#Preppers Await!

This note was originally published at 8am on September 26, 2014 for Hedgeye subscribers.

“We are the ones that we have been waiting for.”

-Alice Walker


“So,” how is everyone feeling this morning? I’m feeling great.


Since I’m running out of fresh content on both shorting the Russell 2000 (IWM) and buying the Long Bond (TLT), today I decided to weave a little Alice Walker (she wrote The Color Purple in 1982) with some perma-bear prepping.


If you don’t know what a #prepper is, look it up. On Wiki you’ll be re-directed to “Survivalism” and on the Googler you’ll get everything from “How To Build Your Own Bunker” to “Getting Ready For Barackalypse.” There’s always a bear market somewhere!

#Preppers Await! - r5


Back to the Global Macro Grind…


When you see me going all bear-mauler in the introduction to a research note, you buy/cover.


Yep, that’s pretty much the call this morning. I call it fading myself. If you didn’t buy and/or cover the swan dive that the SP500 took into yesterday’s close, you aren’t a real bull anyway.


Oh, and don’t forget to sell the “GDP is back” bounce by noon. Damn day-traders.


Forget the traders, how about them damn moving monkeys? Huh? Did Mucker call me a monkey? No. No. I would never call anyone names. I’m referring to this billion dollar app thing that I built for my 6yr old son called Monkey In The Middle.


Here’s how it works:


  1. It has a 1yr chart
  2. It has a simple moving avg
  3. It has a ticker box


And voila! That’s it. So easy a kindergartner can do it. He can analyze any ticker in the world, across asset classes!


Other than this being the most myopic single-factor interpretation of risk since the caveman throwing grass into the wind, the problem I foresee with this billion dollar idea is what happens when my son starts doing wacky stuff like multiplication.


Or, what if he figures out that moving monkeys are different if he uses a simple vs. an exponential moving average? Then my app is dead. But, in the meantime, you never know, yo. There’s an app for that too btw (it’s called “yo” – you say yo to me, I say yo back).


Serious question though, what is the 50-day Moving Monkey?


  1. Is it 1978 (exponential moving avg) or 1976 (simple moving avg) for the SP500?
  2. Or, is it 1151 (exponential moving avg) or 1148 (simple moving avg) for the Russell 2000?


I am not messing around here guys. If I am going to start building my family a legitimate bunker, I need to know what the signal is! Will using the exponential one help me front-run the simple ones? In the bush (with bears), all I need to do is out-run the last guy.


In all seriousness, the entire linear concept of using the 50-day is as ridiculous as the ideology that the Federal Reserve, European Central Bank, and Bank of Japan, can collectively bend gravity.


Moving along…


Does your iPhone bend? The stock did yesterday. It moved 2x what the market did, signaling immediate-term TRADE oversold within its bullish intermediate-term TREND setup. “So” I signaled buy AAPL (Apple) yesterday.


If we get the Q2 “GDP is back” bounce (newsflash: next week it will be Q4), I want to own the real bubbly stuff. Remember when The Facebook (FB), Apple (AAPL), and BABA had a projected $1 TRILLION in combined cap? I do. That may have been the top.


Tops are processes, not points. And the thing about the real bubbly ones is that you can risk manage them for a little while with a bullish bias (commonly called buying the damn dip). But there will come a time when they pop. Try it at home – those don’t bounce.


This is where I use my immediate-term Risk Range process (sorry Jack, our app doesn’t have real-world application!):


  1. SP500 signals immediate-term TRADE oversold at 1962, within a bullish intermediate-term TREND
  2. Russell 2000 signaled immediate-term TRADE oversold at 1104, within a bearish TREND
  3. Front-month VIX signals immediate-term TRADE overbought at 15.92, within a bullish TREND


In other words, both volatility and the SP500 are bullish on an intermediate-term duration and the Russell 2000 small-cap #bubble is bearish across all durations. “So” on the oversold signals, you keep your small cap shorts on and buy big cap liquidity (AAPL).


If you’re longer-term, and not into managing the immediate-term risk of the range… and are right freaked out about something like the #Quad4 (US growth and inflation slowing at the same time), #preppers have a ton of stuff to sell you. Someone should definitely IPO that!


