Takeaway: In today's Macro Playbook, we check in w/ the Chinese economy and officially introduce our bullish bias on the Chinese A-Shares market.


Long Ideas/Overweight Recommendations

  1. Consumer Staples Select Sector SPDR Fund (XLP)
  2. Health Care Select Sector SPDR Fund (XLV)
  3. PowerShares DB U.S. Dollar Index Bullish Fund (UUP)
  4. iShares U.S. Home Construction ETF (ITB)
  5. iShares 20+ Year Treasury Bond ETF (TLT)
  1. LONG BENCH: Vanguard REIT ETF (VNQ), Utilities Select Sector SPDR Fund (XLU), Vanguard Extended Duration Treasury ETF (EDV)

Short Ideas/Underweight Recommendations

  1. iShares TIPS Bond ETF (TIP)
  2. CurrencyShares Japanese Yen Trust (FXY)
  3. SPDR Barclays High Yield Bond ETF (JNK)
  4. Industrial Select Sector SPDR Fund (XLI)
  5. iShares MSCI Emerging Markets ETF (EEM)
  1. SHORT BENCH: SPDR Oil & Gas Exploration & Production ETF (XOP), CurrencyShares Euro Trust (FXE), WisdomTree Emerging Currency Fund (CEW)



Checking In With China: Overnight, China reported its DEC trade data, which came in much stronger than anticipated:


  • Exports: +9.7% YoY from +4.7% YoY in NOV vs. a Bloomberg consensus estimate of +6%
  • Imports: -2.4% YoY from -6.7% YoY in NOV vs. a Bloomberg consensus estimate of -6.2%
  • Trade Balance: $49.6B from a $54.5B in NOV vs. a Bloomberg consensus estimate of $49B


Aside from the obvious sequential strength and positive surprises, there was another “positive” data point embedded in the release:  China imported record volumes of commodities – across the spectrum – in 2014.


You mean the same ‘commodities’ that dropped -17.9% in 2014 (CRB Index) or crashed -26.5% from their TTM closing high on June 20th? Yes, those same ‘commodities’. It would appear counter to the lazy Consensus Macro narrative that Chinese demand is not getting investors paid on the long side of commodities. Hopefully you sold down your commodity exposures when we began making this asset allocation call back in early August.


But, of course, you already knew that Chinese demand is far less important to commodity prices than consensus among the investment community assumes. Whether you’ve followed our work since the beginning (2008) or you’ve been reading our research for only 2-3 weeks, you know that we’ve proven the U.S. dollar is factors #1, #2 and #3 in determining last price, as well as the outlook for both supply and demand in/across global commodity markets:






Generally speaking, both supply and demand for commodities as we have come to know them over the past decade or so are both functions of cheapening-USD credit expansion in and across emerging market economies. How this interplays with China specifically is three-fold:


  1. The confluence of the CNY’s peg (now managed float) vs. the USD and China’s 2001 entry into the WTO allowed the country to dramatically boost its export base, effectively creating massive inflation of the current account surplus
  2. Those USD’s were transformed into CNY liabilities in the Chinese domestic banking sector due to China’s capital account restrictions
  3. Those CNY liabilities were then levered and transformed Chinese domestic banking sector assets, which largely financed the greatest fixed assets investment bubble the world has ever seen


Well, as we show on slides 42-44 in our recent bearish presentation on emerging markets, all three of those factors are being unwound, at the margins:








That unwinding is perpetuating a broader slowdown in Chinese growth, which you can see by the general hue of red across the following tables:






Key highlights:


  • The smoothed, amalgamated YoY rate of change for iron ore, rebar and coal prices – arguably the key leading indicator for the Chinese economy – continues its trend of crashing
  • Official manufacturing PMI data slowing on both a sequential and trending basis
  • Capital flows, money supply growth, fixed assets investment growth – all three of which remain forever linked – are all slowing on both a sequential and trending basis
  • The Chinese property market is an unmitigated disaster at the current juncture; the only indicator that is accelerating on either a sequential or trending basis is finished supply (i.e. housing completions)
  • Continuing with the 'disaster' theme, housing starts and unit demand are tacking down -9% YoY and -8.2% YoY, respectively


Shhh! Don’t tell any of that to the A-Shares, which continue to melt-up on a trending basis (up +58% since the end of June). It’s pulled back a full -4.1% from its 1/7 high on recent official rhetoric that was counter to consensus expectations for perpetual monetary and fiscal easing.




