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#Deflation Trends Continue

Client Talking Points


Expectations continue to rise as prices linked to inflation expectations continue to crash (Russia down another -1.9% this morning to -38.5% year-to-date); the domino risk of deflation from Oil to Energy Stocks and Bonds doesn’t stop there – Policies to Inflate have dominated headlines for half a decade.


Oil crashed clocked in at -42% (from June!) then bounced right off that $62.21 oversold level we gave you yesterday; dynamic and non-linear situation continues with a refreshed risk range of $61.27-68.02/barrel; you’d need to bounce well beyond the top-end of that range to get energy stock/bond bulls back to breakeven.


The trend of accelerating volume on DOWN days continues – yesterday’s Total U.S. Equity Market Volume was +25% and +17% vs. its 1mth and 3mth averages, respectively.

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


RUSSIA: stock market crash continues to be vicious - down another -1.9% today to -38.5% YTD #NoWorries



There is only one way to avoid criticism: do nothing, say  nothing, and be nothing.



68, the number of victories for Green Bay quarterback Aaron Rodgers in his first 100 starts in the NFL.  Rodgers led his team to a 43-37 win over Atlanta last night in his 100th start.

CHART OF THE DAY: Speculator Sentiment Monitor


CHART OF THE DAY: Speculator Sentiment Monitor - el1

Bayesian Answers

“It solved practical questions that were unanswerable by any other means.”

-Sharon Bertsch Mcgrayne


That’s how Sharon Bertsch Mcgrayne summarizes using a Bayesian approach to problem solving in an important book for your risk management library – The Theory That Would Not Die.


Although Bayes’ Rule drew the attention of the greatest statisticians of the 20th century, some of them vilified both the method and its adherents, crushed it, and declared it dead… In discovering its value for science, many supporters underwent a near-religious conversion yet had to conceal their use of Bayes’ Rule and pretend they employed something else.


Sound familiar?


Much like during Bayes’ revolutionary times (18th century), where “mathematics was split along religious and political lines” (pg 4), today we are at the crossroad for the same in economic analysis. If you tell me what someone’s political and/or financial motivation is, I can usually predict their answers. If you’re Bayesian in your approach, your answers are far less certain.




Bayesian Answers - bayesPicture


Back to the Global Macro Grind


We hosted an astute group of RIAs (Registered Investment Advisors) at HedgeyeHQ after the close yesterday where I gave a teach-in on our #process. One of the main examples I like to use is Bayes trying to locate a billiard ball’s location (blindly) on a table…


Each incremental throw gives you more information on where the ball is not. After multiple throws, you can narrow the probability of the ball’s location to a probable range. I call this the Risk Range. And I have no business telling the table where the ball has to be.


What happens if there are multiple competitors at the table, all racing to figure out where the ball is at the same time? That’s what makes a market. Whether you like my competitive style or not, I fully intend on coming out of the room with the ball (read Diary of a Hedge Fund Manager for details!).


If you want to beat your competitors in this game, not only do you need to play your game (read: #process), but you need to understand where the other players at the table are positioned and why. One really simple way to look at this from a consensus hedge fund positioning perspective is through CFTC Non-Commercial net LONG/SHORT futures/options.


I cite the rate of change in this Bayesian information as frequently as I can, but whether I do in a timely fashion or not doesn’t mean that the information ceases to exist. Yesterday’s rip (higher) in the Long Bond (TLT +1.2%) and drop in the SP500 (SPY -0.73%) can be (partly, but importantly) explained by the Consensus Macro’s net positioning as of Friday’s close:


  1. SP500 (Index + Emini) net LONG position ramped +61,389 week-over-week to +59,263 contracts
  2. Long Bond (10yr Treasury) net SHORT position got way shorter (-91,399 contracts) to a net short position of -173,755


In other words, into the “everything is awesome” jobs cheerleading report:


  1. Consensus Macro ramped to the highest NET LONG position (in SP500 futures/options) terms of 2014, and…
  2. They took the NET SHORT position in the Long Bond to a fresh YTD high




“So”, no matter what you think consensus is… that’s what it was - and the next Bayesian probabilities to weigh have everything to do with why consensus is positioned that way. Isolating why on both GROWTH and INFLATION, here are a few A/B tests (toss the ball):


A)     On GROWTH, they must think US growth, employment, wages etc. are fixing to achieve some sort of “escape velocity”…

B)      Or they realize that even if they are wrong on growth… that the Fed, BOJ, and ECB bails them out anyway


While its perverse,  that B) scenario is credible. It’s the levered-long heads you win, tails you win bet – throw the ball anywhere on the table (other than the Russell 2000 and Energy stocks) and you win, right? How about we roll the queue ball on INFLATION?


A)     As #deflation expectations accelerate, consensus must think the Fed is going to raise rates into that? …

B)      Or that consumption growth is going to be so strong that the Fed will dismiss #deflation as a risk and hike anyway


The problem with what we call the #Quad1 scenario: A) US growth accelerating B) on inflation decelerating is that it’s a theory, not yet a reported reality. And that’s the thing about theories – they are for people who are smarter than me that don’t need to keep taking more reps with the uncertainty ball. They just need a survey confirming their pre-determined belief.


