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Contributor Call: Get Long $CTO Says Harvard Financial Analysts Club "Stock Pitch" Winners

Hedgeye CEO Keith McCullough talks with two members of the Harvard Financial Analysts Club (HFAC) who had the winning idea in a Stock Pitch Contest co-hosted by Harvard University and Seeking Alpha. Kevin Li and David Reading walk through their long thesis on Consolidated-Tomoka Land Co. (CTO) and field questions from Keith.

Contributor Call is a video partnership between Hedgeye and Seeking Alpha.

Subscribe to Hedgeye TV on YouTube for more exclusive video content.

This is the opinion of Kevin Li, David Reading, Carlos Xu and Elaine Dai (HFAC team) and does not necessarily reflect the opinion of Hedgeye Risk Management. Investors should always form their own opinions as to the credibility of any company's forward financial guidance. The contributors make no representation or warranties that their forward-looking statements or opinions on forward earnings is correct, and their view should not be deemed more reliable than CTO's own guidance.


THE HEDGEYE MACRO PLAYBOOK

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

INVESTMENT CONCLUSIONS

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)

 

QUANT SIGNALS & RESEARCH CONTEXT

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.

 

THE HEDGEYE MACRO PLAYBOOK - ISM MANUFACTURING vs. GDP

Source: Bloomberg L.P.

 

THE HEDGEYE MACRO PLAYBOOK - ISM NON MANUFACTURING vs. GDP

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!

 

THE HEDGEYE MACRO PLAYBOOK - ISM vs. GDP

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.

 

THE HEDGEYE MACRO PLAYBOOK - WORLD PMI

 

THE HEDGEYE MACRO PLAYBOOK - COMPOSITE PMI

 

THE HEDGEYE MACRO PLAYBOOK - EUROZONE PMI

 

THE HEDGEYE MACRO PLAYBOOK - U.K. PMI

 

THE HEDGEYE MACRO PLAYBOOK - CHINA PMI

 

THE HEDGEYE MACRO PLAYBOOK - JAPAN PMI

 

THE HEDGEYE MACRO PLAYBOOK - INDIA PMI

 

THE HEDGEYE MACRO PLAYBOOK - BRAZIL PMI

 

THE HEDGEYE MACRO PLAYBOOK - RUSSIA PMI

 

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.

 

THE HEDGEYE MACRO PLAYBOOK - TACRM GMRS

 

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.

 

THE HEDGEYE MACRO PLAYBOOK - TACRM GMRS N

 

THE HEDGEYE MACRO PLAYBOOK - TACRM Heat Map

 

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.

 

THE HEDGEYE MACRO PLAYBOOK - 1

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

 

THE HEDGEYE MACRO PLAYBOOK - 2

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.***

 

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: 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,

 

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


#GlobalGrowthSlowing

Client Talking Points

ASIA

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.

FTSE

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

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

CASH 62% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 31% INTL CURRENCIES 7%

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

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

@KeithMcCullough

QUOTE OF THE DAY

Hardships often prepare ordinary people for an extraordinary destiny.

-C.S. Lewis

STAT OF THE DAY

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.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.57%

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. 

 

Frequency:

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

 

  

Joshua Steiner, CFA

 

Christian B. Drake

 


December 10, 2014

December 10, 2014 - Slide1

 

BULLISH TRENDS

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December 10, 2014 - Slide4

 

 

BEARISH TRENDS

December 10, 2014 - Slide5

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Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

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