When and Why We Make Big Contrarian Calls


On The Macro Show this morning, Hedgeye CEO Keith McCullough explains that he's not against consensus just for the sake of it. He discusses how our firm’s process is designed to front-run the biggest mistakes consensus makes to dodge eventual blowups.


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Takeaway: Behavioral indicators suggest short-term capitulation risk is an important factor in managing long exposure.

Gold is the one commodity we would trade long-side right now against the dollar as we continue to believe growth and inflation expectations drive bigger currency/gold inflections. This trade continues to have legs.


An arrival at realistic expectations might end with QE4, but we have to get there first. Who would have thought QE4 would be in the discussion when “lift-off” was inevitable?


The difference for the upside in that trade between now and pre-August 19th minutes release is that the crowd has come closer to the Hedgeye Macro view.


Below we outline 5 behavioral reasons why any strong USD catalyst could provide short-term pain within a longer-term bullish set-up.


We outlined just how consensus rate hike expectations were in an Early Look on August 14th pre-consensus pivot:


Prepare For the Worst.html  

The gist of that note was that within our longer term deflationary view, a snapback reflation trade was a big risk when the world is positioned for deflation. It happened…. Quick.


Can this move be just as vicious into year-end now that policy is more of a baked-in expectation?


Below we give you a few charts to keep you cautious into the ECB meeting which precedes an important week of U.S. economic data next week with Q3 GDP:


1. CONTRACT POSITIONING: What is the actual positioning from the speculative crowd?


At the end of July, net non-commercial futures and options positioning was the shortest of the post-crisis era:

  • W/W into this week, net futures in options positioning moved 27% longer on a relative basis
  • The net-short positioning in gold is washed out if nothing else. On a z-score basis the market is now +0.5X and +0.3x on a TTM and 3-Year basis
  • Longest net contract positioning of 2015 was at the highs in gold with the shortest positioning near the end-of-July lows
  • Longest gold futures positioning since late July is right now, after the unexpected catalysts

Contract positioning chases price…


GOLD: BE CAUTIOUS OF THE HERD - chart 1CFTC Contract Positioning


GOLD: BE CAUTIOUS OF THE HERD - chart 2 futures positioning




  • Futures Aggregate Open Interest +~7% w/w into this week; +4.5% w/w from last Tuesday
  • Futures aggregate open interest +10.0% and +10.7% above 3/6 mth averages
  • Option open interest is spiking, and the divergence in Call vs. Put open interest is widest in at least 5 years as the market gets longer on a net basis. 

GOLD: BE CAUTIOUS OF THE HERD - chart 3 futures aggregate open interest


GOLD: BE CAUTIOUS OF THE HERD - chart4 option open Interest


3. VOLATILY SKEW: Like contract positioning, the volatility assumption embedded in options prices also usually chases price and poses as just another indicator of consensus sentiment

  • Calls most expensive to puts right now
  • Puts most expensive to calls at the 2015 lows in spot gold prices
  • Positive skew, like now, at $1,300 gold in January



GOLD: BE CAUTIOUS OF THE HERD - chart 6 gold chart


4. CORRELATIONS: Relative currency correlations in Gold are stronger (more negatively correlated) than they’ve been over the last 3 years vs. energy correlations which remain broken. The direction of the USD is very important here and the market is increasingly in the camp that the USD moves lower.


The positioning in the USD vs. the gold positioning mentioned above is tracking -1.43X on a 1-Yr z-score basis. The USD and EUR/USD remain neutral on a TREND duration in our model, so we’re waiting and watching for direction here with the upcoming catalysts both tomorrow and next week in the U.S.


The chart below shows relative correlations which are broken ex. Just a few: 


GOLD: BE CAUTIOUS OF THE HERD - Chart 7 USD relative correlations



The bid-yield of December Federal Funds Futures is pinned at its lowest point of the year at 17.5bps. While 5 bps above the current mid-point at 12.5bps, there is very little expectation of a December hike embeded in current prices. 




Again, gold remains on the long side in our Q4 macro deck as we expect growth slowing to continue to manifest with more dovish Fed expectations, but waiting on the right time to buy is key:


Our immediate-term level of support is down at $1,150


Talk of QE4 was a non-starter back when the whole world was positioned for “lift-off.” Consensus is now coming around to our view, and the behavioral set-up in gold markets posits a short-term capitulation risk within a longer term-Trend: Slower-and-Lower-For-Longer.


Feel free to ping us with comments or questions.



Ben Ryan



McCullough: Are We Entering An Earnings Recession? (And If So...)

In a recent note to subscribers, Hedgeye CEO Keith McCullough weighed in on whether the U.S. has entered an earnings recession and if that presages a full-blown economic recession.


"It’s early in [earnings season], but don’t get roped in by the bull-market storytelling. As we outlined in our Q4 macro deck, earnings recessions have preceded economic recessions in the last 3 cycles."   


Take a look at this chart.


McCullough: Are We Entering An Earnings Recession? (And If So...) - 10 19 2015 eps inflecting


It doesn't paint a pretty picture.


In addition, earlier this week on The Macro Show, Hedgeye macro analyst Darius Dale added that the odds of a recession — sometime over the next 12-months — are steadily rising.


"[The probability] is very high, certainly much higher than 50%, and much higher than the average investor believes.”


That's our view. So heads up. 