What if McDonalds (MCD) reporting a down -4.6% year-over-year same store sales number for November has something to do with the non-Wall Street economy that still has no wage growth? What if the recent Retail Sales, real personal consumption growth, and jobless claims numbers reported by the government are right (they’ve been slowing)?


Well, that will make Friday’s Consensus Macro position in SPY vs TLT wrong… and it might remind some of us that practical questions are unanswerable by any other means than by embracing the uncertainty of each risk management day.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.16-2.32%

SPX 2051-2075

RUT 1148-1175

VIX 12.83-15.56

WTI Oil 61.27-68.02

Copper 2.84-2.93  


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bayesian Answers - el1

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Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

December 9, 2014

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TODAY’S S&P 500 SET-UP – December 9, 2014

As we look at today's setup for the S&P 500, the range is 24 points or 0.45% downside to 2051 and 0.71% upside to 2075.                                             













  • YIELD CURVE: 1.63 from 1.63
  • VIX closed at 14.21 1 day percent change of 20.22%


MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Sm Business Optimism, Nov., est. 96.5 (pr 96.1)
  • 10am: JOLTs Job Openings, Oct. est. 4.795m (prior 4.735m)
  • 10am: Wholesale Inventories, Oct. y/y, est. 0.2% (pr 0.3%)
  • 10am: IBD/TIPP Economic Optimism, Dec., est. 47 (prior 46.4)
  • 11:30am: U.S. to sell $25b 1Y bills, 4W bills
  • 1pm: U.S. to sell $25b 3Y notes
  • 4:30pm: API weekly oil inventories



    • Senate Republicans hold closed-door discussion on whether to return to 60-vote threshold for advancing presidential nominees
    • 8am: Politico, Google, Tory Burch Foundation hold second annual “Women Rule Summit: Upping the Game,” w/ VP Joe Biden, Sens. Susan Collins, R-Maine, Cory Booker, D-N.J., House Minority Leader Nancy Pelosi, D-Calif.
    • 9:30am: Senate Finance Cmte hearing on whether Social Security adequately addresses challenges women face
    • 10am: Supreme Court may issue opinions
    • 10:30am: Senate Judiciary panel hearing on sexual assaults on college campuses
    • 11am: Senate Banking subcmte hearing on inequality, opportunity in housing market
    • 2pm: Sec. of State John Kerry testifies at Senate Foreign Relations Cmte hearing on use of military force against ISIL



  • Repsol Is Said to Revive Talks With Talisman Energy Over Possible Deal
  • SEC Said to Seek Standard & Poor’s Suspension of CMBS Rating
  • Fed ‘Considerable Time’ Rate Pledge Under Scrutiny Ahead of FOMC
  • Sumitomo Mitsui Said to Buy Citigroup Japan Retail Bank
  • Cubist Barred From Blocking Generic Cubicin Beyond 2016
  • JPMorgan Said Among Banks Telling Clients to Take Cash Elsewhere
  • China Spurs Bond Rout as Riskier Debt Removed From Repo Market
  • Big Banks Face U.S. Capital Rule Tougher Than Global Agreement
  • Deutsche Bank Sued by U.S. for Alleged Scheme to Evade Taxes
  • U.S. Spending Plan to be Unveiled Today as Funding Deadline Nears
  • CIA Torture Report Set for Senate Release
  • Valeant to Stop Acquisitions in Near Term: Reuters
  • Lone Star Said to Compete With Springleaf in Bid for Citigroup’s OneMain
  • Obama Proposes Expanding China Solar-Cell Levy to New Suppliers
  • Greek Government Bonds Drop as Presidency Vote Brought Forward



    • Analogic (ALOG) 4:15pm, $0.41
    • AutoZone (AZO) 7am, $7.16
    • Conn’s (CONN) 7am, $0.68
    • HD Supply (HDS) 6am, $0.53
    • Hudson’s Bay (HBC CN) 7am, C$0.06
    • John Wiley (JW/A) 8am, $0.84
    • Krispy Kreme Doughnuts (KKD) 4:05pm, $0.19
    • NCI Building Systems (NCS) 4:05pm, $0.17
    • Transcontinental (TCL/A CN) 8:05am, C$0.74
    • UTi Worldwide (UTIW) 8am, $0.05



  • Crude Rebounds From Five-Year Low Amid Shale-Oil Spending Curbs
  • Iron Ore Outlook Cut by JPMorgan as BHP, Rio Shares Extend Slump
  • Kuwait Sees Oil Stuck at $65 for Six Months Until OPEC Moves
  • Cheap Oil Also Means Cheap Copper, Corn and Sugar: Commodities
  • El Nino-Like Weather Seen by Morgan Stanley in South America
  • Gold Rises a Second Day as Lower Dollar and Equities Spur Demand
  • Iraq Follows Saudis Discounting Oil for Asia to 11-Year Low
  • Nickel Leads Industrial-Metals Declines on China Demand Concern
  • OPEC Early Meeting Seen More Likely by Analysts Amid Price Fall
  • Anglo American Cuts Capex, Sees 2016 Div. Funded From Cashflow
  • New York’s Snow Lovers to Get Stuck With Rain in Storm Pinwheel
  • Wheat Drops on Warmer Black Sea Weather, Slow U.S. Export Demand
  • Bullion Board Seen by Council as Way to Manage India Gold Demand
  • Putin Plan to Ship Gas to Europe Via Turkey Seen as Unrealistic
  • More Beef From Down Under Heading for U.S. Tables as Herd Drops


























The Hedgeye Macro Team



















Burn The Wagons

This note was originally published at 8am on November 25, 2014 for Hedgeye subscribers.

