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THE HEDGEYE MACRO PLAYBOOK

Takeaway: The Hedgeye Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes and noteworthy quantitative signals.

CLICK HERE to view the document. In today’s edition, we highlight:

 

  1.  Why investors should be raising cash
  2. For those investors who must remain fully invested, we highlight the rotation within Fixed Income & Yield Chasing to demonstrate how an investor may tilt their book in a defensive manner in preparation for continued #Quad4 deflation

 

Best of luck out there,

 

Darius Dale

Associate: Macro Team


MONDAY MORNING RISK MONITOR: DON'T GET COMPLACENT

Takeaway: The intermediate term trends remain mostly red (2 to 1) across the host of systemic risk factors we track.

Current Best Ideas:

 

MONDAY MORNING RISK MONITOR: DON'T GET COMPLACENT - 19 

 

Key Takeaway:

Last week we flagged a broader trend of rising risk across the Financials complex. There were 3 things that caught our eye. The first was high yield rates rising 36 bps w/w. The second was EU financial CDS widening sharply, especially in Russia. The third was the increase in domestic financial CDS, where 27 of 27 reference entities we track were higher w/w. This week, high yield has calmed down (-28 bps w/w), but remains higher on the month by 34 bps. EU financial CDS was unchanged on the week, but remains higher on the month. US financial CDS was actually better on the week (-3 bps), but remains +6 bps on the month. 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 12 improved / 1 out of 12 worsened / 6 of 12 unchanged

 • Intermediate-term(WoW): Negative / 3 of 12 improved / 6 out of 12 worsened / 3 of 12 unchanged

 • Long-term(WoW): Negative / 2 of 12 improved / 3 out of 12 worsened / 7 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: DON'T GET COMPLACENT - 15

 

1. U.S. Financial CDS -  Swaps tightened for 25 out of 27 domestic financial institutions. The US global banks were tighter by an average of 3 bps with JPM leading the way at -5 bps. In the consumer finance space, MTG & RDN were lower by 19 and 26 bps, respectively. 

 

Tightened the most WoW: ALL, RDN, AXP

Widened the most/ tightened the least WoW: CB, TRV, AON

Widened the least/ tightened the most WoW: MMC, LNC, HIG

Widened the most MoM: AGO, SLM, COF

 

MONDAY MORNING RISK MONITOR: DON'T GET COMPLACENT - 1

 

2. European Financial CDS - Swaps were mixed in Europe last week, but little changed overall. We've been keeping a close eye on Sberbank as our proxy for overall geopolitical risk. After rising steadily for several weeks, it cooled off notably this past week dropping 65 bps w/w to 315 bps. 

 

MONDAY MORNING RISK MONITOR: DON'T GET COMPLACENT - 2

 

3. Asian Financial CDS - Indian bank swaps tightened notably, while Japan and China were little changed.

 

MONDAY MORNING RISK MONITOR: DON'T GET COMPLACENT - 17

 

4. Sovereign CDS – Sovereign swaps were little changed on the week with most countries moving 0-1 bps. Portugal and Japan were the outliers at +3 bps each. 

 

MONDAY MORNING RISK MONITOR: DON'T GET COMPLACENT - 18

 

MONDAY MORNING RISK MONITOR: DON'T GET COMPLACENT - 3

 

MONDAY MORNING RISK MONITOR: DON'T GET COMPLACENT - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 27.6 bps last week, ending the week at 5.95% versus 6.23% the prior week.

 

MONDAY MORNING RISK MONITOR: DON'T GET COMPLACENT - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1866.

 

MONDAY MORNING RISK MONITOR: DON'T GET COMPLACENT - 6

 

7. TED Spread Monitor – The TED spread rose 0.3 basis points last week, ending the week at 22.3 bps this week versus last week’s print of 22.0 bps.

 

MONDAY MORNING RISK MONITOR: DON'T GET COMPLACENT - 7

 

8. CRB Commodity Price Index – The CRB index fell -1.4%, ending the week at 276 versus 280 the prior week. As compared with the prior month, commodity prices have decreased -4.3% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: DON'T GET COMPLACENT - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 2 bps to 11 bps.

