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Keith's Macro Notebook 2/5: China | Euro | Oil


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


Takeaway: Investors cannot afford to miss our immediate-term, intermediate-term and long-term scenario analyses for the U.S. dollar in today's note.


Long Ideas/Overweight Recommendations

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

Short Ideas/Underweight Recommendations

  1. iShares MSCI Emerging Markets ETF (EEM)
  2. SPDR Barclays High Yield Bond ETF (JNK)
  3. Industrial Select Sector SPDR Fund (XLI)
  4. SPDR S&P Regional Banking ETF (KRE)
  1. iPath S&P GSCI Crude Oil Total Return ETN (OIL)
  2. SHORT BENCH: SPDR Oil & Gas Exploration & Production ETF (XOP), CurrencyShares Euro Trust (FXE), WisdomTree Emerging Currency Fund (CEW)



Reviewing Our Bullish Bias on the U.S. Dollar From a Calendar Catalyst Perspective: With the DXY trading near the low end of our immediate-term risk range, we thought we’d review our bullish thesis from the perspective of navigating the macro calendar.




Over the next month or so, we would agree that further consolidation on the DXY is both healthy and justified in the context of the speculative net length in the futures and options markets. The net long position of 70,456 contracts is the widest net long position in the history of the U.S. Dollar Index (data since March 1995) and is nearly two standard deviations above its TTM mean, which indicates the presence of investors crowding into the trade.




Connect the dots on potential incremental consolidation in the U.S. dollar vis-à-vis peer currencies over the next 4-6 weeks:


  1. Draghi remains in wait-and-see mode amid positive 2nd derivative inflections across the preponderance of Eurozone growth data.
  2. The Fed openly acknowledges the marginal deterioration in the U.S. economy – largely citing lagging DEC/Q4 data – at its March 18th meeting.
    • Tomorrow’s jobs report will be critical to monitor in the context of this development.   
  3. There, it effectively punts any near-term rate-hike expectations well into 2H15 or beyond.
  4. By then, however, we’ll likely be receiving the second month of #GrowthAccelerating data points amid our #Quad414 theme.
  5. If the U.S. dollar corrects into mid-March, it would behoove investors to buy the dip then given that the next catalysts in the global currency war would be:
    • Potential BoJ easing at the end of April as Q1 data is likely to negatively inflect from the recent trend of recovery.
    • The ECB revisiting the pace of its QE program sometime in 2H15 as much lower Eurozone CPI readings effectively quash any remaining opposition from the Bundesbank.
    • The U.S. economy looking optically better through at least the end of April when all the MAR/Q1 data is reported.
      • The noise surrounding the Consensus Macro “lower gas prices” narrative will likely peak around then.










Beyond April/May, we view the following scenarios as the three most likely paths for the U.S. dollar to traverse:


  1. Straight the heck up as investors freak out and go to cash once the “lower gas prices” narrative completely morphs into “late-cycle slowdown” or “potential recession” in the U.S.:
    • The U.S. dollar probably rips higher on any U.S. recession freak-out (see: 2001, 2008) considering the current low levels of financial market volatility – which implies tons of dollar-denominated financial leverage that has yet to be [forcibly] unwound.
      • For example, emerging market corporations and banks have raised well over $2 trillion in dollar-denominated debt since 2010. Both debt redemptions and the FX-adjusted cost of financing are rising at accelerating rates for these borrowers.
  2. Down ~5-10% as the U.S. continues to muddle along at +/- 2% GDP growth for 2-3 quarters while easy comps perpetuate a recovery in both the Eurozone and Japan:
    • Based on the trend in initial jobless claims, a U.S. recession is likely within ~12 months of commencing, so the terminal downside in the DXY on any Eurozone and/or Japanese recovery narrative is somewhat limited from that perspective.
  3. To the moon if the 2016 election cycle is as anti-Fed as it has the potential to be (see: Jeb Bush and/or Rand Paul):
    • It’s tough to bet the house on that catalyst if George Bush or Mitt Romney were any indication of the GOP’s official stance on the Federal Reserve.
    • This we know, however: the next election most definitely won’t be dollar bearish… you physically can’t get any more dollar bearish than Bush/Obama + Bernanke/Yellen… well, maybe with the exception of Nixon/Carter + Arthur Burns.
    • Meanwhile open-ended QE has just begun in the Eurozone; it likely won’t produce the desired economic outcome(s), but that definitely keeps the ECB’s main refinancing rate unchanged for at least 1-2yrs.
    • Additionally, the Japanese populous just voted for round two of Abenomics; like the Europeans, they likely won’t hit their politicized economic targets, but that won’t stop the BoJ from getting creative every 6-12 months for the next 3-4yrs.
    • The U.S. has the best demographic curve of the G-3 economies, so the probability that the ECB and BoJ remain at ZIRP longer than the Fed (from here) is likely well north of 50/50.




