Volatility, Oil and Italy

Client Talking Points


After a 2-day bounce in oversold beta all of the bottom callers came back, but day 2 of that came on one of the lightest U.S. Equity Volume days of the year (-9% vs 1 month average) and front-month VIX didn’t come close to breaking any lines of support.


Oil led the bounce (that hasn’t been a good thing for 18 months), up +5.9% on the week for WTI. But it is straight back down -3% this morning after failing at all lines of @Hedgeye resistance – risk range there = $28.21-32.68; Oil Volatility (OVX) = 62!


It was a big week for the Italian (Draghi wins central planner of the week), but it was a bad week for Italy, closing down -0.9% was the MIB Index (in a week almost everything bounced) which remains in crash mode, as does Spain and Germany (-20% or more from peak).


*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

Utilities (XLU) continue to be the bright spot in the equity markets for 2016. XLU is up 1% this year, having edged out all other S&P 500 subsectors by a wide margin. Last week, XLU was down marginally but was still second best among the subsectors, beating all but Healthcare (XLV). Essentially, it's paying off to own low-beta XLU in a crashing market.


General Mills (GIS) has turned on its advertising for no artificial colors and flavors in its cereal, as well as an increased effort for its gluten free campaign. Click here to view the 30 second spot TV commercial.


These steps taken on cereal, coupled with improved merchandise planning across their portfolio in the second half should bode well for the company’s future performance. Additionally, General Mills fits neatly into the style factors that we like from a macro point of view, large cap, low beta and liquidity.


Rating agency S&P disclosed on Thursday three concerning stats as it relates to the wellness of credit oustanding:

  • More companies were at risk of having their credit ratings cut at the end of December than at the close of any other year since 2009
  • The number of potential downgrades was at 655, compared with 824 reported by the finish of 2009
  • The year-end total for 2015 was "exceptionally" higher than a yearly average of 613


Then on Friday, S&P followed with additional action:

  • Disclosure that oil-exporting countries face fresh downgrades as crude prices fall further and that it could repeat last year's move when it made a big group of cuts all at once
  • S&P currently has Azerbaijan, Bahrain, Kazakhstan, Oman, Russia, and Saudi Arabia on negative outlook in its Europe, Middle East and Africa region, as well as Brazil and Venezuela in Latin America

Moody’s echoed the shaky state of credit markets by announcing it was putting the ratings of 120 oil and gas companies on watch Friday.


Strap on your seatbelts as we expect that credit spreads will continue to widen. If the Fed pivots on its “4 rate hikes” in 2016 as the data continues to slow, Treasury bond yields get pushed lower and high-yield spreads widen into a late cycle deleveraging. This should continue to generate alpha in a Short JNK, Long TLT trade.

Three for the Road


POTOMAC INSIGHT | Washington To Wall Street: What To Watch With JT Taylor… via @hedgeye



A person who won’t read has no advantage over one who can’t read.

Mark Twain                                    


The Singapore Straits Times Index is up only 0.2% on the bounce, it remains in #crash mode, down -26.7% from 2015 high.

CHART OF THE DAY: A Look At What's Hammering Consensus Macro In 2016

CHART OF THE DAY: A Look At What's Hammering Consensus Macro In 2016 - 01.25.16 chart


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


"... The real monsters that have been hammering Consensus Macro in 2016 are as follows:

  1. #Deflation (China, Oil, EM, etc.)
  2. US #GrowthSlowing from its Super #LateCycle peak
  3. Illiquidity & Leverage

Unfortunately, Illiquidity (institutional investors can’t get out of small/mid cap equity and junk bond exposures) and Leverage (hedge funds running 150-250% “gross long”, growth slowing companies like IBM levering up to buy back stock, the largest $ amount of corporate credit outstanding in human history, etc.), wasn’t objectively discussed @Davos."


Winter Was Coming

“They were born on the wrong side of the wall – it doesn’t make them monsters.”

-Jon Snow


If you live on the Eastern sea-board of the United States of America, unfortunately there was no central plan to smooth out this weekend’s storm. Winter was coming and how non-linear going from 0 to 2-3 feet of the white walker’s fury that was!


Pardon the pun, but in Stark contrast to the White Walkers (evil dudes) in Game of Thrones, the Wildlings (gnarly dudes) are called the “free folk.” John Snow was the great leader who empathized with their plight for freedom. They weren’t the movie’s real monsters.


To some, maybe this Thunder Bay Bear was born on the wrong side of the Old Wall. Who I am and what I stand for certainly makes for some “us vs. them” drama. After “taking a knee” on last week’s lows, I am back on the field of battle this morning. Grrr!


Winter Was Coming - smiling bear


Back to the Global Macro Grind


Scary growl, eh. Yeah, I can be a real scary dude; especially when I don’t have my makeup on (or when I try to find reasons to be bullish). Bullish on “reflation” or the prospects for US growth magically re-accelerating to its cycle peak of 2015, that is.


