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This note was originally published at 8am on October 16, 2014 for Hedgeye subscribers.

Let them eat debt.”

-Dan Alpert


That’s how my friend Dan Alpert starts chapter 4 of a non-perma-bull book I have been reviewing as of late – The Age of Oversupply. It’s a play on Marie Antoinette telling those who were plundered by central planners in France to eat cake.


Ironically enough, it was on this day in 1793 that Marie was guillotined at the epicenter of the French Revolution. The People will only put up with negative real incomes and the all-time highs in cost of living for so long…


Right in the middle of our new bear cave (Hedgeye Headquarters in Stamford, CT), we have an office I painted pink (with fluffy white couches) that we call the Marie Antoinette Room. There’s a guillotine painted in black on the wall.


"Ebeta" - EL chart 2


Back to the Global Macro Grind


Yep, we do things a little differently over here. And thank God for that. If anyone who works for me bought the “bounce” in the Russell #Bubble (into yesterday’s close), we’d be having a little chat in the pink room today.


Newsflash: the world changed yesterday.


And I can’t for the life of me understand why money managers who haven’t been positioned for it for the last, say 3-6 weeks, wouldn’t respect that. There has never been a % move like that in the Treasury market (in that compressed window of time), ever. I call that part of the phase transition of market risk, The Waterfall.


The Waterfall isn’t ebola (or whatever bulls want to blame next). It’s levered-long hedge fund beta.


And until I get at least a dozen shorter-term hedge funds calling/emailing me (at the same time) and telling me we’re going to crash, we’re probably going lower.


“We”, in market terms – dammit I hate that word. This market isn’t we. That would include me, Mucker, as having some ownership in being long the US equity market. To be clear, I am long the Treasury Bond market – Long Bond style!


Back to the #behavioral point on fund manager positioning and sentiment…


Understand that this entire way down (-11.2% for the Russell 2000, -32% for the 10yr bond yield, -7.4% for the SP500), I have generally been asked about where “we bounce.”


The reason for that is pretty simple. In the Chart of The Day (exhibit 45 in our Q4 Macro Themes deck) you can see Hedge Fund Correlation to SP500 and Average Relative Performance (using a 60 month trailing correlation).


Punch-line: forget ebola – correlation to Ebeta for the levered-long beta chasing trade = +0.90-0.95


When the US equity market goes down, for real… that’s more dangerous than almost any data point you can give me other than the following 3-factor #Bubble chart (exhibit 52 in our Q4 Macro Themes deck) – Spread Risk:


  1. All-time low in credit spreads
  2. All-time low in cross-asset class volatility
  3. All-time high in debt outstanding


No, I didn’t need a one-on-one meeting with my favorite stock picker to come up with that… I am pretty sure that the CFO of the only company I hit the buy button on as of late in Real-Time Alerts (HCA) wouldn’t know what to do with it anyway.


Q: Who does?


A: No one


How could anyone tell you, with a straight face that, even though, they “don’t do macro”, they just know that buying the damn dip is going to work, in spite of coming off the all-time lows in volatility and highs in, well, everything?


To review why our call on rates really matters to cross asset class expectations (risk):


  1. Long-term rates shock consensus to the downside
  2. Yield Spread (leading indicator for US #GrowthSlowing) crashes -34% (10yr minus 2yr yield)
  3. Small caps, bank stocks, and anything illiquid credit junk gets slammed


In the non-it’s-different-this-time playbook, this is what is called an early-cycle slowdown. And from the all-time highs in debt outstanding, I don’t think piling on more of what hasn’t worked (Qe4) is going to make this better.


I am not trying to scare you, or be “not nice” about this. I like to be right as much as you do. “So”, I say, let whoever bought yesterday’s intraday bounce in the Russell #Bubble eat beta.


