Oil, Russia and Italy

Client Talking Points


If consensus didn’t have inflation expectations (instead of #quad4 deflation), oil wouldn’t be moving like this; with the refreshed risk range of $63.86-71.12, realize that a lot of bad things happen to levered equities (MLPs) and high yield debt, even if this crash in oil “bounces” back to the top-end of my range.


Ruble down 6% since Friday (-40% year-to-date) making this the biggest FX crash since 1998 (global macro market #Intereconnectedness mattered then, and it should now) – Russian stocks -3.4% to -32.1% year-to-date.


Amidst a broad base of slowing global economic data this morning (Japanese Auto Sales -13.5% year-over-year for NOV!), Italy reminds ECB President Mario Draghi that he has not been able to ban recessions; Italy Q3 GDP -0.5% year-over-year and the Italian stock market -1.3% remains bearish TREND despite huge QE expectations going into ECB on Thursday.

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


Bulls will point to Cyber Monday as saving grace to poor brick&mortar sales. They'd better be right. No room for error at these valuations.



Only those who dare to fail greatly can ever achieve greatly.

-Robert. F. Kennedy


CRB Commodities Index had a -5.5% weekly loss to -9.2% year-to-date and Silver moved into crash mode, dropping -5.5% on the week to -20.4% year-to-date.

CHART OF THE DAY: Slide #53 from Our Q4 Macro Themes Deck


CHART OF THE DAY: Slide #53 from Our Q4 Macro Themes Deck - chart1

Deflation's Nemesis

“Deflation is every central bank’s nemesis…”

-James G. Rickards


After a wonderful Thanksgiving weekend, I know that’s what some of you are thinking about this morning – some deflation of that inflating waist-line. I sure am! Everything related to a perpetual inflation expectation of commodity prices is too.


The aforementioned quote from Jim Rickards has critical follow on thoughts to consider about #deflation: “… because it is difficult to reverse, impossible to tax, and makes sovereign debt unpayable by increasing the value of real debt.” (The Death of Money, pg 214)


Think about that from a levered upstream-Energy MLP’s perspective (Linn Energy, LINE), and you’ll get the risk management point. Deflating the oil price is difficult to reverse, impossible to “dividend”, and makes the value of their financial leverage a major concern.

Deflation's Nemesis - Deflation cartoon 10.02.2014


Back to the Global Macro Grind


With MLP’s (Master Limited Partnerships) down -3.4% on the week (Alerian MLP ETF), the #OldWall will yawn, and say something like “it’s already priced in” and it “outperformed”, uh, Russia (RSX), last week.


Roger that.


And the biggest currency crisis since 1998 (Russian Rubles -6% since Friday’s close, crashing -40% YTD) and its interconnected crashing of the Russian stock market (down another -3.4% this morning after dropping -8% last week to -32.5% YTD) is #NoWorries too…


Admittedly, the perma-bull case for global growth and inflation expectations is getting more entertaining at this point. The worse real-economic data and #deflationary realities get, the higher the Weimar Nikkei goes! (Japanese auto sales -13.5% y/y in NOV)


Away from the “Dow” being +0.1% last week, there was a lot of money to be made on the bear side of it all:


  1. West Texas Crude Oil continued to crash, -13.5% on the week to -28.1% YTD
  2. Energy Stocks (XLE) dropped -9.8% on the week to -9.8% YTD
  3. Basic Materials (XLB) deflated -3.0% on the week to +6.4% YTD
  4. Greek stocks (Athens Index) lost another -3.1% to -17.2% YTD
  5. CRB Commodities Index got tattooed for a -5.5% weekly loss to -9.2% YTD
  6. Silver moved into crash mode, dropping -5.5% on the week to -20.4% YTD


I know. No one has any exposure to any of this. Diversified 401ks have an 80% allocation to SPY and 20% to Apple (AAPL).


On the bullish side of wacky wide asset class performance #divergences last week:


  1. Consumer Discretionary (XLY) stocks, mean reverted to the upside, and led gainers +2.5% to +7.5% YTD
  2. Consumer Staples (XLP) stocks continued their fantastic year, +1.8% on the week to +14.7% YTD
  3. Oh, and our #fav Macro Long for 2015 (Long Bonds) ripped to fresh 6 week highs, in TLT, EDV, etc. terms


As you can see in the Chart of The Day (slide 53 of our Q4 Macro Themes Deck) we have Consumer Staples (XLP) and the Long Bond (TLT) on the long side and nothing on the short side of Consumer Discretionary, so we were cool with that.


