Growth and Inflation Expectations Falling

Client Talking Points


There’s still a > +276,000 net LONG position in crude futures/options, so don’t forget that the bounce China gave oil last week was A) short lived and B) faded by deflation expectations, big time as WTI tests making lower lows – very bearish for Energy stocks and bonds, imposing interconnected risk to the high-yield market.


There’s still a -128,000 net SHORT position in the 10YR Treasury, so bond bears are getting creamed with the 10YR crashing (-26% year-to-date) to 2.25% this morning. 2.22% is an immediate-term level of short-term support, but we still think yields go lower as the Fed freaks about #deflation in Q1 of 2015.


As front month VIX tests the low-end of my 12.16-15.62 risk range, the II Bull/Bear Spread just tested an all-time high of +4270 basis points wide to the bull side (+108% since OCT 13th) as the Bear side of the survey hit an all-time low of 13.8%. Stay with the Long Bond over RUT and SPX from here – less volatility, and way less crowded.

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


GREECE (which we're still short) down another -1.4% to -18% YTD



Children have never been very good at listening to their elders, but they have never failed to imitate them.

-James A. Baldwin


Copper deflates another -0.5% to -10% for 2014 year-to-date as global growth (demand) slows.

November 26, 2014

November 26, 2014 - Slide1



November 26, 2014 - Slide2

November 26, 2014 - Slide3

November 26, 2014 - Slide4

November 26, 2014 - Slide5




November 26, 2014 - Slide6

November 26, 2014 - Slide7

November 26, 2014 - Slide8

November 26, 2014 - Slide9

November 26, 2014 - Slide10

November 26, 2014 - Slide11
November 26, 2014 - Slide12

November 26, 2014 - Slide13


TODAY’S S&P 500 SET-UP – November 26, 2014

As we look at today's setup for the S&P 500, the range is 54 points or 2.28% downside to 2020 and 0.34% upside to 2074.                                                          













  • YIELD CURVE: 1.73 from 1.74
  • VIX closed at 12.25 1 day percent change of -2.93%


MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Nov. 21 (prior 4.9%)
  • 8:30am: Durable Goods, Oct., est. -0.6% (pr -1.3%, rev -1.1%)
  • 8:30am: Init Jobless Claims, Nov. 22, est. 288k (prior 291k)
  • Continuing Claims, Nov. 15, est. 2.348m (prior 2.330m)
  • 8:30am: Personal Income, Oct., est. 0.4% (prior 0.2%)
  • 9:45am: Chicago MNI, Nov., est. 63 (prior 66.2)
  • 9:45am: Bloomberg Consumer Comfort, Nov. 23 (prior 38.5)
  • 9:55am: UofMich Confidence, Nov. final, est. 90 (prior 89.4)
  • 10am: Pending Home Sales m/m, Oct., est. 0.5% (prior 0.3%)
  • 10am: New Home Sales, Oct., est. 471k (prior 467k)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: DOE Energy Inventories
  • 11:30am: U.S. to sell $29b 7Y notes
  • 12pm: EIA natural-gas storage change
  • 1pm: Baker Hughes rig count



  • House, Senate out of session
  • 6am: Quinnipiac University Polling Institute releases poll of U.S. voters with their assessments of 2016 presidential race



  • Saudi Arabia Says No One Should Cut Output, Oil Will Stabilize
  • HP’s Fourth-Quarter Sales Miss Shows Challenges Ahead of Split
  • EU Privacy Rules Said to Be Extended to Google U.S. Site
  • Uber Said Poised to Raise Funds Showing $40b Value
  • Holiday Sales: Earlier Thanksgiving Hours, Deeper Deals
  • Black Friday Specials to Lure 140 Million U.S. Shoppers
  • East Coast Storm Brings Headaches for Travelers and Forecasters
  • Households Drive U.K. Economy as Exports, Investment Decline
  • Constancio Says ECB Sovereign-Debt Buying Would Use Capital Key
  • Caesars Creditor Group Sues for Receiver to Run Operating Unit
  • HSBC, Goldman Rigged Platinum Prices for Years, Jeweler Says
  • CBS Program Accord With Dish Extended as Contract Talks Continue
  • Samsung to Buy Back Shares After $1.7 Billion Sale of Chemicals
  • China Widens ‘Tax-Evasion’ Net as Microsoft to Pay $150m
  • HSBC Said to Be Probed by U.S. on Hedge-Fund Leak, WSJ Says



    • Deere (DE) 7am, $1.57 - Preview
    • Golar LNG (GLNG) Bef-mkt, ($0.02)
    • Golar LNG Partners (GLMP) Bef-mkt, $0.67



