CHART OF THE DAY: Keep Moving (And Selling the Russell 2000) | $IWM

"While risk often moves slowly, then all at once… sometimes it doesn’t move at all," wrote CEO Keith McCullough in today's Morning Newsletter. "Last week, our least preferred of the major US stock market indices (Russell 2000) did absolutely nothing."


"Oh, and it was unchanged in the week before that too. I guess that’s what they call a 'bull market' - something that doesn’t go down! After going down hard (-15% from its all-time #bubble high in July, to its October low), the Russell is +0.9% YTD.


“So,” keep selling that (IWM) against The Perfect Idea during what we call #Quad4 Deflation = Long the Long Bond (in TLT, EDV, etc.). And de-stress yourself a little as the macro market stresses about both growth and inflation slowing."


CHART OF THE DAY: Keep Moving (And Selling the Russell 2000) | $IWM - 11.17.14 Chart

The Perfect Idea

“The idea, the perfect idea, is to keep moving.”



The more #history I read, the more I like Ike; especially the Ike (Dwight D. Eisenhower) that was on the ground alongside his men, serving as the 1st Supreme Allied Commander of Europe during WWII.


The aforementioned quote comes from page 273 of The Guns At Last Light above a picture of American soldiers wading “from a landing craft toward Omaha Beach” #1944. Oh how our collective expectations in life have changed since then.


I thank God every day for the opportunities I’ve been provided. While my “highest conviction” ideas reside in this fish bowl, The Perfect Idea is for me to have two feet on the floor at the top of the risk management morning, and to keep moving.


The Perfect Idea - dwight


Back to the Global Macro Grind


While risk often moves slowly, then all at once… sometimes it doesn’t move at all. Last week, our least preferred of the major US stock market indices (Russell 2000) did absolutely nothing.


Oh, and it was unchanged in the week before that too. I guess that’s what they call a “bull market” - something that doesn’t go down! After going down hard (-15% from its all-time #bubble high in July, to its October low), the Russell is +0.9% YTD.


“So”, keep selling that (IWM) against The Perfect Idea during what we call #Quad4 Deflation = Long the Long Bond (in TLT, EDV, etc.). And de-stress yourself a little as the macro market stresses about both growth and inflation slowing.


Dow navel gazers saw it “up” +0.3% last week – but here were the rest of the world’s #deflation signals:


  1. Japanese Yen burnt for another -1.4% devaluation (-9.4% YTD vs USD)
  2. Commodities (CRB Index) deflated another -1.4% week-over-week to -4.8% YTD
  3. Oil (WTI crude) continued to crash, down another -3.4% on the wk to -18.1% YTD
  4. Natural Gas dropped -7.8% week-over-week (sans le Polar Vortex) to -5.7% YTD
  5. Energy Stocks (XLE) led US stock market sector losers, -1.8% on the wk to -2.6% YTD
  6. Russian Stocks (RSX) continued to crash, -0.7% to -30.7% YTD


I know, this is cherry picking – or something like that (like quoting the Dow isn’t!), but if you broaden your horizons and look beyond an epic currency devaluation and energy-deflation linked stock and bond exposures, here’s what else was going on:


  1. Greek stocks continued to crash, down another -2.2% on the wk to -23.4% YTD
  2. Brazil’s major stock market index (Bovespa) got tagged for another -2.7% weekly loss (+0.5% YTD)
  3. Mexico’s stock market dropped -2.8% week-over-week to +1.5% YTD


Yes, the “no worries” CNBC narrative gets more worrisome when you consider what the Bank of England’s chief, Mark Carney, called “huge disinflationary pressures” (code words for #deflation) this morning.


That comment came on the heels of Japan’s stock market dropping -3% overnight (after the Yen stopped going down) as Japan “unexpectedly falls into recession.” Unexpected by some Bloomberg beat writer maybe - #expected by anyone paying attention.


While it may feel a little odd buying into a central plan that promises more of what has not worked economically (they call it Abenomics), if you did that last week, you #crushed it –amidst the global #deflation in stock prices, the Nikkei was +3.6% #hooray.


