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Takeaway: We're hosting a quick call today to hit on our thoughts on key drivers headed into tomorrow's print, and will take questions accordingly.

We're hosting a FLASH Call on RH today at 11am ET. Details are below. 

We'll be reviewing our thoughts in advance of Wednesday's print, as well as hitting on the questions we're getting on the event.  


This will be a quick call – with 5-10 minutes of prepared remarks, and then 15 minutes of Q&A.  We’re encouraging people to send questions in advance to , though obviously feel free to send them real-time during the call. As always, all questions will be kept anonymous.  


Dialing Instructions

Time: 11am ET

Toll Free Number:

Toll Number:

Conference ID/Password:  13597516

Materials: CLICK HERE


Takeaway: In today's edition of the Macro Playbook, we show how the U.S. equity market is not yet pricing in a transition out of #Quad4.


Long Ideas/Overweight Recommendations

  1. iShares National AMT-Free Muni Bond ETF (MUB)
  2. Consumer Staples Select Sector SPDR Fund (XLP)
  3. iShares 20+ Year Treasury Bond ETF (TLT)
  4. Vanguard Extended Duration Treasury ETF (EDV)
  5. Health Care Select Sector SPDR Fund (XLV)

Short Ideas/Underweight Recommendations

  1. SPDR S&P Regional Banking ETF (KRE)
  2. iShares MSCI European Monetary Union ETF (EZU)
  3. iShares MSCI France ETF (EWQ)
  4. iShares Russell 2000 ETF (IWM)
  5. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)



One of These Things Is Not Like the Other: Well, make that a few of these things. One of the things we’re watching intently on a day-to-day basis is whether or not the market starts to price in a transition from #Quad4 to #Quad1, which we continue to anticipate is the next logical stop on our GIP Model.




In the process of attempting to front-run the aforementioned phase transition, we are employing our Tactical Asset Class Rotation Model (TACRM) to ardently watch for two signals from the U.S. equity market:


  1. Historically strong #Quad4 sectors and style factors ceding leadership – from a Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) perspective – on a trending basis
  2. Historically strong #Quad1 sectors and style factors gaining leadership – from a VAMDMI perspective – on a trending basis


Why do we anchor on our proprietary VAMDMI reading rather than single-factor price momentum? Because we have no clue from what duration the preponderance of investors are measuring momentum on – other than that as volatility accelerates, the average investor shortens his/her investment horizon (something we solve for in TACRM).


In light of that, all we can do is record and amalgamate price momentum from multiple durations, adjusting for volatility in the process. This process gives us the best probability of determining where an investor might feel compelled to chase outperformance or blow out of underperforming exposures.


Isolating our search to the top-10 U.S. equity sectors and style factors we track in TACRM (47 in total), we see that 4 of those 10 are fairly new entrants and can be attributed to #Quad1 expectations (Financials: XLF, IAI, KIE; Tech: SMH), while the other 6 are unequivocal winners in #Quad4 (Healthcare: XLV, IBB, IHE, IHI; REITS: VNQ; Utilities: XLU) and have remained in/around the top-10 for months.  Moreover, 9 of the bottom-11 VAMDMI readings are sectors and style factors are distinct losers in #Quad4 (Energy: XLE, AMLP, XOP, IEZ; Materials: XLB, GDX; Small-to-Mid Caps: IWM, IWN, IWO) and have also remained in/around the bottom-10 for months.




All told, it can be said that the market continues to price in #Quad4 at the sector and style factor level.


While it’s easy for an investor to get lost in attempting make an all-or-nothing call on the broader market, the real outperformance of 2014 has been sourced from getting the direction of interest rates right as it pertains to slow-growth, yield-chasing sectors, as well as nailing the turn from #InflationAccelerating in 1H15 to #Quad4 in 2H15. We may have gotten a lot of things wrong along the way, but we definitely got those two BIG macro calls right!


***CLICK HERE to download the full TACRM presentation.***



#Quad4 (introduced 10/2/14): Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.


Early Look: Party Hard? (12/8)


#EuropeSlowing (introduced 10/2/14): Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.


Draghi Didn’t Deliver the “Drugs”! (12/4)


#Bubbles (introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.


#Bubbles: “Hedge Fund Hotel” Edition (Part II) (12/8)


Best of luck out there,




Darius Dale

Associate: Macro Team


About the Hedgeye Macro Playbook

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets.


The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends.


Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.

#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.

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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


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Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.