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THE HEDGEYE MACRO PLAYBOOK

Takeaway: Below we highlight the ongoing weakness in domestic consumption data and debate a potential inflection in Chinese economic growth.

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 MSCI European Monetary Union ETF (EZU)
  2. iShares MSCI France ETF (EWQ)
  3. iShares Russell 2000 ETF (IWM)
  4. SPDR S&P Regional Banking ETF (KRE)
  5. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)

 

QUANT SIGNALS & RESEARCH CONTEXT

Quick Check-In w/ the U.S. Consumer: While it’s been nothing shy of fascinating to watch the legacy financial media [positively] spin poor Black Friday and disappointing Cyber Monday results, the data was actually brutal – both from a rate of change perspective and relative to the Consensus Macro “falling gas prices” narrative. While I can spend the next 20 minutes ranting about how embarrassing such mischaracterizations are to our profession, you are probably already well versed in our disappointment with the #OldWall and its bull market marketing appendages. Sparing you from that diatribe, we thought we’d take a second to highlight recent consumer spending data, which remains unequivocally negative from a 2nd derivative perspective on both a sequential and trending basis. Friday’s Jobs Report is the next major data point; will the trend of deceleration inflect or will it continue as U.S. corporations increasingly opt for inflating shareholder returns at the expense of American job growth? As we detailed in our November 26th edition of the Macro Playbook, we still think it pays to wait on rotating into early-cycle consumer exposure.

 

THE HEDGEYE MACRO PLAYBOOK - RETAIL SALES

 

THE HEDGEYE MACRO PLAYBOOK - REAL PCE

 

THE HEDGEYE MACRO PLAYBOOK - PAYROLLS

 

“I Bout ‘Em Because China Told Me To”: To borrow a key excerpt from our 11/21 note titled, “CHINA: WHY DID THE PBOC CUT? WILL IT EVEN MATTER?”: “From a forward-looking perspective, this [rate cut] a good thing only if it signals a sustained move away from the “proactive fiscal policy and prudent monetary policy” they’ve been guiding to and implementing for over two years now… In and of itself, this rate cut will hardly do anything to arrest the rate of decline in Chinese economic growth; nor will it offset the “increasing downward pressure” upon the Chinese economy over the NTM, as most recently reiterated Xu Shaoshi (head of the National Development and Reform Commission) just two days ago.”  Again, Chinese economic growth continues to slow precipitously and the rate cut only confirms our bearish bias on the Chinese economy (i.e. NOT its stock market). If, however, we see continued stabilization in China’s property market and a continuation of more aggressive policy support, it is likely that China joins the U.S. in #Quad1 in 1Q15, which would, in fact, support recent optimism among U.S. equity investors. The next few weeks of guidance out of Beijing are crucial in that regard. All told, if you bought ‘em on the Chinese rate cut news, we hope you allocated capital to the right sectors. In a hypothetical game of 8-on-8, #Quad4 is clearly winning the U.S. equity market; the top-8 VAMDMI readings are all sectors and style factors that tend to outperform in #Quad4, while the bottom-8 are those that tend to deflate in #Quad4.

 

THE HEDGEYE MACRO PLAYBOOK - CHINA High Frequency GIP Data Monitor

 

THE HEDGEYE MACRO PLAYBOOK - CHINA Property Market Monitor

 

THE HEDGEYE MACRO PLAYBOOK - China Iron Ore  Rebar and Coal YoY vs. GDP

 

THE HEDGEYE MACRO PLAYBOOK - CHINA

 

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: 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.

 

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.


Japan, Eurozone and the U.S.

Client Talking Points

NIKKEI

The Nikkei was +0.3% overnight, taking its centrally planned ramp to +22% since Oct 17th, and now (into the FX event in Europe tomorrow) the Yen is signaling immediate-term TRADE oversold at $119.56 (and, not surprisingly, the Nikkei is signaling immediate-term TRADE overbought). If there was a spot to play for a short-term reversal, we think this is it…

EURO

Especially when you have serial money torchers running the show, you need a catalyst to do something like cover Yen – so why not a bounce off the $1.23 EUR/USD line? How much ECB President Mario Draghi can do tomorrow vs. what a lot of shorter-term U.S. based investors think he’ll do remains the question…

UST 10YR

The UST 10YR bounced to yet another lower-high of 2.29% into A) ECB meeting and B) U.S. jobs report Friday – if A and/or B disappoint, we can see 2.16% on the UST 10YR, fast – and that’s what we would be setting up for. Long the Long Bond in the U.S. remains our best Macro long idea in 2014 as Italian 10s break below 2.0% this morning.

