Sympathizing With Q3 Slowing

“Year after year we have had to explain why the global growth rate has been lower than predicted.”

-Stanley Fischer


That’s a quote from earlier this week where the new vice chair of the un-elected-central-economic-planning-committee (Federal Reserve), Stanley Fischer, was way too honest about the Fed’s growth forecasting track record.


Since I was seeing Institutional investors in Boston for the last few days, I kept suggesting  that there was no irony in Fischer’s timing – with Q3 GDP Slowing in the USA, the Fed is getting ready to get more dovish.


Janet Yellen followed Fischer’s lead (Reuters article yesterday) saying that she is “resolved to not raising rates too soon.” That’s code for push out the dots (Hatzius). As an early-cycle slowdown manifests in the US, you’ll be looking at 2016 (or beyond) for a rate hike.


Sympathizing With Q3 Slowing - Yellen bubbles 07.29.2014


Back to the Global Macro Grind


Here’s an abbreviated summary of investor Q&A that the big man, Darius Dale, and I answered in Beantown for the last two days:


Q: If the rate of change in real US economic growth continues to slow, what are the odds of Yellen’s Fed getting more hawkish than the Bernanke Fed was forced to become in the face of 2013’s US #GrowthAccelerating?


A: low


If they did, wouldn’t that be interesting! There was this non-linear strategist by the name of Volcker who did that. Janet won’t.


Q: if the Fed eases (if only rhetorically), do you buy or sell long-term Treasuries?


A: buy


But, but, ‘I can’t buy the long bond (like I did during 2011 #GrowthSlowing when the 10yr went to 1.7% because it’s expensive…’ Right, right. And, as an alternative to “expensive” safety, the Russell is “cheap”…


Q: If the US goes into a recession, do you buy the Russell 2000 here?


A: no


After over 5 years (62 months) of US economic expansion, it’s pretty clear to us that Consensus Macro isn’t anywhere in the area code of being set up for an early cycle US consumer recession. The main reason for that, of course, is that after they missed calling the 2007 top and 2008 decline, most of consensus didn’t come out from under the Old Walls and realize the US was in an expansion until 2013!


Q: How dare gravity (the cycle) surprise both backward-looking-linear-economists who are looking for 3% GDP growth (every quarter for the next 6 quarters) and consensus all at the same time?


A: At first, slowly – then all at once


With bond yields at the long end of the curve falling, US Housing stocks (ITB) leading yesterday’s losers (-0.9% on the day to -9.5% YTD), and the Russell 2000 failing @Hedgeye intermediate-term TREND line of resistance again (-0.8% to -2.7% YTD), this early-cycle slowdown is starting to look, well, like a classic economic cycle.


Q: When does Consensus Macro fold on growth expectations?


A: By year-end


The real smart money (the macro money that’s actually been making money) gets that economic cycles are always testing us to hear Mr. Macro Market’s message – and, as Ray Dalio would say, they are not that sympathetic.


This morning I’ve outlined our immediate-term TRADE risk ranges with @Hedgeye’s proprietary intermediate-term TREND signal in brackets (you can get all 12 relevant macro ranges in this format in our popular Daily Trading Ranges product):


UST 10yr Yield 2.39-2.48% (bearish)

SPX 1 (bearish)

RUT 1107-1148 (bearish)

DAX 8 (bearish)

VIX 13.82-18.18 (bullish)

USD 81.17-81.66 (neutral)

EUR/USD 1.33-1.34 (bearish)

Pound 1.67-1.69 (bullish)

Brent Oil 102.32-104.95 (bearish)

Natural Gas 3.74-4.03 (bearish)

Gold 1 (bullish)

Copper 3.12-3.20 (neutral)


Best of luck out there today,


Keith R. McCullough
Chief Executive Officer


Sympathizing With Q3 Slowing - Chart of the Day


TODAY’S S&P 500 SET-UP – August 13, 2014

As we look at today's setup for the S&P 500, the range is 57 points or 2.31% downside to 1889 and 0.63% upside to 1946.                                                    













