Keith's Macro Notebook 1/2: Euro | Oil | PMIs

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

Hedgeye Retail Black Book – e-commerce Deep Dive

Takeaway: We expect to have no fewer than 15 Black Books in 2015 – the first of which will be a deep dive on e-commerce.

Please mark your calendar for the first of several Hedgeye Retail Black Books we’ll be releasing this quarter. The first one will be a Deep Dive into e-commerce, and will include a detailed presentation and conference call on Thursday, January 22nd at 11am ET. As always, we’ll tie it into key stock ideas – some existing, some new.


Our Research, which will utilize many different resources including a detailed consumer on-line spending survey, will be focused  on four primary areas:

  1. Secular vs Cyclical Growth
    • The Secular growth in e-commerce is undeniable. But where exactly are we in its evolution?
    • Is e-commerce something that will allow retailers to push through historical peak margins? That’s the call that needs to be made to justify margin improvement from here. We’ll quantify the puts and takes.
  2. Category Analysis
    • Which categories in retail (Apparel, Home Furnishings, Electronics, Footwear, Home improvement, about 20 in total…) have the most advanced e-commerce models, and which are most deficient?
    • Consumer opinion on which categories they are incrementally shifting dollars away from brick & mortar, and towards online channels?  Where is there the greatest opportunity to see changes in consumer spending behavior over the next three years?
    • Are the companies aligned with the likely shift in spending, or not?
    • Where does Amazon fit in as it relates to market share in each category, and how is that evolving?
  3. Profitability Implications
    • We’ll take a look at e-commerce vs B&M margins across companies and retail sub-sectors.  There is an extremely wide bifurcation in margins between the different players.
    • A comparison across Retail of spending on IT systems, DC infrastructure, and the ability to use B&M stores as warehouses to facilitate e-commerce growth goals.
    • Where will we see the greatest incremental return on investment (sector and company) as growth continues?
    • A look at how e-commerce sales are inextricably linked to B&M and how that relationship may lead to fewer store closures than we would otherwise suspect.
  4. E-commerce Trends By Category and Company
    • A quantifiable examination at the differences in visitation, shopping patterns, and demographics across categories in retail. And how that affects spending and consumers’ willingness to take purchases online.
    • How do the key metrics (visitation, reach, basket size, and conversion) correlate with reported e-commerce sales figures and what that looks like going forward as e-commerce becomes a more meaningful driver of sales growth.

Welcome to 2015!

Client Talking Points


Mario Draghi is out daily now with jawboning and lobbying for QE at the JAN 22nd meeting – he’s clearly concerned about A) what markets have been signaling (#deflation) and B) not having German support (yet). The Euro moves to immediate-term oversold within its $1.20-1.22 risk range.


Oil up on the EUR/USD oversold signal? That’s definitely what you should be thinking about with the USD overbought – any Down Dollar day should provide a bone for knife catchers who continue to buy oil futures/options contracts – risk range for WTI is finally tightening (implies less volatility) to 52.61-55.38.


If you ask the global manufacturing PMI data for December, the world slowed – not only did the U.S. Markit PMI readings slow, but both China and all of Europe was either flat to down month over month vs. November. Global #GrowthSlowing + #Deflation keeps the Long Bond (TLT) my top Big Macro Long idea right now.

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


COMMODITIES: after crashing in the last 6 months of 2014 #deflation remains an obvious risk



Don't be a spectator, don't let life pass you by.

-Lou Holtz


German bonds yields hit a new record low on Tuesday, ending 2014 with their biggest annual fall in six years.

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CHART OF THE DAY: 2014 Outperformance in Low Beta: #PAIN

CHART OF THE DAY: 2014 Outperformance in Low Beta: #PAIN - 01.02.14 chart


Editor's note: This is a brief excerpt from today's Morning Newsletter by Hedgeye CEO Keith McCullough.


*  *  *  *  *  *  *

If you’re a US equity only investor, the lower-volatility + higher-absolute-and-relative returns came in mostly slow-growth, lower-beta, #YieldChasing sectors:


  1. Number 1 (within the Top 9 S&P Sectors) for 2014 was Utilities (XLU) at +24.3% YTD
  2. Number 2 for 2014 was Healthcare (XLV) at +23.3% YTD


Yep, instead of being long #deflation (Energy stocks, XLE, DOWN -10.6% YTD), these slower-growth, lower-volatility sectors had similar returns to what? Yep – the Long Bond.


2015 Predictions

“My prediction? Pain!”

