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October 13, 2014

October 13, 2014 - Slide1

 

BULLISH TRENDS

October 13, 2014 - Slide2

October 13, 2014 - Slide3

 

BEARISH TRENDS

October 13, 2014 - Slide4

October 13, 2014 - Slide5

October 13, 2014 - Slide6 

October 13, 2014 - Slide7

October 13, 2014 - Slide8

October 13, 2014 - Slide9

October 13, 2014 - Slide10

October 13, 2014 - Slide11
October 13, 2014 - Slide12


VIX, Oil and Gold

Client Talking Points

VIX

The front month fear has crashed to the upside (doubling since the Russell topped July 7th), closing +46% last week to +54.8% VIX year-to-date; immediate-term TRADE overbought within a risk range of 16.85-21.67, so U.S. stocks should bounce.

OIL

Oil is not bouncing; after ramming the rocks of #Quad4 deflation (-4.4% last week), WTI is down another -1.9% this morning and this is starting to get gnarly for both spec and low-quality small/mid cap stocks (and bonds) across the energy complex.

GOLD

Not the best place to be in #Quad4 (the Long Bond and Cash are), but definitely not the worst either – after closing +2.4% last week, Gold is +0.5% to $1230; +2% year-to-date vs. the Russell 2000 -9.5%; Dollar Down helping today.

Asset Allocation

CASH 70% US EQUITIES 0%
INTL EQUITIES 6% COMMODITIES 2%
FIXED INCOME 22% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
EDV

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.

TLT

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.

RH

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

TWEET OF THE DAY

GERMANY: DAX +0.3% to -7.8% YTD #EuropeSlowing

@KeithMcCullough

QUOTE OF THE DAY

You may have to fight a battle more than once to win it.

-Margaret Thatcher

STAT OF THE DAY

We hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 year-to-date, ex-reinvesting interest, TLT = +18.3% year-to-date vs. Russell 2000 -9.5%.

 


THE HEDGEYE MACRO PLAYBOOK

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 importance of raising cash or being #antifragile (i.e. long of volatility) amid #Quad4 asset price deflation
  2. Why a dovish Fed is more likely to spook investors, rather than encourage more passive, levered-long beta chasing
  3. How the broad-based weakness across global macro did exactly what we said it would eventually do: spill over into U.S. equities, which are now broadly breaking down across sectors and style factors
  4. Why the financials – both moneycenters and regional banks – are a good short here

 

Best of luck out there,

 

Darius Dale

Associate: Macro Team


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

CHART OF THE DAY: Small Cap Illiquidity #Bubble $IWM

Takeaway: Peak Valuation + No Turnover = Window Down

 

CHART OF THE DAY: Small Cap Illiquidity #Bubble $IWM - Chart of the Day


Pardon The Bear

“But pardon, gentles all…”

-Shakespeare

 

That’s from William Shakespeare’s Prologue to Henry V. It’s also the opening volley from a #history brick my wife gave me for Father’s Day (sorry, just digging into it now!) called The Guns At Last LightThe War in Western Europe 1.

 

While I think she sometimes thinks I’m at war with my keyboard in the early mornings, she puts up with my market life – and for that I am forever grateful. From my family to my friends at the firm, getting it done is an all-out team effort.

 

But whose team is The Bear on? While I received some kind emails while in London last week, I’m not sure that being right this time is a good thing. The #Quad4 Deflation is nastier than a gnarling grizzly. And I fear the war between inflated asset #Bubbles and gravity has just begun.

Pardon The Bear - Bubble bear cartoon 09.26.2014

 

Back to the Global Macro Grind

 

The thing about fear is that you need to accept it before you conquer it. Last week’s +46% move in the front-month fear (VIX) index to +54.8% YTD should help pave part of that path towards acceptance. But don’t forget that there’s a long way between denial (1st stage of grief), anger, bargaining, depression, and acceptance.

 

Maybe using the Five Stages of Grief is a little over the top for a Monday morning. Maybe not (especially if you are a NY Jets fan). Being bearish at 1208 on the Russell (all-time #Bubble high = July 7th) or during the Ali-Bubble (BABA) IPO day (September 19th) at SPX > 2011 wasn’t easy for me. The denial stage for the bulls was equally isolating for our bearish macro view.