Which brings us to this morning’s Consensus Macro positioning (non-commercial CFTC futures and options contracts):


  1. Japanes Yen’s net short position got -12,042 shorter last week to -85,768 NET SHORT
  2. SP500 (Index + Emini) NET SHORT position got cut by +36,543 contracts to almost neutral at -1,762
  3. UST 10yr Treasury NET SHORT position ramped by another -86,212 contracts to -126,213 shorts!


In other words, Consensus Macro (which has had both global growth and bond yields wrong for all of 2014) figured the Japanese Yen was going to go down every day, US stocks higher (every day), and the Long Bond down (bond yields up)…


In other news, the exact opposite is happening this morning. Which makes being NET LONG the long-end of the Treasury market and NET SHORT the Russell 2000 feel like the perfect contrarian idea to start off your week.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.28-2.36%


RUT 1148-1187

Italy MIB 188

Yen 113.58-116.51
WTI Oil 74.35-77.25


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


The Perfect Idea - 11.17.14 Chart


TODAY’S S&P 500 SET-UP – November 17, 2014

As we look at today's setup for the S&P 500, the range is 55 points or 2.20% downside to 1995 and 0.50% upside to 2050.                                        













  • YIELD CURVE: 1.80 from 1.81
  • VIX closed at 13.31 1 day percent change of -3.48%


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Empire Manufacturing, Nov., est. 12.0 (prior 6.17)          
  • 9:00am: ECB’s Draghi speaks in Brussels
  • 9:15am: Capacity, Oct., est. 79.3% (prior 79.3%)
  • 9:15am: Industrial Production, Oct., est. 0.2% (prior 1%)               
  • 10am: Fed’s Evans speaks in Chicago      
  • 11am: U.S. announces plans for auction of 4W bills          
  • 11:30am: U.S. to sell $24b 3M bills, $28b 6M bills               



    • 1pm: Nuclear Regulatory Commission Chair Allison Macfarlane speaks at NPC on safe operation of nation’s more than 100 nuclear power plants



  • Japan Unexpectedly Enters Recession as Abe Weighs Tax            
  • *Pfizer to Buy Merck KGaA Cancer Drug Rights for $850m            
  • ** Pfizer Cuts 2014 Reported Diluted EPS Range to $1.40-$1.49 
  • Actavis Said Near Deal to Buy Allergan for Over $215/Share         
  • Halliburton Said to Resume Merger Talks With Baker Hughes     
  • JPMorgan Settles Oil Rights-Owner Suit Alleging Deals   
  • Zoetis Adds Poison Pill as Ackman Stake Raises Takeover Chance             
  • Ford Expands Ranger Pickup Recall for Flawed Takata Air Bags   
  • Facebook Tells Marketers to Stop Trying to Post Ads for Free     
  • Delta Seeks to Boost Asia Hub With Plan to Triple Seattle Gates
  • Carrey’s ‘Dumb & Dumber To’ Debuts as Top Box-Office Hit       
  • China’s Bad Loans Jump Most Since 2005 in Threat to Economy 
  • Putin Warns He Won’t Let Rebels Be Beaten by Ukraine Forces 
  • Citigroup, JPMorgan, others post monthly credit-card data         
  • 13-F WRAP: Alibaba Attracts Appaloosa, Paulson, Soros, Moore



    • Agilent Technologies (A) 4:05pm, $0.89 
    • Jacobs Engineering (JEC) 9:30pm, $0.86 
    • Keysight Technologies (KEYS) 4pm, $0.77             
    • Tyson Foods (TSN) 7:30am, $0.77             
    • Urban Outfitters (URBN) 4pm, $0.41                      



