THE HEDGEYE MACRO PLAYBOOK

Takeaway: In today's Hedgeye Macro Playbook, we reiterate our bullish bias on long duration bonds and our bearish bias on small-to-mid cap stocks.

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. iShares Russell 2000 ETF (IWM)
  2. SPDR S&P Regional Banking ETF (KRE)
  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

  • Reiterating Our Long TLT View: With Consensus Macro going “all-in” on U.S. equities at the all-time highs in the SPX, we’re not surprised to see speculators add to their [large] net SHORT position in the 10Y Treasury futures and options markets WoW. Specifically, the net combined position of -128k contracts is the largest net SHORT position since the week ended January 7th; the z-score (TTM) of -1.4x indicates the most crowded lean since the week ended December 31st. Since we all know the 10Y Treasury yield peaked [on a closing price basis] on 12/31, what investors should infer from this data is that Consensus Macro has gotten rates horribly wrong in 2014 and, to the extent our call for lower rates continues to play out, mass capitulation on the short side of bonds is a probable immediate-to-intermediate-term event.
  • Reiterating Our Short IWM View: Looking to the other side of the trade, the small-to-mid cap style factor remains in the bottom-10 of the 45 U.S. equity sectors and style factors we track in our Tactical Asset Class Rotation Model (TACRM) from a Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) perspective. Recall that this indicator is the amalgamation of three independent z-scores of volume-weighted price data whose sample sizes (i.e. duration) accordion inversely to trending global macro volatility. Refer to our TACRM white paper (hyperlinked below) for more details on why this is a more useful way to track momentum than traditional SMAs, EMAs, RSIs, etc.

THE HEDGEYE MACRO PLAYBOOK - CFTC NNCCP

THE HEDGEYE MACRO PLAYBOOK - TACRM U.S. Equity Style Factors

***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: 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,

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.