 

MONDAY MORNING RISK MONITOR: DON'T GET COMPLACENT - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 15 basis points last week, ending the week at 2.53% versus last week’s print of 2.68%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: DON'T GET COMPLACENT - 10

 

11. Chinese Steel – Steel prices in China rose 0.2% last week, or 7 yuan/ton, to 2917 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: DON'T GET COMPLACENT - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 188 bps, -8 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: DON'T GET COMPLACENT - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.5% upside to TRADE resistance and 0.4% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: DON'T GET COMPLACENT - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Investing Ideas Newsletter

Takeaway: Current Investing Ideas: EDV, FXB, GLD, LM, OC, OZM, RH, TLT and XLP.

Below are Hedgeye analysts’ latest updates on our nine current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.

 

*Please note that we removed HCA Holdings (HCA) this week after a 72% gain.

 

We also feature two institutional research notes which offer valuable insight into the markets and economy.

Investing Ideas Newsletter     - II table

 

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

CARTOON OF THE WEEK

Investing Ideas Newsletter     - Super TLT cartoon 10.01.2014

IDEAS UPDATES

TLT | EDV | XLP

 #Winning

 

Yet another solid week for our recommended non-consensus slow-growth, yield-chasing trade (WoW performance):

  • TLT +1.4%
  • EDV +2.4%
  • XLP +0.6%

With the Russell 2000 down a full percent on the week, the market is clearly having a vote of no-confidence for consensus GDP estimates of +3%, per quarter, as far as the eye can see.

 

Investing Ideas Newsletter     - Consensus GDP Estimates

 

Perhaps that’s because growth slowed, on  the margin. Again. In fact, the Bloomberg US Economic Surprise Index actually dropped -45% WoW.

 

While the actual rate-of-change in the economic data was not nearly as dour, there were a number of key #GrowthSlowing data points that were supportive of our fundamental view:

  • Pending Home Sales: -4.1% YoY in AUG from -2.8% in JUL
  • Case-Shiller Home Price Index: 6.8% YoY in JUL from 8.1% in JUN
  • ISM Manufacturing PMI: 56.6 in SEP from 59 in AUG
  • Markit Manufacturing PMI: 57.5 in SEP from 57.9 in AUG
  • Construction Spending: 5% YoY in AUG from 6.9% in JUL
  • ISM Non-Manufacturing PMI: 58.6 in SEP from 59.6 in AUG
  • Markit US Services PMI: 58.9 in SEP from 59.5 in AUG

Now to be fair, PCE (AUG), Initial Jobless Claims and the Jobs Report (SEP) were quite good. In fact, the data was actually really good (per our US macro analyst Christian Drake):

  • “Consumer Spending accelerates as income growth remains strong and savings rate declines modestly from 18-month high.  This month we saw income growth hold just under last month’s highs but the savings rate ticked down, allowing consumption growth to accelerate. Spending improved across services, non-durables and durables, with durables again leading the pack.”
  • “Solid Report overall with private payrolls leading the gains (236k of the 248k). Growth accelerated in September on both a 1Y and 2Y basis across NFP & Private payrolls. The net two-month revision was +69k, which was not surprising. Looking back at historical revision trends August is almost always revised higher & generally with one of the largest magnitudes of any month. The unemployment rate gets a 5-handle as the LFPR ticks down again to another new multi-decade low.”
  • “The initial jobless claims data this morning is reasonably strong. SA rolling claims continue to trend lower, coming in just under 295k this week. The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -6.5% lower YoY, which is a sequential improvement versus the previous week's YoY change of -5.9%We're 7 months into the sub-330k claims environment. The last 2 cycles lasted 31 (2007) and 45 (2000) months before the market top.”

So net-net, there’s some good data and there’s some bad data. The problem with the good data is that the market appears to effectively pricing in its inevitable crescendo. And as long as it’s doing that, we’ll stick with what’s worked all year: long-duration paper and stocks that look like bonds.

FXB

Investing Ideas Newsletter     - Z. DAN GBP 

We’ve been offsides on our position in recent weeks, however resilient fundamentals continue to support our positioning and we view BOE policy (expectations around a rate hike) as hawkish compared to dovish intentions of the Fed and ECB.  For the week the GDP/USD was down -1.2%.

 

That said, the GBP/USD intermediate term TREND of $1.62 has been under attack, and the British have done little to support it.  We’re sticking with the position (strong UK = strong Pound) and watching  to see if/how the Fed acts to devalues the USD. We expect any shift in stance could show a strong mean reversion in the cross.