The real monsters that have been hammering Consensus Macro in 2016 are as follows:


  1. #Deflation (China, Oil, EM, etc.)
  2. US #GrowthSlowing from its Super #LateCycle peak
  3. Illiquidity & Leverage


Unfortunately, Illiquidity (institutional investors can’t get out of small/mid cap equity and junk bond exposures) and Leverage (hedge funds running 150-250% “gross long”, growth slowing companies like IBM levering up to buy back stock, the largest $ amount of corporate credit outstanding in human history, etc.), wasn’t objectively discussed @Davos.


I think that’s mainly because of real-world economic ignorance, willful blindness (compensation), and some form of fictional peddling. Since few (if any) called for this great US Dollar Denominated Liquidity Trap to manifest as the US Dollar Index broke out from 40-year-centrally-planned lows (Bernanke’s QE3 in 2011), what would there be for an academic paid to advise a banker to discuss?


Since it’s easy to argue that all that was core to the ideology of using “monetary policy tools, innovations, and communications” was one of the causal factors in perpetuating one mother of a #Bubble in inflation expectations, over-supply, and bad investor behavior (chasing Kinder’s lure of a levered yield), the Old Wall Folk would have to bear some responsibility in the discussion.


Back to what really happened last week (hint: one more of the many counter-TREND bounces):


  1. US Equities rallied off oversold lows (SP500 +1.4% on the week to -6.7% YTD)
  2. Total US Equity Market Volume had its slowest day (down -9% vs. its 1-month avg) on a +2% Friday (SP500)
  3. Oil (WTI) led the counter-TREND bounce with a +5.9% ramp to -15.7% YTD
  4. Copper had 2x the bounce of the SP500, closing +3.0% to -6.2% YTD
  5. MLP stocks “beat the Dow” at +1.1% vs. +0.7% on the week, but are still in crash mode -17.7% YTD


I’m pretty sure that’s not how the Old Wall’s media recapped the week. In other reality-check news:


  1. Our favorite US Equity Sector Style (Utilities, XLU) closed up another +0.9% to +1.2% YTD
  2. Our least favorite Equity Sector (Financials, XLF) closed down another -0.7% to -10.7% YTD

Yeah, that’s a bummer – when the “market is up” and the sector the “rate hike” bulls like the most was down (again). But that’s to be expected by those of us longer-term investors who understand Lower-For-Longer (US 10yr Yield -23 basis points YTD at 2.04%).


The only thing other than maybe Ukrainian and Italian stocks (down -7.9% and -0.9% on the week, respectively, in a globally “up” tape), that I can find worse than being long the Financials (on a week where Jaime Dimon called everything fine) was:


  1. High Beta Stocks down another -1.6% week-over-week to -13.7% YTD
  2. Low Beta Stocks up +0.1% week-over-week to -2.1% YTD

*Mean Performance of Top Quintile vs. Bottom Quintile (SP500 Companies)


In other words, if all you’ve done in 2016 was express the Illiquidity & Leverage trade in High vs. Low Beta portfolio positioning, never mind charging 2 & 20 for that – you could probably come back as Steve Cohen and charge 5 & 50!


Not to be completely out-done by the weather-trade (ex-the-pending-slow-volume-storm-prep-day, the SP500 is down closer to -8.5% YTD!) one of our Top 3 Macro Long Ideas right now (the US Dollar) had another solid week, +0.6% at +1.0% YTD.


I know. Being long Greenbacks, Utes, and the Long-Bond is boring. But sometimes, in the #GameOfSlowing (Q4 2015 Hedgeye Macro Theme) playing the low-beta, low-leverage strategy works. Finally, since I’m up off my knee, I’ll remind you of Cersei Lannister’s advice:


“When you play the Game of Thrones, you win or you die.”


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.96-2.09%


VIX 20.43-28.91
YEN 116.51-118.99
Oil (WTI) 28.21-32.68


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Winter Was Coming - 01.25.16 chart

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Investing Ideas - Levels

Takeaway: Current Investing Ideas: TIF, JNK, NUS, W, FL, WAB, MDRX, ZBH, FII, XLU, MCD, RH, GIS & TLT

Please see below Hedgeye CEO Keith McCullough's refreshed levels for our high-conviction Investing Ideas.


Have a great weekend.


Investing Ideas - Levels - 1 23 2016 2 14 36 PM


Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

POTOMAC INSIGHT | Washington To Wall Street: What To Watch With JT Taylor


Potomac Research Group Senior Analyst JT Taylor discusses the three most important issues in Washington this week, with special insight on how the U.S. presidential campaign is shaping up.

The Week Ahead

The Economic Data calendar for the week of the 25th of January through the 29th of January is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.



The Week Ahead - 01.22.16 Week Ahead

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.