TODAY’S S&P 500 SET-UP – November 28, 2014

As we look at today's setup for the S&P 500, the range is 45 points or 1.87% downside to 2034 and 0.30% upside to 2079.                                 













  • YIELD CURVE: 1.70 from 1.73
  • VIX closed at 12.07 1 day percent change of -1.47%


MACRO DATA POINTS (Bloomberg Estimates):

  • No major economic reports scheduled



    • House, Senate not in session
    • No events of note expected



  • OPEC Takes No Action to Ease Supply Glut as Crude Oil Slumps
  • Crude Oil Heads for Biggest Weekly Tumble Since 2011
  • Thanksgiving Deal Hunt Draws Millions Away From Dinner in U.S.
  • Wal-Mart Says >22m Customers Visited Its Stores on Thanksgiving
  • Tokyo Electron, Applied Materials Merger Date Delayed to March
  • Enbridge to Buy 80% of E.On U.S. Wind Portfolio
  • Pfizer, Astra Deal May Have Failed on Tax, Soriot Says: CNBC
  • Euro Inflation Slows to 0.3% as ECB Poised to Discuss Stimulus
  • U.S. Jobs, Services, ECB, BOE, NATO: Week Ahead Nov. 29-Dec. 6
  • U.S. equity markets close at 1pm, bond markets close at 2pm



    • No earnings expected from S&P 500



  • Oil Seen in New Era as OPEC Won’t Yield to U.S. Shale: Energy
  • Oil Steadies After OPEC Triggers Biggest Slump in Three Years
  • Iron on ‘Fast Forward’ as Goldman Sees Risk of Price Outlook Cut
  • Commodities Slump to Five-Year Low as Crude Oil Drops on OPEC
  • OPEC Inaction Signals Pain for Refiners With Costly Oil in Tanks
  • Iron Ore Climbs 1.9% to $71.32/Dry Ton, Highest Since Nov. 18
  • Oil Price Drop After OPEC Decision Is ‘Terrible’: Iraq Minister
  • Platinum, Palladium Price Fixings Make Way for Electronic System
  • CARBON: EU Benchmark Allowances Head for Biggest Gain Since June
  • Indonesia’s ‘Toothless’ Policy for Biofuel Seen Hurting Palm Oil
  • Copper Traders Are Bullish on Expectation Stimulus to Aid Demand
  • Wheat in France at Risk of Yellow Rust Outbreak in 2015: Arvalis
  • Palm Drops to One-Month Low as Crude Slump Curbs Biofuel Demand
  • China Said to Order Companies to Check Risks in Commodity Trades


























The Hedgeye Macro Team
















November 28, 2014

November 28, 2014 - HE DTR 11 28 14

Ignore This Chart (At Your Peril)

Editor's note: This is an excerpt from Hedgeye research. For more information on how you can become a subscriber to America's fastest growing independent research firm click here.


* * * * * * * 

Ignore the chart below at your own peril.


U.S. Jobless Claims always bottom below 300,000. That marks the beginning of the end (before the beginning of a recession). Then they ramp higher.


Just something to keep in mind as the number of people seeking unemployment benefits jumped last week to 313,000. This pushed total applications above 300,000 for the first time in nearly three months.


Ignore This Chart (At Your Peril) - jobless claims chart

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CHART OF THE DAY: PCE Growth vs. Disposable Personal Income Growth & Change in Savings Rate

CHART OF THE DAY: PCE Growth vs. Disposable Personal Income Growth & Change in Savings Rate - EL Chart2


As the 3-D scatterplot below shows, the multiple regression between Disposable Personal Income growth and the change in the Savings Rate (independent variables) vs. the change in Consumer Spending (dependent variable) has an R-square of 0.95 across decades of data. More simply, growth in Disposable Income and the change in the Savings Rate explains ~95% of the change in aggregate household spending.

As we distilled it in our institutional note on Friday:


If ya don’t have it (no savings), ya ain’t gettin it (wages), and ya ain’t borrowing it (credit)…ya can’t spend it (PCE).

Macro Tryptophan

“I wish you [turkey] didn’t have to die, but a bunch of white people put on sweaters.”

- Peter Griffin, Family Guy


Tryptophan – the amino acid in turkey responsible for the Thanksgiving post-gluttony coma - has to cross over the blood brain barrier in order to elicit its stuporous effects. And it can only do that in the presence of sufficient amounts of insulin/carbohydrates.