 

This week we got a mix of data out of the UK that weighed on the cross:

 

Bullish

  • Q2 Final GDP Q/Q revised up 10bps to 0.9%
  • UK Construction PMI 64.2 SEPT (exp. 63.5) vs 64.0 AUG
  • Lloyds Business Barometer 57 SEPT vs 47 AUG

 

Bearish

  • UK Services PMI 58.7 SEPT (exp. 59.0) vs 60.5 AUG
  • UK Composite PMI 57.4 SEPT (exp. 58.2) vs 59.3 AUG
  • UK GfK Consumer Confidence -1 SEPT (exp. 0) vs 1 AUG

 

BOE Minutes continue to show 2 votes (out of 9) to increase interest rates (by 25bps) from the Governing Council. We expect this marginally more hawkish tone taken together with the outperformance of UK growth over the US and Eurozone in 2014 to push the GBP/USD higher over the intermediate term. 

GLD 

We bought Gold on the oversold signal Friday morning after a pop in the ten-year yield and a big move in the dollar. Is the economy back after a slight beat from the jobless claims report (post-revision) as seen from the lens of the fed regime? We don’t believe so. Nor do we believe it makes for a material data point supporting the committee’s decision to taper.

  

Draghi has successfully induced a -10% devaluation in the Euro since his first round of rate cutting in the middle of Q2. With growth in the U.S. and European economies slowing at the same time, his relative dovishness has been a tailwind for the dollar (and thus bearish for Gold).  A flattening in the yield curve confirms the disbelief around a sustainable growth outlook domestically (10-year yield -7bps week-over-week).

  

With that being said, our gold position has held strong to the negative correlations inherent in the expectation for the USD. With this summer’s FX move being the largest since 1997, gold in and of itself has been a losing trade.

  

The ECB’s implementation of rate cut on two separate occasions and the herd mentality increasingly positioning for a fed taper into the end of the year have perpetuated the USD strength. Tactical currency exposure in front of centrally-planned policy decisions makes this game more difficult than ever:

 

 Since the May 6th highs in the Euro:

 

- EUR/USD: -10.2%

- Gold: -9.0%

- USD: +9.6%

 

Embedded in this move is correlation risk. It is our view that Draghi in a smaller box at this point whereas Yellen has more flexibility in moving incrementally dovish from here. When she does, we want to have an allocation to Gold.   

  

LM

Shares of Legg Mason continue to perform well up over 18% in 2014 however the story has received a shot in the arm as of late. With last week’s news that leading bond fund manager Bill Gross has left PIMCO, reports of substantial redemptions at Gross’ former shop have been reported with the rest of the large bond fund platform’s likely large beneficiaries.

 

While PIMCO had already been struggling with over $60 billion in redemptions over the past 18 months, a reported additional $23 billion has been pulled from the platform just this week according to various media outlets. While it is not completely a zero sum game (with PIMCO’s loss someone else’s gain), there is reason to believe that the other major fixed income platforms on the Street will mop up these outflows.

 

Legg Mason (LM), Blackrock (BLK), and the private Doubleline funds all have strong existing franchises with strong performance that would be a natural destination for these PIMCO funds in dislocation. While LM and BLK have not commented on the environment over the past 10 days, the private Doubleline has mentioned collecting over $500 million in a single day last week as investors exited PIMCO.

 

This was not a situation we had modeled for in our recommendation of LM shares, however the company will be a beneficiary of a PIMCO in donor mode.

 

OC

This week U.S. construction spending came in for August with both Nonresidential and Residential spending easing.  Private construction spending for residential home improvement disappointed again.  Lack of significant storm activity such as hailstorms and hurricanes are helping keep improvement spending levels depressed.   

Next week, our industrial’s team will host an update call on pricing in the asphalt roof shingle market, on Tuesday October 7.  If recent price increases in this market hold, we believe it would remove a key overhang from OC shares.

Investing Ideas Newsletter     - oc

 

OZM 

Och-Ziff remains on our Investing Ideas list as shares are currently trading at a negative multiple of its incentive fee earnings, a situation that last came about in 2011 when shares were just $7. We arrive at this negative multiple when we apply a traditional asset management earnings multiple of 15.9x to the firm's core asset management earnings of near $0.76 per share which would imply a stock value of $12 per share.

 

Thus with the current stock value at $11, or $1 per share below its "traditional" implied value, the running incentive fees per share earnings of $0.24 implies a new all time low multiple on this earnings stream.

 

The average incentive fee multiple for OZM shares since 2009 has been +3.7x providing solid upside when valuation improves. Thus if the firm can hang on to its running year-to-date positive performance, without additional negative regulatory news flow, that the stock should rally off of these depressed levels.

