Keith's Macro Notebook 1/26: Oil | #Deflation | Financials


Sign Up for Hedgeye's Market Marathon on its new date - Wednesday, January 28, 2015:

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

Join Tomorrow 11AM: Is The Worst Yet to Come In Russia? Top Russia Authority to Discuss

Hedgeye’s Macro Team is pleased to continue our special “Behind the Curtain” conference call series to discuss Russia’s Crash with Russia authority Anders Åslund TOMORROW, Tuesday, January 27th at 11:00am EST.


Åslund is one of the world’s foremost experts on Russia and the Peterson Institute authority on economic policy of Russia, Ukraine, and Eastern Europe.


Åslund is currently calling for Russia’s GDP to plunge -10% this year on sanctions, falling oil prices, and poor structural economic policy.


Similar to our previous speaker, former U.S. Ambassador to Russia Michael McFaul, Åslund brings on the ground experience across multiple Russian regimes to offer broader context on Putin’s Russia.


Specifically, Åslund served as an economic adviser to Russian President Boris Yeltsin in 1991-94 and to Ukrainian President Leonid Kuchma in 1994-97, followed by key economic advisory positions to the Baltic states and Kyrgyzstan.


Åslund will provide 30 minutes of prepared remarks, followed by open Q&A moderated by Hedgeye’s analyst Matt Hedrick.


Join Tomorrow 11AM: Is The Worst Yet to Come In Russia? Top Russia Authority to Discuss - HE M putin2



  • Forecasted view of the Russian economic environment
  • Assessment of the decline of the Russian Ruble and 2015 outlook
  • How falling energy prices will impact the Russian government and budget specifically
  • Discussion of the current and forecasted state of sanctions against Russia and assessment of their impact
  • Russia’s involvement in Ukraine:  War or Resolve?



  • Toll Free Number:  
  • Direct Dial Number:  
  • Conference Code: 275897#
  • Materials:

Ping for more information.





Anders Åslund has been a senior fellow at the Peterson Institute since 2006. He is also an adjunct professor at Georgetown University. He examines the economic policy of Russia, Ukraine, and Eastern Europe, as well as focuses on the broader implications of economic transition. He worked at the Carnegie Endowment for International Peace from 1994 to 2005, first as a senior associate and then from 2003 as director of the Russian and Eurasian Program. He also worked at the Brookings Institution and the Kennan Institute for Advanced Russian Studies. He earned his doctorate from Oxford University.


Åslund served as an economic adviser to the governments of Russia in 1991–94 and Ukraine in 1994–97. He was a professor at the Stockholm School of Economics and the founding director of the Stockholm Institute of East European Economics. He has worked as a Swedish diplomat in Kuwait, Poland, Geneva, and Moscow. He is a member of the Russian Academy of Natural Sciences and an honorary professor of the Kyrgyz National University. He is chairman of the Advisory Council of the Center for Social and Economic Research (CASE), Warsaw, and of the Scientific Council of the Bank of Finland Institute for Economies in Transition (BOFIT).


He is author or coauthor of 13 books, including How Capitalism Was Built: The Transformation of Central and Eastern Europe, Russia, the Caucasus and Central Asia (Cambridge University Press, 2007 and 2013), The United States Should Establish Permanent Normal Trade Relations with Russia (2012), How Latvia Came through the Financial Crisis (2011), The Last Shall Be the First: The East European Financial Crisis (2010), The Russia Balance Sheet (2009),How Ukraine Became a Market Economy and Democracy (2009), Russia's Capitalist Revolution: Why Market Reform Succeeded and Democracy Failed (2007), Building Capitalism: The Transformation of the Former Soviet Bloc (Cambridge University Press, 2002), How Russia Became a Market Economy (Brookings, 1995), Gorbachev's Struggle for Economic Reform, 2d ed. (Cornell University Press, 1991), and Private Enterprise in Eastern Europe (Macmillan, 1985). He is also editor or coeditor of 16 books, including The Great Rebirth: Lessons from the Victory of Capitalism over Communism (2014), Russia after the Global Economic Crisis (2010), Challenges of Globalization: Macroeconomic Imbalances and Development Models (2008), Europe after Enlargement (Cambridge University Press, 2007), and Revolution in Orange(Carnegie Endowment, 2006).

Retail Callouts (1/26): Idea List, GPS, AdiBok, NKE Jordan, PVH, M

Takeaway: Hedgeye Retail Idea List. Gap closes Piperlime. Adibok promos running shoes. Nike sued over Jordan logo.


Retail Callouts (1/26): Idea List, GPS, AdiBok, NKE Jordan, PVH, M - 1 26 chart1





GPS - Gap Inc. to Close Smallest Brand, Piperlime



Takeaway: Not a big deal for the consolidated GPS - at $151mm in revs it's less than a percentage point of the consolidate revenue base. The company started the brand in 2006 and probably shifted its focus away from the whole e-comm thing to focus on Intermix and Athleta which the company acquired in 2013 and 2009 respectively. That helps explain the growth trend which fell off from +60% in 2012 to 7% in '14. It makes us wonder what the prospects are for other e-comm only operators functioning primarily in the wholesale model. Gap probably has a weaker stomach when it comes to dilution from its smallest brand. But, it does reinforce the disconnect between content owners and peddlers in the online channel.  Our math suggests that Piperlime is probably losing about $50mm annually for GPS. That's about $0.06-$0.07 after tax, or about 2% dilution to earnings. So all in, this is a slight positive. 



Adibok, NKE - Forget Soccer—Adidas Challenges Nike to a Foot Race



Takeaway: The product and marketing event surrounding the release jibes with the company's commentary from July of '14 which called for a step up in marketing spend. The company took over a building on Wall Street with a host of athletes on Friday to promote the newest iteration of the Boost line which will retail for $180. Two thoughts on the kicks and the release. 1) Adi's athlete roster is telling. Yohan Blake, David Villa, and Sammy Watkins were on hand for the release of the 'Best Running Shoe Ever'. We'd call that the B maybe even the C team. 2) In what world does Adi think it can command $180 for a pair of runners? We think that's a tough value proposition to communicate to consumers. Excluding iD's, Nike only has 3 models above that price point in its entire running line and it's earned that strata. Adi is still far behind on the innovation side.

Retail Callouts (1/26): Idea List, GPS, AdiBok, NKE Jordan, PVH, M - 1 26 chart2



NKE - Nike sued over Michael Jordan logo



Takeaway: This case revolves around use of a photographer's photo of Michael Jordan dunking, and its use in creating what we now know as the 'Jumpman' logo for Brand Jordan ($3.3bn in retail sales). While parts of the article are convincing as it relates to the merit of a case, we have a hard time seeing how any court could side with the plaintiff. It's like sitting on a $1m lotto ticket that expired in 1987 and then suing for the sum plus interest. Some kind of statute of limitations has to kick in here.

Retail Callouts (1/26): Idea List, GPS, AdiBok, NKE Jordan, PVH, M - 1 26 chart3





PVH - PVH Restructuring Underwear, Dress Furnishings



AAPL - J. Crew CEO to leave Apple board



AAPL - Inroads Made by Apple Pay Propel ‘Mobile Wallet’ Idea



KORS - Full World of Kors to Open in Ginza



M - Macy’s will expand CA fulfillment center to meet omnichannel demand



MIK - Michaels stock offering priced at $23 per share



Sir Philip Green in Talks to Sell BHS





Daily Trading Ranges

20 Proprietary Risk Ranges

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Takeaway: In today's edition of the Macro Playbook, we review the [dour] setup going into Friday morning's 4Q14 U.S. GDP release.


Long Ideas/Overweight Recommendations

  1. iShares U.S. Home Construction ETF (ITB)
  2. Consumer Staples Select Sector SPDR Fund (XLP)
  3. Health Care Select Sector SPDR Fund (XLV)
  4. iShares 20+ Year Treasury Bond ETF (TLT)
  5. PowerShares DB U.S. Dollar Index Bullish Fund (UUP)
  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. iShares MSCI Emerging Markets ETF (EEM)
  3. Industrial Select Sector SPDR Fund (XLI)
  4. CurrencyShares Japanese Yen Trust (FXY)
  5. SPDR Barclays High Yield Bond ETF (JNK)
  1. SHORT BENCH: SPDR Oil & Gas Exploration & Production ETF (XOP), CurrencyShares Euro Trust (FXE), WisdomTree Emerging Currency Fund (CEW)



Reviewing the Setup Into the 4Q14 GDP Release: This week, we get the last heavy dosage of DEC/Q4 economic data, with Friday morning’s GDP print as the obvious main event. There are three reasons we think GDP is likely to slow markedly from the +2.7% YoY growth rate recorded in the third quarter:


One – Unsupportive Base Effects: The GDP “comp” for 4Q14 is the most difficult “comp” the U.S. economy has faced since the fourth quarter of 2007, which marked the start of the Great Recession. Akin to how a bottom-up analyst would model a company, we use a Bayesian inference process to model GDP, smoothing the 1yr, 2yr and 3yr average growth rate to determine the GDP “comp” (i.e. the prior), which determines ~60% of the directional rate-of-change in YoY GDP (i.e. the posterior). On a relative basis, our “comp” metric is more difficult that it was in 3Q14 and it’s as difficult as any comp we’ve seen in the past seven years on an absolute basis as well.




Two – Slowing High-Frequency Data: Determining the other ~40% of the directional rate-of-change in YoY GDP is a function of tracking the relevant high-frequency economic data and interpolating conclusions from market-based signals. As we showed in our 12/10 edition of the Macro Playbook, the three-month moving average in economy-weighted composite PMI has a r² of 0.83 to YoY GDP. On a quarterly average basis, this metric has slowed from 59.8 in 3Q14 to 55.6 in 4Q14 – a slowdown that’s in line with the downside surprise to domestic consumption growth data throughout the quarter.








Three – Dour Market Signals: The persistent bearish quantitative setup combined with lower-lows and lower-highs in the immediate-term risk range for the 10yr Treasury yield continues to signal to us that the market is pricing in a slowing of U.S. economic growth on a reported basis. As we detailed most recently in our 1/20 edition of the Macro Playbook, the persistent strength in asset classes and U.S. equity sectors and style factors that have historically outperformed in #Quad4 is also signaling to us that domestic #GrowthSlowing is likely to continue on a reported basis through at least this week.










A move back into #Quad4 for the fourth quarter (recall that the third and final estimate for 3Q14 GDP nudged the U.S. economy ever-so-slightly into the #Quad1 due to the QSS restatement of healthcare consumption) would mark what we are content to view as the “second consecutive” quarter of #Quad4 in the U.S.


All told, by the time 1H15 is done, it’s likely to “feel” to investors like the U.S. economy has been in #Quad4 for roughly one full year – especially if “Snowmageddon” is as bad as they are predicting it to be, which may cap a likely acceleration in GDP growth here in Q1.




3-4 quarters of #Quad4 would be very counter to the consensus bullish narrative surrounding lower gas prices; luckily for those of you who have been appropriately positioned, that’s not counter to what’s been working in and across financial markets.


***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.


Draghi Delivers the Drugs! (1/22)


#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 (1/23)


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.


EHS | RoC Solid (1/23)


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.          


On Wednesday, January 28 at 11:00am EST, the Hedgeye Gaming, Lodging, and Leisure team will host Mike Driscoll, Editor-In-Chief of Cruise Week to discuss current demand trends.  Mike has extensive contacts throughout the travel agent community and should provide relevant and timely commentary.  In line with our standard format, prepared commentary will be followed by an email Q&A session.


The topics of discussion include:

  • Wave 2015 bookings/pricing
  • Travel agent expectations
  • New ship premiums
  • Customer demographics
  • Destinations: What’s hot/what’s not

For conference call details, please contact  



Mike Driscoll is editor-in-chief of Cruise Week, published since June '95. Its readers include most of the top cruise sellers in the industry, industry analysts, and cruise line executives and employees. Mike has covered travel trade issues for more than 25 years. Before Cruise Week, he was the editor of ASTA Agency Management for seven years and is a graduate of the Medill School of Journalism at Northwestern University. Driscoll also studied writing at Trinity College, Oxford, England.


Takeaway: European pricing in 2015 is weakening. We saw it particularly with the RC brand in January.


With oil falling to a new low last week (Brent at $48), the fuel cost tailwind continues for the cruisers. At some point, oil will stop going down and investors may have to contend with potentially softer than expected cruise demand. The latest pricing survey on Wave continues to signal choppiness with European pricing leading the slowdown. Our survey corroborates recent commentary from some of our travel agent contacts.



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