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Euro, Commodities and Yields

Client Talking Points

EURO

Big part of the bounce was rumoring from the Europeans that ECB President Mario Draghi is going to deliver the devaluation wood @JacksonHole – we don’t doubt that (FX market didn’t either, $1.16 EUR/USD became $1.13, fast) – that is the catalyst when growth is slowing, moarrr #cowbell.

COMMODITIES

Pretty much everything that crashed (China +5.3% this morning, WTI +4.2%, etc.) is “off the lows” as they say – don’t forget to understand/contextualize the bounces (and why we had the crashes). The CRB Index hit a new low yesterday of 185 (-20%, since May).

  

UST 10YR

Wasn’t it just U.S. Yields that bounced on the “risk on” trade yesterday; German and Swiss Yields popped (off their lows) too – stay with the #process and respect the range – UST 10yr Yield’s = 1.98-2.19% right now and a dovish Fischer (like Dudley) gets us paid Long Treasuries.

 

**Tune into The Macro Show with Hedgeye CEO Keith McCullough at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 70% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 2%
FIXED INCOME 28% INTL CURRENCIES 0%

Top Long Ideas

Company Ticker Sector Duration
MCD

One of the ways that McDonald's is going to take market share back is through one of the most popular items on its menu—the Egg McMuffin. "I honestly believe that if there is a silver bullet, it’s all day breakfast for McDonald’s," says Restaurants Sector Head Howard Penney. "And I do believe they’re going down that road and they will do it."

 

Penney adds that we’ll probably know more about that at the November analyst meeting and what the breakfast potential will be. There’s obviously a lot of things that go around MCD doing breakfast (e.g. shrinking other parts of the menu, etc).

PENN

"We continue to like Penn National Gaming here due to stable regional gaming trends, better than expected quarterly and annual earnings, and the Plainridge and Jamul contribution to PENN’s two-year growth story," writes Hedgeye Gaming, Lodging & Leisure Sector Head Todd Jordan. 

TLT

It was a very good week for those sitting behind the long-bond coming out of the FOMC minutes release on Wednesday. During a tumultuous 5-day stretch in which the S&P 500 fell over -5%, subscribers who followed our recommendation on TLT were sheltered from the market storm and gained almost +2%. Moreover, during the past month, TLT has gained +5.7% versus a -6.8% loss for the S&P 500 (a 1,200 basis point difference). In other words, it has paid handsomely to buck the consensus tide.

Three for the Road

TWEET OF THE DAY

The Grand Central Planning Experiment Gone Bad https://www.youtube.com/watch?v=GUdTw-Hh3aw&feature=youtu.be

@KeithMcCullough

QUOTE OF THE DAY

The phrase I can't is the most powerful force of negation in the human psyche.

Paul R. Scheele

STAT OF THE DAY

A study found that traffic congestion cost Americans $160 billion in wasted time and fuel last year.


The Macro Show Replay | August 27, 2015

 


August 27, 2015

August 27, 2015 - Screen Shot 2015 08 27 at 7.46.45 AM

 

BULLISH TRENDS

August 27, 2015 - Slide2

 

 

BEARISH TRENDS

August 27, 2015 - Slide3

August 27, 2015 - Slide4

August 27, 2015 - Slide6

August 27, 2015 - Slide7

August 27, 2015 - Slide8

August 27, 2015 - Slide9


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 80.28%
  • SHORT SIGNALS 78.51%

Hedgeye Cartoon of the Day

Hedgeye Cartoon of the Day - bull riding cartoon 08.26.2015

 

Hedgeye U.S. Macro Analyst Christian Drake in today's Early Look:

 

...As it stands, every S&P Sector is currently bearish TRADE & TREND in the @Hedgeye model.  Select securities may present compelling short-term long opportunities but, in this setup, attempting to knife-catch beta is not an exercise in fiduciary excellence.   

 


DOMESTIC CRUDE PRODUCTION: LOTS OF IT....STILL

Takeaway: A sequential decline in U.S. production won’t be steep enough to curb the supply glut that will continue into the Fall Season.

To answer our own question on when a domestic production slowdown will give a lift to crude oil prices, a rolling over of U.S. production would have to be much more drastic from a first and second derivative perspective for a fundamental and psychological price floor to develop.

 

Domestic production IS rolling over, but U.S. production remains resilient with production per region continuing to show lopsided Y/Y gains vs. what could (even optimistically) be absorbed:

 

DOMESTIC CRUDE PRODUCTION: LOTS OF IT....STILL - Regional Production and Rig Table

 

The headline numbers from the EIA for monthly production have been scrutinized, but all production reported is subject to more accurate revision. In May and June the EIA upwardly revised previously reported production numbers for March and April. Data reported for August now shows the opposite type of revision. Previously reported production numbers have been downwardly revised.

