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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 MSCI European Monetary Union ETF (EZU)
  4. iShares MSCI France ETF (EWQ)
  5. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)

 

QUANT SIGNALS & RESEARCH CONTEXT

 

  • Great Spot to Buy Bonds: Nearing the top end of our 2.21% to 2.38% risk range, this most recent lower-high in the 10Y U.S. Treasury bond yield is signaling to us that this is a great spot to increase exposure to fixed income – in Treasury bond (TLT and EDV) and Muni (MUB) terms. Buy side consensus remains bearish on Treasuries to the tune of a -18.4k net short position in the futures and options markets, but their misguided focus on valuation and/or expectation for a sustained pickup in U.S. GDP growth leaves us anticipating mass capitulation over the intermediate term.  Remember, we want you to continue to avoid the bulk international fixed income exposures like the bubonic plague. Specifically, 18 of the 30 ETFs comprising the Fixed Income & Yield Chasing primary asset class in our Tactical Asset Class Rotation Model (TACRM) have a negative VAMDMI readings. Furthermore, 27% of the total have VAMDMI readings below -1x, which indicates a clear trend of negative volume-weighted average price momentum across multiple durations. PIMCO having to blow out of Bill Gross’ PIIGS paper or the #StrongDollar impact on EM sovereign and corporate debt remain key overhangs.
  • Short Energy on the Bounce(s): Yesterday, we added the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) to our highest-conviction short ideas list up top. Specifically, our fundamental analysis of the outlook for marginal supply (i.e. stable), marginal demand (i.e. global growth slowing) and momentum (i.e. bearish TRADE, TREND and TAIL) portends further downside. We see a [soft] floor of $65/bbl. [and falling] over the intermediate term – especially in the context of the BoJ adopting a more aggressive mindset in response to the global currency war. A weaker yen is dollar-bullish, which is bearish for the price of crude oil; the correlation between the USD and Brent spot prices since the May 6th YTD low in the DXY is -0.90.

 

***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.

 

Oil: More Downside? (11/5)

 

#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.

 

Top Ten Reasons to Stay Short the Euro (11/5)

 

#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: Write It Down (11/4)

 

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.

 


Don't Be Intimidated

This note was originally published at 8am on October 23, 2014 for Hedgeye subscribers.

“We will not be intimidated.”

-Stephen Harper

 

I drove up to Maine in the rain yesterday. My ride was a metaphor for macro markets in the last six weeks. I got in the car in the late morning – equities were up, on decelerating volume. There was a faint bid to European equities and Oil. There was some low-conviction selling in the bond market too.

 

“So”… I did the opposite (in Real Time Alerts) – going right back to our #Quad4 playbook, sending out buy signals in Munis (MUB) and sell signals in stocks with energy price related risks (MLPs like Linn Energy, LNCO). #Bubbles that bounce to lower-highs on no volume don’t intimidate me.

 

As I drove through New Hampshire in the early afternoon, the US equity markets picked up on the intraday drop in oil prices – and bonds caught a bid. I flipped through a few of the manic media’s channels – they all blamed Canada.

 

Don't Be Intimidated - EL chart 2

 

Back to the Global Macro Grind

 

While it would be nice if we could boil down intraday, weekly, and monthly macro market moves to a single factor like ebola or Canada, that is not how a non-linear and interconnected ecosystem (the market) works.

 

That’s why we spend so much time grinding through both multi-factor and multi-duration analysis. We will not write to you about risks in the rear-view. We will not be whipped around by newsy headlines either. Our Global Macro risk management process will not be intimidated.

 

There’s a great complexity theory quote in the WWII #history book I am in the middle of reading that summarizes how the American, British, and Canadian men acted when storming the beaches of Normandy on June 6th, 1944:

 

“Beset by mischance, confounded by disorder, they had mostly done what they were asked to do.”

-Rick Atkinson, The Guns At Last Light (pg 53)

 

And while I try to not feel anything when communicating #timing decisions in markets, I do want our analytical troops to feel confident that, instead of being glued to the screens and emotions of the moment, they can do what they were trained to do. #Process

 

To be clear, the process is dynamic and flexible. That means that if the economic facts and/or market read-throughs change, we are both equipped and tasked to change alongside those changing factors. If they don’t change, we double down on the #process.

