Client Talking Points


Once upon a time, yield curve compression (flattening) was a clean cut #GrowthSlowing signal (it still is, as both U.S. and global growth slow in Q4 vs. Q3 – you’ll get that data in JAN); UST 10YR 2.16% (-29% year-to-date) minus 2yr 0.70% = +146 basis points spread registering fresh tear-to-date lows as commodities continue to collapse.


Collapse, crash – use whatever word you want for a CRB Index (19 commodities) that dropped another -1.4% to fresh year-to-date lows yesterday (-25% since June); while it’s fascinating to watch the narrative on why, reality is that being positioned for #deflation risk (net short Commodities, Junk Bonds, etc.) is paying off big time now.


At the all-time (which is a long time) closing highs for the SPX (2078), Total U.S. Equity Market Volume was -12% and -30% vs. its 1 month and year-to-date averages yesterday.  We would say #NoWorries on the liquidity trap if it wasn’t for the 100-150 handle draw-downs we saw from the no volume SEP and NOV highs – enjoy the markups.

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


VIDEO (2mins) Why I’m Using the Word “Recession” for the First Time This Year via @hedgeye



Excellence is the gradual result of always striving to do better.

-Pat Riley


Greece is leading losers his morning down -2.5% to -26.8% year-to-date.


Takeaway: In today's edition of the Macro Playbook, we review our intermediate-to-long-term outlook for the U.S. dollar (HINT: much higher from here).


Long Ideas/Overweight Recommendations

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



#StrongDollar Continues: The U.S. Dollar Index’s +1.9% WoW delta is yet another reminder of what has been one of the sharpest rallies in the free-floating history of the U.S. currency (up +12.6% since the end of June). At just shy of 90, the DXY is trading at the strongest levels since the first quarter of 2006.


So should you short the dollar on that and reallocate capital to all the carry trades and inflation hedges born out of ~10 years of centrally planned U.S. currency debasement (2001-2011)? Absolutely not.


THE HEDGEYE MACRO PLAYBOOK - Trailing 10Y Correlations to TWDXY


Lost in the fact that last price on the DXY is higher than any other point on the preset 5Y chart on Bloomberg is the fact that the USD could go much, much higher from here versus the EUR and JPY as monetary policy continues to diverge. Specifically, critical mean reversion thresholds in the EUR/USD and JPY/USD crosses auger for roughly -18% downside in the euro and yen from here.




So what would perpetuate a continued divergence in monetary policy from here? Inflation is arguably the key determinant. In our 12/19 note titled, “Does Your View on Rates Include the Risk of a “Reflexive Deflationary Spiral”?” we outlined a 6-step reflexive process whereby the USD perpetually comes out on top vis-à-vis the EUR and JPY over the intermediate-to-long term. Needless to say, we do not think you can afford to not review that note.




Looking to [Bloomberg] consensus, we think the current implied appreciation of +2.9% on the DXY through EOY ’15 is well shy of what is likely to be experienced by investors over the NTM.


THE HEDGEYE MACRO PLAYBOOK - DXY Bloomberg Consensus NTM Forecast


As always, Consensus Macro strategists live in the perceived certainty of anchoring on last price and clustering around the median with respect to their forecasts. At Hedgeye, we prefer to live in the uncertainty of actually making the call – before the big moves occur. From our 8/5 presentation titled, presentation titled, “ARE YOU PREPARED FOR QUAD #4?”:






Long live #StrongDollar!


***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.


Does Your View on Rates Include the Risk of a “Reflexive Deflationary Spiral”? (12/19)


#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.

CHART OF THE DAY: Yield Spread Compression #NoWorries

CHART OF THE DAY: Yield Spread Compression #NoWorries - 12.23.14 chart


YIELD SPREAD – the belly of the curve is even flatter, but the big one almost every objective strategist monitors (10s/2s spread) has compressed another 7bps this morning to a fresh YTD low of +146bps wide (-38% YTD)


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Who Is The Author?

“And who is the author of all this?”

-Napoleon Bonaparte


While it’s getting difficult to pin down who, specifically, nailed the narrative of worldwide #deflation, crashing long-term bond yields, and flattening yield curves as the driver of the all-time high in the SP500… that’s what makes a market!