Without digressing into the underlying (paradoxical) physiological mechanics, the relevant peri-Thanksgiving takeaway is that if you only eat turkey & no carbs alongside it, you won’t get tired.


You can weigh the psycho-social cost-benefit of that biochemical reality for yourself as you ferret through the leftover’s fridge.


Back to the Global Macro Grind….


To attempt to crosswalk that holiday anecdote over the relevancy barrier to the investment space, the tryptophan paradox could be viewed similarly to the de-couplers fallacy.


Sure, you could go to Thanksgiving dinner and just eat some turkey and nothing else, but I’d probably only make that bet…with someone else’s stomach.


The U.S. could ramp into full, escape velocity de-coupling mode while the balance of the global economy harmoniously converges to a state of disinflation and decelerating growth but, right here, we’d probably only get long that improbability via high-beta, early cycle exposure…with someone else’s money.


The first chart of the day below is our global macro summary table which consolidates global estimate trends for growth and inflation.


I know you can’t really see the table detail but that’s not really necessary here - one need only observe the ubiquitous red, which represents negative growth and inflation estimate revisions, to see the global transition to Quad 4 manifesting in real-time.


Oil’s expedited descent to sub-$70 and the massive underperformance in the XLE are acute examples of the stuporous deflationary realities of Quad #4 as the duo of disinflation and decelerating growth remains the scourge of energy assets and inflationary leverage.


Macro Tryptophan  - EL chart1


Given the pervasive, negative revision trends and the re-crescendo of the currency wars and central bank interventionism, both the market and policy makers are discretely acknowledging the deceleration in growth.


Extending the logic chain, an investor overweight and long of high growth (global) equities would then seem to fall into two broad categories:


Wrong: in terms of a fundamental forecast (why would one be levered long into slowing growth?)

Having & Eating Cake: Long under the premise that if growth accelerates you’ll be along for the ride and if it slows equities will (again) get juiced by a global “central bank put”


Given the frequency and magnitude of policy intervention over the last 5+ years and the near-Pavlovian, positive response in market prices, copping to strategy number 2 is somewhat defensible as it amounts to “playing the game that’s in front of you” and not the one you think you should be playing.


The binary nature and exogenous dependency (i.e. the fulcrum thesis driver being completely external to economic or company fundamentals) of that strategy, however, kind of divorces it from true “investing” in an organic sense. It’s also akin to Nassim Taleb’s Turkey problem.


To review Taleb’s popular probability parable:


“Consider a turkey that is fed every day. Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race…On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief.”


It doesn’t take a lot of imagination to extend that metaphor to the equity market farm and envisage who’s the turkey and who’s the farmer.


Anyhow, getting back to the domestic decoupling…..


Inclusive of the crush of pre-holiday data on Wednesday, decelerating growth appears to be the emergent main course for 4Q.


Initial Claims deteriorated for a 3rd week. Peak improvement in claims has been a consistently solid lead indicator of the economic cycle. Are we pushing past peak?

Durable and Capital Goods spending softened (again). We expect the ISM/mfg data to soften alongside declining export demand, shifting seasonals, and middling domestic capex

Household Spending and Income saw tens of billions of dollars of income and savings revised away.


To delve into the last point a bit deeper.


Estimates for personal income were revised for the April-to-September period and the adjustments were remarkable as total disposable personal income saw some $200+ billion (SAAR) shaved away vs. prior estimates.


Alongside a meaningful downward revision to the savings rate in recent months, a net effect of the revision was a complete shift in the trajectory of salary and wage growth.


Whereas, prior to revision, the slope of aggregate wage growth in 2Q/3Q was one of acceleration, after the revision, it shifts to one of flat-to-modest deceleration.


Specifically, private sector salaries and wages were initially reported to be growing +6.1%, +6.0%, +5.9% over the July-to-September period. With the revision, those growth rates were marked down to +5.0%, +4.9%, +4.9%, respectively.


So, prior to revision, wage income was accelerating to a new cycle high alongside higher highs in savings. Thus, the capacity for incremental consumption growth continued to improve even if increased savings was muting the translation to actual spending growth.


The step function revision lower in both wage growth and the savings rate constrain the upside for consumption growth relative to that prior to the revision.


As the 3-D scatterplot below shows, the multiple regression between Disposable Personal Income growth and the change in the Savings Rate (independent variables) vs. the change in Consumer Spending (dependent variable) has an R-square of 0.95 across decades of data. More simply, growth in Disposable Income and the change in the Savings Rate explains ~95% of the change in aggregate household spending.