Tomorrow at 1PM EST I’ll be hosting a Hedgeye Flash Call#Bubble Or Bottom”, updating our Q4 Macro Themes. Ping sales@Hedgeye.com if you’d like to participate.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.01-2.22%

SPX 1833-1889

RUT 1038-1080

VIX 19.55-27.99

USD 84.76-85.79

Gold 1220-1251

Best of luck out there today,



"Ebeta" - Chart of the Day

USD, Oil and the UST 10YR

Client Talking Points


The opposite of the Fed’s Policy To Inflate = #deflation; the Dollar Up, Rates Down move of 2014 continues to crush former carry trades (Energy and Basic Material stocks) and pay slow-growth #yieldchasing.


Another 1-day bounce is met with more selling; WTI down -0.8% this morning to $81.51 and has no immediate-term support to $79.98/barrel. Gas prices are 6.4% of the median consumer (U.S.) budget – that’s not nearly enough to offset either the all-time highs in U.S. cost of living or the wealth compression of falling stock and home prices.


The UST  10YR Yield is meandering around the top end of its immediate-term 2.16-2.35% risk range; don’t forget that the UST  10YR Yield, like oil, has crashed in 2014 (-23%) and that its highly sensitive to U.S. #GrowthSlowing data (like Durable Goods, Retail Sales, New Homes, etc.).

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.


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. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. 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).


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


RUSSIA: probability of economic collapse continues to rise; Russian stock market continues to crash -23.8% YTD



Well done is better than well said.

-Benjamin Franklin


A Starbucks Grande Pumpkin Spice Latte has 49 grams of sugar, compared to a 1.55 oz Hershey’s Milk Chocolate bar, which has 24 grams per bar. That’s more than double the amount of sugar.

CHART OF THE DAY: @Hedgeye Longs vs. Shorts #TimeStamped


CHART OF THE DAY: @Hedgeye Longs vs. Shorts #TimeStamped - Chart of the Day

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.51%
  • SHORT SIGNALS 78.32%

Deflated Disputants

“How many a dispute could have been deflated into a single paragraph if the disputants had dared to define their terms?”



Are you a central planning disputant? I am, big time. So, please, allow me to define my terms:


  1. The Fed’s QE was a Policy To Inflate asset prices
  2. After that inflation, you get the #deflation


That is all.


Deflated Disputants - EL chart 2


Back to the Global Macro Grind


I know. So easy a Mucker can explain it.


If you’d like to have a dispute with me on these terms (or change the M in my nickname to an F like the 1997 Princeton Hockey Team did), I’m happy to have it as long as you define yours. Mr. Market has been pricing them in all year long.


When our #process signals #Quad4 deflation (growth and inflation slowing, at the same time) here’s our asset allocation:


  1. Cash
  2. Long Term Treasuries (TLT, EDV, etc.)
  3. Municipal Bonds (MUB)
  4. Healthcare Stocks (XLV)
  5. Consumer Staple Stocks (XLP)


We #timestamped that in our Q4 Macro Themes deck on October 1st (pre-Oct 14th fetal position for the levered long beta portfolios) and we’ll reiterate that again, now that the Fed has done precisely what they said they’d do (ending the Policy To Inflate).


Now that that’s over, what I think happens next is where I’ll have many disputes. Here’s what I’m thinking:


  1. As both US and Global growth slows, the Fed will be under pressure to say that they can provide moarrr #cowbell
  2. Mean Reversions: classic late-cycle indicators (like employment and “confidence”) should roll over; Fed will freak out on that
  3. Long-term rates will continue to make a series of lower-highs and lower-lows, tracking lower growth and inflation expectations


Again, think like a Fed head. Define their terms – then front-run their proactively predictable behavior.


The main problem my disputants have with me is that I don’t think like they do. I am a dynamic counter-cyclical strategist and they are pro-cyclical linear economists. The economy is non-linear. It’s also one massive cyclical. You don’t buy a cyclical at the top of a cycle – you sell it.


The #1 question you should be asking Ed & Nancy (linear economists) has two parts:


A)     After 65 straight months of US economic expansion, isn’t this an early-cycle slowdown, and

B)      Now that everyone has cut to zero, where are we in the worldwide easing-cycle?