-Mr. T


For those who are in the business of being paid to issue wire-to-wire-JAN-to-DEC annual predictions, that is…


I can also predict, with 100% certainty, that market and economic risks (often two very different things) will accelerate and decelerate throughout the year, in rate of change terms. So let’s embrace the dynamic and non-linear uncertainty of that.


On behalf of everyone on my team, I wanted to wish you, your families, and firms the best of luck and health in 2015. Working together, I know we can make this year every bit as successful as 2014 was.

2015 Predictions - Happy New Year 2015


Back to the Global Macro Grind


What defines a successful year in terms of professional growth is often different vs. the YTD performance that stares us in the face each and every day. Since I think of most things in rate of change terms, progression vs. regression is as important to me as anything.


Are we learning from our mistakes or are we making excuses? Are we challenging ourselves to evolve our processes or are we being complacent? Are we enjoying the path of progression or are we just trying to get paid?


For me personally last year was quite satisfying. It was the 1st year in my career that I was able to translate a bearish view on big Global Macro factors (rate of y/y change in growth and inflation) into an uber bullish position on the long side (the Long Bond).


To review the score:


  1. Depending on what version of the Long Bond Index you had on, you were +24-41% in 2014
  2. The SP500, Dow, and Russell 2000 were +11.4%, +7.5%, and +3.3% in 2014, respectively
  3. Commodities (CRB Index) were -18.4% YTD


Now if your job is to simply navel gaze at one of those US equity centric indexes (you can’t charge active manager fees for that), you’d probably say 2014 was a good year. And I don’t disagree with that. But being long the Long Bond was a great year.


How do you define “great” returns?


  1. Higher absolute returns?
  2. Higher relative returns?
  3. Lower-volatility adjusted returns?


Well, being long the long end of sovereign bond markets from Germany to France to the USA and back again beat their local equity market returns on all 3 of those factors.


That last point on volatility is the most important. It’s also the one that tends to tackle most momentum oriented fund managers, eventually. There is nothing that crushes levered-long beta faster than a breakout in the volatility of an asset class’ price.


If you’re a US equity only investor, the lower-volatility + higher-absolute-and-relative returns came in mostly slow-growth, lower-beta, #YieldChasing sectors:


  1. Number 1 (within the Top 9 S&P Sectors) for 2014 was Utilities (XLU) at +24.3% YTD
  2. Number 2 for 2014 was Healthcare (XLV) at +23.3% YTD


Yep, instead of being long #deflation (Energy stocks, XLE, DOWN -10.6% YTD), these slower-growth, lower-volatility sectors had similar returns to what? Yep – the Long Bond.


Tech (XLK) had a good year at +15.7%. But most of the outperformance in Tech came from the low-beta big cap names like AAPL and MSFT (+40% and +30%, respectively) where stock specific volatility got smashed inasmuch as small-cap social #bubble stocks did.


Then, of course, there was the rest of the world (no, it didn’t cease to exist) in Global Equities where you could have lost everything you made in your Russell or Dow allocations if your RIA’s pie chart had you “diversified” into:


  1. Russian stocks -42.6% for 2014
  2. Greek and Portuguese stocks -25-26% on the year
  3. South Korea’s KOSPI (heaviest weight in the EEM index) -3.7% in 2014
  4. Brazil’s Bovespa -2.6% YTD
  5. FTSE (UK index) down -2.1% for the year as well


And no, I won’t go into all of the #GrowthSlowing and #Deflation realities that train wrecked COMMODITIES as an asset class in 2014. I’m trying to be progressive this morning! “So” I’ll keep our net asset allocation to commodities right where it’s been, at 0%.


As far as my 2015 predictions go – I don’t have any. Or at least not on the JAN-DEC terms that the #OldWall and its media drives advertising revs. That said, I’ll tell you what wouldn’t surprise me in the next 6-10 months (because it’s already happening):


  1. Global #Deflation Risk becomes consensus, as central planning Policies to Inflate fail
  2. Interconnected risks, across asset classes, linked into global #GrowthSlowing + #Deflation continue to rise
  3. Late-cycle US growth indicators (like employment) slow, in rate of change terms
  4. Early cycle US growth indicators (like Housing and Restaurant traffic) accelerate, in rate of change terms
  5. I lose 5-10 pounds, because I need to


Yes, I predict pain (for myself) in cutting out my post Mite Hockey practice Mickey D’s meals on Tuesday nights too.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.13-2.25%

SPX 2017-2090


VIX 16.03-19.95

EUR/USD 1.20-1.22

Oil (WTI) 52.61-55.38

Gold 1167-1195


Best of luck out there this year,



Keith R. McCullough
Chief Executive Officer


2015 Predictions - 01.02.14 chart

January 2, 2015

January 2, 2015 - Slide01

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