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PODCAST| Must-Listen: McCullough Circles the Macro Market Globe In 15 Minutes

In this complimentary New Year’s Eve podcast of Hedgeye’s Morning Macro Call, CEO Keith McCullough discusses the most important macro data on his screen and answers key questions from institutional subscribers.



Keith highlights the desperate scene in Europe as Mario Draghi and Peter Praet (chief economist for ECB) effectively beg for quantitative easing. He also discusses the effects of Quad4 #deflation and why gold will not go up until the USD retreats.

Keith's Macro Notebook 12/31: China | Oil | VIX


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


Takeaway: In today's edition of the Macro Playbook, we discuss what we think are rising prospects of another bubble in Chinese equities.


Long Ideas/Overweight Recommendations

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

Short Ideas/Underweight Recommendations

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



China Equity Bubble 2.0?: In 2014’s “Year of the Horse” China’s benchmark A-Shares index, the Shanghai Composite, galloped all the way to a +52.9% return, handing mainland Chinese and QFII investors their best annual return from stocks since a +79.9% return in 2009.


Prior to this year’s melt-up – the bulk of which had been condensed in the final 6M of the year (the Shanghai Composite was actually down on the year through 7/24) – A-Shares had delivered a negative annual return in three of the previous four years:


  • 2010: -14.3%
  • 2011: -21.7%
  • 2012: +3.2%
  • 2013: -6.8%


THE HEDGEYE MACRO PLAYBOOK - China Shanghai Composite 2H14 Ramp

Source: Bloomberg L.P.


This pattern is eerily similar to the five years preceding the 2006-07 bubble in the A-Shares:


  • 2001: -21.6%
  • 2002: -17.5%
  • 2003: +10.3%
  • 2004: -15.4%
  • 2005: -8.3%
  • 2006: +130.4%
  • 2007: +96.7%


THE HEDGEYE MACRO PLAYBOOK - China Shanghai Composite Yearly Returns

Source: Bloomberg L.P.


That obviously begs the question: is this the start of another bubble in mainland Chinese equities? Ultra-bullish volume and turnover signals support an outlook for continued upside, which rhymes with the pattern seen in 2006-07 (though there has been significantly more of both during this current melt-up):


THE HEDGEYE MACRO PLAYBOOK - China Shanghai Composite Volume   Turnover

Source: Bloomberg L.P.


To be crystal clear, we think the rally in the A-Shares has legs, though we continue to search for confirming evidence as it relates to forming a communicable thesis. We’re still in the early innings of this process (i.e. we’re not yet comfortable with officially going LONG of the CAF ETF), but we think the story is likely to end up as follows:


  1. Growth in China’s current and capital account inflows slow – already happening
  2. Growth in China’s banking sector liabilities slows on a trending basis – already happening
  3. Growth in China’s banking sector assets (e.g. loans designated for fixed assets investment) slows on a trending basis – already happening
  4. China’s overall economic growth slows – already happening
  5. As Chinese GDP growth slows, Chinese demand for commodities wanes; that, coupled with a rising dollar, weighs incrementally upon commodity prices – already happening
  6. As commodity prices fall, reported inflation readings in China continue to slow – already happening
  7. As this perpetual state of #Quad4 threatens the employment and wage growth outlook in China, the State Council and PBoC commit to a stated +7% floor in real GDP growth by easing monetary and fiscal policy, at the margins – already happening
  8. As Chinese officials ease, investors get excited about the prospects for stock market appreciation – already happening
  9. As the stock market appreciates, Chinese speculators commit incremental capital to the stock market in lieu of the property market, which causes property prices to contract – already happening
  10. As Chinese property prices contract, Chinese investors move incremental capital out of this sector into the stock market – already happening


Rinse and repeat?






Stay tuned as we look substantiate the aforementioned hypothesis with further analysis in the coming days and weeks. 2015’s “Year of the Sheep” could be a magical year for Chinese equities – the A-Shares in particular. It’s also worth noting that the sheep is generally considered to be a lucky animal among the Chinese, as it is the 8th animal in the 12-animial zodiac and the number 8 is generally perceived to be among the luckiest of all numbers in China


Happy New Year and best of luck to you and your team in 2015! Many thanks for your continued patronage and interest in our research.


***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.


Early Look: New Discoveries (12/29)


#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.          

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#Deflation is Dominating Headlines

Client Talking Points


If your economy slows, you have to centrally plan a stock market ramp! China’s Q4 economic slowdown = +20.6% gain in December for the Shanghai Comp! To close out the year up a whopping +52.9% (up next, The Year Of The Sheep).


Down another -1.9% this am to $53.12 WTI Oil has been crashing for 6 straight weeks (down -50% since June). Oil will actually signal immediate-term TRADE oversold in our model for the 1st time in a long time anywhere inside of $52.96 (i.e. the low-end of our current 52.96-55.91 risk range).


Remains in what we call a Bullish TREND Phase Transition (we made this call in July with the VIX at 10), making a series of higher-lows and holding immediate-term TRADE support of 12.85. All this tells us is that Q1 should be plenty volatile, and we like that.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). As our declining rates thesis proved out and picked up steam over the course of the year, we see this trend continuing into Q1.  Short of a Fed rate hike, there’s no force out there with the oomph to reverse this trend, particularly with global growth decelerating and disinflationary trends pushing capital flows into the one remaining unbreakable piggy bank, which is the U.S. Treasury debt market.