After $107 oil not being a headwind to their thesis in Q2, the perma-bull thesis drift expectation has quickly moved to “Oil Down is good for the consumer” and we get that (so we’re not short XLY), but that doesn’t mean the bull thesis is going to play out.


BREAKING: “Black Friday Fizzles – Retail Sales Down -11%” –Bloomberg


Spending tumbled an estimated 11 percent over the weekend, the Washington-based National Retail Federation said yesterday. And more than 6 million shoppers who had been expected to hit stores never showed up.”


In what seems like a rarity these days, Bloomberg is running something bearish as their #1 US “Economy” story today (mid-terms are over). But is it true? How can it be? I thought the all-time high in cost of living in America for 2014 was going to vanish instantaneously?


What if it doesn’t?


And what happens when the nasty side of commodity #deflation results in ramping job losses in two of the best hiring States in the last year (Texas and North Dakota). Is that why US jobless claims have been accelerating for 3 straight weeks alongside crashing oil?


Or is that why the Russell #Bubble (Russell 2000) has been literally FLAT, for 4 consecutive weeks? Pardon? I thought Bloomberg/CNBC was saying “stocks are up, everything is fine”? Here are the last 4 weekly closing prints for the Russell:


  1. 1173
  2. 1173
  3. 1172
  4. 1173


Big time bull market there, for the “folks.”


We’re going to have to see some bigger time reversals in both jobless claims and consumer spending in the next 4 weeks to reverse what bond yields (10yr crashing -28% YTD to 2.16%) have been to Russell “growth” investors all year long – their storytelling nemesis.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.16-2.28%

SPX 2038-2090

RUT 1153-1190

VIX 11.98-15.53

Yen 116.45-119.12
WTI Oil 63.86-71.12

Copper 2.80-2.98


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Deflation's Nemesis - chart1

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.


TODAY’S S&P 500 SET-UP – December 1, 2014

As we look at today's setup for the S&P 500, the range is 52 points or 1.43% downside to 2038 and 1.09% upside to 2090.                                                    













  • YIELD CURVE: 1.69 from 1.70
  • VIX closed at 13.33 1 day percent change of 10.44%


MACRO DATA POINTS (Bloomberg Estimates):

  • 9:45am: Markit US Mfg PMI, Nov. final, est. 55 (prior 54.7)
  • 10am: ISM Manufacturing, Nov., est. 58.0 (prior 59)
  • 11:30am: U.S. to sell $24b 3M, $26b 6M bills
  • 12:15pm: Fed’s Dudley speaks in New York
  • 1pm: Fed’s Fischer speaks in New York



    • Takata deadline to respond to 36 questions from NHTSA as part of air-bag investigation
    • 9:30am: Supreme Court issues orders on pending cases
    • 11am: Supreme Court hears arguments in free-speech case over threats made on social media



  • China Factory Gauge Drops as Shutdowns Add to Slowdown
  • Moody’s Japan Credit Rating Cut Is Blow to Abe Before Vote
  • Black Friday Fizzles With Consumers as Sales Tumble 11%
  • Black Friday Online Sales Jump 22% as Jobs, Gas Spur Shopping
  • Gold Tumbles on Swiss ‘No’ Vote; Silver Sinks to 5-Year Low
  • Vodafone Said to Weigh Liberty Tie-Up as CEO Plots Next Move
  • Alibaba-Backed Momo Seeks Up to $232m in IPO of Chat App
  • Wanda in Talks to Acquire Lions Gate, MGM in Hollywood Push
  • U.S. Fast-Food Workers Fighting for Higher Wages Plan to Strike
  • Wells Fargo Accused of Chicagoland Predatory Loans in Suit
  • Daimler to Invest EU12b-EU14b in Electric Cars: Welt am Sonntag
  • Zell Confirms Bid for Grocery Stores to Be Shed by Albertsons
  • ‘Hunger Games’ Installment Collects $56.9m at Box Office
  • Brad Pitt Movie Is Piracy Hit After Sony Studio Cyberattack
  • Macau’s Nov. Casino Revenue Falls for Sixth Straight Month
  • German Manufacturing Slump Pulls Euro Area Near Stagnation



    • Fifth Street Finance (FSC) 7am, $0.26
    • Thor Industries (THO) 4:15pm, $0.82



