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Arena or Circus?

“Because there is no effort without error and shortcoming.”

-Teddy Roosevelt


That’s one of the best quotes from one of the best leadership speeches in American history – President Teddy Roosevelt’s “The Man In The Arena” (more formally referred to by political types as his “Citizenship in a Republic” speech).


I’m not much of a political type. I’m more of a Mucker in the arena type. Perversely, I love getting smacked around once in a while. I love to fight against consensus. Yes, it can get messy. But working alongside those of you whose portfolios are “marred by dust and sweat and blood” drives me.


Those of you who didn’t get run over buying the tops of the 2000 and 2007 US stock market bubbles get where I am coming from. We are going to do this all over again. And while this time may be different, we know “the triumph of high achievement” … and if we fail, at least we’ll do so “while daring greatly.”


Arena or Circus? - tr


Back to the Global Macro Grind


I obviously love that speech, but I don’t think our call for US #GrowthSlowing as inflation accelerated (from 3 year lows) in 2014 was much of a dare at all. It was a playbook modeling call. Amidst all of the storytelling out there, the easiest US Macro positions to take were:


  1. Long Inflation Assets in 1H 2014 (JAN-JUN)
  2. Long Slow-Growth all year long (Long Bond and anything Equities that looks like a Bond)
  3. Short US Domestic Growth (Russell 2000)


Score: Long Bond (TLT) +17.2% vs. Russell 2000 0.0% YTD #timestamped (10yr yield = 2.34%)

*that’s pre-reinvesting dividends if you are long the 30yr UST Bond, the absolute return is even better


But you won’t hear that on Old Wall TV. You probably won’t read that in the paper either (I certainly haven’t – mainly because I don’t read newspapers!). Instead, you’ll hear something from the cheap seats like, “look at the Dow – its above its 50-day moving avg.”


The Dow, btw, is up less than 3% for 2014. Thanks for coming out.


If you’re a hard core perma growth bull, where you should really be long is India. Unlike the Russell 20000, India’s stock market (BSE Sensex) closed the month at its YTD highs, +27.7% YTD. Inflation is falling there – and real consumption growth is accelerating. Sound familiar?


It certainly doesn’t sound like Europe.


European central planning bureaucrats (who are just like the un-elected ones we have here at the Fed) live in perpetual fear of what the general population wants (hint: lower cost of living). Read their conflicted and compromised media headlines this morning:


  1. “Eurozone deflation risk at its highest level since 2009”
  2. “Draghi hints at more stimulus”


This isn’t the arena of real life where real players have a real scoreboard. This is a joke.


For those of you who recall what the Keynesian finance newspaper (The Economist) was trumpeting last year (Abenomics), only 1-year after implementing 60-70 TRILLION Yen in incremental “easing”, here’s what Japan reported for July 2014:


  1. Japanese inflation +3.4% y/y
  2. Japanese Household Spending -5.9% y/y
  3. Japanese Housing Starts -14.1% y/y


In Hedgeye rate of change speak, “y/y” means year-over-year (or what it is now versus last year). And in Japan it’s just plain sad to watch. If you’re blowing up on the golf course this weekend, try it yourself – just keep doing the same things, over, and over, and over again. But don’t expect different results.


“So” Europe definitely needs to do that… definitely, right?


Right, right. And as US growth continues to slow from this fanciful Q2 headline Obama was trying to trumpet yesterday (newsflash: it’s Q3), guess what your central planning committee at the Fed is going to do in the face of that? Must do moarrr easing…


With a few Hedgeye Best Short Ideas going against us (like YELP) right now, I have plenty of issues of my own to deal with, but a broken process is not one of them. If I had a broken process, I would either get fired or mocked.


