CHART OF THE DAY: Not Even Putin the Great Can Stop Gravity | $RSX #Oil

Takeaway: The Russian stock market is down -25% year-to-date. Coincidentally, or not, the price of Brent crude is down right around -25% YTD as well.

CHART OF THE DAY: Not Even Putin the Great Can Stop Gravity | $RSX #Oil - chart of day 11 5

Something is Rotten in The District of Columbia

Horatio: He waxes desperate with imagination.

Marcellus: Let’s follow. Tis not fit thus to obey him.

Horatio: Have after. To what issue will this come?

Marcellus: Something is rotten in the state of Denmark.            

-From Shakespeare’s “Hamlet”


Undoubtedly in Republican circles there are a lot of celebrations going on today.  After all, according to the scoreboard, they handed President Obama and his party a decisive loss.


In the Senate, the Republicans have already won a confirmed +7 seats and the count currently stands at 52 seats for the Republicans, 43 seats for the Democrats, and 2 seats for Independents. There are still three races that are considered undecided.


In the undecided races, it appears that Democrat Mark Warner will ultimately prevail in Virginia as he has the edge (though the margin is less than 13,000 votes and Republican Ed Gillespie has the option of a recount.)  Meanwhile in Alaska, it appears that Republican Mark Begich will ultimately prevail as he has received 49% of the vote with 97% of votes having been counted.  Finally, Louisiana is headed to a December run-off between incumbent Senator Mary Landrieu and Republican Bill Cassidy.


So in the Senate, Republicans will gain a minimum of +7 seats and perhaps as many as +9 seats.  In the House, the Republicans have already gained a net +13 seats to solidify their majority with approximately 19 seats still considered undecided.   In Governor mansions across the nation (outlined in the map below courtesy of Politico) Republicans also solidified their hold on state capitols.


Something is Rotten in The District of Columbia - dj


According to Politico, “even optimistic Republican operatives didn’t anticipate this”, but to be fair, as we wrote yesterday in an intraday note, almost every major media outlet was predicting a decisive Republican victory.  And decisive it was.  In large part this victory can be attributed to the fact that exit polls showed President Obama’s approval rating at a dismal 41%.


In our view, the bigger story from the election is really how despondent Americans have become about the future of America.  According to the exit polls, 2/3s of voters think the country is on the wrong track, a mere 22% believe their children will be better off than them, and more than 72% worry about a terrorist attack on American soil.  That is just plain sad.


But, the fact that Americans are despondent about the future shouldn’t really be a surprise.  This election was characterized by negative attack ads.  In the 34 states with Senate seats up for grabs, there were 1 million TV ads shown and more than 46% of them were attack ads.  While on one hand those ads were seemingly successful in leading the Republicans to victory, on the other hand, what was the cost?


Heading into the election, Congressional job approval was a mere +12%, with more than 80% of voters disapproving of the job that Congress is doing.  As well, consistent with exit polling data above, heading into the election a mere 28% of voters believe that the country is headed in the wrong direction.


So, was this a resounding Republican victory? Perhaps, but the bigger issue we all have to deal with is that something is truly rotten in the District of Columbia.


Back to the Global Macro Grind...


As depressing as the state of U.S. politics may be this morning, there is always a bright side.  The bright side is that we all live in America and can, if we set our minds to it, fix some of the endemic problems, such as distrust in our politicians.  In countries like Russia, of course, the people have much, much less influence.


While certainly being a voter in Russia would be depressing, even more depressing would have to have been being invested in the Russian stock market this year.  Specifically, for the year-to-date the benchmark Russian equity index is down -25%. Coincidentally, or not, the price of Brent crude is down right around -25% for the year-to-date as well.


As many of you know, we are big fans of looking at stock prices as leading indicators, which begs the question: what is the Russian stock market signaling?  Since the market is in full on crash mode, it is truly fair to consider whether the market is signaling a somewhat imminent collapse of Putin’s Russia.  While raising interest rates to strengthen the Ruble is a cute trick, the fundamentals of Russia remain highly dependent on energy exports.


According to the Energy Information Administration, in 2013 a full 68% of Russian exports, or more than $350 billion dollars, came from energy, with more than half of that from crude oil.   For comparison, the United States exports no crude oil and petroleum products comprise a mere 8%.   Given this dependence, it is really no surprise that in 2009, after crude oil declined by 80% in 2008, that the Russian economy shrunk by 7.8% in 2009, the most of any G20 economy.


