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Moving America's Future Forward

“Sometimes you got to go back to actually move forward.”

-Matthew McConaughey in the new Lincoln MKC commercial



I thought Lincoln nailed it with this one-minute McConaughey spot (click here Lincoln’s newest commercial). Both our personal and collective histories have always provided great sources of leadership and inspiration in this country. “You just have to know where to look.”


Moving America's Future Forward - 4g7


As our firm moves forward, we’ll continue to be the change we’d like to see in America. We’ve created an outreach program called HedgeyeCares and tomorrow we’ll be hosting our inaugural golf tournament to support the area’s youth through the Bridgeport Caribe Youth Leaders, a 501(c)(3) organization. (Here’s a short video we put together with testimonials from current recipients: https://www.youtube.com/watch?v=t5NgER166I0).


We’re also extremely thankful to The Lincoln Motor Company for its title sponsorship.  Lincoln is a great American luxury brand that recognizes the importance of giving back to communities across the country.  With its test drive program  “Driven to Give”, it has raised more than $3.27 million dollars for schools and charities across the United States since it was created in 2011. That’s a great win!


Thanks again to all of our event sponsors and participants. Change doesn’t happen unless we make it happen, together.


Back to the Global Macro Grind


Change happened in macro markets last week. They went backwards! And it wasn’t just stocks that pulled back. They smoked pretty much everything from commodities to bonds to any stock that looked like a bond. That leaves us with a lot to think about ahead of the Fed this week.


Will the US Federal Reserve get more hawkish or dovish at its Wednesday meeting? With the US Dollar having had its biggest point to point ramp since 1997, and the 10yr bond yield ramping +15bps week-over-week to 2.61%, expectations for hawkishness are high.


Since I think this USD ramp has been largely driven by horrendous economic data in both Europe and Japan (weaker Euros and Yens), I think you fade the recent strength in US interest rates and buy what was down the most last week:


  1. Long end of the bond market (TLT and EDV) with no support for the 10 and 30 yr yields to 2.34% and 3.11%, respectively
  2. Gold (GLD) was down -2.8% last week (to +2.1% YTD), and has immediate-term upside to $1275
  3. Utilities (XLU) were down -3.1% last week (to +11.3% YTD), and has immediate-term upside to $44
  4. REITS (VNQ) were down -5.4% last week (to +13.2% YTD), and has immediate-term upside to $77
  5. Emerging Markets (VWO) got sacked last week (MSCI LATAM -6.7% on the wk) and have immediate-term upside to $46


That’s why you see me investing what was our largest Cash position of the year in the Hedgeye Asset Allocation Model, taking up our US Equity exposure from 0% to 6% (split the net long position between Utilities and REITS, and stay short the Russell, Housing, and Regional Banks).


The alternative to buying slow-growth #YieldChasing is, of course, chasing the #MoBros. You know, something like Argentina (ARGT) which was up another +6.1% last week to +105% YTD – even though you really can’t get your money in/out of the country.


With the Russell 2000 down for the 2nd straight week to -0.3% for 2014 YTD, that’s why I still like staying net short (for long onlys its called underweight) one of the most obvious bubbles in America right now – small cap stocks that trade at 50x trailing earnings, with no liquidity.


In other #bubble news, at 30x revenues and $220B in market cap, you’ll have plenty of liquidity in AliBubble (BABA) this week!


While I am sure BABA is a fantastic story… as I see it, the problem with Jack Ma’s company is that... I can’t see it. While the Old Wall is fist pumping this sucker to oblivion this week, that’s the bear case – #opacity. And that’s all I have to say about that.


The other big #bubble callout from last week was #deflation.


Unfortunately, your cost of living didn’t deflate much (CRB Food Index was up another +1.3% on the week to 18.3% YTD, Cattle prices were up another +0.7% to +33.4% YTD, etc.), but that was one of the most broad based selloffs across asset classes of the year.


Most of this #deflation was driven by the biggest currency move (in weekly rate of change terms) we’ve seen in 17 years. When stuff moves that fast, what you get is this thing called volatility.


