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#Nice Behavior

This note was originally published at 8am on October 14, 2014 for Hedgeye subscribers.

“It would be nice to think that such bad behavior will never happen again.”

-Daniel Alpert


Some people are nice in this business. Some people are mean. I tend to be nice to subscribers, children, and dogs. I guess I have a not so nice tweet-streak in me for pundits who aren’t accountable. Hockey players can be mean that way.


The aforementioned quote comes from a non-hockey-non-consensus economics book I have been waiting to review called The Age of Oversupply, by Dan Alpert from Westwood Capital. It’s an outside the box, but reasonable way to consider #deflation.


Dan is one of the nice guys who holds himself accountable to his clients. He is also on a short list of people who were appropriately bearish on things like supply in 2008. The main contention in his book is that oversupply is here to stay. That appears right, for now.


Back to the Global Macro Grind


Some of the #MoBros on Twitter have been calling me a meany for calling their levered-long-momentum positions in small cap and/or social (non profit publicly listed companies) stocks #Bubbles. But Dan is down with that – he calls them what they are too.


The Great Credit Bubble may have burst, but the age of oversupply hasn’t ended – and won’t anytime soon. Abundant labor, excess capital, and cheap money are here to stay.” (The Age of Oversupply, pg 18)


By my math, the only way to unwind the excess and stupid-valuation-storytelling associated with these cheap moneys is via lower prices for #bubble stocks. Yesterday’s US stock market volume was revealing on that front:


  1. Total US Equity Market Volume (total exchange + OTC + OTCBB) was +6.2% vs. its 3 month average
  2. Total Exchange Volume was +44% vs. its 3 month average
  3. Total Traded Value (Russell 3000) was +30% vs. its 4 month average


That’s three different ways we try to look at equity market volume in real-time. When it comes to the pick-toggling junk bond #bubble, finding real-time volume read-throughs is more like finding Waldo.


Today’s Chart of The Day (exhibit 51 in our Q4 Macro Themes deck) is a picture of what I am trying to hammer home in terms of the relationship volume has with inflated prices – Total Exchange Volume vs Russell 3000 TTM P/E multiple.


Punch-line: this is the most expensive and illiquid market since the caveman.


“So” how does expensive illiquidity sync with oversupply of labor, capital, etc.? Unfortunately, when Japanese, European, and US growth is slowing (all at the same time), I think what that means is pretty straightforward:


  1. Deflation of illiquid equity bubbles
  2. Re-flation of premiums paid for liquidity (JGBs, Bunds, Treasuries)
  3. And a whole whack of revisionist sell-side economics excuse-making along the way


You see, until this market snapped the backs of the Moving Monkeys (point and click single-factor time/price charts using things like the “50 and 200 day” moving averages), they didn’t have to pay attention to things like books, volume, or volatility.


After a +138% rip in US equity volatility (VIX since the Russell #Bubble topped on July 7th, 2014), they need to start reading!


To be clear on timing, since we’re now probing:


A)     Immediate-term TRADE overbought signals in VIX (risk range = 17.78-24.98)

B)      Immediate-term TRADE oversold signals in SPX and RUT (SPX risk range = 1849-1937)


I don’t want you to be shorting US stocks and buying TLT with the 10yr Yield at its YTD lows (2.21%) today.


I just want you to, objectively, rewind the risk management tapes and learn something from what a baseline 3-factor model (price, volume, and volatility) was signaling for, well, most of 2014.


