Client Talking Points


ECB President Mario Draghi’s drugs were good for a no-volume market bounce, but his EUR devaluation did nothing for the economy and now the DAX has round-tripped, selling off right back to where it was pre-Jackson Hole (AUG lows) – 0 + 0 still = 0; all European Equity indices = bearish TREND.


The front month volatility just punched a higher-high (than the AUG closing high) and #VolatilityAsymmetry (see our JUL 2014 slide deck) remains very much in play off the all-time lows in macro market volatility as both the RUT and SPX are now bearish TREND.


While the “oil is down, buy consumer” thing was intellectually stimulating, it has been a depressing position to have – Discretionary (XLY) now down -1.8% year-to-date alongside Industrials (XLI) -1.7% - both the early and mid-cycle sectors are now seeing what we call #Quad4 deflation.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.


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.


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


10yr UST yield is crashing (-22% YTD), just fyi



The drops of rain make a hole in the stone not by violence but by oft falling.



According to a PricewaterhouseCoopers Survey shoppers remain cautious on the economy and are concerned about disposable income, for the Holiday season the average household will spend $684, down from $735 in 2013.

Adapt and Evolve

This note was originally published at 8am on September 24, 2014 for Hedgeye subscribers.

“When we are no longer able to able to change a situation – we are challenged to change ourselves.”

-Viktor E. Frankl


As egotistical as many successful stock investors seem on the outside, a common attribute for many of them is, ironically, their ability to change their minds.  Now often some poor analyst in their employ is blamed for the mistake, but when the facts and/or thesis changes, the position is rightfully exited.


Hubris is a dangerous thing and in investing it can be downright deadly.  The ability to adapt to new information and admit mistakes, on the other hand, can be an immensely valuable skill.


The ability to adapt, of course, is hardly new to our species.   A recent article in Smithsonian magazine based on new research actually argues that the ability to adapt is maybe the most important skills and has enabled homo sapiens to thrive over the last 1.85 million years. 


According to this article:


“What results from these analyses is the realization that there is no simple, clear picture; no obvious mechanism as to why the genus we know as Homo came to arise and dominate. What we've long thought of as a coherent picture—the package of traits that make Homo species special—actually formed slowly over time.”


So if it was not our unique skill set that allowed us to thrive, what was it? Well, according to the article, the answer is quite straight forward:


“That early Homo species would have had to cope with this constantly-changing climate fits with the idea that it was not our hands, nor our gait, nor our tools that made us special. Rather, it was our adaptability.”


Adapt and Evolve - dj7


So, of course, it begs the questions: when are the Old Wall consensus economists going to adapt their projections for 3% U.S. economic grow in perpetuity?


Back to the Global Macro Grind...


The 3% growth projection noted above may seem like a non-sequitur, but the comment was actually born of out attending the Bloomberg Markets Most Influential conference earlier this week and comments from William C. Dudley, the President of the New York Fed.  Since Bloomberg radio and TV called him one of the smartest men in the world, it seems only prudent that we pay attention to his comments.


Aside from his comments that all will indeed be well if we hit 3% in growth in perpetuity, Dudley also indicated he doesn’t have a lot of faith in that happening.  We’ve paraphrased below, but a couple of interesting comments from Dudley were as follows:

  • The Fed is difficult to manage as it relates to the economic estimates that come in from various methods (Takeaway: this transparency and democracy stuff related to setting policy may be less effective if the inputs aren’t systematic, which they are not);
  • Dudley said not to overweight the “dots . . . he has a wide confidence interval in his dots (Takeaway: we would agree as the fascination with the dots is reaching near epic proportions, so they are certainly soon to be irrelevant);
  • According to Dudley, the Fed doesn’t care about the dollar per se, but too strong of a dollar is an economic deterrent (Takeaway: the Fed cares about the dollar, and, shockingly still doesn’t get the economic value of a strong dollar policy); and
  • There are reasons to be patient on monetary policy and as an example monetary policy was tightened too quickly during the Great Depression (Takeaway: if you didn’t know whether Dudley was dovish, now you know.  But really Bill, a Great Depression reference?).

On one hand, we certainly appreciate Dudley acknowledging the flaw in forecasting--it shows his adaptability.  Conversely, the Great Depression and strong dollar fear mongering is a little disturbing, but certainly difficult to read much from brief comments on a thirty minute panel!  And who are we to judge...