 

OZM shareholders are getting paid to wait for this situation to rectify itself with a dividend year of 7.3%, well above the average for the S&P 500’s yield of 2.1%.

Investing Ideas Newsletter     - ozm

 

RH 

Please click here to read Hedgeye retail sector head Brian McGough's note released on Friday "RH - Stealth revenue Driver."

 

* * * * * * * * * * 

 

Click on each title below to unlock the content.

 

Draghi Disappoints On Delivering the "Drugs"

We believe the market is finally calling ECB President Mario Draghi’s bluff.

Investing Ideas Newsletter     - d2

 

Defcon 2.5: The "China Overhang" Is Likely to Continue

We believe prospects are rising for another leg down in consensus expectations for Chinese growth.

Investing Ideas Newsletter     - c2


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

Commodities: Weekly Quant

Commodities: Weekly Quant - chart1 divergences

Commodities: Weekly Quant - chart2 deltas

Commodities: Weekly Quant - chart3 USD Correls

Commodities: Weekly Quant - chart4 S P Correls

Commodities: Weekly Quant - chart5 volume metrics

Commodities: Weekly Quant - chart6 implied vol

Commodities: Weekly Quant - chart7 sentiment

Commodities: Weekly Quant - chart8 1 mth correls

Commodities: Weekly Quant - chart9 3mth correls

Commodities: Weekly Quant - chart10 6 mth correls

Commodities: Weekly Quant - chart11 1yr correls

Commodities: Weekly Quant - chart12 3yr correls

 

Ben Ryan

Analyst

 


The Week Ahead

The Economic Data calendar for the week of the 6th of October through the 10th of October is full of critical releases and events.  Attached below is a snapshot of some of the headline numbers that we will be focused on.

 

The Week Ahead - 10.03.14 Week Ahead

 


The Best of This Week From Hedgeye

Takeaway: Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.

HEDGEYE TV

Quarterly Macro Themes Q&A

Here’s the question and answer portion from Thursday’s Macro Themes call. Hedgeye CEO Keith McCullough answers questions on a host of topics including #Quad4, #Bubbles and more.

 

One-Minute Video | McCullough: We Haven’t Seen This Bearish Market Signal In Over 18 Months

In this brief excerpt from Thursday's Morning Macro Call, Hedgeye CEO Keith McCullough warns investors that the Russell 2000 and S&P 500 are both bearish trend and tail in our model for the first time in at least 18 months.

 

ONE-MINUTE VIDEO | McCullough: ‘Quad 4’ Matters A Lot More to Your Portfolio than a 50-Day Moving Monkey

In this brief excerpt from Tuesday's Morning Macro Call, Hedgeye CEO Keith McCullough discusses the recent move into Quad 4 in our proprietary model and why it matters to markets ahead of Hedgeye’s Q4 Macro Themes call this Thursday.

CARTOON

Deflation (Got #Quad4 Yet?)

The Best of This Week From Hedgeye - Deflantion quad4 10.01.14

Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.

 

Sweet Success?

The Best of This Week From Hedgeye - Jobs sweetsuccess 10.3.14

Hedgeye reiterates its long bond call (in $TLT terms), and to stay away from small caps.

 

Tweedledee & Tweedledum

The Best of This Week From Hedgeye - techbubble itsdifferentthistime 9.30.14

CHART

Legislating Deflation? (10YR Yield vs. U.S. Dollar Index)

The Best of This Week From Hedgeye - COD 9.29.14

 

#Quad4 [U.S. Growth and Inflation (In Rate of Change Terms) Slowing at Same Time]

The Best of This Week From Hedgeye - COD 10.2.14

 

Need. Moarr. Drugs. $DXY

The Best of This Week From Hedgeye - COD 10.3.14

Mario Draghi’s Drugs proved to be impotent in yesterday’s real-time market voting session. Germany’s DAX closed down -2% on the day. That puts every major European Equity market index in bearish TREND signal mode @Hedgeye.

POLL OF THE DAY 

Tech Bubble: Who's Right Peter Thiel or Keith McCullough?


Entrepreneur Peter Thiel made headlines Monday telling Fox Business anchor Deidre Bolton that we are not in a tech bubble. Thiel said, “I’m investing in tech stocks to hide from the government bond bubble.” Hedgeye CEO Keith McCullough replied in a tweet to @peterthiel, “I’m hiding in the Long Bond so that I can be short the Tech Bubble.” So, who's right?


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 80.30%
  • SHORT SIGNALS 78.51%
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