Tomorrow at 1pm eastern we are going to be hosting a conference call for our institutional macro clients with former U.S. Ambassador to Russia Michael McFaul.  (Email us at for details.)  Mr. McFaul has been called, “the leading scholar of his generation, maybe THE leading scholar, on post-Communist Russia.” He was President Obama’s chief advisor on Russia through his first term and was a main policy architect of “Reset” in U.S. - Russian relations.


 A high-profile figure during his time in Moscow, McFaul was harassed and accused of orchestrating a coup.  Perhaps in light of his considerable work and reputation as an expert on anti-dictator movements and revolutions, Putin reportedly stared at McFaul across a meeting table and remarked, “We know that your Embassy is working with the opposition to undermine me.” 


We hope you can join us for the call tomorrow, which will help illuminate exactly what is happening in Putin’s Russia.  And remember, as depressing as some of the election exits polls, things are still worse in Russia.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.21-2.38%


VIX 13.41-17.80

USD 86.31-87.65

Yen 109.11-114.91

WTI Oil 76.43-80.51 



Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Something is Rotten in The District of Columbia - chart of day 11 5

Japan, Equity Sentiment and the UST 10YR

Client Talking Points


Day-3 of the Burning FX experiment looked like it was in trouble (in Nikkei terms) into the bell, then there was “chatter” of the “BOJ buying ETFs into the close”, and they managed to close the Nikkei up +0.4%. We couldn’t make this up if we tried. At 114.71 the Yen is crashing vs. USD and superimposing #Deflation onto everything and anything tied to Oil inflation expectations.


Today’s II Bull/Bear Spread is only +93% wider to the bullish side than it was on OCT 13th – no worries! If there was one sentiment reading that typifies the hope out there that we don’t revisit that mid-Oct fetal position, this one is it (Bulls at 54.7%, Bears re-testing all-time lows of 15.1% - spread = +3960bps wide, which is close to the end of SEP consensus bullishness).


In the Long Bond we trust. Don’t forget that the UST 10YR Yield is still in crash mode (-22% year-to-date) as U.S. growth and inflation expectations continue to fall – once we get through the mid-terms bounce today, next up is this jobs report (which was suspiciously strong ahead of the elections). A bad report should get your 2.21% on the UST 10YR, fast.

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


#Quad4 Deflation is a very investable theme, on the short side of almost anything Energy/Oil



To be prepared for war is one of the most effective means of preserving peace.

-George Washington


According to an aggregation of polls from Real Clear Politics, Obama’s approval rating is 41.9% and his disapproval rating is 53.4%. For perspective, Obama’s current approval rating is very similar to that of President Bush prior to the 2006 mid-terms.

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.


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


Long Ideas/Overweight Recommendations

  1. iShares National AMT-Free Muni Bond ETF (MUB)
  2. iShares 20+ Year Treasury Bond ETF (TLT)
  3. Vanguard Extended Duration Treasury ETF (EDV)
  4. Health Care Select Sector SPDR Fund (XLV)
  5. Consumer Staples Select Sector SPDR Fund (XLP)

Short Ideas/Underweight Recommendations

  1. SPDR S&P Regional Banking ETF (KRE)
  2. iShares Russell 2000 ETF (IWM)
  3. iShares MSCI European Monetary Union ETF (EZU)
  4. iShares MSCI France ETF (EWQ)
  5. ADD: SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
  6. REMOVE: iShares US Home Construction ETF (ITB)