  • Pre-OPEC Meeting Fails to Deliver Output Cut: OPEC Reality Check
  • HSBC, Goldman Rigged Metals’ Prices for Years, Suit Claims
  • Shorting Chickens Becomes Hot Trade in Stock Market: Commodities
  • WTI Crude Trades Near 4-Year Low as OPEC Sends Mixed Signals
  • Gold Slips as Dollar Strengthens Before U.S. Economic Data
  • Copper Falls to Three-Week Low Before U.S. Durable-Goods Report
  • Gold Bulls Should Buy With Euros, Not Dollars: Chart of the Day
  • Iron Ore Extends Rout Below $70 as Global Supply Seen Expanding
  • Oil Bust of 1986 Reminds U.S. Drillers of Price War Risk: Energy
  • German 2015 Power Gains to 8-Month High Ahead of Capacity Sale
  • Rebar Closes Near Record Low as Investors Weigh Output, Demand
  • Vitol Sees New LNG Supply Adding to Glut as Demand Declines
  • Oil Volatility Here to Stay Regardless of OPEC Decision: Options
  • U.K. Gas Advances in Longest Streak Since 2011 Amid Norway Cuts


























The Hedgeye Macro Team



















Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

CHART OF THE DAY: Rate of Change in US Growth Versus the 10yr Bond Yield

CHART OF THE DAY: Rate of Change in US Growth Versus the 10yr Bond Yield - 11.26.14 EL Chart


Today's Chart of The Day shows the Rate of Change in US growth versus the 10yr bond yield. Unless you are paid to navel gaze at the “Dow”, this macro relationship is obvious to all but the willfully blind. To most of our “rate of change” fans,  the year-over-year rate of change in growth and inflation are pretty basic concepts. To Consensus Macro (and the financial media that dotes on it), not so much…

Uber Bullish!

“If we can get you a car in 5 minutes, we can get you anything in 5 minutes.”

-Travis Kalanick


Travis, how about a massage? Or some turkey day beers and, bonds?


Everyone who has created an anti-consensus company likes how the CEO of Uber, Travis Kalanick, rolls. If this morning’s headlines about T Rowe’s investment are right, it looks like Uber is going to price its final private round at a $35-40B valuation too!


That’s almost as bullish as I am in 2014… on the Long Bond (TLT). In less than 3 minutes, I can get you anything you need to explain the bull case. As growth and inflation expectations slow, globally, bond yields go lower. Ok, maybe that was less than 1 minute.

Uber Bullish! - Fightin  Words 08.29.2014


Back to the Global Macro Grind


In less than 1 minute, I can get you a chart (see Chart of The Day) showing the Rate of Change in US growth versus the 10yr bond yield. Unless you are paid to navel gaze at the “Dow”, this macro relationship is obvious to all but the willfully blind.


To most of our “rate of change” fans,  the year-over-year rate of change in growth and inflation are pretty basic concepts. To Consensus Macro (and the financial media that dotes on it), not so much…


Yesterday’s Consensus Media headlines on US GDP were classic. Sadly, Bloomberg (who we pay a lot of money to for rate of change data), continued down the all-time-CNBC-ratings-lows-perma-SPY-bull-spin-path by writing:


BREAKING: “SP500 Little Changed Near Record On GDP, Consumer Confidence”


In other real-world news yesterday, “Consumer Confidence” actually tanked (falling to 88.7 in NOV from 94.5 in OCT), and the rate of change in year-over-year US GDP growth slowed (again) to 2.4% in Q3 versus 2.6% in Q2.


#PermaBull says pardon?


Yes. Evolve your process, just a little, and stop staring at a next to useless GDP quarter-over-quarter SAAR (sequentially/seasonally adjusted) report and look at it how you look at the companies you invest in (i.e. on a year-over-year basis).


This isn’t rocket science. I can get you these numbers (and a whole lot more of them) in less than 3 minutes!


Again, to review why US bond yields continue to crash (10yr yield -26% YTD to 2.25% this morning):


  1. After topping at +3.1% year-over-year growth in Q4 of 2013, Q314 US GDP growth slowed to +2.4% and…
  2. While the +1.9% year-over-year growth report for Q1 was much uglier than the +3-4% “expected”…
  3. You can look forward to a Q4 GDP growth print in 2014 that is closer to +1.9% than Q3’s 2.4% was


Put another way, we still have US GDP growth (year-over-year dammit!) tracking to +2.2% for 2014 – and, magically, that’s exactly where the 10yr US Treasury Yield is trading this morning.


#Tah-dah! Get growth’s rate of change right – and you get bond yields right.


My inbox is fun. I often get forwarded other people’s macro work and, most of the time, I can’t particularly understand what it means. Mostly, I think that’s because I only care about rates of change. And most of that work doesn’t.