We know how they think about this. They’re making the same calls that they made at the top of prior cycles (that the cycle wasn’t slowing in 2H of 2007). They have defined their surveys and their terms. Those are pro-cyclical too.


What does being pro-cyclical mean?


  1. That you think late-cycle indicators being good is good
  2. That you don’t think in 2nd derivative terms (going from great to good is bad)
  3. And that once things are actually bad, you’re both late and getting bearish a lot lower


No,  I’m not calling anyone names. I am not being “mean” either. Rather than drifting from bullish to bullish thesis on the economy (at the beginning of the year they said inflation and capex would drive the economy; now they are saying global slowing and deflation will), I am being a consistent disputant.


This morning I’ll list the Top 12 Big Macro Risk Ranges (and our TREND views in brackets) – they are in our Daily Trading Ranges product too:


UST 10yr yield 2.16-2.35% (bearish)

SPX 1 (neutral)

RUT 1071-1157 (bearish)

DAX 8 (bearish)

VIX 12.89-22.25 (bullish)

USD 85.34-86.24 (bullish)

EUR/USD 1.25-1.27 (bearish)

Yen 107.11-109.77 (bearish)

WTI Oil 79.98-83.05 (bearish)
Natural Gas 3.57-3.82 (bearish)

Gold 1194-1231 (neutral)

Copper 2.96-3.09 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Deflated Disputants - Chart of the Day


TODAY’S S&P 500 SET-UP – October 30, 2014

As we look at today's setup for the S&P 500, the range is 136 points or 5.61% downside to 1871 and 1.25% upside to 2007.                                              













  • YIELD CURVE: 1.82 from 1.84
  • VIX closed at 15.15 1 day percent change of 5.28%


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Init Jobless Claims, Oct. 25, est. 285k (prior 283k)
  • Continuing claims, Oct. 18, est. 2.352m (prior 2.351m)
  • 8:30am: GDP, 3Q, est. 3% (prior 4.6%)
  • 9am: Fed’s Yellen speaks in Washington
  • 9:45am: Bloomberg Consumer Comfort, Oct. 26 (prior 37.7)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 1pm: U.S. to sell $29b 7Y notes
  • 3pm: Puerto Rico Govt. Devel. Bank webcast for bondholders



    • Senate, House out of session
    • Ideas Forum speakers include Sec. of State John Kerry, Anthony Fauci, director of Natl Inst. for Allergy and Infectious Disease; Senate Ag. Cmte Chairwoman Debbie Stabenow;  U.S. Trade Rep. Mike Froman
    • U.S. ELECTION WRAP: GOP Path to Victory Not So Easy; Ad Money



  • ValueAct’s Ubben Sees Agrium’s Retail Unit as ‘Stable Jewel’
  • Container Store Targeted by Apex Capital’s Colen Urging Growth
  • American Realty Says Accounting Error Was Intentionally Hidden
  • Standard Chartered, Mitsubishi UFJ Said to Face Fresh Inquiries
  • Citigroup Said to Seek Initial Offers for OneMain by Nov. 20
  • Barclays Profit Jumps, Sets Aside $799 Million FX Provision
  • Visa Profit Surpasses Estimates as Consumer Card Spending Rises
  • Suncor 3Q Operating EPS Tops Est., Total Production Below Est.
  • Fifth Street Raises $102 Million in Reduced Initial Offering
  • German Unemployment Unexpectedly Falls as Economy Weathers Woes
  • Samsung Has Smallest Profit Since 2011 as Smartphones Stall
  • Obama Says Attempts to Seal U.S. Futile in Battle Against Ebola