As for Hedgeye, we don’t know what the Fed is going to do next and frankly despite my comments above, Fed watching is a bit of fool’s errand.  In our analysis, as the data changes, we adapt.  It is that simple.


The most recent change for us recently has been the view that the U.S. economy is now likely in what we call Quad 4, which is an environment in which growth is slowing, inflation is slowing, and monetary policy is loose.  


Especially on inflation, this is an about face for us.  But that fact is that headline inflation is now down to +1.8% for the quarter, which is a deceleration.    Along with that many commodities are now deflating incrementally, and Brent Crude in particular is down more than -12% on the year.


Even as inflation is decidedly decelerating, we do continue to get mixed data on growth (some good, some bad).  But as my colleague Darius Dale recently highlighted, we think it’s important to highlight the risk of #GrowthSlowing given where consensus expectations for growth remain – i.e. out to lunch. Moreover, the lack of dispersion among forecasts remains a key risk.


Specifically, in the previous five quarters, the standard deviation of growth is 0.44% and peak to trough is 122 basis points.   Meanwhile the forward consensus projections for the next five quarters have a standard deviation of 0.02% and peak/trough spread of 18 basis points.  We don’t know much, but we do know those projections will be missed. 


Our immediate-term Global Macro Risk Ranges are now (with intermediate term TREND signal in brackets)


RUT 1115-1149 (bearish)

Shanghai Comp 2281-2355 (bullish)

VIX 13.14-14.99 (bullish)

Pound 1.62-1.64 (bullish)

Copper 3.01-3.09 (bearish)


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Adapt and Evolve - chart of day


Takeaway: The Hedgeye Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes and noteworthy quantitative signals.

CLICK HERE to view the document. In today’s edition, we highlight:


  1. The round-trip in the performance of DM Equities during the YTD and how TACRM was out in front of that
  2. The burgeoning illiquidity risk in domestic small caps


Best of luck out there,


Darius Dale

Associate: Macro Team

Attention Students...

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CHART OF THE DAY: #Complacency | $SPX: Days With >1% Move


CHART OF THE DAY: #Complacency | $SPX: Days With >1% Move - Complacency

Conflations and Incongruencies

“History is just one thing after another.”


I’m not sure who the attribution for the above quote goes to, but it does offer a nice little existential change of pace for the early AM global macro hombres.


The macro practitioners’ grind is just one data point and price tick after another.


If we’ve successfully employed our “communication tool” over the last six years, you’re gainfully aware that, at its core, our macro process operates as a hybrid model with our fundamental macroeconomic research dynamically informing our quantitative view of markets.


Reciprocally, as my colleague Darius Dale highlighted yesterday, we apply those top-down quantitative signals – which often front-run reported fundamental inflections - in a reflexive manner to our bottom-up qualitative analysis (e.g. our Growth/Inflation/Policy framework) in order to generate actionable investment ideas and themes.


Most of the time the fundamental and the quantitative are in accord, or harmonize on a small lag.


More rarely, the incongruency persists for an extended period. In those instances we default to the price/quantitative signal – in recognition that market prices are real-time leading indicators and that the market and the economy are not the same thing, particularly over shorter durations.


Theoretically, corporate earnings should reflect economic growth with the high end of sustainable earnings growth capped at potential GDP and the value of the stock market reflecting GDP, corporate earnings as % of that GDP, and the multiple investor’s put on those earnings. But that certainly doesn’t hold in the short run and it’s only approximately true over the long-term.


It’s the conflation of perceived fundamental trends into a convicted market call where economists turned strategists most often go awry.


Conflations and Incongruencies - 15


Back to the Global Macro Grind


In covering the domestic macro economy, the quasi-persistent discontinuity between the research (fundamental) and the risk management (quantitative) signals has been my reality for the last couple months.


Juxtaposing the current domestic labor market data (positive) against the prevailing price signals (bearish) provides a timely and tangible case study:


INITIAL CLAIMS: Rolling Initial Jobless Claims were just under 295K in the latest week, matching the best levels of the post-recession period. As we’ve highlighted, over the last two cycles rolling SA claims have run sub-330k for 45 and 31 months, respectively, before the corresponding market peaks in March, 2000 and October, 2007. We are currently in month seven at the sub-330K level in the present cycle. Further, over the last half century, the trough in initial claims has led the peak in equities and the peak in the economic cycle by 3 and 7 months, respectively. At present, we are still putting in the trough – with cycle precedents suggesting the economic peak is not yet imminent.


