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Hedgeye Morning Macro Call with CEO Keith McCullough: 'We're Running Out of Central Plans'

 

Hedgeye CEO Keith McCullough pulls no punches discussing the latest global market and economic developments in this complimentary peek behind-the-macro-scenes of today's morning macro call for institutional subscribers.




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Oil, Russia and the UST 10YR

Client Talking Points

OIL

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

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

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.

Asset Allocation

CASH 64% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 31% INTL CURRENCIES 5%

Top Long Ideas

Company Ticker Sector Duration
EDV

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.

TLT

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).

XLP

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

@KeithMcCullough

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.


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.


CHART OF THE DAY: Breakevens (Breaking Bad)

CHART OF THE DAY: Breakevens (Breaking Bad) - 11.25.14 EL Chart

 

"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."

 


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