THE HEDGEYE MACRO PLAYBOOK

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

INVESTMENT CONCLUSIONS

Long Ideas/Overweight Recommendations

  1. iShares National AMT-Free Muni Bond ETF (MUB)
  2. iShares 20+ Year Treasury Bond ETF (TLT)
  3. Vanguard Extended Duration Treasury ETF (EDV)
  4. Health Care Select Sector SPDR Fund (XLV)
  5. Consumer Staples Select Sector SPDR Fund (XLP)

Short Ideas/Underweight Recommendations

  1. SPDR S&P Regional Banking ETF (KRE)
  2. iShares Russell 2000 ETF (IWM)
  3. iShares US Home Construction ETF (ITB)
  4. iShares MSCI European Monetary Union ETF (EZU)
  5. iShares MSCI France ETF (EWQ)

QUANT SIGNALS & RESEARCH CONTEXT

Manufacturing “Surges” In October… Or Did It?: Yesterday there was quite a bit of newsy fanfare surrounding the strong ISM Manufacturing PMI print. We think that optimism is quite a bit misguided in the sense that the Markit PMI data – which a substantially more robust indicator – slowed sharply in OCT on both the Manufacturing and Services fronts. The weakness in the Markit Manufacturing PMI data is in line with the trend of slowing growth in Durable Goods New Orders, Core CapEx Orders, as well as waning inventory build in the 3Q14 GDP print. Effectively, this would imply the Markit data series is more in line with economic reality versus whatever the heck the ISM or other widely-followed Consensus Macro “survey” data is pointing to in defense of a fledgling fundamental bull case for U.S. equities. Some might accuse us of data mining, but we’d gladly point them to our “data mining “ work from 2013 when we were equally as bullish on U.S. growth and domestic demand-oriented equities (i.e. Russell 2000) as we are bearish on those factors today.

THE HEDGEYE MACRO PLAYBOOK - Markit PMI Index Info

THE HEDGEYE MACRO PLAYBOOK - Markit Manufacturing PMI

THE HEDGEYE MACRO PLAYBOOK - Markit Services PMI

Defense Remains Offensive: If domestic manufacturing activity was expanding at the robust pace now-widely assumed by consensus, why on earth does the U.S. equity market continue to be led higher by defensive sectors? Specifically, the three sectors exhibiting the highest degree of positive momentum on a multi-duration basis are: Utilities, Consumer Staples and Health Care. Moreover, the XLU’s +2.0x VAMDMI reading is actually the highest across all of global macro and double that of the iShares Russell 2000 ETF (IWM). The performance chase into year-end is officially on in large-cap U.S. equities, but will this behavioral factor be strong enough to offset the slowing economic cycle or the behavior factors associated with the most illiquid asset price bubble in U.S. equity and corporate credit market history? You know where we stand with respect to that question…

THE HEDGEYE MACRO PLAYBOOK - TACRM 20 20

***CLICK HERE to download the full TACRM presentation.***

TRACKING OUR ACTIVE MACRO THEMES

#Quad4 (introduced 10/2/14): 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.

Headlines & Under-Hoods: Sept. Income & Spending (10/31)

Hangovers & Late-Cycle Juggernauts: 3Q GDP & Initial Claims (10/30)

 

#EuropeSlowing (introduced 10/2/14): Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.

Early Look: All Boxed In (10/22)

#Bubbles (introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.

Early Look: Deflated Disputants (10/30)

Best of luck out there,

DD

Darius Dale

Associate: Macro Team

About the Hedgeye Macro Playbook

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today.