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CHART OF THE DAY: Is It Really Different This Time? (Consensus U.S. GDP Forecast Edition)

CHART OF THE DAY: Is It Really Different This Time? (Consensus U.S. GDP Forecast Edition) - 12.16.14 chart

 

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Revolutionary Outlook

“The Revolution transformed science from a popular hobby into a full-fledged profession.”

-Sharon Bertsch McGrayne

 

While December 16th was one of the beauty days of the American Revolution (the Sons of Liberty dumped loads of tea in the Boston Harbor #TeaParty), that is not the revolution the aforementioned quote is alluding to…

 

Believe it or not, there was a time when the French were hard core evolutionists in math, science, and innovation too.”For almost 50 years (from the 1780s until Pierre Simon Laplace’s death in 1827), France led world science as no other country has before or since.

-The Theory That Would Not Die (pg 30)

 

Today, Canadians and Americans (sorry, had to include the homeland) have a once in a lifetime opportunity to revolt and redo the entire profession of mainstream economic and market analysis. During the 18th century American and French Revolutions, they needed a crisis to change. Sadly, I don’t think the change I’m envisioning will be born out of something that’s different this time.

Revolutionary Outlook - minutemen01 jpg

 

Back to the Global Macro Grind

 

While I realize there is tremendous value in fading the forecasts of the #OldWall (and that we should probably pay to keep them in business for that reason alone!), eventually redoing all of this means we must move forward and evolve.

 

Moving forward starts with understanding where we came from. So let’s do that and look at the almighty US growth and inflation “2014 Forecasts” (summarized in bond yield terms) from Barron’s on what was going to happen this year:

 

  1. Bank of America (Savita Subramanian) 10yr Yield forecast = 3.75%
  2. Tom Lee (formerly JP Morgan) 10yr Yield forecast = 3.65%
  3. Barclays (Barry Knapp) 10yr Yield forecast = 3.50%
  4. Morgan Stanley (Adam Parker) 10yr Yield forecast = 3.45%
  5. Citigroup (Tobias Levkovich) 10yr Yield forecast = 3.25%

 

With the 10yr US Treasury Yield crashing to 2.09% today (-31% YTD), my congratulations goes out to the fine folks at Citigroup for being closest to the pin. If you had client moneys in that strategy, you’d be short the Long Bond (and long the Russell, which is -2.1% YTD).

 

#sweet

 

Looking forward at Barron’s “2015 Outlook” for growth and inflation expectations (yes, they do manifest in the bond market):

 

  1. Tobias @Citigroup inched his forecast down to 2.95%
  2. Parker @MorganStanley opted for 2.85%
  3. And Savita @BofA went all-bearish on bond yields at 2.75%!

 

I couldn’t make this up if I tried.

 

And on the why, don’t ask me, because I genuinely do not understand A) the process that got them to 3.25-3.75% in 2014 to begin with and/or B) the risk management components of the 2.75-2.95% forecast cuts, when they should be 100 basis points lower than that.

 

Both Barron’s and Bloomberg Magazine recently ran “This Time It’s Different” on their covers (Barron’s did on the weekend before their almighty god Dow dropped over 700 points). But, for the life of me, I can’t find an 2014 Outlook that read something like this:

 

  1. Worldwide growth will start to slow in the back half of 2014
  2. In response to #GrowthSlowing Europe, Japan, and China will all panic and print
  3. After seeing late cycle inflation peak in 1H14, #deflation will take hold by Q4
  4. Oil will start to crash…
  5. Then Russia will crash…
  6. As Energy stocks crash
  7. And the High Yield debt markets will start to shake…
  8. As Emerging markets will continue to crash

 

I’ll stop there…

 

Q: Who nailed all of that? A: Not Ed & Nancy.

 

The only thing that is different this time are the names of the macro “forecasters” on the sell-side who are willing to subject themselves to my #timestamping. With Tom Lee out, JP Morgan has enlisted some dude named Dubravko.

 

“So”, excited to hear of new competition, I looked Dubravko up hoping to find some innovation in his process. Unfortunately, while his resume says he has some experience as a “Quantitative Researcher”, his 2015 “forecast” looks very #OldWall to me:

 

  1. US GDP Growth = 3.0%
  2. UST 10yr Yield = 2.80%
  3. SP500 “target” = 2250

 

Nice round numbers that ultimately imply:

 

A)     US growth to “de-couple” from global #GrowthSlowing and accelerate year-over-year

B)      US Bond Yields and Growth Equity returns to rise in response to that

 

I wish you luck, Dubravko. And thank you for being part of a Consensus Macro that we will continue to fade with a revolutionary process and risk managed outlook.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.09-2.21%

SPX 1

RUT 1125-1151

VIX 16.31-23.47

YEN 116.28-121.01

WTI Oil 53.27-61.15

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Revolutionary Outlook - 12.16.14 chart


December 16, 2014

December 16, 2014 - Slide1

 

BULLISH TRENDS

December 16, 2014 - Slide2

December 16, 2014 - Slide3

 

 

BEARISH TRENDS

December 16, 2014 - Slide4

December 16, 2014 - Slide5

December 16, 2014 - Slide6

December 16, 2014 - Slide7

December 16, 2014 - Slide8

December 16, 2014 - Slide9

December 16, 2014 - Slide10

December 16, 2014 - Slide11
December 16, 2014 - Slide12


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.

