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Reiterating #Quad4 Deflation

Client Talking Points

COMMODITIES

The CRB Index (19 commodities) deflated another full -1% yesterday and remains bearish TREND @Hedgeye. Energy stocks (XLE) were down another -0.9% on the day. Commodity risk ranges have mostly all opened up to the downside (signaling lower-lows for Oil, Copper, etc.) – immediate-term risk range for WTI crude is now 75.69-79.16.

XLY

Popular consensus is that Down Oil = Up Consumer Stocks, but that isn’t working; Consumer Discretionary (XLY) was both down on a market up week (last week) and down again on a market up day yesterday; by our math 2/3 of the country is in a spending recession (no wage growth and highest cost of living, all-time).

VOLUME

Very similar market dynamics to the SEP highs in the U.S. stock market (SPX made all-time highs, while Russell made lower-highs on decelerating volume); Total U.S. Equity Market Volume (including dark pool) was -8% and -25% vs. the 1 month and year-to-date averages yesterday.

Asset Allocation

CASH 69% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 28% INTL CURRENCIES 3%

Top Long Ideas

Company Ticker Sector Duration
EDV

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.

TLT

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).

XLP

The U.S. is in Quad #4 on our GIP (Growth/Inflation/Policy) model, which suggests that both economic growth and reported inflation are slowing domestically. As far as the eye can see in a falling interest rate environment, we think you should increase your exposure to slow-growth, yield-chasing trade and remain long of defensive assets like long-term treasuries and Consumer Staples (XLP) – which work decidedly better than Utilities in Quad #4. Consumer Staples is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.

Three for the Road

TWEET OF THE DAY

GOLD: widening risk range (not good) = $1121-1201/oz $GLD

@KeithMcCullough

QUOTE OF THE DAY

It's about work before glory, and what's inside of you.

-Michael Jordan

STAT OF THE DAY

According to Moody’s Analytics, adults under age 35 currently have a savings rate of negative 2%, that compares with a positive savings rate of about 3% for those age 35 to 44, 6% for those 45 to 54, and 13% for those 55 and older.



CHART OF THE DAY: Small Cap Liquidity Trap | $IWM

"If PRICE is rising with decelerating VOLUME and trending VOLATILITY is rising, that is called a Liquidity Trap," CEO Keith McCullough wrote in today's Morning Newsletter. "Those are not what you want to be buying at the high end of the risk range. You should consider them wonderful selling opportunities."

CHART OF THE DAY: Small Cap Liquidity Trap | $IWM - 11.11.14 Chart


Early Look

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The Battlefield's Vortex

“Where is the battlefield? The answer would be, everywhere.”

-Colonel Qiao Liang

 

That was a quote from the People’s Liberation Army in China in 1999 that Jim Rickards cited at the beginning of a chapter titled The War God’s Face (The Death of Money, pg 42).

 

Since today is one of the most important days of the year to show our gratitude and respect (Veterans Day in the US, Remembrance Day in Canada, Armistice Day across Europe), I’d like to take a minute to do that this morning.

 

While the battlefield of economic and market risks continue to mount, we should never forget the sacred one where our bravest countrymen have fought for our liberty and freedom.

 

The Battlefield's Vortex - v4

 

Back to the Global Macro Grind

 

In the last few weeks I have been meeting with Institutional Investors in New York, Boston, Los Angeles, San Francisco, and Chicago. I need to get out of the Windy City this morning before this polar vortex thing rolls in!

 

The definition of a vortex: “a mass of whirling fluid or air.” That sounds like the feedback I’ve been getting on the bull case for US and global growth – oh, and the “it’s different this time” short covering we have seen in the US stock market in the last month.

 

But what happens after the vortex? Will there be massive volume buying at the all-time #bubble highs again, or not? How can we measure and monitor that? And what if all that comes after the v-bottom-vortex is crickets?

 

Crickets in the snow?

 

Yep. Anything can happen! Today the bond market is closed, so you’ll definitely hear crickets there. But you could also hear them in yesterday’s US stock market trading too. Here’s what happened in terms of Total Equity Market Volume (including dark pool):

 

  1. Volume was down -8% versus its 1-month average volume
  2. Volume was down -25% versus its YTD average volume

 

This is almost exactly what happened at the end of September (before the -10% drop in the SP500) when I’d write to you about explicit risk signals like decelerating-volume-on-up-days, and how big domestic #GrowthSlowing signals (like the Russell 2000 and UST 10yr Yields making lower-highs) were confirming that an immediate-term topping process was in motion.

 

While many still use point-and-click simple (one factor) moving averages to calibrate what they think is market risk (it’s above the 50-day bro, chart looks sweet!), the core Hedgeye quantitative signal has not changed – it has 3-factors:

 

  1. PRICE
  2. VOLUME
  3. VOLATILITY

 

The reason why we consider the battlefield of risk this way is that this is where you can find the market’s internal convictions. If PRICE and VOLUME are accelerating as trending VOLATILITY is falling (like it did in 2013), I’d be all bulled up on small cap growth.

 

However, if PRICE is rising with decelerating VOLUME and trending VOLATILITY is rising, that is called a Liquidity Trap. Those are not what you want to be buying at the high end of the risk range. You should consider them wonderful selling opportunities.

 

Again, we don’t want you shorting what almost every hedge fund on the planet is using as their perceived “hedge” (the SP500). We want you to short the Russell (IWM), and buy the Long Bond (TLT) on the other side of it.

