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Client Talking Points


After being burnt another -1.3% last week (-10.1% in the last 6 months), the Euro is making fresh year-to-date lows this morning at $1.22 vs. USD – via #StrongDollar, this is only going to perpetuate the #deflation. Swiss CPI is -0.1% year-over-year for NOV. 


Oil saw no bounce last week (-0.8% WTI week-over-week) and is down another -1.1% this morning to $65.10 with no immediate-term support to $62.21. In energy land, small/mid cap equity and high yield/junk do not like the #deflation risk.


The UST 10YR Yield bounced on the 1st good jobs data in over a month (jobless claims rising), but we think it’s just another head-fake within the UST 10YR’s current 2.16%-2.34% immediate-term risk range; #deflation is going to freak the Fed out. 

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


We're going live with @KeithMcCullough on @HedgeyeTV at 830ET. Watch here:




The only lifelong, reliable motivations are those that come from within, and one of the strongest of those is the joy and pride that grow from knowing that you've just done something as well as you can do it.

-Lloyd Dobens


Japanese Yens burned another -2.3% last week (lost -15.6% of their value in the last 6 months) and the U.S. Dollar Index rose another +1.1% on the week (+11.2% in the last 6 months).

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CHART OF THE DAY: #Quad4 Deflation

CHART OF THE DAY: #Quad4 Deflation - 12.08.14 Chart


Here's a little snapshot of our Q4 Macro Theme #Quad4Deflation: 1) US 5yr Breakevens dropped another -4 basis pts on the wk to 1.36% (crashing -26%, or -47bps, YTD) 2) CRB Commodities Index deflating another -0.8% last week to -9.9% YTD

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.

Party Hard?

“I’m the fellow who takes away the punch bowl just when the party is getting good.”

-William McChesney Martin


Economic #history fans will remember McChesney Martin as the Chairman of the Federal Reserve when central planners didn’t decide the fate of every market day (1). Sadly, Richard Nixon and Arthur Burns changed that by Burning The Buck in 1971.


Today, if you want to light up your country’s currency and party hard, you need a Ph.D. in economic storytelling. Devaluation has plenty of stock market pop, but “the trouble is...” according to Ken Rogoff, “a lot of people have not had any punch yet.”


In contrast, the two aforementioned quotes are what Jim Rickards used to introduce Chapter 10 (pg 243 in The Death of Money) – “Crossroads.” And, oh are we at a crossroad for both growth and inflation expectations, globally, this morning.


Back to the Global Macro Grind


Before I replay what happened last week, here’s what the Japanese just restated (revised lower) about the results of burning their currency – Q3 GDP dropped -1.9% (year-over-year) in 2014. “So”, they definitely need to triple down on that!

Party Hard? - Abenomics cartoon 11.17.2014 

I know, that is so Q3. How about China’s November trade data? Imports dropped -7% year-over-year (from +5% in October, which was a bad number to begin with); exports slowed to +5% NOV vs. +12% in OCT. #TrainWreck = Chinese stocks straight up.


In other central planning news, here’s what the world’s Big 3 (currencies) did last week:


  1. Japanese Yens burned another -2.3% last week and have lost -15.6% of their value in the last 6 months
  2. Europe crashed the Euro another -1.3% wk-over-wk (-10.1% in the last 6 months)
  3. US Dollar Index rose another +1.1% on the week (+11.2% in the last 6 months)


With the exception of a counter-TREND move in US jobs data (the 1st pseudo good rate of change report in months), most of the strength in the US Dollar can be attributed to the currency war (i.e. where the BOJ and ECB burn theirs).


To review, why does an un-elected central planner burn the currency?


A)     In response to #GrowthSlowing and/or

B)      In reaction to #deflation


In Hedgeye-speak (i.e. in Bayesian rate of change terms), when both of these core factors (GROWTH and INFLATION) are slowing, we call that the 4th Quadrant. That’s why our Q4 Macro Theme is called #Quad4 Deflation. That’s where we think the USA is too.


But, but… “it’s different this time” (says the cover of Barron’s, who will be charging 2 & 20 for that investment thesis starting in 2015 due to #deflationary forces in Old Wall media print advertising).


And… at the end of a cycle (66 consecutive months of US economic expansion), the other 2/3 of Americans who have only been punched (negative real wages for the last 5 years) are going to magically get wage growth and a capex cycle…


Roger that.


Simple Global Macro risk manager question: with global #GrowthSlowing and #Quad4 Deflation, how are global capex cycles and wages going to inflate? A: I don’t know.


