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Macro Notebook 11/13: Japan | Oil | Russia


Hedgeye Macro Associate Christian Drake shares the top three things in Keith's macro notebook this morning.

This Will Be One of the Big Things That Matter (In the End)

Our macro team’s #Quad 4 deflation call continues to manifest itself in both Oil prices and Energy related countries, stocks, and bonds.


In the end, this will be one of the big things that will have mattered.


This Will Be One of the Big Things That Matter (In the End) - q4


Brent is seeing follow through selling after having a -2.6% down day yesterday (down a whopping -29% year-to-date) while WTIC down -0.4% to $76.85 is looking at lower-lows.


#Quad4. It matters.


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)




  • Trending Deflationary Pressures Abound: As you are likely well aware by now, our #Quad4 theme calls for a continued slowing of both real GDP growth and headline CPI in the U.S. over the intermediate term. One of the ways we arrive at our forecast(s) for domestic disinflation is by outright deflation in the commodity markets. Looking to our Tactical Asset Class Rotation Model (TACRM), Commodities as a primary asset class continues to screen bearishly via a “DECREASE Exposure” recommendation. Its Passive Trend Follower Asset Allocation signal of 7% represents a -44% delta from its TTM average and is only in the 14th percentile of readings since the start of 2008. From a market breadth perspective, 39% of the 23 ETFs comprising this asset class have a Volatility-Adjusted Multi-Duration Momentum Indicator reading below -1x, which indicates a clear trend of negative volume-weighted price momentum across multiple durations. Cocoa (NIB), Crude Oil (BNO, USO), Gasoline (UGA) and Gold (GLD) are leading the charge lower… Over the least ~7Y, we have anchored on commodity prices to inform our view of the 2nd derivative of CPI given that there has been no directional up or down trend in traditional CPI drivers like wage inflation – which continues to be flat-lined around +2% YoY as it has been for the past ~5Y. Outright deflation remains a key intermediate-term risk coming off the 2011-12 bubble highs in commodity prices.








***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.


Early Look: Oh, Snap! (11/13)


#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: Battlefield’s Vortex (11/11)


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.

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Daily Trading Ranges, Refreshed [Unlocked]

This is a complimentary look at Hedgeye CEO Keith McCullough's proprietary buy and sell levels on major markets, commodities and currencies. It was originally published November 13, 2014 at 07:34. Click here to subscribe.

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#GrowthSlowing and Deflation

Client Talking Points


The Weimar Nikkei completed her +20% centrally planned ramp overnight, closing up another +1.1% vs. 14,532 on OCT 17th – it’s a good thing that was “fundamental” – in other news, Global #GrowthSlowing continues and the rest of Asian Equity markets trading from up small (HK +0.3%) to down -0.2-0.5% (KOSPI, India, Philippines).


#Quad 4 deflation continues to manifest in both Oil prices and Energy related countries, stocks, and bonds – this will be one of the big things, in the end, that will have mattered. Brent is seeing follow through selling after having a -2.6% down day yesterday (-29% year-to-date), and WTIC -0.4% $76.85 looking at lower-lows.


Russia is down another -1.9% this morning (Russian Trading System -26.1% year-to-date) as European Equities try to bounce (again) after getting slammed yesterday; both Italian and Spanish CPI showed 0% inflation post European Central Bank President Mario Draghi’s Policy to Inflate.

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).


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


TV TODAY: Hedgeye CEO @KeithMcCullough will be live on @FoxBusiness from 9:30am to 10:10am. @OpeningBellFBN



Dictators ride to and fro upon tigers which they dare not dismount. And the tigers are getting hungry.

- Winston Churchill


Nearly 7 million Americans are stuck in part-time jobs that they don’t want (Wall Street Journal).

LEISURE LETTER (11/13/2014)

Tickers:  NCL, CCL


  • Nov 13:  CHDN acquires Big Fish ; pw: 35368078
  • Nov 13-16
    • Macau Grand Prix
    • Hedgeye Cruise Pricing Survey
  • Nov 16-18: Quantum of the Seas investor event
  • Nov 17:  Potential Carnival Corp announcement?


NCL – (8K) "On November 12,  named executive officers and other executive officers who hold Management Units agreed to exchange their Management Units for ordinary shares of the Parent (the “Exchange”). The Exchange is a taxable transaction for the officers. As a result, on the date of the Exchange, each of our executive officers has agreed to sell a number of ordinary 

shares of the Parent necessary to cover the estimated taxes triggered by the Exchange."

Takeaway:  Tax-related management share sale.  NCL remains our top long idea among the cruisers heading into 2015.


CCL P&O Cruises and Cunard have cancelled all Black Sea port visits in 2015 citing safety and security concerns.  A total of 13 cruises are affected by the decision -- two of them on P&O and the others on Cunard's Queen Victoria.  The ships will go as far as Istanbul then turn round, rather than go into the Black Sea itself.  No information on which ports will replace the Black Sea ones.


 Takeaway:  Black Seas will not play a role in 2015.


CCL (Princess) – According to Princess President, Jan Swartz said, "We met or exceeded every metric' in their $20m media campaign this year, including raising brand awareness, purchase consideration, web traffic and new visitors. As a consequence, Princess is planning a 2015 Wave season campaign, within the 'come back new' genre but with fresh spots, and television will again be among the media mix.


The latest Princess promotion is a two-for-one pricing discounts on  on more than 50 warm-weather destinations in its Winter Clearance Sale.  In addition, passengers can secure their stateroom with a reduced, $100 per person non-refundable deposit. The sale runs through Dec. 2. 


Takeaway: The 'success' doesn't explain the huge discounting and promos by Princess this summer and winter seasons.


CHDN– acquires Big Fish, a mobile and online game maker

  • The transaction is structured on a cash-free/debt-free basis and is valued at up to $885M, including a base consideration of $485M and a potential earn-out payment of up to $350M based on 2015 Adjusted EBITDA, and a potential bonus payment to the founder and current CEO of Big Fish, Paul Thelen, of $50M based on 2016 bookings.
  • The purchase price will be paid in cash, except for approximately $15M paid in CDI common stock to Paul Thelen.
  • Subject to the satisfaction of these conditions, the transaction is expected to close by the end of the year.


AC –  State Sen. President Stephen Sweeney laid out a five-point, $305 million plan to stabilize Atlantic City’s finances , allowing casinos to pay a set amount in annual taxes, while redirecting the Casino Reinvestment Development Authority’s casino assessment to pay down $25 million to $30 million of the resort’s debt per year.


The plan would allow the resort’s casinos to collectively pay $150 million over the next two years. The next 15 years worth of payments would be indexed to gross gaming revenue.


Sweeney, who has publicly feuded with billionaire financier Carl Icahn over benefits for casino workers, proposed mandating casino license holders provide baseline health and retirement benefits. 



Revel – Brookfield Asset Management wants to invest at least $200 million into Revel and reopen it next year 


Takeaway: Revel will be back.


Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  We're seeing bottoms up slowing in Europe cruise pricing in our monthly survey. Europe has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely. Following CCL's earnings release, we recently turned negative on those stocks based on the negative European thesis. 


Hedgeye Macro Team remains negative on consumer spending and believes in muted inflation, a Quad4 set-up.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

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