December 1, 2014

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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

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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


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

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