Please see our note: http://docs.hedgeye.com/HE_Macau_11.25.14.pdf
Takeaway: Wynn remains the laggard in November.
We're going live on @HedgeyeTV with @KeithMcCullough at 830EST.
You can watch here: https://www.youtube.com/watch?v=yfv3KHZMM6Q&feature=youtu.be
Client Talking Points
Chinese central planning bounce (rate cut) looks short lived for everything “China Demand”; WTIC tested the top end of our risk range and failed - no support to $73.04/barrel heading into OPEC; Energy Stocks (XLE) led decliners (again) yesterday -0.8%.
Russia bounced on the China rate cut thing last week (as did most things #deflation), then failed, trading down -1.2% this morning to -23.3% year-to-date on the Russian Stock Market; Ruble remains in crash mode too, down another -1% to 45.28 vs. USD.
UST 10YR Yield reads Japanese, Chinese, European panic (i.e. global growth slowing) as bearish as it should; 2.29% UST 10YR this morning is a 2 week low as the total return of the Long Bond in 2014 continues to be A) higher than most U.S. stock market averages and B) without the SEP-OCT volatility.
|FIXED INCOME||31%||INTL CURRENCIES||5%|
Top Long Ideas
The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.
We continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest).
The U.S. is in Quad #4 on our GIP (Growth/Inflation/Policy) model, which suggests that both economic growth and reported inflation are slowing domestically. As far as the eye can see in a falling interest rate environment, we think you should increase your exposure to slow-growth, yield-chasing trade and remain long of defensive assets like long-term treasuries and Consumer Staples (XLP) – which work decidedly better than Utilities in Quad #4. Consumer Staples is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.
Three for the Road
TWEET OF THE DAY
Macro pros who bought $TLT on central planning gone wild in 2014 (as growth slowed) continue to get paid +19% YTD
QUOTE OF THE DAY
Never confuse a single defeat with a final defeat.
-F. Scott Fitzgerald
STAT OF THE DAY
Russia is losing up to $140 billion per year because of falling oil prices and sanctions with Western nations, according to estimates from Russia's finance minister Anton Siluanov.
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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.
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
- iShares Russell 2000 ETF (IWM)
- SPDR S&P Regional Banking ETF (KRE)
- 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
- 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.
***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.
#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.
"What you also know is that at this stage of the central planning war, equity markets going up really has nothing to do with real-growth anyway," CEO Keith McCullough wrote in today's Morning Newsletter. "It has everything to do with Japan, Europe, USA, China, etc. trying to resuscitate drowning inflation expectations.
On that real-time score, as you can see in today’s Chart of The Day (US TIPS, 5 year Breakevens), so far… no good.
While the 2 day China rate cut “pop” in everything inflation expectations that’s been dropping was fun to watch, it didn’t change #Quad4 Deflation expectations. Both global growth and inflation expectations are still slowing, at the same time."
“We should burn what wagons we have, on order that our cattle not be our generals.”
According to ancient Greek #history, that’s what an emerging Athenian leader, Xenophon, told his men they should do as they marched against their Persian King. “Moreover, let us also abandon other superfluous baggage, except what we have for war or for food.” (Xenophon: The Anabasis of Cyrus, pg 108)
Yep. That’s the stuff I am reading these days. If you want to call it my confirmation bias in being bearish against central planning overlords (i.e. that this will not end well), I’m cool with that.
Buying the Long Bond (TLT) is as close as I am going to get to war with US and global growth bulls. And I probably won’t stop riding this bearish growth view, until the US elects to burn the yield chasing wagons – letting rates rise.
Back to the Global Macro Grind…
In case you didn’t know that one of the only ways out of this centrally planned Liquidity Trap (Total US Equity Market Volume was -29% versus its YTD avg yesterday) is to stop doing what didn’t work, now you know. Or at least the bond market does…
BREAKING (updated growth “survey” from Hedgeye): US 10yr Treasury Yield is ticking down to a fresh November low of 2.29% this morning and the Yield Spread (10yr minus 2yr yield) has compressed towards its 2014 YTD lows of 176 basis points this morning.
These are clean cut #GrowthSlowing signals. But you already know that.
What you also know is that at this stage of the central planning war, equity markets going up really has nothing to do with real-growth anyway. It has everything to do with Japan, Europe, USA, China, etc. trying to resuscitate drowning inflation expectations.
On that real-time score, as you can see in today’s Chart of The Day (US TIPS, 5 year Breakevens), so far… no good.
While the 2 day China rate cut “pop” in everything inflation expectations that’s been dropping was fun to watch, it didn’t change #Quad4 Deflation expectations. Both global growth and inflation expectations are still slowing, at the same time.
Other than one of the Fed’s preferred ways to monitor #deflation expectations (Breakevens), here’s what else I’m looking at:
1. US Dollar Index vs both Burning Yens and Euros = +10% YTD
2. CRB Commodities Index -0.7% yesterday to -4.6% YTD
3. WTI Oil flattish this morning at $76.01, down -17% YTD
4. Copper flat this morning at $3.01/lb, down -10% YTD
5. Russian Stocks (RTSI) -1.2% this morning to -23.3% YTD
6. Energy Stocks (XLE) down (again) -0.8% yesterday to -0.8% YTD
Then, of course, you can look at some late-cycle stuff like US wage Inflation… where 2/3 of the country has seen real wages deflate since the Fed undertook their unprecedented Policy To Inflate (see Federal Reserve’s own papers on the matter for details).
Or you can just find a “survey” that tells you something that has been the complete opposite of the wage deflation and no-capex cycle data. And say that the “market is up” on something like that.
But when you say “market” don’t forget that my preferred risk adjusted market to be long in 2014 (Long Term Treasuries) has had a much higher absolute return on much lower realized volatility than US small/mid cap stocks have.
Even if the July to October +160% ramp in the VIX is forgotten (for now), that doesn’t mean that the non-linear and interconnected economic risks associated with #Deflation Expectations Rising cease to exist.
What also exists as of this week is non-survey computed options positioning in Global Macro (non-commercial CFTC futures and options consensus positioning):
1. SP500 (Index + Emini) has moved to its biggest net LONG position since late SEP at +29,110 contracts
2. Long Bond (10yr Treasury) hit its biggest net SHORT position of 2014 at -128,032 contracts
3. Oil still has a net LONG position of +276,213 contracts, only down -12,971 week-over-week
“So”, what does that tell us?
1. After shorting the OCT lows, hedge funds have covered their shorts and are chasing the bull run in SPY (again)
2. Consensus Macro continues to think the risk in interest rates is to the upside (we reiterate downside!)
3. Perpetual expectations for another central plan (OPEC) remain for a non $65 oil price
Since Consensus Macro is not my expectations general, I say you burn the groupthink wagons and do the exact opposite of where those options are positioned: BUY Long Bond (TLT, EDV, etc.), and SHORT SP500 (SPY), Oil, and its related stocks and bonds.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.28-2.34%
WTI Oil 73.04-77.51
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer