prev

THE HEDGEYE MACRO PLAYBOOK

Takeaway: Our Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes and proprietary quantitative market context.

CLICK HERE to view the document. In today’s edition, we highlight:

 

  1. Our analysis of the "bounce" in DM Equities reaffirms our view that the path of least resistance in this primary asset class is lower (in PRICE terms)  
  2. In our never-ending search to disconfirming evidence to analyze, TACRM is picking up on some very nascent signs of bottoming inflation expectations

 

Best of luck out there,

 

Darius Dale

Associate: Macro Team


Deflation's Good Fortune

This note was originally published at 8am on October 06, 2014 for Hedgeye subscribers.

“See your disappointments as good fortune – one plan’s deflation is another’s inflation.”

-Jean Cocteau

 

After another tough week of #bubbles popping in the US stock market, there was some good fortune in being long bonds!

Deflation's Good Fortune - Super TLT cartoon 10 01 2014

 

Back to the Global Macro Grind…

 

Golf clap for the no-volume bounce to lower-highs in US Equities on Friday. Is it just me, or was there some irony in the US government printing a rosy picture of jobs in America on the last employment report before the mid-term elections?

 

The thing about conspiracy theories is that sometimes they are true. Regardless, the lagging of lagging economic indicators (the US unemployment rate) can now only go one way from here – up. That’s a good thing, if you are long the long end of the bond market.

 

With mostly everything Global Equities and Commodities deflating last week, here’s what long-term Treasuries looked like:

 

1. US Treasury 10yr yield down another -9 basis points week-over-week

2. US Treasury 10yr yield now down -59 basis points, or -19.5%, for 2014 YTD

3. Total Return of the iShares 20yr Bond Fund (TLT) +18% (vs. Russell 2000 -5.1% YTD)

 

The other disappointing thing that happens when the long-end of the curve (bond yields) falls is that this thing called the Yield Spread compresses. Yield Spread is the long end of the curve (10yr yield) minus the short-end (2yr yield). That compressed another 8 basis points to +188bps wide (-77 basis points YTD).

 

Both Yield Spread and the Long-end of The Curve are leading indicators for the rate of change in US economic growth. Whereas things like non-farm payrolls and the unemployment rate are what we call lagging indicators.

 

“So”, if you’re a cyclical investor like me, you want to be shorting what we call “early cycle slowdown” (and/or #bubble) stocks and commodities at the end of an economic cycle (i.e. when the lagging indicators look good). And you want to be re-allocating your capital to cash and bonds all the while.

 

Back to the deflations in stocks last week – it was a global affair:

 

1. Russell 2000 deflated for the 5th week in a row, -1.3% to -5.1% YTD

2. SP500 deflated for the 2nd week in a row, -0.8% to +6.5% YTD

3. European stocks (EuroStoxx600) were down another -2.1% to +2.1% YTD

4. Emerging Market Equities (MSCI) were -2.6% to down -0.5% YTD

5. Russian stocks continued to crash, -5.5% on the week to -24.3% YTD

 

I know – what could possibly go wrong…

 

If we look one layer underneath the crust of the US equity market selloff, in S&P Sector Style terms here’s what happened:

 

1. Energy stocks (XLE) got slammed another -4.1% on the week to DOWN now for the YTD (-0.4%)

2. Basic Material stocks (XLB) deflated -3.9% on the week to +4.8% YTD

3. Consumer Staples stocks (XLP) outperformed, closing +0.8% on the week to +5.7% YTD

 

Unlike the first half of 2014 (when the Hedgeye GIP Model had us in #Quad3, where inflation was accelerating and growth slowing), the 2nd half has us in #Quad4 where both growth and inflation are slowing. That’s bad for commodities and their commodity linked equities and good for Consumer Staples.