“We should burn what wagons we have, on order that our cattle not be our generals.”



According to ancient Greek #history, that’s what an emerging Athenian leader, Xenophon, told his men they should do as they marched against their Persian King. “Moreover, let us also abandon other superfluous baggage, except what we have for war or for food.” (Xenophon: The Anabasis of Cyrus, pg 108)


Yep. That’s the stuff I am reading these days. If you want to call it my confirmation bias in being bearish against central planning overlords (i.e. that this will not end well), I’m cool with that.


Buying the Long Bond (TLT) is as close as I am going to get to war with US and global growth bulls. And I probably won’t stop riding this bearish growth view, until the US elects to burn the yield chasing wagons – letting rates rise.

Burn The Wagons - growth cartoon 10.08.2014


Back to the Global Macro Grind


In case you didn’t know that one of the only ways out of this centrally planned Liquidity Trap (Total US Equity Market Volume was -29% versus its YTD avg yesterday) is to stop doing what didn’t work, now you know. Or at least the bond market does…


BREAKING (updated growth “survey” from Hedgeye): US 10yr Treasury Yield is ticking down to a fresh November low of 2.29% this morning and the Yield Spread (10yr minus 2yr yield) has compressed towards its 2014 YTD lows of 176 basis points this morning.


These are clean cut #GrowthSlowing signals. But you already know that.


What you also know is that at this stage of the central planning war, equity markets going up really has nothing to do with real-growth anyway. It has everything to do with Japan, Europe, USA, China, etc. trying to resuscitate drowning inflation expectations.


On that real-time score, as you can see in today’s Chart of The Day (US TIPS, 5 year Breakevens), so far… no good.


While the 2 day China rate cut “pop” in everything inflation expectations that’s been dropping was fun to watch, it didn’t change #Quad4 Deflation expectations. Both global growth and inflation expectations are still slowing, at the same time.


Other than one of the Fed’s preferred ways to monitor #deflation expectations (Breakevens), here’s what else I’m looking at:


1. US Dollar Index vs both Burning Yens and Euros = +10% YTD

2. CRB Commodities Index -0.7% yesterday to -4.6% YTD

3. WTI Oil flattish this morning at $76.01, down -17% YTD

4. Copper flat this morning at $3.01/lb, down -10% YTD

5. Russian Stocks (RTSI) -1.2% this morning to -23.3% YTD

6. Energy Stocks (XLE) down (again) -0.8% yesterday to -0.8% YTD


Then, of course, you can look at some late-cycle stuff like US wage Inflation… where 2/3 of the country has seen real wages deflate since the Fed undertook their unprecedented Policy To Inflate (see Federal Reserve’s own papers on the matter for details).


Or you can just find a “survey” that tells you something that has been the complete opposite of the wage deflation and no-capex cycle data. And say that the “market is up” on something like that.


But when you say “market” don’t forget that my preferred risk adjusted market to be long in 2014 (Long Term Treasuries) has had a much higher absolute return on much lower realized volatility than US small/mid cap stocks have.


Even if the July to October +160% ramp in the VIX is forgotten (for now), that doesn’t mean that the non-linear and interconnected economic risks associated with #Deflation Expectations Rising cease to exist.


What also exists as of this week is non-survey computed options positioning in Global Macro (non-commercial CFTC futures and options consensus positioning):


1. SP500 (Index + Emini) has moved to its biggest net LONG position since late SEP at +29,110 contracts

2. Long Bond (10yr Treasury) hit its biggest net SHORT position of 2014 at -128,032 contracts

3. Oil still has a net LONG position of +276,213 contracts, only down -12,971 week-over-week


“So”, what does that tell us?


1. After shorting the OCT lows, hedge funds have covered their shorts and are chasing the bull run in SPY (again)

2. Consensus Macro continues to think the risk in interest rates is to the upside (we reiterate downside!)

3. Perpetual expectations for another central plan (OPEC) remain for a non $65 oil price


Since Consensus Macro is not my expectations general, I say you burn the groupthink wagons and do the exact opposite of where those options are positioned: BUY Long Bond (TLT, EDV, etc.), and SHORT SP500 (SPY), Oil, and its related stocks and bonds.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.28-2.34%

SPX 2018-2072

RUT 1154-1190

EUR/USD 1.23-1.25

Yen 117.03-119.16

WTI Oil 73.04-77.51


Best of luck out there today,



Keith R. McCullough

Chief Executive Officer


Burn The Wagons - 11.25.14 EL Chart

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