Long Ideas/Overweight Recommendations
- iShares National AMT-Free Muni Bond ETF (MUB)
- iShares 20+ Year Treasury Bond ETF (TLT)
- Vanguard Extended Duration Treasury ETF (EDV)
- Health Care Select Sector SPDR Fund (XLV)
- Consumer Staples Select Sector SPDR Fund (XLP)
Short Ideas/Underweight Recommendations
- SPDR S&P Regional Banking ETF (KRE)
- iShares Russell 2000 ETF (IWM)
- iShares MSCI European Monetary Union ETF (EZU)
- iShares MSCI France ETF (EWQ)
- ADD: SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
- REMOVE: iShares US Home Construction ETF (ITB)
QUANT SIGNALS & RESEARCH CONTEXT
- The U.S. Equity Market Will Never Go Down Ever Again… Right?: Incongruent with the consensus view that “globally coordinated monetary easing” has completely mitigated the risk of a correction (or crash) in the U.S. equity market is the performance of the asset classes, sectors and style factors most correlated to policy-induced asset price inflation. Specifically, 17 of the 20 ETFs exhibiting the greatest amount of negative momentum across the entire global macro complex as defined by our Tactical Asset Class Rotation Model (TACRM) are commodity producers and/or servicers (GDX, IEZ, FILL, XOP), individual commodity markets (USO, NIB, UGA, BNO, GLD, SLV, DBC, SGG), commodity currencies (FXC, CCX) and country indices with a significant degree of commodity price sensitivity (NGE, EWCS, EWC). Either recent price action has created the mother-of-all buying opportunities in these assets, or buy-side consensus will find itself dead wrong on the lazy thesis that the Fed/ECB/BoJ will “never let markets go down”. While the fear amongst hedge fund investors that “the stock market will never correct” is both pervasive and surreal, the real fear should be whether or not these exposures are discounting the eventual end to the market(s) actually responding positively to incremental Policies To Inflate.
- Commodity Price Tail Risks: Two tail risks emerging the commodity complex and all of the global CapEx (i.e. GDP) associated with commodity E&P include: perpetual debasement of the JPY (bullish for the USD) and the recent GOP mandate in Congress, which may portend a meaningful reduction in the Fed's ability to "CTRL+P". We wonder if the same investors buying the spoos here on the #GOPtakeover will be the same ones who sell the lows if the market crashes in realization of that last catalyst... At any rate, we're adding the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) to our core investment recommendations on the short side in anticipation of further #Quad4 downside for commodity prices.
- Less Bearish on Housing: One of the questions we’ve been wrestling with internally is: “When do we make the turn from bearish to bullish on early-cycle sectors like housing?” Well, interestingly enough, our most recent deep dive into the state of the domestic housing market does indeed warrant reduction in our bearish bias (i.e. less negative). Housing, in ITB terms, continues to make a series of lower-highs so we do not yet think it’s appropriate to get bullish on housing at the current juncture. That being said, however, a failure to make a lower-low versus the intra-day low on 10/13 on the next meaningful pullback would be additional confirmation that our bearish bias is long in the tooth. As such, we are removing the ITB from our core investment recommendations on the short side. All told, a decline of -3.6% YTD for the ITB vs. +8.9% for the SPY is sizeable absolute and relative return for anyone who’s appropriately had our bearish housing thesis on all year.
***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.
#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,
Associate: Macro Team