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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,

KM

 

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. 


Daily Trading Ranges, Refreshed [Unlocked]

This is a complimentary look at Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers every weekday morning by CEO Keith McCullough. It was originally published January 15, 2015 at 07:48. Click here to learn more and subscribe.

Daily Trading Ranges, Refreshed [Unlocked]   - Slide01

BULLISH TRENDS

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Daily Trading Ranges, Refreshed [Unlocked]   - Slide3

 

 

BEARISH TRENDS

Daily Trading Ranges, Refreshed [Unlocked]   - Slide4

Daily Trading Ranges, Refreshed [Unlocked]   - Slide5

Daily Trading Ranges, Refreshed [Unlocked]   - Slide6

Daily Trading Ranges, Refreshed [Unlocked]   - Slide7

Daily Trading Ranges, Refreshed [Unlocked]   - Slide8

Daily Trading Ranges, Refreshed [Unlocked]   - Slide9

Daily Trading Ranges, Refreshed [Unlocked]   - Slide10

Daily Trading Ranges, Refreshed [Unlocked]   - Slide11
Daily Trading Ranges, Refreshed [Unlocked]   - Slide12


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INITIAL CLAIMS | ONE STEP BACK FOR THE US AND TWO STEPS BACK FOR ENERGY STATES

Takeaway: Energy states continue to see their labor markets decoupling from the broader US trend.

Below is the detailed breakdown of this morning's initial claims data from Joshua Steiner and the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact 

 

EYEING THE ENERGY STATES:  The principal risk to the labor market's otherwise healthy disposition is the potential hit to energy-sector jobs from the collapse in energy prices. In an effort to stay vigilant and monitor the situation, we've been tracking weekly state-level filings for the eight energy-heavy US states relative the country as a whole. Those states include AK, LA, NM, ND, OK, TX, WV, WY and further details on them can be found here: Link

 

What we've observed is that energy state initial claims are diverging from the country as a whole since the fall in oil prices began in earnest in late September last year. The first chart below illustrates. The black line represents US initial jobless claims, while the blue line represents the eight energy-heavy states (indexed into a basket). These are NSA claims so we’re interested in the divergence between the two series. 

 

INITIAL CLAIMS | ONE STEP BACK FOR THE US AND TWO STEPS BACK FOR ENERGY STATES - Claims 18

 

INITIAL CLAIMS | ONE STEP BACK FOR THE US AND TWO STEPS BACK FOR ENERGY STATES - Claims states yoy

 

The Data

Prior to revision, initial jobless claims rose 22k to 316k from 294k WoW, as the prior week's number was revised up by 3k to 297k.

 

The headline (unrevised) number shows claims were higher by 19k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 6.75k WoW to 298k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -10.9% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -16.2%

 

INITIAL CLAIMS | ONE STEP BACK FOR THE US AND TWO STEPS BACK FOR ENERGY STATES - Claims 10

 

INITIAL CLAIMS | ONE STEP BACK FOR THE US AND TWO STEPS BACK FOR ENERGY STATES - Claims 2

 

INITIAL CLAIMS | ONE STEP BACK FOR THE US AND TWO STEPS BACK FOR ENERGY STATES - Claims 3

 

 

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Macro Notebook 1/15: Swiss | Oil | Financials

 

Hedgeye Macro Analyst Christian Drake shares the top three things in Keith's macro notebook this morning.


Hedging the Storm in Energy

Hedgeye’s Macro and Energy teams will host a guest speaker call on Wednesday, January 21st at 1 p.m. EST to discuss current trends in and implications of the commodity hedging practices of US E&Ps, natural gas processors, and various industrial commodity consumers.

 

Hedging the Storm in Energy - E Marketing Image


The call will feature Wayne Penello and Andy Furman of Risked Revenue Energy Associates (“R^2”).  R^2 is an independent hedge advisor serving E&P companies, midstream service providers, and large consumers.  Wayne Penello is the President and Founder of R^2, and has 30 years of experience in commodity options trading, market-making, and asset management.  Andy Furman has 25 years of experience in energy trading and is an expert at valuing and trading options.

 

Topics for Discussion:

  • Overview of R^2’s services, clients, and proprietary risk management systems;
  • The mechanics of entering into a commodity hedge;
  • Assessment of current industry hedge positions;
  • R^2’s commodity price outlook for crude oil, natural gas, and NGLs;
  • Client psychology – what E&Ps are currently thinking and doing in the oil, gas, and NGL markets;
  • The challenge and opportunity in hedging NGLs;
  • And more…

About Risked Revenue Energy Associates:

R^2 is a consultant and market agent in the energy space serving upstream, midstream, and end users of energy-related commodities (including private equity interests).  R^2 brings over 150 years of experience including but not limited to market-making, trading, asset management, and industry expertise. The firm utilizes a patented risk management strategy to help implement and stress test a company’s hedge book, leverage, and cash flows, among a long list of other metrics under various scenarios. R^2 suggests the most relevant hedging strategies and negotiates/executes on behalf of their clients on a daily basis.

 

Wayne Penello is the President and Founder of R^2. He has 30 years of market-making, option trading and asset management experience in the energy industry. Mr. Penello began his career on the New York Mercantile Exchange, where he was a market maker and served as Ring Chairman of options trading. Subsequently, he held positions managing globally distributed energy assets for Vitol S.A., Vitol U.S.A., Tenneco Gas Marketing and Torch Energy. Mr. Penello was formerly a research scientist. He holds a Masters degree in Marine Sciences from Stony Brook University and an undergraduate degree in Marine Biology from Southampton College.

 

Andy Furman was co-founder and CEO of Atlantic Capital Consultants, an options market-making firm on the NYMEX from 1987 – 2001. After leaving the NYMEX trading floor in 2001, Mr. Furman traded for hedge funds. Most recently he held the position of Managing Director for Hudson Capital Group, LLC where as Manager and Trader for Energy Futures and Options he used spread arbitrage and option strategies to achieve consistent profitability. Mr. Furman holds a Bachelor of Science degree in Chemical Engineering from MIT.

 

Macro Team


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