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THE HEDGEYE MACRO PLAYBOOK

Takeaway: In today's edition of the Macro Playbook, we show the brewing crisis in the high-yield energy credit space and why it's set to accelerate.

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

The High-Yield Energy Crisis Continues: In last Friday’s edition of the Hedgeye Macro Playbook, we detailed how the confluence of our GIP modeling process and TACRM signals supported strongly reiterating our bearish outlook for all things energy related, especially domestic E&Ps.

 

With the XOP ETF down another -7.2% in the week-to-date, that was clearly the appropriate call in the heat of the moment. An even better call was our decision to cover our short on the homebuilders (ITB), replacing that sector with domestic E&Ps on the short side on November 5th; since then, the ITB ETF has rallied +3.7% while the XOP ETF has crashed, falling -23.9%

 

THE HEDGEYE MACRO PLAYBOOK - 1

 

We still anticipate incremental material downside for domestic E&P stocks – especially in the context of rapidly accelerating risk in the credit market.

 

Specifically, OAS on high-yield USD-denominated energy bonds widened another +43bps DoD to 943bps on volume that was nearly +50% greater than the average of the previous five Wednesdays. That spread of 943bps is 405bps wider than the next closest sector (Industrials) and is wider by +308bps MoM.

 

THE HEDGEYE MACRO PLAYBOOK - 2

 

Using the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Barclays High Yield Bond ETF (JNK) as proxies, the energy sector accounts for roughly 13.5-15% of the existing USD-denominated high-yield credit market. That hefty weighting has certainly weighed heavily upon the broader high-yield complex, with OAS on the broader asset class having backed up +209bps over the past 6M to 543bps wide. Secondary bond market liquidity remains a key risk, as detailed by our #Bubble theme.

 

THE HEDGEYE MACRO PLAYBOOK - 6

Source: IIF

 

THE HEDGEYE MACRO PLAYBOOK - HY Spread Risk

 

Looking to our Tactical Asset Class Rotation Model (TACRM), the JNK ETF has the 2nd lowest Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) reading across the 29 ETFs that comprise our Fixed Income & Yield Chasing primary asset class, just barely edging out MLPs (AMLP). These two ETFs have the 4th and 2nd lowest VAMDMI readings, respectively, across the entire global macro universe of nearly 200 ETFs.

 

THE HEDGEYE MACRO PLAYBOOK - TACRM 20 20

 

All told, we continue to think #Quad4 asset price deflation will continue to perpetuate a continuation of reported disinflation across the developed world – particularly in Europe and Japan. To the extent that continues to perpetuate expectations for easier monetary policy out of the ECB and BoJ amid late-cycle employment #GrowthAccelerating in the U.S., we think this massive rip in the USD has legs. That will undoubtedly weigh on the energy sector – as well as the broader commodities complex and emerging markets.

 

THE HEDGEYE MACRO PLAYBOOK - CRB YoY vs. CPI YoY

 

THE HEDGEYE MACRO PLAYBOOK - DXY vs. CRB Indices

 

***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: U-G-L-Y (12/10)

 

#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 Drugs at the JAN ECB Meeting? Nope! (12/10)

 

#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.


Growth & Inflation Expectations Slowing Globally

Client Talking Points

KOSPI

Global growth bulls used to call it Dr. KOSPI (and Copper), but only because they were going up – now the KOSPI leads losers in Asia, down another -1.5% overnight, re-testing her OCT lows at -4.7% year-to-date; non-central planning catalyst Asia (ex-Japan + China) continues to act horribly.

COMMODITIES

Commodities crushed to fresh year-to-date lows (CRB Index -1.6%, -11.8% year-to-date); remember that this isn’t just about Oil (risk range there is now 60.48-65.38, lower-highs, lower-lows) – it’s about inflation expectations collapsing into #deflation.

UST 10YR

UST 10YR Yield continues to crash, -28% to 2.16% this morning ahead of a U.S. Retail Sales print that the “gas prices are low” bulls better hope isn’t as bad as the Retail Sales print (that missed) in mid-OCT; German 10YR 0.67% and Japanese 10YR at 0.40% - and we still think the Fed gets easier in Q1 as CPI surprises them on the downside.

Asset Allocation

CASH 63% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 32% INTL CURRENCIES 5%

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

Watch @FoxBusiness at 9am ET as @KeithMcCullough talks markets, economy and more for the full hour with @MariaBartiromo.

@Hedgeye

QUOTE OF THE DAY

Goals live on the other side of obstacles and challenges. Be relentless in pursuit of those goals, especially in the face of obstacles. Along the way, make no excuses and place no blame.

-Ray Bourque

STAT OF THE DAY

Restoration Hardware (RH) put up a crusher 22% comp vs. our 18% estimate. This was a huge ramp from 21% on a 2-year basis in 2Q to 30% in 3Q. That includes 31% growth online – a 1,800bp sequential acceleration. RH remains our favorite name in retail.