As growth and inflation expectations continue to slow, stay with low-volatility Long Bonds (TLT). We believe the TLT has plenty of room to run. We strongly believe the dynamics in the currency market are likely contribute to a “reflexive deflationary spiral” whereby continued global macro asset price deflation and reported disinflation both contribute to rising investor demand for long-term Treasuries, at the margins.


Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deflation. 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. Consumer Staples is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.

Three for the Road


TREASURIES: 10yr Yield drops 9bps this wk to 2.16%, -29% for 2014



The pain of discipline is far less than the pain of regret.

-Sarah Bombell


87% of parents are spending New Year’s Eve with their children and 34% of parents plan to fool their children into thinking it’s 2015 before the clock actually strikes midnight, according to a survey conducted by Netflix.

CHART OF THE DAY: Short-Sightedness In Oil (WTI November 2013 to today)

CHART OF THE DAY: Short-Sightedness In Oil (WTI November 2013 to today) - 12.31.14 chart


While signs were emerging at the start of 2014 of an emerging production glut and strong U.S. dollar environment, very few, if any, prognosticators, predicted a total collapse in global energy prices. But as outlined in the Chart of the Day, this is exactly what happened.

Big Eyes

“The only thing worse than being blind is having sight and no vision.”

-Helen Keller


Earlier this week I made my annual visit to my eye doctor.   As per usual for someone that has just eclipsed their 40th year, my eyes were a little worse this year compared to last.  The doctor also had an interesting diagnosis, he told me I’m the perfect example of someone with environmental myopia.


Luckily enough this “problem” is not just mine and in some respects Darwin should be proud.  According to Freakonomics.com:


“It has long been thought that nearsightedness is mostly a hereditary problem, but researchers led by Ian Morgan of Australian National University say the data suggest that environment has a lot more to do with it.


Reporting in the journal Lancet, the authors note that up to 90% of young adults in major East Asian countries, including China, Taiwan, Japan, Singapore and South Korea, are nearsighted. The overall rate of myopia in the U.K., by contrast, is about 20% to 30%.”


According to the aforementioned study, and others, there is an increasing prevalence of near sightedness globally and it is primarily the result of people spending too much time inside focused on small screens.   Specifically, the bright indoor light stimulates the retinal transmitter dopamine, which is the structural basis of myopia and, for all intents and purposes, makes the eyes grow too big.


In the world in which many of us live working indoors and focusing on computer screens, this idea of environmental myopia is fine.  That said, to the extent Armageddon actually arrives and our lives change meaningfully, long haul truck drivers would have a real advantage over many of us in a hunter gather world.


Back to the Global Macro Grind...


As the stock market year of 2014 winds down, environmentally caused near sightedness is really a good topic to contemplate as we head into 2015.  It is actually, whether clinically diagnosed or not, an ailment that already effects many stock operators.  Specifically, that is the over focus on short-term trends when thinking about and contemplating the future.


Big Eyes - Crazy bull cartoon 08.19.2014


According to a summary from about a year ago, the venerable investment bank Goldman Sachs (and no offense to Goldman, as we probably could have picked on any major firm) made a number of key predictions for 2014, which included the following:


1)     Oil – Oil will remain stable at current prices due to falling supply in some areas and political uncertainty in others;


2)     China – Stable growth in China of 7.5% will be enough and give investors enough confidence to propel China higher in 2014;


3)     Emerging markets – Expectation of rate hikes in emerging market as growth continues to accelerate.


Now to be fair, one area in which Goldman nailed it, at least according to this article, is that the Fed would remain on hold.


But in aggregate it reinforces the point, which is that the biggest challenge many stock operators face is actually themselves.  Whether we call it environmental myopia or short termism, the risk is that we put too much credence in the recent past and project it forward.  The classic example of this is probably oil.


While signs were emerging at the start of 2014 of an emerging production glut and strong U.S. dollar environment, very few, if any, prognosticators, predicted a total collapse in global energy prices.   But as outlined in the Chart of the Day, this is exactly what happened.


So as we look forward into the stock market year of 2015, this biggest mistake we can make is likely to project the most recent past into the future.   So does that mean that utilities are going to crash, oil is going to rally, and the ruble is set to become a safe haven?  Likely not, but it does mean that if we all have one resolution in 2015 it is that we should become more aware of our person fallibilities.


As one of Hedgeye’s favorite academics Daniel Kahneman said about short termism:


“If owning stocks is a long-term project for you, following their changes constantly is a very, very bad idea. It's the worst possible thing you can do, because people are so sensitive to short-term losses. If you count your money every day, you'll be miserable.”


Despite the stress of short-term performance that many of you have to endure by the nature of the fund management business, Kahneman is definitely spot on as it relates to the emotional impact of focusing on short-term results in investing.  This is the exact emotion, in fact, that causes many investors to sell low and buy high.


On a closing note, we’d like to thank all of your for continuing to support Hedgeye and our efforts to recreate Wall Street research in an accountable and transparent way.  It’s been almost seven years since we started the firm and without the support of all of you it wouldn’t have been possible.


Our immediate-term Global Macro Risk Ranges are now :


UST 10yr Yield = 2.10-2.23%

SPX 2015-2115

VIX 12.85-19.95

YEN 118.49-121.66

Oil (WTI) 52.96-55.91

Gold 1168-1205 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Big Eyes - 12.31.14 chart

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