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Ongoing Conversations

“There is an ongoing conversation among the different factions in your brain…”

-Dr. David Eagleman


That’s an important quote from neuroscientist , David Eagleman, that was cited by Brene Brown in a new #behavioral book I finished this long weekend called Daring Greatly. If you’re looking for some introspection into both your investment process and life, this one will make you think.


Thinking is good. So is reading/writing. These basic brain exercises help you debate yourself in that ongoing conversation “among the different factions in your brain, each competing to control the single output channel of your behavior.” (Daring Greatly, pg 76)


Eagleman calls your brain a “team of rivals” within the two-party system of “reason and emotion.” Brown contextualizes the back and forth conversations you have with yourself with feelings like vulnerability and shame. These are perfect things to read about right before you take your kids to a pancake breakfast!


Ongoing Conversations - br5


Back to the Global Macro Grind


The market is at its 2014 highs, baby! How does that make you feel? Oh, and what “market” are you thinking about when you read the word market? The long end of the US bond market has had a much better year than the US stock market (TLT = +19%, with dividends).


While it didn’t shame me to see the broad measure of US growth expectations (Russell 2000) rise +1.2% on no volume last week, it certainly didn’t please me to see consensus chasing a misplaced expectation that it’s had all year (for US GDP to be +3-4% and bonds to fall).


It evidently didn’t shame the European growth bulls to beg for a new round of Quantitative Pleasing either. If being long European stocks was always based on Europe slowing to the point that it needed moarrr money printing, my hat is off to whoever nailed that.


For equities-only fans, in addition to European stocks (Europe’s Stoxx 600) and the Russell 2000 being +1.2% last week, here’s what else happened:


  1. US Industrial Stocks (XLI) were down -0.2% to +3.4% YTD
  2. Emerging Markets (MSCI) were down -1.4% to -1.0% YTD
  3. US Utilities (XLU) were +2.0% to +14%YTD
  4. Russian stocks were -5.5% to -17.5% YTD
  5. Argentine stocks were +7% to +82.1% YTD


In other words:


  1. Slow-growth #YieldChasing (long XLU vs XLI) remains alive and well as a US Equity Sector strategy
  2. Emerging Market equities still do not like a stronger Dollar
  3. The more screwed up your country gets, the higher the stock market goes?


Oh, yeah. Definitely.


Doesn’t this all make you feel good? Like this time is different or something? With Japanese, European, and American central planning committees going all in on Policies To Inflate, even that crazy critter called commodity #InflationAccelerating came back online last week:


  1. CRB Commodities Index +1.4% on the week to +4.5% YTD
  2. Coffee prices up another +7.4% on the week to +67.5% YTD
  3. Cattle prices up another +3.5% on the week to +28.0% YTD


I know. Eat a hot dog or something. Steak is overrated. Ask the government people about the “substitution effect” on your barbeques, eh! (PS: if you bought the sausage instead of the ribeye, hog prices were up another +5.7% last week too = +17.2% YTD).


Now the reasoning side of the veggies and water brain couldn’t care less about this stuff. It’s we emotional guys pounding the caffeine and burgers who need to deal with ourselves. Because the US equity consumption growth bulls don’t want to talk about real things, like inflation.


To be clear, even the CRB Index is beating both the Russell 2000 and Euro Stoxx 600 by +360 basis points for 2014 YTD (both the Russell and Euro Stoxx 600 moved back into the black to +0.9% for 2014 last week – raging bull in emotions there!).


In other news, what real cost of living ripping to all-time highs in the US does is slows real growth – so last week you also saw:


  1. Goldman cut its Q3 US Growth estimates for the 2nd time in 2 months
  2. US 10yr Treasury Yield drop another 6 basis points on the week to 2.34%
  3. US Treasury Yield Spread (10yr minus 2yr) continue to compress, -79 basis points YTD


Net of all my own performance issues, emotions, and reasoning, this is where I stand on September 2nd:


  1. Wanting to buy more long-dated bonds (High-grade Corporates or Treasuries) on dips
  2. Wanting to be longer of our two favorite Emerging Markets (China and India) on pullbacks
  3. Wanting to avoid anything US growth equity bubble like the bubonic plague


Plague? Yep. I really do not like to buy the all-time-bubble highs in anything.  But that’s just me. For better or worse (we’ll see), these factions of 1999 and 2007 in my brain just won’t go away.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.33-2.43%


RUT 1151-1179

Shanghai Comp 2199-2278

EUR/USD 1.31-1.33

Pound 1.65-1.67

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Ongoing Conversations - Chart of the Day

