Takeaway: In today's can't-miss edition of the Macro Playbook, we answer the top-10 questions we've been getting from our institutional subscribers.


Long Ideas/Overweight Recommendations

  1. iShares U.S. Home Construction ETF (ITB)
  2. Health Care Select Sector SPDR Fund (XLV)
  3. Consumer Staples Select Sector SPDR Fund (XLP)
  4. PowerShares DB U.S. Dollar Index Bullish Fund (UUP)
  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. iShares MSCI Emerging Markets ETF (EEM)
  4. SPDR Barclays High Yield Bond ETF (JNK)
  5. Industrial Select Sector SPDR Fund (XLI)
  1. SHORT BENCH: SPDR Oil & Gas Exploration & Production ETF (XOP), CurrencyShares Euro Trust (FXE), WisdomTree Emerging Currency Fund (CEW)



Q&A w/ the Hedgeye Macro Team: Yesterday, Keith and I enjoyed a solid start to two full days of client and prospect meetings; as always, the discussions were lively, entertaining and, most importantly, thoughtful. Per usual, we received a fair amount of questions pertaining to our macro themes, which are hyperlinked daily at the bottom of this note.


Below we share our responses to some of the most frequently asked questions from yesterday’s meetings. Please note that we are deliberately keeping these thoughts brief (we’ve already done the work, so please email us if you’d like additional color, charts, etc.).


With the VIX up +85.4% since we called the bottom in our #VolatilityAsymmetry presentation back on July 11th, we’re sure you’re plenty busy these days and don’t want to take up too much of your time. Enjoy:


Q: Will we see a rate hike by the Fed at some point over the next 6-12 months?

A: According to both the preponderance of data most central to their monetary policy decision-making tree and our outlook for employment growth, the FOMC will not be able to justify a rate hike over the intermediate term. In fact, we’d consider a rate hike at this stage in the economic cycle to be a deflationary policy mistake – a la Jean-Claude Trichet in 2008 or 2011 – that threatens to tip the U.S. and global economy into recession.


Q: What gets employment growth to roll over?

A: Reduced energy-related capital expenditures and business services would precipitate the first wave of not hiring and then firings. The knock-on effects are both unquantifiable and very real given that oil and gas E&P has a high multiplier effect because it is a capital intensive industry and because energy-related jobs are typically higher earning than the preponderance of other jobs created during the recovery. And remember, it’s not just energy companies that are reeling from the wave of commodity deflation ripping through their income statements; ask CAT about its mining businesses or BAC, JPM or C about their FICC business... 

(see: "Schlumberger to axe 9,000 jobs amid oil rout" or "Big Oil Companies Get Serious With Cost Cuts on Worst Slump Since 1986")


Q: How can housing work alongside your call for a negative inflection in the rate of change of employment growth?

A: The simple answer is that housing did not work in 2014 with employment growth breaking out to the upside. That alone should tell you not to isolate employment as the driver of housing equities. What’s occurring in housing is a lot more nuanced and we have a 100-slide presentation walking through all of those critical puts and takes. The summary is threefold: 1) macroprudential regulation is being unwound, at the margins, which should perpetuate a positive inflection in mortgage demand growth; 2) demand growth leads home prices by ~1yr and demand growth troughed in early 2014, which means home price appreciation is poised to positively inflect as well; and 3) the comparative base effect for home price appreciation – which carries a +0.90 correlation to housing equities since 2008 – gets incrementally supportive throughout 2015. Lower interest rates are a nice kicker as well as it relates to stimulating incremental demand. The 30yr fixed rate mortgage is now 3.8%; it was 4.42% one year ago. Many headwinds still exist in the U.S. housing market (e.g. low household formation; student debt bubble), but more are shifting into the tailwind category, at the margins.


Q: Are falling oil prices a net positive or a net negative for the U.S. economy?

A: It depends on what part of the cycle you’re referring to. Falling oil prices are very positive for early-cycle Consumer Cyclical and very negative for late-cycle Industrials (via slowing CapEx) and Financials (via slowing employment growth and asset price deflation). On a net-net-net basis after it’s all said and done, falling oil prices probably wind up doing more harm than good – particularly if asset price deflation continues. Remember, gasoline only accounts for 6.4% of median consumer PCE, so the consumer has only experienced a -279bps effective tax cut on the -44% peak-to-present decline in crude oil. Meanwhile, the SPY is down -482bps from its all-time high; MLPs – which are a favorite among retail investors – are down -1437bps from their all-time high. Robbing Peter to pay Paul is not a recipe for sustained economic growth – especially the +3-5% variety bandied about by consensus.


