• Bull.




Dear ETF Pro Plus Subscriber,

Welcome back!

The current lineup of ETFs is as follows:



ETF Pro Plus: September Update (Q3 2023) - 08.31.2023 long healthcare cartoon


Quick updates:

  • Even if you flipped your macro awareness toggle over to "passive summer" mode, it would be challenging to be wholly unaware of the US economy's deceleratory onslaught:  

    • Fed Regional Surveys (Mfg & Services) for August-to-date worsened (also accompanied by a liberal side of stagflationary price increase).
    • MBA Purchase Apps notched a fresh 28-year low.
    • The S&P (Markit) Services Surveys for August saw the MFG PMI fall -2 pts to 49, the Services PMI fall -1.3 pts to 51 with the Composite PMI now flirting with contraction at 50.4.
    • The BLS released its preliminary benchmark revision for the 12 months ending in March. It was meaningfully (but not alarmingly) negative at -306K (Total) and -358K (Private).

    In other words, all’s well that ends well … where "well" effectively means ubiquitous deterioration in the high-frequency data such that bonds catch a bid and "higher forever" (structurally higher r*) and/or (over) Jerome Powell's hawkish tone at Jackson Hole can be plausibly decremented.

  • The start of 3Q was the beneficiary of the confluence of peak AI euphoria, "Barbenheimer," concerts (Taylor Swift et al), sub-7% mortgage rates and an inflection in homebuilder activity, a local trough in gas prices, a local peak in equity prices … and a notable drawdown in the savings rate.

    Each of those are either "non-recurring" or now going the other way.

    • (real) Spending = +0.57% M/M = accelerating +60bps to +3.01% Y/Y. The increase was broad based with Services/Durables/Nondurables all accelerating sequentially on a year-over-year basis.
    • Aggregate Private Sector Wage Growth (i.e. "organic consumption capacity") = decelerated -130bps to +4.6% Y/Y. Personal Income and Disposable Personal Income growth decelerated similarly.
    • Savings Rate = -80bps M/M (flat Y/Y) to 3.5% … so, a material support to sequential spending growth and largely equivocal on a 12-month basis.   
    • Luxury Consumption: Still no mojo across the luxury/high end discretionary consumption proxy = -8.3% Y/Y  and negative for a 10th consecutive month despite progressively easier comps

    It’s probably worth a quick re-reminder here that outside of the most severe recessions, consumption growth rarely actually ever goes negative – it’s business investment, inventories and the Trade balance that are the principal drivers of the slowdown in headline GDP. 

    The consumer squeeze and flow through of tighter credit conditions will continue to intensify as will the lagged impact of rates as maturities hit and debt needs to get rolled into slowing topline and sticky input cost conditions.

  • A ridiculous MSM story last week argued that $1 trillion of U.S. consumer credit card debt is a positive sign for U.S. consumers. Common sense would indicate people paying off their credit cards is a good thing – not taking on more and more debt, particularly when interest rates are as high as they are. 

    “The interest rate on a credit card is above 20%. Going back to the 1990s, the peak was 16%, not 21-23%. U.S. consumers are tapped out,” Keith McCullough says. 

    For the first time in over a decade, people didn’t pay off credit card debt going from 4Q 2022 to 1Q 2023. Things didn’t get any better in 2Q. 30+ day delinquency rates for Capital OneSynchrony and Discover all increased from June 2022 to May 2023. 

    “Wait until we get the June, July and August numbers. It’s going to be terrible,” McCullough adds.

Below is the summary of theme #1 from our 3Q23 Quarterly Macro Themes:

We’re now slouching into month 20 of global/local macro deceleration, and the slope of the macro lines that matter remains negative. The Manufacturing economy is contractionary, Services is in discrete deceleration, credit availability is in conspicuous contraction, commodities & industrial metals are making lower lows, Europe is back to recessionary prints and the failed China re-opening catalyst has already pivoted to outright cuts & incremental stimulus.

We continue to think Quad 4 credit risk will simmer and have detailed the consumer, labor & profit cycle implications associated with the cycle progressively transitioning from tethering to income/savings towards a more conventional tether to policy/credit at the same time that residual excess savings face exhaustion, income/discretionary consumption shocks (student loan repayments) lurk in queue and further fed tightening reflexively amplifies the macro deceleration.

