Chance of a Crash?

This note was originally published at 8am on August 07, 2014 for Hedgeye subscribers.

“We are taking a greater chance of having another crash at a time when the world is less capable of bearing the cost.”

-Raghuram Rajan


Crash? Yep. My man Dr. Raj doesn’t consider it improbable. Do you? The aforementioned quote comes from an interview the former Chief Economist of the IMF (2003-2006) and now Governor of the Reserve Bank of India just gave to the Central Banking Journal.


“Investors are counting on easy money – they put the trades on even though they know what will happen as everyone attempts to exit positions at the same time… there will be major market volatility if that occurs.”


I can assure you that “everyone” has not attempted to get out of the US stock market, yet. Just think, all we needed was a 2% down day (and a -3.5% correction from the all-time bubble highs), and volatility (VIX) ripped +65%! That’s called some wicked asymmetry.


Chance of a Crash? - EL chart 2


Back to the Global Macro Grind


I have no love lost for those who think that they can centrally plan things like gravity, economic cycles, etc. But if I had to pick one modern central planner to help me run money, it would be Dr. Raj. When it comes to real-time interconnected market risk, sorry Janet, but you wouldn’t make it past the first interview at a performance based fund.


Not only did Rajan tell linear-economist Larry Summers to go flower himself circa 2006 (Summers called Rajan’s views of market risks “misguided”), but he’s taken India on a path that American, European, and Japanese bureaucrats seemingly do not have the spine to traverse – that of raising interest rates in order to tone down the real cost of living (inflation).


India’s stock market (one of our favorite long ideas in 2014 – the Wisdom Tree India Earnings Fund (EPI) in Real-Time Alerts) not only took the rate hikes and inflation fighting policy from Dr. Raj in stride, they celebrated them. India’s BSE Sensex is up another +0.4% this morning to +23.2% for the YTD as these wacky things called investment and capex cycle expectations in India take hold.


Raising rates?


Sadly, if we’re right on both US Housing and GDP continuing to slow here in Q3, there isn’t a chance on this side of central planning hell that Janet Yellen is going to raise interest rates in the 1st half of 2015.


Being the bear on both US growth and rates this year, I get a lot of questions on Fed timing. I spent all of yesterday seeing Institutional Investors in NYC (8 meetings) and by the end of the day I came to the realization that the biggest risks to our current views are:


  1. We aren’t bearish enough on US growth
  2. We aren’t bullish enough on long-term Treasuries


Sounds a little crashy, but just fyi, markets do crash after making all-time bubble highs on no-volume.


Again, what I just wrote is that the risk to our current view is that we’re not bearish enough on the US stock market. Since we don’t do the “year-end bonus-target” thing for stock and bond market levels, here’s that current view:


  1. US Treasury 10yr Yield tests 2.21-2.41%
  2. SP500 corrects towards 1829


Yeah, on that 2.41% level for the 10yr, I know. What a leap that forecast is with the 10yr at 2.45% this morning! As my friends from Thunder Bay would say though, “the thing of it is” we’ve been looking for 2.41% since the 10yr was at 3%.


On the SP500 though, my current views are finally shifting to the bear side.


As most of you who have been following my team and my levels know, I have been more focused on having you sell the Russell 2000 than the SP500 YTD, primarily because the SP500 has many more slow-growth #YieldChasing components that I like(d).


Provided that the SP500 remains bearish on my intermediate-term TREND signal (1930 resistance), I see my long-term TAIL risk line of 1829 support as probable. What does probable mean in risk management speak? Well, it doesn’t mean improbable.


Other than a certified train wreck for whoever bought SPX 1987, what would 1829 look like?


  1. A -4.7% correction from yesterday’s closing price of 1920
  2. A -8% correction from the all-time high (1987) – the Russell 2000 has corrected -7% since July 7th


Oh, and about 1987… if you want to go all crashy in your investment meeting today, how ominous of a date/level is that?


If I am right in that I am not bearish enough on the SP500 (yet), and my long-term TAIL risk line of 1829 snaps. Oh snap, they will. That’s the point about my definition of TAIL risk – once it’s on, the only support strategy (level) I’ll be recommending is prayer.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.43-2.53%

SPX 1899-1929

RUT 1107-1131

India’s BSE Sensex 25236-26311

VIX 14.92-18.59

Gold 1281-1314


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Chance of a Crash? - Chart of the Day

August 21, 2014

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The Hedgeye Daily Outlook

TODAY’S S&P 500 SET-UP – August 21, 2014

As we look at today's setup for the S&P 500, the range is 39 points or 1.59% downside to 1955 and 0.38% upside to 1994.                              