As we distilled it in our institutional note on Friday:


If ya don’t have it (no savings), ya ain’t gettin it (wages), and ya ain’t borrowing it (credit)…ya can’t spend it (PCE).


Macro forecasting can be complex and confounding but, every once in a while, it’s worth re-remembering that the strength and prospects for an economy boil down to some simple and very common sense realities.


To close the holiday Friday with some meditative macro invocation,


Grant me the serenity to accept a global entre into Quad #4.

The insight to understand the lagged benefit of lower energy prices.

And the wisdom to know (& time) the difference.


Christian B. Drake

U.S. Macro Analyst


Macro Tryptophan  - EL Chart2

Bad #Deflation

This note was originally published at 8am on November 14, 2014 for Hedgeye subscribers.

“The world wants to deflate while governments want to inflate.”

-Jim Rickards


Now if that isn’t one of the best quotes of the year, I don’t know what is. It’s another way of saying that, since the enemy of government debt is deflation, they’ll do anything to try to arrest economic gravity – so will Wall Street consensus.


To their credit, if only because they’re going #Gruber (Google the video) on The People and preying on their economic and market ignorance, at least government Policies To Inflate are implicit at this stage of the game.


Wall Street strategists, on the other hand, are bullish on “stocks” during both #InflationAccelerating and deflation. Yep, $100-150 Oil was no problemo muchachos…  But $70? Ah, that’s why they’ve been bullish on the “economy” all along!

Bad #Deflation - Deflation cartoon 10.02.2014


Back to the Global Macro Grind


Obviously times, technologies, and mostly everything other than the Old Wall have changed. But the very basic difference between what I’ll call good vs. bad #deflation has not.


Here’s the difference:


  1. Good #Deflation = #StrongDollar + #RatesRising (signal that real, inflation adjusted US growth is accelerating)
  2. Bad #Deflation = #StrongDollar + #RatesCrashing (signal that both US and Global growth are slowing)


And trust me, I know who is out there making the call that I made on #StrongDollar, Strong America (after I did in Q4 2012). He’s the same guy who got run-over by late-cycle #InflationAccelerating from JAN-JUN 2014, and missed both early-cycle US #ConsumerSlowing and #HousingSlowdown in 2014 too. But this isn’t about me versus him. This is about understanding:


A)     The difference between good and bad growth expectations

B)      How to express those very different scenarios in terms of stocks versus bonds

C)      How to pick the right sectors of the stock and bond markets that reflect economic reality


Good vs. Bad, Stocks vs. Bonds?


Yes. Top down, the difference in your asset allocation should have been polar opposite in 2013 and 2014:


  1. Good #Deflation = I said Short the Long Bond, Buy The Russell (80% of its revenues come from USA)
  2. Bad #Deflation = I said Buy the Long Bond (TLT), Short the Russell (until growth expectations reset)




And to be clear, only after you have the Bad #Deflation play out in all of its manifestations (down High Yield Energy Bonds, down upstream MLP Energy Stocks, etc.) will you have the catalyst to get long the Good #Deflation.


Put another way, if and when markets price in what the Long Bond and Russell 2000 have been pricing in all year (like they did in early October), you get to buy your favorite early-cycle consumption stocks, lower.


How some of these guys go from having not called for an early cycle slowdown to calling for an economic recovery (from the consumer spending and US housing slowdown) is above my pay grade, but who really cares. Macro markets are going to do what they are going to do, on their own time.


In the meantime, we want you to stay with the #Quad4 deflation playbook:


  1. Long the Long Bond (TLT, EDV, etc.), Munis (MUB), and Cash
  2. Long Healthcare (XLV), Consumer Staples (XLP), and REITS (VNQ)
  3. Short the Russell 2000 (IWM) and Oil & Gas E&Ps (XOP)
  4. Short France (EWQ), Russia (RSX) and Emerging Markets


The US economy won’t recover until government Policies To Inflates are reversed (#RatesRising, not crashing). That is not what the Old Wall wants. But I called my top contact (God) this morning (smart guy)… and he said he still wants economic cycles and gravity to exist.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.30-2.40%

SPX 2011-2049

RUT 1138-1187

VIX 12.16-16.21

Yen 114.87-116.51

WTI Oil 73.89-77.31


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bad #Deflation - 11.14.14 Chart

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