A Bull Market In Volatility Remains

One of the most obvious bull market “Trends” remains that in volatility. As measure by the VIX Index, I see significant support at the 21.54 line, and potential for a massive breakout if fear can creep back into market psyche.

A close above 24.03 would do the trick – I see no reason why we can’t retest my prior capitulation target level of 31.

Be careful out there.


CRB Commodity Index prices fell -13% since the 1st week of July, and the S&P 500 had a +88 point move from the mid July low. Is that going to improve consumer confidence? Uh, yeah!

The Michigan Consumer confidence for July improved in July, coming in at 61 vs. 57 expected. Stocks, fortunately, are discounting mechanisms of the future however, not trailing data. Now that the 1st round of inflation deflating and shark bite short squeezing has passed, I expect consumer confidence to fall again in August.

The confidence "Trade" was up. Keep a trade a trade. The confidence "Trend" remains negative.

Cute Counting

“Not everything that counts can be counted… and not everything that can be counted counts.” –Albert Einstein

Yesterday’s intraday selloff was plain ugly, and it fortified the US market’s intermediate bearish “Trend”. Within the context of the immediate “Trade” I was riding, and given the pre market facts I was counting, I got too cute and too bullish at the top of my targeted S&P range of 1 (the intraday high at 10:45am on Wednesday was 1289). Thankfully, one thing I definitely didn’t count on was this idea of buying the US Financials. Never mistake a “Trade” for a “Trend”.

Yesterday was the worst US market decline since June 26th. Homebuilders and Financials led the way lower, trading down over -12% and -6% on the day respectively, reminding the perpetually bullish that their momentum chasing models should be checked at the pool this summer. It lasted 6 vicious trading days, and now the bull shark short covering rally is over. If the XLF (Financials Index) breaks $20.58, I think it could crash for a -24% down move from yesterday’s close.

Larry Kudlow says “no no … that was not a bear market rally Jack – this is a Goldilocks summer rally!” (Jack as in Jack Gage, Forbes Magazine Associate Editor). Jack Gage is Larry’s new lap dog and has about as much experience trading markets as Jack McCullough, my 8 month old son. Almost every answer Gage gives Larry is “absolutely” – didn’t this guy get the Wall Street memo – that meme machine catch word is about 15 months old. Thanks for the guest appearance big guy. Nice suit though.

There were 2 critical macro data points released after I wrote my note yesterday that needed to be counted: Weekly Jobless Claims and Existing Home Sales. The jobless # shot up at 8:30am, and the unsold inventory of American homes was reported at a bloated 11.1 months of supply at 10:00am. Since I am data dependent, these were critically bearish pieces of yesterday’s macro picture that I was not able to address. At 406,000 claims, the 4 week moving average returns to its bearish “Trend” line ascent. Ahead of next Friday’s US employment report, the sober did not want to be long that call option. The “Trend” of American homeowners and banks alike marking their assets to model rather than to market remains. The US housing inventory glut will remain for as long as the country lives in this fairy tale land of listed home prices. It’s where the cash buyer bids that counts.

No, not everything that can be counted in this macro picture actually counts. Inflation and growth do, however. Global inflation can decelerate as economic growth deteriorates further. There are no rules saying they can’t. However, there are a whole lot of “growth” investors globally who won’t know what to do with stocks in their portfolios when deteriorating revenue growth is factored into their models. Companies getting crushed when they guide down also remains a bearish “Trend.”

If you’re long everything fertilizer, Brazil, energy, or Russia – it’s all one and the same. As inflation deflates, so will the equity prices associated with growth expectations incorporated in these commodities, companies, and countries. Brazil got hammered again yesterday, trading down another -3.3% to 57,434, taking its cumulative decline since our “Fading Fast Money” call on 5/20 to -22%. Russia is getting pounded this morning, leading European indices lower, trading down -4.7% so far. Coincidentally, Russian stocks are now down -21% since 5/21. These asset class correlations can be counted, indeed.

So what to do with this mess? I think, at minimum, you have to be getting your portfolio back into its crouch of neutral market exposure. That’s what I opted to do intraday at least. My positive macro callout list was largely calling out the implications of inflation slowing, so I didn’t want you to be levered long commodity exposure yesterday, and I certainly don’t today.