  • YIELD CURVE: 2.03 from 2.02
  • VIX closed at 14.13 1 day percent change of -0.70%


MACRO DATA POINTS (Bloomberg Estimates):

  • 5:30am: Bank of England’s Carney presents inflation report
  • 7am: MBA Mortgage Applications, Aug. 8 (prior 1.6%)
  • 8:30am: Retail Sales Advance m/m, July, est. 0.2% (prior 0.2%)
  • 9:05am: Fed’s Dudley speaks in New York
  • 9:20am: Fed’s Rosengren speaks in New York
  • 10am: Business Inventories, June, est. 0.4% (prior 0.5%)



  • House/Senate on Aug. Recess; President Obama on Martha’s Vineyard
  • 10am: National Business Group on Health briefing on large employers 2015 health plan design changes
  • 11:30am: Bloomberg Intelligence holds webinar on corporate inversions, Washington backlash
  • U.S. ELECTION WRAP: Ad Wars; Game Changers in Mich., Alaska



  • Yahoo ordered to face user privacy claims over scanned e-mail
  • Cisco CEO pressured by Verizon, Goldman to adopt software
  • Amazon prices seen holding regulators at bay in Hachette spat
  • Amazon to challenge Square w/credit-card reader, mobile app
  • Alibaba said to target IPO roadshow starting Sept. 3 in Asia
  • Alibaba sells loan unit to Alipay parent in pre-IPO shuffle
  • WellPoint to change name to Anthem as consumer mkting rises
  • Ocwen, Altisource, HLSS put on review for downgrade at Moody’s
  • Consumer activists put pressure on retailers to drop Triclosan
  • Indiana suit challenging Obamacare tax-credit rule goes ahead
  • Cotton extending rout as inventories climb most since 1986
  • Former U.S. attorney to monitor Toyota’s safety practices
  • China credit gauge plunges as industrial-output growth slows
  • U.K. wages post first drop since 2009 as jobless rate falls
  • Iran joins U.S. in backing replacement for Iraq’s Maliki
  • Russia convoy nears border as Ukraine, Red Cross set demands
  • Israel primes for more Gaza fighting as cease-fire winds down



  • Bankers Petroleum (BNK CN) 7am $0.10
  • CAE (CAE CN) 8:44am, C$0.18
  • Canadian Solar (CSIQ) 6am, $0.58
  • Crescent Point Energy (CPG CN) 8am C$0.38
  • Deere & Co (DE) 7am, $2.20 - Preview
  • EZchip Semiconductor (EZCH) 8am $0.34
  • First Majestic Silver (FR CN) 7am, $0.06
  • InterOil (IOC) 6am, $0.11
  • Macy’s (M) 8am, $0.86 - Preview
  • Metro (MRU CN) 7am, C$1.64
  • Onex (OCX CN) 7am $0.94
  • Pinnacle Foods (PF) 8:15am, $0.33
  • SeaWorld Entertainment (SEAS) Bef-mkt, $0.58



  • Aegean Marine Petroleum (ANW) 4:15pm $0.20
  • Aimia (AIM CN) 6:28pm C$0.25
  • Aspen Technology (AZPN) 4:10pm $0.21
  • Cisco Systems (CSCO) 4:05pm $0.53 - Preview
  • Energy XXI Bermuda (EXXI) 4:15pm $0.24
  • Iamgold (IMG CN) 5:04pm $0.03
  • NetApp (NTAP) 4:01pm, $0.57
  • NetEase (NTES) 5pm $1.46
  • Real Goods Solar (RGSE) 4:05pm, ($0.10)
  • Silver Wheaton (SLW CN) 5:06pm $0.20
  • Vipshop Holdings (VIPS) 4:01pm, $0.63
  • WuXi PharmaTech Cayman (WX) 4:30pm $0.47



  • World Awash in Oil Shields Markets From 2008 Price Shock: Energy
  • Indonesia to Retain Ore Export Ban Amid $18 Billion Investment
  • Sumitomo Joins Goldman Seeing Aluminum Market Swing Into Deficit
  • Blue $25.6 Million Diamond Hints at Earth’s Origins: Commodities
  • EU Milk Producers Squeezed as Russian Cheese Ban Cuts Top Market
  • Brent Falls to 13-Month Low Amid Signs China Slowing; WTI Steady
  • Copper at Six-Week Low as Metals Slide on China Growth Concern
  • Kazakhs to Hoard Food as Putin’s Sanctions Rattle Trade Alliance
  • China’s Henan Said to Ask Banks to Support Coal, Solar Companies
  • Sugar Rises in London on Brazil Harvest Concern; Coffee Gains
  • LNG Spot Price in NE Asia Rises on Australia Tender Award: WGI
  • Gold Imports by India Seen Dropping 15% as Rajan Protects Rupee
  • Gold Is Little Changed Below 3-Week High on U.S. to Ukraine
  • Europe’s Green Energy Rules Cost U.K. $156 Billion, Group Says


























The Hedgeye Macro Team
















August 13, 2014

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IRAQ: What to Watch

Takeaway: ISIL is capitalizing on a weak regime in Baghdad, but Iraq's largest Oil fields remain secure for now.

A replay of an expert call we hosted back on June 6th with Professor Charles Hill is included in the link below. His bio and an outline of key takeaways are also included. Professor Hill’s summary of the evolution and potential threats of ISIL’s growing strength out of the Arab Spring in 2011 is a good primer for understanding the longer term dynamic behind ISIL’s advancement into Western Iraq. This topic starts 13 minutes into the hour-long call:


Foreign Policy Briefing With Professor Charles Hill




The EIA estimates that about 75% of the reserves of OPEC’s second largest oil-producing country are contained its southern region. Iraq's other major oil fields with proven reserves (“major” defined as >5Bn barrels or more in proven reserves) is held in regions that ISIL has not yet penetrated. They are currently gaining on two large fields:


1. Southeast of Baghdad

2. Northeast Kurdish Region:

  • By far the largest oil field in Iraq stretching from Kirkuk to Irbil. Neither has been breached thus far

Despite the threat, Iraq’s export capacity remains unabated:

  • Currently shipping approximately 3.2-3.5MM barrels/day into the Persian Gulf (ALL out of Basra and its surrounding regions in the south)
  • ISIL Militants were successful in seizing the Kirkuk-Ceyhan pipeline in June, but the pipeline was under serious repair and had not been operating since March 2nd.
  • From solely a resource capacity standpoint, the IEA estimates that Iraq has the ability to increase its export capacity to 45% of OPEC’s total within the next several years
  • Even without the Kirkuk pipeline, Iraq has the capacity to ship far more than its current OPEC production limit

Nevertheless ISIL took control of Mosul and halted the repairing of the pipeline which is capable of exporting 310K barrels/day into the Mediterranean….


What does ISIL control at this point?

  • Major Cities of Mosul, Fallujah, and possibly now Samara (Just North of Baghdad up the Tigris River)
  • Most of North and Western Iraq: The Iraqi/Syrian border has essentially been wiped out. ISIL has not yet penetrated the Northeast Kurdish controlled region which is likely no coincidence
  • Baghdad is more or less surrounded

IRAQ: What to Watch - Map of ISIL Advance


Over the last week, the threat has escalated on three fronts:


1.       Capturing of the Mosul Dam:

  • ISIL militants captured the Mosul Dam last week north of the city and are fighting to capture the Samarra Dam along with the city itself. Fighting in Samarra has prevented military support to the Kurds in the Northeast. Both Dams sit on the Tigris River which flows from the Mediterranean through Baghdad, and down into the Persian Gulf. They may have the ability to inflict to deliberate and inadvertent flood damage with control of the dam. 

2.       ISIL move on Irbil:

  • Northeastern city in Iraq’s Kurdish controlled region that sits on the Northern tip of Iraq’s largest oil field.

3.       Pursuit and genocide of ancient Yazidi Tribe trapped in Mt. Sinjar:

  • ISIL has stated the goal of systematically destroying the Yazidi cult. ISIL spokemen have said Yazidi tribe has the choice of converting to Islam or being killed.        

These recent developments triggered the response from Washington late last week. President Obama announced airstrikes at Mt. Sinjar and military supplies for Kurdish troops. At Mt. Sinjar, the U.S., France, and U.K. dropped food and water (enough for 8,000 people according to the Defense Department).


As part of ISIL’s pillage, they have reportedly captured U.S.-supplied weaponry and vehicles from Pesh Merga Forces defending the border into Iraq's Kurdish region.


The shift in military firepower may have been a key inflection point for U.S. involvement. Without a clear path for reinforcements from Baghdad, Kurdish forces may be outgunned at the moment as they get ready to defend the two largest cities in Iraq’s Northeastern region. This shift was not considered a real threat back in June when ISIL took the city of Mosul.


A quick look at the map below would explain the significance of the Mosul Dam and the advance on the city of Irbil. Notice that not a single of Iraq’s major oilfields has yet been threatened until now. The ISIL build-up just southwest of Baghdad is increasingly threatening with the distraction of the Iraqi elections.


IRAQ: What to Watch - Map of Oil Fields in Iraq


In his speech last Thursday night Obama threatened airstrikes to protect military personnel and the U.S. consulate IF ISIL were to advance on Irbil. Washington emphasized that the airstrikes will only provide temporary relief on hindering the ISIL advance. A unified coalition coming out of the elections was labeled the key catalyst in uniting the country.


The Obama administration put its stamp of approval on newly elected Prime Minister Haider Al-Abadi. In a speech today Kerry urged Abadi to create a legitimate coalition within thirty days that would unite all sects, a seemingly impossible feat if history is any indication. In adherence to current law, Nuri Al-Maliki will remain caretaker and Prime Minister while Abadi attempts to create an effective coalition. Not surprisingly, Maliki has refused to step aside after an eight year reign. He publicly called the election results “legally insignificant.”


Maliki's disapproval stems from his failure to maintain any semblance of Sunni support. Many Sunni-based groups have now sided with the authoritarian pursuit from ISIL because of their growing disillusionment with the current regime. At this point even Shi’ite military leaders and commanders who have been some of Maliki’s most loyal followers have signed their approval for the political change. Abadi also appears to have the blessing of both Iran and Iraq’s powerful Shi’ite clergy, which have gained significant power since the U.S. helped overthrow Saddam Hussein in 2003.


Abadi said today that he would welcome all political groups to join and unite the government. In terms of granting aid to those affected by the ISIL's radical agenda, John Kerry said that the United States would request international support IF Abadi forms a government that can demonstrate an ability govern. Until this happens, Kerry reaffirmed Obama’s message that the U.S. would not send combat troops.


Abadi’s ability to implement 1) An effective coalition capable of protecting against ISIL’s crusade; and 2) support a Kurdish defense outside of Kirkuk and Irbil will be key catalysts to monitor over the coming weeks.


Please feel free to reach out to us with any additional color or areas of concern that we may be overlooking.  


Ben Ryan


Cartoon of the Day: At the Beach

Takeaway: Is the bull in danger of getting burned?

Cartoon of the Day: At the Beach - Volume cartoon 08.12.2014

VIDEO | Why We're Still Bearish on European Equities and the Euro

Hedgeye macro analyst Matt Hedrick explains why we remain bearish on European equities (via EZU) and the Euro (via FXE) and tells us that today’s weak economic data from Europe remains consistent with our bearish take on the region.

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