The most updated production data shows that vs. June’s release, updated production levels for August have been downwardly revised for March, April, May, and June.

 

DOMESTIC CRUDE PRODUCTION: LOTS OF IT....STILL - WTI vs. Production Per Region Chart

 

An ongoing argument continues as to whether the supply glut is in fact an excess of oil being produced or if the demand picture is just that poor. Arguments can be made for both, but for several reasons below we outline why overproduction will continue to overpower both demand for tight oil and infrastructural capabilities in the near future.

Production may be rolling over, but considering the fact that inventories still remain near all-time highs after going through a seasonal summer drawdown where motor gasoline consumption recovered to near pre-crisis levels and refinery capacity utilization touched all-time highs, it’s hard to argue weak DEMAND for refined products is the stronger factor contributing to a supply glut. Even after this week’s big draw, it’s reasonable to expect inventories to move right back to all-time highs, testing the logistical ability to deal with it.

 

DOMESTIC CRUDE PRODUCTION: LOTS OF IT....STILL - Refinery Inputs Vs. Utilization

 

DOMESTIC CRUDE PRODUCTION: LOTS OF IT....STILL - DOE Regional Inventories Bar Chart and Map

 

DOMESTIC CRUDE PRODUCTION: LOTS OF IT....STILL - DOE LT Inventories

 

DOMESTIC CRUDE PRODUCTION: LOTS OF IT....STILL - Motor Gasoline Inventories

 

How much more crude will refineries eat up now that 1) the summer driving season is over; 2) we’re entering refinery maintenance season? Despite a big draw this week, inventories are expected to tick higher by seasonal default, but how much higher can they go anyway?

A newsy topic in the spring, the big build-up in inventories was centered on the Cushing, OK build where inventories are currently +180% Y/Y.  

 

DOMESTIC CRUDE PRODUCTION: LOTS OF IT....STILL - DOE Cushing vs. Agg. YY delta

 

Refiners continue to develop more storage capacity which can’t happen fast enough:

  • Aggregate working crude oil storage capacity is +2.9% Y/Y
  • Tank Farm storage capacity in Cushing is +6.1% Y/Y

Even so, transportation and the light/heavy processing problems in the Gulf are stickier problems that face near term constraints.

If a seasonal inventory build commences, Cushing inventory levels have the potential to move to concerning levels again with the lack of infrastructural ability of gulf refineries to handle a continued increase in crude flows from America’s main trading hub in Cushing.

Refinery maintenance season is around the corner at the same time gulf refineries are trying to reconfigure to adequately handle the influx of tight oil (domestic shale) over traditional, heavier imported crude.  

For evidence of the problem, Genscape estimates that both the Kinder Morgan Crude and Condensate Pipeline and the Eagle Ford pipeline from Eagle Ford to Houston are only running at half of nameplate capacity because of congestion inhibiting crude to bypass Houston to Louisiana refineries via pipeline. Much of it is being transported by barge and oil tankers, a much more expensive form of transportation.  

A new deal like the Swap agreement with Mexico’s state-run Pemex (U.S. swaps tight oil for heavier crude capable of being processed by gulf refineries) will temporarily help the infrastructural mismatch in Houston, but the bottom line is that storage and transportation capacity constraints will creep back into the picture moving into the fall before adequate infrastructure is put in place.

Ex. A currency catalyst to devalue the USD and support prices (which is highly possible for a brief relation trade: see our recent note), we expect deflationary macro headwinds and the fundamental supply picture domestically to continue pressuring a sustained price recovery into the fall season. The forward curve reflects this shift in psychology which usually happens the longer the "unbelievable" becomes a reality. The curve is flatter 1,2,3-years at this lower low than it was at the January and March lows in WTI.

 

DOMESTIC CRUDE PRODUCTION: LOTS OF IT....STILL - forward curve comparison graph

 

DOMESTIC CRUDE PRODUCTION: LOTS OF IT....STILL - 1YR Swap Table

 

Ben Ryan

Analyst

 

 


Got $VIX? Risk Happens Slowly, Then All At Once

For much of the past 3.5 years, the VIX has been range-bound between 10-20, with occasional blips to 25 on front-month contracts.

 

Got $VIX? Risk Happens Slowly, Then All At Once  - z volatility

 

And then it happens...

 

Crash!

Boom!

Bang!

 

Yesterday’s close of 36.02 confirms a bullish phase transition for U.S. equity volatility that is unlikely to go away anytime soon. It's rocketed +213% higher in just one month. The move was eerily reminiscent of the 8/8/11 rip in the VIX that preceded several months of 30+ VIX closes.

 

With the Fed gearing up to make a policy mistake in the coming months, could we be looking at a similar setup?


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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