Takeaway: In today's edition of the Macro Playbook, we quantify Japan's impact on "risk asset" beta, US corporations and on the active mgmt. industry.


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




  • Quantifying Japan’s Impact on “Risk Asset” Beta: Obviously with the BoJ recently adopting to go all-in on currency debasement, we are not surprised to see inverse correlations between the JPY and so-called “risk assets” tighten in recent months. This perpetual inverse correlation is a function of Japan’s status as the world’s largest supplier of capital. Specifically, Japan’s net international investment surplus of ~$3T is equivalent to 68% of the country’s GDP and compares to a -$5.5T deficit for the U.S. The key takeaway is that when Japanese investors get worried about global growth or when the sustainability of JPY debasement (i.e. income balance inflation) is called into question, investors should expect JPY repatriation to negatively impact global equity and credit markets. Regarding the latter point, the very source of yen debauchery (i.e. Abenomics) is at risk of being rendered a thing of the past just one month from today! Review our 11/19 note titled, “JAPAN: DOES THE "ABENOMICS TRADE" HAVE MORE ROOM TO RUN?” for more details.
  • Quantifying Japan’s Impact on U.S. Corporations: To answer the hyperlinked question above, we do think Abenomics has room to run – beyond December 21st, that is. To the extent Abe’s LDP/NKP coalition wins another parliamentary majority (we think they will, though the mandate will likely be less strong than in 2012), the yen will be burned to lows that even the most ardent yen bears aren’t anticipating. Specifically, Bloomberg consensus expects 120 on the USD/JPY cross by EOY ’15, while FX forwards are implying a pullback to 117. Consensus is nowhere near in the area code of Bearish Enough on the yen if Abe gets another go at it! In the second chart below, we show 51 domestically domiciled companies with revenue exposure to Japan greater than or equal to 10% that could see incremental top line erosion over the NTM.
  • Quantifying Japan’s Impact on Active Management: While Consensus Macro continues to cheer on Policies To Inflate out of G3 central banks (and China this AM), we continue to remind investors of the ultimate risks of minimal volatility and subdued variance throughout the U.S. equity market – which is a continued shift away from active management. Jonathan Casteleyn of our Financials Team as written about these trends extensively, most recently in yesterday’s note titled, “ICI Fund Flow Survey - Passive Market Share Taking Over on Both Sides of the Aisle”: “Year-to-date, running aggregate money flow also reflects this preference for passive products with equity ETFs more than doubling the production of equity mutual funds and with fixed income ETFs having just overtaken bond funds with the recent dislocation in the taxable category.” If you’re interested in receiving this data on a regular basis, simply send an email to ... Going back to the headwinds facing active managers, recent data from BAC showed just 18% of active managers are beating their benchmarks this year, the worst ratio in a decade. Moreover, equity hedge funds (per the HFRX Equity Hedge Fund Index) are on track for their third-worst annual return ever. Refer to our 10/31 note titled, “WEEKEND MUST-READ: DOES THE DEATH OF JAPAN = THE DEATH OF ACTIVE MANAGEMENT?” for more details on why we think cheering on central bank-induced asset price inflation is, at best, a fool’s errand.




THE HEDGEYE MACRO PLAYBOOK -   of revenues from Japan


THE HEDGEYE MACRO PLAYBOOK - HFRX Equity Hedge Fund Index Annual Return


***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: Building Expectations (11/20)


#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.


#Bubbles: S&P500 Levels, Refreshed (11/18)


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.

November 21, 2014

November 21, 2014 - Slide1



November 21, 2014 - Slide2

November 21, 2014 - Slide3

November 21, 2014 - Slide4

November 21, 2014 - Slide5

November 21, 2014 - Slide6



November 21, 2014 - Slide7

November 21, 2014 - Slide8

November 21, 2014 - Slide9

November 21, 2014 - Slide10

November 21, 2014 - Slide11
November 21, 2014 - Slide12

November 21, 2014 - Slide13


TODAY’S S&P 500 SET-UP – November 21, 2014

As we look at today's setup for the S&P 500, the range is 48 points or 2.18% downside to 2008 and 0.16% upside to 2056.               













