Decidedly Dovish

Client Talking Points


Epic decline for the UST 10Yr (-71 basis points year-to-date, -23%) as long-term yields effectively crash vs. consensus expectations of rates rising. Most bond proxies in equity land (Utilities) ripped on the dovish Fed move yesterday; don’t confuse that with growth.


Massive correlation risk in the market as of Friday (when Gold was pinned sub $1180 and EUR/USD was $1.25) reversed, fast – this back and forth Currency War between the Japanese, Europeans, and Americans is very much on – and consensus is way too long of U.S. Dollars given a dovish Fed.


Prime Minister Shinzō Abe does not like Dovish Dollar because he gets up Yen (down Nikkei) on that; Nikkei down another -0.66% overnight to -3.5% year-to-date – it will be interesting to see if the Japanese react to ECB and Fed devaluation moves in the coming months.

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


FX: Currency War #on as Fed takes its turn (Euro up)



Success is not forever and failure isn’t fatal.

-Don Shula


Over the last 34 years, on our way to becoming the biggest debtor nation in history, the U.S. has borrowed some $10.4T, with an average annual deficit-to-GDP ratio of ~3.2%.


TODAY’S S&P 500 SET-UP – October 9, 2014

As we look at today's setup for the S&P 500, the range is 45 points or 1.98% downside to 1930 and 0.31% upside to 1975.        













  • YIELD CURVE: 1.87 from 1.87
  • VIX closed at 15.11 1 day percent change of -12.15%


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Init. Jobless Claims, Oct. 4, est. 295k (prior 287k)
  • 8:45am: Bloomberg Oct. U.S. Economic Survey
  • 9:45am: Bloomberg Consumer Comfort, Oct. 5 (prior 34.8)
  • 10am: Wholesale Inventories, Aug., est. 0.3% (prior 0.1%)
  • 10:15am: Fed’s Bullard speaks in St. Louis
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: ECB’s Draghi, Fed’s Fischer speak in Washington
  • 11am: U.S. announces plans for auctions of 3M/6M/1Y bills
  • 1pm:  U.S. to sell $13b 30Y bonds in reopening
  • 1:10pm: Fed’s Tarullo speaks in Washington
  • 1:15pm: Fed’s Lacker speaks in Asheville, N.C.
  • 1:30pm: Fed’s Fischer speaks in Washington
  • 3:40pm: Fed’s Williams speaks in Las Vegas



    • Senate, House out of session
    • President Obama speaks on economy
    • 8am: Financial Services Roundtable holds Global Financial Summit, participants incl. CFTC Chairman Timothy Massad
    • 9am: IMF Managing Director Christine Lagarde, World Bank President Jim Yong Kim preview IMF, World Bank annual mtgs
    • 9:15am: Sec. of State John Kerry, U.K. Foreign Sec. Philip Hammond at Boston global climate change, clean energy event
    • 11am: ECB President Mario Draghi speaks at Brookings Institution; Draghi, Fed Board Vice Chairman Stanley Fischer follow w/conversation
    • 3pm: Homeland Security Sec. Jeh Johnson at CSIS discussion on border security
    • U.S. ELECTION WRAP: Abortion Issue in N.H.; Kansas Sen. Debate



  • Alcoa Earnings Rebound as Aluminum Use Rises in Autos, Aerospace
  • Barclays to Pay $20m to Settle Libor Suit, Plaintiffs Say
  • McClendon Said to Weigh Bid for Freeport’s California Assets
  • Gap Tumbles After Saying Murphy Will Step Down as CEO Next Year
  • AMD Appoints Lisa Su Chief Executive, Replaces Rory Read
  • Twitter News Head Schiller Exits as Executive Turnover Continues
  • Icahn Says He Plans to Send Open Letter to Apple CEO Tim Cook
  • Russia Moves Ruble Band Most Since March, Spends $1.85b
  • Nurse Tested for Ebola in Australia After Volunteering in Africa
  • Worldwide PC Sales Declined 1.7% in Third Quarter, IDC Says
  • Morgan Stanley Bankers Poised for Biggest Wall Street Bonus Bump
  • Tesla to End ‘The D’ Suspense to Stay Ahead on Electric Autos
  • Boeing Predicts Demand for 1,340 New Planes in Northeast Asia
  • Brooklyn Home Prices Reach Record as New York Buyers Bid Higher
  • CEOs Tout Reserves of Oil, Gas Revealed to Be Much Less to SEC
  • Hong Kong Protest Leaders Say They May Walk Away From Talks
  • China Outlines Plans to Ease Capital Controls, Boost Use of Yuan
  • Elevation Partners Said to Tell Investors No New Fund Is Coming
  • Google Asks Supreme Court to Decide Oracle Suit: Reuters
  • Citigroup Set to Return $16m to Customers After Pact: WSJ
  • Fidelity 1 of 13 Fin Groups Targeted by JPMorgan Hackers: FT



