (EV) 8:45am, $0.62

• Raven Industries (RAVN) 9am, $0.26




• Hain Celestial (HAIN) 4pm, $0.89

• L Brands (LB) 4pm, $0.62 - Preview

• Hewlett-Packard (HPQ) 4:05pm, $0.89

• Synopsys (SNPS) 4:05pm, $0.60

• Semtech (SMTC) 4:30pm, $0.39




  • India Seen Passing China as World’s Biggest Cotton Producer
  • European Gas Reverses Biggest Drop Since 2009 on Ukraine: Energy
  • Putin Turns Poles Into Cider Lovers as Russia Food Ban Bites
  • 3-D Printed Jets and Bicycles Spur Demand for Metal: Commodities
  • Gold Little Changed Near 2-Week Low on Dollar as Platinum Falls
  • China Port Seen as Economic Barometer Set for Record Supply
  • Glencore Says Commodities Outlook from Copper to Zinc Improving
  • Zinc Paces Metals Advance as Glencore Cites Tightening Market
  • Cotton Crop in India Estimated at Near Record 39.6 Million Bales
  • Operations at Mongolia’s Tavan Tolgoi Mine Halted, Macmahon Says
  • Steel Rebar Falls to Record Low Before China PMI as Output Gains
  • Fortescue CEO Says Co. Expects Iron Ore Price to ’Drift Up’
  • Gabelli’s Bryan Tops Gold Funds as Miners Rally: Riskless Return
  • Russian Grain Trader Beating Cargill to Olam as Exports Surge

The Hedgeye Daily Outlook - Chart 4 Commodities



The Hedgeye Daily Outlook - Chart 5 Currencies




The Hedgeye Daily Outlook - Chart 6 Global Per. 1D

The Hedgeye Daily Outlook - Chart 7 Global Perf. 1Y




The Hedgeye Daily Outlook - chart 8 Europe




The Hedgeye Daily Outlook - chart 9 Asia




The Hedgeye Daily Outlook - chart 10 middle east


The Hedgeye Macro Team


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Takeaway: Purchase demand declined for a 3rd week, holding below the 170- level for a 6th consecutive wk – the longest such soft streak since Aug '95

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume


*Note - to maintain cross-metric comparability, the purchase applications index shown in the table below represents the monthly average as opposed to the most recent weekly data point


DEMAND DROUGHT HITS 6-WEEKS - Compendium 082014


Today's Focus: MBA Mortgage Applications

The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended August 15th.


The Composite index gained 1.4% WoW, buttressed fully by refi activity, which was higher by 2.7%, while Purchase activity declined -0.4%. 


  • Lower Lows: Purchase demand declined for a 3rd consecutive week, sliding -0.4% to 164.1 on the index, down from 164.8 last week.  This marks the 6th consecutive week below the 170-level on the index – out “soft-ing” the February, weather distortion lows and the longest such streak since August of 1995.  Purchase demand is currently running -5.7% QoQ  and tracking at its lowest level since 2Q95. 
  • Refi & Rates:  Refinance activity increased +2.7% WoW with rates on the 30Y FRM contract declining a notable -6bps in the latest week to 4.29%.  Rates currently sit just north of the lowest level since May of last year while Refi activity remains down -31% YoY and continues to improve as we traverse through the easiest 2013 comps. 


Cash sales remain elevated and the regulation-catalyzed shift in the origination channel may be a challenge to intertemporal reliability and dampening reported demand as measured by the MBA survey, but the broader takeaway remains unchanged:


Multi-decade lows in purchase demand (modestly distorted or not) is not the stuff accelerating housing recoveries are made of.   We remain inclined to maintain our bearish on the housing complex until the slope of HPI deceleration inflects.





DEMAND DROUGHT HITS 6-WEEKS - Purchase 4wk Rolling Ave


DEMAND DROUGHT HITS 6-WEEKS - Purchase LT w Summary Stats


DEMAND DROUGHT HITS 6-WEEKS - Composite LT w Summary Stats







About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 



The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.



Joshua Steiner, CFA


Christian B. Drake


Diffusive Thoughts

This note was originally published at 8am on August 06, 2014 for Hedgeye subscribers.

Opportunity is missed by most people because it is dressed in overalls and looks like work.

-Thomas Edison


I recently picked up a new book called, “A Mind for Numbers”.  The book is written by Dr. Barbara Oakley, a professor of engineering at Oakland University, who, like many people, struggled with math and sciences while in high school.  Unlike most people with these struggles, she went on to become a very prominent professor in a very math oriented field.


