Japan, UST 10YR and Sentiment

Client Talking Points


Not surprisingly, Abe wins re-election – surprisingly, the Yen is Up (small) on that and the Weimar Nikkei drops -1.6%. The Yen (vs. USD is right in the middle of its 117.06-121.68 risk range) and the Nikkei are now bearish TRADE (Nikkei 17,769 resistance); bullish TREND (Nikkei 16,451 support); the rest of Asian Equities acted poorly, again – Thailand led losers -3.1%.


After crashing to 2.08% on the close of last week, bounces to 2.12% this morning (immediate-term risk range is now 2.08-2.22%) and while we would love to see another big buying opportunity (if, say, the Fed removed the “considerable time” language), we don’t think we’re going to get that this week – Long Bond is still our favorite Macro LONG idea (TLT, EDV, etc.).


Hedge fund consensus remains as long of S&P 500 futures/options as it is bearish on long-term Treasuries. As of last week’s CFTC futures/options contracts data, there’s a +48,911 net LONG position in SPX (Index + Emini) vs. its 6 month average of a -21,000 net short position, and a 10YR Treasury net SHORT position at its year-to-date high of -214,778 contracts!

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


You can ask @KeithMcCullough questions live on @HedgeyeTV at 830am ET. Watch here:



There is nothing more genuine than breaking away from the chorus to learn the sound of your own voice.

-Po Bronson


Latin American Equities moved closer to #crash mode, down -6% on the week to -16.1% year-to-date.

CHART OF THE DAY: Our Least Preferred Player on the 2014 Market Field vs Our Most Preferred

CHART OF THE DAY: Our Least Preferred Player on the 2014 Market Field vs Our Most Preferred - 12.15.14 chart


"After doing absolutely nothing for the 6 weeks prior, our least preferred 2014 player on the US Equity market field (Russell 2000), dropped -2.5% last week to -1.0% YTD ... [Meanwhile] UST 10yr Yield -22 basis points on the week to 2.08% (that’s a -31.3% crash in bond yields for 2014 YTD) ... Our favorite player, TLT (20yr Treasury Bond ETF) was up another +2.9% last week to +24% YTD."


This is an excerpt from today's Morning Newsletter by Hedgeye CEO Keith McCullough.

Money Man

"I can't hear you. There's too much money in my hand."

-Johnny Manziel


Whether former Texas A&M superstar Johnny Manziel said it that way (or with more expletives!) isn’t the point. If you’re a rookie and you’re going to give an entire profession the money signal like that, you better deliver on game day!


In what was an embarrassing professional start, Manziel did not deliver the moneys for Cleveland yesterday – and the Cincinnati Bengals veteran defense proceeded to spend the afternoon giving little Johnny some signals of their own.


Sort of like what the US Treasury Bond market did to the momentum chasing US equity bulls last week…


Money Man - man2


Back to the Global Macro Grind


After doing absolutely nothing for the 6 weeks prior, our least preferred 2014 player on the US Equity market field (Russell 2000), dropped -2.5% last week to -1.0% YTD. With only 2.5 weeks left in the season, that is not a Money Man bull market!


What was interesting about the Russell #Bubble’s drop (topped 5% higher on July 7th, 2014) was that it actually outperformed the almighty navel gazer on the week. The Dow Jones Industrial Index lost 50% of its 2014 gains, closing -3.8% to +4.2% YTD.


All the while, Global Equities continued to look like Manziel:


1. European Equities (EuroStoxx600) dropped -5.8% on the week to +0.7% YTD

2. Emerging Market Equities (MSCI) #deflated another -4.0% wk-over-wk to -5.6%

3. Latin American Equities moved closer to #crash mode, -6% on the week to -16.1% YTD


I know, cheery picking more than a few interceptions to make the game replay tapes look bad isn’t such a nice thing to do during the holiday season – but, to be clear, unless you are long bonds, there hasn’t been much to celebrate in December.




Yep. As the Barron’s Top Strategist 2015 Outlook reiterates its consensus 2014 outlook (GDP accelerating and #RatesRising, which btw was our 2013 outlook), we reiterate both growth and inflation slowing (and lower bond yields).


As US Equity Volatility (front month VIX) rocketed +78.3% last week, the low-volatility ramp in the Long Bond continued:


1. UST 10yr Yield -22 basis points on the week to 2.08% (that’s a -31.3% crash in bond yields for 2014 YTD)

2. UST Yield Spreads compressed to YTD lows (-12bps wk-over-wk and -111bps YTD for the 10s/2s Spread)


For those of you who do Moneyball (or Moneypuck) stats, you’ll respect the reality that A) higher absolute and relative returns + B) lower-volatility in those returns, is where the real money in this game is at...


If you want to think about that in Dow, Russell, or SPY terms vs the Long Bond (TLT and EDV):


1. TLT (20yr Treasury Bond ETF) was up another +2.9% last week to +24% YTD

2. Vanguard’s Extended Duration ETF (EDV) was +3.9% week-over-week to +40.8% YTD


What’s driving this?