ETF Pro Plus: September Update (Q3 2023) - download

ETF Pro Plus: September Update (Q3 2023) - 2023 09 06 13 56 56 

ETF Pro Plus: September Update (Q3 2023) - Picture3


Quick updates:

  • Monday’s September Eurozone Sentix Economic Index slowed to -21.5, versus -18.9 in August
    • Current Situation score falls to the lowest level since September 2022
    • German was particularly weak in this survey coming in at -33.1, with Current Situation at the lowest level since July 2020 (depths of the pandemic)
  • Similar to recent Manufacturing PMIs, August European Services PMIs basically slowed sequentially across the board. The key takeaway here is that ALL Services PMIs in Europe were contractionary (sub-50) in August.
    • Spain Services PMI slowed to 49.3, from 52.8
    • Italy Services PMI slowed to 49.8, from 51.5
    • France Services PMI slowed to 46.0, from 47.1
    • Germany Services PMI was flat at 47.3
    • Eurozone aggregate Services PMI slowed to 47.9, from 48.3
  • Big deceleration in Eurozone July PPI, which came in at -7.6% Y/Y, versus the prior reading at -3.4%
    • Lowest level in roughly 15 years, BUT this compares to +35% from a year ago ... so on a two-year basis PPI is still up some +~27%...
  • Taken in aggregate, it wouldn’t surprise us to see increased dovish commentary out of the ECB after today’s data ...
  • Finally, we had a fairly big deceleration in August China Caixin Services PMI coming in at 51.8, versus 54.1 in July 

Below is the summary of theme #2 from our 3Q23 Quarterly Macro Themes:

This time is different – the Chinese economic engine won’t be bailing out global growth as it did in the Post-GFC period. The promise of a great Chinese reopening has underdelivered, and the developed market consumption shift from goods to services has additionally weighed on Chinese manufacturing activity. Nowhere is this story told better than in the steady YTD downtrend across industrial metals, with recent easing in Chinese monetary policy further confirming this dynamic.

Meanwhile, the European continent, having been spared from an energy crisis this past winter, is increasingly under the weight of elevated inflation, torpid manufacturing activity, tightening credit conditions, and renewed central bank hawkishness. More broadly, the confluence of weakening global demand concentrated, for now, within the goods economy and the new cost-of-capital reality terrorizing Capex plans worldwide; the #Quad4 industrial recession remains a persisting reality.

ETF Pro Plus: September Update (Q3 2023) - euro

ETF Pro Plus: September Update (Q3 2023) - china 


Quick updates:

  • Japan (Nikkei) was up another +0.6% overnight (now up +3% for the month and +17% the past 6 months). Compare that to our broad basket US Stocks Short (Russell) -2.1% yesterday and the SPY (82% of stocks DOWN with an AVG decline of -1.62% on the day).

Below is the summary of theme #3 from our 3Q23 Quarterly Macro Themes:

With growth expected to land in the top-half of the Quad Matrix (accelerating) over the next two quarters for each of these three geographies and with the signal incrementally confirming this trajectory, we are favoring foreign equity exposures in Japan, India, and South Korea.

Japan is enjoying comparatively moderate and decelerating inflation while monetary policy remains accommodative and domestic spending is expected to increase in the post-pandemic yolo fashion of other developed economies that had relaxed Covid era restrictions much earlier. India also enjoys a comparatively superior fundamental setup with buoyant domestic demand fueled by government spending, moderating commodity prices, and strong credit growth.

ETF Pro Plus: September Update (Q3 2023) - w2 


ETF Pro Plus: September Update (Q3 2023) - G20

ETF Pro Plus: September Update (Q3 2023) - Emerging

Best of luck out there,
Team Hedgeye

Below is an updated list of the 33 current ETF Pro Plus tickers. Keep reading for an overview of our thesis for each of these current ETFs, along with what we’ve added and removed since the last newsletter.

New users should definitely check out the Appendix for a brief primer on our Macro process and how we select (and remove) the exposures in ETF Pro PlusReview last month's edition of ETF Pro Plus.


ETF Pro Plus: September Update (Q3 2023) - bullish ETFs

ETF Pro Plus: September Update (Q3 2023) - bearish ETFs


ETF Pro Plus: September Update (Q3 2023) - ETFs added

ETF Pro Plus: September Update (Q3 2023) - ETFs removed


ETF Pro Plus: September Update (Q3 2023) - commodities

We're staying Long Precious Metals like Gold (GLD) because we understand that:

A) Longer-term Bond Yields eventually break-down alongside SLOWER DEMAND … and
B) Yield Curve Inversion has been near CYCLE LOWS recently on 10s minus 2s is just plain bearish economically

Furthermore, the correlation between the U.S. Dollar and Gold (which is typically an inverse correlation) has flipped to a positive correlation (meaning recently dollar up, Gold up). We'll continue to watch this.

We added Physical Gold (AAAU) on 3/21/2023 (just to make sure you're aware we like gold). Rounding out our long Precious Metals exposures we recently re-added Silver (SLV).

We added Gasoline (UGA) on 9/4/2023 as energy is ripping along with inflation acceleration heading into 4Q recession (starting in 3 weeks and already being priced in).


ETF Pro Plus: September Update (Q3 2023) - domestic equities 

We are staying short of Russell 2000 (IWM). High Beta, Secular and Cyclical Growth, and Leverage are among the worst performing Equity Style Factors in #Quad4 according to the backtest, and thus further cements our positioning.

CEO Keith McCullough has been talking about our short of FIRR (Financials, Industrials, Retail and Real Estate). All are elements of the FIRR and represented in ETF Pro. In the high-beta, cyclical arena we remain short Retail (XRT) given its backtest as a poor performer in both Quads 3 & 4. Other cyclical shorts that backtest poorly in oscillating #Quad3-4 that we remain short include Industrials (XLI), Regional Banks (KRE) and Real Estate (XLRE).