For OCT to-date, the #Quad4 deflation in US equity sector styles levered to inflation and/or growth expectations looks like this:


  1. Energy Stocks (XLE) down -10.65%
  2. Basic Material Stocks (XLB) down -9.03%
  3. Industrial Stocks (XLI) down -6.79%


That’s precisely what you should see in #Quad4. Mr. Market is telling you that both growth and inflation expectations are slowing, at the same time. Unless you are overweight Cash, Treasury Bonds, and Munis, that is not #nice portfolio behavior.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr yield 2.20-2.39%

SPX 1849-1937

RUT 1042-1081

VIX 17.78-24.98
USD 84.99-86.64

Gold 1211-1241


Best of luck out there today,



#Nice Behavior - 10.14.14 Volume vs. Russell PEs


TODAY’S S&P 500 SET-UP – October 28, 2014

As we look at today's setup for the S&P 500, the range is 140 points or 6.15% downside to 1841 and 0.99% upside to 1981.                               













  • YIELD CURVE: 1.89 from 1.88
  • VIX closed at 16.04 1 day percent change of -0.43%


MACRO DATA POINTS (Bloomberg Estimates):

  • FOMC starts 2-day meeting
  • 7:45am: ICSC weekly sales
  • 8:30am: Durable Goods, Sept, est 0.5% (pr -18.2%, rev -18.4%)
  • 8:55am: Redbook weekly sales
  • 9am: S&P/Case-Shiller 20 City m/m, Aug., est. 0.18% (pr -0.5%)
  • 10am: Consumer Confidence Index, Oct., est. 87 (prior 86)
  • 10am: Richmond Fed Mfg Index, Oct., est. 11 (prior 14)
  • 11:30am: U.S. to sell 4W bills
  • 1pm: U.S. to sell $29b 2Y note
  • 4:30pm: API weekly oil inventories



    • 8:30am-4pm: U.S. Chamber of Commerce hosts cybersecurity summit
    • 9am: Interior’s Jewell delivers keynote remarks at National Congress of American Indians Annual Convention; Atlanta
    • 9:30am: U.S. Chamber of Commerce releases report on risk-based pricing in consumer lending
    • U.S. ELECTION WRAP: Runoff Scenarios and Senate Control; Polls



  • Ackman’s $5.3 Billion Allergan Bet Examined Before Ouster Vote
  • Apple’s Cook, Alibaba’s Ma Talk Marriage of Mobile Payments
  • Alibaba’s Ma Targets Hollywood Studio Partners in Content Push
  • T-Mobile Raises 2014 Subscriber Forecast After Beating Ests.
  • Regal Entertainment Exploring Alternatives; 3Q Adj. EPS Beats
  • GM to Build Volt Electric Drive, Invest $300m in Michigan
  • Twitter CEO Says Adding Users Top Priority as Growth Slows
  • Sanofi SlumPS on Forecast for Flat Diabetes Sales Next Year
  • Madison Square Garden Mulls Plan to Split Into 2 Companies
  • Money Mkts Split With Economists on Fed Interest-Rate Outlook
  • Largest U.S. Banks See Worst Outflow of Money in ETF Since 2009
  • Detroit to Learn Fate of $7 Billion Debt-Cutting Plan Nov. 7
  • CDC Toughens Monitoring Guidelines for People With Ebola Risk