Asset Allocation

CASH 63% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 31% INTL CURRENCIES 6%

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

Check out @KeithMcCullough today on Fox Business with @MariaBartiromo for the full hour at 10am. Always a great show.

@HedgeyeRetail

QUOTE OF THE DAY

If we did all the things we are capable of doing we would literally astound ourselves.

- Thomas Edison

STAT OF THE DAY

Russian stock market crash update, down -0.3% to -33.4% year-to-date.


Mortgage Apps | Less Bad Is Good

Takeaway: Purchase apps rose modestly during the holiday week. Bigger picture, more evidence emerges that housing is shifting from bad to less bad.

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. 

 

*Note - to maintain cross-metric comparability, the purchase applications index shown in the table below represents the monthly average as opposed to the most recent weekly data point.

 

Mortgage Apps | Less Bad Is Good - Compendium 120314

 

Today's Focus: MBA Mortgage Applications

The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended November 28th. 

 

The -7.3% decline in the Composite Index belied more sanguine growth on the purchase side where demand rose +2.5% sequentially.

 

  • Purchase demand rose +2.5% WoW and the YoY rate of decline improved to -4.9% from -11% prior as the index held above the 170-level for the 3rd straight week – the longest streak at that level since June.  We don’t take a convicted view of holiday week data in isolation but the multi-week trend has been one of modest improvement.  Compares ease further into the last few weeks of the year and take a second dive into the end of 1Q15. 
  • Refi activity declined -13.4% sequentially despite the retreat in rates with the holiday/seasonals providing some measure of distortion. Rates on the 30Y FRM contract dropped -7bps to 4.08% - the lowest rate YTD and lowest since May of last year. 

 

In short, “stabilization” remains the apt characterization for current HPI and purchase demand trends.  Housing, like most things Macro, is more about better/worse than good/bad and while the data remains soft on an absolute basis, from a rate of change perspective, less bad is good. 

 

Mortgage Apps | Less Bad Is Good - Purchase 2013 v 2014 

 

Mortgage Apps | Less Bad Is Good - Purchase   Refi YoY  

 

Mortgage Apps | Less Bad Is Good - Purchase LT w Summary Stats 

 

Mortgage Apps | Less Bad Is Good - Purchase Qtrly 

 

Mortgage Apps | Less Bad Is Good - Composite LT w Summary 

 

Mortgage Apps | Less Bad Is Good - 30Y FRM 

 

 

About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 

 

Frequency:

The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.

 

  

Joshua Steiner, CFA

 

Christian B. Drake

 


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CHART OF THE DAY: Glacial Cascades: Are You Prepared?

CHART OF THE DAY: Glacial Cascades: Are You Prepared? - 12.03.14 Chart

 

Editor's note: The excerpt below is from CEO Keith McCullough's introduction in today's Morning Newsletter.

 

If you’ve proactively prepared your portfolio for the phase transition of market expectations from inflation to #deflation, congrats. Not being long cascading things like Oil, Energy stocks, and Russian Rubles has been key to your wealth preservation in the last 3 months.

 

But how many people really think about their net wealth this way? How many people start with Warren Buffett’s 1st Rule of Investing: “Don’t Lose Money?” How many services that you pay for are equipped to monitor complex systems in a dynamic way so that your expectations of risk are constantly changing alongside analyzable factors?

 

I spent some time discussing these questions at the annual Hedgeye Company Meeting yesterday in Stamford, CT. In order to illustrate how risk manifests slowly, then all at once, I showed what I think was a fantastic 4 minute video on Glacial Calving (https://www.youtube.com/watch?v=hC3VTgIPoGU). I’d love to see how Draghi and Yellen would centrally plan smoothing that.



Glacial Cascades

“The key to wealth preservation is to understand the complex processes and to seek shelter from the cascade.”

-James G. Rickards

 

If you’ve proactively prepared your portfolio for the phase transition of market expectations from inflation to #deflation, congrats. Not being long cascading things like Oil, Energy stocks, and Russian Rubles has been key to your wealth preservation in the last 3 months.

 

But how many people really think about their net wealth this way? How many people start with Warren Buffett’s 1st Rule of Investing: “Don’t Lose Money?” How many services that you pay for are equipped to monitor complex systems in a dynamic way so that your expectations of risk are constantly changing alongside analyzable factors?

 

I spent some time discussing these questions at the annual Hedgeye Company Meeting yesterday in Stamford, CT. In order to illustrate how risk manifests slowly, then all at once, I showed what I think was a fantastic 4 minute video on Glacial Calving (https://www.youtube.com/watch?v=hC3VTgIPoGU). I’d love to see how Draghi and Yellen would centrally plan smoothing that.