December 11, 2014

December 11, 2014 - Slide1

 

BULLISH TRENDS

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December 11, 2014 - Slide3

December 11, 2014 - Slide4

 

 

BEARISH TRENDS

December 11, 2014 - Slide5

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December 11, 2014 - Slide8

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December 11, 2014 - Slide10

December 11, 2014 - Slide11
December 11, 2014 - Slide12


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CHART OF THE DAY: Tizzle In The System: Commodities vs. Long-Term Treasuries $TLT

CHART OF THE DAY: Tizzle In The System: Commodities vs. Long-Term Treasuries $TLT - 12.11.14 TLT vs. CRB

 

"With the Russell 2000 down YTD and both inflation expectations and 10yr bond yields #crashing," Hedgeye CEO Keith McCullough wrote in today's Morning Newsletter, "initial 2014 consensus beliefs of worldwide growth accelerating and rates rising are no longer believed."


Tizzle In The System

“Each time the system is recalculated, the posterior becomes the prior.”

-Sharon Bertsch McGrayne

 

Simple is as simple does, within a non-linear and dynamic system like the Global Macro market, that is…

 

“Conceptually, Bayes’ system was simple. We modify our opinions with objective information. Initial Beliefs (our guess where the cue ball landed) + Recent Objective Data (most recent ball left or right of the prior) = A New and Improved Belief.”

-The Theory That Would Not Die, pg 8

 

What do you believe? Is what you believed in late September consistent with what you believe after the October and December corrections? How about from January to June (when late-cycle inflation was accelerating) vs. today’s global #deflation? The best way to manage risk is by constantly recalculating your system.

Tizzle In The System - Falling cartoon 12.10.2014

 

Back to the Global Macro Grind

 

What does the system say this morning?

 

With the Russell 2000 down YTD and both inflation expectations and 10yr bond yields #crashing, initial 2014 consensus beliefs of worldwide growth accelerating and rates rising are no longer believed.

 

Since so many Old Wall dudes still use the “Dow” as some sort of proxy for the global economy, here’s what the broader global equity system is saying:

 

1. Weimar Nikkei (Japan) only goes up when the economy is so bad that they need to hit the CTRL+Panic (print) button

2. The liquid side of the “China” trade (Hang Seng) continued to signal bearish TREND @Hedgeye overnight (-0.9%)

3. The former Global Growth “signal” (known as Dr. KOSPI in South Korea) -1.5% overnight to -4.7% YTD #bearish

4. The UK’s FTSE failed @Hedgeye TREND resistance and is back to DOWN for 2014 YTD

5. Germany’s DAX is holding on to TREND support of 9688 at +3.2% YTD

6. Greece, Portugal, and Russia continue to crash (down more than 20% respectively, YTD)

 

Oh, and Argentina dropped -14% in the last 2 trading days… but #NoWorries there – centrally planned currency devaluation has had fantastic economic results for the Argentines! Watch the LEGO movie this weekend with your kids – “everything is awesome.”

 

Yep, everything other than this other Big Macro thing that is correlating with #CommoditiesCrashing called 10yr Bond Yields:

 

1. Japan 10yr = 0.40%

2. Germany = 0.67%

3. France = 0.94%

 

“So” I guess my growth-and-inflation-slowing bull case for the USA Long Bond (TLT) with the US 10yr Treasury Yield crashing (-28% YTD) to 2.16% has plenty of room to run.

 

The only thing that is awesome (i.e. you don’t have to make things up about global growth accelerating and #deflation not being a globally interconnected risk) is actually being long something, in size, with very low-volatility (Long-Term Treasuries).

 

One of our hard core customers called it “TLT tizzling” at our Hedgeye NYC Holiday Party on Tuesday… so I looked that up in the Urban Dictionary: “A fat party. This word is derived from the word partizzle, shortened to tizzle…”

 

LOL

 

Yes, it’s ok to laugh at this game. If you don’t, it might just make you cry. And so will what’s most causal to the pain you are seeing in inflation expectations globally right now – central planners losing Mr. Macro Market’s confidence that they can re-flate asset prices.

 

In case you didn’t know, that’s how this central planning game of expectations ends – in #deflation.

 

It’s one thing to run around telling yourself that the Dow and DAX are up because you just knew that markets can’t go down. It’s entirely another to be doing that over and over again when the global macro system starts to signal that the party’s music is stopping.