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.42-2.58%

SPX 1962-1988

RUT 1104-1138

VIX 13.48-15.92

USD 84.64-85.53
Gold 1209-1250


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


#Preppers Await! - 09.25.14 TLT vs. RTY

Oil, XLY and UST 10YR

Client Talking Points


WTI crude crushed (-1.6% this morning) to $84.42 and finally signals immediate-term TRADE oversold within a very bearish TREND; XLE (Energy Stocks) are now -4.3% for 2014 year-to-date and look quite deflationary.


The XLY has been (and continues to be) one of the worst places to be in S&P Sector allocation terms in 2014, down hard again yesterday and -2.6% year-to-date. Our call remains that at least 2/3 of the U.S population is experiencing max cost of living pain - the deflation might help, but on a big lag to expectations.


UST 10YR Yield of 2.32% continues in crash mode (yield is -23% year-to-date) and continues to signal that U.S. GDP will be lucky to be ½ of what consensus had it at the start of 2014. We still can’t believe consensus has 2015 U.S. GDP up at 3.1%; expectations, as our boy William wrote, can be the ‘root of all heartache’.

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


There's only one 2014 LONG I kept on in Real-Time Alerts pre yesterday's swoon, $TLT #timestamped



The vision of a champion is someone who is bent over, drenched in sweat, at the point of exhaustion when no one is watching

-Anson Dorrance


Natural Gas from shale formations accounts for 40% of all U.S. natural gas produced, and this is expected to increase to 53% by 2040 according to EIA estimates.

October 10, 2014

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CHART OF THE DAY: #EuropeSlowing – Austerity Is Dead?


CHART OF THE DAY: #EuropeSlowing – Austerity Is Dead? - YYY. CPI

#EuropeSlowing – Austerity Is Dead?

“Some day, following the example of the United States of America, there will be a United States of Europe.” 

-George Washington


Well, if Washington is right, “some day” is still a long ways off. 


In fact, over the intermediate to longer term we expect the culture clash that is the Eurozone to continue transpiring – from the top (Brussels and the ECB) right on down to the bottom (individual member states).


Our macro playbook continues pointing to a Euro with potential downside from here (it’s down around -9% since May and is broken across TREND and TAIL durations in our quantitative models). Despite ECB President Mario’s Draghi’s pledge “to do whatever it takes” (and lever up the balance sheet by €1 Trillion) to support growth and inflation, we’re not buying the promise of Draghi’s Drugs producing sustainable economic growth.


Why?  Because we expect some member states to be very slow in passing the necessary fiscal and labor market reforms to improve their competitiveness. 


#EuropeSlowing – Austerity Is Dead? - yyy. EUR USD


Back to the Global Macro Grind


And so the culture clash took another turn this week when the French government announced that austerity is dead and that it would not meet its original deficit reduction target. This shot across the bow stands to reignite tension with the fiscally conservative member states (Germany in particular) and may influence the policy stance of other members (like Italy) that have A) long questioned the merit of austerity, B) have yet to deliver on a full package of reforms, and C) like France, are looking to push out their own deficit timetable. 


Specifically, France in its 2015 budget stipulated that it would adapt a pace of deficit reduction parallel to the economic situation of the country. Therefore, instead of meeting the original target of 3% deficit by 2015, the country would push out that target by an additional two years.


And so for the first time in history, the European Commission may exercise its power to reject France’s budget and ask for a new one.  A resolution could come at the end of the month.


In follow-up remarks, French Finance Minister Michel Sapin has said that the EU must shift its policy to avert the threat of prolonged low growth and low inflation (along with boosting investment), if Europe was to prevent being stuck in Japanese-style stagnation.


Here’s the rub playing out from Top to Bottom:

  • The European Commission (EC) and ECB: (pointing the finger at a select group of member states): “You guys need to reform (more).”
  • The Member States Being Accused: (pointing the finger back) “We just issued loads of “austerity” to minimize the public sector, reduce our borrowing costs and improve our credit rating, yet in doing so we’ve choked off growth, are saddled with record high unemployment rates, and have zero ability to manipulate policy to make ourselves more competitive than our European peers. We’re done with this course of action, so be your expectations for deficit and debt consolidation!”
  • The EC and ECB: “But if you don’t reform at the state level, there’s no chance our newest programs (ABS & covered bond buying programs and TLTROs) will have any chance of success!”