While the fanfare surrounding Nikkei and “Dow 18,000 Bro” has been fantastic, the following stock markets have not been:


  1. Emerging Markets (MSCI Equity Index) down -1.8% on the week to -1.6% YTD
  2. Latin American Equities (MSCI Index) down another -5.1% week-over-week to -10.8% YTD
  3. Asia ex-Japan (MSCI Index) down -0.9% on the week to +3.7% YTD
  4. Brazil’s stock market -5.0% on the week to +0.9% YTD
  5. Canada’s stock market down -1.8% week-over-week (+6.3% YTD)
  6. Russia’s stock market continued to crash, -6.7% last week to -37% YTD


These stock markets have been undergoing what we call a phase transition in inflation expectations becoming deflationary ones. You can see that in the following real-time read-throughs:


  1. US 5yr Breakevens dropped another -4 basis pts on the wk to 1.36% (crashing -26%, or -47bps, YTD)
  2. West Texas Crude Oil down another -0.8% to -28.6% YTD
  3. CRB Commodities Index deflating another -0.8% last week to -9.9% YTD


Even the strongest commodities in 2014 (Coffee and Cattle) were down -3.9% and -2.6% last week, respectively.


From here, I think the debate really boils down to what’s more important: A) the impact of #deflation on stocks, bonds, and workers who have been compensated (in size) by the last 5 years of inflation expectations, or B) Ph.D. hopes for US wage growth?


Rather than partying hard with the planners, I’ll take B). Yep, call me names – I’m the fellow who doesn’t get paid to navel gaze at the Weimar Nikkei Dow and think that 55x earnings for the Russell 2000 in 2014 wasn’t a #bubble.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.16-2.34%

SPX 2040-2081

RUT 1149-1190

EUR/USD 1.22-1.24

Yen 119.04-121.31

WTI Oil 62.21-69.40


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Party Hard? - 12.08.14 Chart


TODAY’S S&P 500 SET-UP – December 8, 2014

As we look at today's setup for the S&P 500, the range is 41 points or 1.70% downside to 2040 and 0.27% upside to 2081.                                        













  • YIELD CURVE: 1.66 from 1.66
  • VIX closed at 11.82 1 day percent change of -4.52%


MACRO DATA POINTS (Bloomberg Estimates):

  • 10am: Fed Labor Market Conditions Index Change, Nov. (pr 4)
  • 12:30pm: Fed’s Lockhart speaks in Atlanta
  • 11:30am: U.S. to sell $24b 3M bills, $26b 6M bills
  • U.S. Rates Weekly Agenda
  • FX Weekly Agenda



    • President Obama hosts Prince William at White House
    • 9:30am: Supreme Court issues orders on pending cases
    • 11am: House Democrats hold conf. call briefing to discuss Trans-Pacific Partnership negotiations
    • 2pm: Senate Foreign Relations Cmte hearing on authorization for use of military force against Islamic State



  • Merck Said in Talks to Buy Cubist Pharmaceuticals for $7b
  • CBS, Dish Reach Multiyear Content Distribution Agreement
  • McDonald’s Nov. Comp. Sales Seen Falling for 6th Month
  • Banks Urge Big U.S. Clients to Park Deposits Elsewhere: WSJ
  • KKR, CVC Said to Lead Bidding for KFC Mideast Operator Americana
  • Blackstone to Sell California Office Portfolio for $3.5b: WSJ
  • Obama Tested for Sore Throat at Washington Army Hospital
  • United Technologies CEO Left Amid Director Concern on Priorities
  • Temasek to Buy Stake in High-Speed Trader Virtu Financial
  • PetSmart Auction Said to Be Extended to Later This Week: NY Post
  • China Blocks Review of Carbon Pledges Sought by U.S. at UN Talks
  • Madoff Aide Hired in 1960s Will Be First to Learn Prison Fate
  • China Rejects Arbitration of South China Sea Territorial Dispute
  • Hostages Killed in Yemen During Rescue Mission by Special Forces
  • NYC to Sell Public-Housing Stake to Developers: WSJ



    • ABM Industries (ABM) 5pm, $0.57
    • Diamond Foods (DMND) 4:02pm, $0.25
    • H&R Block (HRB) 4:05pm, ($0.42)
    • Photronics (PLAB) 4:30pm, $0.09
    • Triangle Petroleum (TPLM) Bef-mkt, $0.14
    • Vail Resorts (MTN) 8am, ($2.03)



  • Commodity Benchmarks Seen Open to Manipulation, Law Firm Says
  • Oil Slumps to Five-Year Low as OPEC Decision Spurs Forecast Cuts
  • Gold Bulls Return as Wagers on Stimulus Accumulate: Commodities
  • Hedge Funds Betting That OPEC-Led Oil Rout Is Near End: Energy
  • Wheat Falls as Snow Seen Shielding Black Sea, U.S. Sales Slip
  • Copper Drops for Second Day as Chinese Imports Unexpectedly Fall
  • MORE: China Copper-Product Imports Rise to 7-Month High in Nov.
  • Gold Rises for First Time in Three Days After Bullish Bets Climb
  • Kuwait Plans $7 Billion Heavy-Oil Project Amid Cheaper Crude
  • Trafigura Gross Margin Improves After Oil, Metals Volumes Climb
  • Oil Slump Seen Driving M&A as Nordea Bank Monitors Valuations
  • Algeria’s Sonatrach Says Lower Oil Price Won’t Delay Investments
  • U.S. Gulf-Latin America Fuels Cargoes Rise to Record: Weber
  • Rubber Rises Most in 2 Weeks as Yen at 7-Year Low Boosts Appeal


























The Hedgeye Macro Team



















Risky Business

This note was originally published at 8am on November 24, 2014 for Hedgeye subscribers.

