The Macro Show Replay | January 5, 2016


China, Russell 2000 and Yield Spread

Client Talking Points


The communists did everything they could to centrally plan China’s markets overnight – stopped the Yuan at 6.516 and the State bought stocks! LOL – that went over as well as it did in AUG didn’t it? #GrowthSlowing and #Deflation remain the gravity point.


Liquidity-traps and U.S. domestics slowing remain great reasons to be out of or underweight small caps. The RUT was down -2.3% yesterday (vs. SPX -1.5%) and is now down -14.4% from the all-time #Bubble high we called in July – reiterating sell on bounces.


There is a new 12 month low here for the 10/2s spread at 119 basis points – this is actually the flattest the curve has been post the last U.S. recession; back to back ISM reports < 50 will do that (last time that happened was 2009) #GrowthSlowing.


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

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

With the Fed's 25 basis point hike in interest rates, in the financial sector, FII stands to benefit most from even this marginal change.


In essence, Federated Investors (FII) has a stable business for what we think will be a volatile 2016. 2015 finished with slight positive inflows into the firm's main business line, money market or cash products. This is reminiscent of the start of cash builds in 1999 and 2006 ahead of the negative returns in risk assets in 2000 and 2007.


RH is our top long idea in all of retail, and we view the recent weakness in the stock as a buying opportunity. All in we think the company will build to $5bn in sales at mid-teens operating margin which equates to $11 in earnings power. This growth and profitability comes from...

  •  ~30% Square footage growth with new full line design galleries.
  • New businesses, like Modern and Teen, that can be easily layered over its low cost infrastructure.
  • Leveraging occupancy from the "sweet heart" real estate deals the company is getting as a high end traffic driving tenant willing to take anchor size leases. 

The yield spread (10Y’s -2Y’s) compressed to a 52-week low of 120 basis points last week.  AGAIN, that’s a 52-week low in growth expectations right after “lift-off”. Into year-end, the bond market continues to price in what it has all year long: #Slower-and-lower-for-longer.


We continue to believe deflation will pressure the policy-fueled leverage embedded in junk and high yield bond markets. The cheap money, corporate credit boom inflated asset prices and it has more room to deflate. This deflationary run started in the second half of 2014, with the introduction of our #Deflation theme. Back then, was also the low in cross-asset volatility and the high in outstanding corporate credit (commodity producers chasing inflation expectations were the largest contributor).

Three for the Road


5 Must-See Clips Distilling Hedgeye's Best Ideas



Time is money.

Benjamin Franklin


Yesterday was the sixth-worst start to a year since 1927 for the Standard & Poor’s 500 Index, which fell 1.5% to erase $289 billion in market value. 

January 5, 2016

  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
2.32 2.16 2.24
S&P 500
1,998 2,039 2,012
Russell 2000
1,092 1,142 1,108
NASDAQ Composite
4,875 4,995 4,903
Nikkei 225 Index
18,111 19,118 18,450
German DAX Composite
10,118 10,633 10,283
Volatility Index
17.21 23.51 20.70
U.S. Dollar Index
97.67 99.41 98.92
1.07 1.10 1.08
Japanese Yen
118.71 121.02 119.40
Light Crude Oil Spot Price
35.16 38.26 36.88
Natural Gas Spot Price
1.81 2.48 2.29
Gold Spot Price
1,055 1,085 1,073
Copper Spot Price
2.06 2.16 2.08
Apple Inc.
103 109 105
618 670 636
Alphabet Inc.
749 791 759
Walt Disney Company, Inc.
101 106 102
Netflix Inc.
107 116 109.96
Facebook Inc.
101 105 102


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.


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CHART OF THE DAY: Recession Inching Closer?

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


"... Don’t just blame China. That’s lame. Not only was the ISM report in the US as bad as the made-up Chinese PMI report for December, it was the 1st back to back sub 50 reading (< 50 signals economic contraction) going all the way back to when the US was last in a recession."


CHART OF THE DAY: Recession Inching Closer? - 01.05.16 EL Chart

What Will You Tolerate?

“It’s not what you preach, it’s what you tolerate.”

-Leif Babin


Yep. I’m going back-to-back US Navy SEAL leadership quotes on you to start the year. Welcome to Day 2 of 2016.


When leaders who epitomize Extreme Ownership drive their teams to achieve a higher standard of performance, they must recognize that it’s not what you preach, it’s what you tolerate. When setting expectations, no matter what has been said or written, if substandard performance is accepted and no one is held accountable, that poor performance becomes the new standard.” (Extreme Ownership, pg 54)


With back to back recessionary Chicago PMI and ISM Manufacturing reports of 42.9 and 48.2, respectively, in the USA for December, will you tolerate an internal or external strategist/economist being wrong on US GDP growth for another entire year? Don’t be the person with poor performance.