NFP: Monthly NFP gains have been solid on balance and, due to seasonal artifacts, even sequential slowdowns in net monthly payroll gains have been characterized by flat to rising employment growth on a year-over-year and 2Y average growth basis. At +1.93% YoY in September, Nonfarm Payrolls recorded their fastest rate of improvement since April 2006 and are in-line with peak growth in the last cycle. Similar to initial claims, peak monthly NFP gains lead the economic cycle by ~7 months. Whether the May-July NFP gains represented peak improvement remains to be seen.


JOLTS: Total Job Openings made a new 13 year high and the quits rate held at cycle highs in the August report released yesterday. Total hires moderated sequentially alongside the dip in NFP gains reported for August but is likely to re-accelerate to new highs in the September release. Historically, the Job Openings data leads accelerations in wage growth by about a year. The relationship has been muted vs previous cycles but with the NFIB’s compensation index making new highs, the share of short-term unemployed continuing to rise and labor supply (total available workers per job opening) tightening to pre-recession averages, wage inflationary pressures are percolating.


INCOME: The confluence of an accelerating employment base and flattish wage growth has driven an acceleration in disposable personal income growth over the last 5 months. Indeed, aggregate private sector salary & wage growth is currently running at +5.8% and holding at its best levels of the recovery outside of the peri-fiscal cliff period.


CREDIT: Consumer revolving credit declined at a -0.3% annualized pace in August according to Federal Reserve data released yesterday. The sequential decline wasn’t particularly surprising given the comps (the increase in July was the 2nd largest in 6.5 years) and the already reported retreat in spending on durable goods ex-defense and aircraft (ie. the stuff the average household buys). On a year-over-year basis, growth in credit card spending decelerated just -5bps from the 6 year high recorded in July.


In a Keynesian economy, total spending is cardinal, and income and credit is predominate. You can spend what you make (income) and you can spend what you don’t make (credit) and, with both income and credit accelerating presently, the underlying trends in both are positive.


The caveat has been that while the capacity for consumption growth has improved alongside accelerating income growth, actual household spending has not because the savings rate has shown a commensurate increase.


So, while reported consumption growth remains middling, it’s hard to characterize accelerating income growth, a rising savings rate and moderate credit growth alongside increased investment as fundamentally negative.


Transitioning to the price signals, which paint a contrasting picture for the prospects of forward growth. Keith has hit the boards hard in highlighting these, but to briefly review:


10Y Yields: 10Y bond Yields are down -69 bps YTD (-23%), the yield spread (10’s-2’s) continue to compress and inflation expectations are collapsing – all of which are discretely bearish growth signals.


Russell 2K: The Russell is down -7.5% YTD with the rotation out of growth style factors and small Cap Illiquidity accelerating over the last month+ - again, not a growth-accelerating signal . The Russell 2000 is immediate-term TRADE oversold around 1076, but remains in a Bearish Formation.


Consumer: The XLY is the worst performing sector YTD (-1.84%), underperforming the S&P500 by 6% as real median income growth continues to trend negative and the bottom 60% remain very much income constrained. Also in Bearish Formation.


Housing: The ITB is down -9.1% YTD with housing sitting as one of the worst performing asset classes globally. We have been bearish on housing since the end of 2013 and continue to believe housing related equities underperform, trading sideways-to-down, alongside ongoing deceleration in HPI trends.


ROW: The EU and Japan are in discrete deceleration, China is not an upside catalyst, EM markets are flagging alongside dollar strength and the US is already past the mean duration of expansions over the last century. The IMF marked its (still too optimistic) global growth forecast lower yesterday and growth estimate revision trends over the last quarter across both developed and EM markets have been almost universally negative. Further, the disinflationary trends prevailing globally only add to the Feds Sisyphean fight towards sustained, above target CPI and core PCE inflation.


From a Hedgeye modeling perspective we are entering Quad #4 which is characterized by both growth and inflation slowing from a 2nd derivative perspective and a generally dovish policy response. A sequential slowdown in GDP in 3Q14 from the near 5% in 2Q14 is almost as inevitable as the sequential acceleration from the worst post-war expansionary period GDP print ever in 1Q14. Whether that manifests into a protracted slowdown domestically remains TBD.


Markets are discounting an increasing probability of a more enduring deceleration and are, at the least, refuting consensus’ laughably linear straight-lining of 3% growth into perpetuity.


May the wind be always at your back.

May the sun shine warm upon your face.

May your fundamental and quantitative signals always be in accord.


