MACRO PLAYBOOK DARIUS DALE: MACRO TEAM

Transcription

1 MACRO PLAYBOOK DARIUS DALE: MACRO TEAM AUGUST 19, 2015 UPDATE

2 LEGAL DISCLAIMER Hedgeye Risk Management is a registered investment advisor, registered with the State of Connecticut. Hedgeye Risk Management is not a broker dealer and does not provide investment advice to individuals. This research does not constitute an offer to sell, or a solicitation of an offer to buy any security. This research is presented without regard to individual investment preferences or risk parameters; it is general information and does not constitute specific investment advice. This presentation is based on information from sources believed to be reliable. Hedgeye Risk Management is not responsible for errors, inaccuracies or omissions of information. The opinions and conclusions contained in this report are those of Hedgeye Risk Management, and are intended solely for the use of Hedgeye Risk Management s clients and subscribers. In reaching these opinions and conclusions, Hedgeye Risk Management and its employees have relied upon research conducted by Hedgeye Risk Management s employees, which is based upon sources considered credible and reliable within the industry. Hedgeye Risk Management is not responsible for the validity or authenticity of the information upon which it has relied. TERMS OF USE This report is intended solely for the use of its recipient. Re-distribution or republication of this report and its contents are prohibited. For more detail please refer to the appropriate sections of the Hedgeye Services Agreement and the Terms of Use at HEDGEYE 2

3 SUMMARY RESEARCH CONCLUSIONS 1 2 OUR DOMESTIC GROWTH/INFLATION/POLICY OUTLOOK (SLIDE 4) Domestic economic growth is now well past-peak in rate-of-change terms for this economic expansion. We ve been saying this all year, but it obviously bears repeating ahead of today s FOMC minutes and an increasingly probable rate hike in September: the U.S. economy is mired in a #LateCycle slowdown and the Federal Reserve risks perpetuating the next economic and financial market swoon to the extent they remain hostage to the Gregorian calendar and consensus expectations in lieu of being data dependent. Reported inflation has likely bottomed and should trend ever-so-slightly higher through the balance of the year. There does, however, remain considerable near-term downside risks to CPI readings here in 3Q15. OUR GLOBAL GROWTH/INFLATION/POLICY OUTLOOK (SLIDE 48) We think global real GDP growth comes in at just above half of consensus expectations in 2H15, with real downside surprise risk in major developed economies particularly the U.S. and Eurozone. Moreover, it appears increasingly probable that both economies enter recession sometime in 2H16. Reported inflation readings should continue to trend lower throughout 3Q15 before their likely inflection in 4Q15. 3 OUR THEMATIC INVESTMENT CONCLUSIONS (SLIDE 80) FACTOR EXPOSURE LONGS: Japan (DXJ), Homebuilders (ITB), Long-term Treasury Bonds (TLT), Utilities (XLU) and Healthcare (XLV) STYLE FACTOR LONGS: Mega-Caps, Low Leverage, Low Beta FACTOR EXPOSURE SHORTS: Spain (EWP), Euro (FXE), S&P 500 (SPY), Industrials (XLI), Retailers (XRT) STYLE FACTOR SHORTS: Small-Caps, High Leverage, High Beta HEDGEYE 3

4 DOMESTIC GROWTH & INFLATION TRENDS

5 U.S. GDP MODEL: BASE EFFECTS QUANTITATIVELY SPEAKING, 65% OF THE TIME THE 2 ND DERIVATIVE IN THE FORECAST PERIOD CARRIES AN OPPOSITE SIGN (+ OR -) TO THE 2 ND DERIVATIVE IN THE COMPARATIVE BASE PERIOD, WHICH PROVIDES A GOOD STARTING POINT FOR DIRECTIONAL ADJUSTMENTS TO THE BASE RATE Arithmetic Mean of the 2Y and 3Y Average Growth Rates in the Comparative Base Period Z-Score (trailing 5Y) of the Associated Sequential Delta 2.25% x 1.25% 1.15% 1.3x x 0.7x x 0.6x 0.5x 0.3x 0.1x -0.15% % -0.7x -1.3x -1.7x 2.25% % % 1.85% % 1.2x 0.8x 0.4x 0.1x 0.1x -0.3x -1.1x -1.3x 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 HEDGEYE 5

6 U.S. GDP MODEL: TRACKING ALGORITHM HEDGEYE 6

7 NOMINAL CONSUMPTION GROWTH ACCELERATING ON A SEQUENTIAL AND TRENDING BASIS 3Q15 IS OFF TO A LACKLUSTER START Retail Sales Control Group YoY % Change 10 Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) Quarterly Average: 2Q15 to 3Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) ; EX-FOOD, AUTOS AND BUILDING MATERIALS HEDGEYE 7

8 REAL CONSUMPTION GROWTH SLOWING ON A SEQUENTIAL AND TRENDING BASIS Real PCE YoY % Change 10 Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) Quarterly Average: 1Q15 to 2Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (JUN) 2.7 HEDGEYE 8

9 NOMINAL INCOME GROWTH ACCELERATED SEQUENTIALLY IN JULY, BUT STILL SLOWING ON A TRENDING BASIS 3Q15 IS OFF TO A POOR START Average Hourly Earnings YoY % Change 10 Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) Quarterly Average: 2Q15 to 3Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) HEDGEYE 9

10 REAL INCOME GROWTH ACCELERATED ON A SEQUENTIAL BASIS IN JULY, BUT SLOWING ON A TRENDING BASIS 3Q15 IS OFF TO A GOOD START Real Average Weekly Earnings YoY % Change Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) 92% Quarterly Average: 2Q15 to 3Q15 (rhs) Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) 1.7 HEDGEYE 10

11 REAL DISPOSABLE INCOME GROWTH SLOWING ON A SEQUENTIAL AND TRENDING BASIS Real Disposable Personal Income YoY % Change 10 Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) Quarterly Average: 1Q15 to 2Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (JUN) 2.9 HEDGEYE 11

