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#Quad4 Deflation

Client Talking Points

YEN

The Yen is burning another -0.5% vs. USD and this is one of the biggest reasons why Oil got smoked (Dollar Up), but an interesting level of resistance here at $116.51 – if that holds, Oil should bounce somewhere north of $73 – so just be aware of the short term capitulation in everything Energy (including Putin!).

KOSPI

The Kospi  is down another -0.9% to -3.2% year-to-date; this is another unintended (the Koreans would say the Japanese intended it) consequence of Yens burning . South Korean Wons get more expensive #CurrencyWar; funny that some used to call it Dr Kospi (as a leading indicator for global growth), until it went down…

RUSSELL 2000

The Russell 2000 tried her best @Hedgeye TREND resistance (1187) and failed (again). We can’t tell you how many people A) who missed shorting this in July now say B) the small cap “bottom is in” – but it’s a lot of people; so fade that as the Liquidity Trap that has been this index just made yet another lower-all-time-#Bubble high.

Asset Allocation

CASH 68% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 28% INTL CURRENCIES 4%

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

Real Conversations: Crisis Coming? Stockman on ‘Likely Global Recession’... https://www.youtube.com/watch?v=3q1g5swAUrA&feature=youtu.be

@KeithMcCullough

QUOTE OF THE DAY

Dost thou love life? Then do not squander time, for that's the stuff life is made of.

-Benjamin Franklin

STAT OF THE DAY

Oil is 95% of Venezuelan exports (iron ore is a portion of the other 5%), and they are known as one of the highest-cost producers in OPEC.


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – November 14, 2014


As we look at today's setup for the S&P 500, the range is 38 points or 1.39% downside to 2011 and 0.47% upside to 2049.                                                     

                                                                          

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: 1.82 from 1.83
  • VIX closed at 13.79 1 day percent change of 5.91%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Retail Sales, Oct., est. 0.2% (prior -0.3%)              
  • 8:30am: Import Price Index, Oct., est. -1.5% (prior -0.5%)             
  • 9:10am: Fed’s Bullard speaks in St. Louis               
  • 9:55am: UMich Consumer Sentiment, Nov. prelim, est. 87.5 (pr 86.9)     
  • 10am: Business Inventories, Sept., est. 0.2% (prior 0.2%)             
  • 10am: Mortgage Delinquencies, 3Q (prior 6.04%)             
  • 10:30am: EIA natural-gas storage change             
  • 1pm: Baker Hughes rig count     
  • 4pm: Fed’s Fischer, Powell speak in Washington              

               

GOVERNMENT:               

    • House, Senate in session             
    • 8:30am: EIA Administrator Adam Sieminski delivers remarks on “Implications of the U.S. Shale Revolution,’         
    • 9am: Mexico’s energy undersecretary for hydrocarbons, Maria de Lourdes Melgar Palacios speaks on the nation’s energy reform 
    • 10am: Siemens CEO Joe Kaeser speaks on energy issues at CSIS               
    • 10am: Energy Sec. Ernest Moniz announces “major investment”              
    • 10am: Vice President Biden to speak at Inter-American Development Bank        
    • 11am: Postmaster General Patrick Donahoe on  U.S. Postal Service FY14 end-of-year financial results     

 

WHAT TO WATCH:

  • U.S. Said to Give Banks December Deadline for FX Admissions  
  • Alibaba Said to Seek $8 Billion in Bond for Loan Repayment         
  • BP Loses Bid for New Trial Over Its Gulf Spill Negligence
  • Halliburton, Baker Hughes Consider Merger Amid Industry Downturn    
  • Virgin America Raises $307m Pricing U.S. IPO Within Range          
  • Applied Materials Forecasts Profit, Revenue Short of Estimates
  • German and French Economies Rebound as Italian Slump Persists           
  • China to Waive Capital-Gains Tax for Foreigners Using Stk Link   
  • Boston Scientific Ordered to Pay $26.7 Million in Mesh Case       
  • Banks Said to Alter IPO Pitches as Finra Faults New Conflicts       
  • Wells Fargo Cancels Sale of Mortgage-Servicing Rights to Ocwen              
  • UPS Sees Wider Margins as E-Tailing Nears Business Shipping    
  • Sub-$2-a-Gallon Gasoline Futures Hand U.S. Motorists Gift         
  • Starbucks Dutch Tax Deal Clashes With Global Standards, EU Says            
  • Hostess Owners Said to Plan Sale of Twinkie Maker in Early 2015              
  • Blackstone May Ask U.S. to Speed Waldorf Sale Probe: NYP       
  • G-20, Fed Minutes, Obamacare, Japan GDP: Wk Ahead Nov. 15-22          

               

EARNINGS:        

