Yen, Russia and Sentiment

Client Talking Points


Selling Burning Yens (on the bounce) vs. ramping U.S. Dollars made sense again last week. The Yen is down another -0.3% to $119.81 with no immediate-term support to $120.63 (still bullish for Nikkei, which was +0.1% overnight and is closed tomorrow), this is also bearish for Oil on the bounce (Dollar Up).


Things that crash…bounce. The RTSI is +4.2% this morning after being up big on Friday, but still -42% year-to-date (which means only +72%, from here, to get whoever owned it up there back to breakeven!); massive resistance for the Russian Trading System in the 885-912 range (no support to 623).


Someone definitely didn’t want the S&P 500 to fall into year end; massive ramp in SPX (Index + Emini) futures/options of +104,196 contracts last week, putting the net LONG position at +153,107 contracts (vs. the 3 month average of +19,661 and easily the biggest net long position of the year).

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


OIL: #deflation of -4.6% since June (needs to be +82%, from here, to get back to that breakeven) #DrawDownMath



Practice isn't the thing you do once you're good. It's the thing you do that makes you good.

-Malcolm Gladwell


Today, UPS will deliver 34 million packages, more than any other in its history.

CHART OF THE DAY: Consensus Macro Positioning $SPX $TLT

CHART OF THE DAY: Consensus Macro Positioning $SPX $TLT - 12.22.14 EL Chart


"I’ve used the net long/short positions of CFTC Non-Commercial positioning as a contrarian Global Macro indicator for years," wrote CEO Keith McCullough in today's Morning Newsletter.

Wow, Again!

“Wow, I get to wake up again?”

-Dave Grohl


The former drummer of Nirvana went on to say, “you have to make good with what you’ve got.” And that he did. After Kurt Cobain’s death in 1994, Dave Grohl went on to successfully found the Foo Fighters in Seattle, Washington.


These were the bad boy bands that I grew up listening to in college. I even had the Cobain flow, earrings, and yes, much to my Dad’s chagrin, tattoo. But don’t tell anyone. I have such a politically correct image to uphold!


One of my favorite Foo Fighters tunes was one that Grohl wrote called Monkey Wrench (1997). For bears, in US equity market terms, there’s this thing called year-end that is something similar to that. And wow, did they just ramp it again!


Wow, Again! - d5


Back to the Global Macro Grind…


After going straight down for the 1st two weeks of December (like they did in the 1st two weeks of October), they v-bottomed the US equity futures again. And whoever “they” are – I must once again say, wow – congrats (for now).


One way to ramp the stock market is for a determined group of “they” to buy the living daylights out of SP500 futures in a compressed period of time (say, into options expiration day, for example).


When I say “ramp”, I mean ramp! Check out this ramp in the CFTC net LONG position of SP500 (Index + Emini) last week:


1. SPX net long position (futures and options contracts) was +104,196 week-over-week

2. That takes the total NET LONG positions to +153,107 contracts

3. Vs. the 3 and 6 month avg net positions of +19,661 and -10,751, respectively


#Wow, again!


Since I’ve used the net long/short positions of CFTC Non-Commercial positioning as a contrarian Global Macro indicator for years, this is easily the most interesting data point in my notebook this morning.


Especially for those of you who are uber bullish on #deflation and global #GrowthSlowing in Long Bond (TLT, EDV, etc.) terms, here’s another beauty:


1. 10yr Treasury net SHORT position climbed another -55,605 week-over-week

2. That takes the latest net SHORT position in Long-term Treasuries to a fresh YTD high of -270,383 contracts

3. Vs. the 3 and 6 months avg net short positions of -86,021 and -45,589, respectively


The only other major macro futures/options position I’d call out is that the short position in the Japanese Yen dropped 17,049 contracts to a net SHORT position of -86,805 last week (vs. the 3 and 6 month avg net short positions of -96,791 and -90,156, respectively).


In other words, if you’re fading Consensus Macro alongside us these sentiment moves mean that:


1. While we aren’t currently short SPY in Real-Time Alerts, putting that back on closer to 2090 makes sense

2. Staying with our favorite, low-volatility, absolute return Long Bond positions (TLT, EDV) definitely makes sense

3. Re-shorting Burning Yens (vs USD) on the bounce early last week is where we want to be


If you want to get right racy into year-end and buy some big central planning beta, the Weimar Nikkei is probably where the pin action is going to be at. These Japanese dudes are politically incentivized!


Unlike Asia ex-Japan (MSCI index) which was down another -1.7% last week, the Nikkei was up another +1.4% to +8.2% for 2014 YTD and has immediate-term upside to 17,921 (see our latest Japan deck for the why).


Top-down, while the agenda to mark-up US equity markets into year-end is fun to consider, it’ll be critical to monitor mounting #deflation and #GrowthSlowing risks in the global economy.


Amidst the v-bottoms, Emerging Markets did not. EM Equities (MSCI Index) fell another -0.4% last week to -6.7% YTD. Someone needs to show me some wow there soon, or I’ll just keep waking you up to what we’ve got…


And that’s both growth and inflation expectations slowing, big time.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.03-2.23%


Nikkei 17162-17921

VIX 14.34-24.16

YEN 118.42-120.63

Oil (WTI) 52.06-57.94


Best of luck out there this week,



Keith R. McCullough

Chief Executive Officer


Wow, Again! - 12.22.14 EL Chart

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.

Party Hard?

This note was originally published at 8am on December 08, 2014 for Hedgeye subscribers.

