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THE HEDGEYE MACRO PLAYBOOK

Takeaway: In today's Macro Playbook, we show how central bank-induced asset price inflation is a MAJOR headwind to the active management industry.

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

 

QUANT SIGNALS & RESEARCH CONTEXT

So Easy An ETF Can Do It: Since the end of October, one of the topics we’ve been hitting on fairly consistently is the slow-but-steady share shift away from active management in favor of passive management. From our perspective, this trend is primarily a function of incessant central bank intervention in markets, which tends to depress both the variance and volatility needed for active managers to outperform their benchmarks and justify their fees (click HERE and HERE for more details). Well, unfortunately for everyone involved (including us), recent data is supportive of this trend.

 

THE HEDGEYE MACRO PLAYBOOK - S P 500 Sector Varience

 

Per Jonathan Casteleyn of our financials team this AM: “In the most recent 5 day period, mutual fund activity was subdued with investors continuing to prefer exchange traded funds. All ETFs took in over +$12.7 billion (both fixed income and equity) versus the total take for all mutual fund products at  just +$1.5 billion. Year-to-date, running aggregate money flow also reflects this preference for passive products with equity ETFs more than doubling the production of equity mutual funds (with $122 billion netted by equity ETFs versus just $47 billion inserted into equity mutual funds).” To the extent you’d like to review his weekly deep dives on fund flows and their associated investment implications, please reply to this email and we’ll get you squared away with that...

 

THE HEDGEYE MACRO PLAYBOOK - 12 4 2014 8 58 28 AM

 

Moving along, recent performance data also supports a continuation of the aforementioned trend. On the equity mutual fund side, only 9.3% of active managers are beating their benchmarks per Wharton Research Data Services; the previous annual low was 12.9% in 1995. On the equity hedge fund side, the YTD performance of the HFRX Equity Hedge Index is a mere +197bps, which remains on pace for the third-worst annual return ever (2008 and 2011). Again, the value proposition for active managers is being dramatically reduced amid central bank-induced asset price inflation, calling into question the perverse nature of investors broadly cheering on #GrowthSlowing data.

 

THE HEDGEYE MACRO PLAYBOOK - HFRX Equity Hedge Fund Index Annual Return

 

THE HEDGEYE MACRO PLAYBOOK - Levered Beta Chasing

 

***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.


Euro, Yen and Oil

Client Talking Points

EURO

The risk range for the Euro is 1.23 to 1.25. The market is pricing in a potent dose of ECB President Mario Draghi drugs, but what if he doesn’t deliver? European (EuroStoxx 600) equities are overbought. France's unemployment rate accelerates to 10.4% - in case you didn’t know Draghi's drugs aren’t doing anything for the real economy.

YEN

The risk range for the Yen is 117.03 to 119.99, we signaled a buy for FXY (Yen) in Real-time Alerts yesterday. In the immediate term Japanese (Nikkei) equities are overbought and the Yen is oversold, the market is pricing in an ultra-smooth election bid for Abe.

OIL

If the Euro and the Yen bounce you could easily see the price of oil bounce. Watch for the counter-trend move here USD Down = Yen (and/or Euro) UP = Nikkei Down = Oil Up = High Short International Energy Stocks Up. The risk range for WTI Oil is 63.76 to 71.72.

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

Seems like Western Canadian oil sands and LNG projects are the first ones feeling the heat with lower prices. COS cuts its div. nearly 50%

@Hedgeye_Comdty

QUOTE OF THE DAY

Winners make commitments, losers make promises.

-Anonymous

STAT OF THE DAY

Purchase demand rose +2.5% week-over-week and the year-over-year 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.


December 4, 2014

December 4, 2014 - Slide1

 

BULLISH TRENDS

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December 4, 2014 - Slide5

 

BEARISH TRENDS

December 4, 2014 - Slide6 

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December 4, 2014 - Slide11
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December 4, 2014 - Slide13


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

CHART OF THE DAY: U.S. Housing ... Less Bad?

CHART OF THE DAY: U.S. Housing ... Less Bad? - Compendium 120314

 

Editor's note: The excerpt below is from today's Morning Newsletter written by Hedgeye U.S. macro analyst Christian Drake.