Our immediate-term Global Macro Risk Ranges are now: 


UST 10yr Yield 2.35-2.46%

RUT 1072-1100

DAX 9026-9367

VIX 15.67-17.58

USD 85.05-86.64
WTI Oil 86.92-91.39


To cognitive dissonance, its ubiquity and successful management,


Christian B. Drake

Macro Analyst


Conflations and Incongruencies - Complacency


TODAY’S S&P 500 SET-UP – October 8, 2014

As we look at today's setup for the S&P 500, the range is 30 points or 0.26% downside to 1930 and 1.29% upside to 1960.                                                                 













  • YIELD CURVE: 1.85 from 1.83
  • VIX closed at 17.2 1 day percent change of 11.25%


MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Oct. 3 (prior -0.2%)
  • 8:30am: Fed’s Evans speaks in Plymouth, Wis.
  • 10:30am: DOE Energy Inventories
  • 1pm: U.S. to sell $21b 10Y notes in reopening
  • 2pm: Fed releases minutes from Sept. 16-17 FOMC meeting



    • Senate, House out of session
    • FCC deadline for replies on CMCSA/TWC Deal
    • 10am: Supreme Court to consider arguments on whether workers at warehouses must be paid for time spent in security screenings after they clock out
    • 2:30pm: Chinese Vice Minister of Finance Guangyao Zhu speaks at Peterson Institute talk on China-U.S. economic relations
    • 4:30pm: Former Fed Chairman Ben Bernanke speaks on future of global economy at World Business Forum
    • U.S. ELECTION WRAP: Kansas May Set New Trend; S.D. Crooning



  • U.S. Said to Ready Charges Against Banks, Traders in FX Case
  • Symantec Said to Explore Split Into Security, Storage Businesses
  • Valeant Said to Plan Raising Allergan Bid Near December Vote
  • Yum Cuts Profit Forecast as Chinese Food Scare Weighs on Sales
  • Costco Profit Tops Estimates as Same-Store Sales Increase
  • Russia Buys Rubles for a Third Day While Shifting Trading Band
  • Marchionne Says He’s ‘Done’ After 2018 Plan for Fiat Chrysler
  • Kurdish Protests Roil Turkey as Islamic State Attacks Kobani
  • Facebook to Let Advertisers Target Users Based on Locations
  • SolarCity to Finance Rooftop Systems in Shift From Leasing Model
  • Chimerix’s Antiviral Drug Improved Survival in Josh Hardy Study
  • Bard Said to Pay $21 Million in First Big Vaginal-Mesh Accord
  • World Growth Eclipses Dollar as Concern for Lew, Manufacturers
  • 18 Banks Said to Adjust Derivatives Contracts Practices: FT
  • Fed Needs Plan to Sell Mortgage-Backed Assets, Lacker Says: WSJ
  • San Francisco Supervisors Agree to Legalize Airbnb: SFGate



    • Blackhawk (HAWK) 8:30am, $0.03
    • Jean Coutu (PJC/A CN) 7am, C$0.29
    • Monsanto (MON) 8am, $(0.24) - Preview
    • RPM Intl (RPM) 7:30am, $0.78



    • Alcoa (AA) 4:03pm, $0.22 - Preview



  • London Metal Exchange Wins Appeal Over Rusal Warehouse Ruling
  • Brent Drops to 27-Month Low on IMF Growth Cut; WTI Declines
  • Gold Climbs on Demand From China After Holiday; Platinum Rallies
  • Corn Retreats in Chicago as U.S. Harvest Seen Exceeding Forecast
  • Narrow Price Gap Opens Door for African Oil Exports to U.S. East
  • Arabica Coffee Slides in New York on Speculation of Brazil Rain
  • China Steel Demand May Slow as Economy Becomes More Sustainable
  • OIL DAYBOOK: EIA Crude Build Fcast; OPEC Basket Drops Below $90
  • Northeast U.S. Homes to Pay Higher Prices for Less Gas in Winter
  • Commodity ETP Outflows Totaled $1.8 Billion in Sept: Blackrock
  • Gold With Iron Ore Seen Least Preferred Metals by Morgan Stanley
  • OPEC Crude Below $90 Won’t Spur Immediate Output Cut: Julian Lee
  • Nickel to Aluminum Decline on Demand Concern as IMF Cuts Outlook
  • Indonesia Seen Losing $20B Mining Investment on Political Risk
  • Rusal Says Will Seek to Appeal U.K. Court Ruling on LME Today

























The Hedgeye Macro Team

















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