 

With the US Dollar up another +1.2% last week, here’s what happened to commodities:

 

1. CRB Commodities Index -1.4% on the week to down that much now for the YTD

2. Oil (WTI crude) was down -4.1% on the week to -3.9% YTD

3. Gold dropped another -1.9% on the week to -1.1% YTD

 

No, being long Gold isn’t as bad as being long the small cap US equity #bubble. But it was deflating nevertheless.

 

The thing about the deflation becoming a good thing for the consumer spirit inflating is that it comes on a lag too. Coffee and cattle prices were up +11% and +4%, respectively, last week (they’re +72% and +43% YTD, respectively!) so don’t expect to get a price cut at Starbucks or Chipotle any time soon.

 

Fully loaded with rent at all time highs (anyone get a rent reduction due to REIT deflation last week?) and real wages sucking wind (oh, that was in the jobs report too), that’s the real problem with US GDP – almost 2/3 of the country is already in an early cycle recession.

 

But both the Russell and the 10yr UST yield already signaled that to you, so you don’t have to be disappointed. This is our market life. It’s cyclical too. And our good fortunes are best inflated by allowing markets to help us looking forward, not in the rear-view.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.39-2.50%

SPX 1938-1980

RUT 1081-1132

DAX 9181-9489

VIX 13.34-17.31

USD 84.71-86.89

EUR/USD 1.25-1.28

Pound 1.59-1.62

WTIC Oil 89.13-93.14

NatGas 3.81-4.19

Gold 1185-1235

Copper 2.98-3.06

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Deflation's Good Fortune - 10.06.14 Deflating Bubbles


MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE

Takeaway: The XLF is down 6.3% m/m and the outlook remains negative.

Current Best Ideas:

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 19 2 

 

Key Takeaway:

Our last three weekly risk monitors have been titled:

 

"Danger Zone" - 10/13/14

"Don't Get Complacent" - 10/6/14

"Risk is Rising" - 9/29/14

 

The XLF is down 6.3% on a m/m basis and was down 1.2% last week. A confluence of factors are responsible including European growth slowing, US growth concerns, and, more recently, apprehension about Ebola spreading globally. We've been flagging rising risk for the last 3 weeks (see our note titles above). This morning, the short-term outlook remains challenging. For reference, our Macro team’s quantitative setup in the XLF shows 0.9% upside to TRADE resistance and 2.8% downside to TRADE support. The risk monitor is suggesting a bearish intermediate term outlook. 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 4 of 12 improved / 3 out of 12 worsened / 5 of 12 unchanged

 • Intermediate-term(WoW): Negative / 4 of 12 improved / 6 out of 12 worsened / 2 of 12 unchanged

 • Long-term(WoW): Negative / 3 of 12 improved / 4 out of 12 worsened / 5 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 15 2

 

1. U.S. Financial CDS -  Swaps tightened for 17 out of 27 domestic financial institutions on the week. Large cap US Financials were little changed over the course of the week with an average change of zero bps. On a m/m basis, however, swaps are wider by 10 bps. Morgan Stanley is leading the charge higher, rising by 13 bps on the month and 3 bps on the week.

 

Tightened the most WoW: TRV, CB, ALL

Widened the most WoW: GNW, PRU, LNC

Tightened the most WoW: ACE, CB, AON

Widened the most MoM: AXP, AIG, MS

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 1 2

 

2. European Financial CDS - Swaps were sharply wider in Europe last week. Much of the weakness was driven by Greek banks, which widened by an average 85 bps on the week.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 2

 

3. Asian Financial CDS - Indian bank swaps were the most changed on the week, rising by an average of 7 bps on the week. Chinese bank swaps remain the most changed on the month.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 17

 

4. Sovereign CDS – European Sovereign swaps widened notably last week. Portugal and Spain saw swaps widen 28 and 18 bps, respectively. Meanwhile, Italian and French swaps were wider by 14 and 10 bps. The US and Japan also widened by 2 and 4 bps. 

