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Japan, Oil and The UST 10YR

Client Talking Points

JAPAN

Weimar Nikkei drops -3% on the session as the Yen stops going down (+0.3% vs. USD to $115.90 – so just a little bit of correlation risk there!) as Bloomberg breaks that “Japan unexpectedly falls into recession” – unexpected by those who thought Abenomics was working maybe -  but this is getting panicky, faster.

OIL

WTI Oil is down another -1.2% to $74.9 despite the USD down (on Yen up), which is just nasty given that it was down -3.4% last week; BOE’s Carney called it “huge disinflationary pressures” (i.e. our #deflation call) and this should continue to weigh on illiquid energy stocks/bonds with bad balance sheets (i.e. MLP like Linn Energy w/ 5x leverage).

UST 10YR

The UST 10YR Yield remains in crash mode (-24% year-to-date), falling back down to 2.29% this morning as it becomes less believable by the day that the U.S. will “decouple” from either growth or inflation expectations slowing, globally; long the Long Bond (TLT, EDV, etc) remains our highest conviction macro idea for 2014.

Asset Allocation

CASH 67% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 29% 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

Yield Spread (10yr minus 2yr - good leading indicator for growth) drops back to its YTD lows = 179bps @KeithMcCullough

QUOTE OF THE DAY

A man may die, nations may rise and fall, but an idea lives on. Ideas have endurance without death.

-John F. Kennedy

STAT OF THE DAY

Energy Stocks (XLE) led U.S. stock market sector losers, -1.8% on the week to -2.6% year-to-date.


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.”

-Eisenhower

 

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%

SPX 1

RUT 1148-1187

Italy MIB 188

Yen 113.58-116.51
WTI Oil 74.35-77.25

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Perfect Idea - 11.17.14 Chart


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THE HEDGEYE DAILY OUTLOOK

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.                                        

                                                                                       

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: 1.80 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               

               

GOVERNMENT:               

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

 

WHAT TO WATCH:

  • 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

               

EARNINGS:        

    • 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                      

                               

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • 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 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


THE HEDGEYE MACRO PLAYBOOK

Takeaway: Our Macro Playbook is a daily 1-page summary of our investment themes, core ETF recommendations and proprietary quantitative market context.

INVESTMENT CONCLUSIONS

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)

 

QUANT SIGNALS & RESEARCH CONTEXT

 

  • 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! 

 

THE HEDGEYE MACRO PLAYBOOK - TACRM GMRS

 

THE HEDGEYE MACRO PLAYBOOK - US DOLLAR INDEX

 

THE HEDGEYE MACRO PLAYBOOK - MONETARY POLICY MODEL

 

***CLICK HERE to download the full TACRM presentation.***

 

TRACKING OUR ACTIVE MACRO THEMES

#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,

 

DD

 

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.

 


November 17, 2014

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BULLISH TRENDS

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 BEARISH TRENDS

 

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