  • The U.S. Equity Market Will Never Go Down Ever Again… Right?: Incongruent with the consensus view that “globally coordinated monetary easing” has completely mitigated the risk of a correction (or crash) in the U.S. equity market is the performance of the asset classes, sectors and style factors most correlated to policy-induced asset price inflation. Specifically, 17 of the 20 ETFs exhibiting the greatest amount of negative momentum across the entire global macro complex as defined by our Tactical Asset Class Rotation Model (TACRM) are commodity producers and/or servicers (GDX, IEZ, FILL, XOP), individual commodity markets (USO, NIB, UGA, BNO, GLD, SLV, DBC, SGG), commodity currencies (FXC, CCX) and country indices with a significant degree of commodity price sensitivity (NGE, EWCS, EWC). Either recent price action has created the mother-of-all buying opportunities in these assets, or buy-side consensus will find itself dead wrong on the lazy thesis that the Fed/ECB/BoJ will “never let markets go down”. While the fear amongst hedge fund investors that “the stock market will never correct” is both pervasive and surreal, the real fear should be whether or not these exposures are discounting the eventual end to the market(s) actually responding positively to incremental Policies To Inflate
  • Commodity Price Tail Risks: Two tail risks emerging the commodity complex and all of the global CapEx (i.e. GDP) associated with commodity E&P include: perpetual debasement of the JPY (bullish for the USD) and the recent GOP mandate in Congress, which may portend a meaningful reduction in the Fed's ability to "CTRL+P". We wonder if the same investors buying the spoos here on the #GOPtakeover will be the same ones who sell the lows if the market crashes in realization of that last catalyst... At any rate, we're adding the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) to our core investment recommendations on the short side in anticipation of further #Quad4 downside for commodity prices.
  • Less Bearish on Housing: One of the questions we’ve been wrestling with internally is: “When do we make the turn from bearish to bullish on early-cycle sectors like housing?” Well, interestingly enough, our most recent deep dive into the state of the domestic housing market does indeed warrant reduction in our bearish bias (i.e. less negative). Housing, in ITB terms, continues to make a series of lower-highs so we do not yet think it’s appropriate to get bullish on housing at the current juncture. That being said, however, a failure to make a lower-low versus the intra-day low on 10/13 on the next meaningful pullback would be additional confirmation that our bearish bias is long in the tooth. As such, we are removing the ITB from our core investment recommendations on the short side. All told, a decline of -3.6% YTD for the ITB vs. +8.9% for the SPY is sizeable absolute and relative return for anyone who’s appropriately had our bearish housing thesis on all year.




***CLICK HERE to download the full TACRM presentation.***



#Quad4 (introduced 10/2/14): Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.


Headlines & Under-Hoods: Sept. Income & Spending (10/31)

Hangovers & Late-Cycle Juggernauts: 3Q GDP & Initial Claims (10/30)


#EuropeSlowing (introduced 10/2/14): Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.


Early Look: All Boxed In (10/22)


#Bubbles (introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.


Early Look: Deflated Disputants (10/30)


Best of luck out there,




Darius Dale

Associate: Macro Team

November 5, 2014

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TODAY’S S&P 500 SET-UP – November 5, 2014

As we look at today's setup for the S&P 500, the range is 66 points or 2.24% downside to 1967 and 1.04% upside to 2033.               













  • YIELD CURVE: 1.82 from 1.82
  • VIX closed at 14.89 1 day percent change of 1.09%


MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Oct. 31 (prior -6.6%)
  • 8:15am: ADP Employment Change, Oct., est. 220k (prior 213k)
  • 8:30am: U.S. announces plans for quarterly refunding auctions of 3Y/10Y notes, 30Y bonds
  • 9:45am: Markit US Services PMI, Oct. final, est 57.1 (pr 57.3)
  • 9:15am: Fed’s Kocherlakota speaks in Virginia, Minn.
  • 9:30am: Fed’s Lacker speaks in Washington
  • 10am: ISM Non-Mfg Composite, Oct., est. 58 (prior 58.6)
  • 10am: Fed’s Rosengren speaks in Lima, Peru
  • 10:30am: DOE Energy Inventories
  • 6:45pm Former Fed Chairman Bernanke speaks in Denver



    • President Obama attends meetings at White House
    • Senate, House out of session
    • Sec. of State John Kerry travels to Paris Nov. 4-6 to to meet with French Foreign Minister Laurent Fabius
    • 10am: Supreme Court hears arguments in case over reach of Sarbanes-Oxley provision that makes it a federal crime to destroy documents to impede an investigation
    • 10am: CFTC Chairman Timothy Massad delivers keynote remarks during 1st day of Futures Industry Assn’s conference in Chicago



  • Republicans Profit From Voter Dismay Over Obama Economy
  • White House Puts Distance Between Obama, Losing Democrats
  • Morgan Stanley Expects $1.3b Tax Benefit for This Quarter
  • Gross Exit Prompts $27.5b in Withdrawals From Pimco Fund
  • Apax Said to Prepare $8.8b Bid for Oi Portugal Assets
  • Fox Eyes Digital Options to Counter ‘Fraying’ Cable TV Bundle
  • Antero Midstream Raises $1b in U.S. Pipeline Unit IPO
  • GM Sells First Dollar Bonds Since S&P Rating Upgrade
  • Toyota Forecasts Record Profit on Yen Boon to Lexus Sales
  • LG Electronics, Google Sign Patent Cross-Licensing Agreement
  • Visa Said to Win Best Buy Processing Deal, Replaces MasterCard
  • Monte Paschi Said to Line Up Banks for $3.1b Share Sale
  • Blankfein Sees China’s Century After Growth Transition
  • Xiaomi Seeks $50b Valuation on Apple-Topping Sales Ratio



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