Gambling central bankers across the globe are torching their currencies, inflating dangerous bubbles, and threatening markets and economic stability around the world.
Hedgeye Macro Associate Christian Drake shares the top three things in Keith's macro notebook this morning.
Our macro team’s #Quad 4 deflation call continues to manifest itself in both Oil prices and Energy related countries, stocks, and bonds.
In the end, this will be one of the big things that will have mattered.
Brent is seeing follow through selling after having a -2.6% down day yesterday (down a whopping -29% year-to-date) while WTIC down -0.4% to $76.85 is looking at lower-lows.
#Quad4. It matters.
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Takeaway: Our Macro Playbook is a daily 1-page summary of our investment themes, core ETF recommendations and proprietary quantitative market context.
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)
- SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
- iShares MSCI France ETF (EWQ)
- iShares MSCI European Monetary Union ETF (EZU)
QUANT SIGNALS & RESEARCH CONTEXT
- Trending Deflationary Pressures Abound: As you are likely well aware by now, our #Quad4 theme calls for a continued slowing of both real GDP growth and headline CPI in the U.S. over the intermediate term. One of the ways we arrive at our forecast(s) for domestic disinflation is by outright deflation in the commodity markets. Looking to our Tactical Asset Class Rotation Model (TACRM), Commodities as a primary asset class continues to screen bearishly via a “DECREASE Exposure” recommendation. Its Passive Trend Follower Asset Allocation signal of 7% represents a -44% delta from its TTM average and is only in the 14th percentile of readings since the start of 2008. From a market breadth perspective, 39% of the 23 ETFs comprising this asset class have a Volatility-Adjusted Multi-Duration Momentum Indicator reading below -1x, which indicates a clear trend of negative volume-weighted price momentum across multiple durations. Cocoa (NIB), Crude Oil (BNO, USO), Gasoline (UGA) and Gold (GLD) are leading the charge lower… Over the least ~7Y, we have anchored on commodity prices to inform our view of the 2nd derivative of CPI given that there has been no directional up or down trend in traditional CPI drivers like wage inflation – which continues to be flat-lined around +2% YoY as it has been for the past ~5Y. Outright deflation remains a key intermediate-term risk coming off the 2011-12 bubble highs in commodity prices.
***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.
Early Look: Oh, Snap! (11/13)
#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.
#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: Battlefield’s Vortex (11/11)
Best of luck out there,
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.
This is a complimentary look at Hedgeye CEO Keith McCullough's proprietary buy and sell levels on major markets, commodities and currencies. It was originally published November 13, 2014 at 07:34. Click here to subscribe.
Client Talking Points
The Weimar Nikkei completed her +20% centrally planned ramp overnight, closing up another +1.1% vs. 14,532 on OCT 17th – it’s a good thing that was “fundamental” – in other news, Global #GrowthSlowing continues and the rest of Asian Equity markets trading from up small (HK +0.3%) to down -0.2-0.5% (KOSPI, India, Philippines).
#Quad 4 deflation continues to manifest in both Oil prices and Energy related countries, stocks, and bonds – this will be one of the big things, in the end, that will have mattered. Brent is seeing follow through selling after having a -2.6% down day yesterday (-29% year-to-date), and WTIC -0.4% $76.85 looking at lower-lows.
Russia is down another -1.9% this morning (Russian Trading System -26.1% year-to-date) as European Equities try to bounce (again) after getting slammed yesterday; both Italian and Spanish CPI showed 0% inflation post European Central Bank President Mario Draghi’s Policy to Inflate.
|FIXED INCOME||28%||INTL CURRENCIES||4%|
Top Long Ideas
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.
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).
The U.S. is in Quad #4 on our GIP (Growth/Inflation/Policy) model, which suggests that both economic growth and reported inflation are slowing domestically. As far as the eye can see in a falling interest rate environment, we think you should increase your exposure to slow-growth, yield-chasing trade and remain long of defensive assets like long-term treasuries and Consumer Staples (XLP) – which work decidedly better than Utilities in Quad #4. Consumer Staples is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.
Three for the Road
TWEET OF THE DAY
TV TODAY: Hedgeye CEO @KeithMcCullough will be live on @FoxBusiness from 9:30am to 10:10am. @OpeningBellFBN
QUOTE OF THE DAY
Dictators ride to and fro upon tigers which they dare not dismount. And the tigers are getting hungry.
- Winston Churchill
STAT OF THE DAY
Nearly 7 million Americans are stuck in part-time jobs that they don’t want (Wall Street Journal).
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