What Will You Tolerate? - On your mark GDP 6.12.2014 large


Back to the Global Macro Grind


Don’t just blame China. That’s lame. Not only was the ISM report in the US as bad as the made-up Chinese PMI report for December, it was the 1st back to back sub 50 reading (< 50 signals economic contraction) going all the way back to when the US was last in a recession.


The good news is that someone at the Fed has to keep plugging the actual Q4 2015 numbers into their model, so the Atlanta Fed cut its GDP forecast for Q4 closer to the low-end of our forecast range yesterday to 0.7%.


In other words, if we continue to be right on both #Deflation and #GrowthSlowing, US GDP just got cut in half (sequentially) from Q3 to Q4 and the US Federal Reserve raised rates into that slow-down.


Both credit and stock markets (around the world) are starting to understand the economic gravity of the matter. Yesterday marked the worst Day 1 for US stocks since… drumroll… the last US #Recession started to get discounted by markets (2008).


This morning’s Yield Spread (US 10yr Treasury Yield MINUS the 2yr Yield) of 119 basis points is the flattest it’s been in 12 months too (flattening Yield Spread is one of the many leading indicators for #GrowthSlowing, on the margin).


Additionally, on accelerating volume, some major lines of risk management support broke yesterday:


  1. China’s Shanghai Composite immediate-term TRADE support level of 3561 broke (TREND was already broken)
  2. Japans Nikkei225 intermediate-term TREND support level of 19118 broke
  3. Germany’s DAX intermediate-term TREND support level of 10684 broke
  4. NASDAQ intermediate-term TREND support level of 5020 broke
  5. AMZN (cheap stock, delivers to your door) immediate-term TRADE support of 670 broke


What all 5 of these verified (volume accelerated on the break as volatility broke out) risk signals have in common is that these were market indices (AMZN = core component of FANG chart chasing index) that were UP last year (vs. something like the Russell 2000 down -5.7%).


In other words, they finally wounded the very narrow leadership that was left.


This is not to say that the almighty jungle-multiple-bearer Bezos can’t have a great Christmas and see his stock ramp back above a line that every algo from here to Chicago will chase ($670 AMZN) – but what if he doesn’t?


Not that the numbers matter more than Old Wall’s narrative that US Retail (XRT) only sucks because of “Amazon”, but AMZN has less than $50B (billion) in US Revenues while total US Retail Sales = $4.6T (trillion).


What if Facebook (FB) sees the multiple compression that Google (GOOGL) did during the last US #Recession? How about the ongoing “cheap” multiple Apple (AAPL) has had since it started crashing from the all-time US stock market #bubble high in July?


Oh, right. We’re the only ones making the US #Recession call (for now). So these “what if” questions don’t have to be tolerated (yet).


My Global Macro Team and I will present the case for what is already a US #Recession in industrial/cyclical terms on our Q1 Global Macro Themes call today at 1PM EST – please ping if you’d like access to the call.


Since we’re the rate-of-change-data-dependent guys, you’ll see 73 compelling slides (and some cartoons!) of historical and forward looking data that supports why you shouldn’t tolerate +2.5-3% US GDP “forecasters” this year.


Neither should you tolerate SP500 “revenue and earnings growth” forecasts, particularly in the 1st half of 2016. If you’re preaching #SuperLateCycle on both employment and consumption, you shouldn’t ignore the credit market cycle we’ll be focusing on either.


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


UST 10yr Yield 2.16-2.32% (bearish)

SPX 1 (bearish)
RUT 1092-1142 (bearish)

NASDAQ 4 (bearish)

Nikkei 18111-19118 (bearish)

DAX 10118-10633 (bearish)

VIX 17.21-23.51 (bullish)
USD 97.67-99.41 (bullish)
AAPL 103-109 (bearish)

AMZN 618-670 (bullish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


What Will You Tolerate? - 01.05.16 EL Chart

Cartoon of the Day: China's Slowdown Resurfaces

Cartoon of the Day: China's Slowdown Resurfaces - China cartoon 01.05.2015


"The Shanghai Composite was down as much as 7% to welcome in 2016 after China's PMI had the recessionary 4-handle again at 48.2 in December versus 48.9 last month," Hedgeye CEO Keith McCullough wrote earlier today. "That crushed complacent investors who didn't understand #GrowthSlowing."

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