August 22, 2014














  • YIELD CURVE: 1.92 from 1.94
  • VIX closed at 11.76 1 day percent change of -0.17%


MACRO DATA POINTS (Bloomberg Estimates):              

  • No major economic reports scheduled
  • 10am: Fed’s Yellen at Kansas City Fed symposium at Jackson Hole, Wyo.
  • 1pm: Baker Hughes rig count
  • 2:30pm: ECB’s Draghi speaks at Jackson Hole



    • President Obama on vacation on Martha’s Vineyard
    • Senate, House out on August recess
    • U.S. ELECTION WRAP: McConnell on Shutdowns; Ernst Policies



  • Labor market at Jackson Hole forefront before Yellen speech
  • Theory of tech replacing workers overblown: MIT J.H. paper
  • Lew Says business tax reform best for addressing inversions
  • Family Dollar said open to Dollar General deal with changes
  • BofA seeks to prove Buffett’s call right after settlement
  • Citigroup faces curbs on hedge fund sales after deal: WSJ
  • Enbridge avoids U.S. review with plan to boost oil sands flow
  • GM legal dept. investigated by U.S. on recall delay: WSJ
  • Co. to halt production at Russian plant for 4 periods
  • Home Depot U.S. president Menear to succeed Blake as CEO
  • IBM never stopped server sales to Chinese banks: China Daily
  • GE says reports of FAA grounding of Air India 787 incorrect
  • Keurig 2.0 to go on sale from Aug. 24: WSJ
  • Aeropostale considers closing additional 175 stores
  • Disney unveils new Star Wars game for mobile: NYT
  • Lockheed meets with suppliers on lower F-35 costs: Reuters
  • U.S.GDP, Housing, Ukraine, Tennis, Emmys: Wk Ahead Aug. 23-30



    • Ann Inc. (ANN) 7:31am, $0.69
    • Foot Locker (FL) 7am, $0.54 - Preview
    • Hibbett Sports (HIBB) 6:30am, $0.31
    • Royal Bank of Canada (RY CN) 6am, C$1.57 - Preview



  • WTI Oil Set for Longest Weekly Slide Since November; Brent Drops
  • Gold Advances From Two-Month Low Before Central Bankers Speak
  • Palm Oil Drops Below 2,000 Ringgit First Time Since 2009 on Glut
  • Too Much Corn With Nowhere to Go as U.S. Farmers Plan for Record
  • Chinese Zinc Threatens Biggest Jump in 5 Years: Chart of the Day
  • Pacific Tropical Storm Marie May Strengthen to Hurricane Today
  • Wheat Rises as World Supply Seen Less Ample on Lower Canada Crop
  • MORE: Shanghai Exchange Copper Stockpiles Drop by Most Since May
  • Copper Rises to Two-Week High on U.S. Home Sales: LME Preview
  • Copper Set for Weekly Gain as U.S. Housing Data Beats Estimates
  • WTI Crude Seen Rising on Falling Inventories in Analyst Survey
  • First Crude Tanker Departs From Hound Point After Maintenance
  • Gold Traders Most Bearish in Seven Weeks on U.S. Rate Outlook
  • EU Natural Gas Traders Most Bullish in Six Weeks on Ukraine Risk


























The Hedgeye Macro Team
















Observable Theories

This note was originally published at 8am on August 08, 2014 for Hedgeye subscribers.

“It is the theory that decides what can be observed.”

-Albert Einstein


I have a theory about performance that I developed running my own fund: it’s the score in your P&L that counts. I also have a theory about market theories: your positions reflect your theories.


We can theorize about the relationship between inflation and growth. We can highlight immediate-term market observations within their longer-term trends. We can write and rant too – but, at the end of the day, taking your position in macro is what matters.


In 2014, we’ve had a contrarian theory that as US growth expectations slow, US interest rates will fall, and both Gold and Long-term Treasury Bonds will rise. We’re not changing that theory this morning. We’d like you to keep that position.


Observable Theories - EL chart 2


Back to the Global Macro Grind


But, but… you said that if the Dollar goes up and inflation expectations fall, the consumer gets a tax cut and consumption growth can accelerate. Yep, but I said that before we were 62 months into an economic expansion (in 2009 and again in 2013), not at the end of it.


Year-over-year, the US Dollar is down -0.4%. With US cost of living barely coming off her all-time highs, that isn’t going to make me tell you to run on out there and buy-the-damn-bubble in US stocks. Sorry.


If the US Dollar were to breakout from here, and crude oil were to drop to $80/barrel – now that might get me interested. But there’s this thing called #timing that we need to consider when we theorize about getting long.