  • Brent Crude Drops on Growth Concerns as Japan Enters Recession
  • Gold Trades Below Two-Week High Amid Signs of Physical Buying
  • China to Cut Agriculture Tariffs in ‘Game Changer’ for Australia
  • Hedge Funds Cut Gold Bets in Fastest Exit This Year: Commodities
  • Copper Falls Amid Demand Concern as Japan Sinks Into Recession
  • Australia-China Free Trade Deal to Remove Some Resources Tariffs
  • Mounting Pressure on OPEC Spurs More Wagers on Oil Rally: Energy
  • Osisko to Buy Virginia for $408 Million to Add Gold Royalties
  • Steel Rebar Falls as Weak Demand Weighs Against Production Cuts
  • China Copper, Zinc, Alumina Output Rise to Record Highs in Oct.
  • Wheat Climbs Toward 11-Week High on Australia, U.S. Crop Outlook
  • Arabica Trades Near 3-Week High on Brazil Dryness; Sugar Falls
  • OIL DAYBOOK: Crude Down; Iran Minister Visits UAE Ahead of OPEC
  • Australia Opens China’s Services Market With Free Trade Accord


























The Hedgeye Macro Team





















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




  • New Lows for FX: Our Tactical Asset Class Rotation Model (TACRM) is generating a lowly 2% Passive Trend Follower Asset Allocation for FX as a primary asset class, which represents a delta of -45% and -81% from its trailing 3M and 12M averages, respectively. Furthermore, that 2% reading is only in the 1st percentile of readings since the start of 2008. Only two of the 14 ETFs comprising the FX asset class in TACRM have positive Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) readings; a whopping 57% of them have VAMDMI readings below -1x (i.e. exhibiting a clear trend of negative volume-weighted price momentum on a multi-duration basis). Our #Quad4 theme continues to remain appropriately on the right side of this move in Foreign Exchange
  • #StrongDollar Likely to Continue: Obviously the BoJ has gone all-in with money-printing and our proprietary G3 Monetary Policy Model continues to portend further easing out of the ECB as well. To the extent they are able to act as aggressively as what is being demanded by the markets remains to be seen, however. All told, the USD is clearly broadly overbought, but until our quantitative  signals suggest otherwise, we think it pays to be short of foreign currency exposure. Don’t get caught myopically naval gazing at the U.S. economy; RoW monetary policy is as big a factor in determining FX rates as the Fed! 








***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: Bad #Deflation (11/14)

Oil: Supply, Supply, Supply (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.


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Bootlegging & Banking

This note was originally published at 8am on November 03, 2014 for Hedgeye subscribers.

“I don’t mind going back to daylight saving time.  With inflation, the hour will be the only thing I’ve saved all year.”

-Victor Borge


During daylight savings time, in the fall and winter months, the U.S. Virgin Islands are one hour ahead of East Coast time. 


Instead of getting up at 4am everyday, I could get up at 5am…and, you know… on an island. 


Keith’s in Cali this week.  When he gets back, I’ll try to leverage the jet-lag + daylight savings  brain fog combo and float the “Hedgeye Caribbean” proposal, again….


“you miss 100% of the shots you don’t take”


Bootlegging & Banking - st1


Back to the Global Macro Grind...


In our 4Q Macro Investment themes call we profiled a series of bubbles which, among others, included:


  • Complacency Bubble: Daily moves of >1% vs. Average VIX level (by year)
  • Inequality Bubble: Labors Share of National Income vs. Congressional Disapproval vs. Gini Coefficient
  • Hedge Fund Correlation To Beta Bubble:  Hedge fund trailing correlation to the SPX vs. Average Relative Monthly Performance
  • Leverage Performance Chase Bubble:  Margin Debt (inflation Adjusted), % of SPX Mkt Cap
  • Expensive Small Cap Illiquidity Bubble:  Russell 2000 Trailing PE vs Average Market Cap Traded (by year)
  • Basement Dwelling Bubble: Real Median Household Income vs. 18-34YOA Homeownership Rate vs. Housing Expense as % of Median Income
  • Spread Risk Bubble:  IG & High Yield Spreads over Treasuries vs. Bond Volatility vs. Total Corporate Debt Outstanding


Our timing on the complacency bubble proved particularly prescient (substitute “lucky” if you’d like).  Prior to our themes call, the VIX was trading at its lowest average level in a decade and just 11% of trading days saw moves in excess of 1% in either direction.  Subsequent to our call, the VIX has been higher by ~33% on average and the SPX has had daily moves greater than +/- 1% over 50% of the time.    