At best, this is the equivalent of throwing a cold towel upon a blazing inferno; our expectations for the “downward pressure” upon the Chinese economy continue to be as bearish as anyone’s with actual credibility in calling China’s economic cycle. As such, we expect cries for stimulus and subsequent stimulus measures to continue dominating macro news flow headlines over the intermediate-term as policy makers are forced to defend their +7% real GDP growth floor.








With this note, we are officially introducing our bullish bias on the Chinese A-Shares market, having effectively authored the thesis two weeks ago. U.S. domiciled investors can play this trade via the Morgan Stanley China A-Share Fund (CAF).


***CLICK HERE to download the full TACRM presentation.***



Global #Deflation: Amidst a backdrop of secular stagnation across developed economies, we continue to think cyclical forces (namely #StrongDollar driven commodity price deflation) will drag down reported inflation readings globally over the intermediate term. That is likely to weigh heavily upon long-term interest rates in the developed world, underpinning our bullish outlook for U.S. Treasury bonds.


The Hedgeye Macro Playbook (1/12)


#Quad414: After DEC and Q4 (2014) data slows, in Q1 of 2015 we think growth in the US is likely to accelerate from 4Q, aided by base effects and a broad-based pickup in real discretionary income. We do not, however, think such a pickup is sustainable, as we foresee another #Quad4 setup for the 2nd quarter. Risk managing these turns at the sector and style factor level will be the key to generating alpha in the U.S. equity market in 1H15.


The Hedgeye Macro Playbook (1/8)


Long #Housing?: The collective impact of rising rates, severe weather, waning investor interest, decelerating HPI, and tighter credit capsized housing in 2014.  2015 is setting up as the obverse with demand improving, the credit box opening and 2nd derivative price and volume trends beginning to inflect positively against progressively easier comps. We'll review the current dynamics and discuss whether the stage is set for a transition from under to outperformance for the complex.


Mortgage Apps | Seasonal Wheel-Spinning (1/7)


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. 

Retail Callouts (1/13): WWW Guidance Sandbag, ICSC, EBAY, GME

Takeaway: WWW-4Q review. Revenue? Check. Sperry? Check. Revenue guide? Check. Earnings guide?... Annual sandbag trend continues.

WWW - 2014 Preliminary Results, 2015 Guidance


Takeaway:  Here's a key chart to keep an eye on while watching WWW management try to argue that it's 2015 guidance is not overly conservative. Every single year since at least 2007, WWW has issued initial guidance for the upcoming year in Jan. and every single year it has guided down (with the exception of 2011).  And every year sans one, it beat the high end of its guidance. And in 5 years it posted earnings above where they were before the guide-down. 


Retail Callouts (1/13): WWW Guidance Sandbag, ICSC, EBAY, GME - 1 13 chart1


Seriously, the company ended on a great note, with revenue +9%, and Sperry up in the HSD. Cash flow looked outstanding, and debt is now down below 700mm vs 1.2bn in 4Q12. 


Revenue guidance looked solid at MSD -- conservative -- but solid in WWW terms. The company is getting better confidence in the contribution of Sperry, Keds, Saucony and Stride Rite outside of the US (the crux of the long call). 


But then, lo and behold, the company manages to guide to flat EPS in '15, despite easy comps, better revenue growth, and lower interest expense. 


For such a well managed company, WWW either has horrific internal forecast accuracy, or it does not understand the concept of guidance. 


Either way, we think that 2015 will come in ahead on both revenue (high-single) and EPS (mid-teens at a minimum). 


As a kicker, WWW is likely to buy something in 2H, and while we're not a fan of deals in general, we'd note that a) WWW is very good at them, and b) a new brand will divert attention from Sperry, which can't come soon enough.





Takeaway:  Another strong data point to start the year though the 2.8% reading this week was a 70bp deceleration on the two year trend line.  As we comp the first 14 Polar Vortex weeks of 2014, comps are relatively easy at 1.9% compared to the balance of the year at 2.7%. Our sense is that this was driven by promotional activity due to greater than usual excess inventory available after the Holiday. That's been supported by the traffic trends we saw during December, where the day after Christmas was the best shopping day of the month according to Euclid Analytics.


Retail Callouts (1/13): WWW Guidance Sandbag, ICSC, EBAY, GME - 1 13 chart2





BEBE- bebe stores, inc. Announces 8% comp sales for 2Q15



TLYS - Guides Q4 to range of $0.21 to $0.23, vs prior $0.15 to $0.19



EXPR - Express Guides Q4 to 3-4% comp sales decline from prior mid to high single digit decline, EPS $0.43 to $0.46 from prior $0.38 to $0.45



EBAY - EBay Unveils Retail Platform: All About Omni



Nasty Gal Taps Sheree Waterson as CEO



DLTR, FDO - Dollar Tree Threatens to Abandon Deal If Vote Delays Persist



GME - GameStop to stream video game content to mobile devices




LEISURE LETTER (01/13/2015)



LVS Cheung Che Kin, a businessman from Hong Kong, has sued Marina Bay Sands (MBS), claiming that he suffered loss and damage when he was not allowed to take over a baccarat game from a combined pool of chips he shared with a friend at MBS.  MBS denies that Mr Cheung has suffered loss and damage and has filed a counter-claim for an outstanding credit amount of $1.96 million, plus 12 per cent interest, from Mr Cheung. No date has been set for the trial yet.