  • Lindsay (LNN) 7am, $0.56
  • PepsiCo (PEP) 7am, $1.29 - Preview
  • Helen of Troy (HELE) 4:01pm, $0.73
  • Barracuda Networks (CUDA) 4:15pm, $0.04
  • Family Dollar (FDO) Aft-Mkt, $0.77 - Preview



  • CEOs Tout Reserves of Oil, Gas Revealed to Be Much Less to SE
  • Brent Crude Declines as Germany Nears Recession; WTI Steady
  • Sugar Shortage Seen Looming by Drake Amid Drought in Brazil
  • China Battles GMO Unease From Field to Dinner Table: Commodities
  • Noble Said to Hire Gazprom’s Kapic to Trade European Power, Gas
  • EU Carbon Contango Crushed as Yield Is Better Than ECB: Vertis
  • Copper Advances Most in Three Weeks as Dollar Continues to Slide
  • Alcoa Earnings Rebound as Aluminum Use Rises in Aerospace
  • Gold Futures Rise to Highest in More Than 2 Weeks on Fed Minutes
  • Food Prices Slide a Sixth Month to Four-Year Low as Grains Fall
  • Solar’s $30 Billion Splurge Proves Too Much for Japan: Energy
  • Investors Shun World’s Richest Mineral Store in South Africa
  • Nickel Seen by ANZ Rising in Next Few Months on Slower Exports
  • Aurubis Raises Copper Premium for Europe by 4.8% for Next Year
  • Rio’s Bullish Iron Ore Outlook Bolsters Glencore Case for Bid

























The Hedgeye Macro Team

















CHART OF THE DAY: Energy Price Sensitivity (Wildcatters Energy E&P Index)

CHART OF THE DAY: Energy Price Sensitivity (Wildcatters Energy E&P Index) - 10.09.14 Wildcatters Index


As you can see in today’s chart, the Thomson Reuters Wildcatter’s Index (small and mid-cap E&Ps) has retreated -33% from its June YTD highs. If you top-ticked that move, it was the same day you shorted oil at the 2014 highs.  

Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Biting the Hand That Feeds

“If I were investing in oil and gas stocks, there is one question I would ask CEO’s: what portion of your capital is going to have to go in to stay even?”

-Gwyn Morgan, Former CEO of EnCana, 2002


Shale Gas now accounts for 40% of all U.S. natural gas produced, with its share expected to increase to 53% by 2040 according to EIA estimates. The U.S. has approximately 31 years of current aggregate domestic natural gas production in technically recoverable shale reserves (assuming all natural gas produced is from shale: ~60 years of recoverable reserves at peak estimated production levels).


The Bureau of Labor Statistics (BLS) recently reported that the largest employment increases since the shale revolution commenced circa 2006 have occurred in the four U.S. states which just so happened to have engaged in the heaviest amount of hydraulic fracturing: North Dakota, Louisiana, Oklahoma, and Texas.

Although an increase in overall drilling has ceased, the production of natural gas has increased dramatically. Companies can produce 6x the amount of natural gas they could from the same well in 2010. Smarter, more efficient drilling and better technology have contributed to the increase in well productivity in the last few years.


Many domestic industries benefit from the increase in U.S. natural gas production from the petrochemicals and fertilizers space to the iron, steel, and glass manufacturing players. With an abundance of this resource seemingly available at what should be cheap prices for years to come, why not take advantage?

  • Collectively embrace new projects
  • Quickly approve LNG Export terminals to help both domestic producers and the trade balance
  • Build an interconnected domestic network of pipelines

Biting the Hand That Feeds - 16


Why bite the hand that feeds?