12 HOUSEHOLD SAVINGS RATE ACCELERATED SEQUENTIALLY IN JUNE, BUT SLOWING ON A TRENDING BASIS ARE CONSUMERS GETTING SQUEEZED ON THE MARGIN? DEPENDING ON INCOME LEVEL, SHELTER ACCOUNTS FOR (AND SOMETIMES > 50) PERCENT OF AGGREGATE HOUSEHOLD CONSUMPTION. Personal Savings Rate (%) 10 Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) Quarterly Average: 1Q15 to 2Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (JUN) 4.5 HEDGEYE 12

13 EMPLOYMENT GROWTH SLOWED SEQUENTIALLY IN JULY, BUT ACCELERATING ON A TRENDING BASIS 3Q15 IS OFF TO A POOR START Nonfarm Payrolls MoM Nominal Change (000's) 10 Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) Quarterly Average: 2Q15 to 3Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) 210 HEDGEYE 13

14 GENERAL LABOR MARKET CONDITIONS SLOWED SEQUENTIALLY IN JULY, BUT ACCELERATING ON A TRENDING BASIS 3Q15 IS OFF TO A GOOD START (DECLINING SLACK) Labor Market Conditions Index (19 Indicator Composite) 10 Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) Quarterly Average: 2Q15 to 3Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) HEDGEYE 14

15 CONSUMER CONFIDENCE SLOWING ON A SEQUENTIAL AND TRENDING BASIS 3Q15 IS OFF TO A POOR START Conference Board Consumer Confidence Index SA 10 Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) 99.8 Quarterly Average: 2Q15 to 3Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) HEDGEYE 15

16 INDUSTRIAL PRODUCTION GROWTH ACCELERATED SEQUENTIALLY IN JULY, BUT SLOWING ON A TRENDING BASIS 3Q15 IS OFF TO A POOR START Industrial Production YoY % Change 10 Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) Quarterly Average: 2Q15 to 3Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) 1.0 HEDGEYE 16

17 DURABLE GOODS ORDERS GROWTH ACCELERATED SEQUENTIALLY IN JUNE, BUT SLOWING ON A TRENDING BASIS CONTRACTING YEAR-OVER-YEAR Durable Gods New Orders NSA YoY % Change 10 Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) Quarterly Average: 1Q15 to 2Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (JUN) -7.0 HEDGEYE 17

18 CAPITAL GOODS ORDERS GROWTH SLOWING ON A SEQUENTIAL AND TRENDING BASIS CONTRACTING YEAR-OVER-YEAR Core Capital Goods New Orders NSA YoY % Change Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) Quarterly Average: 1Q15 to 2Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (JUN) HEDGEYE 18

19 FACTORY ORDERS GROWTH ACCELERATED SEQUENTIALLY IN JUNE, BUT SLOWING ON A TRENDING BASIS CONTRACTING YEAR-OVER-YEAR Factory Orders SA YoY % Change 10 Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) Quarterly Average: 1Q15 to 2Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (JUN) -7.0 HEDGEYE 19

20 PMI SUMMARY OLD FORMAT = $800/SQUARE FT ISM Manufacturing PMI SA NEW FORMAT = $1,300 SQ FT ISM Non-Manufacturing PMI SA Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) Quarterly Average: 2Q15 to 3Q15 (rhs) Quarterly Average: 2Q15 to 3Q15 (rhs) % % Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) 52.4 Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) 55.0 HEDGEYE 20

21 COMPOSITE PMI ACCELERATING ON A SEQUENTIAL AND TRENDING BASIS; PEAKING 3Q15 IS OFF TO A GOOD START GDP-Weighted ISM Composite PMI SA 10 Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) 99% Quarterly Average: 2Q15 to 3Q15 (rhs) Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) HEDGEYE 21

22 SMALL BUSINESS CONFIDENCE ACCELERATED SEQUENTIALLY IN JULY, BUT SLOWING ON A TRENDING BASIS 3Q15 IS OFF TO A POOR START NFIB Small Business Optimism Index SA 10 Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) Quarterly Average: 2Q15 to 3Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) 93.0 HEDGEYE 22

23 EXPORT GROWTH ACCELERATING ON A SEQUENTIAL AND TRENDING BASIS CONTRACTING YEAR-OVER-YEAR Exports YoY % Change 10 Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) Quarterly Average: 1Q15 to 2Q15 (rhs) Percentile of Latest Monthly Reading Previous Value Latest Value (JUN) HEDGEYE 23

24 IMPORT GROWTH ACCELERATED SEQUENTIALLY IN JUNE, BUT SLOWING ON A TRENDING BASIS CONTRACTING YEAR-OVER-YEAR Imports YoY % Change 10 Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) Quarterly Average: 1Q15 to 2Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (JUN) -4.5 HEDGEYE 24

25 U.S. CPI MODEL: BASE EFFECTS QUANTITATIVELY SPEAKING, 65% OF THE TIME THE 2 ND DERIVATIVE IN THE FORECAST PERIOD CARRIES AN OPPOSITE SIGN (+ OR -) TO THE 2 ND DERIVATIVE IN THE COMPARATIVE BASE PERIOD, WHICH PROVIDES A GOOD STARTING POINT FOR DIRECTIONAL ADJUSTMENTS TO THE BASE RATE. 3.0 Arithmetic Mean of the 2Y and 3Y Average Inflation Rates in the Comparative Base Period Z-Score (trailing 5Y) of the Associated Sequential Delta % 2.45% 2.55% 2.45% % % x % % 1.2x 1.3x 1.0x 1.95% % 1.75% % x -0.6x 0.6x -0.4x 0.3x -0.3x -0.1x -0.3x 0.1x -0.5x -0.2x 0.5x -0.2x x x -1.4x Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 HEDGEYE 25

26 U.S. CPI MODEL: QUANT SIGNALS RECENT PERVASIVE PRICE DECLINES ACROSS KEY COMMODITY MARKETS IMPLY AT LEAST ONE FINAL LEG DOWN IN REPORTED INFLATION HERE IN 3Q Arithmetic Mean of Hedgeye Macro YoY Commodity Price Sample (lhs) US CPI YoY (rhs) 6.5% % % % % % % % % % The Hedgeye Macro commodity price sample includes the CRB Index, CRB Raw Industrials Index, Brent Crude Oil and the UN Food and Agriculture Price Index. YoY deltas are calculated from monthly averages. Forward estimates assume no change to current monthly averages. HEDGEYE 26