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 18

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 3

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 10.1 bps last week, ending the week at 6.02% versus 6.12% the prior week.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 8.0 points last week, ending at 1854.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 6

 

7. TED Spread Monitor – The TED spread fell 1.4 basis points last week, ending the week at 20.8 bps this week versus last week’s print of 22.2 bps.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 7

 

8. CRB Commodity Price Index – The CRB index fell -1.7%, ending the week at 273 versus 277 the prior week. As compared with the prior month, commodity prices have decreased -3.0% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 9 bps.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 9 basis points last week, ending the week at 2.47% versus last week’s print of 2.57%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 10

 

11. Chinese Steel – Steel prices in China rose 3.5% last week, or 101 yuan/ton, to 3018 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 182 bps, -3 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.9% upside to TRADE resistance and 2.8% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: STAYING IN THE FOXHOLE - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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.

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – October 20, 2014


As we look at today's setup for the S&P 500, the range is 70 points or 3.01% downside to 1830 and 0.70% upside to 1900.                                             

                                                                                  

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.83 from 1.82
  • VIX closed at 21.99 1 day percent change of -12.74%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 10am: Fed Governor Jerome Powell speaks on community banking in online forum
  • 11am: U.S. to announce plans for auction of 4W bills
  • 11:30am: U.S. to sell $24b 3M bills, $30b 6M bills

 

GOVERNMENT:

    • Senate, House out of session
    • FEC filing deadline for candidates, some Pacs, parties for Sept
    • 8am: NY Fed meeting on reforming culture, behavior in financial services; speakers include Sir David Walker at Barclays, UBS’s Axel Weber, JPMorgan’s Lee Raymond, Fed’s Daniel Tarullo, Morgan Stanley’s James Gorman
    • 1pm: Financial Services Roundtable, FBI, Secret Service conf. on cybersecurity
    • 2pm: FHFA Director Melvin Watt, HUD Secretary Julian Castro speak at Mortgage Bankers Assn conf.
    • 4:30pm: Freddie CEO Donald Layton, Fannie CEO Timothy Mayopoulos speak

 

WHAT TO WATCH:

  • IBM Agrees to Pay Globalfoundries $1.5 Billion to Take Chip Unit
  • Investors Plan $2.2b Bid for Adidas’s Reebok, WSJ Reports
  • Yahoo’s Mayer Faces Crucial Earnings Call Amid Investor Pressure
  • CEO Mayer Said to Refresh Turnaround Plan; Seek M&A: WSJ
  • Texas Ebola Cases Had Possible Contact With 300 People in U.S.
  • Spain Ebola Patient May Be Free of Virus After Negative Test
  • Cleco: Investor Group to Buy Cleco for $55.37/Shr in Cash
  • Fed to End Bond Buys This Month as Planned, Rosengren Says: WSJ
  • Obama May Seek an Iran Nuclear Deal Without Congress: NYT
  • Tesoro Acquires QEP Pipeline Assets in $2.5b Deal
  • McDonald’s Says Russia Inspecting More Than 200 Restaurants
  • Boeing Seeks Revised Schedule for $51b U.S. Aerial Tanker
  • Nutreco Agrees to Be Bought by SHV for About $3.4b
  • Sprint Job Reductions Will Include 452 at Kansas Headquarters
  • Marc Andreessen Resigns From EBay Board as PayPal Is Spun Off
  • Banks’ Range of Libor Calculation Methods May Be Standardized
  • Danone Hasn’t Yet Decided on Priorities for External Growth

 

AM EARNS:

    • Gannett (GCI) 8:30am, $0.55
    • Genuine Parts (GPC) 8:52am, $1.24
    • Halliburton (HAL) 7am, $1.10 - Preview
    • Hasbro (HAS) 6:30am, $1.45 - Preview
    • IBM (IBM) 7am, $4.32
    • Lennox Intl (LII) 8am, $1.41
    • Peabody Energy (BTU) 8am, $(0.66) - Preview
    • Valeant Pharma (VRX CN) 6am, $1.99 - Preview
    • VF Corp (VFC) 7am, $1.10 - Preview