Short S&P 500 (SPY)? Yes.

We have added several more shorts in this teetering Quad environment. Telecom (XTL), Utilities (XLU), and Airlines (JETS) are set to underperform heading into an inflation acceleration environment due to our backtesting in the current Quad regime.

We've added two long exposures to offset the short side. Long exposures that traditionally work well in #Quad4 include Healthcare. We have two exposures on that front, including Simplify Health Care (PINK) and Health Care (XLV).


ETF Pro Plus: September Update (Q3 2023) - fixed income

We continue to like short High Yield Corporate Bonds (HYG) and High Yield Bonds (JNK) as beneficiaries of wider credit spreads amid a oscillating Quad 3-4 setup, which serve as the fulcrum points of our Short Credit bias.

  • While HYG and JNK are thematically similar in tracking below-investment grade corporate credit, there are a few slight different in their investment profiles
    • HYG has less BBB rated bonds and more BB, but also less B and less CCC rated bonds (HYG's quality is concentrated in the BB's, while JNK is a bit more spread across the credit spectrum)
    • HYG has a higher expense ratio
    • HYG is far more liquid (higher daily average volume)
    • HYG has a longer effective duration
    • HYG has over double the AUM

Yielding north of 5%, we recently added the US Treasury 3 Month (TBIL).


ETF Pro Plus: September Update (Q3 2023) - emerging equities

Keith's VASP is signaling bearish on Hong Kong (EWH), perhaps because of its proximity to China, but don't worry about the narrative here. EWH is bearish trend.

Another play on China's flagging economy that we added recently is China Real Estate (CHIR). They have seen an influx of negative data, from slowing manufacturing to the HIS Chinese real estate index being in negative territory. Current policies are restricting property purchases in Chinese cities outside of the top tier, raising concern throughout the property market.


ETF Pro Plus: September Update (Q3 2023) - currency

The recent addition of the US Dollar (UUP) comes with our thesis of getting long inflation. “If you can get one thing right, get the US Dollar right,” says Keith McCullough. Inflation's re-acceleration in this teetering #Quad3 environment cements our position as long dollar.


ETF Pro Plus: September Update (Q3 2023) - URA NLR

Recently, Keith's VASP signal has gone positive (i.e. "BULLISH" trend) on Uranium (URA) and Uranium+Nuclear Energy (NLR). Energy is ripping in the current Quad setup with inflation re-acceleration. Uranium has been up recently along with other energy allocations and remains a long position.


ETF Pro Plus: September Update (Q3 2023) - intl equities2

Japan (EWJ) is signaling bullish trend amid a #Quad1 setup between 3Q23 and 4Q23. We recently added Japan Small-Cap (SCJ), JPX-Nikkei 400 (JPXN) and Japan Value (EWJV) to capture this favorable VASP and Quad setup.

Domestic demand, business confidence and industrial production are accelerating in India (hence why we like tickers INDA and INDY) and we see that reflected in our forecast with #Quad2 predicted through end of year.

The European continent, having been spared from an energy crisis this past winter, is increasingly under the weight of elevated inflation, torpid manufacturing activity, tightening credit conditions, and renewed central bank hawkishness. More broadly, the confluence of weakening global demand concentrated, for now, within the goods economy and the new cost-of-capital reality terrorizing Capex plans worldwide; the #Quad4 industrial recession remains a persisting reality. In light of these economic realities we like France (EWQ), Finland (EFNL), Germany (EWG), and Austria (EWO).


No current high-conviction ideas.


We find two factors to be most consequential for forecasting future financial market returns: economic growth and inflation. We track both on a year-over-year rate of change basis to better understand the big picture then ask the fundamental question: Are growth and inflation heating up or cooling down?

From there, we get four possible outcomes, each of which is assigned a “quadrant” in our Growth, Inflation, Policy (GIP) model and the typical government response as a result (neutral, hawkish, in-a-box or dovish): Growth accelerating, Inflation slowing (QUAD 1); Growth accelerating, Inflation accelerating (QUAD 2); Growth slowing, Inflation accelerating (QUAD 3); Growth slowing, Inflation slowing (QUAD 4).

ETF Pro Plus: September Update (Q3 2023) - QuadSetup

After building this base of knowledge, we can now select what we like and don’t like based on our historical backtesting of the different asset classes that perform best in each of the four quadrants. The chart above shows the U.S. economy in #Quad1 in 3Q23 and #Quad4 in 4Q23. However, forecasts via our predictive tracking algorithm over a monthly periodicity, suggests the U.S. economy is more stagflationary. We expect August, September and October inflation reports coming in hot.

Below is a chart that lays out precisely what we like and don’t like when an economy is in each of the four quadrants. This chart should help you make better investment decisions, even outside our recommendations in ETF Pro Plus. (For more on our Macro team's overall research process, click here to read our detailed "Macro Playbook.")

ETF Pro Plus: September Update (Q3 2023) - QuadRegime