1. Falling growth expectations

2. Falling inflation expectations


And while there was a time (earlier this year) where the Old Wall said “bond yields are falling in Europe, not because growth and inflation are slowing, because its different this time”… it’s not.


In rate of change (Hedgeye) terms, when both growth and inflation are slowing, at the same time, the Long Bond investor gets paid.


No, this wasn’t a sexy call. And you won’t see me or my teammates living large on bottle service drinking the chartreuse (Zervos?) or hanging with Roubini either… but it remains the call Consensus Macro still isn’t willing to make.


On that sentiment score, check-out where CFTC (non-commercial) futures and options bets went last week:


1. SP500 (Index + Emini) = +48,911 net LONG position (vs. its 6mth avg of a -21,000 net short)

2. TREASURIES (10yr) = net SHORT position at its YTD high of -214,778 contracts (vs. its 6 mth avg of -38,000 net short)


Yep, I can hear you loud and clear. There’s too much consensus in that hand!


UST 10yr Yield 2.08-2.22%


RUT 1146-1165

VIX 15.47-22.71

YEN 117.06-121.68

WTI Oil 56.48-63.21


Best of luck out there this week,



Keith R. McCullough

Chief Executive Officer


Money Man - 12.15.14 chart


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TODAY’S S&P 500 SET-UP – December 15, 2014

As we look at today's setup for the S&P 500, the range is 58 points or 1.12% downside to 1980 and 1.78% upside to 2038.                                                    













  • YIELD CURVE: 1.55 from 1.54
  • VIX closed at 21.08 1 day percent change of 4.98%


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Empire Manufacturing, Dec., est. 12 (prior 10.16)
  • 9:15am: Industrial Production m/m, Nov., est. 0.7% (pr -0.1%)
  • 10am: NAHB Housing Market Index, Dec., est. 59 (prior 58)
  • 11am: U.S. to announce plans for auction of 4W bills
  • 11:30am: U.S. to sell $24b 3M bills, $26b 6M bills
  • 4pm: Net Long-term TIC Flows, Oct. (prior $164.3b)



    • Acting Deputy Sec. of State Wendy Sherman and U.S. negotiating team to meet with Iranian officials ahead of talks with world powers on Iran’s nuclear program
    • 10am: Sen. Orrin Hatch, R-Utah, joins Financial Services Roundtable discussion on “Retiring Around the Globe";



  • PetSmart Agrees to Be Bought by BC Partners Group for $83-Share
  • Oil Trades Near 5-Year Low as OPEC Seen Resisting Cuts at $40
  • Senate Passes U.S. Funding Bill After Cruz Challenge Rejected
  • JPMorgan, Citigroup, Others to Report Nov. Credit Losses
  • Sony Asks Media to Destroy Data as Sharpton Meeting Looms
  • Scott’s ‘Exodus’ Ends ‘Mockingjay’ 3-Week Run Atop Box Office
  • Lockheed Faces Pension-Mismanagement Trial Over Fees, Returns
  • Unlocking Japan Growth Potential Looms as Task for Abenomics 2.0
  • American Air, EA, Lam Research to Be Added to Nasdaq 100
  • Hostages Flee Besieged Sydney Cafe as Police Seek Bloodless End
  • ‘Monsters’ Line Road to Paris Climate Deal With Rich-Poor Divide
  • McDonald’s Said to Seek Ad Agency Ideas to Boost Sales: WSJ



    • Verifone (PAY) 4:01pm, $0.41



  • Oil Jumps Most in Two Weeks as Fighting, Strike Curb OPEC Output
  • Gold Declines to Lowest in Almost a Week on Fed Rate Outlook
  • Hedge Funds’ Bullish Gold Bets Defy Goldman Outlook: Commodities
  • Goldman Sees U.S. Oil Output Steady as Costs Sink With Price
  • Wheat Drops From 6-Month High as World Crop Eases Russia Concern
  • Nickel Leads Industrial-Metals Increase After Plant Shutdown
  • Oil Slump Blindsides Bulls That Wagered on Rout Ending: Energy
  • U.A.E. Says Oil Market to Stabilize If Shale Output Doesn’t Rise
  • Libya Imposes Force Majeure at Two Oil Ports Amid Clashes
  • Rebar Falls as Weaker China Property Sales Seen Hurting Demand
  • Rubber Surges Most in Nine Months on Optimism About Thai Buying
  • Bird Flu Threatens Vancouver Christmas Dinners as Turkeys Perish
  • U.A.E. Sees OPEC Output Unchanged Even If Oil Drops to $40
  • Brent Forecast to Cost 33% Less as Demand Slows: 2015 Outlook
  • Oyster Herpes Has Scientists Trying to Save $4 Billion Industry


























The Hedgeye Macro Team



















December 15, 2014

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December 15, 2014 - Slide12

Deflation's Nemesis

This note was originally published at 8am on December 01, 2014 for Hedgeye subscribers.

“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

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