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Macro Notebook 12/19: Yen | Europe | XOP (Oil & Gas)


Hedgeye Director of Research Daryl Jones shares the top three things in his macro notebook this morning.


Takeaway: Today we focus extensively on our quant signals for clues as to whether it's safe to increase one's gross and/or net exposure (up here).


Long Ideas/Overweight Recommendations

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

Short Ideas/Underweight Recommendations

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



Global Macro #VolatilityAccelerating: If, like us, you’re having a terrible week from an asset allocation recommendation perspective, you can take solace in the fact that you’re probably in the top decile of performance from a MTD, QTD and YTD perspective.



Source: Bloomberg L.P.


Conversely, if you’re in the “killing it” camp this week – which roughly implies the inverse of “top decile” with respect to MTD, QTD and YTD performance (the XOP is up +8.6% over the past two days; God help you if you were long E&Ps on the way down) – our sincere congrats to you as well. We’re all in this together; that’s what makes a market!


Looking to global financial markets through the deft lens of our Tactical Asset Class Rotation Model (TACRM), not much has changed despite the face-ripping squeeze we’ve seen across global equities over the last two-and-a-half days.



Source: Bloomberg L.P.



Source: Bloomberg L.P.



Source: Bloomberg L.P.




  • At the primary asset class level, TACRM is generating “DECREASE EXPOSURE” signals for every asset class except Cash, which is comprised simply of U.S. dollars and volatility. Every primary asset class except Cash has a higher percentage of ETFs with a Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) reading below -1x (i.e. exhibiting a clear trend of negative VWAP momentum across multiple durations) than those greater than +1x (i.e. exhibiting a clear trend of positive VWAP momentum across multiple durations).
  • The Passive Trend Follower Asset Allocation estimations for Fixed Income & Yield Chasing, DM Equities, EM Equities, FX, Commodities and Cash of 21%, 20%, 10%, 3%, 10% and 36%, respectively, are little changed from where they started the week. Recall that this metric is designed to hone in on what asset classes(s) a “macro tourist” might be overweight or underweight by applying a consistent rules-based formula to increase or decrease exposure to a given asset class based on the breadth of momentum at the sub-asset class level. 
  • When looking for developing signals at sub-asset class level, we typically start with our Extreme Momentum Monitor, which highlights the top-20 and bottom-20 VAMDMI readings across the global macro universe of nearly 200 ETFs. Looking to the bottom-20 readings: 10 are EM Equity ETFs, 4 are DM Equity ETFs, 3 are FX ETFs and 3 are Commodity ETFs. That’s more-or-less the same composition we’ve seen in recent months. Looking to the top-20 readings: 10 are DM Equity ETFs (including the IWO!), 7 are Fixed Income & Yield Chasing ETFs, 1 is a Commodity ETF (WEAT), 1 is a FX ETF (UUP) and 1 is an EM Equity ETF (CHIX). That's a little changed from recent trends, but not by much. The full composition can be found in the fourth chart below.
  • Looking to the U.S. equity market, we see that 7 of the top 11 VAMDMI readings are sectors and style factors that are historically strong performers in #Quad4. The other 4 are sectors and style factors that are historically strong performers in #Quad1 (retailers, financials (2x) and small-cap growth). The #Quad4 vs. #Quad1 debate continues. Moreover, 7 of the bottom 8 VAMDMI readings are historically weak performers in #Quad4, including all the usual suspects across the energy and materials sectors. In spite of the bounce(s), nothing has changed from a momentum perspective to the preponderance of investors across multiple durations.
  • Interestingly, homebuilders (ITB) currently have the 10th lowest VAMDMI reading across the 47 sectors and style factors we track across the U.S. equity market. Given our team’s now-bullish fundamental research view on U.S. housing, we would look to this signal as a potential buying opportunity – provided key levels of long-term support remain intact.












All told, not much, if anything, has changed with respect to the domestic and global macro risk matrix over the past few days. In light of that, one has to ask themselves 100-handles higher on the SPX if the coast is truly clear in terms of buying ‘em up here. It was a great trade for anyone who sold the top and bought the bottom, but the critical risk management question you should be asking yourself is: “Is the next 100-hanlde move on the SPX higher or lower from here?”.


We don’t have an answer to that question, but you can pretty much guess which outcome we think is more probable based on the aforementioned signals.


At the end of what has generally been a rough year across the industry, we hope these signals and research views are additive to your process of setting up for a successful 2015. Best of luck out there!



Source: Bloomberg L.P.


***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.


(Hedg)Eye-Candy: Survey Says… (12/18)


#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.


Moscow, We Have a Problem (12/16)


#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.

LEISURE LETTER (12/19/2014)



  • Dec 19: CCL F4Q earnings call:
  • Dec 20: Trump Taj Mahal Closing - CANCELLED

Today's Headline Story

Macau DICJ Not Expect GGR Growth Until Mid-2015 – Leong Man Ion, deputy director of Macau’s Gaming Inspection and Coordination Bureau (DICJ), is not expecting year-on-year growth in gross gaming revenue (GGR) in Macau to resume before mid-2015.

Article HERE

Takeaway:  We're currently forecasting a return to growth in September.


FLL – announced, Deborah J. Pierce resigned her role as a Chief Financial Officer of the Company, effective as of December 26, 2014.

Article HERE

Takeaway: Not entirely surprising given the arrival of new CEO Dan Lee.


577.HK – Louis XIII announced Beijing builder Jangho Group Co Ltd Macau subsidiary, Sundart Engineering Services (Macau) Ltd, was awarded a HK$70.5 million (US$9.09 million) contract to fit out the Louis XIII hotel standard rooms, superior suites and corridors. The build-out will occur over the next nine months. 

Article HERE

Takeaway: Progress continues at Louis XIII but no table game allocation to date.


PENN – Live Nation on Wednesday announced a multi-year agreement with Hollywood Casino to become the new name-in-title sponsor of their popular amphitheater located in Maryland Heights near St. Louis. The new venue name is Hollywood Casino Amphitheatre.  In 2014 the venue, formerly known as Verizon Wireless Amphitheater, hosted approximately 400,000 guests.

Article HERE


HOT – announced next year the company will eliminate Internet charges across most of its properties. As of Feb. 2, Starwood Preferred Guest loyalty program members booking through Starwood's brand websites and mobile apps will get free Internet access at "the majority of the portfolio." 

Takeaway: Free internet is becoming the industry norm for loyalty card members


LHO – The Portland Business Journal is reporting the Heathman Hotel was sold to LaSalle Hotel Properties. London-based Taylor-Clark Inc. announced in September it was selling the 150-room, 10-story Heathman Hotel, at 1001 S.W. Broadway, and the 91-room Heathman Hotel Kirkland in Seattle.

Article HERE


PEB – announced that it has acquired the 356-room Revere Hotel Boston Common, an attached 826-space parking garage and an adjacent land parcel for $260.4 million. In 2015, PEB forecasts the hotel will generate EBITDA of $18.0 to $18.5M and net operating income after capital reserves of $16.2 to $16.7M.

Takeaway: This UUP scale hotel traded for forward 14x EBITDA


CCL – 2 new ships

  • Carnival Cruise Line brand with 3,954 berths, scheduled for delivery in March 2018
  • Holland America brand (new Pinnacle class) with 2,650 berths, scheduled for delivery in late November 2018

Article HERE

Takeaway: Carnival Corp now has 10 ships on order 


CCL – Carnival is turning to the Super Bowl to market together – for the first time – all nine of its brands, which include Carnival Cruise Line, Holland America, Princess Cruises, Cunard, Seaborn, AIDA Cruises, P&O Cruises in Australia and the U.K. and Costa Cruises.

Article HERE


NCLH – Norwegian Cruise Line became one of the first major cruise companies to roll out a promotion for Wave Season. NCLH says customers who book a cruise of five nights or longer by Jan. 31 can choose a free Ultimate Dining Package, a free Ultimate Beverage Package or up to $300 in on-board credits. Customers booking a cruise in Europe or Hawaii can choose two of three offers. Under the terms of the Freestyle Choice offer, as it's being called, customers must book an ocean-view or higher category of cabin. Customers booking a suite or a room in the upscale area on Norwegian ships known as The Haven will get all three offers.

Article HERE


Macau Challenges Highlighted as President Xi Visits – a WSJ story reviews the issues facing Macau as the Special Administrative Region attempts to grow and diversify its economy (which until recently was entirely built on gambling) in the face of Mainland money laundering enforcement and attempts to stem the flow of capital out of China.

