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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – November 17, 2014


As we look at today's setup for the S&P 500, the range is 55 points or 2.20% downside to 1995 and 0.50% upside to 2050.                                        

                                                                                       

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: 1.80 from 1.81
  • VIX closed at 13.31 1 day percent change of -3.48%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Empire Manufacturing, Nov., est. 12.0 (prior 6.17)          
  • 9:00am: ECB’s Draghi speaks in Brussels
  • 9:15am: Capacity, Oct., est. 79.3% (prior 79.3%)
  • 9:15am: Industrial Production, Oct., est. 0.2% (prior 1%)               
  • 10am: Fed’s Evans speaks in Chicago      
  • 11am: U.S. announces plans for auction of 4W bills          
  • 11:30am: U.S. to sell $24b 3M bills, $28b 6M bills               

               

GOVERNMENT:               

    • 1pm: Nuclear Regulatory Commission Chair Allison Macfarlane speaks at NPC on safe operation of nation’s more than 100 nuclear power plants

 

WHAT TO WATCH:

  • Japan Unexpectedly Enters Recession as Abe Weighs Tax            
  • *Pfizer to Buy Merck KGaA Cancer Drug Rights for $850m            
  • ** Pfizer Cuts 2014 Reported Diluted EPS Range to $1.40-$1.49 
  • Actavis Said Near Deal to Buy Allergan for Over $215/Share         
  • Halliburton Said to Resume Merger Talks With Baker Hughes     
  • JPMorgan Settles Oil Rights-Owner Suit Alleging Deals   
  • Zoetis Adds Poison Pill as Ackman Stake Raises Takeover Chance             
  • Ford Expands Ranger Pickup Recall for Flawed Takata Air Bags   
  • Facebook Tells Marketers to Stop Trying to Post Ads for Free     
  • Delta Seeks to Boost Asia Hub With Plan to Triple Seattle Gates
  • Carrey’s ‘Dumb & Dumber To’ Debuts as Top Box-Office Hit       
  • China’s Bad Loans Jump Most Since 2005 in Threat to Economy 
  • Putin Warns He Won’t Let Rebels Be Beaten by Ukraine Forces 
  • Citigroup, JPMorgan, others post monthly credit-card data         
  • 13-F WRAP: Alibaba Attracts Appaloosa, Paulson, Soros, Moore

               

EARNINGS:        

    • Agilent Technologies (A) 4:05pm, $0.89 
    • Jacobs Engineering (JEC) 9:30pm, $0.86 
    • Keysight Technologies (KEYS) 4pm, $0.77             
    • Tyson Foods (TSN) 7:30am, $0.77             
    • Urban Outfitters (URBN) 4pm, $0.41                      

                               

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Brent Crude Drops on Growth Concerns as Japan Enters Recession
  • Gold Trades Below Two-Week High Amid Signs of Physical Buying
  • China to Cut Agriculture Tariffs in ‘Game Changer’ for Australia
  • Hedge Funds Cut Gold Bets in Fastest Exit This Year: Commodities
  • Copper Falls Amid Demand Concern as Japan Sinks Into Recession
  • Australia-China Free Trade Deal to Remove Some Resources Tariffs
  • Mounting Pressure on OPEC Spurs More Wagers on Oil Rally: Energy
  • Osisko to Buy Virginia for $408 Million to Add Gold Royalties
  • Steel Rebar Falls as Weak Demand Weighs Against Production Cuts
  • China Copper, Zinc, Alumina Output Rise to Record Highs in Oct.
  • Wheat Climbs Toward 11-Week High on Australia, U.S. Crop Outlook
  • Arabica Trades Near 3-Week High on Brazil Dryness; Sugar Falls
  • OIL DAYBOOK: Crude Down; Iran Minister Visits UAE Ahead of OPEC
  • Australia Opens China’s Services Market With Free Trade Accord

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

 

QUANT SIGNALS & RESEARCH CONTEXT

 

