Takeaway: Our Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes and proprietary quantitative market context.

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


  1. Looking past the fact that today will add to a rough couple of weeks for our Macro Playbook short ideas, we offer our thoughts on how to use the current quantitative setup in the market to set up for November and beyond
  2. Our catalyst for further downside in the small-to-mid-cap equity style factor remains the economic cycle and the current risk/reward setup dramatically favors booking gains on the long side and/or shorting it here
  3. Our fortuitous decision to back away from the long side of the Japanese yen (FXY) ahead of today's surprise easing out of the BoJ... sometimes you're lucky and sometimes the quantitative signal is just that pure (this time it was the latter)


Best of luck out there,


Darius Dale

Associate: Macro Team

Halloween Poll of the Day: Which Central Bank Is Scarier?

The Bank of Japan shocked global financial markets today by expanding its massive stimulus spending in a stark admission that economic growth and inflation have not picked up as much as expected sending Japanese stocks soaring 4.8% to their highest close since 2007 as the yen skidded to near seven-year lows against the dollar.


This leads us to today's special Halloween poll question:

Cartoon of the Day: #ConsumerSlowing

Cartoon of the Day: #ConsumerSlowing - Deflation cartoon


U.S. consumer spending fell 0.2% in September, according to a government report this morning. It’s yet another sign of the weak US consumer.


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WTW: Debating Whether to Cover

Takeaway: Stronger 2014 results + Stagnant 2015 consensus estimates = Lower 2015 hurdle. May be less upside to the Short in an already crowded trade.


  1. 3Q14 SHOWS SIGNS OF IMPROVEMENT: Y/Y declines in both revenues and membership moderated once again in 3Q14, with seasonal attrition improving over last year's levels.  That means WTW is likely heading into 2015 with a potentially higher starting member base, reducing the burden of the winter selling season.  We don't believe it will be enough.
  2. BUT 2015 DETAILS WERE VAGUE: We were expecting management to be more explicit regarding 2015 expectations.  WTW implied the headwind from a lower starting member base will be somewhat lower (from $0.60 to $0.55 prior).  That doesn't mean a whole lot since it's only looking at one side of the equations (starting members).  Management also suggested incremental cost investments of $25M next year, but reiterated its expectation that marketing expenses will remain flat, which we do not believe is a prudent move (see point 4).      
  3. CONSENSUS NOW ASKING FOR LESS: 2014 estimates have crept up to reflect the 3Q14 beat and raise, but 2015 estimates have remained largely unchanged).  In turn, 2015 consensus growth expectation have declined, which means the downside surprise factor on the guidance release has also.  We're still expecting considerable downside: 2015 revenue of $1.31B and EPS of $0.96 vs. Consensus of $1.40B and $1.86, respectively. However, when you couple that with sentiment that is already extremely bearish (Short interest > 40% of the float), there may not be too much more upside left in the Short from here. 
  4. THE BIGGER QUESTION: Is WTW's recent weakness secular? Because if it is, then they're shooting themselves in the foot with its cost-containment initiatives, specifically its plans for flat marketing spend in 2015.  WTW's member acquisitions costs have more than tripled in the last 3 years, which alone would suggest secular pressure (but we admit that is backward looking).  If WTW's issues are secular, then its member acquisition costs will keep climbing, which would mean flat marketing spend = worse winter selling season.  Consensus estimates imply improving member acquisition costs in 2015; we doubt that is likely.  We'll be monitoring our Google Trackers, stay tuned.  

WTW: Debating Whether to Cover - WTW   Member Acquisition Costs 1Q15E

WTW: Debating Whether to Cover - WTW   Selling Seasons 1Q15E


Hesham Shaaban, CFA



Thomas Tobin



Client Talking Points


This is what the economic reports said before they hit the panic button (household spending -6% year-over-year, housing starts -14% year-over-year, and Construction spending -40% year-over-year)… so they must do moarrr of what didn’t work? Yep. Massive devaluation of Yen to 111.62 last, and Nikkei ramps to highest since U.S. market collapse began (NOV 2007).


Unintended consequences? Nah – how about Yen Down, Dollar Up = #deflation accelerating? Oil, Gold, Russia, Texas, etc. all going to feel serious pain on this epic central planning day of 2014.


Oil is down on the “news” with WTI re-testing of the lows in play now = down -25% since June and don’t forget that (depending whose index you use),  20-27% of the high yield/junk debt market is “Energy” related. Month end ramp in equities, but we highly doubt that’s on inflation oriented ones.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.


We continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest).


Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road


YEN has one of the biggest 1-day drops in money printing history = $111.62 vs USD



Nothing in all the world is more dangerous than sincere ignorance and conscientious stupidity.

-Martin Luther King


According to a study published in Environmental Science and Technology, 29% of San Francisco's air pollution comes from China.

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