In rate of change terms, the +10.1% week-over-week move in front month US Equity volatility (VIX) was peanuts compared to the % move in volatility in foreign currency and fixed income. That’s what happens when the Fed suppresses volatility to all time lows. The bubble peaks.


If we’re right and we’re set up for one of the most asymmetric moves in volatility ever (see our Q3 Macro Theme deck titled #VolatilityAsymmetry), Americans may be looking back at late 2007 a lot faster than they think.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.34-2.62%


RUT 1151-1169

VIX 11.84-14.04

EUR/USD 1.28-1.30

Gold 1


Best of luck out there today,



Keith McCullough


Moving America's Future Forward - Chart of the Day

Investing Ideas Newsletter

Takeaway: Current Investing Ideas: EDV, FXB, GLD, HCA, OC, OZM, RH, TLT and XLU.

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.


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      - bubble cartoon 09.09.2014



TLT & EDV | Adding XLU


(We added Utilities Select Sector SPDR ETF (XLU) on Friday.)


What a week it’s been for investors with large allocations to slow-growth, yield-chasing instruments. The iShares 20+ Year Treasury Bond ETF (TLT) declined nearly -2% WoW; that decline was overshadowed by a near -3% drop in the Vanguard Extended Duration Treasury ETF (EDV) and was matched by the Utilities Select Sector SPDR Fund (XLU) – which we are adding to investing ideas today.


Leaks and loose-lipped lunches from sources close to the Fed – including former Chairman Ben Bernanke – confirmed that the FOMC is preparing to remove the “considerable time” language from its guidance on interest rates at or shortly after its SEP 16-17 meeting. Recall that previous FOMC statements have suggested that normalization of the Fed Funds Rate would come a “considerable time” after tapering had concluded.


Investing Ideas Newsletter      - 12


Given consensus expectations that still call for compounding 3% real GDP growth, quarterly, as far as the eye can see, investors interpreted this catalyst as decidedly hawkish in that it perpetuated expectations for a rate hike(s) sooner than what was then priced into the market – i.e. from JUL/AUG of 2015 to JUN/JUL of 2015.


While today’s retail sales data is resoundingly supportive of these expectations, we continue to think US economic growth is poised to slow as we traverse through the back half of 2014. One month does not a trend make, however, as both domestic consumption and employment data are now breaking down from a trend perspective.


That, coupled with both #GrowthSlowing and fears of deflation in the Eurozone weighing on European rates (which, in turn, drags down US Treasury rates in the process) is supportive of our outlook for US rates – i.e. lower, not higher, from here with respect to the intermediate term.


Our immediate-term risk for the US Treasury 10Y Yield is 2.33% to 2.58%. Given where rates are today (i.e. at/slightly above the top end of that range) we think it’s a GREAT spot to gross up your exposure to the aforementioned slow-growth, yield-chasing trade.


That means get out there and buy yourself some TLT, EDV and now XLU. Don’t get caught on the same side as consensus when the tide turns!


FXB: How closely the GBP/USD is holding on to polls on Scottish Independence! We maintain our long call in the cross going into voting on September 18th.


This week three polls showed slight favor to the NO camp, and the GBP/USD saw a rally (but was down -60bps week-over-week)


  • Survation:  53% NO vs 47% YES
  • YouGov:  52% NO vs 48% YES
  • ICM/Guardian:  NO 51% vs YES 49%

Investing Ideas Newsletter      - 57 


Critically, these results are in contrast to last weekend’s poll release from YouGov that showed for the first time a slight majority favoring independence, or 51% YES to 49% NO, which carried the GBP/USD down -1.7% for the week.


Also note, UK bookmaker Betfair says the “No” vote is trading at 80% probability.