The Hedgeye Daily Outlook - 1


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  • YIELD CURVE: 1.97 from 1.96
  • VIX closed at 11.78 1 day percent change of -3.52%


MACRO DATA POINTS (Bloomberg Estimates):          

  • Kansas City Fed symposium at Jackson Hole, Wyo. (runs through Aug. 23)
  • 8:30am: Initial Jobless Claims, Aug. 16, est. 303k (prior 311k)
  • Continuing Claims, Aug. 9, est. 2.520m (prior 2.544m)
  • 9:45am: Markit U.S. Manufacturing PMI, Aug. preliminary, est. 55.7 (prior 55.8)
  • 9:45am: Bloomberg Consumer Comfort, Aug. 17 (prior 36.8)
  • 10am: Philadelphia Fed Business Outlook, Aug., est. 19.7 (prior 23.9)
  • 10am: Existing Home Sales, July, est. 5.02m (prior 5.04m)
  • 10am: Index of Leading Economic Indicators, July, est. 0.6% (prior 0.3%)
  • 11am: U.S. to announce plans for auction of 3M/6M bills, 2Y/5Y/7Y notes, 2Y FRN
  • 1pm: U.S. to sell $16b 5Y TIPS in reopening



    • President Obama on vacation on Martha’s Vineyard
    • Senate, House out on August recess
    • 8:30am: FedScoop holds summit on lowering cost of govt with IT, with CIOs, CTOs from federal agencies panelists
    • U.S. ELECTION WRAP: McConnell’s Senate Plan; Ads Hit Sullivan               



  • Countrywide co-founder Mozilo said to face subprime lawsuit
  • BofAML mortgage settlement with U.S. may come today
  • BofAML said to plan salary increase for junior bankers
  • JPMorgan said to consider raising some staff salaries >20%
  • Citigroup said to consider ~20% raise for junior bankers
  • Wal-Mart to lower prices for iPhone 5c, 5s: L.A. Times
  • Dollar General says it was misled during Family Dollar talks
  • Northrup, BAE, GD among 5 cos. splitting Navy CANES contract
  • Carlyle’s 2012 buyout Axalta files for $100m U.S. IPO
  • Media General cut price for Lin Media on loss of CBS deal
  • TV networks seek larger share of pay TV channel sales: WSJ
  • Independent TV studios attract big media M&A: N.Y. Post
  • Chinese hackers affecting U.S. medical tech, pharma cos.
  • Ford planning new hybrid car for late 2018: Reuters
  • Hertz investors said to want former Dollar Thrifty CEO
  • USAF grounds 82 F-16 jets due to cracks: L.A. Times
  • GE considering S. Korean fighter jet development: Yonhap
  • Chinese PMI misses ests., falls for first time since March



    • Buckle (BKE) 7am, $0.53 - Preview
    • Dollar Tree (DLTR) 7:31am, $0.64 - Preview
    • Hormel Foods (HRL) 6:30am, $0.48
    • Nordson (NDSN) 7am, $1.13
    • Perry Ellis Int’l (PERY) 7am, ($0.12)
    • Sears Holdings (SHLD) 6am, ($2.58)
    • Stage Stores (SSI) 6am, $0.52



    • Accuray (ARAY) 4:01pm, ($0.06)
    • Aeropostale (ARO) 4:01pm, ($0.50) - Preview
    • Brocade Communications Systems (BRCD) 4pm, $0.19
    • Fresh Market (TFM) 4:02pm, $0.35
    • GameStop (GME) 8:30am, $0.18
    • Gap (GPS) 4pm, $0.69 - Preview
    • Intuit (INTU) 4pm, $0.07
    • Marvell Technology Group (MRVL) 4:05pm, $0.28
    • Mentor Graphics (MENT) 4:05pm, $0.15
    • Ross Stores (ROST) 4pm, $1.08 - Preview
    • (CRM) 4:05pm, $0.12



  • Gold Drops to 2-Month Low on Fed Rate Outlook as Platinum Falls
  • Palm Oil Seen by UBS Extending Decline on Outlook for Supplies
  • Philippines Nickel Exports to China Plug Gap Left by Indonesia
  • U.S. Mint Platinum Coins Bypassed in Rush for Gold: Commodities
  • All Eyes on Atlantic as Potential Tropical Storm Starts Stirring
  • Israel Nears Gas Sales to Egypt as Mideast Unrest Flares: Energy
  • Market Shrugs 3M B/D Oil Supply Loss to Geopolitics: Julian Lee
  • China Spot Copper Fees Seen Rising as Mine Output Increases
  • U.K. Natural Gas Options Trading Signals Ukraine Supply Concerns
  • Wheat Extends Decline as Ukraine Tension Fails to Disrupt Supply
  • Ebola Virus Threat Sees Sierra Leone Miner Cut Iron-Ore Target
  • India Raises Royalty on Iron Ore Output to 15% From 10%
  • Wheat Harvest in Australia Seen Exceeding Forecast After Rains
  • Brent Spread May Widen as Speculators Add Bets: Chart of the Day
  • Gold Refiner Predicts Import Curbs by India Probably Permanent


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The Hedgeye Daily Outlook - 3A


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The Hedgeye Macro Team
















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Long the Long Bond: Hedgeye Reiterates Our Call on $TLT

Takeaway: We're sticking with TLT.