27 CONSUMER PRICE INFLATION ACCELERATING ON A SEQUENTIAL AND TRENDING BASIS CPI YoY % Change 10 Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) Quarterly Average: 2Q15 to 3Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) HEDGEYE 27

28 CORE PCE INFLATION ACCELERATED SEQUENTIALLY IN JUNE, BUT SLOWING ON A TRENDING BASIS PCE Core Price Index YoY % Change 10 Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) Quarterly Average: 1Q15 to 2Q15 (rhs) % 1.27 Percentile of Latest Monthly Reading Previous Value Latest Value (JUN) HEDGEYE 28

29 PRODUCER PRICE INFLATION SLOWED SEQUENTIALLY IN JULY, BUT ACCELERATING ON A TRENDING BASIS CONTRACTING YEAR-OVER-YEAR 3Q15 IS OFF TO A GOOD START PPI Final Demand YoY % Change 10 Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) Quarterly Average: 2Q15 to 3Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) HEDGEYE 29

30 U.S. G.I.P. MODEL HEDGEYE 30

31 DOMESTIC POLICY EXPECTATIONS THE CURRENT DIVERGENCE BETWEEN POLICY RATE EXPECTATIONS AND LONG-TERM INTEREST RATES HIGHLIGHTS THE GROWING RISK OF A POLICY MISTAKE(S) IN THE FORM OF A RATE HIKE(S) OUT OF THE FEDERAL RESERVE. 1.65% Fed Funds Rate Future 30 Day, One Year Out (SEP '16) U.S. 10YR Treasury Bond Yield 2.8% 1.55% 2.7% 1.45% 1.35% Correlation from 4/1/14-3/31/15: % 2.5% 2.4% 1.25% 2.3% 1.15% 2.2% 1.05% 2.1% 0.95% 0.85% % 1.8% 0.75% 0.65% Correlation since 4/1/15: % 1.6% HEDGEYE 31

32 MONETARY POLICY DRIVERS TRENDS ACROSS A BROAD SWATH OF CYCLICAL AND STRUCTURAL INDICATORS CALL FOR, AT BEST, A NEUTRAL POLICY BIAS OUT OF THE FEDERAL RESERVE. HEDGEYE MACRO G3 MONETARY POLICY MODEL U.S. (Federal Reserve) Neutral Policy Recommendation % % % 33% 15% 33% 36% 38% 4% 5Y-5Y Forward Breakeven Rate (1YR) Benchmark Equity Market (3MO) Nominal GDP YoY (10YR) Composite PMI (1YR) Core CPI YoY (10YR) Econ Surprise Index (3MO) REER (10YR)* Sovereign 10Y- 2Y bps Spread (1YR) Employment Cost Index YoY (10YR) Unemployment Rate (10YR)* WEIGHTED AVERAGE Values shown are the current reading as a percentile of the indicated trailing period. Values in blue carry an equally-distributed outsized influence on the weighted average. An asterisk following an indicator indicates the percentile reading has been inverted to maintain directional consistency within the model. A high average value suggests a high probability of tightening and/or hawkish guidance. A low average value suggests a high probability of easing and/or dovish guidance. HEDGEYE 32

33 DOMESTIC GROWTH EXPECTATIONS 2015 GROWTH EXPECTATIONS ARE JUST OFF THEIR LOWS. USING THE TRAILING 5-YEAR AVERAGE GROWTH RATE AS AN ADMITTEDLY ROUGH GUIDE, POTENTIAL REAL GDP GROWTH IN THE U.S. IS HOVERING AT GENERATIONAL LOWS OF +2% AMID THIS ERA OF SECULAR STAGNATION. 3.4% Bloomberg Consensus U.S Real GDP Growth Estimate (Percentile of Latest Reading = 8th) Poly. (Bloomberg Consensus U.S Real GDP Growth Estimate (Percentile of Latest Reading = 8th)) 3.2% % 2.6% 2.4% 2.2% HEDGEYE 33

34 CONSISTENTLY TOO HIGH ON GDP GROWTH % 3. EVERY SINGLE YEAR OF THE POST-CRISIS ERA HAS SEEN A DOWNWARD REVISION BIAS TO BLOOMBERG CONSENSUS U.S. REAL GDP GROWTH FORECASTS THROUGHOUT THE YEAR Actual Linear (2010) Linear (2011) Linear (2012) Linear (2013) Linear (2014) 2.5% % 2.3% 2.2% 2.4% 1.5% 1.6% % % HEDGEYE 34

35 DOMESTIC INFLATION EXPECTATIONS 2015 INFLATION EXPECTATIONS ARE ALSO JUST OFF THEIR LOWS AND REMAIN FAR FROM SUPPORTIVE OF BROAD-BASED EXPECTATIONS OF MONETARY TIGHTENING. IT S WORTH NOTING THAT, PER THE WSJ, 82% OF [LINEAR] SELL-SIDE ECONOMISTS EXPECT LIFTOFF NEXT MONTH. 3. Bloomberg Consensus U.S CPI Estimate (Percentile of Latest Reading = 9th) Poly. (Bloomberg Consensus U.S CPI Estimate (Percentile of Latest Reading = 9th)) 2.5% % % HEDGEYE 35

36 CONSISTENTLY TOO HIGH ON INFLATION WITH THE EXCEPTION OF 2011 (QE2 PERPETUATED ALL-TIME LOWS IN THE USD), EVERY YEAR OF THE POST-CRISIS ERA HAS SEEN A DOWNWARD REVISION BIAS TO CONSENSUS U.S. CPI FORECASTS THROUGHOUT THE YEAR; A MEDIAN FORECAST OF +2.2% FOR LOOKS AGGRESSIVE Actual Linear (2010) Linear (2011) Linear (2012) Linear (2013) Linear (2014) % % 2.1% 1.5% 1.6% HEDGEYE 36

37 JOBLESS CLAIMS: MONTHS THE TREND IN INITIAL JOBLESS CLAIMS WOULD IMPLY ~10 MORE MONTHS OF ECONOMIC EXPANSION. 650k U.S. Recession Initial Jobless Claims SA, SMAVG(6MO) Indicator of Late-Cycle Labor Market Strength: 300k 600k 550k 500k 450k 400k 350k 300k 250k 18MO 19MO 20MO 9MO HEDGEYE 37