It’s not personal. It’s simply my perspective. And it’s this anti-consensus process and perspective that had us as bearish on the Long Bond in 2013 (when the rate of change in US growth was #accelerating) as we are Uber Bullish now.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.22%-2.33%

SPX 2020-2074

RUT 1154-1190

VIX 12.16-15.62

Yen 117.20-119.16

WTI Oil 73.03-77.04

Copper 2.94-3.01


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Uber Bullish! - 11.26.14 EL Chart

The Fade Trade

This note was originally published at 8am on November 12, 2014 for Hedgeye subscribers.

“Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius —and a lot of courage —to move in the opposite direction."

-E. F. Schumacker


The most challenging thing to do as a stock market operator is to make a trade or investment against consensus.  If you are wrong for any period of time, you hear about it in spades.  Especially in this day and age when every  Jamoke under the sun has a soapbox and/or a twitter feed.  (Admittedly, though, we do applaud the democracy that Twitter has brought to the media world!)


The fact is, the harder consensus leans, the higher your probability of being right in fading that view.   Conventionally speaking, one way in which this is manifested is in value investing.  Now, to some, value investing is about deep dive company analysis, which we get, but on a higher level it is really about the implications of company valuation.  Simply put: when a company’s valuation is high, the prospects for its future are perceived as rosier than when the valuation is low.  (That is a simplification, but you get the point.)


The Fade Trade - fish


In effect, valuation is an opinion, so when the vast majority of stock market operators give a company a low valuation, their opinion of that company is low.  Ironically, or not, this consensus opinion is consistently wrong over the long run.  In fact, Dreman Value Management proved this in spades in a study of “cheap” stocks:

  • First, the study showed that for the period of January 1st, 1970 to December 31st, 2010, stocks in the lowest P/E quintile outperformed stocks in the highest P/E quintile by a margin of 15.4% to 8.3% in terms of annual return;
  • Second, in the 52 quarters when the S&P 500 declined between 1970 – 2010, low P/E stocks outperformed the market by an average of +2.4% versus an under performance of -1.9%  for high P/E stocks; and
  • Finally, from 1973 to 2010 the lowest quintile P/E stocks went up +1.2% on a negative surprise versus a return of -7.4% for the highest quintile P/E stocks on a negative surprise.

Now valuation is obviously only one factor, and not always the best factor for shorter term tactical trading, but over the long run it is a great gauge of the consensus opinions of companies.  And over the very long run, fading well loved “names” as based on high P/E multiples has provided enormous outperformance.


Back to the Global Macro Grind...


This morning it is not difficult to find the consensus view of U.S. equities.  The II Bulll Bear Spread (bulls minus bears) is +99% to the bullish since October 12th.  As well, Bears are tracking near all-time lows at 14.8%.  If you are a lemming, of course, this makes sense.  As markets go up you get more bullish and as markets go down you get more bearish.  Practically speaking, as we highlight in the Chart of the Day, chasing this rally is fraught with risk given how unconvincing the volume has been.


Complacency seems to once again be setting into the view of European equity markets as well.  We’ve seen a few notable chart followers suggest the turn is in for European equities and today they may have some fodder for the case with Eurozone Industrial production, which beat expectations.


Specifically, Eurozone September Industrial Production rose by +0.6% year-over-year versus the consensus view of -0.3%.  This compared to the August reading, which was a -0.5% decline (also an upward revision from -1.9%).   As well, the German economic minister was out this morning saying that the “German economy stabilized in Q3 after a Q2 contraction and now has slight upward momentum”.  Now, of course, if this is the best the Eurozone can do, fading any rally is certainly worth considering.


Over at the Bank of England today, the honest Canadian, BOE Governor Mark Carney, is at least being forthright  in saying, "it’s appropriate that markets now expect easier monetary conditions” based on the real-time growth and inflation data the BOE is seeing.  The challenge with easier monetary conditions for many global central banks is that while they are not out of bullets, the bullets are increasingly ineffective.


Yesterday we hosted a call for our Institutional Macro subscribers with Professor John Taylor from Stanford on this very topic.  Taylor is an outspoken advocate for rules based central banking (hence the eponymous Taylor Rule) and also highlighted in spades a point we’ve been harping on for some time, which is that the extreme QE monetary policy in the U.S. has became increasingly ineffective.   As Taylor noted on QE3:


“When started 10-year Treasury was 1.7%, then rose and has remained higher

  •  Effects of QE on yield spreads

– 1-year vs 10-year US Treasury spread

– 2003-2008 non-QE period……1.3%.

– 2009-2013 QE period……………2.4%”


It obviously begs the question of whether the biggest no-brainer “Fade Trade” has become to fade the increasingly impotent global central banking regime?  You likely already know our answer on that.


If you’d like to listen to the replay of our discussion with Professor Taylor, the replay and his presentation can be accessed below.


***Click here for Replay

***Click here for Presentation Materials


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.26-2.39%

SPX 1965-2049

RUT 1135-1182
VIX 12.33-16.51

Yen 111.99-117.87

WTIC Oil 75.61-78.97 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Fade Trade - cod


Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.