In this brief excerpt from today’s Institutional Morning Macro Call, Hedgeye CEO Keith McCullough discusses current economic pressures in Japan and the U.S., as well as the exaggerated impact of falling oil prices on consumers.
After doing nothing in November (it was literally flat for 4 straight weeks), the Russell 2000 dropped -1.7% yesterday in a straight line. It's back to down -0.9% for 2014 and down -4.5% since July.
Bull market? Or still a #bubble popping?
On a related note, Total U.S. Equity Market Volume was up +14% vs. its 1 month average yesterday as stocks fell.
In other words, the TREND of U.S. equity volume accelerating only on DOWN days continues to signal that the #LiquidityTrap (especially in small caps) remains.
Editor's note: This is an excerpt from Hedgeye morning research. For more information on how you can become a subscriber click here.
Takeaway: Another tough month in Macau. December could be worse.
Please see our note: http://docs.hedgeye.com/HE_Macau_12.2.14.pdf
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Takeaway: October's Corelogic data is the nail in the coffin of the bearish Housing thesis. Time to go the other way.
Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.
Today's Focus: October CoreLogic Home Price Report
Corelogic Home price data for October released this morning showed home prices growing +6.1% YoY – a sequential acceleration relative to the +5.3% rate of appreciation reported last month. Price trends in the Ex-Distressed series were similar, accelerating to +5.6% YoY from +4.8% in September. The short-term projections for November are calling for further acceleration to +6.3% and +5.9% in the national and ex-distressed series, respectively.
The Dilemma…Resolved? Back on 9/2, we put out a note titled: THE DILEMMA where we considered the reported stabilization in home price growth for the Jun/July period in the context of the change in CoreLogic's HPI estimate methodology and the rise in magnitude of estimate revisions in 2014.
Our conclusion was that the emerging stabilization in 2nd derivative HPI – the trend of which is central to our top down view on the directional outlook for housing (see last week's note: INFLECTION INSPECTION for a summary review of our top-down model) – warranted more caution on remaining bearish but that we were content to await confirmatory data, both from CoreLogic and the other primary home price series.
While the subsequent data was, indeed, revised to reflect ongoing price deceleration, the trend across the CoreLogic, Case-Shiller, and FHFA series have shown a gradual slowdown in the sequential rate of year-over-year price deceleration over the last two-to-three months.
*The important takeaway is that what was a fledgling stabilization in HPI trends is now showing a nascent shift towards stabilization/acceleration. Historically, housing related equities have followed the slope in price growth, so an inflection in pricing would sit as a discrete positive for the complex. We’re still a bit weary of a single month of CoreLogic data in isolation but the multi-month stabilization in price growth across HPI series suggests the shift is more legitimate than not.
CoreLogic HPI incorporates more than 30 years worth of repeat sales transactions, representing more than 55 million observations sourced from CoreLogic's property information database. The CoreLogic HPI provides a multi-tier market evaluation based on price, time between sales, property type, loan type (conforming vs. nonconforming), and distressed sales. The CoreLogic HPI is a repeat-sales index that tracks increases and decreases in sales prices for the same homes over time, which provides a more accurate constant-quality view of pricing trends than basing analysis on all home sales. The CoreLogic HPI covers 6,208 ZIP codes (58 percent of total U.S. population), 572 Core Based Statistical Areas (85 percent of total U.S. population) and 1,027 counties (82 percent of total U.S. population) located in all 50 states and the District of Columbia."
Joshua Steiner, CFA
Christian B. Drake
Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
Takeaway: In today's Macro Playbook, we show how the current quantitative setup within the equity market supports reiterating our #Quad4 theme.
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 MSCI European Monetary Union ETF (EZU)
- iShares MSCI France ETF (EWQ)
- iShares Russell 2000 ETF (IWM)
- SPDR S&P Regional Banking ETF (KRE)
- SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
QUANT SIGNALS & RESEARCH CONTEXT
If you tangentially followed our research in the YTD, you’d probably arrive at the conclusion that we’re ultra bearish and/or always negative on the stock market – insomuch as you would’ve arrived at the polar opposite conclusion(s) when we were the bulls of bulls in 2009 or in 2013.
Fortunately for those who are actually paying attention, our research views are much more nuanced. Specifically, being bearish on growth and/or inflation affords us the opportunity to BUY and SELL a number of sectors and style factors.
Along those lines, we reiterate our BULLISH bias on the sectors and style factors associated with #Quad4 outperformance (healthcare, consumer staples, REITs, mega caps) and our BEARISH bias on those that are associated with #Quad4 underperformance (energy, materials, regional banks, small-to-mid caps).
Both recent performance and current levels of momentum support reiterating that view. On a WoW basis, the XLV, XLP, VNQ and USMV ETFs are up +1.6%, +1.1%, +1.5% and +0.8%, respectively. This contrasts with the XLE, XLB, KRE and IWM being down -9.4%, -4.0%, -2.4% and -1.5%, respectively. The domestic E&P ETF (XOP) – another one of our core short ideas – continues to crash, having dropped -19.2% in just the last week alone!
Looking to our Tactical Asset Class Rotation Model (TACRM) we are pleased to see this theme continuing to play out from a volume-weighted perspective across multiple durations. Specifically, among the 47 domestic equity sectors and style factors we track, healthcare (XLV, IHI, IHE), consumer staples (XLP), REITs (VNQ) and mega caps (USMV) account for 6 of the top 8 Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) readings. Meanwhile, mall-to-mid caps (IWM, IWO, IWN), materials (XLB, GDX) regional banks (KRE) and energy (XLE, XOP, IEZ, AMLP) account for 10 of the bottom 11 VAMDMI readings.
To top it all off, trends across key economic indicators continue to augur for a continuation of our #Quad4 theme in the domestic equity market (click HERE and HERE to review said data). As both Black Friday and Cyber Monday sales and traffic data suggest, Consensus Macro remains dead wrong on its [lazy] “lower gas prices = consumer renaissance” thesis.
***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: Golden Headfakes (12/2)
#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.
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