We expect the Dramamine ride to continue. 


Taking a broader view, each of the aforementioned bubbles are, in some magnitude, outcroppings of the larger bubble that is Central Banking. 


With the explicit goal of QE initiatives being financial asset price inflation - and the hope for the ultimate trickle down and around effect - asymmetries and inequalities have become more pronounced in recent years.  Such policy manifestations, however, are more an extension of secular trends than neoteric phenomenon. 


The financial sector and those tied to it have benefited disproportionately since the turn of the interest rate cycle circa 1980.  From 1980 to its peak in 2006,  the finance industry grew from less than 5% of the economy to ~8.3%, taking share at a rate of ~13bps per annum while the financial sector weight in the S&P500 rose from less than 10% to greater than 20% over the same period. 


Industry and activity chase price/profit and the broader reality of the great moderation – which, instead of promoting natural economic cycling, effectively propagated the accumulation of latent risk – is that 30+ years of lower highs and lower lows in interest rates supported a multi-decade run in financial asset price appreciation - a phenomenon exaggerated further by the twin peaks in both demographics and household & corporate leverage. 


Alongside that financialization, the gini coefficient in the U.S. increased almost a full decile and the share of total income earned by the top 1% of families more than doubled from less than 10% to greater than 20%.


The minority with financial assets and those tasked with managing them - which, coincidentally, became increasingly less mutually exclusive - benefited as bond prices had a historic bull run while the ongoing, incremental lowering of discount rates provided for a perma-juicing of asset values via the Present Value effect.  


Q: How much would the median home be worth today if rates were at 10% instead of 4%?

A:  About -45%, or -$110K, less. 


Quasi-relatedly, the policy perpetuated asset bubble rotation into housing destroyed a perfectly predictive housing model. 


Over the pre-1995 historical period, New Home Sales could be modeled as an almost perfect periodic function.  For the aspirant, part-time quants like myself, who would like to plot the function, here’s what I got on a 1st pass…..


f(x) = 241*sin(2Pi/82*x-20.5)+614   ….#CoolButUseless


Perhaps as the last of the cumulative displacement from trend burns off in the next few years we can return to a similarly predictable oscillation in new housing demand.     


Anyhow, a couple weeks back, Janet Yellen expressed concern over the ongoing rise in inequality that team FOMC itself helped perpetuate. 


Janet failed to explicitly address the role of central bank policy in that burgeoning divide but the Fed does hold an appreciation for the lag between Wall Street’s discounting of policy via prices and actual Main Street effects.  And with the normal policy transmission channel left mostly prostrate by the zero bound in rates,  the less potent and longer lagged trickle through of Wall Street wealth to the real Main Street economy has become the hoped for transmission channel detour route. 


Ironically, or unfortunately, the problem with that ideology is that the prescription for ineffectual QE becomes more dovishness in the belief that it’s the bottlenecked transmission of policy and not the policy itself that’s core to the problem.  From that perspective, more and/or longer ‘easiness’ remains the most favorable conduit for the (eventual) leak through of policy to the populace.   


“You keep going until you can’t turn back. That’s where there isn’t any choice. You don’t know where that is. You don’t know until you pass it. And then it’s too late.”


Nucky Thompson epitaphed the bubble in 1920’s Prohibition barbarism and capped the series finale of Boardwalk Empire with that quote.  


I suspect there’s some transferable insight in that Boardwalk epiphany. 


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.16-2.35%

SPX 1967-2023

VIX 13.31-17.79

USD 84.99-87.11

Yen 108.99-112.98

WTIC Oil 79.47-81.43 


To Bootlegging, Central Banking….and kindred spirits...


Christian B. Drake

U.S. Macro Analyst


Bootlegging & Banking - Inequality EL


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