Long Ideas/Overweight Recommendations
- Consumer Staples Select Sector SPDR Fund (XLP)
- Health Care Select Sector SPDR Fund (XLV)
- iShares National AMT-Free Muni Bond ETF (MUB)
- iShares 20+ Year Treasury Bond ETF (TLT)
- Vanguard Extended Duration Treasury ETF (EDV)
Short Ideas/Underweight Recommendations
- iShares Russell 2000 ETF (IWM)
- SPDR S&P Regional Banking ETF (KRE)
- 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
#Quad1 Percolating in the Data; Not Yet in the Market: If there’s one topic we’ve written extensively about in recent weeks, it’s the potential transition to the market pricing in a probable upcoming #Quad1 setup in the U.S., which is a scenario whereby growth (real GDP YoY) is accelerating as inflation (headline CPI YoY) decelerates. To the extent you’re looking to understand this transition from a fundamental perspective, please review our 11/26 edition of the Macro Playbook.
Much to the chagrin of the Consensus Macro “lower gas prices” narrative, however, that – i.e. the market pricing in #Quad1 – hasn’t really happened thus far. Simply put, the #1 sector (consumer discretionary) and #1 style factor (small caps) we’d expect to lead the broader U.S. equity market into the #Quad1 promised land are generally underperforming those which tend to perform most favorably in #Quad4 for the MTD.
The next two charts show the ratio of the XLY and IWM to the XLV, XLP, VNQ and XLU, normalizing them to show absolute return; anything below 100 represents underperformance by the former two ETFs:
Source: Bloomberg L.P.
Source: Bloomberg L.P.
Juxtapose this underperformance with most recent consumption data, which has been both good and better than expected:
- Jobless Claims: From Josh Steiner’s 12/11 note titled, “JOBLESS CLAIMS – 2014 vs. 2007”:
- “Looking back to 2007, by comparison (recall the S&P peaked in October 2007), rolling SA claims were trending higher by the October/November 2007 timeframe. We illustrate this in the first chart below.
- In blue we show the rolling SA claims with a second order polynomial trend line to illustrate the acceleration in claims in the fourth quarter. Claims had been running sideways between ~310k and 330k until week 43, when they broke above 330k and never looked back. That was late October, 2007. By comparison, the green line shows the 2014 trend.
- Second, one can look at the Y/Y rate of change in the rolling NSA data. The data inflected to positive 7% Y/Y rate of change (rising claims) by November, 2007 suggesting that the labor market was already showing early signs of deterioration, less than one month after the peak in the market… The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.0% lower YoY, which is a sequential improvement versus the previous week's YoY change of -7.2%.”
- Broader Labor Market: Obviously the [monster] sequential acceleration in MoM nonfarm payrolls growth to +321k is what it is – i.e. really darn good. Underneath the hood, the labor market continues to tighten materially, which is positive for the consumer. From Christian Drake’s 12/10 note titled, “Early Look: U-G-L-Y”:
- “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 just below recent cycle highs.”
- Retail Sales: To contextualize yesterday’s better-than-expected retail sales release, it’s worth mentioning that spending on goods only and represents ~23 of GDP and ~34% of PCE. Looking to the retail sales control group, which is the category of spending that feeds directly into GDP accounting, we see that growth accelerated sequentially on a MoM (+0.6% from +0.5% prior), YoY (+4.4% from +3.6% prior) and 2Y average (+3.8% from +3.7% prior) basis. The 2Y average growth rate of +3.8% represents a new TTM peak.
To reiterate, the aforementioned consumption data is pretty darn good; you don’t need a Consensus Macro survey or narrative to tell you that.
Moreover, the trend in jobless claims would imply (i.e. NOT guarantee) the improvement in the labor market has considerable room to run, which then implies (i.e. NOT guarantees) that both the economic cycle and market have headroom as well. The following table shows that, on average, both jobless claims trough (on a 3MMA basis) and nonfarm payrolls growth peaks (on a 3MMA basis) ~7 months ahead of the peak in the business cycle and ~3 months ahead of the peak in the market. Please note that these figures are averages; as the table shows, the dispersion across cycles is cavernous, which means that this is, at best, a rough guide to timing your exit from this multi-year bull market.
***CLICK HERE to download today’s updated 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.