The problem is that countries like France haven’t done enough.  For proof of the shortfall, France’s government spending still stands at a monster 55% of GDP. And as an anecdote, the Magic Kingdom a la France (Disneyland Paris) reported this week that it needs a bailout to the tune of $1.25 Billion. The company cited French labor laws and planning regulations making it difficult to replicate the success of the other Disney enterprises, and called-out in particular the high cost of employing French workers.


Similar structural shortfalls could be identified in Italy, which just this Wednesday happened to host an EU Summit in Milan to discuss job creation.


And so as the “rub” between the Top and Bottom plays out, Eurozone growth stands to suffer as there’s no clear action plan on how to fix it.  This week the IMF (a classic lagging indicator) revised down its global GDP forecast and specifically took the Eurozone GDP outlook to 0.8% in 2014 (vs a prior estimate of 1.1% July) and 1.3% in 2015 (vs prior 1.5%).


A quick look at key Eurozone data metrics over the last two weeks shows a similar trend downward:

  • Eurozone PMI Services fell to 52.4 SEPT (exp. 52.8)
  • Eurozone PMI Manufacturing fell to 50.3 SEPT (exp. 50.5)
  • Eurozone PMI Retail Sales 44.8 SEPT vs 45.8 AUG
  • Eurozone Sentix Investor Confidence -13.7 OCT (exp. -11) and -9.8 SEPT
  • Eurozone Business Climate 0.07 SEPT (exp. 0.10) vs 0.16 AUG
  • Eurozone Economic Confidence 99.9 SEPT (inline) vs 100.6 AUG
  • Eurozone Industrial Confidence -5.5 SEPT (exp. -5.8) vs -5.3 AUG
  • Eurozone Consumer Confidence -11.4 SEPT vs -10 AUG
  • Eurozone Unemployment Rate UNCH at 11.5% AUG
  • Eurozone CPI fell 10bps to 0.3% Y/Y in SEPT

Our bottom-up, qualitative analysis (e.g. our Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates). We discussed this point in depth on our Q4 2014 Macro Themes Call on 10/2 (email if you’d like access) in our theme #EuropeSlowing (one of three).


Our key conclusions include:

  • We do not believe Draghi will be able to turn the tide of deflation (see chart below) and growth through his policy tools alone. German Finance Minister Wolfgang Schaeuble has repeatedly said the ECB has “run out of tools” and that “cheap money can’t force growth”
  • We expect the recent package of “supportive” measures (ABS and covered bond purchasing program and TLTRO) to come up short of expectations. Recall as an initial read-through that demand was light for the first round of TLTRO at €83 Billion vs estimates of €150-300 Billion
  • Should Sovereign QE become a reality, expect push back from member states (think uproar over OMT and hearings from the German Constitutional Court)
  • We believe it’s still largely unlikely that a sovereign QE program can support sustained economic growth (witness years of shortcoming on this front from the Japanese).
  • From an investment position, we are recommending shorting French (EWQ) and Italian (EWI) equities and the EUR/USD (FXE).

The former President of France Jacques Chirac once said: “The construction of Europe is an art. It is the art of the possible”. Indeed, if the Eurozone is to become a functioning United States of Europe, it’s just in the initial sketch stage.


Our immediate-term Global Macro Risk Ranges are now:




USD 84.89-86.63

EUR/USD 1.25-1.27

WTI Oil 84.02-89.82

Gold 1195-1230


Matthew Hedrick



#EuropeSlowing – Austerity Is Dead? - YYY. CPI


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. What TACRM's 25% Optimal Asset Allocation to Cash implies for your portfolio
  2.  The strength in short-term Treasuries – which was led by strength in zero coupon bonds for nearly three weeks – confirming a shift to marginally dovish policy out of the Federal Reserve


Best of luck out there,


Darius Dale

Associate: Macro Team


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