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THE HEDGEYE MACRO PLAYBOOK

Takeaway: Today we highlight one of our processes that sets us apart from our competition (HINT: we don't do surveys; we actually crunch the numbers).

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

In Monday’s edition of the Hedgeye Macro Playbook, we highlighted how recent trends across the preponderance of high-frequency economic indicators were supportive of our view that both growth and inflation are slowing domestically. Along those lines, the preponderance of this week’s economic data was more of the same in that regard – i.e. slowing at the margins. Here are those key releases (in order of release date/time):

 

  • Chicago Fed National Activity Index: 0.14 in OCT, down from 0.29 in SEP, which was revised down from an initial reading of 0.47
  • Markit Services PMI: 56.3 in NOV, down from 57.1 in OCT
  • Markit Composite PMI: 56.1 in NOV, down from 57.2 in OCT
  • Real GDP: revised up +10bps to +2.4% YoY in 3Q , which was still down from +2.6% YoY in 2Q
  • Case-Shiller Home Price Index: +4.9% YoY in SEP, down from +5.6% YoY in AUG
  • FHFA House Price Index: +4.2% YoY in SEP, down from +4.8% YoY in AUG
  • Conference Board Consumer Confidence Index: 88.7 in NOV, down from a downwardly-revised 94.1 in OCT
  • MBA Mortgage Purchase Applications: -4.3% WoW, down from +4.9% WoW in the prior week
  • Initial Jobless Claims: +313k WoW, up from an upwardly revised +292k WoW in the prior week; on a 4-week rolling NSA basis, the YoY rate of improvement (which implies the 1st derivative is negative) decelerated for the 5th consecutive week to -12.7%
  • Core Durable Goods (ex-Defense & ex-Aircraft): +5.8% YoY in OCT, down from 6.8% YoY in SEP
  • Core Capital Goods (ex-Defense & ex-Aircraft): +8.2% YoY in OCT, up slightly from +8.1% YoY in SEP
  • Real Personal Consumption Expenditures: +2.2% YoY in OCT, down slightly from +2.3% YoY in SEP
  • University of Michigan Consumer Confidence Index: 88.8 in NOV, down from a preliminary NOV reading of 89.4
  • Pending Home Sales: +2.2% YoY in OCT, down from an upwardly revised +3.4% YoY in SEP
  • New Home Sales: +1.8% YoY in OCT, down from +14% YoY in SEP

 

Got #GrowthSlowing?

 

We know why most investors like surveys such as the [regional] Philly Fed Business Outlook or, worse, an “independent” research provider’s proprietary (READ: fabricated) assessment – they’re almost always bullish and they don’t require any work to interpret (i.e. no rate-of-change calculus, trend amalgamation, etc.)!

 

If, however, we opted to publish a survey like our [perceived] competitors, ours would probably tell you to remain long of our slow-growth yield-chasing trade – the outperformance of which has Consensus Macro attempting to play catch-up.

 

***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: Macro Tryptophan (11/28)

 

#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.

 

QE Conundrums – Draghi’s Misguided Intervention? (11/26)

 

#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.


#Deflation Risk

Client Talking Points

OIL

What this #crash tells you is how the perpetual inflation expectation of all major asset prices ends – at first slowly, then all at once. WTIC $69 is -36% since June; the low-end of our intermediate-term TREND range = $64.45; do not underestimate the correlation impact this has to both levered equities and high yield energy debt.

RUSSIA

Breathtaking move for the oligarchs here as the Russian Trading System loses another -3.1% this morning (-30% year-to-date) and the flow through to stock markets like Norway’s (-3.4% this morning), Canada, etc. is obvious.

UST 10YR

UST 10YR continues to #crash (-27% year-to-date) to 2.20% this morning. The world is now buying certain stock markets on the explicit #GrowthSlowing signal that the bond market is issuing (i.e. the new catalyst is an easier BOJ, ECB, PBOC, and… yes Fed!); U.S. CPI can easily break down through 1% in Q1 now – long the Long Bond still our best macro idea #2014

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

Italy's unemployment rate rockets to +13.2% #NoWorries Draghi is on it

@KeithMcCullough

QUOTE OF THE DAY

No one can whistle a symphony. It takes a whole orchestra to play it.