    • Aetna (AET) 6am, $1.58
    • Agco (AGCO) 8am, $0.63
    • Alere (ALR) 7:30am, $0.52
    • Ametek (AME) 7am, $0.61
    • Arch Coal (ACI) 7:45am, ($0.41) - Preview
    • AutoNation (AN) 7:30am, $0.86
    • Centene (CNC) 6am, $0.99
    • CIT (CIT) 6:30am, $0.89
    • Coach (COH) 7am, $0.45 - Preview
    • Consol Energy (CNX) 6:45am, $0.18 - Preview
    • Corning (GLW) 7:15am, $0.38
    • Cummins (CMI) 7:30am, $2.28 - Preview
    • Ecolab (ECL) 8:05am, $1.20
    • EI du Pont de Nemours (DD) 6am, $0.53 - Preview
    • FirstMerit (FMER) 7:30am, $0.37
    • Freeport-McMoRan (FCX) 8am, $0.61 - Preview
    • Harris (HRS) 6:30am, $1.09
    • HCA (HCA) 8:30am, $1.17
    • Laboratory of America (LH) 6:41am, $1.75
    • Marsh & McLennan (MMC) 7am, $0.53
    • Martin Marietta (MLM) 8:20am, $1.70
    • MeadWestvaco (MWV) 7:25am, $0.54
    • MSC Industrial Direct (MSM) 7:30am, $1.01
    • Noble Energy (NBL) 7:27am, $0.36 - Preview
    • Paccar (PCAR) 8am, $0.96 - Preview
    • Parker-Hannifin (PH) 7:30am, $1.67 - Preview
    • Pfizer (PFE) 7am, $0.55 - Preview
    • PG&E (PCG) 9:02am, $1.14
    • Schnitzer Steel (SCHN) 8am, $0.31
    • Sensata Technologies (ST) 6am, $0.62
    • Sherwin-Williams (SHW) 7am, $3.22
    • Sirius XM (SIRI) 7:01am, $0.02 - Preview
    • Spirit Airlines (SAVE) 6am, $0.97
    • Starwood Hotels (HOT) 6am, $0.65
    • Synergy Resources (SYRG) 6am, $0.13
    • TD Ameritrade (AMTD) 7:30am, $0.36
    • Timken (TKR) 7:25am, $0.66
    • TRW Automotive (TRW) 7am, $1.69
    • United Therapeutics (UTHR) 6am, $1.79
    • Vishay Intertechnology (VSH) 7:30am, $0.28
    • Wabtec (WAB) 7:56am, $0.89
    • Waddell & Reed Finl (WDR) 6:59am, $0.92
    • Whirlpool (WHR) 6am, $3.13
    • Xylem (XYL) 7am, $0.52 - Preview



    • Aflac (AFL) 4:06pm, $1.43
    • AGL Resources (GAS) 5:30pm, $0.30
    • American Financial (AFG) 5pm, $1.14
    • Ameriprise Financial (AMP) 4:07pm, $1.96
    • Anadarko Petroleum (APC) 4:05pm, $1.27
    • Arthur J Gallagher (AJG) 4:13pm, $0.68
    • Aspen Technology (AZPN) 4:10pm, $0.27
    • CH Robinson Worldwide (CHRW) 4:15pm, $0.81
    • Chemtura (CHMT) 4:37pm, $0.30
    • Cincinnati Financial (CINF) 4:02pm, $0.71
    • CNO Financial (CNO) 4:05pm, $0.32
    • Dun & Bradstreet (DNB) 4:15pm, $1.72
    • Dyax (DYAX) 4:01pm, ($0.06)
    • Eagle Materials (EXP) 4:15pm, $1.03
    • Edison Intl (EIX) 4pm, $1.35
    • Electronic Arts (EA) 4:01pm, $0.53 - Preview
    • Equity Residential (EQR) 4:53pm, $0.33 - Preview
    • EXCO Resources (XCO) 4:08pm, $0.01
    • Express Scripts (ESRX) 4:25pm, $1.29 - Preview
    • Facebook (FB) 4:05pm, $0.40 - Preview
    • Fiserv (FISV) 4:01pm, $0.84
    • Gilead Sciences (GILD) 4:05pm, $1.93 - Preview
    • Green Plains (GPRE) 4:48pm, $0.96
    • Hatteras Financial (HTS) 4:02pm, $0.58
    • InvenSense (INVN) 4:06pm, $0.16
    • Kimco Realty (KIM) 4:01pm, $0.14
    • Macerich (MAC) 4:01pm, $0.20
    • Marriott Intl (MAR) 4:30pm, $0.62
    • McKesson (MCK) 4pm, $2.73
    • Mueller Water Products (MWA) 4:25pm, $0.12
    • Newfield Exploration (NFX) 4:01pm, $0.50
    • Owens-Illinois (OI) 4:04pm, $0.73
    • Panera Bread (PNRA) 4:05pm, $1.42
    • PriceSmart (PSMT) 4pm, $0.73
    • SM Energy (SM) 5:15pm, $1.47
    • SolarWinds (SWI) 4:07pm, $0.43
    • Total System Services (TSS) 4pm, $0.52
    • Trinity Industries (TRN) 4:05pm, $0.86
    • TriQuint Semiconductor (TQNT) 4:02pm, $0.24
    • UDR (UDR) 4:01pm, $0.06
    • United States Steel (X) 4:10pm, $1.20
    • Verisk Analytics (VRSK) 4:10pm, $0.64
    • Vertex Pharmaceuticals (VRTX) 4:01pm, ($0.65)
    • Western Digital (WDC) 4:15pm, $2.04
    • Willis (WSH) 4:30pm, $0.17
    • Wynn Resorts (WYNN) 4:05pm, $1.82



  • Russian Mining Tycoons Seek to Trim Debt as Sanctions Sting
  • Soybean Meal Climbs to Four-Month High on Demand to Fatten Hogs
  • Crop Slump Sending Farmers to Wheat as Best Option: Commodities
  • Gold Trades Above Two-Week Low on Fed Outlook to Physical Buying
  • Nickel Advances in London Following Six Sessions of Declines
  • Rice Drops 3.1% in Chicago Trading to Lowest Since October 2010
  • Wheat Gains for Second Day on Australian, Russian Crop Concerns
  • Steel Rebar Holds Losses as Iron Ore Futures Slump to Record Low
  • Goldman Sees Nickel Rally Following a Drop in Pig Iron Output
  • Palm Oil Jumps Most in Seven Weeks on Malaysia Biodiesel Demand
  • Alpiq’s Former Head of Trading Erik Saether Joins Sweden’s Sweco
  • Cocoa Falls to Three-Month Low in London; Arabica Coffee Slides
  • Japan’s Sendai Vote Signals Quickening Pace on Reactor Restarts
  • Rice Exports From India Seen Plunging 30% as Harvest Contracts

























The Hedgeye Macro Team


















October 28, 2014

October 28, 2014 - Slide1



October 28, 2014 - Slide2

October 28, 2014 - Slide3




October 28, 2014 - Slide4 

October 28, 2014 - Slide5

October 28, 2014 - Slide6

October 28, 2014 - Slide7

October 28, 2014 - Slide8

October 28, 2014 - Slide9

October 28, 2014 - Slide10

October 28, 2014 - Slide11

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.51%
  • SHORT SIGNALS 78.32%

Equity Market Bounce

Client Talking Points


The sector variance in the U.S. stock market has completely blown out – yesterday’s -2.1% drop in Energy (XLE) to -5.3% year-to-date vs. Healthcare (XLV) hanging out at the rafters +0.1% to +17.8% year-to-date has a lot to do with #Quad4 deflation.


Copper is bouncing to lower-highs this morning as Chinese stocks had their 1st up day in 6; looks like a selling opportunity anywhere north of $3.09/lb – which is consistent with our SELL Old China (buy New China) theme + commodity deflation.


After opening “up” yesterday, then getting smoked into the close, they bounce them again as Sweden cuts rates to 0.00% - yet everyone knows that isn’t going to do a darn thing for the economy; keep selling European equities on green.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.


We continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest).


Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road


TREASURIES: 10yr = 2.25%, remains in crash mode, -26% YTD (long $TLT)



Sometimes it's just enough to smile sincerely.

-Mike Dolan


66%, the percentage of teams to win the World Series after winning Game 5 and breaking a 2-2 tie. The San Francisco Giants did just that Sunday night, and they play the Kansas City Royals tonight in Game 6.

CHART OF THE DAY: Variance And Contentions


CHART OF THE DAY: Variance And Contentions - Chart of the Day

Variance And Contentions

“Certainty is the mother of quiet and repose; uncertainty the cause of variance and contentions.”

