Oil Down, Rates Down

Client Talking Points


If you’ve been bearish on the #BeliefSystem (central-market-planning) breaking down in Japan alongside us, congrats – Japanese stocks failed @Hedgeye TREND resistance overnight as the Yen popped (again) on a BOJ statement day. The Nikkei is down -0.7% to -10% for the year-to-date. It is not clear how the bulls could be trumpeting losing money year-to-date.


Financials lagged the U.S. Equity market all day long yesterday (they’re down -5.9% year-to-date and remain our favorite sector on the short side) and since rates failed at the top-end of our 1.76-2.00% risk range (UST 10YR) yesterday, it won’t surprise us if they lead the market lower alongside Energy today.


Oil is down hard after failing at the top-end of what is now a $34.05-39.76 immediate-term risk range for WTI – and, again, if you’re thinking the Fed is going to be “hawkish”, don’t forget that means Dollar Up, Commodities Down. We would stay with the better TREND setup than chasing Energy charts (i.e. Long Gold vs. Short Oil for 2016).


*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) remains the alpha generating trades in equities, year-to-date XLU is up 11.3% versus -1.1% for the S&P 500. Factor exposure is very important to us, especially when volatility is in a bullish TREND set-up and small cap, illiquid stocks continue to underperform. Here's another way to look at it:


+ Illiquidity

+ Too many hedge funds chasing performance...

= #Pain

We continue to expect utilities to outperform the broader market given this current environment.   


This stock is not likely 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. That's why GIS is up 5.5% year-to-date versus down -1.4% for the S&P 500.


In the past few newsletters we've noted the effect Walmart is having on GIS, how its Yogurt business is faring against competitors, and how the company is broadening the distribution of its top 450 SKUs. On the M&A front, barring any screaming deals in the market place we don’t see General Mills (GIS) buying anything over roughly $1 billion in sales, just given the added complexity it would cause. So they will most likely continue the string of pearls approach in the Natural & Organic/Snacking categories. This does not rule out the possibility of GIS being bought, 3G & Kraft Heinz could be getting back in the mix as well, although it seems too soon for another deal this big.


Growth and inflation continue to decelerate in the Eurozone and globally. In other words, there is very little central planners can do to stop the cycle and the inevitable deleveraging that must take place in credit Long-Term Treasuries (TLT) remains the alpha generating trade in fixed income this year. 

Three for the Road


Today at 11am ET@JamesGRickards and @KeithMcCullough

Watch (for free) here:… #Gold $GLD $SPY



What is harder than rock, or softer than water? Yet, water hollows out rock. Persevere.



In the U.S. 106,000 aluminum cans are used every 30 seconds.

The Macro Show Replay | March 15, 2016

CLICK HERE to access the associated slides.


Stock Report: Pimco 25+ Year Zero Coupon US Treasury ETF (ZROZ)

Takeaway: We added ZROZ to Investing Ideas on the long side on 3/11.

Stock Report: Pimco 25+ Year Zero Coupon US Treasury ETF (ZROZ) - HE ZROZ table 3 14 16



Our bigger picture cycle work helps contextualize the shorter-term asset price moves within their longer-term trends. Having a multi-duration process centered around the rate-of-change in Growth, Inflation, Policy (GIP Model) is a calculated and tested process.


In other words, we have a repeatable, math-driven process that prevents day-to-day market emotions from getting the best of us. That’s the name of the game if you’re a long-term investor looking to protect your wealth and remain sane in this volatile market environment.


Right now, our model flagged the third consecutive quarter of growth slowing to close out Q4 2015. Aside from a modest acceleration in Q1 of 2016, that model has the U.S. economy tracking squarely in QUAD 4 heading into Q2 (growth and inflation decelerating). Long-term Treasuries have repeatedly been the most telling signal of longer-term growth expectations.  




Only longer-term investors who have been right on the direction of longer-term growth and inflation have been on the right side of long-term Treasuries, which outperform in a growth slowing environment.


Regardless of various attempts by policymakers to influence currencies and rates, if growth continues to surprise to the downside, the long end of the curve will continue to discount forward looking growth expectations. ZROZ is the most sensitive way to express this view with the discounting of longer-term cash flows.    