-H.E. Luccock

STAT OF THE DAY

Energy Stocks (XLE) were -1.3% Wednesday, down -3.6% year-to-date.


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – November 28, 2014


As we look at today's setup for the S&P 500, the range is 45 points or 1.87% downside to 2034 and 0.30% upside to 2079.                                 

                                                                                              

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 1.70 from 1.73
  • VIX closed at 12.07 1 day percent change of -1.47%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • No major economic reports scheduled

 

GOVERNMENT:

    • House, Senate not in session
    • No events of note expected

 

WHAT TO WATCH:

  • OPEC Takes No Action to Ease Supply Glut as Crude Oil Slumps
  • Crude Oil Heads for Biggest Weekly Tumble Since 2011
  • Thanksgiving Deal Hunt Draws Millions Away From Dinner in U.S.
  • Wal-Mart Says >22m Customers Visited Its Stores on Thanksgiving
  • Tokyo Electron, Applied Materials Merger Date Delayed to March
  • Enbridge to Buy 80% of E.On U.S. Wind Portfolio
  • Pfizer, Astra Deal May Have Failed on Tax, Soriot Says: CNBC
  • Euro Inflation Slows to 0.3% as ECB Poised to Discuss Stimulus
  • U.S. Jobs, Services, ECB, BOE, NATO: Week Ahead Nov. 29-Dec. 6
  • U.S. equity markets close at 1pm, bond markets close at 2pm

 

EARNINGS:

    • No earnings expected from S&P 500

                                                                                                                               

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Oil Seen in New Era as OPEC Won’t Yield to U.S. Shale: Energy
  • Oil Steadies After OPEC Triggers Biggest Slump in Three Years
  • Iron on ‘Fast Forward’ as Goldman Sees Risk of Price Outlook Cut
  • Commodities Slump to Five-Year Low as Crude Oil Drops on OPEC
  • OPEC Inaction Signals Pain for Refiners With Costly Oil in Tanks
  • Iron Ore Climbs 1.9% to $71.32/Dry Ton, Highest Since Nov. 18
  • Oil Price Drop After OPEC Decision Is ‘Terrible’: Iraq Minister
  • Platinum, Palladium Price Fixings Make Way for Electronic System
  • CARBON: EU Benchmark Allowances Head for Biggest Gain Since June
  • Indonesia’s ‘Toothless’ Policy for Biofuel Seen Hurting Palm Oil
  • Copper Traders Are Bullish on Expectation Stimulus to Aid Demand
  • Wheat in France at Risk of Yellow Rust Outbreak in 2015: Arvalis
  • Palm Drops to One-Month Low as Crude Slump Curbs Biofuel Demand
  • China Said to Order Companies to Check Risks in Commodity Trades

 

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

November 28, 2014

November 28, 2014 - HE DTR 11 28 14


Ignore This Chart (At Your Peril)

Editor's note: This is an excerpt from Hedgeye research. For more information on how you can become a subscriber to America's fastest growing independent research firm click here.

 

* * * * * * * 

Ignore the chart below at your own peril.

 

U.S. Jobless Claims always bottom below 300,000. That marks the beginning of the end (before the beginning of a recession). Then they ramp higher.

 

Just something to keep in mind as the number of people seeking unemployment benefits jumped last week to 313,000. This pushed total applications above 300,000 for the first time in nearly three months.

 

Ignore This Chart (At Your Peril) - jobless claims chart


CHART OF THE DAY: PCE Growth vs. Disposable Personal Income Growth & Change in Savings Rate

CHART OF THE DAY: PCE Growth vs. Disposable Personal Income Growth & Change in Savings Rate - EL Chart2

 

As the 3-D scatterplot below shows, the multiple regression between Disposable Personal Income growth and the change in the Savings Rate (independent variables) vs. the change in Consumer Spending (dependent variable) has an R-square of 0.95 across decades of data. More simply, growth in Disposable Income and the change in the Savings Rate explains ~95% of the change in aggregate household spending.


As we distilled it in our institutional note on Friday:

 

If ya don’t have it (no savings), ya ain’t gettin it (wages), and ya ain’t borrowing it (credit)…ya can’t spend it (PCE).


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