THE HEDGEYE MACRO PLAYBOOK

Takeaway: Today we rehash the #Quad4 vs. #Quad1 debate as it relates to how you should be positioned within the domestic equity market.

THEMATIC 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. 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

Renewing the #Quad4 vs. #Quad1 Debate: What has become a daily part of our internal asset allocation discussions is a likely fundamental transition into #Quad1 in the U.S. for the upcoming quarter. While we remain firmly entrenched in #Quad4 from both a positioning and reported data perspective, we think it’s helpful to review such discussions in our external publications as well.

Based on the base effects in the GDP data, a trip to #Quad1 is highly likely occurrence in 1Q15. That forecast is augmented by the demonstrable tax cut being levied upon the median consumer as a result of falling rent, food, utilities and gas prices.

THE HEDGEYE MACRO PLAYBOOK - UNITED STATES

THE HEDGEYE MACRO PLAYBOOK - CONSUMER SQUEEZE INDEX

THE HEDGEYE MACRO PLAYBOOK - CONSUMER SQUEEZE INDEX

A confirmed transition into #Quad1 in the U.S. would make us fundamentally bullish on the associated sectors and style factors – namely consumer dictionary (XLY), financials (XLF) and small caps (IWM).

THE HEDGEYE MACRO PLAYBOOK - Consumer Discetionary GIP

THE HEDGEYE MACRO PLAYBOOK - Financials GIP Model Backtest

THE HEDGEYE MACRO PLAYBOOK - Russell 2000 GIP

In light of that, we have been patiently waiting for this fundamental outlook to start to get priced into the U.S. equity market; specifically, we are looking for sustained outperformance of #Quad1 sectors and style factors relative to our preferred #Quad4 sectors and style factors (i.e. healthcare, consumer staples, utilities and REITs).

Thus far, such outperformance has yet to occur – at least not on a trending basis.  On a MoM basis, the IWM is just now starting to outperform the XLV; it’s generally been outperforming the XLP, but still demonstrably underperforming the XLU and VNQ. Moreover, neither the XLY or XLF are confirming a move into #Quad1 just yet.

THE HEDGEYE MACRO PLAYBOOK - IWM vs.

THE HEDGEYE MACRO PLAYBOOK - XLY vs.

THE HEDGEYE MACRO PLAYBOOK - XLF vs.

All told, we’re not in a hurry to adopt an offensive #Quad1 asset allocation recommendation just yet. With global macro volatility making higher-lows for the first time since early 2011 and with both emerging markets and the broad U.S. high-yield debt complex essentially blowing up, we think there are enough warning signs out there to warrant remaining defensively postured in the domestic equity market.

THE HEDGEYE MACRO PLAYBOOK - 10

THE HEDGEYE MACRO PLAYBOOK - 11

If that view changes, trust me – you’ll be the first to know!

***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.

Moscow, We Have a Problem (12/16)

#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.