U.S. ECONOMIC UPDATE. MACRO February 5, 2014

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1 U.S. ECONOMIC UPDATE MACRO February 5, 2014

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 make investment recommendations. 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 1Q14 MACRO THEMES REVIEW #INFLATIONACCELERATING AND #GROWTHDIVERGENCES

4 INFLATION: ARE COMMODITIES BASING? 370 HEDGEYE QUANTITATIVE SETUP: COMMODITY COMPLEX CRB INDEX TREND = 278 TAIL = HEDGEYE 4

5 COMMODITY BASE EFFECT TAILWIND CPI READINGS SHOULD COME IN ~100+ BASIS POINTS HIGHER GLOBALLY OVER THE INTERMEDIATE TERM Thomson/Reuters CRB Commodities Index, Monthly Average YoY Compounded at +1% per Month From Here 50% Compounded at +3% per Month From Here Median YoY CPI Reading of US, Eurozone and China (rhs) 6% 40% 5% 30% 20% 4% 10% 3% 0% 2% -10% -20% -30% -40% -50% It s worth noting that 0% YoY for the CRB Index corresponds perfectly with +2% for our CPI sample and +2% is a common goal for Price Stability among central banks. 1% 0% -1% -2% Forecasts for the CRB Index assume no change to current prices unless otherwise noted. HEDGEYE 5

6 INFLATIONARY PRESSURES BUILDING 20.0% CPI COMPS EASE WHILE CAPACITY UTILIZATION, SERVICES INFLATION, WAGE AND CREDIT GROWTH ARE BEGINNING TO BREAKOUT Household Debt, YoY % Private Sector Salaries & Wages, 2Y Ave Capacity Utilization, 2Y Ave (RH Axis) CPI, 2Y Ave CPI: Services less Energy, 2Y Ave % % % % % 65 HEDGEYE 6

7 1.5x GDP: EASY COMPS VS. HARD COMPS Z-SCORE (TRAILING 3Y) OF SELECTED COMPARATIVE BASE (2Y COMP) FOR THE RESPECTIVE GDP REPORTING PERIOD 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 1.2x 1.0x 0.8x 1.0x 0.7x 0.9x 0.9x 0.9x 0.7x 0.5x 0.4x 0.4x 0.1x 0.2x 0.3x 0.5x 0.5x 0.5x 0.4x 0.4x 0.4x 0.3x 0.3x 0.2x 0.0x -0.5x -0.4x -0.2x -0.5x -0.6x -1.0x -1.5x -0.9x -1.2x -1.2x -1.4x -1.5x -1.5x -1.0x -1.1x -0.9x -0.9x -2.0x China Eurozone Germany Japan United Kingdom United States Data Source: Bloomberg HEDGEYE 7

8 US: QUADRANT #2 OR #3? HEDGEYE 8

9 HERE S THE UPDATE

10 SINCE OUR 1Q THEMES CALL: 1/9/ Commodity and Inflation Hedge Assets Are Rising While Consumption Levered Exposure Is Underperforming XLY Equity Thomson Reuters/Jefferies CRB Commodity Index HEDGEYE 10

11 COMMODITY INFLATION = RISING 288 Thomson Reuters/Jefferies CRB Commodity Index HEDGEYE 11

12 PRICES PAID = RISING ISM Prices Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 HEDGEYE 12

13 SLOW GROWTH OUTPEFORMING OLD FORMAT = $800/SQUARE FT NEW FORMAT = $1,300 SQ FT HEDGEYE 13

14 IN A CHART: SLOPE = WORSE HEDGEYE 14

15 YIELD SPREAD = COMPRESSING 270 Yield Spread (10Y Treasury Yield less 2Y Yield, Bps) HEDGEYE 15

16 ISM MFG NEW ORDERS = SLOWING ISM NEW ORDERS M/M CHANGE Dec '80, Jan '14, HEDGEYE 16

17 ISM SERVICES NEW ORDERS = SLOWING ISM SERVICES: NEW ORDERS July '09, 49.7 Dec '13, HEDGEYE 17

18 DURABLE GOODS = SLOWING 20.0% U.S. DURABLE GOODS ORDERS MoM % YoY % 2Y Ave 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 HEDGEYE 18

19 RETAIL SALES = SLOWING 6.0 ICSC US Retail Chain Store Sales Index SA, YoY % 4 per. Mov. Avg. (ICSC US Retail Chain Store Sales Index SA, YoY %) Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 HEDGEYE 19

20 CONSUMER TRENDS = SLOWING HEDGEYE 20

21 HOUSING DEMAND = SLOWING 230 MBA MORTGAGE PURCHASE APPLICATIONS % HEDGEYE 21

22 HOME PRICES = SLOWING 14.0% CORELOGIC HOME PRICE INDEX 12.0% Corelogic HPI, YoY % 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% (2.0%) (4.0%) Jan- 12 Feb- 12 Mar- 12 Apr- 12 May- 12 Jun- 12 Jul-12 Aug- 12 Sep- 12 Oct- 12 Nov- 12 Dec- 12 Jan- 13 Feb- 13 Mar- 13 Apr- 13 May- 13 Jun- 13 Jul-13 Aug- 13 Sep- 13 Oct- 13 Nov- 13 Dec- 13 Jan- 14 HEDGEYE 22

23 HEDGEYE QUANTITATIVE LEVELS

24 SPX: BEARISH TREND HEDGEYE QUANTITATIVE SETUP: S&P500 SPX INDEX TREND = HEDGEYE 24

25 VOLATILITY: BULLISH TREND 22 HEDGEYE QUANTITATIVE SETUP: VIX INDEX VIX Index TREND = HEDGEYE 25

26 THE DOLLAR: BEARISH TREND 85 HEDGEYE QUANTITATIVE SETUP: US DOLLAR INDEX DXY Curncy TREND = HEDGEYE 26

27 10Y TREASURY: BEARISH TREND 3.10 HEDGEYE QUANTITATIVE SETUP: 10Y TREASURY YIELD 10Y Treasury Yield TREND = HEDGEYE 27

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