THE HEDGEYE MACRO PLAYBOOK

Takeaway: Today we highlight the ongoing financial crisis in emerging markets ahead of our 1pm call today. Email sales@hedgeye.com to obtain access.

INVESTMENT CONCLUSIONS

Long Ideas/Overweight Recommendations

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

Short Ideas/Underweight Recommendations

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

 

QUANT SIGNALS & RESEARCH CONTEXT

The Ongoing Crisis in Emerging Markets: Since our September 23rd [bearish] note titled, "EMERGING MARKETS: THE EM RELIEF RALLY IS LIKELY OVER", the MSCI EM Index has declined -10.5%, the JPM EM Currency Index has declined -7.1% and OAS on the Bloomberg USD EM Composite Index has widened +118bps to 425bps. Even more shocking, the aforementioned returns are not inclusive of the absolute carnage you’re seeing on your screens this morning!

 

THE HEDGEYE MACRO PLAYBOOK - ETF Divergence Monitor

 

THE HEDGEYE MACRO PLAYBOOK - 2

Source: Bloomberg L.P.

 

Highlighting the ongoing crisis in Russia, the country’s benchmark RTS Index continues to crash, down another -15% today and down a whopping -39% in just the past 1M alone! The Russian ruble (RUB) continues to plunge to new all-time lows, gapping down another -15% vs. the USD this morning despite the Bank of Russia having raised its benchmark rate a whopping +750bps in the MTD! No, these figures are not typos.

 

THE HEDGEYE MACRO PLAYBOOK - 3

Source: Bloomberg L.P.

 

The CEO of Sberbank (down -13% today and -19% WoW), which is Russia's largest bank with 46% deposit share, said back on November 14th that if the Russian economy were to decline by more than -1.2% in 2015 Sberbank would need the State to bail it out. Not surprisingly, Sberbank 5Y CDS have widened dramatically since then (+215bps) and are now well wider than the critical threshold of 300bps level we consider to be harbinger of bankruptcy risk for financial institutions.

 

THE HEDGEYE MACRO PLAYBOOK - 4

Source: Bloomberg L.P.

 

Looking to our Tactical Asset Class Rotation Model (TACRM):

 

  • TACRM continues to generate “DECREASE EXPOSURE” signals for EM Equities and Foreign Exchange as primary asset classes. Their Passive Trend Follower Asset Allocation readings of 10% and 3%, respectively, are off -44% and -67% versus their respective TTM averages.
  • Of the 36 ETFs comprising our EM Equities primary asset class, only one of them (CHIX) has a positive Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) reading.
  • 89% of them have a VAMDMI reading less than -1x, which indicates a clear trend of negative VWAP momentum across three distinct durations.
  • Of the 14 ETFs comprising our Foreign Exchange primary asset class, none of them have a positive VAMDMI reading.
  • 57% of them have a VAMDMI reading less than -1x, which indicates a clear trend of negative VWAP momentum across three distinct durations.

 

THE HEDGEYE MACRO PLAYBOOK - TACRM Summary Table

 

THE HEDGEYE MACRO PLAYBOOK - TACRM GMRS N

 

THE HEDGEYE MACRO PLAYBOOK - TACRM GMRS

 

What these signals confirm to us today is that that #Quad4’s #StrongDollar asset price deflation is likely here to stay with respect to the intermediate term. In light of that, we continue to think you should remain short of or completely out of this asset class to the extent you can accomplish that in your mandate.

 

***We will be hosting a conference call today at 1pm to discuss the myriad of top-down and bottom-up risks facing many emerging market economies and how we think you should be positioned to take advantage of these factors. Please email to obtain access to the call and the associated slide deck.***

 

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

 

TRACKING OUR ACTIVE MACRO THEMES

#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: Money Man (12/15)

 

#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 Drugs at the JAN ECB Meeting? Nope! (12/10)

 

#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,

 

DD

 

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.


Golden Headfakes

This note was originally published at 8am on December 02, 2014 for Hedgeye subscribers.

“Money is gold, and nothing else.”

-J.P. Morgan

 

That was one of John Pierpont Morgan’s summary investment conclusions before he passed away in March of 1913.

 

Ironically enough, later that year, Carter Glass introduced modern day central planning of market expectations, currency manipulation, etc. to the US House of Representatives via the Federal Reserve Act.

 

By 1971, when US Dollar denominated money was fully politicized by Nixon (he outright abandoned the Gold Standard), J.P. must have been rolling in his grave…

 

Today, I’d say that money is whatever you think you have that can pay for things. In other words, if all your money was denominated in Bitcoins, Burning Yens, or Russian Rubles, you can pay for a lot less today than you could last year.

 

Money can often be an illusion of wealth, and nothing else.

