THE HEDGEYE MACRO PLAYBOOK

Takeaway: We juxtapose recent strength in consumer stocks w/ our "early-cycle slowdown" thesis and what we need to see more of to turn bullish.

INVESTMENT CONCLUSIONS

Long Ideas/Overweight Recommendations

  1. iShares National AMT-Free Muni Bond ETF (MUB)
  2. iShares 20+ Year Treasury Bond ETF (TLT)
  3. Health Care Select Sector SPDR Fund (XLV)
  4. Vanguard Extended Duration Treasury ETF (EDV)
  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

 

  • Early Cycle Strength Percolating: One of the reasons we refresh our Tactical Asset Class Rotation Model (TACRM) daily is to force ourselves to analyze market signals that may or may not be supportive of our active macro themes. Today is one of those days. Specifically, at #4, #5 and #6 respectively, Large-Cap Consumer Discretionary (XLY), Retailers (XRT) and Homebuilders (ITB) have each crept into the top-10 Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) readings across the entire global macro universe as defined by TACRM (~200 ETFs in aggregate). Recall that our VAMDMI metric is a proprietary measure of momentum that is specific to TACRM and is designed to front-run [non-linear] regime changes across macro markets (CLICK HERE for more details). On this score, early cycle consumer stocks have clearly broken out to the upside ahead of a bullish #Quad1 setup in 1Q15.
  • Housing Is Supportive of the Bullish #Quad1 Narrative: Recall that our Macro Team has been marginally positive on housing since November 5th (when we closed our ITB short) and emerging trends in the data continue to support this directionally bullish shift: “INFLECTION INSPECTION |  FLEDGLING STABILIZATION IN HPI” (11/25), “EXISTING HOME SALES – EMERGENT MOJO, DAY 3” (11/20) and “STARTS & APPS – MORE POSITIVE HOUSING DATA TURNING THE TABLE GREENER” (11/19).
  • Deflation Is Supportive Too: In addition to this bullish impetus provided by the housing sector, we continue to record a healthy amount of deflation in the median consumer’s “core” PnL. Specifically, rent (20.9% of median consumer PCE), food (11.5% of median consumer PCE), utilities (8.3% of median consumer PCE) and gasoline (6.4% of median consumer PCE) have all deflated from their YTD and/or all-time highs at -1.3% (1Q), -13.3% (MAY), -1.7% (OCT) and -24% (APR), respectively. On a weighted basis – both relative to each other and to their cumulative share of total PCE – the median consumer has received a cumulative tax cut worth about -360bps of aggregate expenditures. Arguably more impressively, our proprietary Consumer Squeeze Index is now registering seven consecutive months of sequential deflation – the longest streak since at least the start of 2007!
  • Do NOT Buy Early-Cycle Stocks Up Here, However!: Obviously with housing turning the corner, on the margin, and the consumer continuing to receive a #StrongDollar tax cut, our research focus is slowly but surely shifting to a likely [bullish] #Quad1 setup in 1Q15. That being said, however, we still have 5-6 weeks of [bearish] #Quad4 to get through first! While it's easy to assume that missing this Centrally Planned rally off the mid-October lows is cognitively preventing us from getting bullish on early cycle stocks up here, we can assure you that our refusal to participate in this market at the current juncture is purely a function of process. Neither sentiment, nor consumption data are supportive of capitulating on the bearish side today. As such, we will continue to patiently wait for an opportunity to buy early-cycle stocks [much] lower in the coming weeks. This call is also supported by our industry “axe” Brian McGough, who thinks the recent strength in consumer stocks is largely a function of misguided bullish sentiment surrounding Black Friday. As alluded to above, however, time is indeed running out for our bearish “early-cycle slowdown” thesis. IT'S GAME TIME, BABY!

 

THE HEDGEYE MACRO PLAYBOOK - TACRM 20 20

 

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

 

THE HEDGEYE MACRO PLAYBOOK - CONSUMER SQUEEZE INDEX

 

THE HEDGEYE MACRO PLAYBOOK - UNITED STATES

 

THE HEDGEYE MACRO PLAYBOOK - REAL PCE

 

THE HEDGEYE MACRO PLAYBOOK - RETAIL SALES

 

***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: Uber Bullish! (11/26)

 

#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.