In the meantime (we’re net short in Real-Time Alerts terms) and here’s the score:


  1. US Dollar Index stopped going up this morning (because the Euro stopped going down)
  2. US 10yr Yield of 2.36% is hitting a fresh YTD low of 2.36% (crashing -22% YTD)
  3. US Equities (SPX) have only had 1 up day in the last 11 (dip buyers #underwater)


Bull market, baby (in the Long Bond)! 2014 Score: Long Bond (in TLT terms) +15.1% vs Gold +9.6% vs Russell 2000 -3.9%.


Digging into the Sector Style performance of the SP00:


  1. Consumer Discretionary (XLY) leads losers at -2.2% YTD
  2. Industrials (XLI) aren’t far behind at -1.6% YTD
  3. Financials (XLF) are 3rd worst (of 9 Sectors) at +1.4% YTD


Digging deeper, you can see the real wins and losses (sub-sectors within the S&P’s major sectors):


  1. Housing (ITB) is -10.6% YTD
  2. Regional Banks (KRE) are -7.4% YTD
  3. REITS (VNQ) are up +15.3%


REITS are a way to be long A) slow-growth #YieldChasing and B) US Rents hitting all-time highs. Yep, we have a theory that you can check with your landlord on that too: he’s not reducing your rent tomorrow due to Russia or ebola.


You see, in theoretical-land, as our #InflationAccelerating theme from Q114 stops going straight up into the right (Coffee prices dropped -3.6% yesterday, but are still +66.2% YTD), real-world inflation still sticks. Starbucks (SBUX) isn’t cutting prices today.


Inflation (especially the cyclical stuff like wage inflation and rent), is a late-cycle economic indicator. So is unemployment. Got early cycle? That’s easy. Consumer, Housing, some Industrials, and Regional Banks.


The reason on Regional Banks is really simple. As the bond market prices in slower growth, the long-end of the bond yield curve falls, and net interest margins (i.e. how banks make money off your deposits - long-term rates minus shorter-term ones) compress.


This is called Yield Spread Compression. And it’s part of this fancy theory called gravity. I have a perverse theory that as the Q3 US Growth data slows, the Fed will get easier (on the margin), and that the long-end of the curve will perpetuate moarrr compression.


As growth slows, not only do net interest margins at banks compress, but equity market multiples do. All the while, you’ll see multiple expansion on long-term Treasury bonds.


Since there’s no long-term support to 1.70% on the 10yr, maybe we should all start theorizing about that. The observable score says that’s more likely than seeing the consensus theory of 3.25% anytime soon.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.35-2.51%

SPX 1891-1927

RUT 1105-1128

VIX 15.45-18.89

USD 81.06-81.73

Gold 1298-1323


Best of luck out there today and have a great weekend,



Keith R. McCullough
Chief Executive Officer


Observable Theories - Chart of the Day

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VIDEO: Two Chip Stocks Feeding on the Apple iPhone 6 Frenzy

God, Country, Notre Dame (and Under Armour) $UA

Takeaway: At $199, it’s the most expensive authentic college football jersey on the market.

Notre Dame And Under Armour Unveil 2014 Football Uniforms


Excerpt from Notre Dame's press release:


NOTRE DAME, Ind. -- Inspired in large part by Notre Dame's tradition, and specifically based upon the University's iconic Golden Dome atop the Main Building, Notre Dame and Under Armour officially unveiled the Fighting Irish football team uniforms for the 2014 season. All three versions of the uniform -- home, away and Shamrock Series -- were on display Tuesday afternoon during head coach Brian Kelly's Notre Dame Football Media Day press conference inside the Isban Auditorium at the Guglielmino Athletics Complex on the Notre Dame campus...



Takeaway from Hedgeye Retail: Under Armour (UA) unveiled the crown jewel from its 10-year, $100 million deal with Notre Dame. (The most expensive deal in collegiate athletics.) At $199, it’s the most expensive authentic college football jersey on the market. Starting to see a trend here? Nike's retails for $135.


UA has very little artistic liberty, and we can't see anything that differentiates it from Nike and Adi other than a small embroidered text on the front that reads "God, Country, Notre Dame." Our resident ND alum (Hedgeye macro analyst and former Notre Dame ice hockey captain Ben Ryan) is unimpressed, but we don't doubt that this will be a hit with the masses. Notre Dame has arguably the most loyal fan base in America - last year it was the 3rd highest grossing university in licensed goods sales. Behind UT and Alabama.


While you can't argue with the UA mojo right now, at 75X earnings, it's not a stock we're comfortable buying here.


God, Country, Notre Dame (and Under Armour) $UA - ND1


God, Country, Notre Dame (and Under Armour) $UA - ND2

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