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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. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
  4. iShares MSCI France ETF (EWQ)
  5. iShares MSCI European Monetary Union ETF (EZU)




  • Size Does Matter: All year we’ve beaten the drum on our preference for slow growth, large-cap liquidity in the domestic equity market in lieu of the high growth, small-to-mid-cap illiquidity style factor we favored last year. On this bounce, which remains the most forceful v-bottom in U.S. equities since March 2009, we are pleased to see our preferred style factor leading the charge. Specifically, within our Tactical Asset Class Rotation Model (TACRM) the top four Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) readings across the entire global macro universe (~200 ETFs in aggregate) are the Consumer Staples Select Sector SPDR Fund (XLP), the Utilities Select Sector SPDR Fund (XLU), the iShares MSCI USA Minimum Volatility ETF (USMV) and the Dow Jones Industrial Average ETF Trust (DIA). To recap our process, the reason we track extremes in momentum (i.e. top and bottom 20 VAMDMI readings) across the universe of investable exposures is to front-run regime changes at the primary asset class level. And as it relates to the regime of large-cap outperformance, we’re not yet getting any signals that this trade is overdone. All told, we reiterate this view and see no reason to back away in the context of our #Bubbles theme. Years of equity investors taking on liquidity risk to keep pace with high-beta equity markets is a “chicken” that we think is still in the early innings of “coming home to roost”…
  • U.K. Headwinds: The latest refresh of our GIP Model on the United Kingdom shows another [bearish] #Quad4 setup here in the fourth quarter and a [bearish] #Quad3 setup in throughout 1H15. In fact, we expect U.K. growth to undershoot consensus expectations throughout this entire period. Our quantitative signals are telling a similar tale: the U.K. FTSE Index is bearish TREND and we’d short it on a continued bounce to its TREND line of resistance (6,694); the British pound is also bearish TREND and we’d short it on a bounce to its TREND line of resistance ($1.62); and the 10Y U.K. Gilt yield is bearish TREND (2.51%). In the context of the aforementioned fundamental setup, we’re not surprised to see the CurrencyShares British Pound Sterling Trust (FXB) has snuck into the bottom-20 VAMDMI readings in TACRM.






***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.


Oil: More Downside? (11/5)


#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.


Top Ten Reasons to Stay Short the Euro (11/5)


#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: My Bubble’s Birthday! (11/7)


Best of luck out there,




Darius Dale

Associate: Macro Team


About the Hedgeye Macro Playbook

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today.

CHART OF THE DAY: Non-Linear #Divergences | $SPY vs. Italian MIB Index

"Within a dynamic ecosystem of colliding, non-linear factors, I’ll almost always register #divergences," wrote Hedgeye CEO Keith McCullough in today's Morning Newsletter. "In your natural ecosystem of life, a divergence would be that it’s snowing 10 miles from where you see no precipitation."

CHART OF THE DAY: Non-Linear #Divergences | $SPY vs. Italian MIB Index - 11.10.14 Chart

Blinking Red

“The system was blinking red.”

-George Tenet


That’s what the 9/11 Commission Report told us, after the fact. That’s what I’ll tell you after the next “risk on” move happens in markets like it did in early October. It’s all part of a signaling process I use to identify phase transitions in markets.


This is also the #process that my friend Jim Rickards applied to tracking terror related events in markets. As Rickards writes in The Death Of Money, “no one trades in isolation.” And there is plenty of market wisdom in that.


Jim says he’s “careful to document and time-stamp the signals and analysis in real-time… it would not be credible to look at the tape in hindsight… we wanted to see things in advance.” (Rickards, pg 36). That’s what I do, every market day.


Blinking Red - 47


Back to the Global Macro Grind


But, but… the “market won’t go down on that anymore. What is the next catalyst? How do we know it’s going to go down?” I get some version of those questions all of the time. The answer is that the “market” isn’t just some naval gazing US equity index.


To review the #process:


  1. I write down and document (#notebook) every timestamp and market signal that matters to the “market” every morning
  2. I contextualize time/price within a multi-factor (global equities, FX, etc.) and multi-duration picture (TRADE, TREND, TAIL)
  3. I always assume market dynamism, duration mismatch, and non-linearity – the macro market is a complex ecosystem


Within a dynamic ecosystem of colliding, non-linear factors, I’ll almost always register #divergences. In your natural ecosystem of life, a divergence would be that it’s snowing 10 miles from where you see no precipitation.


