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Client Talking Points


We Have (an accelerating) Problem:  The 4th largest metro in the country is ground zero for energy deflation and the negative data flow keeps flowing.  Goods Producing jobs in Houston are -2.9% YoY, births are tracking -12% YoY, Existing Home inventory is up +28%, Housing demand is down -11% and prices are starting to roll.  Yesterday, the Dallas Fed manufacturing index printed at a remarkable -34.6 with production crashing 23 points (largest decline in 11 years) and the index dropping to the worst level since 2009.  Don’t try to catch the knife on #DeflationsDominoes or homebuilders with Houston leverage – it’s going to get worse.  


While data continues to slow across the region, expect the ‘issues’ around the refugee ‘crisis’ to remain a drag. Winter may limit movement across borders but there’s a long TAIL ahead to deal with large movements of people. The newest development on this front comes from The Times reporting that the EU is set to suspend its passport-free travel zone, Schengen. 


With large impairment charges and write-downs foreshadowed by many large producers, credit markets are front-running balance sheet contraction to reflect lower short and long-term commodity price assumptions. Moody's disclosed Friday morning it was putting the ratings of 120 Oil & Gas companies and 55 mining companies on watch.

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


$MCD is taking share from $CMG!



Good is not good when better is expected.

Vin Scully                                


In Norway - oil has fallen so low and salmon risen so high that one standard, 4.5 kilogram fish costs more than a barrel of crude (measured in kroner).