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)
- iShares MSCI European Monetary Union ETF (EZU)
- iShares MSCI France ETF (EWQ)
- SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
QUANT SIGNALS & RESEARCH CONTEXT
- Housing’s Bottoming Process Continues: In the Wednesday, November 5th 2014 edition of the Hedgeye Macro Playbook, we swapped out housing (ITB) for domestic E&Ps (XOP) on the short side of our core investment recommendations, citing 2nd derivative improvement in the broad compendium of housing data. Since then, the ITB ETF has rallied an additional +5.3%, which compares to a 0.0% return for the XOP ETF. We consider 529bps of alpha a good risk management decision. Moreover, it is indicative of our process in the sense that we’re not wed to any investment thesis; in fact, we find that helping our customers get OUT of positions is as critical as the process by which we help them get IN. Rewinding the tapes, recall that we had been bearish on the rate of change in house price appreciation and homebuilder stocks for the entirety of the year; the ITB was DOWN -3.7% YTD when we backed away from it on the short side. This compares to UP +9.6% YTD for the SPY on 11/5 and represents a material degree of alpha on the short side amid a raging bull market and consensus bullishness on housing. All told, with so much GREEN (i.e. 2nd derivative improvement) percolating throughout our Hedgeye Housing Compendium table, we are not surprised to see the ITB maintain its status among the top-20 Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) readings across the entire global macro complex (~200 ETFs in aggregate). Risk managing the reversal from a #Quad4 early-cycle slowdown to a likely [bullish] #Quad1 economic setup in 1Q15 remains our key focus. We are now short the SPY in Real-Time Alerts, so we are of the view that there'll be at least one more correction in between now and then.
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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.
#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.
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.