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Write It Down

“Write down, therefore, what you have seen, and what is happening, and what will happen afterwards.”

-Revelation 1:19


No, I’m not going all religious on you this morning. That’s the opening volley from Jim Rickards in his recent book, The Death of Money. For those of you who missed it, I had a Real Conversation @HedgeyeTV with Rickards earlier in the year that you can watch here.


Do you write it down? What is “it”? And what do you do when something macro is happening that hasn’t happened for a very long period of time (like #deflation)? Once market expectations go through a phase transition from inflation policies to deflation, what will happen afterwards?


I’ve been writing down real-time market quotes, data, research, etc. in my notebook for 15 years and I have only seen versions of what I have been writing down for the last 10 months 2x: October 2007 and October 2008. Neither were bullish historical reference points and neither were the same.


Write It Down - 3


Back to the Global Macro Grind


To review, what is #Quad4 Deflation? In our risk management process (rate of change) it’s when the second derivatives in both growth and inflation are slowing, at the same time. These signals are both non-linear, and dynamic.


“There has been no episode of persistent deflation in the United States since the period from 1; as a result, Americans have practically no living memory of deflation.” (The Death of Money, pg 9)


I was in LA yesterday (San Francisco today) and, to a degree, I think that’s why we’ve been getting so many moments of silence in one-on-one Institutional Investor meetings as of late. It’s really hard for objective risk managers to absorb a scenario they’ve really never had to deal with.


“Objective”? Yes, as in this is what the market told you about #Deflation expectations yesterday:


  1. US Dollar up +0.3% to +8.8% YTD
  2. WTI Crude Oil down -2.8% to #crashing -20.5% YTD
  3. Energy Stocks (XLE) down -1.6% to -2.8% YTD
  4. Basic Material Stocks (XLB) -0.7% to +3.9% YTD
  5. Healthcare Stocks (XLV) +0.1% to +21.5%% YTD


In other words, in stark contrast to the Dollar Up, Rates Up #Quad1 signal we gave you to be long of everything big beta US growth in 2013, this Dollar Up (going to cash), Down Rates, #Deflation move is nasty for most things that lose their pricing power.


Healthcare (XLV) and Utilities (XLU) are two of the sectors that don’t get decimated by #deflation as fast as a levered-long-crude-oil-hedgie-dude (or an upstream E&P MLP dude who depends on the “dividend” that is decided by the price of the other dude’s oil inflation expectations).


I know, #dude!


That’s why the objective investor who has been writing down the sector returns for the SP500 in 2014 has noted the following RELATIVE YTD performance:


  1. Healthcare (XLV) +12.3% YTD
  2. Utilities (XLU) +11.4% YTD
  3. Technology (XLK) +4.7% YTD


  1. Basic Materials (XLB) -5.2% YTD
  2. Consumer Discretionary (XLY) -7.3% YTD
  3. Energy (XLE) -12.0% YTD


Yep, if all you did was express either our early-cycle slowdown calls for #ConsumerSlowing and #HousingSlowdown from the beginning of the year and/or our #Quad4 deflation call, in your S&P Sector asset allocations, you’ve crushed it.


If all that mattered to the American Consumer was “gas prices” (it actually represents only 6.4% of the median consumer’s budget) all of these rosy “surveys” you’ve been reading would have been right. Instead, in relative and sector performance terms, those narrative fallacies got you killed.


But, but, the ISM number was great yesterday. Yep, just great, another survey!


In other news, Industrials (XLI) closed down on the day on that ISM manufacturing report. I wonder if that’s because the non-survey data (US Retail Sales, Consumer Spending, Durable Goods, Construction Spending, and New Home Sales), all recently SLOWED, in actual rate of change terms!


Moving along…


If only everyone who writes in this business was forced to actually write this stuff down, every single day, consensus might be as concerned about the big beta #bubble in levered-long-and-illiquid US equity inflation expectations as I am.


But what is your catalyst, Keith?