Here are some of last week’s most notable equity market #divergences in my notebook:


  1. Hong Kong’s Hang Seng Index down -1.9% vs. Japan’s Nikkei stock market index +2.8%
  2. The Dow +1.1% vs. Italy’s MIB Index down -3.5% week-over-week
  3. Brazil’s Bovespa Index down -2.8% vs. the Russell 2000 flat on the wk


Meanwhile you saw big time bearish divergences in Emerging Market Equities versus something like the SP500 which closed +0.7% on the week at its all-time high:


  1. MSCI Emerging Markets Index down -2.4% on the week to -1.1% YTD
  2. MSCI Latin American Index -4.5% on the week to -5.8% YTD


Emerging Markets have looked a lot like the Russell 2000 (a US growth index) and the 10yr Treasury Yield (another US economic #GrowthSlowing proxy) as of late – and that shouldn’t surprise anyone who realizes that global growth continues to slow.


But but, if your “market” is simply what the SP500 is doing, I can show you #GrowthSlowing divergences there too:


  1. Consumer Discretionary (XLY) stocks were down -0.1% in an “up SP500 market” last week
  2. Slower growth, Consumer Staples (XLP) stocks beat “the market”, closing up another +2.2% on the week


Since our #Quad4 deflation playbook says you buy Consumer Staples (XLP) and Healthcare (XLV), last week’s divergences at the sector level certainly made a lot more sense to us than the consensus “gas prices are down, so buy the consumer” meme.


Growth and inflation expectations are obviously causal to market prices. But so are central planners burning their respective currencies at the stake.


While many US only “market” people think the US Dollar’s rise is a sign of their savior, it’s not (if you had #RatesRising it might be, but they fell again last week to 2.30% on the UST 10yr Yield). It’s a sign of global economic duress.


Last week had both the Japanese and European central planners devaluing their currencies, at the same time:


  1. Euro (vs USD) down another -0.6% on the week to -9.4% YTD
  2. Yen (vs USD) down another -2.0% on the week to -8.1% YTD


By any long-term measure, these are massive annualized currency moves.


And since the market I look at is coming off all-time lows in cross asset class volatility (FX, Equities, Commodities, Fixed Income – see our #VolatilityAssymetry slide deck from July of 2014), I see the FX market as the biggest blinking red light of all.


It’s warning the world that this grand central planning experiment is failing where it matters most, in economic growth terms.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.26-2.38%


RUT 1134-1181

EUR/USD 1.23-1.25

Yen 111.16-117.24

Gold 1132-1205


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Blinking Red - 11.10.14 Chart

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November 10, 2014

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Don't Call It Bad!

This note was originally published at 8am on October 27, 2014 for Hedgeye subscribers.

“Don’t call it a beachhead…”

-Adolf Hitler


That’s what Hitler told his field marshals after the Allies took the beaches of Normandy in 1944. He called it the “last French soil held by the enemy… and that Cherbourg was to be held at all costs.” (The Guns At Last Light, pg 105)


Evidently, it was a beachhead.


Don't Call It Bad! - EL chart 2


Back to the Global Macro Grind


A reporter from Marketwatch pinged me this morning asking what I thought the “biggest lie is that investors are telling themselves?” After reading a few consensus Bloomberg headlines that “deflation is good” my answer was simple:


The biggest lie US stock market centric investors are telling themselves right now is that the bond market has it wrong, and US growth isn’t half of what they thought it would be 10 months ago.


But , whatever you do, don’t call it bad. The same consensus that said the upside surprise in #InflationAccelerating from JAN-JUN was “good for stocks” are now saying that the #Quad4 deflation of that inflation is “good” too.


Like two bad golfers who are staring down breaking bogey puts from 9 feet in the rain and wind, it’s all “good, good.”


Back to reality…


Is 1 up week in the last 5 for the SP500 good? How about 2 in the last 8 weeks for the Russell 2000? What about both bond yields (10yr -25% YTD) and Oil prices crashing -25% since June? Oh, and 3 of the 4 BRICs falling like the real ones (Brazil,  Russia, China) - all good?


You show me one of the many consensus economists, strategists, etc. whose 2014 call for - 3.25% on the 10yr; +10-15% on the Dow, SP500,  Russell; and +3-4% GDP growth – was based on worldwide #deflation, and I’ll send them a Hedgeye hat.


