Long Ideas/Overweight Recommendations
- iShares National AMT-Free Muni Bond ETF (MUB)
- Consumer Staples Select Sector SPDR Fund (XLP)
- Health Care Select Sector SPDR Fund (XLV)
- iShares 20+ Year Treasury Bond ETF (TLT)
- Vanguard Extended Duration Treasury ETF (EDV)
Short Ideas/Underweight Recommendations
- SPDR S&P Regional Banking ETF (KRE)
- iShares Russell 2000 ETF (IWM)
- iShares MSCI European Monetary Union ETF (EZU)
- iShares MSCI France ETF (EWQ)
- 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%.
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.
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.
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.
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.
***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.
#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 – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.