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)
- Vanguard Extended Duration Treasury ETF (EDV)
- iShares 20+ Year Treasury Bond ETF (TLT)
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
Abenomics Round II = Global Deflationary Spiral Risk: With the advent of the LDP/NKP coalition securing another supermajority in the lower house of Japanese parliament (the Diet) comes risk of another gap higher in the USD/JPY cross and another leg down in commodity prices.
Specifically, we think Japanese Prime Minster Shinzo Abe will use the renewed four-year mandate to push forward this “Abenomics” agenda, which calls for a combination of aggressive fiscal and monetary easing in pursuit of “+5% monetary math” – an extremely aggressive economic goal in the context of Japan’s structural economic trends:
As we outlined in our 11/19 note titled, “JAPAN: DOES THE "ABENOMICS TRADE" HAVE MORE ROOM TO RUN?”, we think the trend in Japanese growth and inflation data along with the GPIF reallocation will force the BoJ to further expand its QQE program over the intermediate term. On balance, that should be bearish for the Japanese yen in the context of consensus expectations for monetary tightening in the U.S. over that same duration.
To the extent the U.S. dollar starts to price in this incrementally bearish outlook for the Japanese yen, our multi-duration correlation study implies further downside in commodity prices:
As we’ve reiterated in recent editions of the Macro Playbook, that portends an incrementally dour outlook for energy equities and high-yield energy bonds, as well as for emerging market equities, currencies and debt. To the extent we’re right on our outlook for the USD/JPY cross, buy-side consensus is not in the area code of being Bearish Enough on either of these asset classes; nor are they Bullish Enough on Japanese equities.
- 12/11/14: “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.”
- 12/8/14: “In today's edition of the Macro Playbook, we reiterate our negative bias on Emerging Market asset class beta.”
- 12/5/14: “We know we're a little late today (post Hedgeye holiday party edition), but you DO NOT want to miss what we have to say about energy below.”
Looking to our Tactical Asset Class Rotation Model (TACRM), currently 46% of the nearly 200 ETFs that comprise the model have a Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) reading less than -1x; that indicates a clear trend of negative VWAP momentum across three distinct durations. On a rolling 3M average basis, that figure is 39%, which is the highest ratio of bearishly trending macro markets since the week ended November 4th, 2011!
#Quad4’s #StrongDollar asset price deflation continues…
***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.