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Japan, UST 10YR and Market Divergences

Client Talking Points

JAPAN

The Nikkei is down -0.6% (down for the 2nd day in 3) as the Yen stopped going down (+0.5% vs. USD to 114.01). Risk ranges for both the Nikkei (14,773-17539) and the Yen (111.16-117.24) are wacky wide now – should lead to plenty of macro volatility.

UST 10YR

The UST 10YR Yield is down hard on the jobs report and down again to 2.29% this morning after trading 10-12bps higher into jobs day on hopes that the U.S. isn’t slowing like the rest of the world is (it is). Staying with long the Long Bond (TLT) and bond proxies as that’s where the fundamental performance is.

DIVERGENCES

Big divergences  were everywhere in global equities last week – Dow +1.1% vs. Russell flat; Consumer Discretionary (XLY) -0.1% vs. Consumer Staples (XLP) +2.2%; Hang Seng -1.9% vs. Nikkei +2.8%; and Emerging Markets down another -2.4% on the MSCI index and -4.5% on the LATAM side.

Asset Allocation

CASH 70% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 27% INTL CURRENCIES 3%

Top Long Ideas

Company Ticker Sector Duration
EDV

d

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.

TLT

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).

RH

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

TWEET OF THE DAY

GREECE: leads losers -2% to -23% YTD #crashing

@KeithMcCullough

QUOTE OF THE DAY

I found out that if you are going to win games, you had better be ready to adapt.

-Scotty Bowman

STAT OF THE DAY

Euro (vs USD) is down another -0.6% on the week to -9.4% year-to-date.


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – November 10, 2014


As we look at today's setup for the S&P 500, the range is 79 points or 3.20% downside to 1967 and 0.69% upside to 2046.                                           

                                                                                    

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.79 from 1.80
  • VIX closed at 13.12 1 day percent change of -4.02%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 10am: Fed Labor Mkt Conditions Index, Oct.
  • 11am: U.S. to announce plans for auction of 4W bills
  • 11:30am: U.S. to sell $24b 3M bills, $28b 6M bills
  • 1pm: U.S. to sell $26b 3Y notes
  • 5:10pm: Fed’s Rosengren speaks at Washington and Lee University, Lexington, Va.

 

GOVERNMENT:

    • President Obama travels to China, Myanmar, Australia through Nov. 16
    • Sec. of State John Kerry meets with former EU High Representative Catherine Ashton, Iranian Foreign Minister Javad Zarif in Oman ahead of Nov. 24 deadline to reach deal preventing Iran from developing weapons
    • Sifma conference: SEC Chairman Mary Jo White, 8:40am; Stephen Luparello, director SEC’s trading and markets division, 2:15pm
    • 9:30am: Supreme Court issues orders on pending cases

 

WHAT TO WATCH:

  • Boeing Wins $8.5b SMBC Aviation Order on Asian Jet Demand
  • Dendreon Starts Voluntary Chapter 11 Proceedings
  • Berkshire Profit Slips After Buffett’s Tesco Investment Falters
  • Obama Accepts Blame for Results of U.S. Midterm Elections
  • Obama Administration Offers Preview for 2015 Health Plans
  • Obama Faulted for Having Fewer Experts Guiding China Policy
  • Paulson Event Fund Said to Plunge 14% in October as Loss Worsens
  • Merck’s 4-Week Hepatitis C Regimen Fails to Beat Gilead Drug
  • American Attendants Reject Contract in Defeat for Merged Airline
  • Takata Falls to Five-Year Low After Calls for Criminal Probe
  • Time Warner Approached Ten About Potential Takeover: AFR
  • Uber Said in Early Talks to Raise $1 Billion to Fund Growth
  • U.S. Gasoline Falls to $2.9421 a Gallon in Lundberg Survey
  • Bank of Russia Cuts 2015 Economic Forecast to Show No Growth
  • China Factory-Gate Prices Decline for Record 32nd Month
  • Disney’s ‘Big Hero 6’ Outdraws ‘Interstellar’ at Box Office
  • SHV Raises Nutreco Takeover Bid to Fend Off Cargill Interest
  • Transocean Posts Qtr Net Loss $6.12/Shr on Goodwill Impairment
  • GM Ordered New Switches Before Recall, E-Mails Show: WSJ
  • BARRON’S ROUNDUP: Telecom Fight, J.C. Penney, Leucadia, Kellogg

 

AM EARNS:

    • 3D Systems (DDD) 8:30am, $0.17
    • Dean Foods (DF) 8am, ($0.13)
    • Gogo (GOGO) 7:30am, ($0.26)
    • Quicksilver (KWK) 7:30am, ($0.09)
    • Rayonier (RYN) 8am, $0.19
    • Sotheby’s (BID) 8am, ($0.35)
    • Turquoise Hill (TRQ CN) Bef-mkt, $0.02
    • WhiteWave Foods (WWAV) 8am, $0.26

