October 17, 2014

October 17, 2014 - 1



October 17, 2014 - Slide2

October 17, 2014 - Slide3

October 17, 2014 - Slide4



October 17, 2014 - Slide5

October 17, 2014 - Slide6

October 17, 2014 - Slide7

October 17, 2014 - Slide8

October 17, 2014 - Slide9

October 17, 2014 - Slide10

October 17, 2014 - Slide11


Takeaway: We’ve identified 17 stocks that each face significant draw-down risk to the extent our macro themes continue to play out as anticipated.



How Did These Stocks Make the Cut?

As you are likely well aware, we continue to be the bears on domestic equities – particularly the illiquid small-to-mid cap style factor (#Bubbles), consumer discretionary stocks (#ConsumerSlowing), homebuilders (#HousingSlowdown), regional banks (#Quad4 and #HousingSlowdown), as well as commodity-linked equities (#Quad4).


And with domestic high-frequency economic data confirming our views, at the margins, we are inclined to think the market has not yet made an investable bottom – especially given that the overwhelming majority of our interactions with customers over the past week or so have centered on “where to buy as opposed to “where to sell.


While our gauge of buy-side consensus is obviously limited to our large (and growing) sample of clients, we think the fact that hedge funds’ correlation to beta is in excess of +90% on a traling-5Y basis speaks volumes to the fact that there isn’t a ton of differentiation out there from either a sentiment or exposure perspective.




The five key takeaways from our discussions are:


  1. Consensus on the buy-side is still likely positioned bullish. Cutting one’s net exposure to 60% net long from 80% net long does not constitute “getting defensive” in our playbook.
  2. In the absence of true downside capitulation, there is likely more downside to come for the overall equity market. Remember the upside capitulation we saw on $BABA IPO day? We do. Never in history has upside capitulation been followed so quickly by a commensurate degree of downside capitulation.
  3. We’ve been harping on this for months, but the illiquidity risk investors are facing out there is very real. Years of the buy-side taking on liquidity risk to keep pace with a low-variance, high return equity market is a “chicken” that is likely coming home to “roost” before our very eyes.
  4. Moreover, the proliferation of low-cost passive exposure to index beta during the QE era likely means there are fewer stock-pickers in the market ready to defend individual names when entire sectors or style factors are being blown out of.
  5. All told, we think a “short the bounce” strategy is likely to prove more profitable than the consensus “buy the dip” narrative over the intermediate term.


Our Screening Methodology

Understanding all of that, we took it upon ourselves to screen for names that fit our bearish macro themes on the short side; the criteria of our screen is as follows:


  1. Accessible: Traded on a US exchange: 14,064 stocks
  2. A known hedge fund hotel: In the top quartile of hedge fund ownership (as a percentage of float): 3,517 stocks
  3. Worth your/our time to analyze: Market cap > $1 billion: 1,274 stocks
  4. A good story that has played out to some degree: In the top quartile of Bloomberg consensus NTM revenue revisions on a YoY basis: 228 stocks
  5. With cracks developing in the thesis: In the bottom quartile of Bloomberg consensus NTM revenue revisions on a QoQ basis: 38 stocks
  6. Illiquid: The trailing 3M average daily turnover in this sample of 38 stocks is $73M; and that includes Netflix, which is actually quite liquid at $977M. These figures compare to an average trailing 3M average daily turnover for S&P 500 constituent stocks of $223M.




The 17 names highlighted in the chart below are those from the list of 38 that have at least 20% downside to their respective trailing 52-week lows. Obviously that’s an arbitrary point to anchor on in the context of the market going straight up for two straight years, but it’s at least a consistent frame of reference to gauge further downside (many of the 38 stocks in our screen have already corrected or crashed from their 52-week highs). The trailing 3M average daily turnover in these names is a “whopping” $53M.




Now that the top-down work is complete, let us know if you’d like one of our senior industry analysts to do the bottom-up work on any one of these names for you (for a fee, of course).


Happy short-selling!




