Europe, Germany and China

Client Talking Points


European equities are mostly flattish to up small across the board. The two outliers are Greece up about 1% and Russia up about 1.3%. Volume in European equities is pretty quiet, at about 2/3 of the one month average. The Euro continues to be in free fall, pushing the low end of our risk range, down about 45 basis points. Our immediate term risk range for the Euro is 1.05-1.08.


Germany is one equity market we want to highlight, it continues to be in a bullish formation and we remain long term bulls. Exports account for 47% of German GDP, so weak EUR policy is a huge TAILWIND for Germany. German fundamentals are outperforming peers and showing positive lift (business & economic confidence; IP, factory orders).


The Shanghai Composite Index is up about 2.7%, it is reportedly up on speculation of increased stimulus. The World Bank effectively came out and said that China will have to do some stimulus to sustain its growth rate. March trade data was kind of disappointing across the board, exports down about 15% year-over-year from 48.3%. March trade balance was $3.08B from $60.62B, this is the narrowest balance since FEB 2014.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Manitowoc  (MTW) is splitting the business into two companies. While the crane business receives the most attention in part due to its cyclicality and because they are well, more noticeable, Manitowoc’s other business, Foodservice equipment, is the larger of the two in terms of operating income (60% vs. 40% for Cranes). Several indicators are pointing towards upward momentum for MTW’s Foodservice business. Restaurant same store sales have benefitted since the drop in oil prices. Furthermore, an indicator by the National Restaurant Association, RPI Capital Expenditures Index, has surged recently in part due to lower fuel prices driving restaurant traffic and restaurant owners’ outlook.


iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. The housing data was again strong with Pending Home Sales, HPI and Purchase Demand all accelerating to close out March. Pending Home Sales rose +3.1% sequentially in February with signed contract activity up a remarkable +12% YoY, taking the index to a new 19-month high. Mortgage Purchase Applications – the most real-time, high frequency housing demand indicator - rose +5.7% WoW on the back of last week’s +4.9% advance and accelerated to +7.6% on a year-over-year basis. HPI: The Case-Shiller 20-city series showed home prices grew +4.6% year-over-year in January.  A stabilization/inflection in home price growth is important as housing related equity performance tracks the slope of home price growth strongly.



It was another week of declining long-term yields getting you paid on the long-side of Low-volatility Long Bonds (TLT). To reiterate our view over the longer-term, we pin a good chance the U.S. Dollar will reach new highs ($120 anyone?) with the probably of long-term Treasury yields reaching all-time lows very much in play.

Three for the Road


Real Conversations: Roach on Global Imbalances, Risks and How It... via @YouTube



Work hard in your silence. Let your success be your noise.

Frank Ocean


92.1% of software developers are men.

European Banking Monitor: More Divergence in Greek Swaps

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email 




Key Takeaway:

While it fulfilled a promise to meet a payment deadline on its IMF loan, Greek spreads widened. This may be an indication that, in the debate of whether Greece is unwilling or unable to repay, investors are leaning towards the latter.


European Financial CDS - Swaps mostly tightened among European banks last week. However, Greek bank swaps widened between 24 and 77 bps, even as Greece met a deadline for repayment of part of its IMF loan and Greek finance minister Yanis Varoufakis promised that the country would meet "all obligations to all creditors". There has been debate recently about the possibility that Greece can make repayments but is unwilling.  Now that Greece has shown its willingness to make payments, continued spread widening could be an indication that investors are leaning towards the belief that the country is unable.


European Banking Monitor: More Divergence in Greek Swaps - chart1 financials CDS


Sovereign CDS – Sovereign swaps modestly tightened over last week. Portugal tightened the most, by -3 bps to 132.  Of those that widened, German sovereign swaps widened by 1 bp to 17.


European Banking Monitor: More Divergence in Greek Swaps - chart2 sovereign CDS


European Banking Monitor: More Divergence in Greek Swaps - chart3 sovereign CDS


European Banking Monitor: More Divergence in Greek Swaps - chart4vf


Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 12 bps.


European Banking Monitor: More Divergence in Greek Swaps - chart5 euribor OIS spread


Matthew Hedrick



Ben Ryan







CHART OF THE DAY: U.S. Crude #Oil Production

Click image to enlarge

CHART OF THE DAY: U.S. Crude #Oil Production - zj


Editor's Note: This is a brief excerpt from today's Morning Newsletter which was written by Director of Research Daryl Jones. Click here to learn more/subscribe.


In the Chart of the Day, we highlight a table from a recent note by our commodities analyst Ben Ryan that shows oil production by each major field in the U.S., productivity by the active rigs in that play, and rig count.  In the case of the bears, they are correct that rig count is down, and meaningfully so.  In fact, Baker Hughes rig count in the U.S. in aggregate is down 47% y-o-y.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.67%

Idealistic Innovation

“Innovation has nothing to do with how many dollars you have.  When Apple came up with the Mac, IBM was spending at least 100 times more money on R&D.  It’s not about money.  It’s about the people you have, how you’re led, and how much you get it.”

