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Takeaway: In today's edition of the Macro Playbook, we quantify Japan's impact on "risk asset" beta, US corporations and on the active mgmt. industry.


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)


  • Quantifying Japan’s Impact on “Risk Asset” Beta: Obviously with the BoJ recently adopting to go all-in on currency debasement, we are not surprised to see inverse correlations between the JPY and so-called “risk assets” tighten in recent months. This perpetual inverse correlation is a function of Japan’s status as the world’s largest supplier of capital. Specifically, Japan’s net international investment surplus of ~$3T is equivalent to 68% of the country’s GDP and compares to a -$5.5T deficit for the U.S. The key takeaway is that when Japanese investors get worried about global growth or when the sustainability of JPY debasement (i.e. income balance inflation) is called into question, investors should expect JPY repatriation to negatively impact global equity and credit markets. Regarding the latter point, the very source of yen debauchery (i.e. Abenomics) is at risk of being rendered a thing of the past just one month from today! Review our 11/19 note titled, “JAPAN: DOES THE "ABENOMICS TRADE" HAVE MORE ROOM TO RUN?” for more details.
  • Quantifying Japan’s Impact on U.S. Corporations: To answer the hyperlinked question above, we do think Abenomics has room to run – beyond December 21st, that is. To the extent Abe’s LDP/NKP coalition wins another parliamentary majority (we think they will, though the mandate will likely be less strong than in 2012), the yen will be burned to lows that even the most ardent yen bears aren’t anticipating. Specifically, Bloomberg consensus expects 120 on the USD/JPY cross by EOY ’15, while FX forwards are implying a pullback to 117. Consensus is nowhere near in the area code of Bearish Enough on the yen if Abe gets another go at it! In the second chart below, we show 51 domestically domiciled companies with revenue exposure to Japan greater than or equal to 10% that could see incremental top line erosion over the NTM.
  • Quantifying Japan’s Impact on Active Management: While Consensus Macro continues to cheer on Policies To Inflate out of G3 central banks (and China this AM), we continue to remind investors of the ultimate risks of minimal volatility and subdued variance throughout the U.S. equity market – which is a continued shift away from active management. Jonathan Casteleyn of our Financials Team as written about these trends extensively, most recently in yesterday’s note titled, “ICI Fund Flow Survey - Passive Market Share Taking Over on Both Sides of the Aisle”: “Year-to-date, running aggregate money flow also reflects this preference for passive products with equity ETFs more than doubling the production of equity mutual funds and with fixed income ETFs having just overtaken bond funds with the recent dislocation in the taxable category.” If you’re interested in receiving this data on a regular basis, simply send an email to ... Going back to the headwinds facing active managers, recent data from BAC showed just 18% of active managers are beating their benchmarks this year, the worst ratio in a decade. Moreover, equity hedge funds (per the HFRX Equity Hedge Fund Index) are on track for their third-worst annual return ever. Refer to our 10/31 note titled, “WEEKEND MUST-READ: DOES THE DEATH OF JAPAN = THE DEATH OF ACTIVE MANAGEMENT?” for more details on why we think cheering on central bank-induced asset price inflation is, at best, a fool’s errand.


THE HEDGEYE MACRO PLAYBOOK -   of revenues from Japan

THE HEDGEYE MACRO PLAYBOOK - HFRX Equity Hedge Fund Index Annual Return

***CLICK HERE to download the full TACRM presentation.***


#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: Building Expectations (11/20)


#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.

#Bubbles: S&P500 Levels, Refreshed (11/18)

Best of luck out there,


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.