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Tales of the Long Bond Pain Trade

Takeaway: The buy-side is far from having capitulated on the short side of the long bond. We think they most likely will in the coming weeks & months.

Consider the following return figures:

 

  • iShares 20+ Year Treasury Bond ETF (TLT): +2.9% WTD, +3.1% MTD, +8.6% QTD and +24% YTD
  • Vanguard Extended Duration Treasury ETF (EDV): +3.9% WTD, +5.1% MTD, +14.2% QTD and +40.8% YTD
  • iShares National AMT-Free Muni Bond ETF (MUB): +0.3% WTD, +0.3% MTD, +0.5% QTD and +6.3% YTD

 

Now consider the most recently reported net speculative position of -214.8k futures and options contracts on 10Y Treasury notes. On a TTM Z-Score basis, that’s the most net SHORT the buy-side has been of the long bond since the week ended March 23rd, 2012.

 

Tales of the Long Bond Pain Trade - 1

Source: Bloomberg L.P.

 

It’s worth mentioning that the long bond rallied hard on that signal; from late-March of 2012 through late-July of that same year, the 10Y Treasury yield plunged -86bps to its all-time closing low of 1.38%.

 

Tales of the Long Bond Pain Trade - 2

Source: Bloomberg L.P.

 

That current setup in the bond market rhymes with investors broadly continuing to anticipate “escape velocity” and a rate “lift-off” over the NTM – even if only a modest tightening: DEC ’15 Fed Funds Futures are pricing in a mere +25bps rate hike by the end of next year.

 

Tales of the Long Bond Pain Trade - 3

Source: Bloomberg L.P.

 

All told, the buy-side hasn’t capitulated on the short side of bonds yet.

 

They most likely will.

 

And when they do, you’ll be able to book some nice gains by selling into their mass short-covering – that is, of course, to the extent you’ve been following our recommendation to be long of long-term Treasuries and munis [and defensive equities that resemble this long duration exposure].

 

Happy holidays!

 

DD

 

Darius Dale

Associate: Macro Team


Cartoon of the Day: The Real One-Percenter?

Cartoon of the Day: The Real One-Percenter? - 1  cartoon 12.12.2014

The epic crash in bond yields continues ... 10-year Treasury yield down over -30% YTD as #GrowthAndInflationSlowing bulls get paid, in $TLT terms. On a related note, this was one of the biggest, most non-consensus calls of the year. And we made it.

 

Click here to learn more about how you can become a subscriber.


RTA Rewind: 12/12/14

 

ICYMI: Hedgeye CEO Keith McCullough hosted an RTA LIVE session today at 11:00AM. He and Macro Analyst Ben Ryan ran through the Real Time Alerts signals, talked about today's market activity, and fielded questions from subscribers.


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Retail Callouts (12/12): 11 SIGMAS, LULU, RH, ZQK, COST, COH + LVMH

Takeaway: Here are SIGMAs for the 11 retailers that reported earnings this week.

Here are SIGMAs for the 11 retailers that reported earnings this week. 

 

If there's any takeaway, it's that 8 of the 11 companies improved inventory position on the margin, but only 3 improved margins. No other major callouts.

 

ZQK - 4Q14 Earnings

Retail Callouts (12/12): 11 SIGMAS, LULU, RH, ZQK, COST, COH + LVMH - 12 12 chart1

 

RH - 3Q14 Earnings

Retail Callouts (12/12): 11 SIGMAS, LULU, RH, ZQK, COST, COH + LVMH - 12 12 chart2

 

LULU - 3Q14 Earnings

Retail Callouts (12/12): 11 SIGMAS, LULU, RH, ZQK, COST, COH + LVMH - 12 12 chart3

 

COST - 1Q15 Earnings

Retail Callouts (12/12): 11 SIGMAS, LULU, RH, ZQK, COST, COH + LVMH - 12 12 chart4

 

VRA - 3Q15 Earnings

Retail Callouts (12/12): 11 SIGMAS, LULU, RH, ZQK, COST, COH + LVMH - 12 12 chart5

 

FRAN - 2Q14 Earnings

Retail Callouts (12/12): 11 SIGMAS, LULU, RH, ZQK, COST, COH + LVMH - 12 12 chart6

 