 

PM EARNS:

    • Acadia Pharmaceuticals (ACAD) 4:01pm, ($0.22)
    • Atwood Oceanics (ATW) 4:49pm, $1.55
    • Caesars Entertainment (CZR) 4:01pm, ($1.47)
    • Cumulus Media (CMLS) 4pm, $0.07
    • Forest Oil (FST) 5:08pm, ($0.06)
    • Halcon Resources (HK) 4:15pm, $0.06
    • Halozyme Therapeutics (HALO) 4:15pm, ($0.14)
    • Inter Parfums (IPAR) 4:05pm, $0.36
    • Legacy Oil + Gas (LEG CN) Aft-Mkt, C$0.09
    • NPS Pharmaceuticals (NPSP) 4:30pm, $0.02
    • ParkerVision (PRKR) 4:01pm, $0.01
    • PDL BioPharma (PDLI) 4:09pm, $0.56
    • PRA (PRAA) 4pm, $1.11
    • Rackspace (RAX) 4pm, $0.16
    • Resolute Energy (REN) Aft-Mkt, ($0.06)
    • Towerstream (TWER) 4:01pm, ($0.10)
    • Wayfair (W) Aft-Mkt, ($0.37)
    • Woodward (WWD) 4:05pm, $0.78

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Gold Declines After Biggest Advance Since June on U.S. Outlook
  • Brent Oil Reaches One-Week High as China Exports Exceed Forecast
  • Kuwait Oil Minister Sees No OPEC Output Cut at Next Meeting
  • Gold Bulls Trim Bull Wagers at Fastest Pace of Year: Commodities
  • Rebar Climbs by Most in a Week Amid Output Cuts, Record Exports
  • Corn to Soybean Price Forecasts Cut by Morgan Stanley on Supply
  • Iron Ore Seen Extending Declines by ANZ as Global Glut to Double
  • Port Hedland Officers, Deckhands Settle as Engineers to Strike
  • Bullish Oil Bets Cut in Sign of Growing OPEC Skepticism: Energy
  • Kuwait Oil Minister Sees No Decrease in OPEC Crude Output
  • Global Oil Market Oversupplied by as Much as 1.5m B/D: PIRA CEO
  • Corn Extends Decline Before USDA Report Set to Show Ample Supply
  • Rayonier Cuts Dividend, Restates Earnings on ‘Material Weakness’
  • Kashagan Oil Field Seen by Total Producing by 2017 at the Latest
  • Zinc Climbs for Third Day as Chinese Exports Exceed Estimates

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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

 

QUANT SIGNALS & RESEARCH CONTEXT

 

  • Size Does Matter: All year we’ve beaten the drum on our preference for slow growth, large-cap liquidity in the domestic equity market in lieu of the high growth, small-to-mid-cap illiquidity style factor we favored last year. On this bounce, which remains the most forceful v-bottom in U.S. equities since March 2009, we are pleased to see our preferred style factor leading the charge. Specifically, within our Tactical Asset Class Rotation Model (TACRM) the top four Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) readings across the entire global macro universe (~200 ETFs in aggregate) are the Consumer Staples Select Sector SPDR Fund (XLP), the Utilities Select Sector SPDR Fund (XLU), the iShares MSCI USA Minimum Volatility ETF (USMV) and the Dow Jones Industrial Average ETF Trust (DIA). To recap our process, the reason we track extremes in momentum (i.e. top and bottom 20 VAMDMI readings) across the universe of investable exposures is to front-run regime changes at the primary asset class level. And as it relates to the regime of large-cap outperformance, we’re not yet getting any signals that this trade is overdone. All told, we reiterate this view and see no reason to back away in the context of our #Bubbles theme. Years of equity investors taking on liquidity risk to keep pace with high-beta equity markets is a “chicken” that we think is still in the early innings of “coming home to roost”…
  • U.K. Headwinds: The latest refresh of our GIP Model on the United Kingdom shows another [bearish] #Quad4 setup here in the fourth quarter and a [bearish] #Quad3 setup in throughout 1H15. In fact, we expect U.K. growth to undershoot consensus expectations throughout this entire period. Our quantitative signals are telling a similar tale: the U.K. FTSE Index is bearish TREND and we’d short it on a continued bounce to its TREND line of resistance (6,694); the British pound is also bearish TREND and we’d short it on a bounce to its TREND line of resistance ($1.62); and the 10Y U.K. Gilt yield is bearish TREND (2.51%). In the context of the aforementioned fundamental setup, we’re not surprised to see the CurrencyShares British Pound Sterling Trust (FXB) has snuck into the bottom-20 VAMDMI readings in TACRM.