The aforementioned quote comes from a section in The Theory That Would Not Die titled “Enlightenment and the Anti-Bayesian Reaction” (page 30) where Napoleon realizes that Pierre-Simon Laplace wasn’t as full of it as those who weren’t yet enlightened.


Much unlike the perma bulls, bears, and partisan hacks in our profession, Laplace was a math, stats, and probability guy. In forecasting terms, he didn’t cling to religion or failed academic dogmas. As the facts changed, he did – or at least he had a framework (Bayes Rule) to try.

Who Is The Author? - Crazy bull cartoon 08.19.2014


Back to the Global Macro Grind


While I can try to explain why the SP500 can drop 103 points in a straight line (in 7 days), then ramp 106 points in 4 days, I don’t think that’s where I add value. There are legions of pundits on the #OldWall that use 1-factor moving averages than can help you with that.


Using my #waterfall metaphor for multi-factor, multi-duration risk management, I’m much more comfortable trying to explain market moves in terms of what is happening beneath the headline US stock market index price.


What’s interesting, but not surprising, is that some of the big Global Macro factors that concerned consensus on December 16th (when the SP500 closed -5.1% lower at 1972) are actually worse today than they were then.


No, I’m not talking about where Russia is trading (-41% YTD). I’m talking about really big US economic risk indicators like:


  1. #Deflation Expectations Accelerating
  2. Yield Spread Compression
  3. Risk Ranges Widening


“So”, now that I am in the holiday cheer spirit, allow me to knock those pins down, one by one:

  1. #DEFLATION – with Oil reversing intraday and Gold dropping -1.7%, the CRB Commodities Index (19 commodities) dropped another -1.5% yesterday to a fresh YTD low of 237 (that’s -15.4% YTD, crashing -25% since June)
  2. YIELD SPREAD – the belly of the curve is even flatter, but the big one almost every objective strategist monitors (10s/2s spread) has compressed another 7bps this morning to a fresh YTD low of +146bps wide (-38% YTD)
  3. RISK RANGES – for the SP500 and her inverse brother (VIX), immediate-term risk ranges are as wide as they have been in almost 3 years (SPX = 1, VIX 14.28-23.87)

But #NoWorries, “the market is up”…


Not clear what that means, but if the “market” includes things like global bond markets, international equity markets, commodities, currencies, etc., that CNBC type statement would make a 16th century dude who called the world “flat” look smart.


Asia (ex-Japan, which we’re actually net long for now via the DXJ) continues to trade much more in line with global #GrowthSlowing than the Dow does. Dr. KOSPI (South Korea) was down another -0.3% overnight to -3.5% YTD. Australia (struggling alongside Canada, Brazil, etc. with #deflation expectations) was -1.1%, and both the Hang Seng and Thailand failed @Hedgeye TREND resistances too.


All the while, High Yield and Junk started going down again yesterday. Remember that part of the December 16th #Deflation Dominoes? I do. Down Yen and Euro à Up Dollar à Down Oil, Commodities, etc. (#deflation) à Down High Yield Energy Bonds.


In other words:


  1. Don’t be levered long Commodities, Energy Stocks/Bonds, Russia, etc.
  2. Stay with #StrongDollar, but don’t confuse that with US growth accelerating in Q4 vs Q3
  3. As growth and inflation expectations continue to slow, stay with low-volatility Long Bonds (TLT)


After the 2000 and 2008 crashes, who is the author of all this risk management speak?


Don’t blame me. It’s Mr. Macro Market’s message. And, at a bare minimum this morning, I wanted to remind you of it as those who are in the business of being willfully blind into year-end won’t.


Our Global Macro Risk Ranges are now:


UST 10yr Yield 2.05-2.22%


VIX 14.28-23.87
USD 88.91-90.36

Oil (WTI) 52.05-56.99

Gold 1167-1199


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Who Is The Author? - 12.23.14 chart

December 23, 2014

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Bayesian Answers

This note was originally published at 8am on December 09, 2014 for Hedgeye subscribers.

“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


Bayesian Answers - el1

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.