Confirmation bias in being bullish on growth all of the time is what it is, but it’s not getting people paid this year. Looking at last week’s #Quad4 deflations (that continued, despite the Russell 2000 bouncing +3.4% to down -3.9% YTD):


  1. WTI crude Oil -1.3% to -12.6% YTD
  2. Russian Stocks -3.4% to -28.1% YTD
  3. Brazilian Stocks -6.8% to +0.8% YTD


And with Dilma Rousseff winning Brazil’s presidency this weekend (stock market indicated down another -5-6% pre-open), it appears that the anti-dog-eat-dog-socialist contract #deflation in that part of the global demand construct isn’t good either. It’s bad.


In Hedgeye #process speak:


  1. Quad 1 (inflation slowing and growth accelerating) is good
  2. Quad 4 (both inflation and growth slowing, at the same time) is bad


That’s it. We’ve already constructed a framework to talk about these trivial matters so that the people I used to pay on the sell-side can be held to account. If both growth equity bulls and bears agree that inflation is deflating, the only debate left is on growth.


If you’re in the #Quad4 camp (and you have to buy stocks) there are only 3 S&P Sector allocations you’d be net long of right now:


  1. Healthcare (XLV)
  2. Consumer Staples (XLP)
  3. Utilities (XLU)


And I’d weight them in that order. Since Healthcare stocks (XLV) led last week’s rally (+6.6% on the week to +17.6% YTD vs. something like the Dow which was only +2.6% on the week to +1.4% YTD), that was only confirmation that we are in #Quad4.


If we were in Quad 1 (and growth was accelerating again), early cycle stocks like housing and consumer discretionary would be leading to the upside (and big things like Retail Sales and New Homes wouldn’t be missing). Consumer Discretionary (XLY) lagged last week and is still down -0.7% YTD.


I’m not saying we’ll never be in Quad 1. That’s where markets went in the 1st half of 2009 and there were very few macro strategists who shifted from bearish on #deflation to bullish on consumption back then. Most were forced to call #Quad4 bad, after missing it the whole way down. Timing matters.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.12-2.31%

SPX 1835-1967

RUT 1055-1127

DAX 8501-9143

VIX 14.34-27.86

WTI Oil 80.05-83.78


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer



Don't Call It Bad! - Chart of the Day


Takeaway: We agree that November won't be as bad as October but December may be

Fairly negative commentary overall but a ray of hope: "October was an anomaly"




  • November trends:  more normal.  Still tough but October was 'an anomaly'
  • Gaming revenue affected by changes in Mainland China regulatory policies
  • 3Q dividend:  22 cents/share; dividend policy:  pay no less than 50% of profits
  • Cutback in luxury goods and gambling budgets
  • Other factors:  Visa restrictions, increased funding costs in junkets and increased scrutiny on UnionPay transactions (cannot be in casinos)
  • October:  continuation of trends in past summer 
  • Mass market affected in October:  partial smoking ban and HK protests
  • Grand Lisboa tables:  
    • Going to reconfigure Grand Lisboa to accommodate mass market by shifting 5 tables to mass market 
    • Expect more tables from govt (have applied for 45 tables - 35 tables allocated to Legend, 10 tables to Grand Lisboa) 
    • Adding new premium mass space in January (shift VIP to mass - 15 tables in Grand Lisboa) 
  • Grand Jai-Alai will open in 2015
  • SJM Cotai on schedule to open in 2017
  • 1 item items in 3Q:  higher staff costs (14th month bonus - $43m; $5-6m incremental costs for rest of year), change in marketable securities value ($20m)
  • 3Q EBITDA margins:  have normalized;  declining VIP volumes have had high adverse impact on margins
  • Occupancy Grand Lisboa:  40 rooms being refurbished (process will take 2 yrs)
  • Smoking ban: have impacted player time on tables; saw more impact on slot side than table side
  • VIP business at old Lisboa was very soft
  • Oceanus will be impacted by Grand Prix
  • Grand Lisboa visitation:  visa restrictions had impact on premium mass segment.  October visitation was down 8%.
  • Mass reclassification:  have not reclassified any tables in October; do not have any current plans to reclassify
  • Grand Lisboa:  have placed 7 smoking areas

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