September 2, 2014

September 2, 2014 - Slide1



September 2, 2014 - Slide2

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September 2, 2014 - Slide5

September 2, 2014 - Slide6

September 2, 2014 - Slide7 



September 2, 2014 - Slide8

September 2, 2014 - Slide9

September 2, 2014 - Slide10

September 2, 2014 - Slide11


TODAY’S S&P 500 SET-UP – September 2, 2014

As we look at today's setup for the S&P 500, the range is 29 points or 1.17% downside to 1980 and 0.28% upside to 2009.                                                        













  • YIELD CURVE: 1.88 from 1.86
  • VIX closed at 11.98 1 day percent change of -0.58%


MACRO DATA POINTS (Bloomberg Estimates):

  • 9:45am: Markit US Manufacturing PMI, Aug. final (prior 58)
  • 10am: ISM Manufacturing, Aug., est. 57 (prior 57.1)
  • ISM Prices Paid, Aug., est. 58.8 (prior 59.5)
  • 10am: Construction Spending, July, est. 0.8% (prior -1.8%)
  • 10am: IBD/TIPP Economic Optimism, Sept., est. 45.5 (prior 44.5)
  • 11am: U.S. to announce plans for auction of 4W bills
  • 11:30am: U.S. to sell $28b 3M bills, $24b 6M bills, $15b 11-day cash management bills



    • Senate, House out on final week of summer recess
    • Presdident Obama leaves for a trip to Europe; in Estonia tomorrow to meet with Baltic state presidents
    • Moelis names Eric Cantor as vice chairman, member of board




  • Iliad said in talks w/buyout firms on new T-Mobile US bid
  • Apple said to partner with Visa, MasterCard on iPhone wallet
  • Norwegian Cruise said near $3b buy of Prestige Cruises: Rtrs
  • AT&T to buy America Movil Mexico assets, Financiero reports
  • America Movil said to hire BofA to sell assets
  • BofA asks judge to dismiss Countrywide fraud verdict
  • Apollo said to mull $2b offer for Kloeckner Pentaplast
  • Compuware said to be near deal to sell itself: WSJ
  • J&J’s Pinnacle hips face first trial over poisoned patients
  • Goldman Sachs loaned Banco Espirito Santo $835m in July
  • Apple probes report iCloud hacked to gain stars’ nude photos
  • Cipla targets U.S. w/Glaxo’s Advair, anti-AIDS medicines
  • Symantec said to narrow CEO picks, with Brown leading list
  • Fiat plans to sell withdrawal shares with New York listing
  • Sanofi-Regeneron drug cuts cholesterol, has prevention promise
  • Heineken to sell Mexican packaging unit to Crown Holdings
  • Aluminum warehousing antitrust suits dismissed by U.S. judge
  • Mozilo sees no villainy at Countrywide as govt. closes in
  • Facebook purchase of WhatsApp gets review by EU regulators
  • Kellogg seeks stake in Egyptian sweets-maker Bisco Misr
  • Exelis to cut 70% of jobs; COMET-1 trial fails to meet endpt
  • Calif. lawmakers set to adjourn without incentives for Tesla
  • NBA’s Durant to sign $300m Nike deal, besting Under Armour
  • Microchip says any offer for CSR likely to be in cash
  • Akzo’s cost-cutting CEO said to be solicited for $7b deal
  • Russia said to plan sovereign fund move over sanctions
  • Macau casino rev. falls for 3rd month on China graft probes
  • France urges ECB action to weaken euro on deflation threat
  • Swiss economy unexpectedly stalls as euro area takes toll



    • Conn’s Inc. (CONN) 7am, $0.75
    • Guidewire Software (GWRE) 4:05pm, $0.28
    • TerraForm Power (TERP) Post-mkt, $0.07



  • Copper Advances in London With U.S. Manufacturing Seen Expanding
  • China Banks Boost Precious Metals Hoard Amid Gold-Leasing Demand
  • Agriculture ETPs Losing Investors on Record Harvest: Commodities
  • Gold Falls to 1-Week Low as Palladium Trades Below 13-Year High
  • Arabica Coffee Rises to 1-Month High on Brazil; Raw Sugar Gains
  • Corn Climbs as Ukraine Escalation Spurs Black Sea Export Concern
  • Ebola Putting West Africa Harvests at ‘Serious Risk’, FAO Says
  • BullionVault’s Gauge of Client Buying Falls Toward Four-Year Low
  • Palm Rebounds From 2009 Low on Demand Recovery, Weaker Ringgit
  • Heraeus Joins Shanghai Gold Exchange’s Free-Trade Zone Bourse
  • Keystone Redux Haunts Trans Mountain as Fight Shifts to Climate
  • Japan Seeks to Buy 110,146 Tons of Milling Wheat in Tender
  • A Mile Below Paris Drillers Hit Hot Pools to Warm Houses: Energy
  • Palm Oil Seen Rebounding by Sime’s Dass as Demand Recovers


























The Hedgeye Macro Team
















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TV Markets

This note was originally published at 8am on August 18, 2014 for Hedgeye subscribers.