38 CONSUMER CONFIDENCE: MONTHS RECESSIONS TEND TO OCCUR WHEN THE INTERMEDIATE-TERM TREND IN CONSUMER CONFIDENCE BREAKS DOWN BELOW THE LONG-TERM TREND WITH THE ADVENT OF THE JULY PRINT, THAT EVENT IS AT RISK OF OCCURRING WITHIN MONTHS. U.S. Recession Conference Board Consumer Confidence Index SMAVG(12MO) SMAVG(36MO) HEDGEYE 38

39 CORPORATE EARNINGS: 3-6 MONTHS 120 THERE IS PERHAPS NO SUCH THING AS AN EARNINGS RECESSION WITHOUT AN ACTUAL RECESSION; THE LAST THREE RECESSIONS HAVE BEEN PRECEDED BY S&P 500 TTM EPS BREAKING DOWN BELOW ITS TTM AVERAGE AN EVENT THAT IS AT RISK OF OCCURRING FAIRLY SOON. U.S. Recession S&P 500 TTM EPS TTM Average HEDGEYE 39

40 TRACKING THE FED S FORECASTING FOLLY 4. OVER THE PAST FIVE YEARS, THE FEDERAL RESERVE S INTRA-YEAR FORECASTS FOR U.S. REAL GDP GROWTH HAVE BEEN TOO AGGRESSIVE BY AN AVERAGE OF 100 BASIS POINTS! THEIR OUT-YEAR FORECASTS REMAIN IN THE LAND OF FAIRY TALES AND FABLES. Peak FOMC Intra-year Forecast Trough FOMC Intra-year Forecast Actual Maximum Mid-Year Tracking Error (rhs) 205bps 210bps 3.5% 3.5% 3.7% 190bps 170bps % 150bps 2.7% 2.5% 2.6% 2.5% 2.5% 2.4% % bps 2.2% 2.2% 95bps 2.1% 1.8% 1.7% 1.6% 1.5% 50bps 45bps E 2015E = latest Bloomberg Consensus estimate. 2.5% 2.3% 1.9% 40bps HEDGEYE bps 110bps 90bps 70bps 50bps 30bps

41 LEADING/LAGGING RATIO: MONTHS THE LAST THREE RECESSIONS HAVE BEEN PRECEDED BY A TRENDING DOWNWARD SLOPE OF THE TRENDING RATIO BETWEEN LEADING AND LAGGING INDICATORS THE CURRENT SLOPE OF THIS TRENDING RATIO REMAINS POSITIVE. U.S. Recession Conference Board Leading Economic Indicators Index/Conference Board Lagging Economic Indicators Index, Ratio (TTM Average) HEDGEYE 41

42 KNOW YOUR TIGHTENING CYCLES THE MEDIAN LENGTH OF TIME AND CUMULATIVE INCREASE OVER THE LAST FIVE TIGHTENING CYCLES IS 47 WEEKS AND +300 BASIS POINTS, RESPECTIVELY. HEDGEYE 42

43 CASE STUDY: U.S. DOLLAR INDEX SOMEWHAT IRONICALLY, THE DOLLAR TENDS TO WEAKEN ONCE RATE HIKES COMMENCE; THIS IS LIKELY DUE TO ITS FRONT-RUNNING NATURE. 15% 12/16/1986 3/29/1988 2/4/1994 6/30/1999 6/30/2004 Median 8.6% 7.6% 10.6% 10.5% 5% -5% -4.7% 2.5% 2.1% 2.1% 2.6% 2.3% 1.7% 1.7% 0.2% 0.4% 0.8% 0.2% 0.3% 0.2% -0.1% -1.8% 1.3% 0.3% -1.6% -1.6% % -4.5% -4.2% -4.2% % 0.3% 0.3% % % -9.1% -6.9% -9.3% -6.9% -8.8% -15% - t ₆ t ₃ t ₁ t₁ t₃ t₆ t₁₂ -18.1%. PERFORMANCE AS OF PRECEDING 6MO, 3MO, 1MO, AND SUBSEQUENT 1MO, 3MO, 6MO AND 12MO. HEDGEYE 43

44 CASE STUDY: S&P 500 INDEX THE STOCK MARKET TENDS TO DECLINE IMMEDIATELY AFTER THE INITIAL RATE HIKE, BUT ALMOST ALWAYS RECOVERS SIX AND 12 MONTHS LATER. 25% 12/16/1986 3/29/1988 2/4/1994 6/30/1999 6/30/2004 Median 21.9% 15% 11.4% 15.3% 12.4% 5% -5% 1.6% 4.7% 2.8% 2.8% 7.9% 6.3% 5.5% 5.5% 5.4% 2.7% 2.3% 1.2% 0.6% 1.8% 1.8% -2.9% 6.5% 0.5% -1.1% -1.1% -3.2% -3.4% 4.2% -3.9% -2.3% -2.3% 6.7% 6.4% 6.4% 4.8% -2.4% -0.8% % 4.4% 1.9% % -15% % -25% t ₆ t ₃ t ₁ t₁ t₃ t₆ t₁₂. PERFORMANCE AS OF PRECEDING 6MO, 3MO, 1MO, AND SUBSEQUENT 1MO, 3MO, 6MO AND 12MO. HEDGEYE 44

45 CASE STUDY: 10Y TREASURY YIELD 200bps LONG-TERM RATES TEND TO RISE DRAMATICALLY FOLLOWING THE FIRST RATE HIKE WITH THE NOTABLE EXCEPTION OF THE LAST TIGHTENING CYCLE; AS SUCH, THERE IS HISTORICAL PRECEDENT FOR SPREAD COMPRESSION DURING AN EPISODE OF MONETARY TIGHTENING. 12/16/1986 3/29/1988 2/4/1994 6/30/1999 6/30/2004 Median 190bps 163bps 150bps 114bps 125bps 124bps 115bps 100bps 50bps 0bps -50bps -55bps 0bps 32bps 0bps 69bps 59bps 18bps 18bps -27bps -37bps 38bps 16bps 4bps 4bps -7bps -15bps 49bps 36bps 12bps 12bps -9bps -11bps 9bps 29bps 10bps -46bps 10bps 59bps 59bps 40bps -33bps 78bps 25bps -67bps 78bps -100bps -113bps -150bps t ₆ t ₃ t ₁ t₁ t₃ t₆ t₁₂. PERFORMANCE AS OF PRECEDING 6MO, 3MO, 1MO, AND SUBSEQUENT 1MO, 3MO, 6MO AND 12MO. HEDGEYE 45