  • YIELD CURVE: 1.83 from 1.83
  • VIX closed at 13.58 1 day percent change of -2.72%


MACRO DATA POINTS (Bloomberg Estimates):


• 11am: Kansas City Fed Mfg Activity, Nov., est. 6

• 1pm: Baker Hughes rig count



    • Sec. of State John Kerry in Vienna for Iran nuclear talks
    • Final day of Clearing House conf. in NYC.
    • 12:45pm keynote Comptroller of the Currency Thomas Curry
    • 9:45am: Nellie Liang, Director of Office of Financial Stability Policy and Research, Federal Board
    • 10am: Senate Banking panel hears from William Dudley, president and CEO of Federal Reserve Bank of NY, at oversight hearing
    • 10am: Senate Permanent Subcmte on Investigations holds 2nd day of hearings



  • Dudley Testifies to Senate as Fed Starts Review of Supervision
  • Draghi Says ECB Must Raise Inflation Rate as Fast as Possible
  • PBOC Said to Inject Funds as IPOs Trigger Cash Squeeze
  • U.S. Said to Seek Multibank Settlement in Criminal Forex Probes
  • Bank of America Granted Penalty Relief in SEC Mortgage Case
  • Janus Says Soros’s Quantum Invests $500m With Gross
  • NewLink Said in Talks With Merck & Co. on Ebola Vaccine
  • Hewlett-Packard Selects Team to Manage Split Into 2 Cos.
  • Blackstone to Acquire GE Japan Apartments for $1.61b
  • CBS Agrees to Extend Deal With Dish as Negotiations Continue
  • Target Wants Bank Claims Thrown Out a Year After Data Breach
  • Panasonic May Start Tesla Battery Production Early: Asahi
  • Sysco/US Foods Merger Seen Approved on Disposals: NY Post
  • Disney Adds Movie Co-Prod., TV to Shanghai Media Alliance
  • Adelson Faces Repub. Rebellion on Online Gambling: W. Post
  • Costolo’s Family Trusts Sell 50% of Twitter Stock This Month
  • Google Testing Website Subscriptions for Ad-Free Browsing
  • Chinese Insurer Buys Sydney Hyde Park Sheraton for $400m



    • Ann (ANN) 7:31am, $0.68
    • Berry Plastics (BERY) 8:45am, $0.37
    • Foot Locker (FL) 7am, $0.79
    • Hanwha SolarOne (HSOL) 6am, no est.
    • Harbinger (HRG) 8:30am, no est.
    • Hibbett Sports (HIBB) 6:30am, $0.61
    • Sirona Dental (SIRO) 7am, $0.90



  • Banks Had Unfair Advantage From Commodity Units, Senator Says
  • Top Rubber Growers Agree to Reduce Exports to Boost Global Price
  • Aluminum Fee to Japan Seen Climbing to Record on Global Deficit
  • Oil at $75 Means Patches of Texas Lose Money for Shale Drillers
  • Goldman Lowers 2015 Nickel Estimate on China Pig Iron Output
  • Goldman, Glencore Found in ‘Merry-Go-Round’ Aluminum Trades
  • Soybeans Rebound From Two-Week Low on U.S. Feed Supply Outlook
  • Pigs Are Too Fat for Holiday Hams as Prices Surge: Commodities
  • Ebola Stokes Liberian Food Shortage as Hungry Farmers Eat Seeds
  • Goldman Sachs to Wind Down Uranium Unit After Failing to Sell
  • Gold Futures Fall a Second Day as Dollar Gains After Fed Minutes
  • Codelco Sees Copper Price Outlook ’Quite Stable’: Chairman
  • JPMorgan Power Market Influence Targeted in U.S. Senate Report
  • Saudi Arabia Tenders for 330,000 Tons of Hard Wheat
  • Goldman, Morgan Stanley Commodity Heyday Gone as Units Faulted


























The Hedgeye Macro Team




















My Bubble's Birthday!

This note was originally published at 8am on November 07, 2014 for Hedgeye subscribers.

“Today you are you! That is truer than true! There is no one alive who is you-er than you!”

-Dr. Seuss


On this day in 2007, my first of three children, John Henry McCullough (we call him Jack) was born. It was the most humbling, yet inspirational moment of my life. While he won’t quite get what that means until he reads this many years from now – I’ll give him a big hug when he wakes up this morning and thank him for it anyway.