Golden Headfakes - Dollar cartoon 11.25.2014

 

Back to the Global Macro Grind

 

What if all your money was in the Russell 2000 this year? That would suck. After doing literally nothing (flat for 4 straight weeks in November), the Russell #Bubble got pounded for a -1.7% loss yesterday, falling back to -0.9% for 2014 YTD.

 

Gold, on the other hand, had a big day, rallying +3.1%, inching its way back to +0.8% for 2014. And this came on a US Dollar DOWN day, which drove the machines squirrely.

 

*Squirrely (definition: to chase one, either proverbially in your head, or physically in the Yale Hockey House).

 

Here are the inverse correlations, across durations, between Gold and the US Dollar Index:

 

  1. 180-days = -0.90
  2. 120-days = -0.94
  3. 90-days = -0.96

 

In other words, for most of the time in the last 3-6 months, Gold has been the inverse of the US Dollar, and nothing else.

 

“So”, with the following moves across a crashing commodity complex yesterday:

 

  1. Silver +6.1% to -15.0% YTD
  2. Wheat +5.1% to +0.3% YTD
  3. WTI Crude Oil +4.8% to -29.5% YTD

 

What do you do? Do you chase the squirrel? Do you fade? Or do you do nothing at all?

 

Most of the time, I like to analyze everything… and do nothing. It hasn’t always been this way for me (as a knuckle-head hockey player, I always thought I needed to do something!). But as I age, I’ve found that there is more money in waiting and watching.

 

After not chasing silver, wheat, or oil yesterday, and seeing today’s renewed selling in everything inflation expectations (commodities down), I’ll be considering the short side of Gold and Silver today.

 

While we can have a healthy debate about the definition of squirrel hunters or money, there is none to be had about the direction of trending prices – they are either inflating or deflating – and it’s our job to be on the right side of those trends.

 

As of this morning’s refreshed price, volume, and volatility data here are some bearish Hedgeye TRENDs I want to reiterate:

 

  1. Russell 2000 remains bearish TREND with intermediate-term resistance = 1190
  2. UST 10yr Bond Yield remains bearish TREND with intermediate-term resistance = 2.79%
  3. CRB Commodities Index remains bearish TREND with intermediate-term resistance = 280
  4. Gold remains bearish TREND with intermediate-term resistance = 1225
  5. Silver remains bearish TREND with intermediate-term resistance = 17.98
  6. WTI Oil remains bearish TREND with intermediate-term resistance = 85.31

 

I know, I know… but the SP500 and Apple are up. And that’s just great – but it doesn’t change the fact that the stability of the macro market’s proverbial snow-pack is getting less stable by the day.

 

Exercising the same mountain of snow metaphor, if there is one factor forming within the layers of interconnected market risk that is signaling #avalanche right now … it’s #deflation.

 

In between now and mid-December you have two causal forces (Draghi/ECB perpetuating #deflation via devaluing the Euro and/or a Japanese snap election that will decide at what pace Abe/Kuroda can burn the Yen) that can drive #StrongDollar deflation.

 

If yesterday was simply a head-fake, and Dollar Up, Gold Down, Oil Down correlation risks take hold (again), the accumulation of #deflation risks will continue to rise. And neither Putin nor High-Yield Energy/Gold Bonds will sit on this mountain of risk idly.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.16-2.26%

SPX 2029-2077

RUT 1146-1173

VIX 13.11-15.59

USD 87.41-88.54
WTI Oil 64.45-69.69
Gold 1154-1225

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Golden Headfakes - 12.02.14 Chart


Abenomics Round II: Risk Is GROSSLY Mispriced | REPLAY PODCAST & SLIDES

Takeaway: We are once again officially bearish on the Japanese yen (FXY) and bullish on large-cap Japanese equities (DXJ).

Yesterday afternoon we held a flash conference call to discuss our revised outlook for Japan and the associated investment implications. Key topics included:

 

  • Where we stand vs. consensus on Abenomics: we think a re-test of ~147 on the USD/JPY cross is a probable occurrence over the intermediate term and we think that equates to roughly 50% upside in the Nikkei 225 from today’s closing price
  • Our intermediate-term outlook for Japanese monetary and fiscal policy: commensurate with this forecast, we think the BoJ will consistently surprise investors with the frequency and scope of further QQE expansion; fiscal policy is extremely supportive over the NTM
  • The elevated risk of a global deflationary spiral: in line with our extremely bearish bias on the Japanese yen, we believe #StrongDollar commodity deflation is set to continue weighing on reported inflation readings globally, underpinning expectations for looser G3 monetary policy, at the margins

 

Consistent with these views, we are once again officially bearish on the Japanese yen (FXY) and bullish on large-cap Japanese equities (DXJ).

 

CLICK HERE to access the replay podcast for today’s call.

 

CLICK HERE to access the associated presentation (~20 slides).

 

As always, please feel free to reach out with any follow-up questions.

 

Have a great evening,

 

DD

 

Darius Dale

Associate: Macro Team


Early Look

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