This note was originally published
at 8am on December 04, 2014 for Hedgeye subscribers.
“You are the average of the five people you spend the most time with.”
The quote above is lathered in cutesy life-coachy’ness, but I still like it. It implies that #Greatness is, in part, a choice. And, empirically, I’ve generally found it to be true.
For the majority, our confreres in the daily grind constitute most of that top five. With the Hedgeye firm meeting on Tuesday and our holiday party tonight, I’ll get a chance to look around and re-appreciate the unique team and business model born from the creative destruction of the financial crisis.
It’ll also serve as the annual reminder not to be the weak-link outlier and bringer of negative skew to our Macro team’s greatness distribution.
Back to the Global Macro Grind…
You can choose your colleagues and comrades but you can’t, in large part, choose your neighbors. You may, however, have more of them in the coming year.
We’ve been bearish on housing since the beginning of the year with the expectation for the compressed demand shock (rising rates/tighter regulation) in 2H13-1H14 to manifest in a significant deceleration in home price growth and underperformance across housing related equities.
At this point, most of what we expected at the beginning of the year has played out and, inclusive of the recent rally, housing related equities (ITB/XHB) have been among the worst performing sectors YTD.
So, what now?
Housing, like most things Macro, is more about better/worse than good/bad. From a rate of change perspective – how we measure/contextualize data – less good is bad, less bad is good, and the successful front-running of second derivative inflections remains the sangre vital of macro alpha generation.
As it relates to housing, while the macro environment remains a discrete risk, (very) easy volume compares, the lapping of weather/QM Implementation/FHA loan limit reductions, looser regulation, and a fledgling stabilization in 2nd derivative HPI trends all sit as modest, prospective tailwinds for 2015.
In other words, the downside asymmetry that existed at the beginning of the year has largely collapsed and, from a rate of change perspective, demand and price trends are showing a nascent inflection that looks likely to continue as comps ease progressively into 2H15.
We’ll be hosting a conference call on December 11th updating our outlook for housing in 2015. Institutional subscribers can ping email@example.com for call details/access.
I would, however, caution against conflating our shifting view on housing with our broader view on growth/inflation. The counter-trend call on housing is more of an idiosyncratic, rate of change call at this point than it is a discrete call for a sustained acceleration in consumer discretionary or early-cycle exposure at large.
Perhaps we’ll rotate out of our favored Quad #4 allocations to capture another short-cycle oscillation of pro-growth, high beta style factor outperformance but that’s not the call, yet.
The call, of course, is always that the call can change – particularly when taking a multi-duration view of risk.
In a tactical, counter-TREND move yesterday, we covered TIPS and bought JO (coffee) and FXY (Yen) in Real-time Alerts.
As the Quad #4 (i.e. disinflation and decelerating growth) callers the last couple quarters, we’ve been out front in slope surfing the strong dollar, down energy/commodities trade. But that doesn’t mean we need to go full deflation-ista at every price and across every duration.
As Keith put it: COUNTER TREND Call = USD Down = Yen (and/or Euro) UP = Nikkei Down = Oil Up = High Short Int Energy Stocks Up
In other words, in the immediate term, with Japanese (Nikkei) and European (EuroStoxx 600) equities overbought and the Euro and Yen oversold, the market is pricing in a potent dosing of Draghi drugs and an ultra-smooth election bid for Abe.
In other, other words, while our TREND view on deflation/Japan/etc. remains largely unchanged, the probability for a sizeable short-term macro reversal and $USD correlation risk to manifest in the opposite direction for prices is as high as its been.
Since we get a regular flood of process related questions, it’s probably worth extending and generalizing the thought process under yesterday’s tactical RTA maneuvering.
Our broader Trend view has been that:
- We are currently late-cycle
- Our Trend expectation has been for disinflation and slowing growth
- Our favored positioning YTD has been Bonds, Cash and Low Beta/Large Cap/Defensive yield sectors/companies
Inside of that Trend view, the macro and market reality is that:
- Tops are processes, not points (as are bottoms)
- ‘Perma-‘ anything isn’t a process and there is always a time/price to like and not like something
How do we integrate those market realities with our particular Trend view?
- By having a multi-duration view of risk. The probability of a particular short-term move need not be the same (or in the same direction) as the probability of a particular intermediate-term price trend.
- Recognizing that the market view should evolve and gross/net positioning should dynamically shift alongside changes in price
How does it work in practice?
- Selling/shorting on green and buying/covering on red (ie Fading Beta) within a defined, probability weighted immediate-term risk range allows us to pick off positive P&L in both direction without being overexposed to market risk
- We can maintain a TREND view on the trajectory for macro fundamentals/markets while taking high probability, tactical counter-TREND positions on overbought/oversold conditions. Taking the other side of our own TREND/TAIL view for a TRADE (particularly at immediate-term momentum turns) need not be incongruous if there is a repeatable process for quantifying the balance of risk
We get that multi-duration risk management and tactical positioning (i.e. “trading”) isn’t conventional investing in the classical sense but that’s why we try our best to explain the process and contextualize ‘the why’ underneath it. It’s also why we tell you over what duration(s) we like a particular call/idea/theme.
“If I had asked people what they wanted, they would have said faster horses.” (Henry Ford)
Cars are cool, but only if you know how to drive it.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.16-2.30%
WTI Oil 63.76-71.72
To re-learning, defenestrating convention, and macro mavericking,
Christian B. Drake
U.S. Macro Analyst