    • Air Products (APD) 6am, $1.61
    • Alpha Natural Resources (ANR) 7am, ($0.71) - Preview
    • AltaGas (ALA CN) 7:45am, $0.19
    • Altria (MO) 6:58am, $0.68 - Preview
    • American Tower (AMT) 7am, $0.56 - Preview
    • AmerisourceBergen (ABC) 7am, $1.05 - Preview
    • Avon Products (AVP) 7:01am, $0.16 - Preview
    • Ball (BLL) 6am, $1.06
    • Baytex Energy (BTE CN) 7:30am, C$0.74
    • BGC Partners (BGCP) 8am, $0.16
    • Bombardier (BBD/B CN) 6am, $0.10 - Preview
    • BorgWarner (BWA) 8am, $0.79
    • Bunge (BG) 6:30am, $1.90
    • Cardinal Health (CAH) 7am, $0.96
    • Catamaran (CCT CN) 6am, C$0.56 - Preview
    • Cigna (CI) 6am, $1.83
    • CME (CME) 7am, $0.82
    • CNH Industrial (CNHI) 9:30am, $0.13
    • ConocoPhillips (COP) 7am, $1.21 - Preview
    • CVR Energy (CVI) 8:30am, $0.62 - Preview
    • Diebold (DBD) 8:16am, $0.50
    • Elizabeth Arden (RDEN) 7:15am, ($0.53)
    • Enterprise Products (EPD) 6am, $0.37
    • Fidelity National Information (FIS) 7am, $0.79
    • Fortress Investment (FIG) 7:09am, $0.16
    • GNC (GNC) 8am, $0.74
    • Goldcorp (G CN) 8am, $0.18 - Preview
    • GrafTech Intl (GTI) 8:56am, ($0.04)
    • Greenbrier (GBX) 6am, $1.03
    • Harman Intl (HAR) 8am, $1.11
    • Host Hotels & Resorts (HST) 6am, $0.09
    • Incyte (INCY) 7am, $0.07 - Preview
    • Invesco (IVZ) 7:30am, $0.62
    • Iron Mountain (IRM) 6am, $0.40
    • ITC (ITC) 8:30am, $0.47
    • Johnson Controls (JCI) 7am, $1.01
    • Kellogg (K) 8am, $0.92 - Preview
    • L-3 Communications (LLL) 7am, $1.84
    • Lincoln Electric (LECO) 7am, $0.90
    • LKQ (LKQ) 7am, $0.32
    • Maple Leaf Foods (MFI CN) 7:30am, (C$0.03)
    • Marathon Petroleum (MPC) 7am, $2.29 - Preview
    • MasterCard (MA) 8am, $0.78 - Preview
    • MGM Resorts Intl (MGM) 8am, $0.06
    • Mosaic (MOS) 7am, $0.58 - Preview
    • MSCI (MSCI) 7:30am, $0.49
    • National Oilwell Varco (NOV) 7am, $1.54
    • New Gold (NGD CN) 7:30am, $0.02 - Preview
    • New York Times (NYT) 8:30am, $0.00
    • NiSource (NI) 6:30am, $0.16
    • Ocwen Financial (OCN) 7:30am, $0.60 - Preview
    • Old Dominion Freight Line (ODFL) 7am, $0.87
    • PBF Energy (PBF) 6:30am, $1.04
    • Pitney Bowes (PBI) 7am, $0.46
    • Public Service Enterprise (PEG) 7:30am, $0.74
    • Radian (RDN) 7am, $0.32
    • Scana (SCG) 7:30am, $0.96
    • Starz (STRZA) 7:30am, $0.51
    • Taser Intl (TASR) 7:30am, $0.11
    • Teva Pharmaceutical (TEVA) 7am, $1.24 - Preview
    • Thomson Reuters (TRI CN) 7am, $0.45
    • Time Warner Cable (TWC) 6am, $1.90
    • TransAlta (TA CN) 7:30am, C$0.07
    • Ultra Petroleum (UPL) 8am, $0.51
    • Vantiv (VNTV) 7am, $0.49
    • Xcel Energy (XEL) 6am, $0.76



