VIX, Oil and Gold

Client Talking Points


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 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.


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


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


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



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

-Margaret Thatcher


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%.



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

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

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Pardon The Bear

“But pardon, gentles all…”



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:



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,



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


Investing Ideas Newsletter

Takeaway: Current Investing Ideas: EDV, GLD, LM, OC, RH, TLT and XLP.

Below are Hedgeye analysts’ latest updates on our seven current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.


*Please note that we removed the British Pound (via the etf FXB) and Och-Ziff Capital Management Group (OZM) this week from our Investing Ideas list.


We also feature two institutional research notes which offer valuable insight into the markets and economy.


Investing Ideas Newsletter     - II 


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     - Bear bubbles song 10.6.14

Small caps. Tech stocks. IPOs. And more. There are bubbles everywhere, and it’s why #Bubbles is one of Hedgeye’s three core Macro Themes this quarter.




Montrez-moi l'argent!


Per Google Translate, the title of this note means, “show me the money!” in French. Why French? Because it is the language of love. And we love helping you make money…


Indeed, the week ended October 10th, 2014 was another great week for the slow-growth, yield-chasing trade we’ve been ardently advocating all year. To recap weekly performance:

  • iShares 20+ Year Treasury Bond ETF (TLT): +2.0%
  • Vanguard Extended Duration Treasury Bond ETF (EDV): +2.56%
  • Consumer Staples Select Sector SPDR (XLP): +0.37%

Those performance figures represent material outperformance when benchmarked against traditional equity exposures like the S&P 500 (SPY) or Russell 2000 (IWM), which were down -3.04% WoW and -4.48% WoW, respectively.


Moreover, the widening spread of relative performance over the past month is supported by our view that both domestic and global economic growth is slowing.

  • iShares 20+ Year Treasury Bond ETF (TLT): +4.3% MoM
  • Vanguard Extended Duration Treasury Bond ETF (EDV): +5.86% MoM
  • Consumer Staples Select Sector SPDR (XLP): +0.57% MoM
  • SPDR S&P 500 Trust (SPY): -4.76% MoM
  • iShares Russell 2000 ETF (IWM): -9.60% MoM



There wasn’t really any meaningful domestic economic data to anchor on this week. In spite of this lack of data, global financial markets managed to go completely haywire on the Fed reminding everyone exactly what we’ve been forewarning all year:


US real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent.


To recap the decidedly dovish minutes from the FOMC’s September 16-17th meeting:

  • The  minutes highlighted risks to the US economy and domestic inflation expectations from sluggish global growth and a stronger US dollar.
  • The minutes suggested that the “considerable time” forward guidance and “significant underutilization of labor market resources” language may remain in the October FOMC statement.
  • The minutes suggested that any changes to the board’s current guidance will present communication challenges and that caution would be required to avid an unintended tightening of financial conditions.
  • Lastly, the minutes also downplayed concerns about potential risks to financial stability, which effectively means the Fed would be slow to react, if at all, to bubbly valuations in either the credit and/or equity markets with a less accommodative policy mix.

It is clear to us that market participants – many of whom have been anchoring on the Fed (which itself has a terrible track record at forecasting the economy) to guide their asset allocation all year – are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. They should.


All told, we continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond.


Stick with the playbook. The USD-monetary policy hedge that is gold loves surprisingly dovish statements from FOMC members. We continue to lean on our internal model for predicting the change in the slope of 1) growth and 2) inflation, and the third part of the model is a policy input.


We’ve hammered this point all year with regard to our gold position, but the policy response from today’s central bankers has been one of the most predictable inputs into the model.


When growth and inflation are decelerating and consensus positioning suggests that growth will surprise to the downside, the monetary response will take a relatively dovish turn.


While Draghi was successful in taking down the Euro over Q2/Q3, the Federal Reserve will be dovish at the same time. Gold remains neutral from an intermediate-term TREND duration and will catch a bid on each incrementally dovish statement pressuring the outlook for the dollar.


Yellen’s commentary Wednesday on the minutes from the September 16th-17th Fed meeting indicated the global economy was weaker than expected and that policy members were worried that “FURTHER GAINS IN THE DOLLAR COULD HURT EXPORTS AND DAMP INFLATION.”


  • The 10-yr yield tightened (Bonds rallied)
  • The USD closed RED on the day after being in positive territory right before Yellen’s speech (-46bps)
  • GOLD followed up Thursday with a +1.6% rally


Legg Mason (LM) continues to surprise to the upside with results above Street expectations. During the most recent week, the company posted its monthly assets-under-management report with the strongest results in six months. In aggregate LM posted net new asset growth of $11.4 billion in September with all 3 of its major segments posting gains. While the company posted net new inflow of $800 million within its leading bond franchise and $8.8 billion within its money fund business, most impressive was the $1.8 billion inflow within its equity franchise.


While we continue to recommend a long position in Legg Mason on its underappreciated bond business, if the high margin equity franchise starts to generate above average results, our estimates could be too conservative leading to further upside. We currently estimate fair value on LM stock at $57-58 per share but if the Legg equity segment continues its recent trend line our estimates will prove too conservative.


Investing Ideas Newsletter     - chart7


Earlier this week we hosted a follow-up call on the roofing market’s pricing and the current environment with Bill Carlin. Bill has over 36 years experience in the industry and previously held executive positions in OC’s roofing business.


Bill noted a more stable pricing environment for asphalt roof shingles, a significant improvement from year-on-year price declines in 2Q and most of 3Q 2014. Following OC’s poorly explained lack of pricing discipline in late 2013, prices and margins suffered. 


The industry offers little fixed cost leverage, limiting the competitive benefits of seeking volume and market share over price (>80% non-variable cost).  As long as competitors respect the value of oligopolistic pricing over market share, the industry should remain reasonably profitable. 


The September 2014 price increase appears to be holding so far, transferring some pain to distributors.  Unfortunately, high inventories across the channel may limit the 4Q benefit of better pricing.  The survival of the price increase is a key issue for OC investors to track.




Sentiment around RH ticked up slightly over the last month, which is largely due to an 8% reduction in short interest for the month. That’s not a major surprise in light of CEO Gary Friedman’s $2mm open market stock purchase, which sent a powerful signal to the market.


All that said, 28.6% of the RH float is currently held short. To put that into context, JC Penney, which one might think sets the standard for ‘investor hatred’ is sitting right at 29%. By comparison, Williams-Sonoma is at 6.8%, Macy’s is 3.1%, and Nike is 0.9%.


We think the fundamental story will play out in a way that will prove today’s short interest levels to never be retested. 


Investing Ideas Newsletter     - chart6


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Click on each title below to unlock the content.


ICI Fund Flow Survey - Worst Quarter since 4Q 2012 for Equity Fund Flows 

The most recent ICI fund flow survey rounded out the worst quarter for equity funds since 4Q 2012 and also reflected the dislocation at PIMCO.

Investing Ideas Newsletter     - Money flows


Semiconductor Downcycle Confirmed by MCHP

Semiconductor Downcycle Confirmed by MCHP; All Chip Firms to be Impacted over the course of a couple quarters.

Investing Ideas Newsletter     - chip firms

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