Less Compelling?

“Compelling reason will never convince blinding emotion.”

-Richard Bach


Particularly when I look back to those all-time US stock market highs, the botched “reflation” call, etc. in June/July, I can’t count how many times people told me in either meetings or in the media that there was compelling reason for the Fed to raise rates.


Now, “due to international developments” and stocks/commodities/yields crashing, the New York Federal Reserve calls a September rate hike, “less compelling.” Cool. So do Fed Fund Futures.


And I suspect that the oversold bounce we are getting in everything that crashed has largely to do with the catalyst socialized market participants beg for when they don’t get what you can’t print growth – moarrr central planning #cowbell!

Less Compelling? - Deflation cartoon 02.24.2015


Back to the Global Macro Grind


It’s a good thing they bounced stocks/commodities from the lows. Imagine they didn’t?


Since a lot of people are blaming “China” for all of this, how did markets react to the Chinese cutting rates (again) a few days ago? That did nothing but scare macro markets. So… what markets really needed to see was moarrr – and in the last 24hrs they got it:


  1. Rampant rumors that Mario Draghi is going to tell you he can do whatever it takes at Jackson Hole
  2. Rumors that the Fed’s Vice Chair (Fischer) is going to double-down on the dovish Dudley comments (at Jackson Hole)
  3. And since the Chinese can’t dominate the dialogue at Jackson Hole, they just “bought stocks” with State moneys!


Yep. Gotta love the Chinese central-planning dudes. They just went all Japanese on the stock market and bought it themselves.


Wouldn’t that be fun – if the Fed did the same?


Moving along… once markets get through this bounce (after the biggest move in volatility since 2008, it should be big, no?), I still recommend we respect/understand the following risks that caused many of the crashes (defined as price declines of 20% of more in anything that ticks):


  1. #LateCycle Slowdown (locally and globally)
  2. #Deflation (obviously)
  3. #LiquidityTraps
  4. #Volatility Asymmetry
  5. #Credit/Profit Cycles Slowing


Apologies if I left a few out this morning.


Just in case you missed the last one, here’s the update (post 484 of 500 SP500 companies reporting Q2):


  1. Revenues -3.8% YoY
  2. Earnings -2.5% YoY


Old news, eh. How about this Chart of The Day? This shows you the classic go-to-move for my Old Wall buddies - back-end loading earnings and revenue estimates into Q3/Q4. Given what’s happened to macro markets in the last 3 months, good luck with that.


The other big problem (maybe the biggest of all since it’s so obvious in our model) is what I’ve been walking Institutional Investors through for the last 2-days of meetings in Boston and NYC – the GDP Comps for Q3 and Q4.


Comps, meaning comparative base effect or year-over-year comparison. Yes, they matter a lot more than some made-up PMI indicator with a random “lag.” And our call remains that on the US consumer side (toughest Christmas comps since 2007), it’s really going to matter.


Forget consensus being objective and reviewing the causal factors of phase 1 of this crash – they probably won’t do that. Parker at Mogan Stanley reiterates 2275 SPX! Instead, they’ll pivot, hard, to whatever bull case they can find – and that’s definitely “Lower Gas Prices.”


Yep. Everything was awesome at $100-150 Oil, and it’s awesomer at $40. That makes a ton of sense. Even though US Rents are ripping to higher all-time highs and represents 24% of the Median US Consumer’s spending budget vs. Gas at 6%.


Oh, but that part of the country doesn’t matter. Right, right. And Consensus Macro hasn’t perpetuated inequality behaving that way either. How do “high-end” consumers “act” on 10-20% stock/commodity market draw-downs. Can’t wait for those compelling Christmas comps.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.99-2.19%

VIX 23.25-43.42
EUR/USD 1.08-1.16
Oil (WTI) 37.66-40.98


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Less Compelling? - z x Chart of the Day

Euro, Commodities and Yields

Client Talking Points


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.


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).



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


Top Long Ideas

Company Ticker Sector Duration

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).


"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. 


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


The Grand Central Planning Experiment Gone Bad



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

Paul R. Scheele


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



August 27, 2015 - Slide2




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 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.   



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.




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






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.  




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




Ben Ryan




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