Article HERE

Takeaway:  Relief rally in the stocks after he leaves?


China Lottery Sales – China lottery sales increased 24.4% to $5.567 billion in November.  Sports Lottery sales rose 31.6% to $2.593 billion while Welfare Lottery sales grew 18.8% to $2.974 billion. Lottery sales were up in 28 provinces and cities in November, the exceptions being Gansu and Liaoning provinces and Beijing, according to the ministry’s data published this week. 

Article HERE

Takeaway:  Mainland lottery sales continue to be robust.


Trump Taj Mahal  – Carl Icahn announced he will "provide up to $20 million of additional financing to keep the Taj operating throughout the bankruptcy proceedings, will also work collaboratively with the State of New Jersey, Atlantic City and the Union to try to forge a global settlement that will bring real stability to the Taj and its employees."

Article HERE


New Orleans Considering Smoking Ban – New Orleans City Council is considering an ordinance to make it illegal to smoke in bars, casinos, parks, at bus stops, work places and other public venues such as the zoo and festivals. Bars, restaurants, video poker outlets, tobacco wholesalers and gambling halls — including the big downtown casino, Harrah's New Orleans — have come out against the measure and vowed to fight it. Businesses that allow smoking worry about a loss of revenues, at least in the short term. Proponents of the ban say studies show business increases over time following a smoking ban.

Article HERE

Takeaway:  Potential negative for Harrah's New Orleans.


South Dakota Free Play Not Taxable GGR – South Dakota Supreme Court ruled free play in casinos should not be subject to state taxation. 

Article HERE

Takeaway:  Good news for the Deadwood Casinos.


Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015. 

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

#Deflation Expectations

Client Talking Points


Don’t forget what triggered #Deflation’s Dominoes to begin with (Japan and Europe burning their currencies = Dollar Up, Oil Down, Commodity Correlation Crash, High Yield Spread Rip, etc.) – we signaled short Yen, buy Nikkei on Tuesday (#timestamped 10:29AM in Real Time Alerts), and still like that Macro Idea to express #Quad4 deflation.


3 big things happened this morning (German deflation of -0.9% year-over-year in the NOV PPI, central planning talk of making QE the periphery’s burden, and Italian, Spanish, Russian equity markets all resuming their bearish TREND declines); we do not think ECB President Mario Draghi can get a big thing done in JAN to stem this European Equity draw-down.

XOP (Oil & Gas Stocks)

On the bounce yesterday we registered another big time SELL signal not in the almighty navel gazing Dow, but where the alpha is at on the short side = Energy Stocks! From a Macro Themes perspective, we’ve had this SELL idea on for the entire quarter, and say short more into the end of the quarter.

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


Watch @KeithMcCullough on @FoxBusiness w/ @MariaBartiromo at 9am ET for a full hour. They'll talk markets, economy and more.



Stop walking through the motions of a conditioned routine and start consciously taking action on your visualized intent.

-Steve Maraboli


Russia derives about 50% of its budget revenue from oil and natural gas taxes and 25% of its GDP is linked to the energy industry.

CHART OF THE DAY: Positioning for Fire $LNCO

CHART OF THE DAY: Positioning for Fire $LNCO - chartofday


Editor's note: Below is an excerpt from today's Morning Newsletter written by Hedgeye Energy Sector Head Kevin Kaiser. 


I don’t spend a lot of time trying to forecast what I’m ill-equipped to forecast with a high degree of confidence.  I don’t know when lightning will strike.  But I can put forth investment ideas that are based on sound data and reasoning, and are likely to work under various assumptions and scenarios.  And when the spark is set, I am prepared and well-positioned. 


I’ve written about no company more than LINN Energy (LINE, LNCO) over the past two years because I thought that the system was extremely unstable.  The basic story has always been the same – the company makes no real profit, but dividends out $1 billion per year, which it pays for via serial debt and equity issuance.  As I saw it, it was highly likely to end disastrously.  The pushback was consistent, “There’s no catalyst.”  This was not a good idea, I was told, because there wasn’t a lightning storm in sight…

Positioning for Fire

“From the elevation of retrospect we can see it all coming together more clearly and sooner than those who were there and running.”  - Norman Maclean, Young Men and Fire

On August 5, 1949 fifteen young men parachuted out of a C-47 transport plane to fight a wildfire in the remote forests of central Montana. 


