Keith's Macro Notebook 11/26: Oil | UST 10YR | Sentiment

Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.


Takeaway: We juxtapose recent strength in consumer stocks w/ our "early-cycle slowdown" thesis and what we need to see more of to turn bullish.


Long Ideas/Overweight Recommendations

  1. iShares National AMT-Free Muni Bond ETF (MUB)
  2. iShares 20+ Year Treasury Bond ETF (TLT)
  3. Health Care Select Sector SPDR Fund (XLV)
  4. Vanguard Extended Duration Treasury ETF (EDV)
  5. Consumer Staples Select Sector SPDR Fund (XLP)

Short Ideas/Underweight Recommendations

  1. iShares Russell 2000 ETF (IWM)
  2. SPDR S&P Regional Banking ETF (KRE)
  3. iShares MSCI European Monetary Union ETF (EZU)
  4. iShares MSCI France ETF (EWQ)
  5. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)




  • Early Cycle Strength Percolating: One of the reasons we refresh our Tactical Asset Class Rotation Model (TACRM) daily is to force ourselves to analyze market signals that may or may not be supportive of our active macro themes. Today is one of those days. Specifically, at #4, #5 and #6 respectively, Large-Cap Consumer Discretionary (XLY), Retailers (XRT) and Homebuilders (ITB) have each crept into the top-10 Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) readings across the entire global macro universe as defined by TACRM (~200 ETFs in aggregate). Recall that our VAMDMI metric is a proprietary measure of momentum that is specific to TACRM and is designed to front-run [non-linear] regime changes across macro markets (CLICK HERE for more details). On this score, early cycle consumer stocks have clearly broken out to the upside ahead of a bullish #Quad1 setup in 1Q15.
  • Housing Is Supportive of the Bullish #Quad1 Narrative: Recall that our Macro Team has been marginally positive on housing since November 5th (when we closed our ITB short) and emerging trends in the data continue to support this directionally bullish shift: “INFLECTION INSPECTION |  FLEDGLING STABILIZATION IN HPI” (11/25), “EXISTING HOME SALES – EMERGENT MOJO, DAY 3” (11/20) and “STARTS & APPS – MORE POSITIVE HOUSING DATA TURNING THE TABLE GREENER” (11/19).
  • Deflation Is Supportive Too: In addition to this bullish impetus provided by the housing sector, we continue to record a healthy amount of deflation in the median consumer’s “core” PnL. Specifically, rent (20.9% of median consumer PCE), food (11.5% of median consumer PCE), utilities (8.3% of median consumer PCE) and gasoline (6.4% of median consumer PCE) have all deflated from their YTD and/or all-time highs at -1.3% (1Q), -13.3% (MAY), -1.7% (OCT) and -24% (APR), respectively. On a weighted basis – both relative to each other and to their cumulative share of total PCE – the median consumer has received a cumulative tax cut worth about -360bps of aggregate expenditures. Arguably more impressively, our proprietary Consumer Squeeze Index is now registering seven consecutive months of sequential deflation – the longest streak since at least the start of 2007!
  • Do NOT Buy Early-Cycle Stocks Up Here, However!: Obviously with housing turning the corner, on the margin, and the consumer continuing to receive a #StrongDollar tax cut, our research focus is slowly but surely shifting to a likely [bullish] #Quad1 setup in 1Q15. That being said, however, we still have 5-6 weeks of [bearish] #Quad4 to get through first! While it's easy to assume that missing this Centrally Planned rally off the mid-October lows is cognitively preventing us from getting bullish on early cycle stocks up here, we can assure you that our refusal to participate in this market at the current juncture is purely a function of process. Neither sentiment, nor consumption data are supportive of capitulating on the bearish side today. As such, we will continue to patiently wait for an opportunity to buy early-cycle stocks [much] lower in the coming weeks. This call is also supported by our industry “axe” Brian McGough, who thinks the recent strength in consumer stocks is largely a function of misguided bullish sentiment surrounding Black Friday. As alluded to above, however, time is indeed running out for our bearish “early-cycle slowdown” thesis. IT'S GAME TIME, BABY!