  • OPEC Inaction Spurs Survival of Fittest as Oil Tumbles Below $65
  • Gold Advances With Silver as Traders Close Out Bearish Bets
  • Commodities Retreat to Five-Year Low as Oil Tumbles With Copper
  • Japan Dairies Losing Cost Battle as Abe Weakens Yen: Commodities
  • Swiss Gold Rejection Deals Blow to Investors Hurt by Slump
  • Surprise End to Indian Gold-Import Controls Seen Boosting Demand
  • Steel Rebar Declines on Weak Winter Demand, Higher Mill Output
  • Glencore, Merafe Sign Union Agreement to End Ferrochrome Strike
  • Iran Wary of Oil ‘Shock Therapy’ as OPEC Vies for Market
  • China Winning in OPEC Price War as Hoarding Accelerates: Energy
  • Miners ‘Covering Their Eyes’ as China Commodity Cliff Looms
  • Soybeans Extend Weekly Drop as Rains Boost South Amercian Crop
  • Amplats Sees 2014 Profit Down at Least 20% on Strike
  • Gold ETF Volatility Soars as Dollar, Oil Tame Inflation: Options

























The Hedgeye Macro Team
















The Perfect Idea

This note was originally published at 8am on November 17, 2014 for Hedgeye subscribers.

“The idea, the perfect idea, is to keep moving.”



The more #history I read, the more I like Ike; especially the Ike (Dwight D. Eisenhower) that was on the ground alongside his men, serving as the 1st Supreme Allied Commander of Europe during WWII.


The aforementioned quote comes from page 273 of The Guns At Last Light above a picture of American soldiers wading “from a landing craft toward Omaha Beach” #1944. Oh how our collective expectations in life have changed since then.


I thank God every day for the opportunities I’ve been provided. While my “highest conviction” ideas reside in this fish bowl, The Perfect Idea is for me to have two feet on the floor at the top of the risk management morning, and to keep moving.


The Perfect Idea - dwight


Back to the Global Macro Grind


While risk often moves slowly, then all at once… sometimes it doesn’t move at all. Last week, our least preferred of the major US stock market indices (Russell 2000) did absolutely nothing.


Oh, and it was unchanged in the week before that too. I guess that’s what they call a “bull market” - something that doesn’t go down! After going down hard (-15% from its all-time #bubble high in July, to its October low), the Russell is +0.9% YTD.


“So”, keep selling that (IWM) against The Perfect Idea during what we call #Quad4 Deflation = Long the Long Bond (in TLT, EDV, etc.). And de-stress yourself a little as the macro market stresses about both growth and inflation slowing.


Dow navel gazers saw it “up” +0.3% last week – but here were the rest of the world’s #deflation signals:


  1. Japanese Yen burnt for another -1.4% devaluation (-9.4% YTD vs USD)
  2. Commodities (CRB Index) deflated another -1.4% week-over-week to -4.8% YTD
  3. Oil (WTI crude) continued to crash, down another -3.4% on the wk to -18.1% YTD
  4. Natural Gas dropped -7.8% week-over-week (sans le Polar Vortex) to -5.7% YTD
  5. Energy Stocks (XLE) led US stock market sector losers, -1.8% on the wk to -2.6% YTD
  6. Russian Stocks (RSX) continued to crash, -0.7% to -30.7% YTD


I know, this is cherry picking – or something like that (like quoting the Dow isn’t!), but if you broaden your horizons and look beyond an epic currency devaluation and energy-deflation linked stock and bond exposures, here’s what else was going on:


  1. Greek stocks continued to crash, down another -2.2% on the wk to -23.4% YTD
  2. Brazil’s major stock market index (Bovespa) got tagged for another -2.7% weekly loss (+0.5% YTD)
  3. Mexico’s stock market dropped -2.8% week-over-week to +1.5% YTD


Yes, the “no worries” CNBC narrative gets more worrisome when you consider what the Bank of England’s chief, Mark Carney, called “huge disinflationary pressures” (code words for #deflation) this morning.


That comment came on the heels of Japan’s stock market dropping -3% overnight (after the Yen stopped going down) as Japan “unexpectedly falls into recession.” Unexpected by some Bloomberg beat writer maybe - #expected by anyone paying attention.


While it may feel a little odd buying into a central plan that promises more of what has not worked economically (they call it Abenomics), if you did that last week, you #crushed it –amidst the global #deflation in stock prices, the Nikkei was +3.6% #hooray.