Article HERE

Takeaway:  More credit headaches to deal with for MBS


GTECH – Ontario State’s newly launched GTECH Interactive powered online gambling portal has faced several issues since its launch on Friday 9 January, which has left many Ontario online gambling consumers frustrated. Ontario consumers took to social media channels to report website issues regarding game loading times, onsite glitches and flawed geolocation access services which would not allow some customers to register with gambling portal.

Article HERE


Amaya Gaming is evaluating non-binding proposals from certain persons for its B2B land-based gaming solutions business, Cadillac Jack Inc

Takeaway:  Amaya acquired Cadillac Jack in Oct 2012 and has been thinking of strategic alternatives for that business since Oct 2014. 


Chinese Strategic Holdings Limited – has been in negotiations with a Macau Nasdaq-listed company involving a proposed casino on Tinian Island in the Northern Marianas.  Steps include 1) assistance in the possible application for a gaming license of and for the new hotel complex; (2) facilitation of gaming license applications through its experience, professional knowledge, and understanding it gained through global licensing applications; (3) rendering of consultancy services relating to negotiations between the government and regulatory agencies in the CNMI; and (4) providing advice and enabling TRI to fulfill and satisfy compliance and/or regulatory duties and responsibilities and comply with licensing conditions and requirements imposed by the CNMI government.


The plan, according to Townland Consultants, includes two world-class golf courses, 20-30 6-star high-end villa s, mid/high-end 4-5 Star hotel with 300-400 rooms, a retail / dining village, an agricultural cultivation zone which will provide quality food for the hotels on the island, among other attractions.

Article HERE 


Junkets –  Recently, there has been more lower quality VIP players, meaning gamblers that bet less money and pay their debts much later – with some not paying at all. There is also data that seems to suggest that credit flow and junket revenues are diverging with the latter significantly underperforming the former.

Article HERE

Takeaway:  We dismiss any analysis trying to compare trends in country credit flow vs a specific segment of a localized gaming industry over a short period of time


Alan Ho arrested – Hotel Lisboa’s executive director Alan Ho (a longtime senior executive at SJM and the nephew of SJM founder and Macau gambling mogul Stanley Ho) was sent in handcuffs to the Public Prosecutions Office Monday morning along with five associate suspects, for running a multi-million-pataca prostitution ring that was based at the hotel.

Article HERE

Takeaway:  It seems nobody is off limits - not even a member of the Ho family.


China lotteries – country's main lottery, the Welfare Lottery, achieved officially confirmed sales of 205.96 billion yuan ($33.6 billion) in 2014, up 16.67% YoY 

Article HERE

Takeaway: Positive for SGMS


Singapore visitation – Nov 2014 visitation fell 3.6%, the 9th consecutive monthly decline.  Mainland China was the lone bright spot, rising 10% YoY in Nov - its 2nd consecutive monthly gain off of a very low comp.  Indonesia and Malaysia visitation remain weak, falling -8% and -19%, respectively in November.


Meanwhile, Singapore's Changi Airport Group reported passenger traffic declined 1% in November.


LEISURE LETTER (01/13/2015) - s1


LEISURE LETTER (01/13/2015) - 2


Takeaway:  Given the number of airline incidents and tighter regulations recently, it's no surprise that S'pore visitation has declined in 2014. This could affect mass revenues in Q4.


Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015. 

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.

Don’t Be Consensus

Client Talking Points


The UST 10 YR Yield 1.88% now (started the year at 2.17% and Old Wall consensus still has it going to 3.06% by year end?); and the non-commercial net SHORT position in futures/options contracts (CFTC data) is as big as its been in 6 months at -250,163 (and consensus is long SPX Index and Emini contracts on the other side of that!); don’t be consensus.


Gold is looking more interesting by the day as the drop in bond yields becomes more pervasive (USD stopped going up too, which helps). We would like to see it hold our TREND support level of $1237 to suggest you buy it back, but we’re in no rush – consensus is currently long Gold (+106,734 net LONG contracts vs. +76,449 average three months ago).


