Inflation Expectations, OPEC and China

Client Talking Points


As Janet Yellen jawboned the dollar higher yesterday, all things inflation expectations and dollar settled commodities headed south: Oil = -4.4%, XLE = -3.1%, Gold = -1.5%, Copper = -1.8%, 5YR Breakevens = -1.7 bps, etc.  While energy price comps will ease beginning in late 1Q16, a sustained attempt at domestic policy “normalization” will only perpetuate strong dollar disinflationary pressure at home and continue to pressure currencies and growth expectations abroad, particularly across EM, developing and commodity economies.   


OPEC members with the highest production costs and fiscal break-evens are creating quite a bit of noise around production cuts ahead of tomorrow’s meeting. Saudi Arabia has changed its tone in a sense from last year after oil has been cut 45% from the last meeting in saying that it would consider a cut if those within OPEC (namely Iraq), and those outside of OPEC (namely Russia) are willing to cut production. Russia has already said it has no interest in complying or attending the meeting. Stick with the relative monetary catalysts (ECB today) and Jobs Report tomorrow for direction on the USD and commodities. 1 and 3-month correlations between the USD and WTI are tightening up again at -.68 and .79 for WTI (r-squared).  


Mainland Chinese markets strengthened on Thursday with the Shanghai rising +1.35% and the Shenzhen adding +2.50% with banks and property developers were among the leading gainers amid expectations of more stimulus following a spate of November PMI data that confirmed an ongoing contraction in China’s manufacturing industry – most notably with the official National Federation of Logistics and Purchasing Managers index falling to 49.6 (the lowest since August 2012). On the stimulus front, the PBoC injected CNY30B in liquidity during regular open market operations today, bringing the net liquidity injection in the week-to-date to CNY50B. This marked the largest weekly injection since early September. With key structural headwinds intact and various high-frequency indicators continuing to slow on a trending basis across a variety of key metrics, we continue to caution against anticipating a recovery in Chinese economic growth over the intermediate-term TREND or long-term TAIL.


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

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We added McDonald's to Investing Ideas on August 11th. Since then shares of McDonald's have risen over 16% compared to a 0.2% return for the S&P 500.


As Restaurants Sector Head Howard Penney wrote right around the time we added McDonald's (MCD), "We continue to get more bullish every time we talk to the company, franchisees and/or customers which we have polled via conducting surveys. We are going to be looking at a much different company 1-3 years from now. Urgency has been instilled from the top down by new CEO Steve Easterbrook," according to Penney. "This ship is in gear and headed north. 2015 will be the last time this stock is below $100."


We believe that RH is to Home Furnishings what Ralph Lauren is to Apparel and what Nike is to Athletic Shoes. That’s a meaningful statement given that RH has only 3% share of a $140 billion relevant market.


RH is the preeminent brand in the space. We think that RH is in second inning of a game that may ultimately prove to be a double header. We believe the company will add $3 billion in sales over 3-years and climb to $11 in EPS. The earnings growth and cash flow characteristics to get to that kind of number would support a 30+ multiple. In the end, we see a stock in excess of $300.


The consumption side of the economy is arguably the most important, as its 69% of U.S. GDP. From a rate-of-change perspective, consumption growth decelerated in October, and consumer confidence is waning along-side it. That's why we would like to reiterate our Growth Slowing=Long TLT call.


To be clear, the consumption side of the economy had been a point of strength over the last several months. We’re not calling for a crash in household consumption, but the comps (comparison vs. prior reporting period) are important in rate-of-change analysis. The next four quarters of comps for Real PCE growth are the most difficult since Q3 2008 while the next four quarters of comps for CPI are the easiest since the four quarters ended in 4Q11. Simply put, both are headwinds for the consumer and we expect that the consumption component of the economic equation will continue to decelerate.

Three for the Road


NEW VIDEO (3 mins) | The Astonishing Audacity of Central Planners… via @KeithMcCullough #ECB #Draghi #Fed $FX #Yellen



Obvious thinking commonly leads to wrong judgments and wrong conclusions.

Humphrey B. Neil


Drake was the most-streamed artist of 2015 on Spotify, according to the company, with 1.8 billion streams. Justin Bieber (another fellow Canadian) took the record for the most streams in a single day, with 36 million on November 13. 