Setting aside the polls and betting markets, the most notable reasons for Scotland to stay a part of Great Britain are related to the Scottish economy itself.  We’ve outlined a number of major risks to the Scottish economy should the Scots pursue independence, including:

  • Currency – UK politicians have stated that Scotland could not use Sterling. The country would have to issue its own currency
  • Central Bank – until the formation of a central bank there is no backstop for sovereign debt
  • Massive Capital Flight –investors could pull money out of Scottish banks en masse that would destabilize the financial system 
  • EU Membership – it’s unclear if an independent Scotland would be granted EU membership, which could have huge trade implications
  • Regulation – uncertainty if banks would remain regulated under the UK regulatory authority? Tax and trade regulations also uncertain
  • Economic Drag – prominent financial firms likely to move to London
  • Budget –  the Institute for Fiscal Studies pointsout that Scotland's Deficit could be 4.6% if independent. Low credit quality could negatively impact debt raises, and push the country's debt and deficit levels higher, a vicious cycle.

Our view continues to be that the No vote will prevail and the British Pound will rally accordingly.


We also think that given the weak nature of the Scottish economy and the fact that 2 out of every 3 Scots are on some form of social welfare, over the long run a Great Britain without Scotland might actually be a stronger economy and certainly more healthy from a fiscal perspective.  So on some level, perhaps the British Pound is in a win-win situation given its recent sell off.  A No vote leads to a relief rally and a Yes votes leads currency traders to assess United Kingdom’s much improved fiscal health without Scotland, which leads to a long term tail wind for the Pound.


Heads you win, tails you win. We like that set-up.


GLD: The market has clearly positioned itself for a Fed rate hike and a stronger U.S. dollar. With gold being the commodity most tightly correlated to the outlook for the U.S. dollar, a USD breakout makes data-supported, logical sense to us. While we were firmly on top of the observable macro factors driving domestic and European growth (which are both slowing), we underestimated ECB President Mario Draghi’s hand in the central bank-fueled currency war.  


On March 6th the EUR/USD hit its YTD top when Draghi hinted at a rate cut by saying, “There is consensus [among the ECB Committee] about being dissatisfied with the potential path of inflation.”


Since the May 6th YTD highs in the EUR/USD:


  • USD: +5.6%
  • GLD: -5.6%


The relationship here is self-explanatory. At two points over the summer, Draghi took deliberate policy steps to devalue the EUR/USD. Anchoring on the FACT that the price of Gold is directly related to the outlook for the USD, the FOMC meeting next Wednesday the 17th is the next catalyst.


Refreshed daily, our real-time view on both Q3 and full year 2014 growth estimates remain meaningfully divergent from consensus (the Fed and sell-side macro).


We expect incremental divergence in this view to warrant an easier Fed.


If a pile of cash and a pot of gold sat on a table, we’ll take the Gold prior to the spotlight shifting from Draghi to Yellen.           


HCA: What a difference a week makes.  Investors have tuned out last week’s UHS commentary regarding a sequential slowdown in volume and tuned into positive utilization and growth comments made by HCA at a conference earlier in the week. 


In fact, this was enough to warrant major brokerage firm’s increase their price targets to where we have been since Q2, in the mid-$80s.  That being said, any price in the $80s, to us, implies a fair valuation and with a series of difficult comps ahead of us the asymmetric return setup we saw when first adding to HCA to Investing Ideas is waning.


After a pickup in July, results of our August physician survey point to slower patient volume in August.  The three-month average trend is now negative for a second month, despite being less bad on the margin.  Crux of the weakness stems from Midwest region, which experienced the largest decline.  South and West regions continue to be strong where HCA has the greatest presence.  Despite being up 46.3% YTD, we can continue to favor HCA on the long side and will be monitoring the data closely for signs of weakness as we move closer to our target.


Investing Ideas Newsletter      - tt


OC: Owens Corning has been a problematic "value" position on this list and a performance disappointment in 2014.  While we despise losing, it is an unavoidable reality in capital markets.  When evaluated independent of performance, we think that shares of OC are likely to prove strong performers over the next year or two from current levels.  That said, for taxable investors with a loss, it might be worth exploring recognition of a tax loss with a tax expert, possibly re-entering OC after qualifying.