Devastating #deflation happening in the commodities asset class year-to-date (CRB Index at 221 was -2.1% yesterday, -29% since June) as both price and supply go the wrong way in the face of global #GrowthSlowing – still bearish on the Dr. (and his cousin KOSPI).

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.


Hologic (HOLX) is a name our Healthcare Sector Head Tom Tobin has been closing monitoring for awhile. In what Tom calls his 3D TOMO Tracker Update (Institutional Research product) of U.S. facilities currently offering 3D Tomosynthesis, month-to-date December placements signaled a break-out quarter after a sharp acceleration in October and slight correction to a still very high rate in November. We believe we are seeing a sustained acceleration in placements that will likely drive upside to Breast Health throughout FY2015. Tom’s estimates are materially ahead of the Street, but importantly this upward trend in Breast Health should lead not only to earnings upside, but also multiple expansion and a significant move in the stock price.

Three for the Road


TREASURIES: being long The Long Bond, in size, remains the best place to be YTD - 10yr 1.88% $TLT



Hard work spotlights the character of people: some turn up their sleeves, some turn up their noses, and some don't turn up at all.

-Sam Ewing


Economic optimism hit a 2-year low in Japan,  the BoJ published a quarterly survey Sunday, in which more than 50% of respondents said that they felt worse off than a year ago. Only 6% of the respondents said their situation had improved last year and 7% of respondents said conditions would get better this year.

CHART OF THE DAY: An Eye on Labor Force Participation

CHART OF THE DAY: An Eye on Labor Force Participation  - LFPR


*  *  *  *  *  *  *

Editor's note: This is a brief excerpt from today's Morning Newsletter which was written by U.S. Macro analyst Christian Drake.


In the 1st chart of the Day below we show the 3 major inflections in labor force participation along with the projected decline in participation through 2020 based singularly on changing age demographics.   The multi-decade rise in participation peaked at the turn of the century and should remain in secular retreat through the back-half of the decade.  Improvements in per capita GDP enjoyed over the 1960-2000 period stemming from the rise in the fraction of Americans employed will likely prove somewhat transient.  

Golden Tickets

“Almost only counts in horseshoes and hand grenades”


Golden tickets are, by definition, an exceedingly scarce commodity.  Occasionally they’re found at the nexus of chance and preparation.  More often they’re the product of randomness; the nebular nursery of accidental billionaires.     


Golden tickets are not like horseshoes or hand grenades.  Unfortunately, as I’ve learned, half-tickets don’t count.  Neither does simply recognizing a ticket…..even if only a few others have. 


Here’s a selection of some of my personal misadventures in golden ticket recognition:  

Golden Tickets - goldenticket 

2002:  I called a fledgling energy drink company and tried to invest $9,500 – all the money I could scrape together as a middle-class college kid with no connections.  They showed some minor interest – mostly I think they were just amused by a kid trying to pitch them on an inconsequential capital investment – but mostly gave me the blow-off.  I followed up a couple times but ultimately abandoned the pursuit.   You’ll know the energy drink company as ROCKSTAR – pioneer in the fastest growing beverage category of the last half-century.


2008/09:  I encouraged Hedgeye to pursue an investment in a young yogurt company located in central New York.   That upstart grew into the yogurt juggernaut known as Chobani which catalyzed the Greek yogurt renaissance and jumpstarted the fastest growing food category of the last decade.  Hedgeye was young itself and in the midst of a bid for the Phoenix Coyotes – it just wasn’t the right time.  


2015:  I have another idea in pocket but I’m not divulging….yet.


Back to the Global Macro Grind...


Golden tickets, however, are not the exclusive right of chocolate factory contestants or the providentially charmed.  Modern Macroeconomies of the last century have generally been born with a golden economic ticket that sits latent until the correct demographic and cultural factor cocktail pushes it out of dormancy. 


The story of the U.S.’s Golden Ticket can be contextualized simply and is key to understanding both its current economic situation and its intermediate term prospects.  Pulling back the charts and detaching from the myopia of every market minute can be a refreshing exercise as well.


Back to Basics:  GDP | Having ‘stuff’ is dependent on making ‘stuff’


Real GDP per capita = Average labor productivity * share of the population that is employed


More simply, at its core, GDP is the product of how many people you have making stuff and how much stuff each person can make. 


That’s about as fundamental as it gets, but the reality underneath that simplicity carries a lot of economic gravity.   The amount of goods and services the collective consumer can consume, on average, can increase only to the extent that each person can produce more (increased productivity) and/or the fraction of the population that is employed increases. 


1:  Accelerating Population Growth + Rising Labor Force Participation = Golden Ticket in per capita output


The rise of the Baby Boom generation in combination with an acceleration in immigration and the secular rise in female labor participation was a golden ticket event for the domestic economy.     