 

Housing, like most things Macro, is more about better/worse than good/bad.  From a rate of change perspective – how we measure/contextualize data – less good is bad, less bad is good, and the successful front-running of second derivative inflections remains the sangre vital of macro alpha generation.

 

As it relates to housing, while the macro environment remains a discrete risk, (very) easy volume compares, the lapping of weather/QM Implementation/FHA loan limit reductions, looser regulation, and a fledgling stabilization in 2nd derivative HPI trends all sit as modest, prospective tailwinds for 2015. 

 

In other words, the downside asymmetry that existed at the beginning of the year has largely collapsed and, from a rate of change perspective, demand and price trends are showing a nascent inflection that looks likely to continue as comps ease progressively into 2H15.   

 

We’ll be hosting a conference call on December 11th updating our outlook for housing in 2015.  Institutional subscribers can ping sales@hedgeye.com for call details/access.



Mavericks & Milquetoasts

“You are the average of the five people you spend the most time with.”

-Jim Rohn

 

The quote above is lathered in cutesy life-coachy’ness, but I still like it.  It implies that #Greatness is, in part, a choice.  And, empirically, I’ve generally found it to be true. 

 

For the majority, our confreres in the daily grind constitute most of that top five.   With the Hedgeye firm meeting on Tuesday and our holiday party tonight, I’ll get a chance to look around and re-appreciate the unique team and business model born from the creative destruction of the financial crisis. 

 

It’ll also serve as the annual reminder not to be the weak-link outlier and bringer of negative skew to our Macro team’s greatness distribution. 

 

Mavericks & Milquetoasts  - s9 

 

Back to the Global Macro Grind…

 

You can choose your colleagues and comrades but you can’t, in large part, choose your neighbors.  You may, however, have more of them in the coming year. 

 

We’ve been bearish on housing since the beginning of the year with the expectation for the compressed demand shock (rising rates/tighter regulation) in 2H13-1H14 to manifest in a significant deceleration in home price growth and underperformance across housing related equities.   

 

At this point, most of what we expected at the beginning of the year has played out and, inclusive of the recent rally, housing related equities (ITB/XHB) have been among the worst performing sectors YTD. 

 

So, what now?

 

Housing, like most things Macro, is more about better/worse than good/bad.  From a rate of change perspective – how we measure/contextualize data – less good is bad, less bad is good, and the successful front-running of second derivative inflections remains the sangre vital of macro alpha generation.

 

As it relates to housing, while the macro environment remains a discrete risk, (very) easy volume compares, the lapping of weather/QM Implementation/FHA loan limit reductions, looser regulation, and a fledgling stabilization in 2nd derivative HPI trends all sit as modest, prospective tailwinds for 2015. 

 

In other words, the downside asymmetry that existed at the beginning of the year has largely collapsed and, from a rate of change perspective, demand and price trends are showing a nascent inflection that looks likely to continue as comps ease progressively into 2H15.   

 

We’ll be hosting a conference call on December 11th updating our outlook for housing in 2015.  Institutional subscribers can ping for call details/access.

 

I would, however, caution against conflating our shifting view on housing with our broader view on growth/inflation.  The counter-trend call on housing is more of an idiosyncratic, rate of change call at this point than it is a discrete call for a sustained acceleration in consumer discretionary or early-cycle exposure at large.   

 

Perhaps we’ll rotate out of our favored Quad #4 allocations to capture another short-cycle oscillation of pro-growth, high beta style factor outperformance but that’s not the call, yet. 

 

The call, of course, is always that the call can change – particularly when taking a multi-duration view of risk.  

 

In a tactical, counter-TREND move yesterday, we covered TIPS and bought JO (coffee) and FXY (Yen) in Real-time Alerts.

 

As the Quad #4 (i.e. disinflation and decelerating growth) callers the last couple quarters, we’ve been out front in slope surfing the strong dollar, down energy/commodities trade.  But that doesn’t mean we need to go full deflation-ista at every price and across every duration.    