MW - 3Q14 Earnings

Retail Callouts (12/12): 11 SIGMAS, LULU, RH, ZQK, COST, COH + LVMH - 12 12 chart7

 

RSH - 3Q14 Earnings

Retail Callouts (12/12): 11 SIGMAS, LULU, RH, ZQK, COST, COH + LVMH - 12 12 chart8

 

CASY - 2Q15 Earnings

Retail Callouts (12/12): 11 SIGMAS, LULU, RH, ZQK, COST, COH + LVMH - 12 12 chart9

 

OXM - 3Q14 Earnings

Retail Callouts (12/12): 11 SIGMAS, LULU, RH, ZQK, COST, COH + LVMH - 12 12 chart10

 

WTSL - 3Q14 Earnings

Retail Callouts (12/12): 11 SIGMAS, LULU, RH, ZQK, COST, COH + LVMH - 12 12 chart11

 

COH, LVMH - Coach targeted by LVMH

(http://primeretailer.com/2014/12/11/coach-targeted-by-lvmh/)

 

Takeaway: This is why we covered our long-standing short on COH in the low 30s.

 

 

OTHER NEWS

 

KERING - Creative Director Frida Giannini and CEO Patrizio di Marco to step down from Gucci

(http://www.kering.com/en/press-releases/creative_director_frida_giannini_and_ceo_patrizio_di_marco_to_step_down_from_gucci_)

 

Advent Bids for Stuart Weitzman

(http://www.wwd.com/business-news/mergers-acquisitions/advent-bids-for-stuart-weitzman-8072425?module=hp-topstories)

 

KR - David Dillon to Retire as Kroger Chairman

(http://ir.kroger.com/file.aspx?IID=4004136&FID=26516658)

 

"Rodney McMullen Elected Chairman Starting Jan. 1"

 

Tag Heuer CEO Resigns

(http://www.wwd.com/business-news/human-resources/tag-heuer-ceo-resigns-8073263?module=hp-topstories)

 

BABA - Report – Alibaba security flaw potentially exposes user info to hackers

(http://www.chainstoreage.com/article/report-%E2%80%93-alibaba-security-flaw-potentially-exposes-user-info-hackers)


Got Deflation?

Client Talking Points

Oil

A lot people trying to pick bottoms. You shouldn’t do that when something’s crashing like oil. Deflation. Deflation. Deflation.

Oil is down 44% since June with lower highs and lower lows. Not good.

10-Year Yield

The 10-Year bond yield trading with what? Deflation expectations because deflation expectations are price in what? Oil. It’s a clean cut correlation. The crash in bond yields continue with the yield on the 10-Year down 30% YTD. 

Vix

Volatility went up 80% in three days. #NoWorries. We’ve been bullish on volatility since July. We’ve remained bullish on volatility since July. We’ve been bearish on things like growth and junk bonds since July. These things are interconnected and correlated.

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

Yield Spread pounded to YTD lows; Spread risk in low-quality bonds at YTD highs #NoWorries

--@KeithMcCullough

QUOTE OF THE DAY

“If winning isn’t everything, why do they keep score?”

--Vince Lombardi

STAT OF THE DAY

$1.1 trillion, the amount of the spending bill passed by Congress last night. 


THE HEDGEYE MACRO PLAYBOOK

Takeaway: Today we help you own the following debates: #Quad1 vs. #Quad4; gas prices vs. the consumer; and the labor market vs. the economic cycle.

INVESTMENT CONCLUSIONS

Long Ideas/Overweight Recommendations

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

Short Ideas/Underweight Recommendations

  1. iShares Russell 2000 ETF (IWM)
  2. SPDR S&P Regional Banking ETF (KRE)
  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

#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.

 

THE HEDGEYE MACRO PLAYBOOK - UNITED STATES

 

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:

 

THE HEDGEYE MACRO PLAYBOOK - XLY

Source: Bloomberg L.P.

 

THE HEDGEYE MACRO PLAYBOOK - IWM

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.

 

THE HEDGEYE MACRO PLAYBOOK - claims

 

THE HEDGEYE MACRO PLAYBOOK - available workers per job opening

 

THE HEDGEYE MACRO PLAYBOOK - retail sales control group

 

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.

 

THE HEDGEYE MACRO PLAYBOOK - labor 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.

 

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.


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