Back to the Global Macro Grind…

Just to (again) re-iterate our preferred #QUAD4 positioning (GROWTH SLOWING, INFLATION DECELERATING):

  • We still like bonds (treasuries and munis)
  • We still think growth and inflation are slowing in the U.S.
  • We still have no evidence to suggest the monetary policy response in #Quad4 is anything but dovish

We outlined the outlook for the domestic economy in a #QUAD4 scenario in our macro themes call last week (ping for replay access).


If there was any question about the Fed-fueled leverage embedded in overall market levels, Janet Yellen’s dovish commentary that lifted the S&P 500 44 handles off the lows to close on the highs of the day should give some insight as to why the economy and the stock market become diverged (even for long periods of time)… UNTIL IT ENDS.


The global economy was cited as “weaker than anticipated” yesterday and the stock market rallied +2.3% off the lows.


The release of the Fed minutes from the September 16-17 meeting revealed that committee members were worried that:


“further gains in the dollar could hurt exports and damp inflation”

  • The S&P 500 airlifted off the lows to close +1.7% d/d
  • The 10-Yr yield backed up for the fourth consecutive day and is now at a new YTD LOW (2.28%) with every tick
  • The USD retreated 44 bps (RED AGAIN THIS MORNING)
  • Gold is ripping this morning on the follow through (+1.6%)


Why not just buy stocks and let the Fed have their “Free Lunch” as my colleague Christian Drake explained in Tuesday’s Early Look?  Why complain? Why bite the hand that feeds?

While the Fed can admittedly talk the currency in either direction, a #QUAD4 scenario also implies the existence of deflationary headwinds in the commodity space.  


The answer to Gwyn Morgan’s aforementioned quote is difficult to answer at the beginning of a project.


Which E&P projects are NPV positive? How can we possibly know?

With so much uncertainty in energy prices years into the future, this question is often left unanswered until it’s boom or bust. Energy companies certainly don’t like the disinflation of prices since mid-summer.


As you can see in today’s chart, the Thomson Reuters Wildcatter’s Index (small and mid-cap E&Ps) has retreated -33% from its June YTD highs. If you top-ticked that move, it was the same day you shorted oil at the 2014 highs. 


The steep premiums for natural gas in some parts of the United States shed light on the capital intensive nature of investing in the re-birth of the North American energy boom fueled by evolutionary production of shale rock resources.


While the onsite production is ramping-up across the country and flooding the market with supply, refining and transportation availability is still lacking, causing large premiums in those regions where it’s difficult to distribute resources. Developing the infrastructure requires time, and the profitability of each project is at the mercy of unpredictable oil and gas prices.

Marginal production costs in the Utica and Marcellus regions in Ohio, Pennsylvania, and West Virginia are as low as anywhere in the country. Yet, natural gas futures for January delivery in New England are priced $15 (highest nationally). If a producer in Utica could produce and refine for, call it $3, the spread is $12, so why not build a pipeline? Assume a pipeline was built from Harrison, WV to Boston (656 miles) at $3M/MILE (low-end of the cost structure).  The all in cost is approximately $2Bn.


While it’s easy to field one side of the argument to produce more oil and gas, create jobs, and export the extra supply (amidst a global slowdown), lower prices are squeezing domestic producers. With the lever-up, invest now-benefit later nature of the business, the most- sound companies who have picked the best projects to undertake will be able to withstand a further sell-off in oil and gas prices.


Rankings of Marginal Production Costs of U.S. Shale Plays (Lowest to Highest):

  1. Utica
  2. Southwest Marcellus
  3. Permian
  4. Northeast Marcellus
  5. Eagle Ford
  6. Granite Wash
  7. Niobrara
  8. Barnett
  9. Haynesville

Rankings of Natural Gas Production per New Rig (Highest to Lowest):

  1. Marcellus
  2. Haynesville
  3. Utica
  4. Niobrara
  5. Eagle Ford
  6. Bakken
  7. Permian


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.30-2.45%


RUT 1072-1123


VIX 14.16-17.58

USD 85.01-85.99

EUR/USD 1.26-1.28

Pound 1.60-1.62

WTI Oil 86.82-93.17

Nat. Gas 3.81-4.05

Gold 1195-1235

Copper 2.98-3.07


Ben Ryan



Biting the Hand That Feeds - 10.09.14 Wildcatters Index



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. Why you should continue rotating out of "risky" fixed income exposure and into "non-risky" fixed income exposure, at the margins
  2. How a dovish Fed is contributing to pervasive strength in "safe" fixed income


Best of luck out there,


Darius Dale

Associate: Macro Team

Yo, FX Go!