-Steve Jobs


Innovation is a tricky concept.  No doubt, we all struggle with it in our businesses.  The key question often is how much to stick with what is tried and trusted versus creating brand new processes in an attempt to meet future and unplanned needs.


Harvard Professor Clayton Christensen addressed this very issue in his thoughtful book, “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail.”  His point in the book is that successful companies can put too much emphasis on customer’s current needs, and fail to adopt new technology or models that will meet their customer’s future needs.


This weekend I was a judge at Stamford Start-Up Weekend and the role made me consider both Jobs’ quote at the top and Christensen’s book.    Over the weekend, the teams in Stamford had to come up with an idea and then deliver a five minute pitch to the judges. The pitch was followed by five minutes of Q&A from the judges and audience.


Interestingly, all four judges picked the same winning company – Slip Share.  The company was “founded” by an avid recreational boater that had determined it was very difficult to find slips to rent or use when he was away from his home marina.  In effect, he was proposing an AirBNB for the boating industry.  


Even if Slip Share doesn’t ever become a billion dollar company, or a real company at all, we all liked it for the same reasons – the management team was passionate, there was a defined problem they were trying to solve for consumers, competition was limited and unorganized, and there was an intuitive business model. 


Certainly, Slip Share isn’t developing the type of innovation that Christensen is alluding to in his book or that Peter Thiel alludes to in his recent book, “Zero to One”.   But just because it may not be a billion dollar disruptive idea, doesn’t mean Slip Share won’t succeed.  As I noted in a recent critique of Thiel’s book, sometimes the most important part of becoming an entrepreneur is just to get going.


Back to the Global Macro Grind . . .


Speaking of innovation, or lack thereof, data from the CFTC this weekend shows that hedge funds boosted net-long positions in WTI oil by 30% in the seven days ended April 7th.  In terms of context, this is the biggest jump in net long exposure since October 2010.  It is also the most significant long bet in more than nine months. (Note to reader: CFTC data is often a contrarian indicator.)


In as far as we can tell, the bulls are on some level anchored on U.S. rig count and interpreting the precipitous decline in active drilling rigs in the U.S. as sign of future slowdown in U.S. production.  Certainly this thesis may be true to a point, but the reality remains that innovation in the drilling industry means the most productive rigs are still active.


In the Chart of the Day below, we highlight a table from a recent note by our commodities analyst Ben Ryan that shows oil production by each major field in the U.S., productivity by the active rigs in that play, and rig count.  In the case of the bears, they are correct that rig count is down, and meaningfully so.  In fact, Baker Hughes rig count in the U.S. in aggregate is down 47% y-o-y.


Conversely, oil production in each major field and on a per rig basis is still up dramatically.  Even if on the margin production growth is slowing, and trust us we get that changes on the margin do matter, the more notable challenge, or looming catalyst, is that storage capacity in the U.S. is nearing capacity.  In fact by our math, the hub at Cushing, Oklahoma will be completely full in 6 or 7 weeks.


While there is some merit in the oil bulls focusing on U.S. production, that focus shouldn’t be myopic in the context of the global demand picture.  On that note, this morning’s data out of China shows that crude imports into China slowed dramatically in March at 26.1M metric tons. This is down 5.2% month-over-month and the slowest pace since November.


The broader context out of China this morning was the trade data, which was in one word: dismal.  Exports were down -15% year-over-year versus the consensus estimates of being up +11.7%.  Imports were also disappointed coming in at -12.9% year-over-year.  


Certainly, there were some 1-time impacts in the Chinese trade numbers, but the fact remains it’s hard to be excited about global growth, let alone global oil demand, when the world’s second largest economy is reporting those sorts of trade numbers. 


That said, we aren’t bearish on all economies and all asset classes.  In fact, we still are quite favorably disposed to German Equities.  Even as the DAX has had a major run over the past six months, over the past five years it has dramatically underperformed its U.S. counterparts.  Tomorrow at 11am, our European Analyst Matt Hedrick will be presenting a 50-page deck that outlines that continued case to be long of German equities.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.85-1.99

SPX 2079-2116


DAX 12075-12395

VIX 12.48-16.01
WTI Oil 47.09-53.74


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Idealistic Innovation - zj

CALL INVITE | Germany: Still Bullish

Hedgeye’s European analyst Matthew Hedrick will lead a discussion on why we are still bullish on the German equity market.


The call will be held on Tuesday, April 14th at 11am ET.


In the wake of ECB President Mario Draghi’s big QE announcement in January, we’ll discuss the impact of QE, where we see policy measures heading, and why we see Germany as the biggest ‘winner’ of central bank intervention.



