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The Best of This Week From Hedgeye

Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.


McCullough: Why I’m Using the Word “Recession” for the First Time This Year


In this excerpt from the Q&A portion of Monday's Morning Macro Call for institutional subscribers, CEO Keith McCullough says that Fed Chair Janet Yellen could make a move that puts the U.S. in recession.


Keith's Macro Notebook 12/22: Yen | Russia | Sentiment


Hedgeye CEO Keith McCullough shares the top three things in his macro notebook Monday morning.


McCullough: Serious Lack of Momentum in the Momentum Stocks | $GPRO $LOCO


In this brief excerpt from Tuesday’s Macro Call for institutional subscribers, Hedgeye CEO Keith McCullough notes the similarities between current and earlier bubbly periods and highlights two momentum stocks in particular which are representative of the current climate. 



 This Won't End Well

The Best of This Week From Hedgeye - Russia Timmy 12.23.14

The Gong Show that is Russia continues. The stock market is in a deep hole, down more than 40% this year.



Consensus Macro Positioning $SPX $TLT

The Best of This Week From Hedgeye - COD 12.22..14

"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 Monday's Morning Newsletter.



Yield Spread Compression #NoWorries

The Best of This Week From Hedgeye - COD 12.23.14

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



Will the 10-year Treasury yield go below 2% at any time in the 1st quarter of 2015?


Our biggest call by far this year has been bucking the consensus tide on the direction of Treasury yields. While others said yields had nowhere to go but up, we remained resolute that yields were in fact, heading lower. So, as we head into the new year, we wanted to know what you think 2015 has in store. 

Cartoon of the Day: Abe-Broken

Cartoon of the Day: Abe-Broken - Abenomics cartoon 12.26.2014

As long as the Weimar Nikkei (which, by the way, we’ve been suggesting you be long, while short Yens vs USD) is up, the financial media that panders to central-planning-access is going to tell you that this Abenomics gong show may actually work. It hasn't and it won't.



Long Ideas/Overweight Recommendations

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

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)



#Quad1 Lands a Punch in the “#Quad4 vs. #Quad1 Debate”: For the past 4-6 weeks, we’ve been incessantly looking for confirmation in financial markets and affirmation in the economic data that the domestic equity market was beginning to price in an investable transition to #Quad1 on our GIP chart.


With the advent of recent quant signals and fundamental data, it would appear that process is beginning to get underway. Starting with the economic data, the U.S. consumer has finally responded to disinflationary stimuli by showing signs of life in November:












Looking to our Tactical Asset Class Rotation Model (TACRM), we’re starting to see quantitative confirmation of this very nascent transition as well. Specifically, of the 47 sectors and style factors we track across the U.S. equity market, those which have been historical outperformers during periods of #Quad1 (i.e. financials, consumer cyclical and small-caps) have six of the top 10 Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) readings: IAI, XRT, XLF, IWO, XLY and IWM. Moreover, healthcare – which has historically been the best performing sector during periods of #Quad4 – now accounts for three of the bottom 11 VAMDMI readings: XLV, IBB and IHE.




We can’t stress enough that these are very nascent signals, but they are indeed signals nonetheless and require further monitoring as it relates to our current defensive asset allocation recommendation. To the extent such signals start to trend (they aren’t yet), we will undoubtedly look to adopt a more offensive posture in our thematic investment conclusions above.


Happy Boxing Day!



#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.

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

ICI Fund Flow Survey - Withdrawals Across the Board

Takeaway: Investors continued to pull funds across the board, even withdrawing capital from money market funds.

Investment Company Institute Mutual Fund Data and ETF Money Flow:


As markets tumbled prior the Federal Reserve's announcement that it would be patient in raising interest rates, investors continued to pull capital from funds across the board in the most recent ICI survey ending December 17th.  Only tax-free bonds and fixed income ETFs experienced inflows (+$950 million and +$3.8 billion respectively) although aggregate total net bond funds lost $5.6 billion last week with the $10.3 billion withdrawal in taxable bonds. Total equity products (ICI mutual funds and all ETFs according to Bloomberg) lost $12.4 billion last week according to the ICI.


ICI Fund Flow Survey - Withdrawals Across the Board - 1


In the most recent 5 day period ending December 17th, total equity mutual funds put up net outflows of $6.6 billion according to the Investment Company Institute. The outflow was composed of domestic stock fund withdrawals of $4.2 billion and international stock fund withdrawals of $2.4 billion. The international and domestic equity categories have been polarized this year with international stock funds having inflows in 48 of the past 50 weeks, versus domestic trends which have been very soft with inflow in just 16 of the past 50 weeks. The running year-to-date weekly average for all equity fund flow continues to decline and now settles at a $702 million inflow, well below the $3.1 billion weekly average inflow from 2013. 