Slower for longer on growth has equated to relative outperformance for buy-and-hold investors in long-term sovereign bonds. One of the largest headwinds to our consumption-based economy (~70% of GDP) for the next several years is unfavorable demographic trends. The U.S. economy’s core spending group (35-54 year olds) is projected to contract through 2019. That fits with our big picture calls on U.S. growth slowing and hence lower for longer rates to the benefit of ZROZ.


Stock Report: Pimco 25+ Year Zero Coupon US Treasury ETF (ZROZ) - HE ZROZ chart 3 14 16

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.67%

Cartoon of the Day: Fed Day

Cartoon of the Day: Fed Day - Hawkish cartoon 03.14.2016


Hedgeye CEO Keith McCullough wrote in this morning's Early Look:


"... On cyclical stuff that has been crashing for 1-3 years, we’re “off the lows”, bros! And the Fed is going to be hawkish about that on Wednesday because:


  1. Deflation In Commodities has had another short-term “reflation” (isn’t that “transitory” btw?)
  2. Late Cycle Employment reports (while slowing in rate of change terms) are still “good” 

Stopping Trump: As Rubio Fades, All Eyes On Kasich

Takeaway: What to watch on the election 2016 campaign trail.

Below is an excerpt from Potomac Research Group Chief Political Strategist JT Taylor's Morning Bullets sent to institutional clients each morning.



Stopping Trump: As Rubio Fades, All Eyes On Kasich - kasich


Having picked the eventual winner in every election since 1960, Ohio continues to be the linchpin of the presidential race. It is poised to play a unique role yet again. With Marco Rubio waning in FL, the establishment's hopes of halting Donald Trump's march hinge on John Kasich winning his home state. The components for a Kasich victory there are much more feasible there than they are for Rubio in FL: Kasich just won an election there two years ago in a landslide, has very high approval ratings, and has run a positive campaign throughout this race. Rubio on the other hand, has faces a different scenario altogether. His approval ratings are now under water and he hasn't run a state-wide election in four years.  Not to mention that neither FL Governor Rick Scott nor formal rival Jeb Bush have deigned to endorse him. 



Stopping Trump: As Rubio Fades, All Eyes On Kasich - rubio


This is the last time the goalposts will move (we hope) -- after tomorrow the possible trajectories for the Republican delegate race will narrow significantly.  If Trump sweeps, game over.  If Kasich wins Ohio or Rubio wins Florida then the math gets much trickier for Trump to win the nomination outright.  If Trump loses both OH and FL, fasten your seatbelts because we'll likely be headed to a contested convention in Cleveland.   




Stopping Trump: As Rubio Fades, All Eyes On Kasich - ted cruz 34


We know we've been guilty of focusing on FL and OH as make or break, winner-take-all states with 165 delegates in play, but there are three other states up for grabs tomorrow that deserve just a little attention with 193 proportional delegates at stake -- NC, MO and IL.  While Rubio is frantically criss-crossing his home state and Kasich following suit in his, Ted Cruz is selectively targeting voter-rich suburbs and pockets of evangelicals and mainstream conservatives in the "orphan" states looking to capitalize on the vacuum and take home a win, or at least a respectable portion of the delegates. 

W: We Are Removing Wayfair From Investing Ideas

Takeaway: Please note we are removing Wayfair from Investing Ideas (short side) today.

"While our Retail Sector Head Brian McGough still likes Wayfair as a short idea, it's not at the top of my list right now," says Hedgeye CEO Keith McCullough. "I'm trying to make room for some new/fresh short ideas."


W: We Are Removing Wayfair From Investing Ideas - wayfair info


Here's the bearish case on Wayfair from McGough's original stock report on the company:

  • "Wayfair has considerably higher penetration in its TAM (total addressable market) than people believe. People – including Management, are using numbers like $200bn-$300bn as an addressable market. That’s just flat-out wrong. We’ve done extensive research on this one, and when all is said and done, we think that the end market is no more than $30bn."
  • "Wayfair has about 10% share of its market. That’s 2-3x the share of players like RH and IKEA. There’s absolutely no reason why this should be the case."
  • "... Wayfair sells furniture and home goods. The purchasing process for a consumer durable like a set of bunk beds, for example, almost always includes in-store visits as well as online research... But you can’t touch and feel the seven million items sold by Wayfair before you buy. In fact, our research suggests that W’s target consumer has a ‘blind buy’ threshold of around $750. That’s well below the prices listed for furniture sold on its websites."
  • "While it might take a while, we think that Wayfair is ultimately headed to zero."


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.