Takeaway: We highlight the ongoing deterioration in global growth and how that is perpetuating a continued rally in [safe] USD-denominated assets.


Long Ideas/Overweight Recommendations

  1. iShares National AMT-Free Muni Bond ETF (MUB)
  2. Consumer Staples Select Sector SPDR Fund (XLP)
  3. Health Care Select Sector SPDR Fund (XLV)
  4. iShares 20+ Year Treasury Bond ETF (TLT)
  5. Vanguard Extended Duration Treasury ETF (EDV)

Short Ideas/Underweight Recommendations

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



Global #GrowthSlowing Continues: As you are probably well aware, we’re not huge proponents of survey data; often times surveys can be incongruent with actually recorded rate-of-change data for key economic indicators like real GDP. That said, there is some merit to following monthly PMI data – to the critical extent it is done so appropriately.


What we mean by “appropriately” is accounting for variations (read: “noise”) in the monthly PMI readings. A simple 3MMA to transform the data into a smoothed trend dramatically tightens the correlation between both ISM Manufacturing PMI and ISM Non-Manufacturing PMI and the YoY growth rate of real GDP.


Specifically, when smoothed, the change in ISM Manufacturing PMI can be said to explain 60% of the delta in real GDP growth vs. only 37% on a raw basis (trailing 15Y). Those figures are 83% and 70%, respectively, for ISM Non-Manufacturing PMI.



Source: Bloomberg L.P.



Source: Bloomberg L.P.


You’ll note the dramatically tighter correlation for the non-manufacturing data. This is simply because the services sector is a much, much larger component of GDP in most mature economies. In fact, given manufacturing’s relatively miniscule share of U.S. GDP (~10-12%) we remain perplexed as to why the ISM Manufacturing PMI data is so widely followed and anchored upon as a barometer of U.S. economic health. It’s impact as an indicator is hideously overstated relative to the strength of its signal. But I digress…


Amalgamating the two readings on a smoothed, economy-weighted basis is ultimately the most appropriate way to extract a meaningful signal from PMI survey data.


As you can see in the chart below, this measure is over three times more statistically significant in determining the marginal rate of change in real GDP. The r² of 0.83 compares to an r² of 0.37 for the raw Manufacturing PMI data – which is ironically the one the Consensus Macro community anchors on the most!



Source: Bloomberg L.P.


In the charts below, we show economy-weighted Markit PMI data for the world and its eight largest economies, opting for the Markit PMI series over the ISM series because it is:


  1. Comparable across economies (same survey format for every country);
  2. More robust in the sense that is anchors more heavily on actual operating results vs. confidence/expectations; and
  3. Consistently released 1-2 weeks earlier than the ISM data.


What you’ll quickly note is that global growth continues to slow on both sequential and trending basis. The only exceptions are sequential (i.e. NOT trending) accelerations in India (which is now on the other side of a tightening cycle), Japan (which is crawling from the depths of [but still in] recession) and the U.K.




















Perhaps more shocking to anyone naval gazing at the performance of large-cap U.S. equities is the fact that these trends continue to be appropriately priced across the global macro universe.


Looking to our Tactical Asset Class Rotation Model (TACRM), we see that on a trailing 3M average basis 37% of asset class, country, sector and/or style factor ETF exposures have a Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) reading of < -1x, which implies a clear trend of negative VWAP momentum across multiple durations. That’s roughly the highest reading since July of 2012 and actually the highest reading since November of 2011.


Moving along, at the primary asset class level we see that only DM Equities and Cash – which is comprised simply of U.S. dollars and the VIX – currently have more ETFs exhibiting a clear trend of positive VWAP momentum across multiple durations (i.e. VAMDMI reading > +1x) than those exhibiting a clear trend of negative VWAP momentum across multiple durations.




In fact, DM Equities is currently the only primary only asset class with more positive VAMDMI readings than negative ones, thanks mostly to the strong performance of large-cap U.S. equities and Japan. European equities remain an obvious drag.






Given that both the fundamental data and quantitative signals suggest global capital allocators in search of positive absolute returns can really only buy U.S. dollar-denominated assets and Japanese equities (on a hedged basis), we totally understand why the S&P 500 keeps making higher-highs in the context of our #Quad4 theme.


That’s certainly not to say #Quad4 hasn’t worked! In fact, we’d argue what’s driving the top quartile of performance in the active management space in 2H15 is, in fact, our #Quad4 theme, which calls for an allocation to slow-growth, yield-chasing in lieu of commodity producers and servicers in the domestic equity market and for an allocation to relative safety over high yield/junk in the domestic fixed income market.



Source: Bloomberg L.P. (indexed to our 8/5 presentation titled, “ARE YOU PREPARED FOR QUAD #4?”)



Source: Bloomberg L.P. (indexed to our 8/5 presentation titled, “ARE YOU PREPARED FOR QUAD #4?”)