In related news...


McCullough: Are We Entering An Earnings Recession? (And If So...) - 10 20 2015 vader

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WAB | RSI Orders, Not Sales


Takeaway:  Orders for both rail cars and locomotives are well below delivery rates in 3Q, a situation that we do not expect to improve given weak rail volumes.  2016 build rates look at risk to us, as customers may seek stretched deliveries and manufacturers would benefit from steadier production.





RSI reported rail car order, delivery and backlog data yesterday that provided further support to the view that rolling stock demand has entered a downcycle.  GE received only 3 locomotive orders last quarter, and the RSI data points to 7,374 rail car orders vs. a build rate over 20,000.  While it might seem reasonable to look at the large backlog and assume the 2016 is in the bag, many of the orders in backlog are scheduled for delivery more than 12 months forward – some into 2020.  The rail car backlog itself may be vulnerable to both delivery date push outs and cancellations from captive lessors. Cancellations of third-party orders can be costly for buyers, but can also occur.  At current order rates, we would expect a drop down in build rates by mid-2016, a potential negative for WAB shares.



Rail Car Demand Down

Orders…: Both rail volume growth and fleet age demographics point to a sustained period of weak rail car orders, as we see it, with the recent demand spike due to tank car regulations and the boom in fracking.  


WAB | RSI Orders, Not Sales - WAB Orders 10 21 15



…Not Deliveries:  While deliveries will tend to correspond to 3Q equipment sales for WAB, equity markets should focus on the forward looking order data.  Deliveries are peaking out, in our estimation, while orders have likely entered a sustained period of below replacement demand activity.


WAB | RSI Orders, Not Sales - WAB Deliveries 10 21 15



Backlog Not So Clear:  While it might be tempting to see the backlog as 6 quarters of demand, many of the orders are scheduled for delivery more than 12 months out.  For example, TRN disclosed that 45% of orders were longer than 12 months out at the start of the year.  Given the implementation date of tank car regulations, we would expect the backlog duration to be reasonably far out.  We also think that as much as 10% of the backlog may be ‘spec’ orders from lessors owned by rail car manufacturers.  We estimate that the current pace of orders and deliveries portend a potential step down in deliveries by mid-2016. 


WAB | RSI Orders, Not Sales - WAB Backlog 10 21 15



Timing A Bit Clearer:  Orders will need to improve, build rates will need to be pushed lower, or 2017 will be very messy, by our estimates.


WAB | RSI Orders, Not Sales - WAB Book to Bill 10 21 15


Retail Callouts (10/21): UA E-Trends Best in Class, AdiBok 'SpeedFactories', NKE, LULU

Takeaway: UA Web Traffic trends leading athletic space. AdiBok to onsite manufacture by 2020. Nike will be there 1st.

UA - E-comm  Traffic Trends = Best In Class


UA traffic trends on a YY are basis are the best we've seen in the athletic space. Yep, better than LULU, Adi, and even NKE which has been growing like a weed -- in excess of 40% online in each of the past six quarters. The metric - which ranks all sites on the internet on a relative basis based on a) unique visits and b) page visits per user, has looked dynamite for UA throughout the year.


That tell us that a) UA continues to push its DTC agenda with sales growth in this channel on par with or outpacing the company average in 8 of the past 12 quarters. And b) brand heat remains strong as visitation to continues to outpace the rest of the industry on a relative basis.

Retail Callouts (10/21): UA E-Trends Best in Class, AdiBok 'SpeedFactories', NKE, LULU - 10 21 chart1


Adibok - Adidas Expects to Establish US Speedfactories by 2020 



3-D printing and on site manufacturing are hot button topics in the athletic space. But we can be sure of two things. 1) AdiBok will not beat NKE to market with this technology. 2) NKE's FlyKnit technology lends itself much more to this process than anything Adi currently produces. Adi is saying 2020 for on site customization, NKE quietly should have it rolled out by 2017.


UA - Under Armour Reuniting Jamie Foxx and Steph Curry for the Curry 2 Launch



DKS - New Dicks Sporting Goods Store Openings: Numbers 641 to 645

Glendale, CA

Cerritos, CA

Sevierville, TN

Las Vegas, NV

Muskogee, OK


HD, LOW - The hipster hardware store that has Home Depot scared



Prime FREE Same-Day Delivery Expands to Chicago and Orlando Metro Areas – Serving More Than 750 Cities and Towns Nationwide



AMZN - targets fake reviewers in Lawsuit



AMZN - Amazon gets into the restaurant delivery biz in Oregon



Why McDonald's Stock Will Never Trade Below $100 Again

Why McDonald's Stock Will Never Trade Below $100 Again - 10 21 2015 Fortune Howard


The fast-food chain’s stock will likely pop next year, thanks to its real estate holdings and its ‘All-Day Breakfast’ menu.


Last week, McDonald’s shares jumped 1.5%, amid speculation that the fast-food giant might spin-off its massive real-estate holdings. That looks increasingly likely under the activist-like new CEO, Steve Easterbrook. It’s another welcome development and a broader sign that McDonald’s is finally turning the corner. Our prediction: This year will be the last time McDonald’s stock sees a price below $100.


Let’s be clear. A lot has changed at McDonald’s in the past year...


Click here to read more of Hedgeye analyst Howard Penney's story on Fortune.  

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