-Edward Coke


Edward Coke was Chief Justice of the King’s Bench in the early 17th century. His aforementioned quote is dead on when I think about it in the context of modern central planning ideology.


Many want un-elected bureaucrats and benches (like the Federal Reserve) to deliver them the elixir of certainty, quiet, and repose. Unfortunately, markets and economies can’t be centrally planned that way. They are grounded in uncertainty and contention.


“Variance” was a thoughtful word for a judge to be using way back then. It’s too bad that the Fed doesn’t talk in these terms. Variance (how far a set of numbers spread out) and correlation risks are at the heart of what modern Macro Risk Managers think about every day.


Variance And Contentions - EL chart 2


Back to the Global Macro Grind


The variance between how political types talk about market risks and how practitioners on the buy-side explain them continues to widen.

That’s not a good thing. With time, humans aren’t supposed to get dumber.


That said, into both the almighty central planning decision tomorrow (Fed meeting) and Q3 GDP report this week, “should I be turned into a vegetable or a happy imbecile?” (Taleb, pg 61 of Antifragile)


Great question! I actually get asked some version of that question, a lot. Bob Brooke, Darius Dale, and I spent all of yesterday meeting with Institutional Investors in Boston. And one of the underlying questions remains – ‘what if it’s different this time?’


A: It’s not.


What we call #Quad4 deflation is like gravity – it occurs slowly, then all at once.


One of the best ways to observe which “Quad” the market is trending towards is through what modern day risk managers call Sector Style Factors (the variance of the stock market’s sector returns):


  1. When Sector Variance is LOW (like all-time lows in 2013) a monkey can be right on the long side (every sector goes up)
  2. When Sector Variance is RISING (like now), sector returns diverge, and momentum monkeys fall from the trees


Low-variance is the birth-child of compressed (low) volatility. And, to a large extent, that’s what the Fed is trying to promise you, in perpetuity. How else could an un-elected ideology live, unless it delivered political “certainty”, forever!


Then, non-linear market risks do what they do, and volatility rips +160% to the upside in 3-4 months (from the all-time #RussellBubble high of July 7th, 2014 to mid-0ctober) and the Fed needs to “smooth” that with the next central plan.


Or so they think…


And what happens when the next central plan loses credibility in delivering the one thing every political animal who has empowered the Fed is whining about when they stump about “inequality” (with the one thing being inflation)?


Oh, the #deflation.


Look at yesterday’s market action, in Sector Variance terms:


  1. Energy Stocks (XLE) down another -2.1% on the day to -7.53% for OCT to-date
  2. Basic Material Stocks (XLB) down another -2.1% to -4.68% for OCT to-date
  3. Healthcare Stocks (XLV) up another +0.1% to +2.14% for OCT to-date


Yep, since Healthcare (XLV) and Consumer Staples (XLP) are the only Sector Styles you’d be really net long of in Hedgeye #Quad4 terms right now (versus short the commodity #deflation sectors), it looks like Mr. Market is confirming a loss of the Policy To Inflate’s credibility.


And what happens after all 3 of the major central planning committees (Fed, BOJ, and ECB) have already cut to zero? Oh, it looks like Sweden is cutting to 0.00% (from 0.25% prior) this morning. Maybe European stocks can go up for another 4 hours on that.


As both volatility and variance risks are rising, the other big market risk that develops is called mean reversion risk.


In other words, now that Healthcare stocks (XLV) are +17.8% YTD (versus Energy -5.3%), prudent Portfolio Managers starts to ask themselves how much more they can pay up to chase Healthcare stocks.


Unless it’s different this time (it’s not), there are historical precedents for what people are willing to pay for things too. Enter the contentiousness of the “valuation” debate. How much are you willing to pay to not lose money?


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.12-2.31%


RUT 1057-1127

Nikkei 149

VIX 14.34-28.05

WTI Oil 79.79-81.84


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Variance And Contentions - Chart of the Day

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