If all you do is buy the SPY with leverage, then clearly you have little need for our global macro overlay. But to the extent you are actually looking to both outperform and preserve capital, we hope you have found and continue to find our investment ideas helpful.


***CLICK HERE to download the full TACRM presentation.***



#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: Party Hard? (12/8)


#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.


Draghi Didn’t Deliver the “Drugs”! (12/4)


#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: “Hedge Fund Hotel” Edition (Part II) (12/8)


Best of luck out there,




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 – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.


Client Talking Points


Big #divergences continue to manifest across Asian Equity markets – KOSPI down another -1.3% overnight to -3.3% year-to-date and it remains bearish TREND @Hedgeye. The bounces in India and the Hang Seng were quite weak; Thailand (straight down in December) down another full 1% #GlobalGrowthSlowing.


The FTSE got hammered yesterday and doesn’t have much of a bounce this morning either – its obviously more Energy weighted than the DAX is, so you have a #divergence here of bearish FTSE/bullish DAX, as the weakest (most illiquid) European Equity markets (Greece and Portugal) continue to crash this morning (-23% and -21% year-to-date, respectively).


Sentiment (U.S. Equities) – the spread in the weekly II Bull/Bear survey is one of the few that backtests as a relevant contrarian indicator, and the Bears finally bounced off all-time lows this week (to a whopping 14.8% from 13.8%, where it bottomed at NOV end); Bull/Bear Spread is -14% less bullish than where it was 2 weeks ago at +3670 bps wide to the Bull side.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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.


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).


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


Reiterating the SELL calls on everything Oil, Energy, Copper, etc #Deflation



Hardships often prepare ordinary people for an extraordinary destiny.

-C.S. Lewis


Amazon is now on the list of companies receiving $5 million in tax credits for creating jobs in New York, Amazon must now create 500 jobs.

Mortgage Apps | More Signs of Progress

Takeaway: Purchase apps have been on the rise for a month now. Evidence continues to emerge that housing is inflecting from bad to decent.

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 | More Signs of Progress - Compendium 121014


Today's Focus: MBA Mortgage Applications

The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended December 5th. 


The +7.3% increase in the Composite Index reflected a strong print from Refi and a modest uptick in Purchase. 


  • Purchase demand rose +1.3% WoW and the YoY rate of decline improved to -4.5% from -11% two weeks prior as the index held above the 170-level for the 4th straight week – the longest streak at that level since June.  This is important as last week, while strong, was a holiday week, reducing the reliability of the data. The multi-week trend in place now shows steady, 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 popped +13.2%, essentially retracing the -13.4% print in the previous holiday week. Rates ticked up modestly to 4.11% from 4.08% in the week prior.  


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 | More Signs of Progress - Purchase 2013 vs 2014 


Mortgage Apps | More Signs of Progress - Purchase   Refi YoY  


Mortgage Apps | More Signs of Progress - Purchase Qtrly 


Mortgage Apps | More Signs of Progress - Purchase LT w Summary Stats 


Mortgage Apps | More Signs of Progress - Composite LT w Summary Stats 


Mortgage Apps | More Signs of Progress - 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. 



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



Joshua Steiner, CFA


Christian B. Drake


December 10, 2014

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“U-G-L-Y, You Ain’t Got No Alibi”

-Wildcat Cheerleaders


Every year around the holidays I make a point to pick up a stranger, fund a trip to the nearest fast food drive-thru and further them towards wherever “point B” happens to be.   


I picked up my first hitchhiker in four years this past weekend. 


My multi-year drought in holiday humanism hasn’t been intentional, there’s just been a secular bear market in central CT hitchhiking. 


My father started the tradition when I was young.  He passed away when I was 17 and I’ve carried on the tradition over the last decade+.


It’s an homage of sorts and my way of paying-it-forward.


U-G-L-Y - h1


Back to the Global Macro Grind….


The thing about ‘paying-it-forward’, in real terms, is that one generally has to get paid to begin with. 


While the recent crescendo in Energy/Russia/Greece crashing captions has dominated newsflow the last couple weeks, accelerating wage inflation – and its seemingly perpetual imminence – remains a trending and favorite topic for headline writers.   


Indeed, slack reduction and the hoped-for flow through to wage inflation has been the bull case for purveyors of panglossianism for the last year. 


The flow of Wall Street wealth to Main Street income remains core to Janet Yellen’s policy calculus as well – and front-running reactionary central bank policy remains the game – so the iterative, Bayesian review of the monthly labor/wage data remains a ceaseless exercise. 


To review:


THE THEORY: Conventionally, wages are viewed as a lagging indicator, with wage inflationary pressure building as the labor supply declines and the economy moves towards constrained capacity.


That an output gap still exists in the domestic economy remains readily apparent.  The core of the slack debate continues to center on the magnitude of the shift in labor supply-demand dynamics and whether policy makers will move ahead of or behind any emergent inflationary curve.     



