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
- Take the Fed’s Word For It On Global Growth: In yesterday’s FOMC minutes, committee members expressed concerns over the impact of slowing global growth on the U.S. economy. We couldn’t agree more. With the advent of this morning’s flash Manufacturing PMI data out of Europe, China and Japan, we received further confirmation of a slowdown in global growth in the month of November. Specifically, in Germany, Manufacturing PMI slowed to 50 from 51.4; in France, Manufacturing PMI slowed to 47.6 from 48.5; in China: Manufacturing PMI slowed to 50 from 50.4 (a six-month low); and in Japan, Manufacturing PMI slowed to 52.1 from 52.4. Our July 15th note titled, "SINGAPORE SAYS, “GLOBAL GROWTH WILL SLOW IN 3Q”" was actually quite prescient when you delve even further into the recent economic data coming out of Europe, China and Japan.
- Global Growth Slowing is NOT Good for the U.S. Equity Market: When Keith and I are in meetings with institutional subscribers, #EuropeSlowing remains the theme we spend the least amount of time talking about – primarily because calling for a European recession is trivial at this point in the cycle. Moreover, Japan is already in recession and looks set to remain there, while China’s economic slowdown also looks set to continue per the GDP math and Beijing’s recent guidance. It’s worth noting that in the most recently reported calendar year (2013), China, Japan and Europe accounted for roughly 40% of both global GDP and global GDP growth on a PPP basis. Moreover, with roughly one-third of S&P 500 revenues coming from abroad, we can’t see how this weakness and commensurate USD strength will not negatively impact the operating results of U.S. companies in the upcoming quarters. Conclusion for perma-bulls: buy high and PRAY for more buyback activity!
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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.
#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.