Where I grew up, they call the place where people who get paid to get mocked a circus. That’s the perfect place for a bunch of unaccountable people who are bought and paid for by governments policies to perform.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.32-2.39%


RUT 1138-1175

Shanghai Comp 2181-2280

VIX 11.34-13.90

EUR/USD 1.31-1.33


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Arena or Circus? - COD

The Gambler

This note was originally published at 8am on August 15, 2014 for Hedgeye subscribers.

“You’ve got to know when to hold’em, know when to fold ‘em.

Know when to walk away, know when to run.

You never count your money when your sittin’ at the table,

There’ll be time enough for countin’ when the dealin’s done.”

-Kenny Rogers


It is hard to believe it, but the song “The Gambler," written by Don Schlitz and recorded by the legend Kenny Rogers is almost 36 years old.  Some songs, poems, and books transcend time and this is certainly one of them.


In many ways, the song is also apropos for stock market operators like ourselves.  Certainly, we don’t tell our clients that we are gambling, but some days it does feel like we are at the casino.  And some days certain stock market operators go on unbelievable runs that seem to belie even the best of odds.


The Gambler - gambler


Take my colleague Howard Penney for example.  Yesterday he introduced another Best Idea, which was to short HAIN.  (If you’d like learn how to get access to his 70 page deck on the name, please email sales@hedgeye.com.)


To say Howard has had a hot “hand” would be an understatement to say the least.  His last five short ideas have had great returns on an absolute basis and versus the market.  They are as follows:


  • Del Frisco – DFRG ~+20% (still live)
  • Annie’s Inc – BNNY ~+22% (still live)
  • Potbelly – PBPB ~+56% (still live)
  • Panera – PNRA ~+10% (closed)
  • Bloomin Brands – BLMN - ~+21% (closed)


So as it relates to the restaurant and consumer staples sectors, you can gamble or if you are going to go to the stock market casino you can listen to Penney and improve your odds versus the house.


Back to the Global Macro Grind...


Speaking of casinos and gambling, former Reagan budget director David Stockman recently had a great quote saying the markets were like a branch casino of the central bank.  According to Stockman:


“The Fed has destroyed the money market. It has destroyed the capital markets. They have something that you can see on the screen called an "interest rate." That isn't a market price of money or a market price of five-year debt capital. That is an administered price that the Fed has set and that every trader watches by the minute to make sure that he's still in a positive spread. And you can't have capitalism if the capital markets are dead, if the capital markets are simply a branch office – branch casino – of the central bank. That's essentially what we have today.”


Now, casinos are great when the odds are lined up in your favor, but when the odds shift or are not aligned with your bets, it doesn’t matter how many red bulls and vodka you drink, the casino is a very frustrating place to spend the evening.


This morning, by and large, the ball has landed on green across the global markets.  This comes despite, particularly in Europe, some fairly despondent growth data points over the last couple of weeks.  


On the good news front, the U.K. continues to outperform as evidenced by its GDP report last night.  On a year-over-year basis, GDP in the U.K. expanded by +3.2% and was up +0.8% sequentially. Interestingly, U.K. policy makers seem to get that a strong currency helps.  Even the manic media is getting the point, as Reuters wrote this morning:

The strong Pound policy from Carney seems to be a tailwind for the U.K. economy.”  (Note that we bought the British Pound (via the etf FXB) on 8/13 in our Real-Time alert products.)


Hopefully, Dr. Yellen gets the memo!  


Ironically, Dr. Yellen and her colleagues will actually have decent cover to become incrementally dovish (read: push out the dots) given the anemic situation in the U.S. housing market.  In the Chart of the Day today, we’ve included a table from our housing team that summarizes the recent data points in housing.  Of the 22 housing data points we track regularly, 18 of them are worse in the most recent period.


As my colleague Christian Drake wrote yesterday:


“The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended August 8th.


The Composite index fell -2.7% WoW as refi activity was weaker by -4.0% on the week and purchase demand slid -1.0% sequentially.


The anemia extends to August as purchase apps hold the 160 level for a 5th consecutive week and are now running -5.3% QoQ and at the lowest quarterly ave reading since 2Q 1995.  


