China, Copper, and the Euro

Client Talking Points


Evidently Chinese #GrowthSlowing has the Chinese worried enough that they cut rates overnight – I didn’t see that coming. Everything commodity #deflation is ripping higher on that move this morning; Shanghai Comp +1.8%.


If you knew China was going to cut, you’d have the most bang for your central planning buck buying Copper futures, +1.5% to the top end of my 2.96-3.06/lb risk range – selling opportunity there (and in Oil, again).


To add fuel to the “futures are up” fire, Draghi told the Germans (he’s in Frankfurt speaking today) that he’ll do whatever it takes now that whatever it took didn’t work – European Stocks ripping +1-2% on that (after selling off hard yesterday on NOV PMI #GrowthSlowing data).

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


FX: Euro takes its turn being burnt by an un-elected bureaucrat, -0.9% to $1.24 #Draghi



“Insanity: doing the same thing over and over again and expecting different results.”

Albert Einstein


5.6%, China’s new lending rate, which the country lowered by 0.4 percentage points today.

CHART OF THE DAY: Ali Baba and the 40 Thieves


CHART OF THE DAY: Ali Baba and the 40 Thieves - JAPAN

Ali Baba and the 40 Thieves

“We hang the petty thieves and appoint the great ones to office.”



Ali Baba and the 40 Thieves is one of the most famous of the “Arabian Nights” folk tales.  It tells the story of a poor son of a merchant, Ali Baba, who over hears a pack of thieves (40 to be exact) who are visiting their treasure store at a cave in the forest.


After hearing their password, “Open Sesame” (akin to using 1,2,3,4 to unlocking your iPhone no doubt), Ali Baba waits until the thieves are gone and uses the password himself to enter the cave and steal some of their gold.  Ali Baba’s brother, Cassim, realizes the secret of the cave and goes back to the cave with a donkey to try and take as much gold as possible.


Largely because of his greed, and lack of planning, Cassim is locked in the cave and when found by the thieves on their return is subsequently killed and quartered into four pieces.  The thieves then do their best to find Ali Baba, to little avail, and eventually the thieves meet their demise and Ali Baba is the only one left knowing the secret of the cave.


The one obvious parallel between the Ali Baba folk tale and the company Alibaba (BABA) is the name.  If you go deeper than that, it is also clear that for a long time the Chairman and Founder, Jack Ma, was perhaps one of a small group who knew the secret of the treasure cave.  Now that BABA is public, though, we all have the opportunity to understand the secrets of the monolithic BABA.


To be fair, we aren’t suggesting that Jack Ma or his colleagues are thieves, although the corporate structure of BABA and transfer of Alipay’s ownership might be construed as thievery by some, but rather that just like the Ali Baba of folklore, the modern Alibaba has limitations on the amount of “gold” it can take.


At 11am today, our Internet and Media Analyst Hesham Shaaban is going to be hosting a call titled: “Baba: Risks & Timing, What Others Aren’t Telling You”.  The bear case call will be focused on the following:

  • China Can't Grow Fast Enough: Top-down analysis of the key factors driving E-Commerce in China.
  • Growth Will Come at a Price: How the China growth story will pressure BABA's Business Model.
  • Timing the Short: Model Projections and the Key Metrics we're tracking to monitor our thesis.

Email if you’d like to learn how to get access to the call.


Ali Baba and the 40 Thieves - z DJ EL


Back to the Global Macro Grind

Perhaps we are being a bit too harsh on BABA.  It is after all a veritable monopoly with very high returns on capital, but at a valuation that is also priced in.  More importantly as we think of thievery and the global markets, it is probably more apropos to think of the extreme policies perpetuated by the world’s major central banks as thievery. 


On a basic level, the average consumer is being robbed of his return on his savings, and punished with  monetary inflation.  Recently, of course, the inflation has started to deflate, which may be beneficial eventually, but also brings about its own set of challenges and unfortunately also gives central bankers the carte blanche to manipulate monetary policy even further.


The mystical ECB head Mario Draghi once again opened the treasure cave of policy in a speech at a banking conference earlier today when he said:


“We will continue to meet our responsibility—we will do what we must to raise inflation and inflation expectations as fast as possible, as our price stability mandate requires of us.  If on its current trajectory our policy is not effective enough to achieve this, or further risks to the inflation outlook materialize, we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases.”


That’s a pretty direct comment, especially for a European.


The Chinese central bankers took it one step further and actually walked the walk with a 25 basis point cut of the deposit rate and a 40 basis point cut of the lending rate over night.  On some level, this of course epitomizes the new currency war.  The Europeans used rhetoric, but the Chinese answer back with some monetary artillery fire.


Of course nothing truly compares to the shock and awe that the Japanese are capable of when it comes to monetary policy, or as my colleague Darius Dale called it “getting crazier”.  In an update note on Japan Wednesday, Dale summarized the outlook for Japanese policy moves adroitly:


“Japanese consumption be damned, we now know that the BoJ is completely comfortable with going “full Weimar [Republic]” with Japanese monetary policy, as most recently highlighted by today’s 8-1 vote in leaving monetary policy unchanged; recall that the board was split 5-4 when Governor Haruhiko Kuroda opted for additional easing last month.


What we found even more surprising is the fact that Kuroda reiterated his “upbeat” assessment of the economy. Yes, the same Japanese economy that is mired in recession and contracting -1.2% on a YoY basis!


What this tells us is that he is likely leaving room for a downside surprise to his targets, which would afford him scope to expand QQE sooner, rather than later. Per Bloomberg, sellside consensus expects a further expansion of QQE by June. Kuroda surprised us once; he won’t catch us off guard again!”


In summary there is an increasing case for Japan to ease more aggressively than consensus believes and with a negative correlation of -0.94 between the SP500 and JPY/USD, that is one really important reason for U.S. equity investors to keep Japan and its monetary policy front and center!


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.29-2.38% 

SPX 2008-2056 

RUT 1152-1187 

USD 86.99-88.06 

EUR/USD 1.23-1.25 

Gold 1135-1208 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Ali Baba and the 40 Thieves - JAPAN

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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

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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




















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