At the time, I thought Jack inspired me to say goodbye to a life in the hedge fund business that was very good to me. Little did I know that my goodbye (to the head hunter community) was more like a “top of the risk management morn” hello to all of you.


So I just wanted to thank all of you this morning too. I started building this company 7 years ago with only 1 thing in mind – being true to who I am. To do that, I could only build alongside teammates and business partners who share the same principles and purpose. While we may not get everything right, today I can still say that we are who we are, truer than true.


My Bubble's Birthday! - 80


Back to the Global Macro Grind


Today is also my bubble’s birthday. Shortly after Jack was born, the US stock market #bubble of 2007 stopped going up. It actually started to go down fast, closing down 6.6% in November of that year – and didn’t bottom for 16 months after that.


Today’s all-time #bubble high in the SP500 is approximately +30% higher than that one was…


And while I haven’t been explicitly bearish on the SP500 this year (my focus has been much more on the small/mid cap illiquidity #bubble that was the Russell 2000, which is still -3.1% from its all time high), I’m obviously getting there!


What a long, strange, but thoroughly enjoyable trip…


What’s the same between now and November of 2007?


  1. They were both all-time SPY highs – and in both cases, all-time was/is a very long time
  2. As we hit all-time highs, in both cases, both local and global growth was already slowing
  3. In both cases, there were/are a myriad of “it’s different this time” perma bull cases being made


Away from that – this day of November 2014 versus that in 2007 are entirely different.


How so?


  1. This time, every major central planning agency considers itself some version of a gravity bending god
  2. There are fewer hedge funds that are actually hedged for a crash (hedge fund correlation to SP500 beta = +0.9)
  3. Where I am most bearish (Russell 2000), this market is way more expensive (55x trailing earnings) and illiquid


I’m also grayer and fatter, but you already know that.


What we don’t know now is similar to what they didn’t know then (with they being those who bought them at the all-time high). There is a buyer and seller at every cost basis don’t forget.


I am the way I am, partly because I am a Canadian hockey player, but largely because I’ve never lost money in a down US stock market (2000, 2001, 2002, 2008).


While I think I was as bullish as anyone on small/mid cap US growth stocks in both 2009 and 2013, but I’m definitely not the guy who is going to give you reasons to buy #bubbles. At least 90% of the Old Wall can get you that call this morning (for a brokered fee!).


So don’t expect that from me today and/or on Monday if the jobs report is magically “better than expected” this morning either. The main reason for that isn’t an ideology or a marketing model – it’s a risk management process.


My catalyst in both 2007 and 2014 was/is the same. It’s called the economic cycle. Whether naval gazing US stock market consensus is forced to acknowledge it today, next week, or next month isn’t the point.


Long-term Bond Yields, Oil, Gold, Japan, Russia, Brazil, Europe, Emerging markets, Russell 2000, etc. have already confirmed it.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.22-2.40%

SPX 1967-2046

RUT 1121-1181

Nikkei 14602-17378

VIX 13.29-17.14

WTI Oil 76.23-79.92


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


My Bubble's Birthday! - 11.07.14

DRI: Still Lacking Direction

As promised, the “new” Darden is cutting costs and streamlining the organization.


Unfortunately, the recent press release reads like the “old” Darden.  It lacks conviction, enthusiasm, new thinking and a new strategic direction.  We do recognize, however, that the new board was recently elected and that we are in the early innings of an overhaul.


While “winning market share, improving same-restaurant sales and achieving best-in-class profitability” are the right things to say, these objectives pale in comparison to the other strategic changes that must be made at Darden, which includes fixing the broken culture of the company.


Commensurate with the changes at the board level, the company needs an entirely new strategic direction.  We understand the company is in the midst of a CEO search, and now in need of a new CFO, but FY15 is rolling on and there appears to be little sense of urgency.  With the stock up 13% and 17% over the past one and three months, respectively, it appears as though there is anticipation of better times ahead.


The company needs a new strategic plan that addresses the issues brought forth by Starboard in its 297 page activist presentation.  Until then, the move in the stock is premature.