Q: Isn’t this setup – i.e. U.S. dollar breakout, mid-cycle economy and the Fed getting tighter – just like the 1990s

A: First and foremost, anyone who thinks it’s the 1990s from an economic standpoint clearly has not yet done the work on domestic debt and demographic trends. Those two factors alone will most certainly ensure that the U.S. economy will never again experience a period like 1990s for very long time.


Q: If so, why can’t stocks keep working?

A: It doesn’t have to be the 1990s for stocks to keep working - #Quad4 stocks that is. As highlighted daily in our thematic investment conclusions above, there are plenty of sectors and style factors you can buy with our bearish thesis. Nevermind that healthcare, staples, utilities and REITs are “expensive” on both a relative and absolute basis. The fact of the matter is that ~80-90 of active managers underperformed their benchmarks last year, so the majority of the buy-side clearly isn’t long what we were telling them to be long of most of the year. That means they will eventually have to sell what isn’t’ working (i.e. the U.S. “escape velocity” narrative) in order to chase what is working or even just to avoid becoming increasingly underweight the aforementioned sectors as a function of relative performance. This is how macro fund flows work. Moreover, this is why you need a competent macro view either internally or outsourced.


Q: How low can rates go?

A: Lower and lower and lower – until Consensus Macro strategists and the investors who either don’t do macro or overpay for the wrong macro research capitulate on the short side of Treasury bonds. Both camps remain far from having done just that.


Q: Will Draghi disappoint next Thursday?

A: From these levels in the EUR/USD, most likely. The probability that he disappoints is particularly high given the speculative net length in the futures and options markets and yesterday’s SNB revaluation, which prompted speculation that the ECB would pursue substantially more divergent monetary policy over the intermediate-to-long term. It remains to be seen whether or not Draghi has secured enough of a mandate to achieve the degree of balance sheet expansion believed needed to appropriately combat deflation and economic stagnation in the Eurozone.


Q: Are Japanese stocks a short?

A: Not here, but certainly if the USD/JPY breaks our intermediate-term TREND line of 114.26. That would be a clean-cut signal to us that either QQE expansion will not happen on our expected horizon (i.e. within 2-3 months) or that any QQE expansion will be overshadowed by a continued breakout in cross-asset volatility, which has historically been positive for the Japanese yen. Either of those events would make us very wrong on the bearish side of the JPY and bullish side of the Nikkei.


Q: Is gold a buy?

A: Right now, gold is trading right at our long-term TAIL line of resistance, which is $1,262/ozt. When securities or asset classes break out above or break down below our TAIL line, we don’t ask questions – we look for answers. Sometimes our fundamental analysis front-runs these TAIL risk events, like our call on bond yields in 2013 (i.e. domestic #GrowthAccelerating) and in 2014 (i.e. domestic #GrowthSlowing). Other times – like today’s setup in gold – we don’t yet know what the answer is so we simply make one up because that’s what the market is telling us to do. Could a breakout in gold be front-running a marginally dovish policy shift by the Fed that perpetuates a more material pullback in the DXY? We don’t know yet, but that’s a story that not only makes sense, but would also be easy for the preponderance of market participants to substantiate with data. Moreover, we’d look to confirm gold’s breakout across other dollar-sensitive asset classes like emerging markets and upstream MLPs.


***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.


EARLY LOOK: Macro Stars (1/15)


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.


HOUSING: Purchase Demand | Post-Holiday Deluge (1/14)


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.  

CHART OF THE DAY: What If Jobless Claims (Energy States) Break Out to the Upside?

CHART OF THE DAY: What If Jobless Claims (Energy States) Break Out to the Upside? - Claims vs Crudel

Climbing The Wall

“We were just us up there – 19 days on the wall.”

-Kevin Jorgeson


In case you missed it, two American free-climbers achieved greatness this week. After a 19-day epic #grind of human preparation, teamwork, and perseverance, Tommy Caldwell and Kevin Jorgeson successfully scaled Yosemite’s El Capitan.


Since you know I like to think and write in metaphors of historical feats and failures, there are obviously a lot of ways I can roll with this story. But the most important lesson is to have both patience and #process.


These guys spent 7 years planning to embrace the uncertainty of the climb… and 7 full days, literally stuck, hanging, on the most difficult face of mountain (Dawn Wall). If you think multi-duration and multi-factor like these guys do, you can achieve excellence too.


Climbing The Wall - 99


Back to the Global Macro Grind


I’m not a fan of excuse making or mediocrity. I know that might rub some people the wrong way but, in case you didn’t notice, I don’t particularly care about what they think. My teammates and I are out here, every day, climbing an Old Wall that we know we can beat.


Does that mean that this is easy? Of course not. This is one of the highest paying professions on the planet because excellence isn’t allocated to job titles and/or academic standing – it’s earned out there on The Wall, every day.


The toughest climb we’ve had in the last 3 years hasn’t been making the bullish Long Bond (TLT) call. It was in building a #process (for 7yrs as a team) that was flexible and could objectively go both ways, calling for:


  1. A breakout in US interest rates in 2013 (as real US economic and employment growth #accelerated)
  2. Then the reversal of rates in 2014 (global #GrowthSlowing + #Deflation)


I don’t know if it was the 7 days at the end of September (before the Russell’s JUL-OCT drawdown capitulated at -15%) or the last 7 trading days of December when everything was going the wrong way vs. our plan…


But there were plenty of times where I questioned my every premise. I had to review everything I’d written in my notebooks, my teammates models, etc. and ask myself, over and over again, whether or not this was the right path to take.


Fortunately, it was.


This morning both the inability of central planners to arrest gravity (global #GrowthSlowing) and market expectations for #deflation are reaching an immediate-term capitulation point.


No, that’s not just staring at the “Dow 18,000 Bro” futures guys – remember, we do Global Macro – and there’s a lot more to beating this Old Wall than calling out the 50-day in spooz.


Today is capitulation day for Long Bond bears. If they didn’t get rates right, they’re going to be feeling plenty of pain in those asset allocations that are directly correlating to crashing bond yields. Their pain is your gain.


Follow #Deflation’s Dominoes:


  1. UST 10yr Yield = 1.71% (already down 21% YTD, and -43% since this time last yr)
  2. Commodities (CRB Index) = 220 (that’s -29% since June of 2014, at 12 month #deflationary lows)
  3. Financials (XLF) and Regional Bank Stocks (KRE) are already -6.2% and -10.2% YTD, respectively


Particularly on that last point (which is just equities following what bonds and commodities already did), that’s a nasty start to the year. And it fundamentally should be, because:


  1. Crashing Bond Yields (and widening credit spreads) are clean cut #GrowthSlowing and #Deflation signals
  2. Yield Spread Compression (10yr minus 2yr at a fresh 12 month low of 128 bps today) = #GrowthSlowing
  3. And when 1 and 2 are true, you don’t buy late-cycle stocks like Energy, Financials, and Industrials


If all you do is US stocks (we don’t), here’s the YTD score:


  1. Energy (XLE) -8.0% YTD
  2. Financials (XLF) -6.2% YTD
  3. Industrials (XLI) -3.9% YTD


Vs. the #alpha climbers:


  1. Utilities (XLU) = +2.1% YTD
  2. Healthcare (XLV) = +1.0% YTD
  3. Consumer Staples (XLP) = +0.8%


In other words, if you are out-front, beating your competition on that absolute and relative performance wall, you are A) short/underweight what we don’t like and B) long what we like.


What’s next for bond yields, the late-cycle bank stocks, etc?


  1. What if jobless claims (Energy States) breakout to the upside (see Chart of The Day)
  2. What if #Deflation hurts sales, earnings, and margins? (SP500 is coming off peak)
  3. What if European stocks react to Draghi’s plan next wk like Swiss stocks just did?


What if you woke up, every day, asking yourself not whether or not you like me as a person… but asking yourself about yourself, your process, and your performance path?


This isn’t Yosemite. This is Wall Street. And yes, you need to have a macro view. So #Timestamp it! The plan is always that the plan is going to change. And while you might lose a few fingernails, stressing yourself to not take the consensus route along the way…


If you can make that epic performance climb, you can sit up there at the top, smiling all day.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.70-1.93%


VIX 19.78-23.31

Oil (WTI) 44.43-47.93
Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Climbing The Wall - Claims vs Crudel

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2015 Predictions

This note was originally published at 8am on January 02, 2015 for Hedgeye subscribers.

“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

FTSE 6360-6661

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

Cartoon of the Day: Currency Wars

Cartoon of the Day: Currency Wars - currency wars

In the latest signal of central bank monetary mayhem, Switzerland has triggered unprecedented turmoil in the currency market.


"My long-term call has always been that the next crisis would be perpetuated by the central planners themselves," wrote Hedgeye CEO Keith McCullough earlier today. 

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