Which brings us to this morning’s Consensus Macro positioning (non-commercial CFTC futures and options contracts):


  1. Japanes Yen’s net short position got -12,042 shorter last week to -85,768 NET SHORT
  2. SP500 (Index + Emini) NET SHORT position got cut by +36,543 contracts to almost neutral at -1,762
  3. UST 10yr Treasury NET SHORT position ramped by another -86,212 contracts to -126,213 shorts!


In other words, Consensus Macro (which has had both global growth and bond yields wrong for all of 2014) figured the Japanese Yen was going to go down every day, US stocks higher (every day), and the Long Bond down (bond yields up)…


In other news, the exact opposite is happening this morning. Which makes being NET LONG the long-end of the Treasury market and NET SHORT the Russell 2000 feel like the perfect contrarian idea to start off your week.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.28-2.36%

SPX 1995-2050

RUT 1148-1187

Italy MIB 18601-19088

Yen 113.58-116.51
WTI Oil 74.35-77.25


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


The Perfect Idea - 11.17.14 Chart

Investing Ideas Newsletter

Takeaway: Current Investing Ideas: EDV, HCA, MUB, RH, TLT and XLP.

Below are Hedgeye analysts’ latest updates on our six current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.


*We also feature a special market commentary from Hedgeye managing director Moshe Silver.


Our team is grateful for your continued business and trust and wish you and yours a Happy Thanksgiving weekend!

Investing Ideas Newsletter      - InvestingIdeas11.28 

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less


Investing Ideas Newsletter      - Dollar cartoon 11.25.2014

Sure... when you compare the Dollar to its peers in this global #CurrencyBurning gong show, the greenback looks pretty good.




Slow-Growth, Yield-Chasing Update: More of the Same 


In last week’s Investing Ideas update, we highlighted how trends across the preponderance of domestic high-frequency economic indicators were supportive of our view that both growth and inflation are slowing.


Along those lines, the preponderance of this week’s economic data was more of the same in that regard (i.e. slowing at the margins). Here are those key releases (in order of release date/time):


  • Chicago Fed National Activity Index: 0.14 in OCT, down from 0.29 in SEP, which was revised down from an initial reading of 0.47
  • Markit Services PMI: 56.3 in NOV, down from 57.1 in OCT
  • Markit Composite PMI: 56.1 in NOV, down from 57.2 in OCT
  • Real GDP: revised up +10bps to +2.4% YoY in 3Q , which was still down from +2.6% YoY in 2Q
  • Case-Shiller Home Price Index: +4.9% YoY in SEP, down from +5.6% YoY in AUG
  • FHFA House Price Index: +4.2% YoY, down from +4.8% YoY in AUG
  • Conference Board Consumer Confidence Index: 88.7 in NOV, down from a downwardly-revised 94.1 in OCT
  • MBA Mortgage Purchase Applications: -4.3% WoW, down from +4.9% WoW in the prior week
  • Initial Jobless Claims: +313k WoW, up from an upwardly revised +292k WoW in the prior week; on a 4-week rolling NSA basis, the YoY rate of improvement (which implies the 1st derivative is negative) decelerated for the 5th consecutive week to -12.7%
  • Core Durable Goods (ex-Defense & ex-Aircraft): +5.8% YoY in OCT, down from 6.8% YoY in SEP
  • Core Capital Goods (ex-Defense & ex-Aircraft): +8.2% YoY in OCT, up slightly from +8.1% YoY in SEP
  • Real PCE: +2.2% YoY in OCT, down slightly from +2.3% YoY in SEP
  • University of Michigan Consumer Confidence: 88.8 in NOV, down from a preliminary NOV reading of 89.4
  • Pending Home Sales: +2.2% YoY in OCT, down from an upwardly revised +3.4% YoY in SEP
  • New Home Sales: +1.8% YoY in OCT, down from +14% YoY in SEP


Got #GrowthSlowing?


We know why most investors like surveys such as the [regional] Philly Fed Business Outlook or, worse, an “independent” research provider’s proprietary (READ: fabricated) assessment – they’re almost always bullish and they don’t require any work to interpret (i.e. no rate-of-change calculus, trend amalgamation, etc.)!


From our perspective, however, being lazy about the economic cycle at the all-time highs in the stock market seems like a risky proposition. We don’t get paid to be lazy and neither do you.


But, again, what the heck do we know? We’re just the guys that told you to Sell ‘Em in early-2008 and early-2011 too.