Long China, short Japan makes sense to me in Asia. Short Europe outright until the US Federal Reserve re-flates the US Dollar and deflates the Euro. European currency inflation is killing their economy and the ECB’s Klaus Liebscher is perpetuating a broad based European stock market selloff this morning with this comments that “we have more room to raise rates.” This hawkish rhetoric made sense with the CRB Commodities Index at 472 in early July, not this morning. Commodities are -13% lower in three weeks.

Considering “everything that counts” in my macro model, my new S&P 500 target range is 1212 on the low end, and 1277 on the high end. Look for shark jumping at the top, and bedlam at the bottom.

Have a great weekend,


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

The Song Remains The Same

My fingers started off typing about Columbia’s miss and guide down. Then I realized that I was getting caught up in the weeds. COLM was not a horrible performer relative to its peers. The reality is that this space just stinks. Organic sales under pressure, order cancellations ticking up, FX benefits are easing, cost inputs are rising, pricing power is nil/negative, GM% eroding, and SG&A is heading higher. Not pleasant. Most companies are answering by opening up their own stores, hence taking up their respective capital plan and operating asset base at exactly the wrong time. This means greater margin volatility, which means little reason for valuations to emerge from the basement. Whether it’s COLM, VFC, VLCM, SKX or CROX (all have reported over the past week), the song remains the same. Margins are coming down another 2-3 points for this industry over 2-3 years.

Our recent mantra in the halls here at Research Edge is that it’s time where stock-pickers can once again earn their keep. I’d take it a step further. In that it is more important now than ever to understanding the extent to which management teams ‘get it’ and can properly allocate capital (or realizing that the best allocation is to pull back deployment meaningfully).

Names that have yet to suffer the same fate, that I think will over 2 quarters, include VFC, WRC, PVH, GIL, DSW, ADS.DE,DKS and (still more to come) in SKX. I continue to like companies that are entering harvesting mode as it relates to brand investment and capital deployment. These include RL, TBL, LIZ, FINL and PSS.
Here's a chart showing aggregated sales, GM, and inventory/sales for all companies that have reported in this space thus far. Not a pretty picture whatsoever.

A Lesson in Resisting Temptation

CROX wins the award for the name I’ve been most tempted to turn positive on over the past year. Yes, the core product is a complete fad that is heavily dependant on consumers under the age of 12 and over the age of 50 (i.e. not good). Yes growth is negatively inverting, asset turns are eroding as CROX grows away from its core, and yes, margins are coming down.

But the stock has been trading like the brand is terminal – which I absolutely do not think is the case (nor do any retailers I speak with regularly), and the international opportunity remains rather huge. I’ve been increasingly tempted by the numerous SG&A, capex and working capital levers that are available to management to recapture margin. With investors giving up hope and the stock trading off 45% after hours and trading at sub-1x sales and tangible book, it’s tough to resist the temptation to do the deep dive here. Expect to hear back from me soon with some deep analysis.

In the spirit of maintaining my role as my own worst critic, my biggest regret here is not having a mechanism to catch the divergence between shipments and retail sales. The chart below shows how wholesale sales are falling short of retail relative to prior quarters based on the numbers CROX reported after the close and meshing with NPD data we received last week (which appeared to check out OK). Catching this just days earlier would have offered me the foresight to catch a nice trade and, more importantly, preserved capital for our clients who own the stock. Research Edge clients can rest assured that I’m on the case to capitalize on this next time around – for CROX as well as everyone else in the industry.
Wholesale sales are falling short of retail relative to prior quarters based on the numbers CROX reported after the close and meshing with NPD data we received last week.


My sources indicate that IGT may have begun an aggressive cost cutting program by targeting approximately 500 employees (10% of the workforce) for dismissal. The cuts appear to be concentrated in the manufacturing and service areas but probably will impact all divisions. This aggressive move by IGT could generate $40-50m ($0.08-$0.10) in annual cost savings. My sense is that layoffs are only the first bite out of a pretty comprehensive cost reduction apple. IGT management was deliberately vague on their conference call but I suspect there will be details forthcoming. We may have a margin story forming here people.

I’ve followed IGT for 12 years and I’ve known them to be many things including resourceful, creative, shareholder friendly, etc. But I’ve never known them as “cost focused”. Okay I’m being nice. IGT is chunky, obese, rotund, wears long loose clothing, etc. I think that mentality is changing and investors may be underestimating the impact. IGT could emerge from this fat boot camp “a lean, mean, fighting machine” (Dewey Oxburger, Stripes, 1981).

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 80.52%
  • SHORT SIGNALS 78.67%