46 CASE STUDY: CRUDE OIL THE FLIP SIDE OF THE USD FRONT-RUNNING THE RATE HIKES AND THEN SUBSEQUENTLY TRADING LOWER ARE CRUDE OIL PRICES TENDING TO REBOUND AFTER TIGHTENING HAS COMMENCED. 8 12/16/1986 3/29/1988 2/4/1994 6/30/1999 6/30/2004 Median % 68.5% % 52.5% % % 21.8% 5.3% -5.7% -10.2% -13.5% 2.5% -5.7% % 6.7% 3.4% % -0.9% -4.7% % 32.6% 27.1% 29.2% 29.2% 27.5% 10.5% 11.3% 8.9% 11.3% -5.2% 23.4% 13.4% 21.1% 23.4% -3 t ₆ t ₃ t ₁ t₁ t₃ t₆ t₁₂. PERFORMANCE AS OF PRECEDING 6MO, 3MO, 1MO, AND SUBSEQUENT 1MO, 3MO, 6MO AND 12MO. HEDGEYE 46

47 CASE STUDY: GOLD THE PRICE OF GOLD TENDS TO PERFORM IN A SIMILAR MANNER AS CRUDE OIL IN/AROUND MONETARY TIGHTENING CYCLES ALSO LIKELY DUE TO THE TENDENCY OF SUBSEQUENT U.S. DOLLAR DEPRECIATION. 25% 12/16/1986 3/29/1988 2/4/1994 6/30/1999 6/30/2004 Median 23.7% 15% 15.9% 13.8% 15.2% 5% 3.8% 6.7% 5.7% 3.5% 6.1% 3.5% 11.1% 9.7% 9.7% 10.3% 10.5% 10.3% -5% % -8.6% -5.8% -5.5% % -5.8% -3.7% 0.2% -1.9% -1.3% -0.8% -1.9% -1.3% -2.9% -2.4% -2.5% -2.4% -2.1% -4.7% -2.6% -15% - t ₆ t ₃ t ₁ t₁ t₃ t₆ t₁₂ -12.4% -15.8%. PERFORMANCE AS OF PRECEDING 6MO, 3MO, 1MO, AND SUBSEQUENT 1MO, 3MO, 6MO AND 12MO. HEDGEYE 47

48 GLOBAL GROWTH & INFLATION TRENDS

49 WORLD G.I.P. MODEL HEDGEYE 49

50 EUROZONE G.I.P. MODEL HEDGEYE 50

51 CHINA G.I.P. MODEL HEDGEYE 51

52 JAPAN G.I.P. MODEL HEDGEYE 52

53 GLOBAL PMI SUMMARY OLD FORMAT = $800/SQUARE FT JPMorgan Global Manufacturing PMI SA NEW FORMAT = $1,300 SQ FT JPMorgan Global Services PMI SA Percentile of Latest Monthly Reading (Trailing 3Y Basis; lhs) Percentile of Latest Monthly Reading (Trailing 3Y Basis; lhs) Quarterly Average: 2Q15 to 3Q15 (rhs) Quarterly Average: 2Q15 to 3Q15 (rhs) % % Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) 50.9 Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) 53.3 HEDGEYE 53

54 GLOBAL COMPOSITE PMI ACCELERATED SEQUENTIALLY IN JULY, BUT SLOWING ON A TRENDING BASIS 3Q15 IS OFF TO A BAD START JPMorgan Global Composite PMI SA 10 Percentile of Latest Monthly Reading (Trailing 3Y Basis; lhs) Quarterly Average: 2Q15 to 3Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) 53.0 HEDGEYE 54

55 GLOBAL ECON SURPRISE INDEX ON BALANCE, GLOBAL GROWTH DATA IS SURPRISING TO THE UPSIDE AT AN ACCELERATING RATE ON A SEQUENTIAL BASIS AND SURPRISING TO THE DOWNSIDE AT AN ACCELERATING RATE ON A TRENDING AND QUARTERLY AVERAGE BASIS. Merrill Lynch Economic Surprise Index - Global (Monthly Average) 10 Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) Quarterly Average: 2Q15 to 3Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (AUG) HEDGEYE 55

56 DEVELOPED MARKETS PMI SUMMARY OLD FORMAT = $800/SQUARE FT Markit Developed Markets Manufacturing PMI SA NEW FORMAT = $1,300 SQ FT Markit Developed Markets Services PMI Business Activity SA Percentile of Latest Monthly Reading (Trailing 3Y Basis; lhs) Percentile of Latest Monthly Reading (Trailing 3Y Basis; lhs) Quarterly Average: 2Q15 to 3Q15 (rhs) Quarterly Average: 2Q15 to 3Q15 (rhs) % % Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) 52.1 Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) 54.3 HEDGEYE 56

57 DEVELOPED MARKETS COMPOSITE PMI ACCELERATED SEQUENTIALLY IN JULY, BUT SLOWING ON A TRENDING BASIS 3Q15 IS OFF TO A BAD START Markit Developed Markets Composite PMI SA 10 Percentile of Latest Monthly Reading (Trailing 3Y Basis; lhs) Quarterly Average: 2Q15 to 3Q15 (rhs) Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) HEDGEYE 57

58 DM ECON SURPRISE INDEX ON BALANCE, G-10 GROWTH DATA IS SURPRISING TO THE UPSIDE AT AN ACCELERATING RATE ON A SEQUENTIAL, TRENDING AND QUARTERLY AVERAGE BASIS. Citigroup Economic Surprise Index - Major Economies (Monthly Average) 10 Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) Quarterly Average: 2Q15 to 3Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (AUG) HEDGEYE 58