  • Lower Lows in Purchase Demand:  The Purchase Index slid yet again to 164.8 on the index, down from 166.5 last week - marking a second week of decline and the 5th consecutive week at the 160-level.  As it stands, purchase demand continues to sit just above the 10Y lows recorded during the peak weather distortion trough in February while average purchase demand for 3Q to-date is currently tracking at its lowest level since 2Q of 1995.  
  • Refi & Rates:  Refinance activity declined -4% WoW with rates on the 30Y FRM contract static at 4.35% in the latest week.  Refi activity remains down -38.4% YoY and continues to improve as we traverse through the easiest 2013 comps. 

Summarily, the high frequency housing data continues to corroborate the sea of red currently blanketing our housing compendium.  As we’ve highlighted repeatedly, we’re inclined to remain bearish on the housing complex until the slope of HPI deceleration inflects.”


Not surprisingly then, we recently shorted Toll Brothers (TOL) in our real-time alert products.  There is nothing like fundamentals to put the odds on your favor!


Good “luck” out there today.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.38-2.48% 

SPX 1906-1960 

DAX 8999-9431 

VIX 11.84-14.99 

Pound 1.66-1.68 

Gold 1303-1323 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Gambler - Compendium 081314

August 29, 2014

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TODAY’S S&P 500 SET-UP – August 29, 2014

As we look at today's setup for the S&P 500, the range is 37 points or 1.24% downside to 1972 and 0.61% upside to 2009.                                                          













  • YIELD CURVE: 1.84 from 1.84
  • VIX closed at 12.05 1 day percent change of 2.29%


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Personal Income, July, est. 0.3% (prior 0.4%)     
  • 8:30am: Personal Spending, July, est. 0.2% (prior 0.4%) 
  • 9am: ISM Milwaukee, Aug., est. 60 (prior 63.87)               
  • 9:45am: Chicago Purchasing Manager, Aug. 56.5 (prior 52.6)        
  • 9:55am: UMich Confidence, Aug. final, est. 80 (prior 79.2)            
  • 1pm: Baker Hughes rig count     
  • 3pm: New York Fed to release Sept. QE schedule            



    • President Obama to  Westchester, N.Y., for DNC fundraiser, Newport, R.I., for DCCC event        
    • Senate, House out on August recess      
    • IMF executive board meeting; considering Ukraine reforms, actions, add’l $1.4b traunche in aid               
    • U.S. ELECTION WRAP: Immigration Politics; Dark Money; Platforms         



  • Takeda, Lilly lose bid to overturn $9b Actos award           
  • Fiat clears Chrysler-merger hurdle as withdrawals below cap      
  • JPMorgan hack said to start mos. ago exploiting multiple flaws  
  • Schaeuble sees Draghi at end of road to help spur euro region  
  • J&J said to be exploring sale of Cordis devices business 
  • Microsoft cuts 1,050 jobs in Finland as talks end, YLE reports       
  • IBM, Ford win dismissal in U.S. of claims they aided apartheid    
  • Google takes rivalry w/Amazon to the skies with drone testing 
  • Tesla signs deal w/China Unicom to set up 400 charging points   
  • Google’s Smith said to be headed to D.C. for U.S. CTO Role         
  • Tesco slumps as retailer cuts div. 75% on lower outlook
  • Omega Pharma said to get interest from Perrigo to Boehringer 
  • U.S. joins EU denouncing Russia over surging Ukraine warfare   
  • U.S. Jobs, Fed, ECB, BOE, NATO, Abe: Wk Ahead Aug. 30-Sept. 6              
  • U.S. markets closed Monday for Labor Day holiday         