    • Aegerion Pharmaceuticals (AEGR) 4:15pm, ($0.15)
    • AlonA Energy (ALJ) 5:03pm, $0.59
    • Bally Technologies (BYI) 4:01pm, $1.17
    • Bell Aliant (BA CN) Post-Mkt, C$0.42
    • Boyd Gaming (BYD) 4:05pm, $0.01
    • Canadian Oil Sands (COS CN) 4:51pm, C$0.42
    • Constellation Software (CSU CN) 5pm, $3.16
    • Crown Castle (CCI) 4:02pm, $0.27
    • Eastman Chemical (EMN) 5:15pm, $1.80
    • Eldorado Gold (ELD CN) 5:41pm, $0.06 - Preview
    • Energen (EGN) 4:30pm, $0.46
    • Expedia (EXPE) 4:09pm, $1.74 - Preview
    • Fairfax Financial (FFH CN) 5pm, $14.04
    • First Quantum Minerals (FM CN) 5pm, $0.25 - Preview
    • FleetCor Technologies (FLT) 4:01pm, $1.33
    • Fluor (FLR) 4:05pm, $1.10
    • GoPro (GPRO) 4:05pm, $0.08
    • Groupon (GRPN) 4:05pm, $0.01
    • Investors Bancorp (ISBC) 5pm, $0.10
    • LinkedIn (LNKD) 4:05pm, $0.47
    • Live Nation (LYV) 4:09pm, $0.36
    • MasTec (MTZ) 4:30pm, $0.55
    • MB Financial (MBFI) Post-Mkt, $0.44
    • MercadoLibre (MELI) 4:04pm, $0.66
    • Microchip Technology (MCHP) 4:15pm, $0.67
    • Mohawk Industries (MHK) 4:01pm, $2.42
    • Mylan (MYL) 4pm, $1.14
    • Newmont Mining (NEM) Post-Mkt, $0.16 - Preview
    • ON Semiconductor (ONNN) 4:05pm, $0.22
    • PerkinElmer (PKI) 4:05pm, $0.57
    • Republic Services (RSG) 4:05pm, $0.53
    • Scientific Games (SGMS) 4:08pm, ($0.39)
    • Seattle Genetics (SGEN) 4:05pm, ($0.24)
    • Sirius XM Canada (XSR CN) 4:05pm, C$0.05
    • Spansion (CODE) 4:04pm, $0.27
    • Standard Pacific (SPF) 4:02pm, $0.15
    • Starbucks (SBUX) 4:05pm, $0.74 - Preview
    • Tempur Sealy Intl (TPX) 4:05pm, $0.89
    • Tesoro (TSO) 5pm, $2.16 - Preview
    • Theravance (THRX) 4:08pm, ($0.13)
    • Trimble Navigation (TRMB) 4:05pm, $0.38
    • Western Union (WU) 4:01pm, $0.38



  • China Said to Probe September Surge in Precious Metals Exports
  • Metals Investors Seeing Slowdown Head for ETP Exit: Commodities
  • WTI Falls From One-Week High on Fed Stimulus Halt, U.S. Supply
  • Gold Equals 15 Barrels of Oil in Sign Inflation Wagers Too High
  • Oil Stocks Lure Most Bearish Bets Since ’07 After Slump: Options
  • Diamond Dealers Using Web Bring Light to $18 Billion Gem Trade
  • U.S. Light-Crude Production Spurs Export Debate, Official Says
  • Raw Sugar Drops as Oversupply Caps Prices; Arabica Coffee Gains
  • Gold Slides to Three-Week Low as Dollar Strengthens After Fed
  • Trafigura Seeks to Handle More Copper Ore Amid Arsenic Hurdles
  • Bauxite Supplies From Africa Seen Showing Resilience Amid Ebola
  • Copper Drops From Five-Week High as Fed Decision Boosts Dollar
  • China State Reserves May Buy Copper in Bonded Zones: Citigroup
  • How Oil’s 29% Drop Took Investors by Surprise on OPEC Price War

























The Hedgeye Macro Team


















October 30, 2014

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