It was the dead of summer in the middle of an extreme heat wave.  On the day of the jump it was 97 degrees, then the hottest day on record in Helena, Montana.  The fire danger rating was 74 out of 100, which meant “explosive potential.”  It was so windy that the turbulence onboard the plane caused one of the men not to jump, return to the base, and immediately resign.  The men that did jump landed on a steep slope in Mann Gulch that was covered in dry, knee-high grass… 


Within two hours of landing all but three of the “smokejumpers” were dead. 


What happened in Mann Gulch that day was one of the greatest disasters in US forest-fire fighting history.  The lessons learned from the tragedy had a significant effect on how the US Forest Service fought wildfires for years to come.


Positioning for Fire - top pic for EL


I think of wildfires a lot like I do investment research, in that the identification and understanding of an unstable system is the primary goal.  A wildfire occurs because existing conditions allow it to: the forest is dry, it’s hot, it’s windy, and there hasn’t been a fire in a long time.  As conditions become more extreme, the probability of fire increases.  So, as a fundamental analyst, I try to figure out where the hot, dry forests are before everyone else does, and before they go up in flames.


The instantaneous cause of the wildfire – the “catalyst” – is a secondary concern, and often, unpredictable.  If the forest is dry and hot enough, any small spark can set it ablaze, at any moment.  Will it be an irresponsible campfire?  A bolt of lightning to a dead tree?  A cigarette butt thrown from a car window?  It doesn’t really matter because the result is the same, the forest burns down.


Didier Sornette, an expert on financial crises, summarizes the point:


“...a crash occurs because the market has entered an unstable phase and any small disturbance or process may have triggered the instability. The collapse is fundamentally due to the unstable position; the instantaneous cause of the collapse is secondary. Essentially, anything would work once the system is ripe… a crash has fundamentally endogenous, or internal origin.”


I don’t spend a lot of time trying to forecast what I’m ill-equipped to forecast with a high degree of confidence.  I don’t know when lightning will strike.  But I can put forth investment ideas that are based on sound data and reasoning, and are likely to work under various assumptions and scenarios.  And when the spark is set, I am prepared and well-positioned. 


I’ve written about no company more than LINN Energy (LINE, LNCO) over the past two years because I thought that the system was extremely unstable.  The basic story has always been the same – the company makes no real profit, but dividends out $1 billion per year, which it pays for via serial debt and equity issuance.  As I saw it, it was highly likely to end disastrously.  The pushback was consistent, “There’s no catalyst.”  This was not a good idea, I was told, because there wasn’t a lightning storm in sight…


…And then the price of crude oil tumbled from $100 to $55 per barrel, prompting more investors to doubt the sustainability of LINN’s business model, and sell.  The prices of LINN’s stocks and bonds plummeted quickly; in just three months LINE and LNCO fell 60%, and the unsecured bonds lost 25 points.  The “catalyst” is now clear, as it always is in retrospect.  It was the oil price collapse, though it easily could have been something else: a failed acquisition, an SEC enforcement action, a rise in interest rates, another leg down in the natural gas price, or something else I never even considered.…  It doesn’t matter – we were well positioned for any small disturbance to trigger the instability.


Our latest energy investment idea is an unstable situation of a different kind – and this one we like on the long side.  Natural gas pipeline MLP Boardwalk Pipeline Partners LP (BWP) trades at a 50% discount to its peer group because it doesn’t dividend out all of its cash flows.  Investors are still sour from the February 2014 distribution cut – which we called for in advance – and have not recognized the positive turn that BWP’s business took this year.  In our view, this is an unstable system waiting for a trigger to re-rate the stock higher...  (Ping us if you’re interested in learning more about our work on BWP.)


What else in the financial world is at risk of going up in flames?  Like the Mann Gulch disaster of 1949, it’s not always easy to recognize an unstable system for what it is…  Are you prepared and well positioned for the lightning strikes and errant campfires that will invariably come?


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.03-2.23%


RUT 1130-1199

VIX 15.21-24.58

Yen 116.97-121.38

Oil (WTI) 52.02-58.32 


Kevin Kaiser

Managing Director


Positioning for Fire - chartofday

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