    • Big Lots (BIG) 6am, $0.30             



  • Sugar From Thailand Heading for NY Bourse Amid Global Glut
  • Aluminum Set for Record Run of Monthly Gains as Supplies Shrink
  • Corn Heists Turning Port Into Argentina’s Chicago: Commodities
  • WTI Oil Set for First Weekly Gain in Six on Economy; Brent Rises
  • Gold Falls for First Time in Four Days on Improving U.S. Economy
  • Wheat Extends Climb as Black Sea Tensions May Threaten Supplies
  • German Power Set for More Spikes in Winter on Supply Risk
  • Rubber Has Biggest Monthly Drop Since April on Ample Supplies
  • Russia-Ukraine Interim Gas Accord Sought by EU as Winter Nears
  • Morgan Stanley Extends Diesel-Buying Spree Amid Supply Surge
  • Rebar Drops for 2nd Month to Near Record Low on Weakening Demand
  • U.S. LNG Export Market Smaller if EU Enters Deflationary Period
  • WTI Oil Seen Rising on Ukraine-Russia Conflict in Analyst Survey
  • Sugar Rises in New York on Brazil Supply Concern; Coffee Gains


























The Hedgeye Macro Team
















Is Indonesia's Export Ban on Copper Bauxite Nearing Resolution?

Indonesia moved to ban the exporting of unprocessed minerals in January bringing the expectation of a -$3Bn decrease in annual exports:


Nickel: +36% YTD

Copper: -8% YTD


Recent developments concerning Indonesia’s largest copper producers, Freeport McMoRan and Newmont Mining, suggest that the two companies may be at the negotiating table with the Indonesian government. This apparent optimism, coupled with China’s move to seek additional sources of production, suggest the market needs to continue absorbing a multi-year supply increase.

  • A shipment of 10,000 tons of copper concentrate left Indonesia for China on Aug. 8.

By the end of June, talks between Freeport McMoRan and the Indonesian government appeared to breakdown, fueling speculation over whether the country’s biggest miner even had a future in Indonesia.

Simultaneously, Newmont also reached an impasse as the U.S. miner decided to file for international arbitration. Jakarta retaliated by threatening to terminate Newmont's contract if the company did not withdraw its legal challenge.

Freeport chose to continue negotiations…

The government agreed to a framework valid for at least six months that could be used to renegotiate the contract under the next administration.

Now Newmont appears to be following suit to begin friendly negotiations…


Newmont announced Tuesday it has withdrawn an international arbitration claim against the government after a breakthrough in negotiations with the government.


Just how important is Indonesian mineral production?


Without a doubt, more important for nickel than copper…


Nickel +36% YTD (ETF: JJN)  

  • Indonesia accounts for 20% of global production
  • China and Japan are two of the largest buyers of Indonesian nickel ore


Government officials have emphasized they have no plans to lift the ban on unprocessed nickel ore….


Defending his case, chief economic minister, Chairul Tanjung said that producing and refining and smelting within Indonesia is much more productive and lucrative than doing the same for unprocessed copper.

A recent report from Indonesia’s Investment Coordinating Board showed that they are in fact investing in the second-leg of the production process:


  • $8Bn was being spent to build three alumina refineries and two ferronickel projects
  • 102 Nickel Smelters were in the process of being constructed

Indonesia’s share of global copper production is smaller but still significant…


Copper -8% YTD (ETF: JJC) Bullish TREND ($3.16 Spot Resistance)

  • Grasberg copper mine in the Papua province is one of the top ten largest copper mines
  • Proximity to China and Japan provides is an advantageous supply source

According to the Copper Development Association the 2012 global production rankings are as follows:


Chile: 5.37MM tons (36% global total)

Reserves: 190MM tonnes


China: 1.5MM tons

Reserves: 30MM tons


Peru: 1.2MM tons

Reserves: 76MM tons


United States: 1.1MM tonnes

Reserves: 39MM tonnes


Australia: 970K tonnes

Reserves: 86MM tonnes


China is one of the largest producers, but it doesn’t have nearly the reserves compared to the rest of the top 5 which explains their sense of urgency in moving to secure supply lines elsewhere:

