THE HEDGEYE MACRO PLAYBOOK

Takeaway: In today's Macro Playbook, we highlight the crowded net short position in long-term Treasuries and why we want you to continue buying bonds.

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

  • Buyside Consensus Remains on the Wrong Side of Bonds: As Keith highlighted in yesterday’s Early Look, the speculative net SHORT position in long-term Treasuries via the futures and options markets just hit a 6M high of -126.2k, which represents an -86.1k WoW delta and -1.4 standard deviations shy of the TTM average. What’s important about that last quantitative signal is that it’s the most crowded net short positioning in long-term Treasuries since the week ended 12/31/13. Not ironically, the 10Y Treasury Yield  peaked on a closing price basis at 3.03% on that date. As most recently supported by our #Quad4 theme, we have remained completely on the other side of buyside consensus on bonds all year and continue to recommend this contrarian asset allocation at the current juncture. Much like our #RatesRising view of 2013, fading consensus on bonds has proven to be an extremely profitable exercise over the past two years.
  • “But, But I Can’t Buy Bonds Up Here”: Over the past 1-2 months, one question we’ve repeatedly received from subscribers is some version of whether or not our view on bonds has already played out. Such inquiries are typically prefaced with the assumption that XYZ investor has “missed the move” and that “all the money has been made”. We obviously disagree with this highly consensus premise and prefer to substantiate our claims with hardcore analysis. Moreover, we find it odd that we never get questions like that on the equity market; investors seem to love buying high in the stock market, but not so much in bonds (TLT, EDV, MUB) and in bond-like equities (XLP, XLU, VNQ)… Buy bonds and like it.
  • Keep Pushing Out Those “Dots”!: On that note, our proprietary G3 Monetary Policy Model shows that we’re nearing the strike zone for marginal easing out of the FOMC. While we don’t necessarily believe they’ll actually pull the trigger on another LSAP before year-end, we do find that a continued pushing out of the “dots” on tightening expectations is a highly likely occurrence based on our model. Looking back to QE1, QE2 and Operation Twist, our model was showing an average reading of 26% on the day marginal easing was either announced or strongly hinted at Jackson Hole. QE3 was the lone anomaly in this data set with a 58% reading; recall that its announcement caught consensus by surprise as well. To review, our G3 Monetary Policy Model is an amalgamated look at 10 economic and financial market indicators (on a percentile basis), whereby 0% implies a high probability of easing in the near term, while 100% implies a high probability of tightening in the near term. We are currently at a relatively low reading of 36%...

THE HEDGEYE MACRO PLAYBOOK - ust 10Y NCCP

QE1 Announcement (11/25/08):

THE HEDGEYE MACRO PLAYBOOK - QE1 Announcement 11 25 08

QE2 Hint at Jackson Hole (8/27/10):

THE HEDGEYE MACRO PLAYBOOK - QE2 Jackson Hole 8 27 10

Operation Twist Announcement (9/21/11):

THE HEDGEYE MACRO PLAYBOOK - Operation Twist Announcement 9 21 11

QE3 Announcement (9/13/12):

THE HEDGEYE MACRO PLAYBOOK - QE3 Announcement 9 13 12

Current: 

THE HEDGEYE MACRO PLAYBOOK - Current 11 17 14

***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: November Rain (11/18)

 

#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.