 

As Keith put it:   COUNTER TREND Call = USD Down = Yen (and/or Euro) UP = Nikkei Down = Oil Up = High Short Int Energy Stocks Up

 

In other words, in the immediate term, with Japanese (Nikkei) and European (EuroStoxx 600) equities overbought and the Euro and Yen oversold, the market is pricing in a potent dosing of Draghi drugs and an ultra-smooth election bid for Abe. 

 

In other, other words, while our TREND view on deflation/Japan/etc. remains largely unchanged, the probability for a sizeable short-term macro reversal and $USD correlation risk to manifest in the opposite direction for prices is as high as its been. 

 

Since we get a regular flood of process related questions, it’s probably worth extending and generalizing the thought process under yesterday’s tactical RTA maneuvering.   

 

Our broader Trend view has been that:   

  1. We are currently late-cycle
  2. Our Trend expectation has been for disinflation and slowing growth
  3. Our favored positioning YTD has been Bonds, Cash and Low Beta/Large Cap/Defensive yield sectors/companies

 

Inside of that Trend view, the macro and market reality is that:

  1. Tops are processes, not points (as are bottoms)
  2. ‘Perma-‘ anything isn’t a process and there is always a time/price to like and not like something 

 

How do we integrate those market realities with our particular Trend view?

  1. By having a multi-duration view of risk.  The probability of a particular short-term move need not be the same (or in the same direction) as the probability of a particular intermediate-term price trend. 
  2. Recognizing that the market view should evolve and gross/net positioning should dynamically shift alongside changes in price

 

How does it work in practice?

  1. Selling/shorting on green and buying/covering on red (ie Fading Beta) within a defined, probability weighted immediate-term risk range allows us to pick off positive P&L in both direction without being overexposed to market risk 
  2. We can maintain a TREND view on the trajectory for macro fundamentals/markets while taking high probability, tactical counter-TREND positions on overbought/oversold conditions. Taking the other side of our own TREND/TAIL view for a TRADE (particularly at immediate-term momentum turns) need not be incongruous if there is a repeatable process for quantifying the balance of risk   

 

We get that multi-duration risk management and tactical positioning (i.e. “trading”) isn’t conventional investing in the classical sense but that’s why we try our best to explain the process and contextualize ‘the why’ underneath it.  It’s also why we tell you over what duration(s) we like a particular call/idea/theme. 

 

“If I had asked people what they wanted, they would have said faster horses.” (Henry Ford)

 

Cars are cool, but only if you know how to drive it.    

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.16-2.30%

RUT 1148-1190

DAX 92

VIX 11.71-14.53

Yen 117.03-119.99

WTI Oil 63.76-71.72 

 

To re-learning, defenestrating convention, and macro mavericking,

 

Christian B. Drake

U.S. Macro Analyst

 

Mavericks & Milquetoasts  - Compendium 120314


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – December 4, 2014


As we look at today's setup for the S&P 500, the range is 45 points or 1.90% downside to 2035 and 0.27% upside to 2080.                                                                                                                          

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: 1.73 from 1.73
  • VIX closed at 12.47 1 day percent change of -2.96%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: Bank of England seen maintaining 0.5% bank rate
  • 7:30am: Challenger Job Cuts y/y, Nov. (prior 11.9%)
  • 7:30am: RBC Consumer Outlook Index, Dec. (prior 51.7)
  • 7:45am: ECB seen maintaining 0.05% main refinancing rate
  • 8:30am: Init Jobless Claims, Nov. 29 est. 295k (prior 313k)
  • 8:30am: ECB’s Draghi holds news conference
  • 8:30am: Fed’s Mester speaks in Washington
  • 9:45am: Bloomberg Consumer Comfort, Nov. 30 (prior 40.7)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: U.S. to announce plans for auction of 3M/6M/1Y bills, 1Y bills, 3Y/10Y/30Y debt
  • 12:30pm: Fed’s Brainard speaks in Washington

 

GOVERNMENT:

    • Sec. of State John Kerry meets with Russian Foreign Minister Sergei Lavrov in Basel, Switzerland; delivers remarks at London Conference on Afghanistan, holds meetings with officials including Pakistani Prime Minister Nawaz Sharif
    • Financial Industry Regulatory Authority board meets to consider items including proposed amendments to TRACE rules
    • 11:50am: President Obama delivers remarks at summit on college opportunity
    • 2:30pm: SEC Commissioner Kara Stein speaks at the Consumer Federation of America’s Financial Services Conference