If you’re bullish, you should be bullish on the Long Bond.


It’s crushing every major US equity index YTD (Russell 2000 is in negative territory for 2014: -0.70%). The 10-year yield has immediate term downside to 2.34% into Janet Yellen’s “pushing out the dots” in Jackson Hole.


Long the Long Bond: Hedgeye Reiterates Our Call on $TLT - Staying Long TLT

HAIN: Strong Q Looks Stronger Than It Is

HAIN remains on the Hedgeye Best Ideas list as a short.


On the surface, HAIN reported a strong quarter and the stock responded nicely, trading up ~11% on the day.  4Q14 adjusted earnings from continuing operations were $0.90 compared to $0.65 in 4Q13, good for a 35% increase year-over-year.  On the call, management reported a strong 7.5% organic growth rate for 4Q14 and 8.5% for FY14.  Guidance for organic growth remains in the mid-single digit to high-single digit range for FY15.


The adjustments made to continuing operations are a list of recurring and non-recurring items that, in our view, lower the quality of the reported number.  Notably, these adjustments are getting bigger each quarter.  In 4Q14 the adjustments to net income totaled $0.15, 50% greater than the $0.10 of adjustments in 4Q13.


The current adjustments to net income of $10.3 million are principally from:

  1. $6 million related to the voluntary recall
  2. Start-up cost of $3.8 million primarily related to Project Castle (the chilled desserts facility in the UK)
  3. $2.9 million of acquisition related fees and expenses, including integration costs from Tilda and Rudi’s
  4. $2.2 million non-cash valuation reserve on net operating losses incurred along with the start-up of the non-dairy facility in Europe


It’s amazing to see that a company can get away with adjusting earnings for growth related innovation and operating costs that are desperately needed to grow organic revenues.  The company also reported $4 million of non-recurring income including a true-up of contingent consideration earn outs, unrealized currency gains and gains from the sale of shares.


On top of that, the company continues to push SG&A lower in order to drive operating margins.  In 4Q14, SG&A on an “adjusted” basis (excl. amortization of acquired intangible assets) was 14.4% of net sales, a 110 bps improvement versus last year. 


HAIN: Strong Q Looks Stronger Than It Is - 8 20 2014 2 25 28 PM


Therefore, despite higher commodity costs, HAIN “effectively managed operating expenses” to report a 49% increase in “adjusted” operating income to $73.9 million and a 200 bps improvement in operating margin to 12.7%.  We continue to view the steady, significant reduction in SG&A as a competitive long-term disadvantage.  In fact, we’d go as far as to say that the company’s margin structure is highly unsustainable and, as a result, it is currently over-earning in an increasingly competitive environment.


One of the core tenets of our short call was the lack of leverage in the business model.  Despite a 200 bps improvement in operating margins, the company only reported “adjusted” EBITDA of $79.5 million or 13.6% of net sales versus 13.5% last year.  It’s clear to us that the management is far away from hitting its objective of delivering long-term growth EBITDA of 15% to 18% of net sales.


The company’s inability to leverage its cost structure is clearly illustrated in the chart below.


HAIN: Strong Q Looks Stronger Than It Is - 22


The biggest risk to our short thesis was the strong revenue growth the organic sector is seeing.  But, as you can see below, sales trends are expected to continue to slow at HAIN.  In order to sustain its past level of growth, management will need to acquire more brands in FY15. 


HAIN: Strong Q Looks Stronger Than It Is - 33


Net sales guidance for FY15 is between $2.7 billion to $2.8 billion, with approximately two-thirds of growth coming from acquisitions and one-third coming from organic sales.  If this plays out, HAIN expects to deliver FY15 EPS within the guided range of $3.72 to $3.90.


While today is painful, we are sticking with our short thesis.


Call or email with questions.


Howard Penney

Managing Director


Fred Masotta


Cartoon of the Day: Ain't No Hawk!

Takeaway: Think the Fed's going to suddenly strike a hawkish tone? Don't hold your breath.

Cartoon of the Day: Ain't No Hawk! - JacksonHole cartoon 08.20.2014



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