  1. What I have been writing to you all year is already happening
  2. What I have seen (on the mid-October Russell and Bond Yield Lows) has not been forgotten
  3. What is most probable to happen next is more of the same


If everything that was in #crash mode on October 13-14th were to crash, literally, tomorrow… I’d write it down too – and “it” would be something that should not come as a surprise to anyone.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.21-2.37%


RUT 1086-1181

Italy’s MIB Index 189

Yen 109.27-113.66

WTI Oil 76.41-80.94


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Write It Down - 11.04.14 Chart


TODAY’S S&P 500 SET-UP – November 4, 2014

As we look at today's setup for the S&P 500, the range is 66 points or 2.52% downside to 1967 and 0.75% upside to 2033.                                                 













  • YIELD CURVE: 1.80 from 1.83
  • VIX closed at 14.73 1 day percent change of 4.99%


MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am: ICSC weekly sales
  • 8:30am: Trade Balance, Sept., est. -$40.2b (prior -$40.1b)
  • 8:55am: Redbook weekly sales
  • 9:45am: ISM New York, Oct. est. 62 (prior 63.7)
  • 10am: Factory Orders, Sept., est. -0.6% (prior -10.1%)
  • 10am: IBD/TIPP Economic Optimism, Nov., est. 46.5 (prior 45.2)
  • 11:30am: U.S. to sell 4W bills
  • 4:30pm: API weekly oil inventories



    • Election Day:
    • GOP chance of Senate control: NYT: 70%; FiveThirtyEight: 74%; Washington Post: “near certainty"; 96%
    • President Obama attends meetings at White House
    • Senate, House out of session
    • Sec. of State John Kerry travels to Paris to meet with French Foreign Minister Laurent Fabius
    • 8:30am: U.S. Census Bureau releases monthly export data, including figures for oil
    • U.S. ELECTION WRAP: Senate Outlook, Latest Polls, Gaffes



  • Republicans Have Edge in Vote With Senate Too Close to Call
  • EU Cuts Euro-Area Growth Outlook for 2014, 2015
  • JPMorgan Faces U.S. Criminal Probe Into Currency Trading
  • Blackstone Is Said Near $8b Deal to Sell IndCor Unit
  • AIG Profit Climbs to $2.19b in Hancock’s First Report
  • MetLife’s Kandarian Said to Attend FSOC Hearing on SIFI Vote
  • Scotiabank Cuts Jobs, Branches; Takes C$451m Pretax Charge
  • Stryker to Pay More Than $1b for Recalled Hip Devices
  • Disney Broadens Movie-Sharing Application to Android Users
  • Sprint Cutting 2k Jobs as More Subscribers Cancel Service
  • Herbalife Policy Changes Hurt Sales After Ackman Criticism
  • Phoenix Voters Consider Abandoning Public Pension Promise
  • Macau Casino Revenue Plunges Record 23% as Austerity Bites
  • Capital One Subpoened by NY DA’s Office in Auto-Loan Probe
  • Ignition Switch Unrepaired on Millions of GM Cars: NYT
  • San Francisco Gave Airbnb Hometown Advantage, HomeAway Says
  • Saudis Cut Oil Prices to U.S. in December Amid Shale Boom
  • GPIF’s Strategy Shift Means Adding $187b to Stocks



    • AerCap (AER) 6:58am, $1.18
    • AK Steel (AKS) 8:30am, $0.09 - Preview
    • Alibaba (BABA) 7am, $2.74
    • Archer-Daniels-Midland (ADM) 7am, $0.73
    • Arcos Dorados (ARCO) 8am, $0.08
    • Ares Capital (ARCC) 8:05am, $0.38
    • Becton Dickinson (BDX) 6am, $1.66
    • Bloomin’ Brands (BLMN) 7am, $0.08
    • Burger King (BKW) 7am, $0.27
    • Cobalt Intl Energy (CIE) 7am, ($0.17)
    • CVS Health (CVS) 7am, $1.13 - Preview
    • DiamondRock (DRH) 8am, $0.10
    • Discovery Communications (DISCA) 7am, $0.43 - Preview
    • DISH Network (DISH) 6:04am, $0.39 - Preview
    • Emerson Electric (EMR) 6:49am, $1.23 - Preview
    • Entergy (ETR) 7am, $1.68
    • Estee Lauder (EL) 7:30am, $0.55 - Preview
    • Expeditors Intl (EXPD) 9am, $0.49
    • FirstEnergy (FE) 8:30am, $0.88
    • HMS (HMSY) 6am, $0.14
    • Intercontinental Exchange (ICE) 7:30am, $2.01
    • International Flavors (IFF) 7am, $1.32
    • International Paper (IP) 7am, $0.88
    • KBR (KBR) 7am, $0.23
    • Linn Energy (LINE) 6:45am, $0.41
    • LinnCo (LNCO) 6:45am, $0.60
    • Michael Kors (KORS) 7am, $0.89 - Preview
    • Monster Worldwide (MWW) 7:30am, $0.03
    • Motorola Solutions (MSI) 7am, $0.41
    • Northwest Natural Gas (NWN) 6am, ($0.34)
    • Och-Ziff Capital (OZM) 7:30am, $0.19
    • Office Depot (ODP) 7am, $0.09
    • PPL (PPL) 6:58am, $0.52
    • Priceline (PCLN) 7am, $21.08 - Preview
    • Regeneron Pharmaceuticals (REGN) 6:30am, $2.57 - Preview
    • Sempra Energy (SRE) 9am, $1.24
    • Targa Resources (TRGP) 7:17am, $0.69
    • TransCanada (TRP CN) 8:30am, C$0.62 - Preview
    • Valero Energy (VLO) 7:46am, $1.57
    • Vulcan Materials (VMC) 8am, $0.52
    • Western Refining (WNR) 6:01am, $1.47
    • Westlake Chemical (WLK) 6:30am, $1.57
    • WP Carey (WPC) 7:30am, $0.54
    • Zoetis (ZTS) 7am, $0.37



    • Activision Blizzard (ATVI) 4:07pm, $0.13
    • Amdocs (DOX) 4:01pm, $0.79
    • Cimarex Energy (XEC) 4:20pm, $1.51
    • Devon Energy (DVN) Aft-mkt, $1.23 - Preview
    • Diamondback Energy (FANG) 4:04pm, $0.62
    • EOG Resources (EOG) 5:05pm, $1.30 - Preview
    • FireEye (FEYE) 4:03pm, ($0.56)
    • HomeAway (AWAY) 4pm, $0.15
    • Ironwood Pharmaceuticals (IRWD) 4:01pm, ($0.32)
    • Jack Henry (JKHY) 4:15pm, $0.63
    • Jazz Pharmaceuticals (JAZZ) 4:05pm, $2.23 - Preview
    • KAR Auction Services (KAR) 4:15pm, $0.31
    • Liberty Interactive (LINTA) Aft-mkt, $0.21
    • Liberty Media (LMCA) Aft-mkt, $0.35
    • Linamar (LNR CN) 4pm, C$0.93
    • Myriad Genetics (MYGN) 4:05pm, $0.25
    • Oasis Petroleum (OAS) 6:08pm, $0.72
    • Oneok (OKE) 4:10pm, $0.39
    • Pembina Pipeline (PPL CN) 6:18pm, C$0.29
    • Pharmacyclics (PCYC) 4:04pm, $0.33
    • PHH (PHH) 4:05pm, ($0.27)
    • Pioneer Natural Resources (PXD) 4:09pm, $1.26 - Preview
    • RenaissanceRe (RNR) 4:15pm, $2.28
    • Russel Metals (RUS CN) 5pm, C$0.53
    • Sanchez Energy (SN) 4:15pm, $0.20
    • SBA Communications (SBAC) 4:02pm, $0.00
    • TripAdvisor (TRIP) 4:09pm, $0.60
    • Twenty-First Century Fox (FOXA) 4:05pm, $0.36 - Preview
    • WPX Energy (WPX) 4:05pm, ($0.01)
    • Zulily (ZU) 4:05pm, ($0.04)



  • U.S. Oil Falls to 3-Year Low on Saudi Price Cut as Supply Gains
  • How Blue Skies for Obama in Beijing Help to Cut Iron Ore Prices
  • Gold Rises for First Time in 5 Days as EU Cuts Growth Estimates
  • Saudi Oil Market Fight Shifting to U.S. as Asia Prices Increased
  • Changing Global Silver Fix Was Just the Beginning: Commodities
  • Glencore Increases Third-Quarter Coal Output as Price Slumps
  • Halliburton CEO Expects Shale to Reverse Decline in Oil: Energy
  • Burkina Faso Army Promises Religious Leaders It Will Step Down
  • Rubber Falls From 10-Week High as Oil Price Drop Cuts Appeal
  • Zinc Heads for Three-Week High as U.S. Auto Sales Beat Estimates
  • Rebar Advances as Output Cuts During APEC Seen Reducing Supply
  • Perth Mint October Gold Coin, Minted Bar Sales Drop From Sept.
  • Pacific Shippers Say Dock Crews Slow Down in Seattle, Tacoma
  • BullionVault’s Gauge of Client Buying Falls From 7-Month High


























The Hedgeye Macro Team



















November 4, 2014

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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.

Useless Sleep

This note was originally published at 8am on October 21, 2014 for Hedgeye subscribers.

“There is something in the New York air that makes sleep useless.”

-Simone De Beauvoir


I’m not known as a big sleeper. I’ve been krolled (not to be confused with being trolled on Twitter) a few times during the due diligence process for different ownership/partnership stakes and positions, and “irregular hours” always comes up as a “flag.”


Back when we started the firm in 2008, that’s why I called this morning rant the Early Look. And so my amateur writing career began… with the promise of only one repeatable competitive differentiator: getting up early and writing to you at the top of the risk management morning.


Last night we hosted a small group dinner in NYC to talk about how everything has “bottomed.” While the feedback (and fear) is that most don’t want to “miss” the next move up, I couldn’t sleep last night thinking that fear itself might just be the biggest #Bubble of them all.


Useless Sleep - EL chart 2


Back to the Global Macro Grind


When someone uses the word “fear”, it tends to have negative connotations. And, to be clear, I am thinking very negative things could happen if I am correct in calibrating that many got longer of #bubble exposures on the equity and junk bond market’s most recent bounce.


Sure, they may have sold short indices and overpaid for volatility, protection, etc. in the heat of last week’s melt-down, but they A) didn’t sell all of their crashing small/mid cap equity exposures and/or B) their junkie “high-yield” positions either.


In risk management speak, in bear markets we call this cardinal sin “selling what you can, not what you should”… and while my calibration might be wrong, I can’t see that in the market’s futures/options positioning (which is getting longer of beta, not shorter).


To review where some of the hardest core #Bubbles are in this interconnected world:


  1. Central Planning
  2. Carry Trading
  3. Complacency
  4. Small Cap Illiquidity
  5. Fixed Income Junk
  6. Hedge Fund Levered Long Beta


To me, a lot of this is one and the same thing. And it really starts with the 1st #Bubble (Central Planning) because that’s what drove macro markets to inheriting the mother of all interconnected risks (see exhibit 52 in the Q4 Macro Themes Deck) – the #Bubble in Spread Risk (see Chart of The Day):


  1. All-time Low in Spreads (Investment Grade over Treasuries)
  2. All-time low in Volatility (across asset classes)
  3. All-time high in Debt Outstanding (globally)


What’s fascinating about this 3D risk picture is that almost every equity only PM we meet with agrees with it much more adamantly than any of my US stock market centric #bubble charts (like the one that has Russell 2000 at 55x earnings with low liquidity).


There’s obviously confirmation bias in that, but reality is that unless you think it’s different this time (almost every “the bottom is in” thesis has something to do with markets not being able to go down anymore), this is how The Waterfall of Spread Risk works:


  1. Global Growth continues to surprise to the downside
  2. US Long Bond Yields continue to fall in kind (mean reverting to what Japan and Germany’s did)
  3. Both volatility and spread risk continue to break-out from their all-time lows


You see, the core differentiator in our call this year has always been fundamental – that growth slows and starts to get priced into expectations.


“So”, instead of living in fear of your own performance and/or what the “other funds” did last week when the Russell was -15% from its July #bubble high, why don’t I hear most people focusing on what was causal to the gap down in bond yields and equity markets to begin with?


You can lose sleep over what everyone else is doing, or you can focus on what you need to do to get the fundamental research right. And this early riser humbly submits that if you get the rate of change in growth and inflation right, you’re going to get both bond yields and your exposures right.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.09-2.25%

SPX 1830-1935

RUT 1040-1106
VIX 15.15-28.82

WTI Oil 79.97-83.95

Gold 1215-1258


Best of luck out there,



Useless Sleep - Chart of the Day

FL - The Last Straw

Takeaway: Moving FL up to our Core Short list. Key issue “what he no longer sees that is making him go”. Similarities to Murphy/GPS are startling.

Conclusion: We’re moving FL up from our Short Bench to our Core Shorts.  The announcement of Ken Hicks retiring as CEO is the icing on a cake that was already baking. To be clear, we don’t think that FL is in trouble because Ken Hicks is leaving. We think that Ken Hicks is leaving because Foot Locker is in trouble. The juxtaposition here with Glenn Murphy leaving GPS last month is striking. Both of them; a) are seasoned executives, b) joined their respective companies within a year of the last recession (and trough margins), c) have hit home runs with zero square footage growth retailers, and d) are leaving for no apparent reason. How can this be anything other than a negative signal for where we are in the retail margin cycle? We’ve been harping over and over again about how we are in year six of a six year cycle. We can’t help but think that these two gentlemen are validating that premise.


Another point…one thing that kept us on the sidelines about pushing the FL short case was all the talk of an LBO. Even though we thought it was ridiculous, the reality is that the math works for someone gullible enough to straightline current margins into perpetuity. But would Hicks be walking out the door if the company was being shopped to buyers? Probably not.



As background, we added Foot Locker to our Idea Bench in August as a short. Trends look fine today, as better product from Nike and UA on top of more efficient store formats are pushing productivity past old limits. But sometimes limits push back. Today FL is operating in excess of $500/ft, which is about 25% higher than historical peak, margins are setting new peak levels at 11% this year, and the stock is trading at 15x forward earnings (close to peak).


Since August, three things have happened, all of them negative.

1)       Europe has started to soften for many retailers on the margin, including footwear and apparel.

2)      Nike and UnderArmour both put up stellar consumer-direct comps, with e-commerce readings literally off the charts. We’ve never seen the athletic brands so blatantly aggressive in growing outside of the traditional wholesale channel.

3)      Ken Hicks stepped down. This is the icing on the cake. The guy was money for FL, and for shareholders. The stock has been a 4-bagger since he was appointed in Aug 2009. He has beat two sets of long-range objectives in half the time intended. We know that he has groomed Johnson and other top talent to take his role in as seamless a manner as possible. But it’s just not enough.


We’ll be back with more detailed analysis on our short thesis.


FL - The Last Straw - 11 4 2014 6 02 45 AM

A Quick Thought on Victoria's Secret "Free Shipping" | $LB

Takeaway: Hedgeye's Brian McGough thinks Victoria Secret's "free shipping" offer is a continuation of a trend that will plague the rest of retail.

Victoria's Secret (LB) has used the Free Shipping offer as an offensive weapon in the past (they were one of the first to do so, actually), but this is a continuation of a trend that we think will ultimately plague the rest of retail.


A Quick Thought on Victoria's Secret "Free Shipping" | $LB - vs3


While LB is a high-end brand with a very loyal customer base, we would note that even a powerhouse like Victoria's Secret can't easily absorb free shipping costs due to a relatively low average basket size.


It's high-ticket retailers like Nordstrom (JWN) and brands like Nike (NKE) and Ralph Lauren (RL) that could absorb shipping costs without a material hit to their margins. 


A Quick Thought on Victoria's Secret "Free Shipping" | $LB - vs2

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