 

WHAT TO WATCH:

  • Draghi Nudges Policy Bounds as ECB Awaits Stimulus Evidence
  • Fisher Says Slow Roll Off of Fed Assets Would Do No Harm
  • CBS to Pull Network From Dish Today Without New Agreement
  • Chrysler Expands Air-Bag Recall; Not Enough for Regulators
  • Toyota Widens Air-Bag Recalls on Japan Scrapyard Rupture
  • November U.S. Comps. Seen Benefiting From Early Holiday Sales
  • Unilever to Split Spreads Business Into Standalone Unit
  • *Blackstone Pres. James Considers Role Outside Co.: Reuters
  • Best Buy Sells Five Star Business in China to Jiayuan Group
  • Google Seeks to Avoid Paying Authors to Scan Their Books
  • Nextera Agrees to Buy Hawaiian Electric for $2.63b
  • Sanofi Whistle-Blower Says in Suit Drugmaker Paid Kickbacks
  • EU’s Privacy Law Backtracking Seen Thwarting Google, Facebook
  • Amgen Wins Early U.S. Approval for Rare Leukemia Treatment
  • Take-Two’s Grand Theft Auto Pulled From Australian Shelves
  • Buffett’s NetJets Sued by Pilots’ Union Over Privacy Breach
  • UTi Worldwide, DSV Said to Halt Talks After UTi Shares Spike
  • Putin Calls for Harsh Measures on Speculators as Ruble Drops

 

AM EARNS:

    • Barnes & Noble (BKS) 8:30am, $0.31
    • CIBC (CM CN) 5:56am, C$2.25 - Preview
    • Descartes Systems (DSG CN) 6am, $0.15
    • Dollar General (DG) 7am, $0.80 - Preview
    • Dollarama (DOL CN) 7:30am, C$0.54
    • Express (EXPR) 7am, $0.16
    • Gildan Activewear (GIL CN) 8:30am, $1.08
    • Kroger (KR) 8:30am, $0.61 - Preview
    • Sears (SHLD) 6am, ($3.31)
    • Toro (TTC) 8:30am, $0.15
    • Toronto-Dominion Bank (TD CN) 6:30am, C$1.06 - Preview
    • United Natural Foods (UNFI) Bef-mkt, $0.63

 

PM EARNS:

    • Ambarella (AMBA) 4:05pm, $0.54
    • American Eagle Outfitters (AEO) Aft-Mkt, $0.22
    • Cooper Cos (COO) 4pm, $2.03
    • Finisar (FNSR) 4pm, $0.25
    • Five Below (FIVE) 4:01pm, $0.06
    • Smith & Wesson (SWHC) 4:05pm, $0.07
    • Ulta Salon (ULTA) 4:03pm, $0.84 - Preview
    • Zumiez (ZUMZ) 4:01pm, $0.53

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • WTI Crude Steady After U.S. Stockpiles Drop From Five-Month High
  • Gold Retreats as Dollar Holds Advance Before ECB Policy Meeting
  • Blame Italian Olive Bugs for Dearth of Virgin Oil: Commodities
  • Sub-$50 Oil Surfaces in North Dakota as Regional Discounts Swell
  • Philippines Starts Evacuations Before Super Typhoon Lands
  • Copper in London Rises on U.S. Jobs Data, Mine Fire: LME Preview
  • Vietnam Plans to Replant 120,000 Hectares Coffee by 2020: Duc
  • World Food Prices Stabilize as Costs Diverge for Grain, Sugar
  • Purple Cocoa Pods Help Women Farmers Crack Ban on Land Ownership
  • Zambia to Resist ‘Stampede’ Against New Mines-Tax Proposals
  • Norway Seeks to Temper Oil Addiction After OPEC Price Shock
  • Wheat Extends Slide From Five-Month High Amid Ample Supplies
  • Ebola Traps Drug Shipment as West African Economies Unravel
  • Saudi Arabia Seen Widening Asia Oil Discount on Shale Surge

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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