Panic! Market Up

This note was originally published at 8am on August 19, 2014 for Hedgeye subscribers.

“Panic! Dow Plunges Through Floor”



The 1980s were awesome. From big hair bands to Boesky getting bagged, there was a lot going on. A straight up stock market went straight down. The Dow dropped -22.61% in a day (October 19th, 1987)… but, if you ask the perma bulls, “the market was flat that year.”


It’s already August and the Russell 2000 is still trying to get back to flat for the year. With the 10yr Bond Yield having crashed alongside fanciful 1980s like +3-4% US GDP growth expectations, in Greenwich meetings yesterday I was told that GDP “doesn’t matter anymore anyway.”


Yep. This time is different. Roger that.


Panic! Market Up - Black Monday the Stock Market Crash of 1987 NYT


Back to the Global Macro Grind


The rate of change in US economic growth may not matter to long-short stock pickers, but it matters, big time, to both the bond market and the sector asset allocations that are driving performance in the US stock market. As growth slows, big-cap-slow-growth #YieldChasing stocks & sectors outperform.


They didn’t yesterday though. My Connecticut investor meetings were great, but my recommended positioning sucked:


  1. Housing (ITB) led gainers at +2% on the day
  2. Regional Banks (KRE) were right behind the builders at +1.7%


The only thing that has sucked more than having that short position yesterday, has been having it as a long position all year.


BREAKING:Wall St Rallies on M&A Blitz and Home Builder Data” –Yahoo


Yahoooo! Everyone is going to buy everyone as US growth slows. Why not? And I’m not being sarcastic about that either. That said, there’s also a greater chance of Big Alberta Cows jumping over the moon than the US economy accelerating as US Housing and consumption slows.


Another US equity only manager told me yesterday that if I was right on #Q3Slowing (and that Janet Yellen gets more dovish, in kind), that “oh, the stock market is going to go higher on that.”


In other words:


  1. If growth accelerates, as Consensus Macro has been calling for since January, stocks are going to rip
  2. If growth slows, stocks are going to rip too




It’s a good thing everyone is going to be a winner under any scenario with Global Macro volatility (across Equities, Currencies,  Commodities, and Fixed income – ping for our Q3 Macro Theme of #VolatilityAsymmetry) at all-time lows.


That hasn’t happened before, but neither did 1987.


Q: How many US equity only PMs live in fear of missing the last 3% of a 5 year rally in the US stock market? A: lots


Or at least a lot more than there are PMs, strategists, and (god forbid) economists, who are in print like this Canadian mutt writing about the US economic cycle similarities between Q3 of 2007 and 2014.


Enough of the ranting – here are some #timestamped short ideas for this morning’s “futures are up” to sell into:


  1. Russell 20000 (IWM)
  2. Housing (ITB)
  3. Toll Brothers (TOL)
  4. Target (TGT)
  5. Brinker (EAT)


Yep. On the no-volume bounce (Total US Equity Market Volume was -15% and -39% vs. its 3 month and YTD averages yesterday), I’m going right back to the wood (i.e. the SELL calls that worked for me in both 2007 and 2014). They are early-cycle slowdown housing and consumption shorts.


And no, I don’t think that what’s going on in Ferguson, Missouri right now is a bullish catalyst for the 80% of this country being smoked by the all-time highs in Fed-inflated cost of living. Neither would I be surprised if the US stock market had a 3-6% down day in the next 3 months. Then you’ll see panic.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.34-2.42

SPX 1950-1977

RUT 1115-1161

MIB Index 18994-20246

VIX 11.14-17.29

USD 81.31-81.72

Gold 1293-1321


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Panic! Market Up - Chart of the Day

Welcome to September

Client Talking Points


Another solid move for our two favorite macro equity markets overnight (China and India) with the Shanghai Comp +1.4% to a new year-to-date high of +10.4% and India at a new year-to-date high of +29.7%.


Hope springs eternal that QE (quantitative easing) will once again save the day (ECB decision Thursday) – not the bull case European growth bulls were looking for 9 months ago, but who cares! DAX and CAC @Hedgeye TREND resistance lines = 9642 and 4452, respectively.


Total U.S. Equity Volume was -40% vs its year-to-date average last week but it was interesting to see the weekly divergence between Industrials (XLI) which were down -0.2% on the week vs slow-growth #YieldChasing Utilities (XLU) which were +2.0% to +14% year-to-date #EarlyCycleSlowdown.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


The level of activism in the restaurant industry has never been more rampant.  In the past year alone, we’ve seen CBRL, DAVE, DRI, BJRI and BOBE attract largely uninvited attention from these investors. BOBE has a long history of mismanagement, evidenced by flawed strategic rationale, an excessively bloated cost structure and severe underperformance relative to peers.  Fortunately, its poor operating performance presents a tremendous opportunity. After almost a year of pushing for change at Bob Evans, activist investor Sandell Asset Management is claiming a big victory. Activist investor Sandell won at least five seats on the board of the restaurant operator and food processor, based on preliminary results from the company’s annual shareholder meeting last month. This is precisely the sort of bullish catalyst that was central to our high conviction on BOBE.


Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.

Three for the Road


FX: Yen testing fresh 3mth lows vs USD at $104.89 with whispers of incremental Japanese easing



If it doesn’t challenge you, it won’t change you.

-Fred Devito


AAA Travel projected 34.7 million Americans would journey 50 miles or more from home during the Labor Day holiday weekend, the highest volume for the holiday since 2008 and a 1.3% increase over 2013.

CHART OF THE DAY: #ConsumerSlowing (look a little closer)


CHART OF THE DAY: #ConsumerSlowing (look a little closer) - Chart of the Day

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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

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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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