“They got their politics on TV and were not persuaded by policy descriptions or rational arguments.”

-George Packer


I showered, shaved, and slapped on a suit to do Fox News in NYC yesterday (yep, just what I wanted to do on a summer Sunday). On my way out, my son Jack was riding his bike in the driveway and said to me “Dad, good luck.” I thought to myself, man isn’t this country going to need it.


The aforementioned quote comes from a book I’m reading right now that I highly recommend: The UnwindingAn Inner History of The New America. It cuts through many of the threads I’ve been trying to weave in 2014 (history, behavioral, demographics).


From Jay Z to Newt to Oprah and Sam Walton, this collection of histories contextualizes why so much of what this country has become is made for TV. Sound bites, quick fixes and bling. “Yes We…” … uh… maybe No We Can’t, from here…


TV Markets - f3


Back to the Global Macro Grind


No we can’t get back to 3-4% US GDP growth. Not this year. And probably not next year either. Never mind what you hear on TV. The real US economy is slowing in Q3. The bond market reiterated that last week, big time.


The 10 yr US Treasury Yield dropped another -7 basis points last week to 2.34%. In case you are keeping context’s score, that’s:


  1. A fresh YTD low for the leading indicator for the rate of change in US growth
  2. Down -23% (69 basis points) from where the 10yr started 2014 (3.03%)
  3. And isn’t in the area code of Consensus Macro’s 3.25-3.5% “forecast” for the 10yr in 2014


Alongside falling bond yields and the Russell 2000 (a proxy for US growth expectations) being -1.9% YTD what’s interesting now is that some of the more cyclically sensitive (read: LATE CYCLE) stuff like inflation and employment growth is starting to wane:


  1. CRB Commodities Index was down another -0.9% last week to +3.5% YTD and is now bearish TREND @Hedgeye
  2. CRB Food Index was flat last week (still +17% YTD) and is now bearish TRADE (losing momentum) within a bullish TREND
  3. Oil prices continued to fall last week (Brent -2%) and remain a bearish intermediate-term TREND @Hedgeye


Let me write that one more time – inflation and employment gains are late, not early, cycle indicators. “So”, as both the European and US economies slow in Q3 of 2014, why can’t we see both inflation and employment rates of change deteriorate from their 1H 2014 peaks?


One way to play this from a US stock market investors perspective is:


  1. Rotating out of Energy (XLE) stocks (which led losers last week at -0.2%)
  2. Rotating into more Healthcare (XLV) exposure (which led gainers at +2.4% last wk)


That’s a later cycle portfolio move than the early cycle ones we have been signaling since the beginning of the year (which we’d stay with and include):


  1. Short Housing (ITB)
  2. Short Consumer Discretionary (XLY)
  3. Short Regional Banks (KRE)


Getting out of late-cycle commodity inflation is also very defensive in the sense that you can’t be as “invested” as we thought you should be in #inflationAccelerating for the first 6 months of the year. You won’t hear this on TV either, but in risk management speak that means RAISE CASH.


At 52% Cash in the Hedgeye Asset Allocation model this morning, that’s the highest Cash position we have had in at least 2 years. On the 48% “invested”, my Top 3 positions (rank ordered in terms of size) would be:


  1. Long the Long Bond (TLT)
  2. Long Emerging Market Equities (India, China, Indonesia)
  3. Long Gold (GLD)


In other words, if I was running my old hedge fund, I’d still be running net long Bonds and International Equities in Global Macro, but scaling into net short positions in both US growth and European Equities.


While we haven’t re-signaled the short calls in places like Portugal (PGAL), Italy (EWI), or the SP500 (SPY) yet, the best way to see me do that in real-time is in our Real-Time Alerts product. From a short seller’s perspective, you won’t get that trying to learn market timing on TV either.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.34-2.43%

SPX 1934-1965

RUT 1115-1151

BSE Sensex 25689-26391

VIX 11.84-14.92

WTIC Oil 95.41-98.46

Gold 1291-1321


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


TV Markets - Chart of the Day

Investing Ideas Newsletter

Takeaway: Current Investing Ideas: BOBE, FXB, GLD, HCA, HOLX, OC, OZM, RH and TLT.