  • New Lows for FX: Our Tactical Asset Class Rotation Model (TACRM) is generating a lowly 2% Passive Trend Follower Asset Allocation for FX as a primary asset class, which represents a delta of -45% and -81% from its trailing 3M and 12M averages, respectively. Furthermore, that 2% reading is only in the 1st percentile of readings since the start of 2008. Only two of the 14 ETFs comprising the FX asset class in TACRM have positive Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) readings; a whopping 57% of them have VAMDMI readings below -1x (i.e. exhibiting a clear trend of negative volume-weighted price momentum on a multi-duration basis). Our #Quad4 theme continues to remain appropriately on the right side of this move in Foreign Exchange
  • #StrongDollar Likely to Continue: Obviously the BoJ has gone all-in with money-printing and our proprietary G3 Monetary Policy Model continues to portend further easing out of the ECB as well. To the extent they are able to act as aggressively as what is being demanded by the markets remains to be seen, however. All told, the USD is clearly broadly overbought, but until our quantitative  signals suggest otherwise, we think it pays to be short of foreign currency exposure. Don’t get caught myopically naval gazing at the U.S. economy; RoW monetary policy is as big a factor in determining FX rates as the Fed! 

 

THE HEDGEYE MACRO PLAYBOOK - TACRM GMRS

 

THE HEDGEYE MACRO PLAYBOOK - US DOLLAR INDEX

 

THE HEDGEYE MACRO PLAYBOOK - MONETARY POLICY MODEL

 

***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: Bad #Deflation (11/14)

Oil: Supply, Supply, Supply (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.

 

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: Battlefield’s Vortex (11/11)

 

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.

 


November 17, 2014

November 17, 2014 - Slide1

 

BULLISH TRENDS

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 BEARISH TRENDS

 

November 17, 2014 - Slide5

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Bootlegging & Banking

This note was originally published at 8am on November 03, 2014 for Hedgeye subscribers.

“I don’t mind going back to daylight saving time.  With inflation, the hour will be the only thing I’ve saved all year.”

-Victor Borge

 

During daylight savings time, in the fall and winter months, the U.S. Virgin Islands are one hour ahead of East Coast time. 

 

Instead of getting up at 4am everyday, I could get up at 5am…and, you know…..be on an island. 

 

Keith’s in Cali this week.  When he gets back, I’ll try to leverage the jet-lag + daylight savings  brain fog combo and float the “Hedgeye Caribbean” proposal, again….

 

“you miss 100% of the shots you don’t take”

 

Bootlegging & Banking - st1

 

Back to the Global Macro Grind...

 

In our 4Q Macro Investment themes call we profiled a series of bubbles which, among others, included:

 

  • Complacency Bubble: Daily moves of >1% vs. Average VIX level (by year)
  • Inequality Bubble: Labors Share of National Income vs. Congressional Disapproval vs. Gini Coefficient
  • Hedge Fund Correlation To Beta Bubble:  Hedge fund trailing correlation to the SPX vs. Average Relative Monthly Performance
  • Leverage Performance Chase Bubble:  Margin Debt (inflation Adjusted), % of SPX Mkt Cap
  • Expensive Small Cap Illiquidity Bubble:  Russell 2000 Trailing PE vs Average Market Cap Traded (by year)
  • Basement Dwelling Bubble: Real Median Household Income vs. 18-34YOA Homeownership Rate vs. Housing Expense as % of Median Income
  • Spread Risk Bubble:  IG & High Yield Spreads over Treasuries vs. Bond Volatility vs. Total Corporate Debt Outstanding

 

Our timing on the complacency bubble proved particularly prescient (substitute “lucky” if you’d like).  Prior to our themes call, the VIX was trading at its lowest average level in a decade and just 11% of trading days saw moves in excess of 1% in either direction.  Subsequent to our call, the VIX has been higher by ~33% on average and the SPX has had daily moves greater than +/- 1% over 50% of the time.    