 

Price, Volume, and Volatility provide a quantitative overlay to our fundamental research process. If there’s one fundamental factor that has mattered most in my investor debates, it’s the same one that has mattered all year – growth.

 

After 65 consecutive months of a US economic expansion, is the rate of change in US growth accelerating or slowing? That’s the battlefield debate – and, if you’re in our camp, there are plenty of ways to express our US #GrowthSlowing view:

 

  1. LONG: Healthcare stocks (XLV) led yesterday’s rally, +1% on the day, to +22.3% YTD
  2. SHORT: Consumer Discretionary (XLY) and Energy (XLE) stocks (which were both down, again, yesterday)

 

That’s right. While everybody and their thesis-drifting-brother on the Old Wall is now parroting that “you buy Consumer Discretionary stocks because of down oil prices”, that’s been one of the worst sectors of the market to be long in the last week.

 

Not only was it down with Energy deflating yesterday, Consumer Discretionary (XLY) was down on the week last week too. “So”, what does that tell you about late-cycle indicators like employment (and the lack of wage growth)?

 

Prepare for slowing’s vortex. Winter is coming.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.25-2.40%

SPX 1

RUT 1135-1182

Yen 111.99-117.87

WTI Oil 75.69-79.16

Gold 1121-1201

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Battlefield's Vortex - 11.11.14 Chart


November 11, 2014

November 11, 2014 - Slide1

 

BULLISH TRENDS

November 11, 2014 - Slide2

November 11, 2014 - Slide3

November 11, 2014 - Slide4

November 11, 2014 - Slide5

 

 

BEARISH TRENDS

November 11, 2014 - Slide6

November 11, 2014 - Slide7

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November 11, 2014 - Slide9

November 11, 2014 - Slide10

November 11, 2014 - Slide11
November 11, 2014 - Slide12

November 11, 2014 - Slide13


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – November 11, 2014


As we look at today's setup for the S&P 500, the range is 87 points or 3.69% downside to 1963 and 0.58% upside to 2050.                                                    

                                                                           

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 1.83
  • VIX closed at 12.67 1 day percent change of -3.43%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • Bond markets closed for Veterans Day
  • 7:30am: NFIB Small Business Optimism, Oct., est. 96 (pr 95.3)
  • 7:45am: ICSC weekly sales
  • 8:55am: Redbook weekly sales

 

GOVERNMENT:

    • House, Senate not in session
    • Govt. offices closed for Veterans Day
    • Political directors from China, France, Germany, Russia, U.K., U.S. meet with Iran in Muscat, Oman
    • Sec. of State John Kerry accompanies Obama in Beijing

 

WHAT TO WATCH:

  • Banks Said Poised to Settle With CFTC in Currency-Rigging Cases
  • Barclays, HSBC Sued by U.S. Soldiers Over Attacks in Iraq
  • Takata Accused in Suit of Burying Results of Bad Air-Bag Tests
  • Juniper CEO Resigns After Board Review Over Customer Negotiation
  • Mondelez to Buy Stake in Kinh Do Snack Unit for $370 Million
  • U.S. Says Breakthrough Reached With China on Trade Accord
  • Alibaba Open to Working With PayPal to Expand Payments Business
  • American Apparel Posts Biggest Quarterly Sales Drop Since 2010
  • Hortonworks Planning Stock Sale Touts $50 Billion Hadoop Market
  • Mersch Says ECB Ready to Expand Asset Purchases to ABS Next Week
  • Shanghai Stock Trading Surges to Record Before Exchange Link
  • Google to Lease NASA’s Moffett Field Airfield for $1.2 Billion
  • Clear Channel Said to Consider Europe Outdoor Unit Ad Sale: Rtrs
  • SpaceX to Make Micro-Satellites Announcement in 2-3 Mos: Musk
  • GM Ignition Defect Tied to Death of Woman 11 Years Ago: NYT

 

EARNINGS:

    • Aecom Technology (ACM) 7am, $0.82
    • CST Brands (CST) 7am, $0.58
    • DR Horton (DHI) 7am, $0.48 - Preview
    • Fossil (FOSL) 4:01pm, $1.82 - Preview
    • Insys Therapeutics (INSY) 7am, $0.26
    • Sabre (SABR) 8am, $0.25
    • Semafo (SMF CN) 8am, $0.06
    • Tahoe Resources (THO CN) 4:02pm, $0.25
    • YY (YY) 4:01pm, $0.74

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Get Ready for $60 Iron Ore as Citi Says Slump Has Long Way to Go
  • Brent Crude Falls to Four-Year Low as WTI Slides on Stockpiles
  • Gold Falls a 9th Time in 10 Days as Stronger Dollar Cuts Demand
  • Aluminum to Copper Slide as Strengthening Dollar Erodes Demand
  • Palm Imports by India Seen Rising for Fourth Month on Festivals
  • Saudis Using Price Correction to Pressure OPEC Members: SocGen
  • Corn Little Changed After Surprise Drop in U.S. Crop Outlook
  • NLMK May Boost Dividend After Completing Spending, Cutting Debt
  • Power Funds Post Losses as Nordic Weather Confounds Forecasters
  • Rebar Declines First Time in Four Days on China Demand Concerns
  • OIL DAYBOOK: Iraq Tracks Saudi Price Moves; Angola Dec. Exports
  • OPEC’s Choice Is Pricing Power or Sales in New Oil Order: Energy
  • Qatar Commits to 2022 World Cup Spending Even After Oil’s Plunge
  • OPEC’s Kuwait Sees No Oil-Output Cut at November Meeting

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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.

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