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Japan and Russia

Client Talking Points

YEN

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).

NIKKEI

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).

RUSSIA

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

CASH 56% US EQUITIES 4%
INTL EQUITIES 2% COMMODITIES 0%
FIXED INCOME 31% INTL CURRENCIES 7%

Top Long Ideas

Company Ticker Sector Duration
EDV

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.

TLT

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).

XLP

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

TWEET OF THE DAY

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

@KeithMcCullough

QUOTE OF THE DAY

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

-Oliver Wendell Holmes

STAT OF THE DAY

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%

 

#sweet

 

 


Shadow Boxing

“I’ve seen George Foreman shadow boxing, and the shadow won.”

-Muhammad Ali

 

Traditionally observed by Commonwealth Nations like my homeland, today is Boxing Day.

 

Much to Muhhamad Ali’s chagrin, today has nothing to do with him beating up on Foreman or Frazier. It used to be the day when British servants received gifts from their overlords in a “Christmas Box.”

 

Now, barring any central plan you might receive from upon high, it’s just another day off for Canadians to drink beers and watch the World Junior Hockey tournament (which is being held in Toronto and Montreal this year).

 

Shadow Boxing - a5

 

Back to the Global Macro Grind…

 

Although its economy is getting speed-bagged, Japan doesn’t do Boxing Day. That said, their bureaucrats love central planning. In a holiday message to the people he is plundering via currency debasement, this is what the Prime Minister, Shinzo Abe, had to say:

 

“I want companies with high profits that are benefiting from the weak yen to raise wages, investment, and on top of that, consider the prices they pay their suppliers…”

 

Isn’t that just great – thanks for the pep talk, Shinzo.

 

In other news, the people of Japan don’t want to do what Abe is telling them to do. Not to be confused with the Policy To Inflate the Weimar Nikkei’s last price, here’s what’s cooking in Japan, economically:

 

1. As the Yen burns, Japanese Consumer Prices (CPI) are +2.7% year-over-year

2. But Japanese Household Spending (in Burning Yen Terms) is down -2.5% year-over-year

3. And the Savings Rate of the Japanese people just went negative alongside real wage growth

 

I know, this is all progressing so very well…

 

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.

 

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%

 

#sweet

 

And so is worldwide #GrowthSlowing + #deflation risk, right? Maybe if you’re shadow boxing USA style with year-end performance chasing, or something like that. But I wouldn’t confuse that with trending global macroeconomic gravity.

 

Our immediate-term Global Macro Risk Ranges are now (I’ve added the our intermediate-term TREND view in brackets – you can get our Top 12 macro ranges and TREND views in our Daily Trading Range product):

 

UST 10yr 2.03-2.30% (bearish = bullish Long Bond)

SPX 1 (bullish)

RUT 1125-1220 (neutral)

Nikkei 175 (bullish)

VIX 12.95-24.11 (bullish)

USD 89.26-90.89 (bullish)

EUR/USD 1.21-1.23 (bearish)

YEN 118.23-121.11 (bearish)

Oil (WTI) 54.08-57.99 (bearish)

Nat Gas 2.91-3.47 (bearish)

Gold 1161-1197 (bearish)

Copper 2.83-2.93 (bearish)

 

Happy Holidays – best of luck and health to you and your families,

KM

 

Keith R. McCullough

Chief Executive Officer

 

Shadow Boxing - EL 12.26.14


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December 26, 2014

December 26, 2014 - HE DTR 12 26 14.001


Cartoon of the Day: Merry Christmas!

Cartoon of the Day: Merry Christmas! - Christmas cartoon 12 25 2014  2

 

From all of us at Hedgeye, we wish you and your families the best this holiday season.


Tizzle In The System

This note was originally published at 8am on December 11, 2014 for Hedgeye subscribers.

“Each time the system is recalculated, the posterior becomes the prior.”