59 EMERGING MARKETS PMI SUMMARY OLD FORMAT = $800/SQUARE FT Markit Emerging Markets Manufacturing PMI SA NEW FORMAT = $1,300 SQ FT Markit Emerging Markets Services PMI SA Percentile of Latest Monthly Reading (Trailing 3Y Basis; lhs) Percentile of Latest Monthly Reading (Trailing 3Y Basis; lhs) Quarterly Average: 2Q15 to 3Q15 (rhs) Quarterly Average: 2Q15 to 3Q15 (rhs) % % Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) 48.8 Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) 48.5 HEDGEYE 59

60 EMERGING MARKETS COMPOSITE PMI ACCELERATED SEQUENTIALLY IN JULY, BUT SLOWING ON A TRENDING BASIS 3Q15 IS OFF TO A BAD START Markit Emerging Markets Composite PMI SA 10 Percentile of Latest Monthly Reading (Trailing 3Y Basis; lhs) Quarterly Average: 2Q15 to 3Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) 49.4 HEDGEYE 60

61 EM ECON SURPRISE INDEX ON BALANCE, EMERGING MARKET GROWTH DATA IS SURPRISING TO THE DOWNSIDE AT A DECELERATING RATE ON A SEQUENTIAL, TRENDING AND QUARTERLY AVERAGE BASIS. Citigroup Economic Surprise Index - Emerging Markets (Monthly Average) 10 Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) Quarterly Average: 2Q15 to 3Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (AUG) HEDGEYE 61

62 EUROZONE PMI SUMMARY OLD FORMAT = $800/SQUARE FT Markit Eurozone Manufacturing PMI SA NEW FORMAT = $1,300 SQ FT Markit Eurozone Services PMI SA Percentile of Latest Monthly Reading (Trailing 3Y Basis; lhs) Percentile of Latest Monthly Reading (Trailing 3Y Basis; lhs) Quarterly Average: 2Q15 to 3Q15 (rhs) Quarterly Average: 2Q15 to 3Q15 (rhs) % % Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) 52.1 Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) 53.8 HEDGEYE 62

63 EUROZONE COMPOSITE PMI SLOWED SEQUENTIALLY IN JULY, BUT FLAT ON A TRENDING BASIS 3Q15 IS OFF TO A LACKLUSTER START Markit Eurozone Composite PMI SA 10 Percentile of Latest Monthly Reading (Trailing 3Y Basis; lhs) Quarterly Average: 2Q15 to 3Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) HEDGEYE 63

64 EUROZONE ECON SURPRISE INDEX ON BALANCE, EUROZONE GROWTH DATA IS SURPRISING TO THE UPSIDE AT AN ACCELERATING RATE ON A SEQUENTIAL AND TRENDING BASIS AND SURPRISING TO THE UPSIDE AT A DECELERATING RATE ON A QUARTERLY AVERAGE BASIS. Citigroup Economic Surprise Index - Eurozone (Monthly Average) 10 9 Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) 16.9 Quarterly Average: 2Q15 to 3Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (AUG) -4.0 HEDGEYE 64

65 CHINA PMI SUMMARY OLD FORMAT = $800/SQUARE FT Caixin China Manufacturing PMI SA NEW FORMAT = $1,300 SQ FT Caixin China Services PMI Business Activity SA Percentile of Latest Monthly Reading (Trailing 3Y Basis; lhs) Percentile of Latest Monthly Reading (Trailing 3Y Basis; lhs) Quarterly Average: 2Q15 to 3Q15 (rhs) Quarterly Average: 2Q15 to 3Q15 (rhs) % % Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) 47.0 Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) 50.5 HEDGEYE 65

66 CHINA COMPOSITE PMI SLOWING ON A SEQUENTIAL AND TRENDING BASIS 3Q15 IS OFF TO A BAD START Caixin China Composite PMI Output SA 10 Percentile of Latest Monthly Reading (Trailing 3Y Basis; lhs) Quarterly Average: 2Q15 to 3Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) 50.0 HEDGEYE 66

67 CHINA ECON SURPRISE INDEX ON BALANCE, CHINESE GROWTH DATA IS SURPRISING TO THE DOWNSIDE AT A DECELERATING RATE ON A SEQUENTIAL, TRENDING AND QUARTERLY AVERAGE BASIS. Citigroup Economic Surprise Index - China (Monthly Average) 10 Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) Quarterly Average: 2Q15 to 3Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (AUG) HEDGEYE 67

68 JAPAN PMI SUMMARY OLD FORMAT = $800/SQUARE FT Nikkei Japan Manufacturing PMI SA NEW FORMAT = $1,300 SQ FT Nikkei Japan Services PMI Business Activity SA Percentile of Latest Monthly Reading (Trailing 3Y Basis; lhs) Percentile of Latest Monthly Reading (Trailing 3Y Basis; lhs) Quarterly Average: 2Q15 to 3Q15 (rhs) Quarterly Average: 2Q15 to 3Q15 (rhs) % % Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) 49.4 Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) 50.9 HEDGEYE 68

69 JAPAN COMPOSITE PMI FLAT SEQUENTIALLY, BUT ACCELERATING ON A TRENDING BASIS 3Q15 IS OFF TO A GOOD START Nikkei Japan Composite PMI Output SA 10 Percentile of Latest Monthly Reading (Trailing 3Y Basis; lhs) Quarterly Average: 2Q15 to 3Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) 51.2 HEDGEYE 69

70 JAPAN ECON SURPRISE INDEX ON BALANCE, JAPANESE GROWTH DATA IS SURPRISING TO THE UPSIDE AT AN DECELERATING RATE ON A SEQUENTIAL BASIS AND SURPRISING TO THE UPSIDE AT AN ACCELERATING RATE ON A TRENDING AND QUARTERLY AVERAGE BASIS. Citigroup Economic Surprise - Japan (Monthly Average) 10 Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) 95% Quarterly Average: 2Q15 to 3Q15 (rhs) Percentile of Latest Monthly Reading Previous Value Latest Value (AUG) 0.0 HEDGEYE 70

71 GLOBAL CONSUMER PRICE INFLATION SLOWING ON A SEQUENTIAL AND TRENDING BASIS IMF World CPI YoY % Change 10 Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) Quarterly Average: 1Q15 to 2Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (JUN) 2.54 HEDGEYE 71