  • China’s MMG closed on a $7Bn acquisition of the Las Bambas copper project in Peru in July
  • Chinese backers are now behind one-third of all Peru’s new mining investments by value

Copper Quant Set-UP --> Testing the Trend line On Heavy Selling


Is Indonesia's Export Ban on Copper Bauxite Nearing Resolution? - Copper Levels Chart

  • BULLISH @Hedgeye Trend set-up --> $3.16 support (CURRENTLY TESTING)
  • Today’s close marks the fourth consecutive close in the RED
  • Volume +30% d/d in the active contract month
  • Volatility +90%, +116%, +105.8% above 1/3/6-month averages



  • So much of understanding of the base metal outlook is to develop a view on the demand outlook for the larger EM countries, namely China, which is a very difficult space to navigate (see below for China’s share of global base metal consumption)

Near-Term Expectations

  • Copper basis between front and second month is currently +70 bps (expectation for 0.70% higher prices in 1-month)
  • Copper basis between front and 1-year is +1.64%     
  • The largest copper basis is Sep 14-Aug15 basis which is slightly wider than spot-1Yr

Copper continues to trade on the outlook for the Chinese economy, and for good reason based on their share of global copper consumption. We published a note on July 28th, outlining the uncertainty behind the China catalyst.

An excerpt from that note is included below along with the link:


Copper: A Scary Short


“Consensus macro leans on the strength of the Chinese economy as a leading indicator for base metal demand (as it should). China consumes over 40% of the world’s industrial metals (up from 5% in 1980).

2013 Consumption (% global demand):

  • Nickel: 47.4%
  • Aluminum: 46.1%
  • Zinc: 45.6%
  • Copper: 42.4%

An equally weighted index of Chinese GDP and industrial production to industrial metals prices (CRB metals index) is running an r-squared of 0.50 currently, down from a December 2011 peak. Although diverging from the 2011 highs, the relationship cannot be ignored as a market catalyst.”



We will be watching the following factors in the coming weeks for a read-through on the supply outlook:

1)      Chinese economic outlook takes a more definitive turn positive or negative

2)      The Indonesian copper bauxite export picture reaches a long-term resolution

3)      Continued confirmation in a late-cycle mining cap-ex push from the largest miners

4)      A continued positive Trend for the USD


With these fundamental factors in play, copper may be interesting on the short-side if our @Hedgeye $3.16 TREND line breaks and confirms.

Please feel free to ping us with comments or questions.


Ben Ryan


P: User Penetration Survey (N=20,000)

Takeaway: Purpose: Determine P's actual US penetration levels (excluding duplicates). Results: P could see declining users/hours as soon as 2015


  1. Hedgeye Pandora User Survey: We surveyed 20,000 people in the US to determine Pandora’s user penetration and runway.  We filtered the data down to roughly 14,000 users where demographic data was available.  The most surprising takeaway is the number of P's duplicate accounts, which we estimate at over 50% of its total registered accounts.
  2. The User Growth Runway is Shorter Than We Thought: After backing out duplicate accounts, we estimate that P has penetrated 53% of the US adult internet population. More importantly, the majority of its unpenetrated TAM are adults over 45 year old, which will be tougher to penetrate and monetize.  Further, we estimate the teenage cohort is over 70% penetrated.
  3. Declining Users/Hours in the Intermediate Future?: P has historical retention issues; more so than its duplicate accounts could explain.  P's limited runway for new user growth may not be able to compensate for its churn much longer.  Declining users is a very real possibility, and may occur as early as 2015.
  4. Sell-Through is the Bigger Question: Even if users/hours decline, P can still generate revenue growth by improving sell-through rates of its ad inventory.  The question is how much of this opportunity lies with improving sell-through rates in the major ad markets vs. the minor ones.  Answering this question is the next leg of our analysis; stay tuned.