  • Quits & Hires:  Yesterday’s JOLTS data showed voluntary separations (Quits) held above 2.7MM for a second consecutive month – the highest level since February 2008 – while total hires held above 5MM for a second month for the first time since December 2007. 
  • Available Workers per Job Opening:  Available Workers (the sum of Unemployed + those Not in the Labor force but Want a Job) per Job Opening (JOLTS reports) dropped to 3.21 in October – marking a new cycle low and dipping below the pre-recession average of 3.31.
  • Short-term Unemployed, % of Total:   The share of short-term unemployed - those unemployed for less than 5 wks – made another new cycle high, increasing to 27.6% of total in November.   While the share of total has typically ranged between 40-50% at peak in prior cycles, the trend in the current cycle remains one of ongoing improvement. 
  • NFIB Hiring & Compensation: The Small business optimism data for November, released yesterday, showed hiring plans, compensation, and difficulty in filling positions all remain positive with each increasing sequentially and sitting jut below recent cycle highs.


So, the continued, albeit frustratingly slow, transition to tautness remains ongoing on the labor slack front.  Does that portend material (imminent) upside in wage growth?  



  • Nominal Wage growth over the last 3 cycles (1) has peaked at just north of 4% and has averaged 3.3%.   Real Wage growth, however, has been largely a phantasm – particularly for the median and lower income quintiles.   
  • The lone long-term data set on realwage growth – which focuses on production and nonsupervisory workers - shows real wage growth has been flat/negative for most of the last 4 decades.  The current post-recessionary progression in real wage growth actually compares favorably with those observed over the last half century. 
    • Labor’s share of National Income only rises at the tail end of an expansion and after growth and profits have been strong for a protracted period. 

Remember too that those averages were achieved alongside peak positive demographics, accelerating credit growth, and a favorable interest rate backdrop.    


PLAYING FOR…+40bps?:


Is a return to a halcyonic 3-4.5% level of nominal wage growth in the face of persistently lower inflation, an aging workforce, top heavy demographics, lower productivity and lower credit growth a reasonable expectation?


We don’t think so. 


Hourly wage growth for the private sector has been stuck at ~2% for the better part of the last four years.  The trend in wage growth for production and non-supervisory workers (+2.4% in November) has been better but not great. 


Assuming there is an intermediate-term to the current expansion (now 67 months old), there is probably some runway for further wage gains but with upside to something closer to ~+2.5% than to the ~4% (a double from current levels) of prior cycle peaks. 


Strong dollar deflation and a protracted deceleration in global growth should only constrain the upside for domestic inflation.    


To review the current state of the top 7 Global Economies: 


  1. United States:  Good - but slowing from a rate of change perspective
  2. China:  Ugly - Growth slowing, Disinflation rising (printed 5Y low last night), central bank easing
  3. India:  Good - growth improving & inflation worries ebbing with Dr. Raj doing a credible job at the helm of the RBI
  4. Japan:  Ugly - Yen crashing, economy slowing, Abe/Aso scrambling
  5. Germany/Eurozone:  Ugly – deceleration growth and disinflation prevailing, Incremental CB easing imminent
  6. Russia:  Disaster – Ruble is crashing, GDP is looking like -6-8% at current oil prices, risk of a banking crisis is rising
  7. Brazil:  Ugly -  perhaps some interesting upside in another quarter or so but, for now, Brazilian policymakers/economy (still) can’t get out of their own way 


If you’re keeping score that’s:  4 Uglies, 1 Disaster, and 1.5 Good


What say prices/markets about those macro realities?


  1. Global Growth and Inflation Revisions = negative
  2. 10Y Yield = -27% YTD, Bearish Formation, immediate-term downside to 2.16%
  3. Yield Spread (10’s -2’s) = 52 Week Low
  4. Inflation Expectations = Crashing
  5. Energy Equities & Commodities = Crashing
  6. Style Factor Performance = Low Beta, High Yield, Large Cap Outperforming (across durations)
  7. High Yield = Breaking Out and holding at 52-wk highs. 


In his keynote address to the CATO institute, Jim Grant presaged that a summary analysis of the 2016 crash will sound something similar to the following:


“My generation gave former tenured economics professors discretionary authority to fabricate money…we put the cart of asset prices before the horse of enterprise…we entertained the fantasy that high asset prices made for prosperity, rather than the other way around.”


With hedge fund trailing correlations to beta >0.90 and rampant central bank interventionism starving the alpha from active management, most investors, wittingly or not, have just been along for the five-year ride. 


Thumbing for central bank (helicopter) rides….no secular bear market there.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.16-2.26%

SPX 2043-2075

RUT 1163-1194

VIX 13.05-15.56

Yen 119.36-121.76

Oil (WTI) 60.94-66.99 


To chickens & eggs, carts & horses, paying it forward & having it to begin with.  


Christian B. Drake

U.S. Macro Analyst


U-G-L-Y - Available Worker per Job Opening

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