 

Glacial Cascades - 55

 

Back to the Global Macro Grind

 

Yesterday I used the snow-pack metaphor to discuss market risk factors that have a rising probability of cascading into asset class draw-downs. The idea was inspired by my friend Jim Rickards, who wrote an awesome chapter called “Maelstrom”:

 

“An avalanche is an apt metaphor of financial collapse. Indeed, it is more than a metaphor, because the systems analysis of an avalanche is identical … An avalanche starts with a snowflake that perturbs other snowflakes, which, as momentum builds, tumble out of control… The dynamics are the same, as are the recursive mathematical functions used in modeling the process.”

-The Death of Money, pg 265

 

Unless they are just looking at “charts”, I think almost everyone who gets paid real money to pick stocks, bonds, commodities, etc. has a bottom-up process to analyze securities. In fact, some are quite impressive. But how impressed are you with the systems of analysis our profession uses, from a top-down perspective?

 

Going on 16 years into this, my experience has been a learning one. The more I read, the less I know. But the more I observe how consensus thinks about top-down macro risks that are developing in this dynamic ecosystem of market expectations, the more opportunity I see in learning more of what not to do, out loud.

 

You see, while I certainly don’t make the same “money” I used to make on the buy-side, I am making a difference in my learning experience. When you open yourself up to the critique of the crowd (daily), you’re actually forced to learn faster.

 

In terms of big bang losses of wealth (draw-downs), the lessons, unfortunately, tend to be more expensive for the many, and profitable for the few. That’s why I think making money at the all-time highs in asset price inflation becomes next to impossible, without protecting for the downside risks associated with an avalanche (deflation) like the one we just saw in Energy markets.

 

Moving along…

 

Never mind snowflakes, there are two big snowballs that are going to hit you square in the forehead on Thursday and Friday:

 

  1. Thursday: European Central Bank (ECB) decision by Draghi
  2. Friday: US Jobs Report for November

 

In isolation, even for people who don’t do macro (but have a macro opinion on everything!) both of these events probably matter. From an interconnectedness perspective, fully loaded with time/price for both Euros and Yens relative to where European and Japanese equity markets are right here and now, these events matter as much as any we’ve seen in months.

 

Here’s the system’s setup:

 

  1. Japanese stocks (Nikkei) are signaling immediate-term TRADE overbought with a risk range of 16,945-17,741
  2. European Stocks (EuroStoxx 600 Index) are signaling immediate-term TRADE overbought with a risk range of 337-351
  3. Both the Euro and Yen are signaling immediate-term TRADE oversold vs. USD at $1.23 and $119.56, respectively

 

In other words, measuring the system’s risk within a “risk range” (where being at the top and/or bottom end of the range increases the probability of a short-term reversal), the probability is as high as it’s been of seeing a big macro reversal.

 

There’s that word again, probability…

 

If you’ve never gone heli-skiing on a mountain with identifiably risky snow-pack factors, try it and you’ll get my point. I’m not saying you are going to break your leg going down a certain path – I’m saying some paths/situations have higher probabilities of that happening than others!

 

Whether you are skiing, or risk managing your portfolio alongside already cascading asset class paths (like high-yield Energy stocks, Silver futures, Brazilian stocks, etc.), you should always be asking yourself a lot of questions:

 

  1. What if Draghi doesn’t deliver the drugs?
  2. What if Japanese election sentiment forces Abe to tone down the currency burning?
  3. What if the US Jobs reports misses, and the Dollar corrects from its overbought highs?

 

There are obviously a lot of questions to ask yourself, all of the time – and maybe that’s why some people don’t “do macro” the way we do. It requires a ton of rinse/repeat systems analysis, yes. But, more importantly, it always puts you at the epicenter of the uncertainty of the system… and stock picking tends to “feel” more certain than that.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.16-2.30%

SPX 2032-2078

Nikkei 161

EUR/USD 1.23-1.25

Yen 117.41-119.56

WTI Oil 64.55-70.36

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Glacial Cascades - 12.03.14 Chart


December 3, 2014

December 3, 2014 - Slide1

 

BULLISH TRENDS

December 3, 2014 - Slide2

December 3, 2014 - Slide3

December 3, 2014 - Slide4

December 3, 2014 - Slide5

 

 

BEARISH TRENDS

December 3, 2014 - 6

December 3, 2014 - 7

December 3, 2014 - 8

December 3, 2014 - 9

December 3, 2014 - 10

December 3, 2014 - 11
December 3, 2014 - 12

December 3, 2014 - 13


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