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Here's Why Now Is A 'Great Spot' To Short Oil

Takeaway: Oil prices are headed lower despite rumors of an OPEC production freeze.

Here's Why Now Is A 'Great Spot' To Short Oil - oil fallen and can t get up

 

"Great spot to get more aggressive on the short side of Energy (again)," Hedgeye CEO Keith McCullough wrote in a note to subscribers earlier this morning.

 

"Oil ripped to the top-end of my immediate-term risk range and failed (again); no immediate-term downside support in the risk range for WTIC to $25.77 as the upside in Oil’s Volatility (OVX) remains 81!"

 

 

Our Potomac Research Group colleagues Joe McMonigle and former Energy Secretary Spencer Abraham have nailed the call that oil prices are headed lower despite rumors of an OPEC production "freeze."

 

 

Here's what McMonigle wrote in a recent note to institutional subscribers:

 

"As the energy world gathers in Houston this week for IHS' CERA Week conference, Russia announced that talks with OPEC members on a production freeze will continue. The Russian energy minister said he expects an agreement by March 1. 

 

We are highly skeptical that an agreement will be reached or that it changes the outlook for oil markets. There is nothing new here."

 

Watch McMonigle in the 3-minute video below explaining why this will remain a 'painful' year for oil.

 


The Macro Show Replay | February 23, 2016

 


Yen, Oil and EPS

Client Talking Points

YEN

The epicenter of big bang risk resides in the #BeliefSystem breaking down – meaning that when central-market-planners tell you to short their FX and it goes up (and stocks go down). That is becoming Japan with the Yen +0.8% here testing new year-to-date highs vs. USD – this is becoming as important a live quote as U.S. High Yield Spreads.

OIL

Oil ripped to the top-end of our immediate-term risk range and failed (again). There is no immediate-term downside support in the risk range for WTIC to $25.77 as the upside in Oil’s Volatility (OVX) remains 81!

EPS

With consensus staring (hoping) at oil, don’t forget that the most important relationship right now is that between profits and credits. With 435 out of 500 S&P companies reporting total revenues are -4.2% and EPS -6.5%; forget the “ex-Energy” thing – look at the best Sector Short (Financials) who now has EPS -8.8% year-over-year.

 

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

Asset Allocation

CASH 63% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 4%
FIXED INCOME 25% INTL CURRENCIES 8%

Top Long Ideas

Company Ticker Sector Duration
XLU

Long-Term Treasuries (TLT) and Utilities (XLU) remain our two best fixed income and equity vehicles to play #Lower-For-Longer on growth and interest rates as the market gets more and more skeptical about the central bank dogma.

 

With market turmoil, the Junk Bond ETF (JNK) is down -4.5% vs. the defensive, growth slowing equity sector Utilities (XLU) which is up 6.7%, outperforming the S&P 500 by 12.9% on a relative basis. That’s yet more confirmation of our dour economic outlook economy (spreads widen in tumultuous market environments and Utilities are a defensive sector that outperforms when growth is slowing).

GIS

General Mills (GIS) is a large player in the Yogurt category with their Yoplait brand. Their competitors, Dannon, Chobani and Fage have been aggressive on merchandising and consumer spending, making it difficult to compete while maintaining internal margin objectives. GIS is turning on innovation with the growth of Annie’s yogurt and that should help the trajectory of the business. Yogurt being a roughly $1.4 billion business, turning it around is a top priority for management.

 

On the broader GIS long thesis, it's unlikely that the stock is going to go up 20% in the next year, but we do believe it will fare better than most in the consumer staples sector, especially as we head into an economic slowdown.

TLT

With the market losing faith in the central planning policy backstop, investors continue to yield to top-down market signals and the direction of the data. To be clear, the data continues to deteriorate and volatility continues to break-out.

 

The yield spread (10-year Treasury yield minus 2-year Treasury yield) has compressed 24 basis points this year, and TLT is up 8.6% vs. the S&P 500 which is down -5.2%. The December Federal Funds Futures contract has declined in a straight line since December’s rate hike.  

Three for the Road

TWEET OF THE DAY

WHO: You

WHAT: @HedgeyeCares Golf Challenge

WHEN: Tuesday, May 17

WHERE: Glenarbor Country Club in Bedford, NY

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QUOTE OF THE DAY

Don’t play for safety. It’s the most dangerous thing in the world.

Hugh Walpole                                                

STAT OF THE DAY

435 of 500 S&P 500 companies have reported their respective quarters and only 3 of 10 S&P Sectors have positive year-over-year EPS growth and energy (31 of 41 companies reported) has sales down -34% and EPS -74%.


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CHART OF THE DAY: Stocks Always Crash When This Rolls Over. Is This Time Different? Probably Not

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.

 

"... Unless it’s different this time, US stocks always crash (greater than 20% decline from peak) once corporate profits go negative (on a year-over-year basis) for two consecutive quarters."