Darius Dale

Associate: Macro Team

Contributor Call: Short John Deere ($DE), Says BluePac's Chris Sommers


Hedgeye CEO Keith McCullough talks to Seeking Alpha Contributor and BluePac managing partner Chris Sommers about Sommers' high conviction short idea, John Deere. It's the latest from Hedgeye's video partnership with Seeking Alpha.

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.

Cartoon of the Day: Weak Consumer

Cartoon of the Day: Weak Consumer - weak consumer cartoon 10.16.20141


The consumer, a main driver of the US economy, isn’t showing many signs of strength these days.


subscribe to cartoon of the day

Flash Call Friday: #Bubbles Or Bottom?

Flash Call Friday: #Bubbles Or Bottom?  - HE M bubblesbottom


#Bubbles or Bottom? Join the Hedgeye Macro Team, led by CEO Keith McCullough, for a 15 minute flash call tomorrow, October 17th at 1:00pm EDT. We remain bearish on both domestic and international equities. On the call we will highlight the best places to "hide out in" in order to weather the market volatility.  


Our industry-leading fundamental macro research and proprietary quantitative risk management systems suggest a heightened probability of a market crash over the intermediate term. When juxtaposed against the consensus narrative of, "where do I buy the dip?", we think this is a call no one can afford to miss.  




  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 149679#
  • Materials: CLICK HERE (The presentation will be available approximately 30 minutes prior to the call)

Ping for more information.



Takeaway: The expectation for a supply/demand floor is not a catalyst for volatility-induced real-time market moves

The daily narrative these last few weeks following the sell-off in energy markets has anchored on the fundamental supply/demand dynamic in the energy space, and it’s been pretty simple:


There’s tons of supply hitting the market, and global growth appears to be slowing.


As a precursor to reading this note, the following is an over-simplified view of our risk management process (the sequence of relevant events is of importance in understanding how we contextualize the daily news flow in global macro): 


1         We quantitatively model global macro to front-run inflection points in the slope of growth and inflation which gives us the expectation for the current environment (#QUAD4: GROWTH SLOWING, INFLATION DECELERATING)

2         With this expectation, we lean on our research team for sector-specific alpha (which companies are better longs in a macro set-up where we would want to be long that sector?). In other words we look for the fundamentals to follow and confirm.

3         With an intermediate to long-term BULLISH view on a ticker (delta positive), we will use our immediate-term TRADE ranges to BUY on RED and SELL on GREEN


NOTE: A fundamental supply/demand dynamic in global energy markets follows the quant and market-based signals to confirm our view (market-based meaning PRICE, VOLUME, AND VOLATILITY signals):

  • We wouldn’t buy oil here on a fundamental catalyst when volume is 50%-100% above trailing averages over different durations on down days
  • OPTIONS COLOR: volume in WTI Jan 15’ expiry was 3:1 to 5:1 puts-call ratio on Tuesday at most strikes. 25 Delta put-call skew over the last week went from around 2 points historically to 7-8 points as the spike in volatility forces investors to pay-up for protection: #VOLATILITY ASSYMETRY        

Every mainstream financial news and media source this week supplied a myriad of quotes and one-off statistical arguments as to why prices can only go so low:

  • “OPEC will cut production”
  • “OPEC won’t cut production BUT Saudi Arabia and the other major players are deliberately making a stance not to cut production to squeeze higher cost North American shale plays” 
  • “Marginal Production costs will slow the supply flood: There’s resistance starting at $80/barrel, and this will step up as oil moves lower as more and more producers are squeezed”:
    • The Executive Director of the IEA reported this week that 98% of crude oil and condensates from the U.S. have a breakeven oil price below $80/barrel. She followed up with the estimation that 82% of these companies have a breakeven at $60 or less.