THE HEDGEYE MACRO PLAYBOOK - U.S. 35 54 Year Old Population Growth






If scenarios #1 or #3 are put in play, inflation expectations are likely to continue to decline and the current concept of “deep value” in commodities and high yield credit will come under severe pressure – especially the latter as the outlook for cash flow generation wanes:






THE HEDGEYE MACRO PLAYBOOK - Brent Crude Oil vs. Breakevens






If scenario #2 is put in play, then both emerging markets and commodity prices are likely to experience sharp relief rallies. We currently view that scenario as the least likely of the three so we are content to maintain our bearish biases on these asset classes with respect to the intermediate- term TREND and long-term TAIL.


***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 (2/3)


#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.


Rearview Report:  Income & Spending Diverge in December (2/2)


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 Apps | Easings & Accelerations (2/4)


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. 

China, Euro and Oil

Client Talking Points


They had the rate cut, they had the rumor of the rate cut, they had the rate cut after the rumor of the rate cut…and the stock market went down. The Shanghai Composite was down -1.2% overnight, down for 6 of the last 7 days to -3% year-to-date. Now bearish on our trend duration, the intermediate-term risk range for the Shanghai Composite is 2917-3212.


The Euro is banging the top end of our risk range this morning, which is currently 1.11-1.14, the Euro remains in a bearish formation. This is interesting ahead of the jobs report tomorrow, there is a lot of concern (at least here at Hedgeye) and we will have to see if the bond market cares. That would be very bullish for bonds on the long end of the curve.


Another +2% bounce for WTI Oil to 49.43 with an intermediate risk range of 42.24-51.97 - trade it. Big correction yesterday on the order of 8%, there is a lot of downside in the risk range, but a bad jobs report would be bad for the USD and in turn bullish for oil (for a trade).

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


Contributor Call: Short iRobot $IRBT, Says Spruce Capital's Axler: https://www.youtube.com/watch?v=_cT3dmZw4SE&feature=youtu.be @BenAxler



Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.

-Albert Einstein


China has one of the highest levels of corporate debt in the world, at 125% of GDP.

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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

RH - Story Very Much On Track

Takeaway: This story is very much on track, and the catalyst calendar for 2015 will be explosive.

For all people asking the question "Why is RH Pre-announcing?"  

Here you go...


The company wants to let everyone know that business is a-ok. 

They are looking at a a comp pf 24% compared to the Street at 19%.

That translates to 24% sales growth -- the top end of the guided range.

EPS is $1.00-$1.01 -- vs prior guide of $0.99-$1.01.

All numbers are preliminary -- meaning that they're probably headed a bit higher.


This week, management is in the process of planning and goal setting on key initiatives for 2H15. So they had preliminary info as to how the quarter turned out for a broader internal group. Our sense is that they had to announce this info to all of us in conjunction.


In addition, RH is not reporting earnings until late March. The company knows from past experience that large windows of time without financial information given to the Street is rarely a good thing. They're trying to fix that.


So, if you're caught off guard by the release...we see where you're coming from. But absolutely don't freak out. This is good news. The story is on track. And the catalyst calendar for 2015 will be explosive. 


LEISURE LETTER (02/05/2015)




  • Feb 10: 
    • IGT extraordinary shareholder meeting vote
    • HOT 4Q CC 10:30am
      • (1866) ; pw: 67514695
  • Feb 12: 
    • MPEL 4Q CC 8:30am
      • (1866) ; pw: MPEL
    • PNK 4Q CC 10:00am
      • ; pw: 68847867
    • BYD 4Q CC 5:00pm
      • ; pw: 5378350
  • Feb 17: MGM 4Q CC 11:00am
    • ; pw: 8870181
  • Feb 18: 
    • HYATT 4Q CC 11:30am
      • ; PW: 62845475
    • MAR 4Q release 5pm
  • Feb 19:
    • HST 4Q CC 9:00am
  • Feb 25: Prestige analyst day (9:00am-12pm)


LVS - Sheldon Adelson says he expects rich mainlanders to avoid gambling in Macau until the mainland’s campaign against corruption has run its course. “They will stay low and will not be conspicuous in their spending habits until the witch-hunt or whatever it is called – the crackdown on corruption levels – goes down.” “They want to stay below the visibility radar because nobody, whether they are legitimate business people making millions or billions of dollars, wants to come in and be ostentatious.”


Adelson also recalled that visitation to Macau has not declined over the past months. But it doesn’t mean “every person that came in is what we call here a VIP player that could spend a large amount of money in each visit.” Premium mass players – who Mr Adelson says can usually bet between USD5,000 to USD100,000 – have not been spending as much as they did before. 


Nevertheless, Mr Adelson is confident that Macau’s gaming revenue will see brighter days in the near future: “Everything in life is cyclical. Night follows day, day follows night; and recession follows expansion, expansion follows recession…this too will pass, and this too is cyclical.”