 

In asset allocation terms, here’s what we did (before the morning part of that drive!) yesterday:

 

  1. CASH – took it down small, deploying assets to a region of the market that likes #Quad4 (Municipal Bonds – MUB)
  2. FIXED INCOME – took it up, in kind, to a 26% allocation (which is 78% of what I consider my max, 33%, to any asset class)
  3. EQUITIES – stayed the course with the “net zero” exposure, adding to the bear side of energy related shorts like LNCO

 

For those of you who are new to reading my rants, the Hedgeye Asset Allocation Model is basically like my p.a. (personal account). It’s not what a long-only fund with a mandate to be fully invested has to do. It’s not a hedge fund either. It’s simply what I would do with my money - not being intimidated!

 

“So”, when I say “net zero” that means that if I had to be in something like US Equities, at a minimum, I’d hedge (with alpha oriented shorts) out the market risk and have a beta-adjusted net exposure to that asset class of 0%.

 

That’s why, on the morning of October 17th, in the Early Look you saw an asset allocation to US Equities of +3%. After a stiff selloff, I signaled “buy” in #RealTimeAlerts in 1 of the 2 S&P Sectors that are LONGS in our #Quad4 playbook – Consumer Staples (XLP). Then I took us back to net zero, on the bounce.

 

I know. It’s not easy trying to communicate a process that the Old Wall doesn’t use.

 

Commercializing how I think about risk has been as much a communication learning process for me as it has been for those of you trying to learn it alongside me. I appreciate your open-mindedness. These are still the early days of our changing parts of a profession that needs changing.

 

Back to what is really crushing market expectations (it’s not Canada – it’s #Quad4 deflation):

 

  1. Oil prices got smoked for another -2.8% loss yesterday, taking WTI to down -18.2% YTD
  2. Bullish to Bearish Phase Transitions in both Energy prices and their related stocks/bonds is #on because Oil is crashing
  3. Alongside a -25% drop in WTI Crude since June, the Russian stock market has crashed (-25.8% YTD)

 

That’s also why the Canadian Stock Market (TSX) went from bullish to bearish TREND @Hedgeye. Not because some whacko loser started killing people in Ottawa yesterday. In chaos (or complexity theory) speak, that was simply the grain of sand that knocked over the interconnected sand-pile.

 

In our playbook, terrorism doesn’t have a quadrant; #deflation does. If our quantitative signal is right, and the price of oil remains in an intermediate-term TREND risk range of $64.67-86.11:

 

  1. Both Oil & Gas (XOP) and Energy (XLE) related equities are going to be bearish TREND
  2. MLP related stocks and bonds are going to start discounting distribution (dividend) cuts
  3. Kevin “The Bear” Kaiser is going to look really right on his Best Short Ideas!

 

Instead of listening to more than 3 minutes of market spew on the radio yesterday, on that same drive up to Maine’s coast, I smoked  a cigar (don’t tell my wife!) and listened to Kaiser’s Institutional Research call on MLPs from 1-2PM. It was awesome.

 

And I’m not just saying that because the man is on my team. I am telling you what it is to hear a world class analyst not be intimidated by institutional group-think and stay with a fundamental call that companies who don’t have the cash flow to pay out future promises are shorts.

 

Stocks that he doesn’t like (VNR, LNCO, etc.) got hammered intraday. If you’d like access to the replay of his call and 40 slide deck, please ping sales@hedgeye.com.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.09-2.34%

SPX 1830-1948

RUT 1037-1119

VIX 15.09-28.26

WTI Oil 79.43-82.63

Natural Gas 3.59-3.79

 

Best of luck out there today,

KM

 

Don't Be Intimidated - Chart of the Day



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Top 10 Reasons to Stay Short The Euro

This note was originally published November 05, 2014 at 12:38 in Macro

Below are the top 10 reasons we continue to recommend short EUR/USD (etf FXE) over the intermediate term TREND: 