-Sharon Bertsch McGrayne

 

Simple is as simple does, within a non-linear and dynamic system like the Global Macro market, that is…

 

“Conceptually, Bayes’ system was simple. We modify our opinions with objective information. Initial Beliefs (our guess where the cue ball landed) + Recent Objective Data (most recent ball left or right of the prior) = A New and Improved Belief.”

-The Theory That Would Not Die, pg 8

 

What do you believe? Is what you believed in late September consistent with what you believe after the October and December corrections? How about from January to June (when late-cycle inflation was accelerating) vs. today’s global #deflation? The best way to manage risk is by constantly recalculating your system.

Tizzle In The System - Falling cartoon 12.10.2014

 

Back to the Global Macro Grind

 

What does the system say this morning?

 

With the Russell 2000 down YTD and both inflation expectations and 10yr bond yields #crashing, initial 2014 consensus beliefs of worldwide growth accelerating and rates rising are no longer believed.

 

Since so many Old Wall dudes still use the “Dow” as some sort of proxy for the global economy, here’s what the broader global equity system is saying:

 

1. Weimar Nikkei (Japan) only goes up when the economy is so bad that they need to hit the CTRL+Panic (print) button

2. The liquid side of the “China” trade (Hang Seng) continued to signal bearish TREND @Hedgeye overnight (-0.9%)

3. The former Global Growth “signal” (known as Dr. KOSPI in South Korea) -1.5% overnight to -4.7% YTD #bearish

4. The UK’s FTSE failed @Hedgeye TREND resistance and is back to DOWN for 2014 YTD

5. Germany’s DAX is holding on to TREND support of 9688 at +3.2% YTD

6. Greece, Portugal, and Russia continue to crash (down more than 20% respectively, YTD)

 

Oh, and Argentina dropped -14% in the last 2 trading days… but #NoWorries there – centrally planned currency devaluation has had fantastic economic results for the Argentines! Watch the LEGO movie this weekend with your kids – “everything is awesome.”

 

Yep, everything other than this other Big Macro thing that is correlating with #CommoditiesCrashing called 10yr Bond Yields:

 

1. Japan 10yr = 0.40%

2. Germany = 0.67%

3. France = 0.94%

 

“So” I guess my growth-and-inflation-slowing bull case for the USA Long Bond (TLT) with the US 10yr Treasury Yield crashing (-28% YTD) to 2.16% has plenty of room to run.

 

The only thing that is awesome (i.e. you don’t have to make things up about global growth accelerating and #deflation not being a globally interconnected risk) is actually being long something, in size, with very low-volatility (Long-Term Treasuries).

 

One of our hard core customers called it “TLT tizzling” at our Hedgeye NYC Holiday Party on Tuesday… so I looked that up in the Urban Dictionary: “A fat party. This word is derived from the word partizzle, shortened to tizzle…”

 

LOL

 

Yes, it’s ok to laugh at this game. If you don’t, it might just make you cry. And so will what’s most causal to the pain you are seeing in inflation expectations globally right now – central planners losing Mr. Macro Market’s confidence that they can re-flate asset prices.

 

In case you didn’t know, that’s how this central planning game of expectations ends – in #deflation.

 

It’s one thing to run around telling yourself that the Dow and DAX are up because you just knew that markets can’t go down. It’s entirely another to be doing that over and over again when the global macro system starts to signal that the party’s music is stopping.

 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets, which you can find in our Daily Trading Range product) are as follows:

 

UST 10yr Yield 2.14-2.24% (bearish)

SPX 2018-2042 (bullish)

RUT 1151-1172 (bearish)

KOSPI 1901-1965 (bearish)

VIX 14.43-19.59 (bullish)

USD 87.67-88.79 (bullish)

EUR/USD 1.22-1.25 (bearish)

Yen 116.79-121.65 (bearish)

Oil (WTI) 60.48-65.38 (bearish)

NatGas 3.49-3.81 (bearish)

Gold 1205-1242 (neutral)

Copper 2.84-2.95 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough

Chief Executive Officer

 

Tizzle In The System - 12.11.14 TLT vs. CRB


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