“I have long understood that losing always comes with the territory when you wander into the gambling business, just as getting crippled for life is an acceptable risk in the line backer business.  They both are extremely violent sports, and pain is part of the bargain.  Buy the ticket, take the ride.”

-Hunter S. Thompson


The stock market business isn’t nearly as risky as being a NFL linebacker or, at least in some jurisdictions, being involved in the gambling business.  Nonetheless, being a stock market operator does not come without its risks.  Ironically, the most significant risk to being invested in the stock market currently is likely mismanaging the actions of central banks.


The most recent and significant action of course comes from the People’s Bank of China (PBOC) which cut the 1-year deposit rate by 25 basis points and 1-year lending rate by 40 basis points.  This was China’s first interest rate cut since June 2012.  For those that were long Chinese equities, this is a short term positive, but for those that were caught offside, not so much. 


Recent history shows rallies related to Chinese rate cuts have been very, very short lived.  In fact, six of the past seven cuts to interest rates and reserve requirements have been followed by declines in stock prices over the next two months.   Perhaps this is why according to Reuters this morning, “the Chinese leadership and PBoC are ready to cut interest rates again and also loosen lending restriction.”


The longer term challenge with seemingly arbitrary moves in central banking policy is the creation of excesses.  As Professor John Taylor from Stanford wrote in a recent paper, the biggest issue with abnormally dovish policy specifically (read: low rates) is the increased appetite for risk.  According to Taylor:


“Anther effect of extra low policy rates is on risk aversion. Using time series techniques Bekaert, Hoerova, and Duca (2012) found that this effect is empirically significant. They decompose the VIX into a risk aversion component and an uncertainty component. They then look at the cross autocorrelations between policy rates and these two components. Their empirical results show that “Lax monetary policy [below policy rule rates] increases risk appetite (decreases risk aversion) in the future, with the effect lasting for about two years and starting to be significant after five months.” These results provide a reason why a change in monetary policy might actually shift the tradeoff curve in Figure 2 back up—a channel to poor economic performance which is quite different than the risk aversion channel of Elliot and Baily (2009) or King (2012) and with much different policy implications.”


Net-net, non-rules based and extra low policy rate rates may actually have the unintended consequence of increasing risk and eventual economic underperformance.


Risky Business - z. EL 11.24 Mid pic


Back to the Global Macro Grind


This morning’s monetary policy rumor of the day is that the EU is set to announce a new fund this week that will use “financial engineering” in an effort to create at least €300B of additional investment.  The question, of course, is what is the point of more “financial engineering”?   In the chart of the day, we take a look at the yields on 10-year sovereign debt for Spain, Italy and Portugal, that highlights that cost of sovereign capital of all three are down meaningfully year-to-date and over the last three years.


Interestingly, at 2.04% and 2.25% for Spain and Italy respectively, their 10-year yields are both lower than the United States.  Clearly, then,  the government lending market is not the issue, so perhaps a magical €300B in incremental investment in the private sector will be what it takes to lift Europe out of its economic malaise?  Perhaps, and maybe Santa Claus does actually exist!


Speaking of unlikely global macro scenarios, how about the scenario that OPEC finally agrees on production targets and sticks to them?  Currently, according to reports, OPEC is over producing by about 500 – 600K barrels per day over its 30 million barrel per day target.   Already, Libya, Iran, Ecuador, and Venezuela have called on the cartel to cut production, but Saudi Arabia, the key swing producer, has little ability to measure whether other members of the cartel have cut production and the four aforementioned countries are hardly the most transparent.


While OPEC in theory can control supply (although in practice we aren’t so sure), the reality remains that the biggest issue is demand from the world’s largest consumer – the United States.   Currently, the U.S.’s oil imports from OPEC are the lowest they have been in 30 years.   Specifically, in August, OPEC’s share of U.S. oil imports dropped to 40% versus the 1976 peak of 88%.


With Brent Crude down over -27% in the YTD and WTI down over -22%, it is no surprise that OPEC is a bit rattled.  In the long run, this has the potential to be a decent tail wind for the U.S. economy, although in the short run, this quick and decisive move in oil may have some negative derivative impacts.


Currently, the gap between U.S. corporate bonds and Treasuries is at 124 basis points, near the widest level of the year.  Conversely, European corporate spreads are near their tightest levels.   Not surprisingly, the likely culprit is the price of oil as energy bonds are the largest industry grouping in the high yield market domestically.  Speaking of which, if you want any over levered short ideas in the Energy and MLP sector, definitely email us at sales@hedgeye.com, because we have a plethora.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.28-2.38%

SPX 2011-2066

RUT 1153-1188

USD 87.45-88.51

EUR/USD 1.23-1.25

WTI Oil 73.90-78.11


Keep our head up and stick on the ice,


Daryl G. Jones

Director of Research 


Risky Business - 11.24.14 Chart

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%