  • Employment & Participation:  from 1980 to 2007 employment grew 47% while the over 16 YOA population grew 35%, driving the fraction of the population employed from ~59% to greater than 67%.   The concurrent acceleration in the working age population and employment-to-population ratio catalyzed an epochal rise in per capita output and improvement in living standards.  This benefit was a one-shot deal.
  • Immigration:  Foreign born residents grew from 9.7M (~5% of the population) in 1960 to over 40M (~13% of the population) by 2010.  Indeed, from 1 immigration accounted for nearly 30% of total population growth in the United States.  Clearly, immigration has played a central role in U.S. population growth over the last half-century.  Immigration trends over the next decade+ will play an equally important role in determining how gracefully the U.S. traverses the demographic cliff. 

In the 1st chart of the Day below we show the 3 major inflections in labor force participation along with the projected decline in participation through 2020 based singularly on changing age demographics.   The multi-decade rise in participation peaked at the turn of the century and should remain in secular retreat through the back-half of the decade.  Improvements in per capita GDP enjoyed over the 1 period stemming from the rise in the fraction of Americans employed will likely prove somewhat transient.  


Golden Tickets - LFPR


Real Wage Growth:   Remember that time demand went down, supply went up and price rose…me neither

  • Labor Supply:  The Boomer generations entre into prime working age along with increased labor participation by women drove an acceleration in labor supply.  In isolation, rising supply of labor should have a depressive effect on the price of labor (i.e. the real wage)
  • Labor Demand:  That the US production function is Cobb-Douglass with the marginal product of labor proportional to average labor productivity is very ivory-tower.   More simply, remember that the real wage is the price paid to labor in units of output.    If productivity rises such that each unit of labor can produce more output (and assuming stable prices and end demand)  then the demand curve should shift to the right with both total employment and real wages rising – that’s the basic theory anyway.  As the 2nd Chart of the Day below illustrates, empirically, the data supports the theory with real wage growth closely tracking the trend in productivity growth. 
  • Looking Forward:  Rising labor supply and slower growth in productivity in the decades following 1970 combined to depress real wage growth.  If those secular trends are slowing and/or reversing as most believe they are – i.e. slower employment growth, lower LFPR, moderating population growth – then labor supply growth should slow with tighter supply supporting gains in real wages.  Remember, however, that we’re talking about secular trends and that supply is only half of the supply-demand equation…..


Wild-Cards and Inconvenient Truths:  In the long-run productivity gains are the primary driver of economic growth….policy makers have a model for that, right?


The fading tailwind of rising population and labor participation suggests that, from here, the onus on real growth will fall increasingly on gains in productivity.      


To the extent tech innovation and the ICT driven productivity gains of the late 90’s can re-assert themselves in the back half of the current decade, real wage growth stands to benefit.   Whether higher entitlement spending, debt service costs and an accelerating dependency ratio emerge as material offsets to gains in real income remains to be seen. 


It’s also important to note that, despite its centrality to sustainable growth and canonical growth theory, policy makers don’t really know how to model and/or forecast productivity.  They more-or-less just plug something close to 2% into any intermediate and LT forecast because that’s what it’s been, on average, historically.  With growth itself only expected to average ~2% over the intermediate term, that is a huge assumption.    


Degree of Difficulty Doesn’t Count:  The discussion above is necessarily simplified but, in this instance, “almost” is probably sufficient  as it captures ~80% of what matters from a Trend perspective and offers an intuitive, tractable review of the growth, employment and income dynamics that have characterized the domestic, Golden Ticket improvement in living standards over the last 50-years. 


Understanding the implications of a secular shift in those dynamics alongside a reversal in the multi-decade monetary policy to inflate will be central to effectively navigating the forward Trend. 


From a Trade perspective, with Japanese 5Y yields at 0%, 10Y Bunds at 0.47% and the U.S. 10Y at 1.88% this morning, we continue to watch global deflationary forces swamp enervated inflationary policies in real time.    With Global growth slowing and deflation predominating, our most important macro call remains Long the Long Bond. 


It’s not a particularly sexy position or an especially complicated thesis but as Buffett is fond of saying… ”Degree of Difficulty Doesn’t Count” in (macro) investing. 


Our immediate-term Global Macro Risk Ranges are now:



Russia (RTSI) 708-796

VIX 17.31-21.99

USD 91.77-93.22

Oil (WTI) 44.41-49.98
Gold 1 


Best of luck out there today,


Christian B. Drake

U.S. Macro Analyst


Golden Tickets - Productivity

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