  • Draghi’s influence on the capital markets vs the real economy
  • Why Germany’s economy is poised to most benefit from QE
  • An overview of German fundamentals
  • Key investment conclusions across durations


  • U.S. Toll-Free Number:
  • U.S. Toll Number:
  • Confirmation Number: 39466899
  • Materials: CLICK HERE (the slides will be available approximately one hour prior to the start of the call

CALL INVITE | Germany: Still Bullish - Draghi cartoon 01.20.2015

Ole Fashioned Group Patterns

This note was originally published at 8am on March 30, 2015 for Hedgeye subscribers.

“Individual persons tend to act pretty randomly.”

-Peter Zeihan


“But put those individual persons into large groups and individual randomness gives way to group patterns.”

-The Accidental Superpower, pg 92


Zeihan was alluding to one of the most important research topics @Hedgeye right now (demographics), but it can very well be applied to intermediate-term TRENDs in Global Macro positioning.


Eventually, most have to chase. And until everyone has given up on inflation expectations, I think the chase for #StrongDollar Deflation performance remains very much #on.


Back to the Global Macro Grind


I do both bottom-up and top-down investing. And while some of their respective rate-of-change analytics are the same, how I consider “valuation” in each discipline is not.


In Global Macro, funds flow to and from specific exposures and styles; whereas in value-investing, for example, you can buy something that’s “cheap”, and get paid – provided there is a catalyst. In macro, “cheap” tends to get cheaper – and “expensive” tends to stay expensive, until a phase transition finds a causal factor to arrest it.


In the case of what was our Top Global Macro Theme for Q1 of 2015, Global #Deflation, the causal (and correlating) factor is the US Dollar. Get the TREND in the US Dollar right, and you’re going to get a lot of other things right.


Last week, the US Dollar had what we call a counter-TREND move, closing down for the 2nd straight week. Down Dollar weeks provide us both buying (stocks) and selling (commodities) opportunities – here’s what a -0.6% wk-over-wk decline in the US Dollar Index delivered:


  1. Burning Euros bounced +0.6% to -10.0% YTD vs. USD
  2. Commodities (CRB Index) bounced +0.5% to -6.4% YTD
  3. Oil (WTI) bounced +4.9% to -11.1% YTD
  4. Gold bounced +1.3% to +1.3% YTD
  5. Copper bounced +0.2% to -2.0% YTD


That’s a lot of bouncing! Notwithstanding that I was long 0% of those 5 things, I am quite pleased that I didn’t chase any of them either. Come Friday afternoon, most of these counter-TREND bounces failed @Hedgeye immediate-term resistance.


In Global Equities last week, Down Dollar didn’t get either the #BigBeta chasers (Biotech and Technology) or #YieldChasers (Utilities and REITS) bulls paid. For one of the few weeks of the year, it didn’t get European Equity bulls paid either – Emerging Market equities were weak as well:


  1. SP500 lost -2.2% on the week taking it to +0.1% YTD
  2. EuroStoxx600 corrected -2.1% wk-over-wk to +15.5% YTD
  3. Emerging Markets LATAM dropped another -2.3% to -11.8% YTD


In other words, if you chased the counter-TREND move in Oil mid-week, by the weekend you were getting spanked, in Brazilian stock market terms, as the Bovespa reversed sharply, closing down -3.6% on the week at +0.2% YTD.


But why does CNBC’s beloved SP500 look as anemic as a major equity market index that is tied to commodities (like Brazil). Oh, right – they’ve morphed the SP500’s earnings into an international basket that is very much infected by #StrongDollar too. That sucks.


This is why, instead of owning the SP500, Global #Deflation Bulls have appropriately re-allocated their US equity exposure to US domestic revenue and earnings expectations:


  1. US Housing Stocks (ITB) were +0.1% in a down tape to +7.3% YTD
  2. US Consumer (XLY) and Healthcare (XLV) stocks continue to beat the SP500 at +3.8% and +6.8% YTD, respectively
  3. Russell 2000 and Nasdaq are +3.0-3.3% for 2015, beating their International Earnings Index competition too


If I didn’t signal “BUY” in what I signaled on red last week (and I had to chase the green US Equity futures this morning), I’d definitely buy more of the aforementioned basket over the SP500. It’s much more appropriately positioned for #Deflation.


The last point I wanted to make this morning has to do with Consensus Macro Sentiment. Going back to the weekend wood chopping, here’s how Wall Street’s (non-Commercial CFTC Futures & Options) net positioning looks going into quarter-end:


  1. SP500 (Index + Emini) net SHORT position came in by 41,359 contracts last week to -35,152
  2. Russell 2000 net SHORT position came in by 12,952 contracts last week to -13,277
  3. US Treasury 10yr Bond net SHORT position ROSE by 23,083 contracts last wk to -155,983


So you’ll probably get paid on hedge fund guys getting squeezed in both SP500 and Russell 2000 today anyway. We call this a good ole fashioned group pattern of a month-end markup!


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.84-2.01%

SPX 2043-2080
RUT 1224-1250
DAX 11708-12153
USD 96.35-100.02
EUR/USD 1.05-1.09
Oil (WTI) 42.82-51.40
Gold 1150-1208


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Ole Fashioned Group Patterns - 03.30.15 chart


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