 

We expect the Dramamine ride to continue. 

 

Taking a broader view, each of the aforementioned bubbles are, in some magnitude, outcroppings of the larger bubble that is Central Banking. 

 

With the explicit goal of QE initiatives being financial asset price inflation - and the hope for the ultimate trickle down and around effect - asymmetries and inequalities have become more pronounced in recent years.  Such policy manifestations, however, are more an extension of secular trends than neoteric phenomenon. 

 

The financial sector and those tied to it have benefited disproportionately since the turn of the interest rate cycle circa 1980.  From 1980 to its peak in 2006,  the finance industry grew from less than 5% of the economy to ~8.3%, taking share at a rate of ~13bps per annum while the financial sector weight in the S&P500 rose from less than 10% to greater than 20% over the same period. 

 

Industry and activity chase price/profit and the broader reality of the great moderation – which, instead of promoting natural economic cycling, effectively propagated the accumulation of latent risk – is that 30+ years of lower highs and lower lows in interest rates supported a multi-decade run in financial asset price appreciation - a phenomenon exaggerated further by the twin peaks in both demographics and household & corporate leverage. 

 

Alongside that financialization, the gini coefficient in the U.S. increased almost a full decile and the share of total income earned by the top 1% of families more than doubled from less than 10% to greater than 20%.

 

The minority with financial assets and those tasked with managing them - which, coincidentally, became increasingly less mutually exclusive - benefited as bond prices had a historic bull run while the ongoing, incremental lowering of discount rates provided for a perma-juicing of asset values via the Present Value effect.  

 

Q: How much would the median home be worth today if rates were at 10% instead of 4%?

A:  About -45%, or -$110K, less. 

 

Quasi-relatedly, the policy perpetuated asset bubble rotation into housing destroyed a perfectly predictive housing model. 

 

Over the pre-1995 historical period, New Home Sales could be modeled as an almost perfect periodic function.  For the aspirant, part-time quants like myself, who would like to plot the function, here’s what I got on a 1st pass…..

 

f(x) = 241*sin(2Pi/82*x-20.5)+614   ….#CoolButUseless

 

Perhaps as the last of the cumulative displacement from trend burns off in the next few years we can return to a similarly predictable oscillation in new housing demand.     

 

Anyhow, a couple weeks back, Janet Yellen expressed concern over the ongoing rise in inequality that team FOMC itself helped perpetuate. 

 

Janet failed to explicitly address the role of central bank policy in that burgeoning divide but the Fed does hold an appreciation for the lag between Wall Street’s discounting of policy via prices and actual Main Street effects.  And with the normal policy transmission channel left mostly prostrate by the zero bound in rates,  the less potent and longer lagged trickle through of Wall Street wealth to the real Main Street economy has become the hoped for transmission channel detour route. 

 

Ironically, or unfortunately, the problem with that ideology is that the prescription for ineffectual QE becomes more dovishness in the belief that it’s the bottlenecked transmission of policy and not the policy itself that’s core to the problem.  From that perspective, more and/or longer ‘easiness’ remains the most favorable conduit for the (eventual) leak through of policy to the populace.   

 

“You keep going until you can’t turn back. That’s where there isn’t any choice. You don’t know where that is. You don’t know until you pass it. And then it’s too late.”

 

Nucky Thompson epitaphed the bubble in 1920’s Prohibition barbarism and capped the series finale of Boardwalk Empire with that quote.  

 

I suspect there’s some transferable insight in that Boardwalk epiphany. 

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.16-2.35%

SPX 1967-2023

VIX 13.31-17.79

USD 84.99-87.11

Yen 108.99-112.98

WTIC Oil 79.47-81.43 

 

To Bootlegging, Central Banking….and kindred spirits...

 

Christian B. Drake

U.S. Macro Analyst

 

Bootlegging & Banking - Inequality EL

 


Investing Ideas Newsletter

Takeaway: Current Investing Ideas: EDV, HCA, MUB, RH, TLT and XLP.