 

CHART OF THE DAY: Stocks Always Crash When This Rolls Over. Is This Time Different? Probably Not - 02.23.16 chart


Big Bang Theory

“There were humans long before there was history.”

-Yuval Noah Harari

 

I think there were lots of bears before there was a Wall St. bull too. If you go all the way back, you’ll find that there was physics before humans. A new book on #evolution called Sapiens, by Yuval Noah Harari, got me thinking about this last night.

 

As Harari reminded me, “about 13.5 billion years ago matter, energy, time and space came into being in what is known as the Big Bang…” After physics, came biology (3.8 billion years ago) … then human history (70,000 years ago)…

 

And now, post a 500 year long scientific revolution, we have a social “science” experiment (or ideology) called central-market-planning (or QE)… which could easily implode if the #BeliefSystem that humans can bend and smooth economic gravity crashes.

 

Big Bang Theory - Growth cartoon 11.10.2014

 

Back to the Global Macro Grind

 

Wow. In terms of a time-series, that’s a little deeper than staring at a 50-day moving monkey, isn’t it? While our understanding of physical, biological, and human histories continue to evolve at an accelerating rate, how did the Old Wall’s thinking get left behind?

 

Over the course of the last 30 years, Japan’s “growth” story has been left for dead. Instead of asking yourself when you should be “buying Japanese stocks”, why not ask yourself if this is the beginning of the end – of the grand central-market-plan, that is?

 

My Big Bang Theory for the #CurrencyWar (one of the Top 3 Themes in our Macro deck right now) is as follows:

 

  1. Japan is no longer able to convince markets that it can burn its currency at the stake on command
  2. Japan’s Yen starts to rise, and Japanese stocks start to crash
  3. Europe then fails to convince consensus of the same
  4. Euro goes up (instead of down) on Draghi’s next central-market-planning day (March 10)
  5. European and US stocks resume their current crashes and go straight down

 

I know, I know. It’s just a theory. But it’s what I would call one that has a probability that is rising, not falling, in rate-of-change terms. Not only is my intermediate-term TREND signal research suggesting rising probability, but super long-term history has always sided with gravity. So why would economic reality vs. perma-asset-inflation-hope be any different?

 

On a much shorter-term basis (because that’s where the next ECB and Fed meetings reside):

 

  1. Realize that the inverse correlation between the USD and Commodities remains pervasive (not transitory)
  2. But there is a developing POSITIVE correlation (15-30 day = +0.5-0.7) between USD and US stocks

 

What that tells me is that if we’re right on both the US economic and profit cycle continuing to slow in 1H 2016, Dollar Down => Rates Down => Stocks Down, could easily be perpetuated by the #BeliefSystem in both Japan and Europe breaking down.

 

Anyway – just a theory. Moving along…

 

As you know, irrespective of any longer-term Big Bang Theories that have a short-term catalyst, the easiest call for me to stick with is the intimate relationship PROFITS have with CREDITS at this stage of the cycle.

 

While they’ve “rallied” US stocks “off the lows” on slow-volume (Total US Equity Volume -15% vs. 1-month avg yesterday), the SP500 and Russell 2000 are still -8.7% and -21.1% (crashing), respectively, from their all-time #Bubble highs established in July.

 

Meanwhile, here’s the update on corporate profits:

 

  1. 435 of 500 S&P 500 companies have reported their respective quarters
  2. Aggregate SALES growth is -4.2% year-over-year and EPS down -6.5% year-over-year
  3. Only 3 of 10 S&P Sectors have POSITIVE year-over-year EPS growth
  4. ENERGY (31 of 41 companies reported) has SALES -34%, EPS -74%
  5. FINANCIALS (85 of 89 companies reported) has SALES -1%, EPS -8.8%

 

In other words, if your friends are still “backing out energy” and levered long US Equity beta, they’re a lot more exposed to rates crashing, Yield Spread compressing, and the Financials (XLF -11% YTD) than they’ve ever been!

 

Unless it’s different this time, US stocks always crash (greater than 20% decline from peak) once corporate profits go negative (on a year-over-year basis) for two consecutive quarters.

 

I’m certain that physics and biology have played a part in all economic cycles. But given that there was history before there were “stocks”, I have no idea how slowly or quickly the beginning of the end turns into a new beginning for a more credible belief system.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.62-1.84%

SPX 1811-1966
RUT

Nikkei 15129-16740

VIX 18.43-29.58
YEN 111.41-114.86
Oil (WTI) 25.77-33.61

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Big Bang Theory - 02.23.16 chart


Cartoon of the Day: Recession Knocking?

Cartoon of the Day: Recession Knocking? - recession cartoon 02.22.2016

 

Since January, our Macro team has been highlighting the increasing likelihood that the U.S. economy slips into recession in Q2 or Q3 of 2016, as the preponderance of economic data continues to roll over. 


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