Below are Hedgeye analysts’ latest updates on our nine current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.


We also feature three recent institutional research notes that offer valuable insight into the markets and the global economy.


Have a great Labor Day weekend!


Investing Ideas Newsletter      - levs


Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less


Investing Ideas Newsletter      - Trading volume cartoon 08.28.2014



BOBEAs it turns out, activist investor Sandell was only able to secure four seats on Bob Evans’ board.  This is after reports surfaced that the investor had successfully secured five.  An incremental seat always helps, but four is still a significant number and should be enough to influence change within the company.  Considering that three other nominees joined the Bob Evans’ board in April 2014, we’d argue that majority of the board (7 out of 12 members) is new.


BOBE reported another uninspiring quarter on Wednesday when they released 1QF15 results.  To be blunt, the call was rather painful to listen to.  But not all is lost.  We continue to believe there is significant upside in BOBE, but it is likely this upside will not be realized until we see several changes at the senior level.  We do find solace, however, in the fact that we are one step closer to this becoming a reality.


It’s difficult to get excited about this company until the new board members complete their “initiation” to every aspect of the business.  Shortly thereafter, we would expect to see material changes to the operating structure of the company in order to unlock significant underlying value.  We knew this would be a bumpy ride, but we’re in it for the long haul.  Buckle up.



FXB: Down ~ -3.5% since early July, we believe the GBP/USD (via the etf FXB) has found support above its long-term TAIL line of $1.65.


Our positioning in the currency cross remains based on what we see as relatively healthy underlying fundamentals for the country into 2H (to drive strong UK = strong Pound), versus our forecast for decelerating growth trends in the U.S. and Eurozone, combined with dovish policy expectations from central bank heads Janet Yellen and Mario Draghi.


In contrast, recent Bank of England Minutes revealed that for the first time in over three years, there were 2 votes to increase interest rates (by 25 basis points). We expect this bullish tone (on the margin) coupled with the outperformance of UK growth over the US and Eurozone in 2014 to push the GBP/USD higher.


GLD: With continuing monetary policy uncertainty in the coming weeks, we have no reason not to have an allocation to Gold. Until the market confirms that 1) Gold is not a hedge to USD exposure 2) the outlook for forward-looking monetary policy is more definitive, we’ll continue to treat it in currency-like fashion:


USD                       +1.8% m/m

CRB                       -2.4% m/m

Gold                      -1.6% m/m

EUR/USD              -1.9% m/m


For the record, Janet Yellen’s ideology gives us no reason to believe she’ll be pulling back the dots, but the market has clearly heightened the expectation for a further devaluation in the Euro from Mario  Draghi in the near future.


The next important catalyst is the September 4th ECB meeting. We find no reason to take a position in front of the meeting without market confirmation, but we expect:


  • updated ECB staff projections --> downward revisions to growth and inflation
  • A “pushing” of the growth and inflation prospects from TLTROs and QE-lite (ABS buying)
  • Emphasis that QE is still a viable option    


Bottom line: We are sticking with our year-to-date call on the long-side for a 7% winner.


HCA & HOLX: Our monthly OB/GYN survey will deploy next Tuesday as physicians get back to work just like the rest of the country.  Our survey will ask OB/GYNs what trends they are seeing in patient visits, pregnancy, deliveries, and Pap testing.  The survey results will be important for our outlook for both companies.  


For HCA, the delivery trend should continue to accelerate this month, as we compare to the extreme weakness this time in 2013.  In recent months the trend in pregnancy has been improving, which should lead to deliveries increasing in upcoming months.  


For Hologic, the trend in Pap testing, which continues its expected decline, is key.  We’re looking for an unsurprising result and continued declines in the low double digits or better. 


For both HCA and HOLX, patient volume is the most important metric.  As we’ve seen some retail companies struggle with customer traffic, housing trends weaken,  and broader measures of economic activity slow in 3Q13, we’re interested in how consumers have changed medical consumption patterns, if at all.    


OC: Industrials analyst Jay Van Sciver has no update on Owens Corning.


OZM: Please click here to access the research note financials analyst Jonathan Casteleyn's sent out on Och Ziff earlier this week.  