The Macro Show Replay | December 3, 2015


December 3, 2015

Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, with our intermediate-term (TREND) view and the previous day's closing price for each name.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.


  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
2.28 2.15 2.18
S&P 500
2,046 2,109 2,079
Russell 2000
1,163 1,209 1,191
NASDAQ Composite
5,055 5,159 5,123
Nikkei 225 Index
19,608 20,091 19,938
German DAX Composite
10,932 11,451 11,190
Volatility Index
14.39 18.45 15.91
U.S. Dollar Index
99.14 100.49 100.02
1.05 1.07 1.06
Japanese Yen
122.36 123.86 123.24
Light Crude Oil Spot Price
40.02 43.01 40.10
Natural Gas Spot Price
2.14 2.31 2.22
Gold Spot Price
1,044 1,082 1,052
Copper Spot Price
1.98 2.09 2.05
Apple Inc.
115 119 116
645 684 676
1,221 1,305 1,275
Valeant Pharmaceuticals International, Inc.
75.86 100.11 96.23
McDonald's Corp.
112 116 113
Pandora Media, Inc.
12.16 14.85 14.27



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CHART OF THE DAY: Is The Fed's Credibility Crashing?

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to subscribe.


"... Since the Fed’s forecasts on growth and inflation have been wrong 70% of the time since Bernanke’s reign, why isn’t it normal to assume that the Fed will be wrong on US growth by another 25-45% for the next year like they were this year on #Deflation?"


CHART OF THE DAY: Is The Fed's Credibility Crashing? - 12.03.15 EL chart

What's Normal?

“I shouldn’t say I’m looking forward to leading a normal life, because I don’t know what normal is.”

-Martina Navratilova


In terms of what she is now referring to as the “normalization” of Federal Reserve interest rate policy, Fed Chair Janet Yellen proclaimed her mystery of central-planning faith yesterday, suggesting that it will be “a day we all are looking forward to.”


And US stocks proceeded to go straight down after she said that.


What does “normalization” mean? Is it normal for the head of the Federal Reserve to only answer pre-screened questions (like she did yesterday at The Economic Club of Washington) using cue cards? How about raising rates into a slow-down?


What's Normal? - Yellen cartoon 11.11.2015


Back to the Global Macro Grind


Notwithstanding the lack of credibility in how Yellen characterized the rate of change in recent economic data yesterday, what I found more unnerving was my old boss, David Rubenstein, sitting there nodding his head in exchange for the all-access-gov pass.


In the context of what the Founding Fathers envisioned, what, precisely, is normal about any of this?


While my risk management process is grounded in the opposite of what these ideologues promise (certainty), I am fairly certain that our children (and theirs) will look back on this period in US economic history as one they learned from.


What’s normal about human evolution is learning from all of our mistakes.


What isn’t normal is hanging our every investment decision on the words of a perma-dove pretending to be a hawk. Yellen was grasping for #LateCycle employment reasons to raise rates. Never mind the data – she really wants to hike.


In other news,


  1. The Fed is cutting its GROWTH forecasts (see Atlanta Fed at 1.4% for Q4)
  2. But raising its INFLATION forecasts


For Q4 2015 and for most of 2016, that is.


You see, for the last 18 months, they’ve been calling slowing inflation and crashing oil prices “transitory.” As in, no worries “folks”, even though we had no idea this was going to happen, it’s definitely going to pass. Nothing we failed to forecast can continue.


Meanwhile, inflation expectations continued to crash yesterday – here’s how #Deflation looked, in real-world terms:


  1. Nickel crashing to -44.9% year-over-year
  2. Natural Gas crashing to -44.1% year-over-year
  3. Oil (WTI) crashing to -40.3% year-over-year
  4. Lean Hogs crashing to -33.7% year-over-year
  5. Coffee crashing to -35.4% year-over-year
  6. Copper crashing to -30.4% year-over-year
  7. Aluminum crashing to -27.6% year-over-year
  8. Wheat crashing to -25.3% year-over-year
  9. Cattle crashing to -23.4% year-over-year


Sure, it would be normal to round that off to the Top 10 Crashes in asset inflation bubbles that Bernanke perpetuated in 2011-2012, but I’m having a hard time picking between Emerging Markets, Foreign Currencies, and Junk Debt for my 10th.