The supply-side of the equation is definitive. There’s tons of supply from newly developed sources flooding the market:

  • North-American oil and gas boom from newly developed, non-traditional sources
  • Stable production from OPEC countries
  • Continued E&P activity in Russia and the South China Sea





  • Global production increased ~+910K B/D in September (annualized) to 93.8M B/D (annualized) which is +2.8M higher y/y
  • OPEC producers have all verbally confirmed they have no plans to reduce output and several have cut prices to Asia and Europe:
    • OPEC’s largest producer, Saudi Arabia, usually leads the charge, became the first to cut prices to Asian end-markets (others followed):
      • Iraq is now following Saudi Arabia and Iran in cutting prices to Asia and Europe
      • Iraq (2nd largest OPEC producer) will sell its Basrah Light crude to Asia at the biggest discount since January 2009, the country’s State Oil Marketing Co. said this week.
  • Iran last week said it will sell oil to Asia in November at the biggest discount in almost 6 years, matching cuts by Saudi Arabia.   




Global growth is slowing and demand expectations have been downwardly revised..

  • The IEA significantly cuts global crude oil demand growth for 2014-15 this week:
    • Full-year 2014 global demand growth cut by -200K B/D to 900K
    • Full-year 2015 global demand growth cut -300K B/D to 1.1M B/D (93.5M total)


Many of the statistics are self-explanatory in suggesting that production cuts are inevitable to reach equilibrium. We will be the first one to tell you that fundamentals will play-out over the long-term (and they may, but it could be at much lower prices).


With that being said, we completely disagree with the argument that an expectation for fundamental equilibrium can somehow back-stop the real-time relative changes in price, volume, and volatility. The quant signals give us indications, and we look to the fundamental set-up to confirm.


Fed-fueled easy-money policy and low periods of volatility create a few big risks:

  • Leverage
  • Volatility Spikes

Managed money is forced to chase outperformance. Longer periods of time in a low volatility environment force leveraged beta-chasing. It also creates the behavioral assumption as to what volatility is, based on how it’s been, and how it’s expected to be.

In a recent note before Janet Yellen’s September speech, we outlined the correlation risk embedded in the assumption of continued tapering and the outlook for a stronger USD…. Oil Getting Whacked


In the note we highlighted the correlation inherent in a non-consensus policy response:


1.            When Fed heads use communication tools to talk up rate hikes (like Bernanke just did) USD and rates rise


2.              When USD and rates are rising, at the same time, commodities, oil, Gold, etc. go down


3.              The machines (quants) then chase macro correlations, and macro markets get overbought/oversold”


Point three addresses the immediate, real-time risk that can smack you in the face. When those looking to minimize large currency and rate exposure anchor on macro correlations for hedge-sizing considerations one-way, large positions create the execution risk block traders love to hate:

  • Anchoring: Tighter the correlation requires a bigger hedge
  • Volume: Larger positions create large capitulation risk
  • Sentiment: The “Commitments of Traders Report” from the CFTC shows a consensus position that is short the Euro, short long-duration treasuries, and longer (Than US) on U.S. growth.
  • Volatility: If a leveraged consensus trade is wrong, the volatility risk is greater in the FX, Gold, and Oil markets as robots and scalpers chase the large trades.
  • Risk: What is the probability of price moving to a certain level? We model it higher with this correlation risk. From an immediate-term TRADE duration perspective the bands/levels for identifying overbought/oversold exhaustion signals widen." 

Yellen kicked the can in Jackson Hole, but just last week she reverted in her commentary on the minutes from the September 16-17th meeting:   


A.K.A we are not hawks, and we’re not reverting on the ingrained beliefs for how monetary policy should intervene in the marketplace.

We have reiterated our expectation for this policy response all year in an environment with growth slowing and expectations for growth too high as it is an input into our macro modeling.  

A +160% move in VIX from the July lows is the follow-through from Fed-induced leverage in the system.  How many of the market participants in oil markets (or any derivative of oil markets, which is a much larger pool of investors) have any interest in the physical commodity over financial speculation anyway? What percentage of average daily trading volume?


Both BRENT and WTI are currently BEARISH from both an intermediate-term TREND duration. Our quantitative signals front-ran the fundamental supply/demand story which is taking shape. As always, we will continue to look to these quantitative signals and back-fill into the story.


WTI Set-Up:

BEARISH TREND (Intermediate-Term) : $94.63

BEARISH TAIL (Long-Term): $97.95


Please feel free to ping us with comments or questions on our current position here.


Ben Ryan


Early Look

daily macro intelligence

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.