We have expected OC’s insulation division to move to profitability, revealing the value of this unit in the transition.  The insulation division has historically had mid-teens margins and we expect it to again show that level of profitability.  We have also expected a rebound in profitability in the Composites segment.  Oddly, we got those two catalysts right, with the shares underperforming anyway.


Investing Ideas Newsletter      - oc


What we did not fully anticipate was a decline in profitability in the Roofing segment and the resultant loss of investor confidence in that business’s prospects.  Unfortunately, a lack of storm activity and other factors led to lower than expected volume and weaker pricing in 2014, particularly relative to very strong 2013 results.  As we see it, the decline in margin in the roofing segment raised the prospect that this industry was ‘broken’, which is to say that the previous price discipline had been lost.  We do not believe that to be the case. 


Recent price increases (e.g. this price increase from GAF here) suggest to us that competitors still understand the importance of maintaining a cooperative (oligopolistic) pricing environment.  Our recent distributor survey work also point to improved pricing in September from weak levels earlier in the year.  While volumes in 3Q and 4Q are likely to remain poor, better pricing seems likely to alleviate concerns about price-based competition and, we would expect, lift shares of OC. 


Investing Ideas Newsletter      - oc2


Investing in asset-rich, underperforming Industrials can require patience and strong stomach.  We still believe that OC is an undervalued company, - rare in today’s market - that holders will be well rewarded for tolerating in coming quarters.


OZM: Shares of Och-Ziff (OZM) continue to trend water mainly on fears of a more intense regulatory environment. As highlighted in prior updates, we think the focus on the firm’s investment in a mining deal in 2011 during a controversial time is well discounted in shares as the item has been fully disclosed in the company’s financials and mentioned several times in major media outlets.


Currently shares continue to trade at no incentive fee multiple despite the main Och Multi-Strat fund being up over 2.0% year-to-date. The average incentive fee multiple has been 3.7x creating at least $1.50 per share upside in shares on our calculated incentive fee earnings of $0.40 for this year. This excludes the firm’s current dividend yield of over 6% for a total return opportunity of nearly 20% in the intermediate term.

Investing Ideas Newsletter      - ozm


RH: The minute we saw the Restoration Hardware's numbers, we were shocked, to say the least. Good EPS ($0.67 vs $0.64E consensus), but nowhere near where it should have been, and revenue well below our model (and just about everyone else’s). That didn’t sit well with us, a high-growth, high-multiple name like RH does not have the luxury of missing on the top line. That’s particularly true for us given that such a big part of our thesis is predicated on outsized revenue growth over time.


Our concern lasted about 15 minutes... until we a) realized precisely what drove the sales miss, b) determined that it is not symptomatic of an underlying problem, and c) quantified the impact. How we’re doing the math, the 7-week shift in the timing of RH’s Source Book drop cost between $12-$18mm in sales, or about $0.07-$0.10 per share in earnings.  


In other words, excluding this event, the company would have printed a number of $0.74-$0.77. Our estimate for the quarter was $0.77 compared to the Street at $0.64. That’s big by any stretch. The stock is trading off moderately on this, but we think it will be very short lived. If RH didn’t have a shift in Source Book timing, the stock would be up $10 on this print.


All of that said, we clearly can’t ‘exclude’ this event. It happened, and there’s no taking it back. Some sales will be lost forever. But will there be a revenue push into 3Q? Yes. Did the company play down the impact it will have on the top line in 3Q? We think so.


Investing Ideas Newsletter      - 67


Are we concerned about any management ‘execution issues’? Absolutely not. Let’s be clear, we think that it is management’s responsibility to anticipate timing shifts like this and communicate them to its constituents accordingly (including all of us). But this is a company that a) is pulling off one of the biggest real estate transformations the Retail landscape has seen in a decade, b) has reduced its mailings from 10 to 1 over two years, and c) doubled its product assortment from a year-ago (while simultaneously redesigning floorsets in all its stores). Think of any other retailer or brand. Nike, Kors, Lululemon, whatever… Now think of that company doubling its product assortment over two quarters. The complexity is staggering. All-in, we’re willing to give RH management a seven-week slide with revenue planning on this one, particularly given that Merchandise Margins are stellar and SG&A is so well-controlled.  