    • Amaya Gaming (AYA CN) 6:30am, C$0.22             
    • B2Gold (BTO CN) 6:30am, $0.01
    • InterOil (IOC) 6am, ($0.51)          
    • Onex (OCX CN) 7am, $1.26         
    • Power Corp. of Canada (POW CN) 11:12am, C$0.68         
    • Springleaf (LEAF) 8am, $0.51      

               

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Brent Rises Amid Speculation OPEC Will Respond to Oil-Price Drop
  • Commodities Retreat to Five-Year Low as Oil Slumps With Metals
  • Fracking Boom Spurs Demand for Sand, Clouds of Dust: Commodities
  • Snowfall Alert Triggered Because Lakes Are Too Warm for Cold Air
  • Noble Said to Reload Its First Spanish LNG for Delivery to Japan
  • Soybeans Fall as China Slows and Oil’s Slide May Weigh on Demand
  • U.S. Shale-Oil Surge to Continue Amid Price Slump, IEA Says
  • Glencore to Shut Australian Coal Mines Temporarily Amid Glut
  • Palm Trims Weekly Gain as Crude Oil Losses Reduce Biofuel Demand
  • Steel Rebar Posts Second Weekly Drop as Mills Restart After APEC
  • European Coal Set to Gain Most in Three Months as Glencore Cuts
  • Corn Traders Divided on Demand Concerns to Harvest Forecast
  • Buffett’s Power Market With California Faces Pricing Anomalies
  • OPEC Diplomacy Picks Up From Iraq to Libya Amid Oil Plunge
  • Gold Drops as Inflation Concern Fades; Platinum at Five-Year Low

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


CHART OF THE DAY: #Quad4 = Bad #Deflation

Editor's note: The excerpt accompanying today's Chart of the Day is from CEO Keith McCullough's Morning Newsletter this morning.

 

Obviously times, technologies, and mostly everything other than the Old Wall have changed. But the very basic difference between what I’ll call good vs. bad #deflation has not.

 

Here’s the difference:

 

  1. Good #Deflation = #StrongDollar + #RatesRising (signal that real, inflation adjusted US growth is accelerating)
  2. Bad #Deflation = #StrongDollar + #RatesCrashing (signal that both US and Global growth are slowing)

CHART OF THE DAY: #Quad4 = Bad #Deflation - 11.14.14 Chart


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Bad #Deflation

“The world wants to deflate while governments want to inflate.”

-Jim Rickards

 

Now if that isn’t one of the best quotes of the year, I don’t know what is. It’s another way of saying that, since the enemy of government debt is deflation, they’ll do anything to try to arrest economic gravity – so will Wall Street consensus.

 

To their credit, if only because they’re going #Gruber (Google the video) on The People and preying on their economic and market ignorance, at least government Policies To Inflate are implicit at this stage of the game.

 

Wall Street strategists, on the other hand, are bullish on “stocks” during both #InflationAccelerating and deflation. Yep, $100-150 Oil was no problemo muchachos…  But $70? Ah, that’s why they’ve been bullish on the “economy” all along!

Bad #Deflation - Deflation cartoon 10.02.2014

 

Back to the Global Macro Grind

 

Obviously times, technologies, and mostly everything other than the Old Wall have changed. But the very basic difference between what I’ll call good vs. bad #deflation has not.

 

Here’s the difference:

 

  1. Good #Deflation = #StrongDollar + #RatesRising (signal that real, inflation adjusted US growth is accelerating)
  2. Bad #Deflation = #StrongDollar + #RatesCrashing (signal that both US and Global growth are slowing)

 

And trust me, I know who is out there making the call that I made on #StrongDollar, Strong America (after I did in Q4 2012). He’s the same guy who got run-over by late-cycle #InflationAccelerating from JAN-JUN 2014, and missed both early-cycle US #ConsumerSlowing and #HousingSlowdown in 2014 too. But this isn’t about me versus him. This is about understanding:

 

A)     The difference between good and bad growth expectations

B)      How to express those very different scenarios in terms of stocks versus bonds

C)      How to pick the right sectors of the stock and bond markets that reflect economic reality

 

Good vs. Bad, Stocks vs. Bonds?

 

Yes. Top down, the difference in your asset allocation should have been polar opposite in 2013 and 2014:

 

  1. Good #Deflation = I said Short the Long Bond, Buy The Russell (80% of its revenues come from USA)
  2. Bad #Deflation = I said Buy the Long Bond (TLT), Short the Russell (until growth expectations reset)

 

#TimeStamped

 

And to be clear, only after you have the Bad #Deflation play out in all of its manifestations (down High Yield Energy Bonds, down upstream MLP Energy Stocks, etc.) will you have the catalyst to get long the Good #Deflation.

 

Put another way, if and when markets price in what the Long Bond and Russell 2000 have been pricing in all year (like they did in early October), you get to buy your favorite early-cycle consumption stocks, lower.

 

How some of these guys go from having not called for an early cycle slowdown to calling for an economic recovery (from the consumer spending and US housing slowdown) is above my pay grade, but who really cares. Macro markets are going to do what they are going to do, on their own time.

 

In the meantime, we want you to stay with the #Quad4 deflation playbook:

 

  1. Long the Long Bond (TLT, EDV, etc.), Munis (MUB), and Cash
  2. Long Healthcare (XLV), Consumer Staples (XLP), and REITS (VNQ)
  3. Short the Russell 2000 (IWM) and Oil & Gas E&Ps (XOP)
  4. Short France (EWQ), Russia (RSX) and Emerging Markets

 

The US economy won’t recover until government Policies To Inflates are reversed (#RatesRising, not crashing). That is not what the Old Wall wants. But I called my top contact (God) this morning (smart guy)… and he said he still wants economic cycles and gravity to exist.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.30-2.40%

SPX 2011-2049

RUT 1138-1187

VIX 12.16-16.21

Yen 114.87-116.51

WTI Oil 73.89-77.31

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bad #Deflation - 11.14.14 Chart


November 14, 2014

November 14, 2014 - Slide1

 

BULLISH TRENDS

November 14, 2014 - Slide2

November 14, 2014 - Slide3

November 14, 2014 - Slide4

 

BEARISH TRENDS

November 14, 2014 - Slide5

November 14, 2014 - Slide6 

November 14, 2014 - Slide7

November 14, 2014 - Slide8

November 14, 2014 - Slide9

November 14, 2014 - Slide10

November 14, 2014 - Slide11
November 14, 2014 - Slide12


Panic Plan, CTRL-Print

This note was originally published at 8am on October 31, 2014 for Hedgeye subscribers.

“When I suck, I’ll retire.”

-Tom Brady

 

I suck this morning.

 

While many may very well have nailed this, I did not. The Japanese economy is so bad that they just went all 1920s Germany on the rest of the world, printing 80 TRILLION Yens.

 

Panic Plan, CTRL-Print - EL chart 2

 

Back to the Global Macro Grind

 

Just how bad does the Japanese economy suck? Well, right before they came out of left-central-planning-field with this decision, here’s what they reported, in economic growth terms:

 

  1. Japanese Household Spending -6% year-over-year
  2. Japanese Housing Starts -14% year-over-year
  3. Japanese Construction Spending -40% year-over-year

 

No, the down -14-40% prints aren’t typos. Abenomics is killing it, literally.

 

Q: “So”, what do central planners do when all else fails?

A: moarrr of the same! (*definition of insanity)

 

Japan’s equivalent of Janet (his name is Kuroda) said that Hedgeye nailed it on the #GrowthSlowing call and that the Bank of Japan is at a “critical point to overcome deflation.”

 

There’s that word again, #deflation.

 

Forget what 80 TRILLION is in the context of what the Germans did in the 1920s for a second (99% of people in this world don’t get the econ #history lesson anyway) and think about what this Panic Policy in Japan is going to do to the rest of the world’s economics in 2015:

 

  1. Burning The Yen = Dollar Up = Oil Down
  2. Oil Down = Russia Down
  3. Job growth in Texas, North Dakota, etc. Down

 

In other words, what these macro morons in Japan don’t get is that what they just did is only going to perpetuate worldwide #deflation.

 

Did I just call them morons? Yes. And I said I suck this morning too. Get over it and get on with the next move in the game that is Global Deflation Risk. Did you know that 27% of the high yield/junk debt market in the US is levered to some version of Energy inflation?

 

Again, follow the bouncing puck on that thought. Yen burnt to a crisp à #StrongDollar à Quad4 deflationary pressures à Down Oil à Down Energy stocks à Down Energy related debt #Bubble.

 

And, while you’re going to see the mother of all month-end markups (many mutual funds have their year-end in October too, so isn’t Japan falling into the ocean perfect timing!), what does that mean for #deflation risk to the US stock market as it re-tests all-time highs?

 

Technically speaking (my 4 year old daughter just pointed this out after she looked at the chart), an all-time high in the SP500 is a long time. “So”, there has never been more risk that US equities deflate, starting in November.

 

REMINDER: the last US stock market #bubble peaked in OCT 2007 and Japan’s Nikkei hasn’t been this high since NOV 2007 either.

 

If you’re looking to buy either Japanese or US stocks on this “news”, how do you explain it to your investors? ‘Well, you see, our thesis all along was that these money printings would result in economic collapse, so we wanted to be long the #PanicPlan associated with that.’

 

My asset allocation of 0% (net) to US equities will be dead wrong this morning. Zero percent allocation to Commodity Deflation and its related energy stocks and bonds is right though, so I don’t have to retire just yet.

 

Our immediate-term Global Macro Risk Ranges are now:

 

SPX 1900-2011

RUT 1071-1175

VIX 12.89-21.78

Yen 108.11-111.98

WTI Oil 79.03-81.65

Gold 1162-1231

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Panic Plan, CTRL-Print - Chart of the Day


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