Since Starboard’s impressive victory in early October, the “new” Darden has issued four press releases:

  • October 14, 2013 - Darden names Gene Lee Interim CEO
  • October 16, 2014 – Darden’s Board Appoints Additional Director
  • November 5, 2014 – Darden Retains Korn Ferry for CEO Search
  • November 13, 2014 – Darden Announces Corporate Governance Reforms and Sets Second Quarter Earnings Release for December 16, 2014.
  • November 18, 2014 – Darden Announces Leadership Changes and Strategic Actions


These are important steps, but we’re still waiting for the big one.  We will likely not reach an inflection point in the business until we see a press release that reads:


“Darden to Hold Conference Call for New CEO to Outline a New Strategy for the Company.”


The plan would need to include:

  1. A new strategic direction for Olive Garden - DRI’s future valuation depends on this brand being fixed.
  2. A plan to improve LongHorn’s relatively low AUV’s and below average returns.
  3. Significant changes to capital allocation strategies, including limited new unit growth and the potential sale of real estate and other non-core assets.
  4. Strategic priorities for improving the cost structure of the enterprise.


Our point is that the majority of Darden’s announcements over the past month are insignificant relative to what needs to take place for this company to turn the corner.  Importantly, the list of executives that have left the company since interim CEO Gene Less was appointed COO back in September 2013 is staggering:


Dave Pickens, Drew Madsen, Clarence Otis, Michael Barnes, Leonard Berry, Odie Donald, Christopher Fraleigh, Victoria Harker, David Hughes, Charles A. Ledsinger Jr., William Lewis Jr., Senator Connie Mack III, Michael Rose, Maria Sastre William Simon, Brad Richmond, Daisy Ng and Bob McAdam.


Importantly, zero new executives have joined in order to breathe new life into the company.  It seems like more of the same – a “trust me” mentality that got Darden into trouble in the first place.


Recall that during the past year, the current management team said they could not fix Red Lobster.  So what did the company do?  They promptly sold the business.  Following the sale, there was some very conflicting commentary about the Red Lobster opportunity.  We feel it could have been ‘saved’ under the right leadership and ultimately sold for a significantly better return for shareholders.  In other words, we believe the company was in need of some new leadership and oversight. 


While Darden has a new board in place, we must recognize that this is only the beginning and further changes are needed.


Now the same management team says they have a plan to fix Olive Garden.  Again, why should we play the “trust us” game?  We believe that a new CEO-CFO team will be central to any strategic turnaround plan.


We continue to believe that DRI, with a healthy Olive Garden (positive same-store sales and guest count growth), would have the potential to be a tremendous investment over time.  Like all great restaurant turnarounds, DRI would likely go on a multi-year run of shareholder value creation if this is achieved.


Here’s our takeaway from the news flow since October:

The $20 million in cost cuts announced is underwhelming relative to the $216 million Starboard thought was possible.

  • Hedgeye: Since there was no indication that more cost cuts are on the way, is this $216 million number still a relevant benchmark?


There are only a few days left in the quarter, meaning management knows what the numbers look like. If the company’s core brand, Olive Garden, was participating in the industry upturn in sales wouldn’t they have given shareholders the good news?

  • Hedgeye: The Company was making progress on the Renaissance Plan in 1Q15. Has there been any follow through into 2Q15?


There has been no indication the company will cut spending on new units and stop the egregious spending on Olive Garden remodels.

  • Hedgeye: This is a must.  Why was this not a part of the strategic actions revealed in the November 18th press release?


Even with the current round of cost cutting, 2015 EPS guidance is aggressive.

  • Hedgeye: If I’m the interim CEO, and trying to become the full-time CEO, there’s no way I’m cutting guidance this quarter.  I’d rather push it out three months from now.


We suspect that the last time Darden issued earnings guidance; they assumed a recovery in the Olive Garden business.  While there may be an industry upturn, there is no renaissance happening at Olive Garden.  There is a chance the company makes 2Q15 numbers, but the hockey stick improvement the street expects in 2H15 is far too aggressive.


DRI: Still Lacking Direction - 894949


As we’ve said many times DRI can be a great company once again.  We just don’t see the path to prosperity yet!


Feel free to call, or email, with questions.


Howard Penney

Managing Director


Fred Masotta


Cartoon of the Day: Unraveling Yen

Cartoon of the Day: Unraveling Yen - Yen cartoon 11.20.2014


The Yen. Worth the paper it's printed on?

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.