 

So pardon, gentles all – isolation is often where the alpha lives. And we certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest, TLT = +18.3% YTD vs Russell 2000 -9.5%).

 

In US Equity terms, here’s how the Def-#Quad4 Deflation looked last week:

 

  1. SP500 down -3.1% (down for the 3rd straight week) to +3.1% YTD
  2. Russell 2000 down -4.7% (down for the 6th straight week) to -9.5% YTD
  3. US Energy Stocks (XLE) down -5.2% to -5.6% YTD
  4. US Industrial Stocks (XLI) down -4.7% to -3.7% YTD
  5. US Consumer Staples (XLP) up +0.4% to +6.1% YTD

 

That’s right. In addition to the Long Bond (Treasuries), Munis, and Cash, we’ve noted in our most recent Macro Themes slide deck that Consumer Staples (XLP) is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.

 

Typically, when Correlation Risk (commodities trading inversely to USD) is this high, Down Dollar pays the commodity bulls. But last week, that was only true for pockets of the commodity complex (Oil was -4.4%). In addition to Gold +2.4% last week:

 

  1. Coffee was up another +6.7% to +83.5 % YTD
  2. Palladium was +4.0% to +8.7% YTD
  3. Cocoa was +3.3% to +16.4% YTD

 

But I am thinking there are more hedge funds who are still carry trading oil futures with a levered long bias than there are 2 and 20 alpha dogs who are long Cocoa on the #Ebola trade.

 

In fact, if you look at how hedge funds are positioned from a speculative net futures and options perspective:

 

  1. Crude Oil still has a net LONG position of +299,755 futures and options contracts (vs. 6 month avg of +385,000)
  2. US 10yr Treasury still has a net SHORT position of -51,954 contracts (vs. 6 month avg of -15,000)
  3. SP500 (Index +E-mini) has a net LONG position of +48,616 contracts (vs. 6 month avg of -41,000)

 

We’re obviously on the other side of every one of these Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX), so it was a good week. But the bigger question is where do the US equity bulls (and Treasury bears) go from here?

 

Within the small cap US equity #Bubble, there are a whole bunch of #bubbles we highlighted on our Q4 Macro Themes call (ping if you want the replay). And some of them play right into hedge fund consensus:

 

  1. Complacency #Bubble (slide 44)
  2. Levered Beta Chasing #Bubble (slide 45)
  3. Leveraged Speculation #Bubble (slide 46)

 

We can do a conference call with you to review all of these #bubbles, but the #Complacency one is really easy to show in terms of the number of days where the SP500 has had a > 1% move. After hitting an all-time YTD low, we just had 4 of those days, in a row!

 

Sure, markets scare people when they do that. I think I scared the hell out of some Institutional Investors in London with some of these slides too. Coming off the all-time lows in complacency, there’s never been this level of #VolatilityAsymmetry, ever.

 

While never-ever is a very long time – and I certainly don’t mean to be mean (or scare people) - I’d appreciate it if you took it easy on my inbox. My wife thinks of me as a cuddly Thunder Bay Bear, so be gentle with me.

 

Our immediate-term Global Macro Risk Ranges are now:

 

SPX 1

RUT 1037-1086

VIX 16.85-21.67

USD 85.07-86.67

WTI Oil 83.99-88.64

Gold 1

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Pardon The Bear - Chart of the Day


Commodities: Weekly Quant

Commodities: Weekly Quant - chart1 divergences

Commodities: Weekly Quant - chart2 deltas

Commodities: Weekly Quant - chart3

Commodities: Weekly Quant - chart4 s P correls

Commodities: Weekly Quant - chart 5 volume

Commodities: Weekly Quant - chart6 implied vol

Commodities: Weekly Quant - chart7 sentiment

Commodities: Weekly Quant - chart8 1mth correls

Commodities: Weekly Quant - chart9 3mth correls

Commodities: Weekly Quant - chart10 6mth correls

Commodities: Weekly Quant - chart11 1yr corrles

Commodities: Weekly Quant - chart12 3 yr correls

 

 

Ben Ryan

Analyst


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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