“I’m the fellow who takes away the punch bowl just when the party is getting good.”

-William McChesney Martin


Economic #history fans will remember McChesney Martin as the Chairman of the Federal Reserve when central planners didn’t decide the fate of every market day (1951-1970). Sadly, Richard Nixon and Arthur Burns changed that by Burning The Buck in 1971.


Today, if you want to light up your country’s currency and party hard, you need a Ph.D. in economic storytelling. Devaluation has plenty of stock market pop, but “the trouble is...” according to Ken Rogoff, “a lot of people have not had any punch yet.”


In contrast, the two aforementioned quotes are what Jim Rickards used to introduce Chapter 10 (pg 243 in The Death of Money) – “Crossroads.” And, oh are we at a crossroad for both growth and inflation expectations, globally, this morning.


Back to the Global Macro Grind


Before I replay what happened last week, here’s what the Japanese just restated (revised lower) about the results of burning their currency – Q3 GDP dropped -1.9% (year-over-year) in 2014. “So”, they definitely need to triple down on that!

Party Hard? - Abenomics cartoon 11.17.2014 

I know, that is so Q3. How about China’s November trade data? Imports dropped -7% year-over-year (from +5% in October, which was a bad number to begin with); exports slowed to +5% NOV vs. +12% in OCT. #TrainWreck = Chinese stocks straight up.


In other central planning news, here’s what the world’s Big 3 (currencies) did last week:


  1. Japanese Yens burned another -2.3% last week and have lost -15.6% of their value in the last 6 months
  2. Europe crashed the Euro another -1.3% wk-over-wk (-10.1% in the last 6 months)
  3. US Dollar Index rose another +1.1% on the week (+11.2% in the last 6 months)


With the exception of a counter-TREND move in US jobs data (the 1st pseudo good rate of change report in months), most of the strength in the US Dollar can be attributed to the currency war (i.e. where the BOJ and ECB burn theirs).


To review, why does an un-elected central planner burn the currency?


A)     In response to #GrowthSlowing and/or

B)      In reaction to #deflation


In Hedgeye-speak (i.e. in Bayesian rate of change terms), when both of these core factors (GROWTH and INFLATION) are slowing, we call that the 4th Quadrant. That’s why our Q4 Macro Theme is called #Quad4 Deflation. That’s where we think the USA is too.


But, but… “it’s different this time” (says the cover of Barron’s, who will be charging 2 & 20 for that investment thesis starting in 2015 due to #deflationary forces in Old Wall media print advertising).


And… at the end of a cycle (66 consecutive months of US economic expansion), the other 2/3 of Americans who have only been punched (negative real wages for the last 5 years) are going to magically get wage growth and a capex cycle…


Roger that.


Simple Global Macro risk manager question: with global #GrowthSlowing and #Quad4 Deflation, how are global capex cycles and wages going to inflate? A: I don’t know.


While the fanfare surrounding Nikkei and “Dow 18,000 Bro” has been fantastic, the following stock markets have not been:


  1. Emerging Markets (MSCI Equity Index) down -1.8% on the week to -1.6% YTD
  2. Latin American Equities (MSCI Index) down another -5.1% week-over-week to -10.8% YTD
  3. Asia ex-Japan (MSCI Index) down -0.9% on the week to +3.7% YTD
  4. Brazil’s stock market -5.0% on the week to +0.9% YTD
  5. Canada’s stock market down -1.8% week-over-week (+6.3% YTD)
  6. Russia’s stock market continued to crash, -6.7% last week to -37% YTD


These stock markets have been undergoing what we call a phase transition in inflation expectations becoming deflationary ones. You can see that in the following real-time read-throughs:


  1. US 5yr Breakevens dropped another -4 basis pts on the wk to 1.36% (crashing -26%, or -47bps, YTD)
  2. West Texas Crude Oil down another -0.8% to -28.6% YTD
  3. CRB Commodities Index deflating another -0.8% last week to -9.9% YTD


Even the strongest commodities in 2014 (Coffee and Cattle) were down -3.9% and -2.6% last week, respectively.


From here, I think the debate really boils down to what’s more important: A) the impact of #deflation on stocks, bonds, and workers who have been compensated (in size) by the last 5 years of inflation expectations, or B) Ph.D. hopes for US wage growth?


Rather than partying hard with the planners, I’ll take B). Yep, call me names – I’m the fellow who doesn’t get paid to navel gaze at the Weimar Nikkei Dow and think that 55x earnings for the Russell 2000 in 2014 wasn’t a #bubble.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.16-2.34%

SPX 2040-2081

RUT 1149-1190

EUR/USD 1.22-1.24

Yen 119.04-121.31

WTI Oil 62.21-69.40


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Party Hard? - 12.08.14 Chart

Commodities: Weekly Quant

Commodities: Weekly Quant - chart1 deltas

Commodities: Weekly Quant - chart2 deltas 2

Commodities: Weekly Quant - chart3 usd correls

Commodities: Weekly Quant - chart4 volume

Commodities: Weekly Quant - chart5 open interest

Commodities: Weekly Quant - chart6 vol

Commodities: Weekly Quant - chart7 sentiment



Ben Ryan


Investing Ideas - Levels

Takeaway: Here are Hedgeye CEO Keith McCullough's refreshed levels for our high-conviction investing ideas.

Investing Ideas - Levels  - Investingideas12.19

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

Anything longer than 3 years is unpredictable.


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