 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets, which you can find in our Daily Trading Range product) are as follows:

 

UST 10yr Yield 2.14-2.24% (bearish)

SPX 2018-2042 (bullish)

RUT 1151-1172 (bearish)

KOSPI 1 (bearish)

VIX 14.43-19.59 (bullish)

USD 87.67-88.79 (bullish)

EUR/USD 1.22-1.25 (bearish)

Yen 116.79-121.65 (bearish)

Oil (WTI) 60.48-65.38 (bearish)

NatGas 3.49-3.81 (bearish)

Gold 1 (neutral)

Copper 2.84-2.95 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough

Chief Executive Officer

 

Tizzle In The System - 12.11.14 TLT vs. CRB


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – December 11, 2014


As we look at today's setup for the S&P 500, the range is 24 points or 0.40% downside to 2018 and 0.78% upside to 2042.                                        

                                                                                       

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: 1.58 from 1.60
  • VIX closed at 18.53 1 day percent change of 24.45%

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Retail Sales Advance, Nov., est. 0.4% (prior 0.3%)
  • 8:30am: Import Price Index, m/m, Nov., est. -1.8% (pr -1.3%)
  • 8:30am: Initial Jobless Claims, Dec. 6, est. 297k (pr 297k)
  • 8:45am: Bloomberg U.S. Economic Survey, Dec.
  • 9:45am: Bloomberg Consumer Comfort, Dec. 7 (prior 39.8)
  • 10am: Business Inventories, Oct., est. 0.2% (prior 0.3%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 12:pm: Household Change in Net Worth, 3Q (prior $1.390t)
  • 1pm: U.S. to sell $13b 30Y bonds in reopening

 

GOVERNMENT:

    • Deadline day for govt funding bill
    • 9:10am: SEC Chair Mary Jo White speaks at New York Times Dealbook conference
    • 9:30am: House Energy and Commerce subcmte holds hearing on crude oil export ban
    • 12:15pm: IRS Commissioner John Koskinen delivers luncheon keynote address at GWU, IRS International Tax Conf.

 

WHAT TO WATCH:

  • New York Regulator Said to Probe Barclays, Deutsche Bank Forex Algorithms
  • Oil Trades Near 5-Yr Low as Saudis Question Need to Cut Output
  • Cargill Weighs Stand-Alone Bid for Animal-Feed Supplier Nutreco
  • Wal-Mart Report Found Inflated Profit in China
  • KKR Is Looking at Mexico Investment Opportunities, Petraeus Says
  • House Passes Bill to Ease Dodd-Frank Capital Rules for Insurers
  • PBOC Said to Inject 400b Yuan as Targeted Move Preferred
  • Google Shutting Down Spain News Website After Copyright Ruling
  • Walgreen CEO Is Out as Top Shareholder Pessina Takes Over
  • United Technologies Fills CFO Post Ahead of Investor Day
  • Fiat Chrysler Sells Stock at 4% Discount After Slump on NYSE
  • Starboard Takes 6% Staples Stake, Boosts Office Depot Shrs: WSJ
  • Ebay Said to Mull Cutting Thousands of Jobs Next Year: WSJ
  • SNB Sees Higher Deflation Risk, Keeps Franc Limit at EU1.20
  • Hong Kong Police Tear Down Tents as Democracy Protesters Make Last Stand
  • Danone Said to Discuss Two Offers Topping $3.7b for Nutrition Unit
  • ECB Says Banks Take EU130b in 2nd Targeted Long-Term Loan Offer

 

EARNINGS:

    • Adobe Systems (ADBE) 4:02pm, $0.30
    • Ciena (CIEN) 7am, $0.13
    • Dominion Diamond (DDC CN) 5pm, $0.25
    • Esterline Technologies (ESL) 4:05pm, $1.84
    • Lululemon (LULU) 5:30am, $0.38 preview
    • Methode Electronices (MEI) 6:30am, $0.55
    • Nordson (NDSN) 4:30pm, $1.13
    • North West (NWC CN) 10:45am, C$0.38
    • Quiksilver (ZQK) 4:04pm, ($0.12)
    • RadioShack (RSH) 7am, ($1.04)

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Oil Trades Near 5-Year Low as Saudis Question Need to Cut Output
  • Roubini Global Predicts Sub-$60 Iron Ore Amid ‘Massive Surplus’
  • Milk Glut Spurs Slump in Win for U.S. Butter Eaters: Commodities
  • Gold Declines With Silver for Second Day as Dollar Strengthens
  • Robusta Coffee Falls for 6th Day on Vietnam Harvest; Cocoa Drops
  • HSBC Sees Silver Market Moving Into Supply Deficit Next Year
  • Copper Advances Amid Speculation China Will Move to Stoke Growth
  • Ore Ship-Charter Cost Has Longest Retreat in More Than a Year
  • Putin Pledges Oil, Weapons and Nuclear Power for Modi in India
  • Traders Hedge Oil ETF While Energy Stocks Lure Buyers: Options
  • Brent Crude May Fall to $60 a Barrel in Coming Weeks: Natixis
  • Wheat Extends Drop as Supply Outlook Improves; Soybeans Climb
  • ICE Gasoil Flips to Front-Month Contango for 1st Time Since Oct.
  • Iraq Says Its Oil Pricing Gives ‘No Basis’ for Price War Claims
  • Gold ETF Buyers Return as Investors Take Cover From Equities

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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