 

PM EARNS:

    • Apple (AAPL) 4:30pm, $1.30 - Preview
    • BancorpSouth (BXS) 6:43pm, $0.33
    • Brookfield Canada (BOX-U CN) Aft-Mkt, C$0.41
    • Cadence Design Systems (CDNS) 4:05pm, $0.24
    • Celanese (CE) 5pm, $1.44
    • Chipotle Mexican Grill (CMG) 4:02pm, $3.83
    • CYS Investments (CYS) 4:05pm, $0.32
    • East West Bancorp (EWBC) 5:16pm, $0.60
    • Helix Energy Solutions (HLX) 5:30pm, $0.50
    • Hexcel (HXL) 4:05pm, $0.54
    • IDEX (IEX) 4:05pm, $0.84
    • Illumina (ILMN) 4:05pm, $0.56
    • Packaging Corp of America (PKG) 5pm, $1.26
    • Rambus (RMBS) 4:05pm, $0.13
    • Rent-A-Center (RCII) 4:25pm, $0.47
    • Steel Dynamics (STLD) 6pm, $0.44
    • Texas Instruments (TXN) 4:30pm, $0.71
    • Zions Bancorp (ZION) 4:10pm, $0.44

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Gold Advances in New York on Dollar Weakness to Falling Stocks
  • Brent Crude Oil Trades Near Level Seen as OPEC Test; WTI Steady
  • Gold Bulls Lured Back for First Time in Two Months: Commodities
  • Copper Declines With Other Industrial Metals on China’s Slowdown
  • Hedge Funds Cut Bullish Bets on Crude as Prices Tumble: Energy
  • Sumitomo’s $1.55 Billion Loss Shows Shale Isn’t Booming for All
  • Citrine’s Hommert Sees ‘Good Upside’ for Nickel Next Year
  • Sugar Millers See Thai Cane Output Dropping Below 100 Mln Tons
  • Rubber Reaches 1-Month High as Malaysia Sees 10% Drop in Output
  • Fire Shuts U.K.’s Didcot B Power Station; No Risk Seen to Supply
  • Iron Ore Risks Extending Collapse as Supply Jumps, Moody’s Says
  • Modi Uses Oil Slump to Ease Curbs Deterring Exxon, Chevron
  • Deeper Oil Slump Seen as ‘Disaster’ Risk for Australian LNG
  • Goldman Sees Copper Underperforming Most Base Metals in 2015

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Seeing Red

“We will have to send soldiers into this party seeing red.”

-Bernard Montgomery

 

World War II #history rarely accuses British Army General Bernard Montgomery of having a confidence problem. He was often decisive and ruthless. In the end, he was also a winner.

 

On the eve of landing on the beaches of Normandy, Monty’s bravado reminded Churchill’s Chief of Staff (Lieutenant Hastings Ismay) of the eve of Agincourt (as depicted in Henry V):

 

“He which hath no stomach to this fight – let him depart.” (The Guns At Last Light, pg 11)

 

Seeing Red - EL Chart 2

 

Back to the Global Macro Grind

 

Seeing red, in single-factor price momentum terms, is not what everyone saw on Friday’s US stock market bounce. That’s because not everyone looks at risk on a multi-factor, multi-duration basis. But that doesn’t mean it ceases to exist.

 

Actually, the Russell 2000 was down on Friday, so even in single-factor terms, many saw red. Don’t forget that even though the Russell was up for the 1st week in 7, over 60% of stocks in the Russell 2000 are currently crashing (-20% from their 12-month highs).