RH: Williams-Sonoma's (WSM) print earlier this week which sent shares southbound is a factor we won’t ignore as it relates to Restoration Hardware. Even though the customer mix is very different, WSM is RH’s closest publicly-traded comp. The reality is that this is an environment where a poor quality retailer (M, KSS, TGT) could hit numbers with horrible quality earnings and the stock trades up, where great (and higher multiple) companies smoke estimates but say one word wrong and the stock is down 10-20% (KATE). That’s our greatest concern near-term.


But for many reasons, after taking in this data point we don’t think this WSM print can be extrapolated to RH.


We think RH will beat the quarter in two weeks, and more importantly will ultimately print $2.70 this year versus the Street at $2.30. We’re still at $11 in 2018, and think that this stock will be well in excess of $200. We still think RH is perhaps the most powerful story in retail. A bad quarter at WSM does not change that.


Some key points to consider…

1) The WSM concept that overlaps most with RH is West Elm. Though it is only 12% of sales, it comped 16.7%, and accelerated by 140bp on a 2-year basis.

2) WSM called out ‘seasonal’ product as being weak. That’s little concern for RH. Less than 10% of the RH assortment is considered ‘seasonal’. WSM is more tied to seasonal promotions in the first nine months of the year. That’s not an issue for RH.

3) Let’s not confuse ‘seasonal’ for ‘outdoor’. People familiar with the RH story know that so-called ‘outdoor space’ is critical to the economic model of its new design galleries. Yes, that’s where they sell outdoor furniture – but it’s not what WSM is referring to as ‘seasonal’. A $3,000 teak outdoor dining table isn’t exactly what WSM was referring to as being promotional. It simply does not compete much with RH’s core.

4) Weakness that WSM might be seeing in kitchen and tabletop is nothing compared to what it will see when RH launches its Kitchen business in the Spring of 2015.

5) To put these stories in context, RH square footage growth is accelerating from -5% to over 40% in just two years. WSM, on the flip side, is shrinking its US store base in the Pottery Barn and Williams-Sonoma concepts. And with the exception of West Elm, its only new sq. ft. is coming outside of the US. In total WSM has 1.5% unit growth and 3.7% sq. ft. growth for the year. There’s very little leverage left to the model from unit growth.


TLT: CEO Keith McCullough summed it up well on Friday morning:


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.


* * * * * * * * * * 


Click on each title below to unlock the content.


We're Shorting France

We’ve been waiting for an entry point on European equities, with major indices broken TREND for nearly two months in our model. We were afforded the opportunity this week with ~ 50bp bounce in the EWQ as the CAC remains broken TREND and fundamentals support economic weakness ahead.

Investing Ideas Newsletter      - fra


M&A Trends Remain Hot, Semis Want to Run Higher

This week was another busy week in the Semiconductor space for Merger & Acquisition activity, with two deals both priced at a greater than 70% enterprise value premium to prior day's closing price...wow!!

Investing Ideas Newsletter      - 789


ICI Fund Flows: 2-To-1 Demand for Fixed Income Over Equities

Despite a slight rebound in equity fund flow trends last week, fixed income demand still outpaced stocks by a 2-1 ratio.

Investing Ideas Newsletter      - 1212




The Best of This Week From Hedgeye

Takeaway: Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.


Q&A: Is The Stock Market Cheap?

In the Q&A portion of Tuesday's Morning Macro Call, Hedgeye CEO Keith McCullough answers a subscriber question about whether or not stocks are cheap.

Deep Dive Into Semi Sector

Hedgeye semiconductor analyst Craig Berger discusses major trends in semis including M&A activity, and gives us his take on three key stocks in the sector.


 All Time SPY-Highs

The Best of This Week From Hedgeye - Waiting bear 08.27.2014

Keith McCullough wrote in Wednesday's Morning Newsletter, "While the stock, bond, and commodity market bubbles have all had different narratives, one thing is not different – prices go up, then down, a lot."


Burning Euro

The Best of This Week From Hedgeye - bruning euro 08.25.2014

ECB chief Mario Draghi is evidently a bigger fan of monetary cowbell than previously imagined. 


 U.S. Personal Savings Rate vs. Asset Price Inflation 

The Best of This Week From Hedgeye - COD 8.27.14

As you can see in the Chart of The Day from Wednesday, the U.S. Personal Savings Rate (% of Disposable Income) has been falling for the past 3 years (as the stock market makes new highs).


Burger King

Right or wrong, Burger King's merger with Canada-based Tim Hortons has been lumped into the growing public outcry over tax inversions. Does this spell trouble for their merger? Cast your vote and let us know your thoughts.

Nike or Under Armour?

Which brand would you rather be wearing? Cast your vote and leave a comment in our Poll of the Day.

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