72 GLOBAL INFLATION SURPRISE INDEX ON BALANCE, GLOBAL INFLATION DATA IS SURPRISING TO THE DOWNSIDE AT AN ACCELERATING RATE ON A SEQUENTIAL, TRENDING AND QUARTERLY AVERAGE BASIS. Merrill Lynch Economic Surprise Index - Global CPI (Monthly Average) 10 9 Percentile of Latest Monthly Reading (Trailing 10Y Basis; lhs) Quarterly Average: 2Q15 to 3Q15 (rhs) % Percentile of Latest Monthly Reading Previous Value Latest Value (JUL) HEDGEYE 72

73 G-20 INFLATION MONITOR THERE EXISTS A CONSIDERABLE DIVERGENCE BETWEEN DEVELOPED MARKET INFLATION RATES (SOMEWHAT DUE TO #SECULARSTAGNATION) AND EMERGING MARKET INFLATION RATES (LARGELY DUE TO ACCELERATED CURRENCY DEPRECIATION). TTM Average Trailing 3M Average Latest Print Australia 1.6% Brazil 9.6% Canada 1. China 1.6% European Union 0.2% France 0.2% Germany 0.2% India 3.8% Indonesia 7.3% Italy 0.2% Japan 0.4% Mexico 2.7% Russia 15.6% Saudi Arabia 2.2% South Africa 5. South Korea 0.7% Turkey 6.8% United Kingdom 0.1% United States 0.2% G-20 MEDIAN 1.6% 2% 4% 6% 8% 12% 14% 16% 18% HEDGEYE 73

74 GLOBAL INFLATION MODEL OUR PROPRIETARY INFLATION MODEL IMPLIES FURTHER DOWNSIDE HERE IN 3Q15, AS WELL AS AN INFLECTION IN 4Q Thomson Reuters/CoreCommodity CRB Commodities Index, Monthly Average YoY Median YoY CPI Reading of U.S., Eurozone, China and Japan (rhs) % % % % % % % % YoY deltas are calculated from monthly averages. Forward estimates assume no change to current monthly averages. HEDGEYE 74

75 G-3 INFLATION EXPECTATIONS THE CURRENT WORLDWIDE DECLINE IN INFLATION EXPECTATIONS IS MIMICKING THE DECLINE WE SAW IN 2H14. 10Y Breakeven Rates 2.3% U.S. Japan Germany France Italy Spain Eurozone Average Fed/ECB/BoJ Target = 2% 2.1% 1.9% 1.7% 1.5% % 1.3% 1.1% 0.9% % 0.7% 0.5% HEDGEYE 75

76 POPULATION GROWTH SLOWING GLOBAL POPULATION GROWTH IS DECELERATING AT ITS FASTEST RATE SINCE THE EARLY-TO-MID-1990S. BASED ON HISTORICAL PRECEDENT, ANOTHER LEG DOWN IN GLOBAL GROWTH IS LIKELY TO FOLLOW. 1.88% 1.78% 1.68% 1.58% 1.48% 1.38% 1.28% 1.18% 1.08% 0.98% 1.85% 1.82% 1.84% 1.84% % World Total Population; YoY % Change World GDP (PPP); Trailing 5Y CAGR Linear (World GDP (PPP); Trailing 5Y CAGR) 1.76% 1.66% 6.9% 6.8% 7.1% % 1.59% 7.8% 1.53% 7.2% % 1.43% 1.38% 1.33% % 1.26% 5.8% 1.25% 1.24% 1.23% 5.6% 5.5% 1.22% 1.22% 5.4% 1.21% 1.21% 1.21% % 5.3% 1.19% 1.18% 5.3% 5.2% 1.17% % 6.2% 7.1% 7.9% 7.6% 6.1% 4.6% 4.6% 5.5% 1.16% 1.14% 1.12% 1.09% 1.07% 1.05% 1.02% % % % % % 4. DATA SOURCE: OECD HEDGEYE 76

77 POPULATION AGEING ACCELERATING PEELING BACK THE CURTAINS FURTHER, OUR ANALYSIS SHOWS THE WORLD S KEY ECONOMIES ARE AGING AT THEIR FASTEST RATES EVER. ACADEMIC STUDIES HAVE SHOWN THAT AGING IS SIGNIFICANTLY AND INVERSELY CORRELATED TO GDP GROWTH AND INFLATION. left axis: 65+ Year-Olds as a % of the Working-Age Population (15-64); YoY bps Change right axis: Aggregated Ratio 220bps 200bps 180bps 160bps 140bps 120bps 100bps 80bps 60bps 40bps 20bps 0bps -20bps 139bps 20.3% 127bps 126bps 131bps 131bps 19.6% 120bps 117bps 110bps 18.9% 103bps 102bps 18.4% 97bps 87bps 88bps 89bps 90bps 17.8% 83bps 78bps 79bps 81bps 77bps 17.4% 75bps 72bps 67bps 64bps 64bps 65bps 68bps 64bps 67bps 70bps 72bps 74bps 75bps 80bps 75bps 77bps 73bps 16.7% bps 16.5% 64bps 60bps 61bps 61bps 59bps 57bps 57bps 58bps 61bps 16.2% 49bps 47bps 48bps 51bps 51bps 39bps 39bps 40bps 41bps 40bps 33bps 31bps 17bps 19bps 25bps 30bps 26bps 28bps 28bps 18bps 23bps 25bps 24bps 27bps 27bps 28bps 29bps 31bps 29bps 24bps 26bps 26bps 19bps 22bps 25bps 29bps 30bps 30bps 26bps 27bps 31bps 28bps 31bps 28bps 22bps 24bps 13bps 15bps 14bps 9bps 10bps 5bps 0bps 4bps 6bps 10bps 11bps 12bps 13bps 14bps 16bps 16bps 15bps 12bps 14bps 8bps 11bps 9bps 8bps 9bps 9bps 10bps 12bps 16bps 21bps 22bps 25bps 31bps 14.7% 14.9% % 15.3% 15.4% 15.5% 15.6% 15.7% 15.9% 16.1% 14.5% 14.4% 14.2% % 13.7% 2bps 0bps 0bps 4bps 13.1% 13.2% 13.2% 13.3% 13.4% 13.5% 0bps -1bps U.S. E.U. Japan China Total -4bps -14bps -15bps -16bps -11bps -12bps -10bps -2bps -5bps 183bps 197bps 214bps 168bps 21.1% 21.8% 22.5% 24% 23% 22% 21% 19% 18% 17% 16% 15% 14% 13% 12% DATA SOURCE: OECD HEDGEYE 77

