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

 

  • Global Macro Spillover Risk: As our research on the Eurozone, China, Japan, Brazil and Russia continues to highlight, global growth is slowing. Even India – which had been our favorite international equity exposure through late-September – is starting to show economic deterioration, on the margin. With #GrowthSlowing in at least six of the world’s top seven economies – four of which are in recession (Brazil), teetering on recession (Japan, Eurozone) or careening towards economic collapse (Russia) – what could possibly go wrong? It would appear the U.S. is the lone holdout – at least according to Consensus Macro “surveys” – although our analysis of the actual economic data continues to show a steady trend of degradation from the 2Q highs. While the “bad house in a worse neighborhood” argument is effective in the FX market where pricing is always relative, we don’t think it has any place in equity investing. Anyone who’s being honest with themselves understands that simultaneous domestic and global slowing is a headwind to the revenue growth and profitability of U.S. corporations. Moreover, the domestically-exposed Russell 2000 (IWM) should be materially outperforming the S&P 500 (SPY), if in fact, the “bad house in a worse neighborhood” argument has any validity... Looking to our Tactical Asset Class Rotation Model (TACRM) for quantitative confirmation, 33% of the ~200 ETFs in the model have a VAMDMI reading less than -1x on a trailing 3M average basis. That’s the highest reading of broad-based negative multi-duration price momentum since the summer of 2012!
  • Follow the Bouncing Ball on Nat Gas: On Tuesday, Keith and I met with one of the best natural resource investment firms on the planet. One of the topics of discussion that stuck with me the most is how shale/tight oil production has impacted natural gas supply in recent years. Specifically, one of the co-PMs remarked that 2/3rds of natural gas supply growth in the U.S. has been from “associated gas” – or the gas that comes out concomitantly with crude oil production. Well, if OPEC is right in their assumption that CapEx associated with U.S. crude oil production is likely to be cut if crude oil prices remain at/near current prices, then it’s reasonable to assume a subdued outlook for natural gas growth as well. Perhaps that’s why TACRM is now generating a “BUY” signal for the United States Natural Gas Fund (UNG). Just something to watch…

 

***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: My Bubble’s Birthday! (11/7)

 

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.


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