***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: Uber Bullish! (11/26)


#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.

Daily Trading Ranges, Refreshed [Unlocked]

This is a complimentary look at Daily Trading Ranges, Hedgeye's proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers every weekday morning by CEO Keith McCullough. It was originally published November 26, 2014. Click here to learn more and subscribe.

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Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

BABA: What the Street is Missing

Takeaway: China’s Elite drives BABA’s GMV. BABA's user growth moving forward will come from a much weaker consumer; a double-edged sword for its GMV.


We hosted a call last week laying out our BEAR case on BABA, and the key metric we're tracking to time the short opportunity (contact us for the deck and replay).  We're going to publish a series of short notes detailing the salient points from the call.  This is the first, and maybe the most important.



  1. CHINA’S ELITE DRIVES BABA’S GMV: Both GMV/Active Buyer (average spend) and its cohort commentary suggest China’s upper class drives its GMV.  After comparing these metrics to China consumer demographic data, there is no other plausible explanation.
  2. GROWTH WILL COME AT A PRICENew BABA consumers will have considerably less funds to spend.  In turn, user growth will pressure BABA’s average GMV; turning what was a growth driver into a headwind, and leading to a sharp deceleration in GMV growth through F2017.  Note that ~85% of BABA’s revenues are linked to its GMV.



The average consumer on BABA’s China Retail sites spends roughly ¥6.5K annually (~USD $1.1K).  In the chart below, you can see the distribution of China’s internet users by income (red columns) and what BABA's average GMV would represent as percentage of their incomes (orange columns).  In short, BABA’s GMV would be a prohibitively large amount for most consumers in China; especially since BABA can’t sell’s everything.   


BABA: What the Street is Missing - BABA   China s Elite

BABA: What the Street is Missing - BABA   Can t Sell Everything


The other thing to consider is BABA’s cohort commentary on its F2Q15 earnings call, which we have pasted below. 


BABA F2Q15 Earnings Call (Maggie Wu): “Let me share with you some color on this average spending per buyer. As I said that the longer customers stay with us, the more they're going to spend annually on our platform. I'll give you an example”

    • “The customer who stayed with us for a year's time, their average annual spending level is somewhere around RMB 1,000
    • “And for the ones who stayed with us for five years' time, their spending level is somewhere around RMB 15,000
    • “And then for the ones who stayed around 10 years, their levels is going to above RMB 30,000


The amounts spent by those on the platform for more than 5 years are just jaw-dropping when you consider the income distribution of China’s internet users.  If we compare these metrics to the first chart above, only 5% to 14% of China's internet population at most could afford to spend ¥15K-¥30K annually; let alone BABA's ¥6.5K average GMV. 



The obvious takeaway is that BABA’s GMV is currently hostage to the whims of its upper class consumers.  What’s more concerning is that GMV growth moving forward will be driven primarily by new consumers with considerably less to spend.  In turn, new user growth will come with disproportionately lower GMV growth since average GMV is facing decline; turning what was a growth driver into a headwind.


We illustrate this dynamic in our China GMV Market Model, which is driven by user growth and e-commerce spending projections (both by income cohort); the former being the more important driver.  As new lower-income consumers join the BABA platform, they will grow in proportion to BABA’s total users; driving down both average income and average spending of its user base. 


BABA: What the Street is Missing - BABA   GMV Model Penetration

BABA: What the Street is Missing - BABA   GMV Model growth


Note that roughly 85% of BABA’s revenues are linked to its GMV, which our model suggests is heading for sharply decelerating growth through F2017. 


We will be publishing a follow-up note with more detail on the impact of our GMV projections on BABA's business model.  In the interim, see link below for broader summary of our bearish thesis, or let us know if you would like to see our BABA deck.



BABA: Leaning Short, But...

10/21/14 07:02 AM EDT



Hesham Shaaban, CFA



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

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Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.