78 CONSUMPTION HEADWINDS IN ADDITION TO THE PROBLEM OF HYPER-AGING, THE CORE END-CONSUMPTION DEMOGRAPHIC FROM EACH OF THESE KEY ECONOMIES IS NOW CONTRACTING Year-Old Population; YoY % Change % % 2.8% 2.7% 2.5% U.S. E.U. Japan China Total 2.7% 2.6% 2.6% 2.5% 2.5% 2.5% 2.25% % 2.3% 2.2% 2.2% 2.1% 2.2% 2.3% 2.2% 2.2% % 1.8% % 1.25% 1.3% % % 0.8% 0.7% 0.4% 0.2% 0.2% % 0.1% % -0.2% -0.2% -0.1% 0. DATA SOURCE: OECD HEDGEYE 78

79 CONSUMPTION HEADWINDS BOTH INTUITIVELY AND EMPIRICALLY SPEAKING, YEAR-OLDS ARE THE PEAK SPENDERS. U.S. Average Annual Disposable Income by Age Bracket Poly. (U.S. Average Annual Disposable Income by Age Bracket) U.S. Average Annual Expendiutres by Age Bracket Poly. (U.S. Average Annual Expendiutres by Age Bracket) $70,000 $69,152 $68,048 $65,000 $60,000 $55,000 $53,178 $58,784 $60,524 $63,312 $55,892 $50,000 $48,087 $48,742 $46,757 $45,000 $40,000 $35,000 $30,000 $25,000 $26,559 $30,373 $34,382 $32,744 $20,000 Under 25 Years-Old Years Old Years Old Years Old Years Old Years Old 75+ Years-Old DATA SOURCE: BLS 2013 CONSUMER EXPENDITURE SURVEY HEDGEYE 79

80 THEMATIC INVESTMENT CONCLUSIONS

81 QUANT SIGNALS: TACRM KEY TAKEAWAYS: OUR TACTICAL ASSET CLASS ROTATION MODEL (TACRM) CONTINUES TO BE DYNAMITE AT PROSPECTIVELY SIGNALING MEANINGFUL INFLECTIONS IN PERFORMANCE AT THE PRIMARY ASSET CLASS LEVEL. IT S LATEST TWO SIGNALS (SELL U.S. EQUITIES AND SELL INTERNATIONAL EQUITIES) LOOK INCREASINGLY APPROPRIATE BY THE DAY BARRING OBVIOUS IMMEDIATE-TERM SHORT SQUEEZES. THE SIGNALS PRIOR TO THAT SPECIFICALLY SELL FOREIGN EXCHANGE, SELL COMMODITIES AND SELL EMERGING MARKET EQUITIES APPEAR EQUALLY AS PRESCIENT... WITH TACRM SIGNALING TO REDUCE EXPOSURE TO ALL SIX PRIMARY ASSET CLASSES, THE ONLY THING FOR INVESTORS TO DO IS RAISE CASH ALTHOUGH THE SELL SIGNAL ON DOMESTIC FIXED INCOME, CREDIT & EQUITY YIELD PLAYS COULD BE SIDESTEPPED BY DEFT FACTOR EXPOSURE SELECTION (I.E. LONG TREASURIES, UTES AND REITS VS. SHORT HIGH-YIELD CREDIT WHICH SHOULD CONTINUE TO SEE PRICE DEGRADATION IF THE FED HIKES RATES INTO A DOMESTIC AND GLOBAL ECONOMIC SLOWDOWN). IF YOUR MANDATE CALLS FOR YOU TO REMAIN LONG OF U.S. EQUITIES, WE CONTINUE TO LIKE HEALTHCARE, HOUSING AND UTILITIES ON THE LONG SIDE OF SECTOR EXPOSURES AND LOW-BETA AND LOW-LEVERAGE ON THE LONG SIDE OF STYLE FACTOR EXPOSURES. ***CLICK ON THE FOLLOWING LINK TO DOWNLOAD THE FULL TACRM PRESENTATION: HEDGEYE 81

82 WHY DOES THE 2 ND DERIVATIVE MATTER? BECAUSE FINANCIAL ASSET RETURNS HAVE HISTORICALLY ANCHORED ON THE MARGINAL RATE OF CHANGE IN BOTH GROWTH AND INFLATION ESPECIALLY WHEN THESE DELTAS ARE COUNTER TO CONSENSUS EXPECTATIONS. ; THE AVERAGE QUARTERLY RETURN DATA IS WEIGHTED BY DELTA INTO RESPECTIVE QUADRANT HEDGEYE 82

83 LONG: TREASURY BONDS & UTES OLD FORMAT = $800/SQUARE FT NEW FORMAT = $1,300 SQ FT HEDGEYE 83

84 LONG: HEALTHCARE & HOUSING OLD FORMAT = $800/SQUARE FT NEW FORMAT = $1,300 SQ FT HEDGEYE 84

85 LONG: JAPAN / SHORT: SPAIN OLD FORMAT = $800/SQUARE FT LONG JAPAN THESIS REVIEW: Abenomics Round II: Risk Is GROSSLY Mispriced (12/15/14) Japan Economic Update: Win-Win-Win? (4/23/15) Buy the Dip in Japan (4/30/15) NEW FORMAT = $1,300 SQ FT SHORT SPAIN THESIS REVIEW: Q3 Macro Theme: #EuropeSlowing (7/7/15) *CLICK ON THE HYPERLINKS ABOVE TO ACCESS THE RELATED MATERIALS HEDGEYE 85

86 SHORT: SPY & EURO OLD FORMAT = $800/SQUARE FT NEW FORMAT = $1,300 SQ FT HEDGEYE 86

87 SHORT: RETAILERS & INDUSTRIALS OLD FORMAT = $800/SQUARE FT NEW FORMAT = $1,300 SQ FT HEDGEYE 87

88 THEMATIC INVESTMENT CONCLUSIONS ; PERFORMANCE OF ACTIVE IDEAS THROUGH 8/18/15 CLOSE HEDGEYE 88

89 For more information contact: