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January 29, 2015

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CHART OF THE DAY: The Hedgeye “Avoid, Sell, Short” List

CHART OF THE DAY: The Hedgeye “Avoid, Sell, Short” List  - 01.29.15 Chart


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


  1. Energy Stocks (XLE) got smoked for another -3.9% down day yesterday as Oil/Nat Gas continue to crash
  2. Financials (XLF) underperformed a -1.3% SPY, closing -1.8% on the day at -6.2% YTD
  3. Industrials (XLI) “outperformed” at -0.9% on the day but are down the same as SPY YTD at -3.1%


Since all 3 of these S&P Sectors remain on our “avoid, sell, short, etc.” list (they are both late-cycle and carry explicit Global #Deflation risks), I’ll just reiterate that call this morning – because it’s easy to.

Lots of Questions

“The best way to get a good idea is to have a lot of ideas.”

-Linus Pauling


Linus Pauling was one of the most influential American scientists of the 20th century. He locked down his officialdom prize (Nobel) in chemistry in 1954 and is widely considered the forefather of molecular biology and quantum chemistry.


I love his creativity quote. I found it in a chapter of The Medici Effect (page 103) titled “How To Capture The Explosion – MacGyver and Boiling Potatoes.” I highly recommend you take the time to read that book.


I’d also suggest you take Pauling’s independent research advice one step further and apply it to your risk management #process. The best way to manage the risk in your portfolio of ideas is to ask yourself lots of macro questions.


Lots of Questions - Linus Pauling


Back to the Global Macro Grind


With the SP500 down for 3 of the last 4 trading days and down -2.7% for the YTD (vs. the total YTD return of our TLT up over +9%), have you asked yourself whether or not earnings season is what you thought it was going to be?


If you’re honest with yourself, you’ll note that the SP500 has only had 1 up week in 2015, and that had nothing to do with nothing other than the Europeans forcing yet another central plan on what used to be free-markets.


This leads me to asking myself lots of questions in the Global Equity sphere:


  1. On Europe, post the 3-day Viagra ramp, what’s next? Buy European stocks because things are that bad?
  2. On China (down -3.8% in the last 3days on #GrowthSlowing), do I buy it because it’s slowing?
  3. Do I buy #Deflation Domino markets that got crushed yesterday (Argentina -2.8%, Brazil -1.9%, Canada -1.6%)?


What if you can only buy US Equities?


  1. Energy Stocks (XLE) got smoked for another -3.9% down day yesterday as Oil/Nat Gas continue to crash
  2. Financials (XLF) underperformed a -1.3% SPY, closing -1.8% on the day at -6.2% YTD
  3. Industrials (XLI) “outperformed” at -0.9% on the day but are down the same as SPY YTD at -3.1%


Since all 3 of these S&P Sectors remain on our “avoid, sell, short, etc.” list (they are both late-cycle and carry explicit Global #Deflation risks), I’ll just reiterate that call this morning – because it’s easy to.


Back to the questions…


  1. Do we buy more Long Bonds (TLT, EDV, ZROZ), Munis (MUB), and low-volatility-high-return securities like them?
  2. Do we book some gains in some of those and buy more equally “expensive” stock sectors like Utes (XLU) and REITS (VNQ)?
  3. Do we own both long-duration bonds and some lower-beta, higher-return sectors like Staples (XLP) and Healthcare (XLV)?


Oh, and how does one justify bucking up for something that is “expensive” if one didn’t get that they should have bought it when it was less-expensive to begin with? That’s their storytelling problem. Let them deal with it.


Another question on valuation: what if you bought Energy stocks because you thought they were “cheap”, and the earnings just got cut in half, so now you own what’s one of the most expensive sectors in the S&P 500 anyway?


Two more very basic questions in risk managing the macro side of your portfolio:


  1. Doesn’t “expensive” get more expensive when investors seek liquidity and shelter (Long-term Treasuries)?
  2. Doesn’t “cheap” get cheaper when investors shun illiquid investments that have deteriorating fundamentals?


If you’ve studied macro market #history, you know the answers to these questions are not what you will find in bottom-up Value Investing books. In the intermediate-term, Mr. Macro Market doesn’t care about valuation – he cares about risk.


Individual stocks clearly care about their own rate of change fundamentals. If growth is accelerating and margins are expanding, they get multiple expansion. Whereas companies who show #GrowthSlowing and margin compression get multiple compression.


That’s why identifying bottom-up stock ideas like AAPL in an environment like this helps you crush your competition. Don’t you want to own stocks that can generate multiple expansion in a market like US Equities that has multiple compression risk? Indeed.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.71-1.82%


VIX 16.73-23.27

Oil (WTI) 43.69-46.44
Gold 1
Copper 2.42-2.54


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Lots of Questions - 01.29.15 Chart

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Takeaway: Today we show how consensus is not in area code of being bullish enough on the U.S. dollar and how that is likely to impact U.S. stocks.


Long Ideas/Overweight Recommendations

  1. Consumer Staples Select Sector SPDR Fund (XLP)
  2. iShares U.S. Home Construction ETF (ITB)
  3. Health Care Select Sector SPDR Fund (XLV)
  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)



The U.S. Dollar Is Crushing Naysayers: Those of you who are familiar with our work know that core to our research and risk management processes is a behavioral finance overlay that centers mostly on sentiment. Specifically, we believe there are three states of sentiment that investors must attempt to contextualize prior to taking a position in or formulating a view on a specific security or market:


  1. Bullish
  2. Bearish
  3. Not enough of either


In that context, we continue to believe that consensus is not in the area code of being Bullish Enough on the U.S. dollar.


As you know, we’ve been dollar bulls for nearly six months now in conjunction with our #Quad4 theme and what continues to amaze us about the strength in the U.S. Dollar Index is the level of disbelief among investors with respect to the velocity of its appreciation.




Anecdotally speaking, I can count on one hand the number of institutional clients that expect parity in the EUR/USD cross and/or reversion to the August ’98 highs of ~147 on the USD/JPY cross.




But why use anecdotes when you can use math?


Specifically, the sell-side (i.e. Bloomberg consensus) expects the U.S. Dollar Index (DXY) to appreciate +1.3% to 95.68 by EOY ’15 based on our weighted amalgamation of all the constituent currency forecasts.


That sounds reasonable, but not in the context of them expecting it to appreciate +2.2% to 92.27 by EOY ’15 at the end of last year. It’s worth noting that 92.27 is a full -2.5% lower than where the DXY is trading today – just four weeks later!


In line with their institutionalized processes, sell-side forecasts for key USD crosses are likely to continue chasing trending price momentum – within one sigma of the median forecast, of course! Can’t risk being isolated from the herd…


THE HEDGEYE MACRO PLAYBOOK - DXY Bloomberg Consensus NTM Forecast


What about the buy-side? Have institutional investors been any better at forecasting where the dollar has been headed? Absolutely not. Far from it actually.


For example, let’s review how buy-side consensus was positioned ahead of the ECB smoking the EUR/USD cross to ~12yr lows with the announcement of its QE program last week. At the end of last year, the most probable spot price range for January 22nd was 1.2131-1.2162 according to Bloomberg’s FX Rate Forecast Model. The left tail of the 95% confidence interval band was 1.1526. The EUR/USD cross closed at 1.1366, a 0.24% probability just some ~3 weeks earlier!



Source: Bloomberg


Why was the precipitous YTD decline of -6.6% on the EUR/USD cross considered such a low probability among investors?


Anecdotally, some investors were myopically focused on the hawkish commentary emanating from the Bundesbank – Wolfgang Schaeuble in particular – in their relatively hawkish handicapping of ECB QE risk(s). Other investors were myopically focused on the Fed and what a deteriorating outlook for growth and/or inflation would do to the FOMC “dot plot” and, ultimately, the U.S. dollar.


While both views can be considered to be well within reason at the time(s), the fact of the matter is that both views were ultimately proved wrong by the market. Fortuitously, our team has been on the right side of the long-dollar trade all along.


With respect to the Fed in particular, the “dots” continue to get punted at every interval yet the dollar continues to ascend to new heights.


Specifically, according to the Fed Funds futures curve, the probability of “liftoff” (i.e. a rate hike) by the December 2016 FOMC meeting at the May 6th 52-week low in the DXY was 90.8% (100% less a 1.4% probability of 0% less a 7.8% probability of 0.25%). It regressed to 86.1% by the end of last year and further to 65.3% currently.



Source: Bloomberg



Source: Bloomberg



Source: Bloomberg


With long-duration Treasury bonds continuing their moonshot higher (yes, we’ve been bullish on those too), the rates market clearly gets this dynamic.


What the currency market is failing to appropriately price in is the global monetary policy divergence we have identified and continue to view as supportive of the USD over the intermediate term and potentially over the long term if the 2016 election cycle portends a structurally hawkish shift in monetary and fiscal policy.






In short: the ECB and BoJ are simply more dovish than the Fed at the current juncture and that is likely to continue at least until a clear trend of deteriorating labor market fundamentals takes hold in the U.S.


We repeat: the ECB and BoJ will likely remain more dovish than the Fed until a clear TREND of deteriorating labor market fundamentals takes hold in the U.S. We are simply not there yet according to how the Fed analyzes labor data.


Hopefully by now we’ve done a good job using our #process trifecta of History, Math & Behavioral Finance to make a compelling case for material U.S. dollar appreciation from here. Our bearish call on commodities, emerging market financial assets and dollar-denominated high-yield corporate debt is an easy call to continue to make in light of that.


How will that impact equity portfolios, however? Based on historical return patterns, a continued strengthening of the USD vis-à-vis peer currencies is likely to continue to perpetuate a performance divergence between the “haves” (i.e. high domestic revenue exposure) and the “have nots” (i.e. high international revenue exposure) in the domestic equity market.






Email us if you have questions on how to replicate this equity screen or if you have any other questions we may be able to help with. Best of luck out there.


***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.


EARLY LOOK: Late-Cycle Slowdown (1/27)


#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.


HOUSING: Riding Strong Through the Actual and Arithmetic Blizzard of Crummy Macro Data (1/27)


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.  



The stock should be flat on this earnings release.  Macau disappointed on already reduced numbers, Las Vegas was surprisingly weak, and when one-time items and good luck is stripped away from Marina Bay Sands, Singapore performed in line.  So why shouldn’t the stock be down?  Well, the quarter wasn’t awful and could’ve been worse.  However, management’s repeated mantra – Where’s the slowdown? – rang hollow.  There was ample evidence of a slowdown across many metrics across all properties.


There’s a lot to like about LVS over the long-term and we will be positive on this stock again.  For now, we will stay on the sidelines.  There is no evidence of a fundamental bottom in Macau and in fact, January looks worse to us than Q4.  Optically (on a YoY basis), February will be awful.  Risks remain high and visibility low.  We wouldn’t be surprised to see another leg down.


Please see our detailed note: http://docs.hedgeye.com/HE_LVS_Slowdown_4Q2014_1.29.15.pdf

Macro Stars

This note was originally published at 8am on January 15, 2015 for Hedgeye subscribers.

“Stars can’t shine without darkness.”



It is indeed the contrast that draws one’s eye towards something that is different.


Every once in a while in Independent Research we earn an opportunity to see that light develop before consensus does. God willing, the search for macro stars is what has my two feet on the floor each morning of every risk management day.


While it would be convenient to skip over the #deflation part of an epic central planning experiment, unfortunately that’s not the way the cycle from day to night works. There will be darkness before America’s free market economy can shine again.

Macro Stars - 445


Back to the Global Macro Grind


Don’t forget that I had the lowest grade in my freshman creative writing course @Yale. “So”, I’m still working on it (thanks for bearing with me over the years!). I’d love to go back to New Haven and slap some hash-tags on my English Lit prof’s desk.


While I probably don’t deserve a Ph.D. (or a perma bull II vote) for this, I’ve always said that un-elected central market planners would perpetuate the next crisis. That’s #on this morning – follow the interconnected risk:


  1. SWISS – there’s CTRL+Print, then there’s panic – and this is rightly A) freaking people out and B) equating to a massive margin call on levered FX trades – Swiss cut by 50bps (to neg -0.75%!) and cut the wire loose on their exchange rate? (Richemont -11.2%, Swatch -8.5%, UBS -7.2%, Adecco -7.9%, Credit Suiss -8.2%, Julius Baer -7.5%, ABB -7.4%) #nice
  2. OIL – follow the #Deflation Dominos – Yens, Euros, Francs panic/burn > Up Dollar > Crashing Oil Spreads blow out in High Yield Energy > Energy States lose moneys and jobs > Financials and Industrials follow (late-cycle rolls) > Fed doesn’t hike … this was the call I made in our Macro Themes Deck for Q1, reiterating it this am
  3. FINANCIALS – yesterday’s drop in JPM was its biggest since 2011. Volume was huge. Remember 2011? Financials worst perf #divergence vs Utilities, ever. XLF already -5% for the YTD and the Regional Banks are in the midst of a 10% draw-down since that no-volume all-time SPX high on December 29th (2090)


“So” how are you feeling about some of our #Quad1 US equity long ideas now? After seeing the US stock market drop in 10 of the last 12 trading days, I’m thinking some of those look a tad early!


What’s really cranking for us are these #Quad4 Deflation ideas (Long #TLT!). And that makes complete sense to me, because:


  1. In Q1, globally #Quad4 doesn’t bounce to #Quad1 anywhere but in the USA
  2. USA is still coming to grips with the #Quad4 slowdown that happened in DEC and Q4 of 2014


Slowing? Yeah, that “everything is awesome” LEGO gas station thesis that everyone and their brother in long-only USA equity land ended up being almost as fictional as the movie. At -0.9% month-over-month, that was a big US Retail Sales miss.


It wasn’t recessionary, and that wasn’t our call anyway. It was simply A) slower in rate of change terms (both sequentially and on a 2yr comp basis) and, more importantly, B) way worse than the Old Wall was prepped for.


Go back and read their tweets. My boy Lavorgna was tweeting in sync with Bloomberg/CNBC’s new editorial JV macro team that the US economy was “booming” and that it was a “closed economy, unaffected by the global slowdown.”


Then they got Swissy’d.


Don’t you hate when that happens? When an un-elected Swiss dude wakes up in the morning and whacks his country’s stock market for a 7% down day and takes out Zervos’ spoooz at the knees?


Yes, I am going to call these people out by name this time. Oh, right – I did last time too. And, no, it’s not “mean” or unprofessional. It’s what someone with a spine needs to do, or our profession will never be held to account and evolve.


Due to the countless conflicts of interest associated with the aforementioned brokers, banks, and advertisers, the consensus complacency about risk remains the greatest risk to your country, children, and their future stars.


Our immediate-term Global Macro Risk Ranges are now (I’ll give you all 12 Big Macs in our Daily Trading Ranges report from this morning – in brackets is our intermediate-term TREND views):


UST 10yr Yield 1.78-1.97% (bearish)

SPX 1991-2031 (bearish)

SMI (Swiss Index) 8471-9016 (bearish)

FTSE 6230-6467 (bearish)

VIX 19.27-22.51 (bullish)
USD 91.48-93.11 (bullish)
EUR/USD 1.16-1.19 (bearish)

Yen 116.43-119.12 (bearish)
Oil (WTI) 44.43-48.97 (bearish)
Natural Gas 2.74-3.31 (bearish)

Gold 1213-1245 (neutral)

Copper 2.45-2.71 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Macro Stars - 01.15.15 chart