In fact, Gary Friedman’s and Karen Boone’s poise and confidence came across as being in the top 5% of the 100+ names we tracked over this past earnings season. These guys are in control of the business. Period. Did we walk away thinking that there might be more quarter-to-quarter revenue oscillations as the company grows up? Yes, we did. But again, for a company that is going to add $3bn in revenue and another $8 per share in earnings, we’re pretty much OK with that. Maybe we give it a slightly lower multiple to account for the revenue volatility. But the aggregate value that should be created here is still astonishing. We’d buy this on the sell-off. We’d buy it without a sell-off.


We’re making minimal changes to our model. We think RH is a double over 12-18 months, and is likely to double again. RH is still our top idea, by a long shot.


* * * * * * * * * * 


Click on each title below to unlock the content.


Short EWI: Italy Has Yet to Find a Bottom

Our thesis on Italy is relatively simple.

Investing Ideas Newsletter      - 55i


Fund Flows: A Hole In the Hull ... Equity Trends Taking On Water

The second worst outflow all year in U.S. equity funds increase our caution on T Rowe Price and Janus Capital closing out the year.

Investing Ideas Newsletter      - 90


Housing | Mortgage Apps: From August Anemia to September Slowdown

Plumbing new lows in purchase demand, at least according to the Mortgage Bankers Association Survey.

Investing Ideas Newsletter      - h90


Commodities: Weekly Quant

Commodities: Weekly Quant - chart1 divergences

Commodities: Weekly Quant - chart2 CRB deltas

Commodities: Weekly Quant - chart3 USD Correls

Commodities: Weekly Quant - chart4 S P Correls

Commodities: Weekly Quant - chart5 volume

Commodities: Weekly Quant - chart6 implied vol

Commodities: Weekly Quant - chart7 sentiment

Commodities: Weekly Quant - chart8 1mth correls

Commodities: Weekly Quant - chart9 3 mth correls

Commodities: Weekly Quant - chart10 6 mth correls

Commodities: Weekly Quant - chart11 1 year

Commodities: Weekly Quant - chart12 3 year correls

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

The Week Ahead

The Economic Data calendar for the week of the 15th of September through the 19th of September is full of critical releases and events.  Attached below is a snapshot of some of the headline numbers that we will be focused on.


The Week Ahead - 09.12.14 Week Ahead


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 | McCullough: Small and Mid Cap US Equity Bubble "Epic" 

Hedgeye CEO Keith McCullough answers questions from institutional investors about small and mid cap stocks and about his current asset allocation.


Hedgeye's Berger With The Latest Intel on INTEL $INTC

Hedgeye semiconductor analyst Craig Berger gives us his key takeaways after attending this week’s Intel Developer Forum in San Francisco.


McCullough: Housing  “Train Wreck Within a Train Wreck”

In this excerpt from Wednesday's Morning Macro Call, Hedgeye CEO Keith McCullough says today’s weak mortgage application numbers are further evidence that the US housing market is really weak.


McCullough on Fox Business: The Biggest Risks to the Markets and Economy Right Now

Hedgeye CEO Keith McCullough sits down with "Opening Bell" host Maria Bartiromo on Fox Business to discuss the biggest risks to investors right now.


 Bubble Bath

The Best of This Week From Hedgeye - Bubble bath 9.9.14

Yes, it's a bubble.


Smells Like 2007

The Best of This Week From Hedgeye - smells like 2007 9.8.14


Will They Or Won't They?

The Best of This Week From Hedgeye - Scotland 9.10.14

Will the Scots decide to leave the United Kingdom, or not? A few weeks ago, no one was even considering this as a potential global macro issue, but after a recent YouGov.Com poll that showed a slight majority of Scots voting Yes (51%) to independence versus No (49%), the British pound was sold dramatically and Scottish independence became a hot topic with the manic media.


The New Fundamental Analysis: Front- Running Fed Leaks!