 

THE HEDGEYE MACRO PLAYBOOK - TACRM 20 20

 

THE HEDGEYE MACRO PLAYBOOK - UNITED KINGDOM

 

***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.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

CHART OF THE DAY: Non-Linear #Divergences | $SPY vs. Italian MIB Index

"Within a dynamic ecosystem of colliding, non-linear factors, I’ll almost always register #divergences," wrote Hedgeye CEO Keith McCullough in today's Morning Newsletter. "In your natural ecosystem of life, a divergence would be that it’s snowing 10 miles from where you see no precipitation."

CHART OF THE DAY: Non-Linear #Divergences | $SPY vs. Italian MIB Index - 11.10.14 Chart


Blinking Red

“The system was blinking red.”

-George Tenet

 

That’s what the 9/11 Commission Report told us, after the fact. That’s what I’ll tell you after the next “risk on” move happens in markets like it did in early October. It’s all part of a signaling process I use to identify phase transitions in markets.

 

This is also the #process that my friend Jim Rickards applied to tracking terror related events in markets. As Rickards writes in The Death Of Money, “no one trades in isolation.” And there is plenty of market wisdom in that.

 

Jim says he’s “careful to document and time-stamp the signals and analysis in real-time… it would not be credible to look at the tape in hindsight… we wanted to see things in advance.” (Rickards, pg 36). That’s what I do, every market day.

 

Blinking Red - 47

 

Back to the Global Macro Grind

 

But, but… the “market won’t go down on that anymore. What is the next catalyst? How do we know it’s going to go down?” I get some version of those questions all of the time. The answer is that the “market” isn’t just some naval gazing US equity index.

 

To review the #process:

 

  1. I write down and document (#notebook) every timestamp and market signal that matters to the “market” every morning
  2. I contextualize time/price within a multi-factor (global equities, FX, etc.) and multi-duration picture (TRADE, TREND, TAIL)
  3. I always assume market dynamism, duration mismatch, and non-linearity – the macro market is a complex ecosystem

 

Within a dynamic ecosystem of colliding, non-linear factors, I’ll almost always register #divergences. In your natural ecosystem of life, a divergence would be that it’s snowing 10 miles from where you see no precipitation.

 

Here are some of last week’s most notable equity market #divergences in my notebook:

 

  1. Hong Kong’s Hang Seng Index down -1.9% vs. Japan’s Nikkei stock market index +2.8%
  2. The Dow +1.1% vs. Italy’s MIB Index down -3.5% week-over-week
  3. Brazil’s Bovespa Index down -2.8% vs. the Russell 2000 flat on the wk

 

Meanwhile you saw big time bearish divergences in Emerging Market Equities versus something like the SP500 which closed +0.7% on the week at its all-time high:

 

  1. MSCI Emerging Markets Index down -2.4% on the week to -1.1% YTD
  2. MSCI Latin American Index -4.5% on the week to -5.8% YTD

 

Emerging Markets have looked a lot like the Russell 2000 (a US growth index) and the 10yr Treasury Yield (another US economic #GrowthSlowing proxy) as of late – and that shouldn’t surprise anyone who realizes that global growth continues to slow.

 

But but, if your “market” is simply what the SP500 is doing, I can show you #GrowthSlowing divergences there too:

 

  1. Consumer Discretionary (XLY) stocks were down -0.1% in an “up SP500 market” last week
  2. Slower growth, Consumer Staples (XLP) stocks beat “the market”, closing up another +2.2% on the week

 

Since our #Quad4 deflation playbook says you buy Consumer Staples (XLP) and Healthcare (XLV), last week’s divergences at the sector level certainly made a lot more sense to us than the consensus “gas prices are down, so buy the consumer” meme.

 

Growth and inflation expectations are obviously causal to market prices. But so are central planners burning their respective currencies at the stake.

 

While many US only “market” people think the US Dollar’s rise is a sign of their savior, it’s not (if you had #RatesRising it might be, but they fell again last week to 2.30% on the UST 10yr Yield). It’s a sign of global economic duress.

 

Last week had both the Japanese and European central planners devaluing their currencies, at the same time:

 

  1. Euro (vs USD) down another -0.6% on the week to -9.4% YTD
  2. Yen (vs USD) down another -2.0% on the week to -8.1% YTD

 

By any long-term measure, these are massive annualized currency moves.

 

And since the market I look at is coming off all-time lows in cross asset class volatility (FX, Equities, Commodities, Fixed Income – see our #VolatilityAssymetry slide deck from July of 2014), I see the FX market as the biggest blinking red light of all.

 

It’s warning the world that this grand central planning experiment is failing where it matters most, in economic growth terms.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.26-2.38%

SPX 1

RUT 1134-1181

EUR/USD 1.23-1.25

Yen 111.16-117.24

Gold 1132-1205

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Blinking Red - 11.10.14 Chart


November 10, 2014

November 10, 2014 - Slide1

 

BULLISH TRENDS

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BEARISH TRENDS

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November 10, 2014 - Slide12


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