Fixed income mutual funds put up outflows of $9.4 billion with $10.3 billion of outflows from taxable funds offset by $950 million of inflows into tax-free funds.  Munis have had a solid year with subscriptions in 48 of the past 50 weeks. The 2014 weekly average for fixed income mutual funds now stands at an $804 million weekly inflow, an improvement from 2013's weekly average outflow of $1.3 billion, but still a pittance of the weekly average of +$5.8 billion in 2012 (our view of the blow off top in bond fund inflow). 


ETF results were mixed; equity ETFs put up a $5.8 billion outflow, well below the the 2014 weekly average of a $2.6 billion inflow. Fixed income ETFs, however, put up a $3.8 billion inflow, well above the year-to-date average of a $1.1 billion inflow.


Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   


Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the running weekly year-to-date average for 2014 and the weekly quarter-to-date average for 4Q 2014:


ICI Fund Flow Survey - Withdrawals Across the Board - 2 2


ICI Fund Flow Survey - Withdrawals Across the Board - 3 2


ICI Fund Flow Survey - Withdrawals Across the Board - 4 2


ICI Fund Flow Survey - Withdrawals Across the Board - 5 2


ICI Fund Flow Survey - Withdrawals Across the Board - 6 2



Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI) and the running weekly year-to-date average for 2014 and the weekly quarter-to-date average for 4Q 2014. The third table are the results of the weekly flows into and out of the major market and sector SPDRs:


ICI Fund Flow Survey - Withdrawals Across the Board - 7 2


ICI Fund Flow Survey - Withdrawals Across the Board - 8 2


Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, the the XLB materials ETF experienced a reversal from the prior week, losing 9% or $288 million in withdrawals.  The XLY Consumer discretionary experienced the largest flow on a percentage bases at a +10% (+$738 million inflow).


ICI Fund Flow Survey - Withdrawals Across the Board - 9 2



Net Results:

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $6.8 billion spread for the week ($12.4 billion of total equity outflow versus the $5.6 billion outflow from fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $1.8 billion (more positive money flow to equities), with a 52 week high of $17.7 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 


ICI Fund Flow Survey - Withdrawals Across the Board - 10 2


Exposures: The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:


ICI Fund Flow Survey - Withdrawals Across the Board - 11 




Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA



Japan and Russia

Client Talking Points


As the Yen burns, Japanese Consumer Prices (CPI) are +2.7% year-over-year. But Japanese Household Spending (in Burning Yen Terms) is down -2.5% year-over-year, and the Savings Rate of the Japanese people just went negative alongside real wage growth. The immediate term risk range for the Yen is 118.23-121.11 (bearish).


But as long as the Nikkei (which, by the way, we’ve been suggesting you be long, while short Yens vs USD) is up, the financial media that panders to central-planning-access is going to tell you that this Abenomics thing could actually work. The immediate term risk range for the Nikkei is 17261-17995 (bullish).


Despite “bouncing” off its lows, the Russian Trading System Index is down -38.4% year-to-date, and would only have to be +63% (from here) to get whoever “allocated assets” to it a year ago back to breakeven. The immediate term risk range is 642-875. In other words, with the RTSI (Russian Stock Market) currently trading at 847, it has immediate-term upside of +3% and immediate-term downside of -24%.

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


$LINE down another -5% - not a merry christmas for people who got sucked into owning that



A mind that is stretched by a new experience can never go back to its old dimensions.

-Oliver Wendell Holmes


The U.S. 10YR Yield ticks back down to 2.25%, -26% year-to-date as growth and inflation expectations fall. 

CHART OF THE DAY: A (Not So) Merry Christmas In Russia

CHART OF THE DAY: A (Not So) Merry Christmas In Russia - EL 12.26.14


Editor's note: Below is a brief excerpt from today's Morning Newsletter by Hedgeye CEO Keith McCullough. For more information on how you can get a couple steps ahead of consensus every morning click here.


In other Global Macro news, other than getting to play Denmark in the 1st round of the 2015 IIHF World Junior Hockey Championship today, things for Russia still suck.


Despite “bouncing” off its lows, the Russian Trading System Index is:


1. Down -38.4% for 2014 YTD

2. And would only have to be +63% (from here) to get whoever “allocated assets” to it a year ago back to breakeven

3. With an immediate-term risk range of 642-875


In other words, with the RTSI (Russian Stock Market) currently trading at 847:


1. It has immediate-term upside of +3%

2. And immediate-term downside of -24%





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.