We ran a single-question poll using Google Consumer Surveys: "How many Pandora Internet Radio accounts have you ever created for your own use (Unique Usernames/Log-Ins)”?.  The purpose of this question was to determine P's actual penetration levels, and the impact that users with multiple accounts had on P's registered user metrics. 


We surveyed 20,000 people in the US; we then filtered the data down to 13,899 responses where demographic data was available (Google inferred). We present the data both as reported (unweighted), and weighted to represent the US Internet population.


At face value, the results are don't appear too surprising.  But the total number of duplicate accounts is staggering.

  • Penetration skews younger, 76% of 18-34 year olds have P accounts
  • Most users only have one Pandora account (75%) 
  • The remaining 25% of users with multiple accounts are responsible for roughly 55% of P's total registered accounts.  

While the duplicate percentage may seem too high to make sense, remember that P has over 250M registered accounts, which by most external estimates is almost the same size of the entire US population accessing the internet.  


P: User Penetration Survey (N=20,000) - P   Survey Distribution

P: User Penetration Survey (N=20,000) - P   Survey Penetration

P: User Penetration Survey (N=20,000) - P   Survey Response   

P: User Penetration Survey (N=20,000) - P   Survey Duplicates


After backing out duplicates, and marrying the survey results with Census data, we estimate that Pandora is roughly 54% penetrated into the US Adult Internet Population.  While that may sound like a lot of runway, the demographics of its remaining addressable market skew much older, which will make incremental user growth more challenging.  

  • Roughly half (49%) of the total number of survey respondents that didn't have a Pandora account were over the age of 55; roughly 73% were over 45.  
  • When comparing our survey against demographic internet data from the Census, we estimate that 66% of P's remaining US TAM among adults are over 45 years old.

We haven't discussed teenagers yet, which are an inherently easier group to penetrate.  However, we estimate that P has already penetrated a considerable portion of this segment.  The table below details our analysis here.  In short, P has likely penetrated over 70% of the non-adult US internet user base. 


P: User Penetration Survey (N=20,000) - P   Survey Distrubtion 0

P: User Penetration Survey (N=20,000) - P   TAM analysis 


We have previously identified that P has historical retention issues, which we detail in the chart below.  Over the last 3.5 years, P has added more than 160M registered accounts, yet only grew active users by 44M, suggesting total churn of at least 116M accounts, or 72% of its gross account gains during this period.  


We do not have enough data to explicitly calculate its quarterly churn rate after 1Q11.  However, we estimate using a rough back-of-envelope calculation that quarterly attrition over the past 3.5 years has averaged somewhere in the mid to high-teens as a percentage of its active users.  


Currently, P has 76.4M active users as of 2Q14.  If we a assume mid- to high-teen churn rate, then the company would need to sustain a run-rate of gross new quarterly account adds of 11M-13M to maintain its active user base.  Even If that run-rate was possible over the long-run, and P could penetrate every internet user in the US, we estimate that P would exhaust its unpenetrated TAM within 7-10 quarters.  


In a more likely scenario, we expect gross new account adds to slow given the high concentration of older users within P's unpenetrated TAM, which should lead to y/y declines in user and/or listener hour growth sometime in 2015.


 P: User Penetration Survey (N=20,000) - P   Attrition 2Q14


We want to be extremely clear: Declining users and/or hours does not mean that revenues will decline.  Even if users/hours decline, P can still generate revenue growth by improving sell-through rates on its ad inventory, which remains below 50% of total hours according to management.  


The question is how much of this opportunity lies with improving sell-through rates in the major advertising markets vs. the minor ones (e.g. New York City vs. Topeka).  


Put another way, if users in New York City are already receiving peak ad load (sell-through rate), then losing those users would likely outweigh any benefit of improving sell-through rates in Topeka.  


Answering this question is the next leg of our analysis; stay tuned.  In the interim, let us know if you have any questions, or would like to discuss in more detail



Hesham Shaaban, CFA




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