Since the Fed’s forecasts on growth and inflation have been wrong 70% of the time since Bernanke’s reign, why isn’t it normal to assume that the Fed will be wrong on US growth by another 25-45% for the next year like they were this year on #Deflation?


I don’t know. I hope someone does.


With both Chicago PMI and ISM Manufacturing PMI at recessionary readings (below 50) in NOV, Janet Yellen should have called the data what it is. But she didn’t. And that’s just sad, partisan, and un-objective – all at once.


If the Fed was audited (i.e. held to account by the taxpayers that fund their rock-star status), many of our frustrations wouldn’t exist. If Yellen was the CFO of a public company, her depiction of the recent “data” would, at a bare minimum, be considered a lie.


That will sound harsh to people who get paid to kowtow to this grand central-planning experiment. But it will sound quite normal to American farmers, miners, and … oh… the entire state of Texas. Who cares about those non-Washington people anyway?


Our immediate-term Global Macro Risk Ranges are now (intermediate term TREND research views in brackets):


UST 10yr Yield 2.15-2.28% (bearish)

SPX 2046-2109 (bearish)
RUT 1163--1209 (bearish)

NASDAQ 5055-5159 (bullish)

Nikkei 191 (bullish)

DAX 101 (bullish)

VIX 14.39-18.45 (bullish)
USD 99.14-100.49 (bullish)
EUR/USD 1.05-1.07 (bearish)
YEN 122.36-123.86 (bearish)
Oil (WTI) 40.02-43.01 (bearish)

Nat Gas 2.14-2.31 (bearish)

Gold 1044-1082 (bearish)
Copper 1.98-2.09 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


What's Normal? - 12.03.15 EL chart


On the call we will discuss a number of important topics facing the restaurant industry, from labor issues, to the potential for increased restrictions on alcohol consumption at restaurants.  In addition, Rick will talk about his advocacy organization, the Center for Consumer Freedom, and a number of issues they have with Chipotle.  The Center for Consumer Freedom has been very critical of Chipotle's advertising message among other issues.



Time: Today, December 3rd @ 11:00am ET

Toll Free: 


Confirmation Number: 13625958


Discussion Points:

  • A view "inside the beltway" on minimum wage and the risks facing the restaurant industry
  • Potential new restriction on the sale of alcohol and what can be done to mitigate the impacts of increased regulation
  • What Chipotle's protein "standards" are versus other restaurant companies (beef, pork and chicken)
  • A discussion about the use of antibiotics in the food supply and the difference between USA vs International standards
  • Concerns about antibiotics in meat: myth, or reality?
  • Did CMG change its standards regarding antibiotics in the meat its serves?
  • Is CMG's advertising a form of fear mongering?
  • What is the real meaning of cage-free/free range?  Does this definition matter?
  • How prevalent is non-gmo feed, and why does it matter? 



Rick Berman Bio

Rick Berman is President of Berman and Company, a Washington, DC-based public affairs firm specializing in research, communications, and creative advertising.


Berman has founded several leading nonprofit organizations known for their fact-based research and their aggressive communications campaigns.

A long-time consumer advocate, Rick champions individual responsibility and common sense policy. He believes that democracies require an informed public on all sides.


Berman was previously employed as Executive Vice President of Public Affairs at the Pillsbury Restaurant Group, where he was responsible for the government relations programs of all restaurant operations. He was also a labor lawyer at the United States Chamber of Commerce, the Dana Corporation, and the Bethlehem Steel Corporation.


Rick Berman has testified on numerous occasions before committees of the various state legislatures, the U.S. Senate and the U.S. House of Representatives. The Hill, a popular Washington, DC newspaper has named him a “Star Rainmaker” on Capitol Hill. Rick has appeared on all the major broadcast and cable television networks, and has organized national coalitions to address a wide variety of issues.


Here is the link to the center for Consumer Freedom web site -


In addition, here is a link to the Chubby Chipotle web site -


Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw


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