 

Back to the multi-factor thing, we highly suggest you consider Mr. Macro’s market message on a baseline 3-factor basis – PRICE, VOLUME, and VOLATILITY. In those terms, this is what we saw on Friday’s “bounce”:

 

  1. PRICE – both the SPX and Russell failed at all 3 core levels of @Hedgeye resistance (TRADE, TREND, TAIL)
  2. VOLUME – Total US Equity Market Volume was -11% and -4% vs. its 1 and 3 month averages, respectively
  3. VOLATILITY – VIX was down on the day but +3.5% and +60.3% for the week and YTD, respectively

 

Price momentum is an easy concept for people to understand (it goes up or down – look at the chart, bro!). That’s why many still use what I affectionately refer to as Moving Monkeys (50 and 200 day) in order to contextualize price. Unfortunately, that is not a risk management process.

 

The direction of price obviously matters, but so does multi-factor context. Here’s what I mean by that:

 

  1. BULLISH – Price Up, Volume Up, Volatility Down
  2. BEARISH – Price Down, Volume Up, Volatility Up

 

Within the context of a bearish intermediate-term TREND @Hedgeye, Price UP, Volume DOWN, and trending (implied) Volatility UP is bearish too.

 

Setting aside our research view of US #GrowthSlowing, to get bullish and “buy-the-damn-dip” in US Equity beta, what I would need to see is the SP500 close above my immediate-term TRADE line of 1949 on accelerating VOLUME and a break-down in the VIX below my TRADE line of 15.03.

 

Those of you paying attention to my immediate-term risk ranges will note that these levels aren’t in the area code of today’s ranges. And, to a degree, that’s the point. If I look beyond 1-3 days in duration (to 3 weeks), I’m seeing a heightening probability of more red.

 

Across asset classes (multi-factor), here are the other big #Quad4 deflationary forces at work across multiple-durations (TRADE and TREND):

 

  1. European Equity deflation of -0.9% last week (-2.9% YTD EuroStoxx600) is bearish TRADE and TREND
  2. Emerging Market Equity deflation of -1.9% last week (-3.2% YTD MSCI) is bearish TRADE and TREND
  3. CRB Index deflation of -1.1% last week (-2.7% YTD) is bearish TRADE and TREND
  4. Oil (WTI) deflation of -3.3% last week (-11.1% YTD) is bearish TRADE and TREND
  5. Energy Equity (XLE) deflation of -1.1% last week (-6.6% YTD) is bearish TRADE and TREND

 

Then, of course, you have trivial risk signals like:

 

  1. US 10yr Treasury Yield crashing (-27% YTD) to 2.19% (bearish TRADE, TREND, and TAIL)
  2. US Treasury Yield Spread crashing (-31% YTD) to +182bps wide (10yr minus 2yr)
  3. And Credit Spreads starting to move off of their all-time lows as equity and commodity volatilities breakout

 

“So”, yes, I do see more red pending in US, European, and Emerging Market Equities in the coming weeks and months. And, no, I don’t think last week’s immediate-term capitulation was the bottom.

 

But consensus does! Here’s the updated net positioning of hedge funds in non-commercial CFTC futures/options terms:

 

  1. SP500 (Index + E-mini) got longer by +5,537 contracts to a net LONG position of +54,153 last week
  2. 10yr Treasury Bond saw shorts get -6,976 contracts shorter last week to a net SHORT position of -58,930
  3. Crude Oil bulls only gave up -14,225 contracts last week, keeping the net LONG position at +285,500 contracts!

 

In other words, consensus got longer of the US stock market, shorter of the Long Bond, and not nearly less-long enough of a crashing Oil price.

 

I know that some are frustrated out there with their performance. I can assure you that I’ve been there and had to deal with that. But there comes a time where you have to choose between being consensus and not seeing any more red in your P&L.

 

Our Immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.09-2.28%

SPX 1

RUT 1040-1101

VIX 20.46-28.92

WTI Oil 79.96-84.58

Gold 1211-1251

 

Best of luck out there this week,
KM

 

Seeing Red - CoD seeing red


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

next