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
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.
“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.
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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.