Article HERE

Takeaway:  We think the junket business is permanently impaired.


LVS - Macau casino operator Sands China Ltd says it is paying a bonus on February 16 – three days before Chinese New Year – to all eligible full-time employees. A total of 27,000 full-timers that have already completed at least one year of full service will receive a bonus of at least one month’s salary, said the company.

Article HERE

Takeaway:  13 month bonus is the norm for 2015


CZR - Caesars Entertainment announced that Gary Loveman, Chairman and CEO, has decided to begin transitioning management of the company at the end of Q1. Loveman will continue to serve as Chairman of Caesars Entertainment and of Caesars Entertainment Operating Company. As Chairman, Loveman will continue to oversee the restructuring of CEOC. Mark Frissora joins Caesars Entertainment as CEO designee and will become CEO on 1-Jul. He joins the board immediately, and will report to the board. Frissora is the former CEO of Hertz and Tenneco.

Article HERE


GTECH – The Georgia Lottery has launched a full complement of online lottery games through a partnership with supplier GTECH, with a mobile offering to follow later this year. GTECH claims that Georgia is now the first lottery in the US to offer a full line of iLottery products, which includes traditional draw based games, iKeno, and eInstant games at various price points.

Article HERE


IGT - IGT achieved another international win with its agreement to install the Company's systems solutions at the prestigious Palazzo Club, which is located within the Sheraton Saigon Hotel & Towers, Vietnam.

Article HERE


Konami- Konami Corp’s gaming and systems division on Thursday reported net revenue of JPY23.2 billion (US$197.8 million) for the nine months ended December 31, 2014, up 4.2% YoY. 


“Sales of the Podium video slot machine continued to be favorable, mainly in the U.S. market. Full-scale marketing is also in progress in Asia, Central and South America and Europe, where we are working on building distribution networks," the company said.


Konami also expanded its line-up of premium products in the North American market, by introducing Podium Goliath, “a larger size version of Podium" under a participation agreement with casino operators.

Article HERE

Takeaway:  We will have more details on KNM's ship share but it wouldn't be surprising to see gains there.


Stations - Station Casinos is extending its reach northward through an agreement to operate a sports book inside the Baldini’s Casino in Sparks. The location is the company’s second sports book operation outside its large and small casinos in the Las Vegas area. Station Casinos has 15 sports wagering facilities at its own properties and also operates the race and sports book at the El Cortez in downtown Las Vegas.

Article HERE


CCL - Cruise prices will never go back up to what they once were as cruise holidays become increasingly mainstream, according to David Noyes, the new CEO of Carnival UK. “We’ve always got to put a good-value proposition in front of them. A lot of what we’re seeing [with price] in cruising – and not just in the UK – as it becomes more mature and more mainstream is inevitable as people look for better value.”


Asked if discounting had been eradicated by the commission cuts instigated by his predecessor David Dingle, and if fares had started to edge up, Noyes said: “We can still charge a premium with brands like P&O Cruises and Cunard, but there’s a lot of competition, not just in cruise but in the holiday market generally.

“Overall, prices are on a par 
with last year, but you never know until the end of the season how it will end up.”


Noyes added that trading so far in 2015 had been strong and this year’s wave period had been designed to be the biggest yet.  “We’ve seen a significant increase in traffic to our website and callers into our contact centers, and our travel partners are reporting lots of people coming into their shops and ringing them,” said Noyes.  “This is all converting into bookings.”

Article HERE

Takeaway:  We agree UK bookings are doing well, partially attributed to an earlier Wave but Noyes's commentary on flat pricing is worse than what many analysts are expecting.  


Paradise Co South Korean casino operator Paradise Co Ltd reported a decline in profit attributable to shareholders, even as casino sales saw a double-digit growth last year. The firm on Thursday reported net profit attributable to controlling interests of KRW96.4 billion (US$88.3 million) for the whole of 2014, down 4.2 percent from a year earlier.


Chinese VIP players accounted for 66.7 percent of table drop at Paradise Co casinos last year, the firm said in Thursday’s filing. Japanese high-rollers came a distant second, accounting for 17.1 percent of total table drop.

Article HERE

 Takeaway: Korea's GGR has benefited from Macau's slump.


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.

CHART OF THE DAY: Collapse In Oil Prices vs. Energy State Jobless Claims

CHART OF THE DAY: Collapse In Oil Prices vs. Energy State Jobless Claims - EL Chart 2

*  *  *  *  *  *  *

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


  • Energy State Decoupling:  We’ve indexed both the National and Energy State series back to May of last year and have monitored the spread between the two indices in the wake of the oil price collapse.  As can be seen in the Chart of the Day below the spread between the two series has held at around 15 points the last couple weeks.  In short, the accelerating decline in oil prices since late September has coincided with a moderate acceleration in energy state initial jobless claims relative to the US as a whole.  We’ll get the incremental update this morning at 8:30am.    


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