This note was originally published at 8am on September 25, 2014 for Hedgeye subscribers.

“Listen: there’s a hell of a good universe next door; let’s go.”

-E.E. Cummings


With a body of work that included almost 3,000 poems, E.E. Cummings was one of the most prolific poets in America’s 20th century. If he was around today, he’d probably tell you the aforementioned quote was about centrally planned economies.


You got it, yo. It’s all about jamming our noses into 18th century export-models and burning the purchasing power of The People at the stake. Rip some lip. You know, bro – get those asset prices hooked and up and out of the water!


This is Master of The Universe type stuff. Janet, Mario, Haruhiko - God put you on earth to do this, yo. Let’s go!


Yo, FX Go! - 3gp


Back to the Global Macro Grind


As you can see, when left to my own 45 minutes of creative writing devices in the early morning, I get flashback moments to what my first English professor @Yale deemed “un-grade-able” work …


Getting back to where I have some competence - central questions about centrally planned currencies:


  1. Did the devalued currency model work for the Argentines or Japanese?
  2. What happens when all 3 of the major players in the FX War (Japan, Europe, USA) are at 0%?
  3. Coming off the all-time lows in FX, Fixed Income, Commodity, and Equity volatility, what could go wrong?




  1. No
  2. They’ll tell you that 0 minus 0 is actually greater than 0
  3. Everything


No way. Everything?


Uh, yeah, yo. Let’s go there:


  1. When USD goes up or down, a lot, the machines chase this thing called the Correlation Trade
  2. In 2011, with Buck Burning to all-time lows, the Correlation Trade = Long Commodities, Gold, FX, etc.
  3. In 2014, with Euro and Yens Burning, the Correlation Trade = Short Commodities, Long Nikkei, etc.


Causality or correlation? Please. The causal factor that drives all of this are market expectations that central planners only do one thing when the economic data (always) misses their growth forecasts – they get easier…


Easier, as in dovish = devaluing…


At the first sniff of #EuropeSlowing (in May) Mario’s Italian and French bureaucrat buddies immediately focused on devaluing ze Euros. That gave the USD a surrender bid. Then, as the Abenomics experiment started to fail, the market started speculating that there were another 3-legs to the 3-legged Japanese devaluation stool.


That’s right – 0 minus 0 = moarrr than 0. And 3-legged central planning stools really have 6, or 10 legs. This is so ridiculous at this point that my jokes aren’t funny.


Moving along. If you are into the monthly performance chasing thing, here is the wood (6-week USD correlations):


  1. USD’s 6 week inverse correlation to Gold -0.95
  2. USD’s 6 week inverse correlation to Commodities (CRB Index) -0.93
  3. USD’s 6 week inverse correlation to Brent Crude Oil -0.92
  4. USD’s 6 week positive correlation to Japanese Stocks +0.89
  5. USD’s 6 week positive correlation to Swiss stocks +0.83
  6. USD’s 6 week positive correlation to Austrian stocks +0.82


In other words, as it became glaringly obvious that both Japan and Europe’s economies were slowing, you either bought the living daylights out of the Mother’s Index in Japan or something in Austria, and you crushed it.


“#Boom, crush. Night, losers. Winning. Duh!”

-Charlie Sheen


Oh, and what happens if and when my rates call plays out “fundamentally” – i.e. US #GrowthSlowing here in Q3 (then Q4) takes hold… the Fed freaks, and starts to devalue the Dollar again?


Bingo. This entire bongo board of Correlation Risk turns upside down and you do the opposite, fast.


As a result, volatility (across asset classes) is already signaling to me that we could very well see the mother of all historical volatility breakouts in FX, Commodities, and Equities. But no worries. For now, the central planners call this “price stability”, yo.


Out immediate-term Global Macro Risk Ranges are now:


SPX 1977-2011

RUT 1115-1144

VIX 12.91-14.98

USD 84.61-85.33

EUR/USD 1.27-1.30

WTI Oil 90.42-93.95

Gold 1209-1254


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Yo, FX Go! - Chart of the Day

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%