The essence of the book is really about how to make a break through while studying any subject.  In doing so, the book proposes on relying on the two modes that our brains naturally work in: focused and diffused.  In focused thinking your brain logically works through problems in a careful and attentive manner. Meanwhile, diffused thinking occurs more in the background, your brain processes while you are doing other things like jogging, driving, playing sports, and so on.


Some of the most productive thinkers of our time actually systematically shifted theirs brains between the two modes.  In particular, Thomas Edison had a unique trick for shifting how his brain was operating.  Edison was known for his focus and work ethic, but he would also often take “cat naps” during the day.


During these small naps while sitting in a chair in his laboratory, Edison would hold a steel ball in his hands. As he would nod off into a deeper and deeper sleep, Edison would drop the ball and it would fall to the floor and naturally wake him. Thus Edison was able to switch into diffusive thinking, without getting into a much deeper sleep that would potentially make him groggy and slow his efforts.

Now for many of us stock market operators, a mid-day nap on the trading floor is probably not practical, but as Oakley writes in her book:


“The key is to do something else until your brain is consciously free of any thought of the problem.”


In effect, you need to distract your brain, so you can shift into diffusive thinking, so that the big picture part of your brain can kick into gear and help you solve the problem at hand. 


Diffusive Thoughts - EL chart 2


Back to the Global Macro Grind . . .


Like many of you, we tend to get in early and grind away at Hedgeye, but lately we have also been doing some diffusive thinking. On this front yesterday, my colleague Darius Dale prepared a 50 page presentation yesterday (after some long walks around our office park) that is titled, “Are You Prepared for Quad #4?”


As most of you know already, we look at economies based on our propriety GIP model (growth, inflation and policy).  In our view, as supported by historical studies, asset price returns are driven by shifts in growth, inflation and policy within an economy.  In the Chart of the Day, we highlight this graphically with a definition of the four quadrants.  Quad 4 occurs when growth slows and inflation decelerates, which typically elicits a dovish policy response.


If you’d like to see the full length presentation, please email your institutional sales contact or simply email  Also CLICK HERE for a short video that Darius did on HedgeyeTV going through the key points.

A key catalyst for a shift in our thinking, aside from long walks or baths, has been the break out in the U.S. dollar. As Darius notes in the presentation, the investment conclusions from a shift into Q4 for the domestic economy are as follows:

  • Bonds over stocks;
  • Defensive equities over cyclical equities;
  • Late cycle investments over early cycle investments;
  • Buy U.S. dollar and short commodities.

As it relates to translating this directly into what we would recommend selling and owning under this scenario, we’d focus on the following:

  • Long – Long term treasuries (TLT), Muni Bonds (MUB), Healthcare (XLV), and Old China (FXI)
  • Shorts (or Underweights / Sells) – Russell 2000 (IWM), High-yield credit (JNK), Homebuilders (ITB), Regional Banks (KRE), Retailers (XRT), and Eurozone (EZU)

On the last point of selling the Eurozone, over the last month European equities have been getting crushed.  Every major European equity index is down over the last month ranging from the U.K. down -4% to Russia down -14%.  Germany is also clearly in the midst of a World Cup hangover as German benchmark equities are down -9.5% and now down over 5% for 2014.


Speaking of Germany, German factory orders were an unmitigated disaster for June.  Consensus expectations were for an increase of 0.9% from May and the actual number came in at -3.2%.  On a year-over-year basis, the numbers were just as abysmal as factory orders that declined -2.4%.  This marked the largest decline since September 2011.  For those long of Germany, hopefully Oktoberfest is a positive catalyst!


Switching gears for a second, our Restaurant and Consumer Staples Sector Head Howard Penney has had a very successful alpha generating year within the restaurant sector and after rolling up his sleeves, focusing, and then taking a break (yoga?) to diffuse the thoughts, he has a healthy pipeline of Best Ideas in the Consumer Staples Sector.


The next idea he is rolling out will be a short call on Hain Celestial Group (HAIN).  We added the idea to our Best Ideas list as a short on Monday and the deep dive call on the name will occur on Thursday August 14th at 1pm eastern.  If you’d like the materials for the call, please email sales at Hedgeye (this call won’t be pro bono though, alpha doesn’t come cheap!).


Keep your head up and stick on the ice,

Daryl G. Jones

Director of Research


Diffusive Thoughts - Chart of the Day

August 20, 2014

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