THE HEDGEYE MACRO PLAYBOOK

Takeaway: Today we highlight the ongoing financial crisis in emerging markets ahead of our 1pm call today. Email sales@hedgeye.com to obtain access.

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 Ongoing Crisis in Emerging Markets: Since our September 23rd [bearish] note titled, "EMERGING MARKETS: THE EM RELIEF RALLY IS LIKELY OVER", the MSCI EM Index has declined -10.5%, the JPM EM Currency Index has declined -7.1% and OAS on the Bloomberg USD EM Composite Index has widened +118bps to 425bps. Even more shocking, the aforementioned returns are not inclusive of the absolute carnage you’re seeing on your screens this morning!

 

THE HEDGEYE MACRO PLAYBOOK - ETF Divergence Monitor

 

THE HEDGEYE MACRO PLAYBOOK - 2

Source: Bloomberg L.P.

 

Highlighting the ongoing crisis in Russia, the country’s benchmark RTS Index continues to crash, down another -15% today and down a whopping -39% in just the past 1M alone! The Russian ruble (RUB) continues to plunge to new all-time lows, gapping down another -15% vs. the USD this morning despite the Bank of Russia having raised its benchmark rate a whopping +750bps in the MTD! No, these figures are not typos.

 

THE HEDGEYE MACRO PLAYBOOK - 3

Source: Bloomberg L.P.

 

The CEO of Sberbank (down -13% today and -19% WoW), which is Russia's largest bank with 46% deposit share, said back on November 14th that if the Russian economy were to decline by more than -1.2% in 2015 Sberbank would need the State to bail it out. Not surprisingly, Sberbank 5Y CDS have widened dramatically since then (+215bps) and are now well wider than the critical threshold of 300bps level we consider to be harbinger of bankruptcy risk for financial institutions.

 

THE HEDGEYE MACRO PLAYBOOK - 4

Source: Bloomberg L.P.

 

Looking to our Tactical Asset Class Rotation Model (TACRM):

 

  • TACRM continues to generate “DECREASE EXPOSURE” signals for EM Equities and Foreign Exchange as primary asset classes. Their Passive Trend Follower Asset Allocation readings of 10% and 3%, respectively, are off -44% and -67% versus their respective TTM averages.
  • Of the 36 ETFs comprising our EM Equities primary asset class, only one of them (CHIX) has a positive Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) reading.
  • 89% of them have a VAMDMI reading less than -1x, which indicates a clear trend of negative VWAP momentum across three distinct durations.
  • Of the 14 ETFs comprising our Foreign Exchange primary asset class, none of them have a positive VAMDMI reading.
  • 57% of them have a VAMDMI reading less than -1x, which indicates a clear trend of negative VWAP momentum across three distinct durations.

 

THE HEDGEYE MACRO PLAYBOOK - TACRM Summary Table

 

THE HEDGEYE MACRO PLAYBOOK - TACRM GMRS N

 

THE HEDGEYE MACRO PLAYBOOK - TACRM GMRS

 

What these signals confirm to us today is that that #Quad4’s #StrongDollar asset price deflation is likely here to stay with respect to the intermediate term. In light of that, we continue to think you should remain short of or completely out of this asset class to the extent you can accomplish that in your mandate.

 

***We will be hosting a conference call today at 1pm to discuss the myriad of top-down and bottom-up risks facing many emerging market economies and how we think you should be positioned to take advantage of these factors. Please email to obtain access to the call and the associated slide deck.***

 

***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: Money Man (12/15)

 

#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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