  1. ECB Indecision:  We expect the ECB to continue to fumble with its policy messaging and for its policy “tools” to underperform its expectation to guide the economy out of its deflated state. (Interestingly, Reuters reported yesterday that Eurozone central bankers are having a working dinner with ECB President Draghi tonight to discuss his “secretive style and erratic communication”).
  2. Policy Relativity: On a relative basis, the Fed has lifted its foot off the QE gas petal while the ECB (and BOJ) is pushing down harder on the petal. Draghi has already target a €1 Trillion expansion to the ECB balance sheet. That number could go higher given the BOJ comp.  
  3. ECB All-In:  The ECB has telegraphed that it may in fact issue sovereign QE following a mixed message on the ability of the TLTROs and/or ABS and covered bond purchasing programs to deliver real growth “drugs” to the region.
  4. Into the Shadows:  The ECB has no where left to cut from the ZERO bound in interest rates.  Attempting to push the so-called shadow rate lower via large scale asset purchases becomes the recourse.  
  5. Extended Outflows:  Record outflows of investment from Europe will continue to put downward pressure on the EUR.  ECB data showed that domestic and foreign investors pulled out €187.7B from the Eurozone, which is the most since the EUR was launched in 1999.
  6. Broken Quantitatively:  The EUR/USD is broken across our intermediate and long term TREND and TAIL lines (see chart below).
  7. Downward Dog:  Eurozone country growth expectations have further room to run lower in 2014 and 2015 (just cut by European Commission). #EuropeSlowing
  8. Peripheral Pressure: The Eurozone’s PIGS, despite commitments, will struggle to meet their deficit consolidation targets, as cracks remain in the banking sector (Italy had 9 banks fail the ECB’s 130 Bank Comprehensive Assessment).
  9. Putin Pangs: Putin’s Pull over Ukraine and Western Europe’s gas looms ever present to engage the geopolitical risk card.
  10. Separatist Solidarity: The rise of the Right and splinter groups that are anti-EU [across Germany (Alternative for Germany, AfD), France (Popular Front), to bold movements across Greece, Austria, Netherlands, to name a few] are growing and calling for separation from the EUR.

This is a simplified hit parade – ping us if you’d like to dig into any of the points above.

 

Top 10 Reasons to Stay Short The Euro  - chart2

 


Top 10 Reasons to Stay Short The Euro

Below are the top 10 reasons we continue to recommend short EUR/USD (etf FXE) over the intermediate term TREND: 

  1. ECB Indecision:  We expect the ECB to continue to fumble with its policy messaging and for its policy “tools” to underperform its expectation to guide the economy out of its deflated state. (Interestingly, Reuters reported yesterday that Eurozone central bankers are having a working dinner with ECB President Draghi tonight to discuss his “secretive style and erratic communication”).
  2. Policy Relativity: On a relative basis, the Fed has lifted its foot off the QE gas petal while the ECB (and BOJ) is pushing down harder on the petal. Draghi has already target a €1 Trillion expansion to the ECB balance sheet. That number could go higher given the BOJ comp.  
  3. ECB All-In:  The ECB has telegraphed that it may in fact issue sovereign QE following a mixed message on the ability of the TLTROs and/or ABS and covered bond purchasing programs to deliver real growth “drugs” to the region.
  4. Into the Shadows:  The ECB has no where left to cut from the ZERO bound in interest rates.  Attempting to push the so-called shadow rate lower via large scale asset purchases becomes the recourse.  
  5. Extended Outflows:  Record outflows of investment from Europe will continue to put downward pressure on the EUR.  ECB data showed that domestic and foreign investors pulled out €187.7B from the Eurozone, which is the most since the EUR was launched in 1999.
  6. Broken Quantitatively:  The EUR/USD is broken across our intermediate and long term TREND and TAIL lines (see chart below).
  7. Downward Dog:  Eurozone country growth expectations have further room to run lower in 2014 and 2015 (just cut by European Commission). #EuropeSlowing
  8. Peripheral Pressure: The Eurozone’s PIGS, despite commitments, will struggle to meet their deficit consolidation targets, as cracks remain in the banking sector (Italy had 9 banks fail the ECB’s 130 Bank Comprehensive Assessment).
  9. Putin Pangs: Putin’s Pull over Ukraine and Western Europe’s gas looms ever present to engage the geopolitical risk card.
  10. Separatist Solidarity: The rise of the Right and splinter groups that are anti-EU [across Germany (Alternative for Germany, AfD), France (Popular Front), to bold movements across Greece, Austria, Netherlands, to name a few] are growing and calling for separation from the EUR.

This is a simplified hit parade – ping us if you’d like to dig into any of the points above.

 

Top 10 Reasons to Stay Short The Euro  - zz. euroo

 

Matthew Hedrick

Associate


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