The Best of This Week From Hedgeye - COD fed 9.12.14
Bernanke allegedly (and recklessly) told a group of investors during a secret lunch Thursday that US GDP growth was going to surprise to the upside (i.e. be better than 3% consensus) and that he could not believe the 10yr was still trading under 3%. In Fed whisper speak, that’s code for Janet is going to get more hawkish (look at the intraday chart, post lunch) … but is she?


At Some Point, Consumers Just Run Out of Breathing Room

The Best of This Week From Hedgeye - COD consumers 9.11.14


 Do You Agree With Bernanke's 'Secret' >3% GDP Forecast?

At a "super secret" Morgan Stanley lunch Thursday, Ben Bernanke allegedly told a group of investors that US GDP growth was going to surprise to the upside (i.e. be better than 3% consensus). Do you agree or disagree with him?


As shares of Apple hover around $100, what's the next stop? Cast your vote.



Takeaway: Upwardly revised U.S. production levels from the EIA and USD strength meet the IEA’s expectation for a slower pace of global demand growth

A big currency move meeting a shift in forward-looking supply/demand expectations continue to put downward pressure on oil prices.

From a quantitative perspective, our intermediate-term TREND set-ups in Oil vs. the USD have reversed from their 1H14 TRENDS:





Below we outline two major factors contributing to the oil and gas disinflation over the summer with a view on the potential price risk into next week’s FOMC statement….  





Moving into 2014 we positioned for a slowdown in U.S. growth and acceleration in inflation perpetuating an easier Fed-putting pressure on the dollar. 


Through May 6th, 2014:

  • USD debauchery: -1.18%
  • domestic growth DECELERATION (this view is still FIRMLY intact)
  • domestic inflation ACCELERATION
  • CRB Commodity Index: +9.7%
  • 10-Year yield: -44 bps (-14.4%) against the largest short position in U.S. treasuries we have seen since. See below for an outline of the risk with one-way, leveraged consensus macro positions


Adding to the pressure on the USD was the sustained strength in most Eurozone economies through the first half of the year. Once this relative strength began missing expectations with inflation missing estimates, Draghi moved to talking down the Euro with every opportunity.  


On May 6th he hinted at a rate cut and asset purchase program by stating, “There is consensus [among the ECB Committee] about being dissatisfied with the potential path of inflation.”

May 6th also happened to be the YTD high in the EUR/USD: +1%. Since the May 6th highs, the USD has run +5.6%.

The relationship here is self-evident. At two points over the summer, Draghi took deliberate policy steps to devalue the EURO and plant the QE seed (WHICH HE DOES NOT HAVE THE POWER TO IMPLEMENT RIGHT NOW).


While the USD continues its steady move off its 2014 lows, Oil has sold off sharply from the June highs in WTI and BRENT:



  • -12% from June highs
  • -6% YTD
  • -2.8% WTD



  • -15% From June highs
  • -11.7% YTD
  • -3.7% WTD



Refreshed daily, our real-time view on both Q3 and full year 2014 growth estimates remain meaningfully divergent from consensus (the Fed, sell-side/buy-side macro):




We expect incremental divergence in this view to warrant an easier Fed. With consensus leaning 1) short the Euro, 2) short of treasuries; And 3) longer of U.S. growth (THAN US)


YTD highs in the negative correlations between gold and oil vs. the USD present the volatility and macro correlation risk Keith outlined in this morning’s Early Look:



OIL GETTING WHACKED - Relative USD Correls  


The chart above shows the dislocation of correlation risk relative to historical averages which are more or less insignificant.


KM’s EL commentary:


“Again, this is where the Hydra-headed monster of market expectations really matters – it’s called correlation risk:

  1.      When Fed heads use communication tools to talk up rate hikes (like Bernanke just did) USD and rates rise
  2.        When USD and rates are rising, at the same time, commodities, oil, Gold, etc. go down
  3.        The machines (quants) then chase macro correlations, and macro markets get overbought/oversold”


Point three addresses the immediate, real-time risk that can smack you in the face. When those looking to minimize large currency and rate exposure anchor on macro correlations for hedge-sizing considerations one-way, large positions create the execution risk block traders love to hate:

  • Anchoring: Tighter the correlation requires a bigger hedge
  • Volume: Larger positions create large capitulation risk
  • Sentiment: The “Commitments of Traders Report” from the CFTC shows a consensus position that is short the Euro, short long-duration treasuries, and longer (Than US) on U.S. growth.
  • Volatility: If a leveraged consensus trade is wrong, the volatility risk is greater in the FX, Gold, and Oil markets as robots and scalpers chase the large trades.
  • Risk: What is the probability of price moving to a certain level? We model it higher with this correlation risk. From an immediate-term TRADE duration perspective the bands/levels for identifying overbought/oversold exhaustion signals widen.   




  • On Tuesday the Energy Information Administration (EIA) increased its expectation for U.S. oil production for the full year 2014 and 2015
  • On Wednesday the International  Energy Agency (IEA) decreased its estimate for global oil demand for 2015


In The EIA’s monthly release of its “Short-Term Energy Outlook” on Tuesday, the administration raised its estimate of 2015 U.S. Crude Production to 9.53M/BD (highest level in 45 years)

OIL GETTING WHACKED - U.S. Crude Production


The report included the following data points and revisions:


  • Increased full year 2014 U.S. production estimate to 8.53M/BD vs. 7.45M/BD 2013
  • Production levels for August reach 8.6M/BD (highest since July 1986)
  • Also in the report, the EIA estimates GLOBAL oil supplies will increase by 1.3M/BD in 2015 (U.S. accounting for 91% of the increase)


The increase in expected U.S. production can be seen in a widening of the Spot-1YR basis between WTI and BRENT:


OIL GETTING WHACKED - 1 yr Basis Differential


This summer’s decline in petroleum prices is finally flowing through to the pump….

The average gallon of gas in the U.S. is $3.433/gallon which is down -6% from Memorial Day. This summer’s decline is the largest since 2008.

Following the EIA’s Tuesday report, the IEA released its downward predictions for global energy demand in 2015:

  • Demand to expand +1.2M/BD (+1.3% in aggregate) 2015 vs. August estimate (-165K/BD less) m/m
  • Saudi Arabia exported the least in 3-years in August


As a result OPEC has now cut its estimates for the amount of petroleum it needs to produce for the full year 2014 by 200K/BD to 29.2M/BD on average.

The two reports induced selling pressure and volatility to WTI and BRENT markets. The move in BRENT is a great indication on how quickly the bid for volatility can change with a catalyst:


OIL GETTING WHACKED - Oil Implied Vol Table. Spike


The move was confirmed with heavy VOLUME Tuesday and Wednesday in BRENT-WTI:

  • Tuesday: BRENT-WTI +10-25% 1/3/6-month averages
  • Wednesday: BRENT +56/34/48% above 1/3/6-month averages
  • Wednesday: WTI +18/11/16% above 1/3/6-month averages


Also adding to the pressure is an overall ease in the geopolitical catalysts threatening supply disruptions 



The U.S., Canada, and Iraq are expected to experience the largest increases in global oil production over the next five years, so protecting Iraq’s oil reserves remains a priority for production sustainability into the future. OPEC estimates Iraq will peak at 40% of OPEC’s total production in the future, a fourfold increase from ~9% currently. The ISIS advance is undoubtedly a real threat, and our involvement in the conflict is timely. We outlined the ISIS threat to Iraq’s production capacity in a recent note. So far it’s minimal.  


Iraq: What to Watch


Russia/Ukraine (add link to Note):

Energy encompasses 70% of Russia’s annual exports. Russia’s dependency on demand from the rest of Europe as a driver for the rest of Europe is outline in a recent note we published last week:


Why Vladimir Putin is More Judo Master Than Chess Player


As always, please feel free to reach out with any comments or questions. Have a great weekend.


Ben Ryan



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 80.46%
  • SHORT SIGNALS 78.35%