Below are Hedgeye analysts’ latest updates on our six current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.

 

*We also feature two pieces of content from our research team at the bottom.

Investing Ideas Newsletter  - InvestingIdeas11.14 

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

CARTOON OF THE WEEK

Investing Ideas Newsletter  - Moby Yen 11.13.2014

IDEAS UPDATES

TLT | EDV | XLP | MUB

 

More #Quad4 Confirmation

 

  • #Deflation Risk, Revisited: With respect to our CPI model (CLICK HERE to review that methodology), we continue to anticipate disinflation in headline CPI readings over the intermediate term. This would be the case even if commodity prices stopped going down today and remained flat, due to the comparative base effects of #InflationAccelerating in 1H14. Of course, additional commodity price deflation – which our TACRM model continues to imply – would only perpetuate downward concavity in reported inflation; sub-1% YoY CPI readings are very probable over the intermediate term. Since the start of 2008, the CRB Index has declined by a cumulative -43% on a 1-week forward basis when TACRM is generating a “DECREASE Exposure” signal for Commodities as a primary asset class like it is currently.
  • #ConsumerSlowing, Confirmed: Speaking of developing downward concavity, how about domestic consumption growth? Lost amid the perma-bull storytelling about lower gas prices is the fact that Retail Sales growth continues to slow on a trending basis, decelerating from +4.4% YoY in SEP to +4.1% YoY in OCT! Retail Sales accounts for roughly 1/3rd of PCE, which is ~70% of GDP, so as U.S. consumption growth goes, U.S. economic growth goes – in this case, lower!

 

Investing Ideas Newsletter  - 3

 

Investing Ideas Newsletter  - 4

 

Investing Ideas Newsletter  - 5

 

All told, with both growth and inflation slowing, we reiterate our #Quad4 asset allocation of long TLT, MUB, EDV and XLP. We see downside to 1.7% on the 10Y Treasury bond yield over the intermediate term.

HCA

 We sent out a report explaining our position on Friday. Click here to read.

RH 

There’s only one thing that matters right now with Restoration Hardware – and that is next week’s Grand Opening of the new Restoration Hardware Design Gallery in Atlanta.

 

The store, which is in the Buckhead section of Atlanta, was constructed in space formerly occupied by ESPN Zone. It is about 3x the size of existing design galleries, and 7x larger than legacy stores. While one store will not make or break this company, the anecdotes about productivity that come out in the ensuing weeks will be a major focal point for Wall Street.

 

The company reports earnings in the second week of December, and will have quantitative insight as to how the store is performing. They set expectations for $650/square foot once the store is up and running, but we think it will come in well ahead of that. 

 

 

* * * * * * * * * * 

ADDITIONAL RESEARCH CONTENT BELOW

mcdonald's: weak

We continue to stay on the sidelines here... with a bearish bias.

Investing Ideas Newsletter  - 14

oil: supply, supply, supply

After a heavy week of data, both the fundamental picture and behavioral market activity suggest continued downside pressure.

Investing Ideas Newsletter  - 57


Commodities: Weekly Quant

Commodities: Weekly Quant - chart1 divergences

Commodities: Weekly Quant - chart2 deltas

Commodities: Weekly Quant - chart3 USD correls

Commodities: Weekly Quant - chart4 s P correls

Commodities: Weekly Quant - chart5 volume

Commodities: Weekly Quant - chart6 implied vol

Commodities: Weekly Quant - chart7 sentiment

Commodities: Weekly Quant - chart8 1 mth correls

Commodities: Weekly Quant - chart9 3 mth correls

Commodities: Weekly Quant - chart10 6 mth correls

Commodities: Weekly Quant - chart11 1yr correls

Commodities: Weekly Quant - chart12 3yr correls

 

Ben Ryan 

Analyst


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