All told, long-term Treasury bond yields should continue to fall. And as rates fall, we want you to remain long of the long bond and defensive large-cap equities that resemble the long bond.


We spoke to HCA earlier this week and came away feeling good with our long position.  We noted with interest a new slide in their recent presentation at CSFB (see below).   We’re happy to see HCA using “macro” to talk to their buisness trends.  Better still, the company said they were getting good interest from the buyside, which is more than we get. 


Investing Ideas Newsletter      - HCA macro


We did notice that some of the items included on HCA’s macro slide are not particularly helpful in understanding the short or intermediate term modeling, and others are interrelated.  HCA’s list may be helpful thinking longer term, but for the short term, our new huckleberry is the Job Openings and Labor Turnover Survey (JOLTS) for healthcare openings (chart below).  We’ll include the series when we publish our Hospital Monitor next week with the Labor report.


Investing Ideas Newsletter      - jolts vs HCA 

Bottom line? After speaking to HCA, our takeaway is that 1.5% volume and 3.5% price (still) doesn’t feel like a stretch. If true, HCA shares can and should move higher from here.


Hedgeye retail sector head Brian McGough has no update on Restoration Hardware this week.

* * * * * * * * * * 

Black Friday Special

The markets are clearly in the hands of the Bulls.  The Bullish / Bearish sentiment indicator continues to track at all-time bullish levels – leading us to wonder who will buy their stock when they all turn bearish – and markets are fully cooperating with the spirit of the season.  It’s All-Time Highs, all the time!


Here are a few key metrics:


Employment: Market boosters are pounding gleefully away at the comparative strength in the employment numbers, which remain the best in many years.  While remaining well below levels in recent years, seasonally-adjusted unemployment claims rose this week, making it three weeks in a row of erosion.  And non-seasonally-adjusted claims numbers continue to improve, but the 4-week rolling average has slowed for the fifth straight week, and the rate of improvement has slowed to revert to its underlying trend.  Simple math indicates that phenomena almost always Revert to the Mean; experience teaches that what goes up will almost certainly come down.  Today the rate of improvement is no longer improving.  Tomorrow, that rate will likely dip below the mean.  That’s what “mean” means (note to Janet Yellen.)


Also note that unemployment figures are being compared to relatively higher than average levels.  Yes, they are lower than they were last year, but this is an easy comparison.  Meanwhile the marginal slowing of the rate of improvement indicates that the car of the US economy is slowly running out of gas.


Unemployment is a lagging indicator; by the time unemployment figures reach alarming levels, the damage in the economy has already been done.  Hedgeye looks at the rate of change in the current comparisons, and that rate of change is slipping.  Positive, but less positive than it has been. 


Income & Spending: Hedgeye Macro analyst Christian Drake calls it “the great vanishing income growth of October 2014.”  Estimates for personal income were revised for the April-to-September period with total disposable personal income shaved by some $200+ billion (SAAR) 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 private sector wage growth in 2Q/3Q was one of acceleration, after the revision, it shifts to one of flat-to-modest deceleration.


The Bureau of Economic Analysis releases these figures on a two-month lag, still longer after the CPI is calculated.  But the Fed treats consumer income and spending as a coincident indicator, meaning they make policy based on the assumption that this represents current reality.  In case you haven’t noticed, a lot can change in the economy in two months.


A second month of soft Durable and Capital Goods spending in October is signaling an inauspicious start for domestic consumerism in 4Q and is heralding a likely moderation in consumer credit growth as well. Positive, but decelerating, income growth, goods consumption and credit growth  is not an escape-velocity factor cocktail. Hedgeye’s focus is this deceleration at the margin.  A negative change in the rate of change.  


Reliance on simple comparisons, whether in data points or in current rates of change, perpetuates a bullish narrative.  But under the hood, the trend is in clear risk of going away.


A bubble is a self-contained pocket of air.  A market bubble is a self-perpetuating pocket of high prices with no solid foundation.  Look no further than the weakness in volume on up days in the averages for lack of conviction behind these record highs.


Markets can’t defy gravity forever.  In time, erosion in the rates of change of key indicators will turn into actual changes in key data points. Then they’ll get it and the market gurus will be calling out negative reads in key indicators.


Position yourself early.  You never know how many shopping days are left until the next major correction.


It’s awful to have to say We Told You So.  It’s worse to have to say that we knew, and we didn’t tell you.


Happy Thanksgiving.


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.