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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.


LEISURE LETTER (12/18/2014)

Tickers:  PENN, CZR, GENTING, GTECH, CCL, NCLH, RCL

EVENTS

  • Dec 20: Trump Taj Mahal Closing

Today's Headline Story

Regulators meeting bankers in January – According to the SCMP, the note sent out by the Monetary Authority on December 16 tells Macau banks that the January meeting will explain the "live monitoring system" that will allow the Ministry of Public Security to to view transfers using the China UnionPay card, and that the note also asks the banks for a list of information on "high-risk businesses" using the China UnionPay system, such as stores selling jewelry and wine.

 

A senior gaming insider tells the SCMP that the crackdown appears to be the real deal, and "it's not just the VIP junket operators who bring in the high-rollers who are nervous." 

 

Article HERE

Takeaway: China government may be supportive of Macau but GGR growth is clearly not a concern.

COMPANY NEWS

PENN/CZR/GENTING – The Gaming Facility Location Board chose sites in Sullivan, Schenectady and Seneca counties and decided not to recommend a fourth license amid an increasingly saturated gambling market where consumers have more options closer to home. The NY winners:

  • Montreign Resort Casino will be built in the Catskills town of Thompson. The $630 million project will include 2,150 slots, 61 table games, a 391-room hotel, indoor waterpark, golf course and entertainment village including restaurants and retail shops.
  • Its developer, Empire Resorts, operates through a subsidiary, the nearby Monticello Casino & Raceway. Montreign The Rivers Casino & Resort at Mohawk Harbor in the city of Schenectady will be part of a larger redevelopment effort at a formerly blighted riverfront site. The $300 million project will include a hotel, a high-end steakhouse, 66 gambling tables and more than 1,100 slot machines.
  • Lago Resort & Casino, a $425 million project in the Finger Lakes town of Tyre in Seneca County, will include 2,000 slot machines. It was the largest contender in the Finger Lakes-Southern Tier region.

Article HERE

Takeaway:  This was a major disappointment for the big operators, particularly Genting who was a front runner. Selecting 3 casino sites instead of 4 is the right move given the saturated gaming environment.

 

GENS – Genting Singapore today repurchased 12.2 million shares (38% of today's trading volume) for S$13 million. Cumulative shares repurchased year-to-date = 143,561,000 or 1.2% of the outstanding shares.  Following today's share repurchase, the total shares outstanding = 12,104,575,298.   

Article HERE

 

PENN– Hollywood Casino Toledo has won approval for an outdoor smoking deck with 34 slot machines. Similar areas have been approved in Horseshoe Cincinnati and Hollywood Columbus.

Article HERE

 

GTECH – offers to buyback its €750M of Subordinated Interest-Deferrable Capital Securities.  GTECH also declared a €0.75 interim dividend payable January 2015.

 

CCL – announced the new President of its Carnival Cruise Lines brand will be CLIA’s current CEO, Christine Duffy.  Duffy’s appointment takes effect Feb. 1. She succeeds Gerry Cahill, who retired in November. 

Article HERE

 

NCLH – Norwegian Escape, due to cruise the Caribbean year-round from Miami in November 2015, will feature two Planks, that let guests walk eight feet out over the edge of the ship. The expanded sports complex will have five zipline-style Sky Rails, including one that will loop out over the side of the 4,200-passenger ship. In addition to a full-sized basketball court, Escape will have a bocce ball court, a mini-golf course themed to the Teenage Mutant Ninja Turtle characters, an expanded Aqua Park and a new tandem slide in the Aqua Park called Aqua Racer.  In addition, Norwegian is also adding the line’s first dedicated nursery for children ages 2 and under. In expanding its “Guppies” program to children ages 6 months to three years, Norwegian will offer an active area for play time and age-appropriate activities and a separate space for napping. 

Article HERE

INDUSTRY NEWS

LV visitation record– According to LVCVA, Las Vegas visitation has passed 40 million for the first time. And, with two weeks left in the year, visitation could reach 41 million. The previous record was 39.727 million visitors in 2012. More air service from Canada and Mexico was credited with part of the growth. Also, the National Finals Rodeo broke attendance records at 177,656 over its 10 days.

Article HERE

Takeaway: Visitation has grown in every month this year. Meanwhile, gaming revenues, YTD, have been flat.

 

2015 Notable LV openings – See details in the link below.

Article HERE

 

2015 Mainland holidays– The central government has announced that next year’s Lunar New Year holidays in the mainland will be from February 18 to 24.

Mainlanders will also be given four periods of three days off in a row, beginning respectively on January 1, April 5, May 1 and June 20. The seven days of National Day holidays will begin on October 1.

Article HERE

 

Custom border – new custom clearance policy between Macau and the city of Zhuhai come into effect today. The opening time for Macau customs and Gongbei will be extended an extra two hours each, people with effective identifications will be able to enter and leave from 6am to 1am in the next day.

 

Macau's Lotus border and Zhuhai's Hengqin border will open 24 hours for clearance of visitors as well as passenger cars. The Chief Executive of Macau Chui Sai On visited Wednesday the borders before the new measures were put in force.

Article HERE

Takeaway: As expected. A slight positive.

 

Golden Nugget Lake Charles Staking Its Claim – Golden Nugget Lake Charles is the manifestation of owner Tilman Fertitta's risky maneuver to obtain Louisiana's last casino license. Fertitta refers to his new location as one of the nation's most appealing markets, but he's next door to an established, successful competitor with identical amenity offerings.

Article HERE

 

Cuba – The White House's move toward normalizing relations with Cuba has fueled interest among American cruise passengers hoping to visit, although the agreement doesn't allow U.S.-based cruise ships to call. Lifting the ban on mass tourism would require congressional approval.  

Takeaway:  No doubt Cuba would benefit the cruise lines but that would take some time.

MACRO

Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.  


Call Details For Today's Athletic Black Book - 1PM EST

Takeaway: Call Details For Today's Athletic Black Book - 1PM EST

Below is the conference call information for our Athletic Black Book Call Today at 1:00PM EST.

 

We look forward to having you join us for the call.

 

Call Details

Toll Free Number:

Toll Number:

Password: 13597073

Materials: CLICK HERE

 


Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

The Bull Case Is Now “Decoupling”

Client Talking Points

OIL

Oil bounces (again) and this one seems to be inspiring the many (Janet trades oil futures now - says the crash was just “transitory”). The immediate-term risk range for WTI, however, continues to signal lower-lows and lower-highs = 52.89-59.91, so if you weren’t short Russia, Energy, etc., here’s another chance.

RUSSIA

Putin is 1 of 5 central planners in the Top 5 Bloomberg Economic Stories this morning (the others include Yellen, Draghi, Abe, and a Swiss Guy who cut to negative rates). You know this is going to end well because Putin said Russia’s economy will “recover in 2017”… Russian stocks +5.3% on that to -47.7% year-to-date – UAE +13%, Saudi +8% (totally normal market moves).

EUROPE

The Swiss central bank telling savers they get to pay them (negative rates) is the latest catalyst to drive European Equities to lower-highs, but this doesn’t seem to be stimulating Greece (-2.2% to -26.6% year-to-date). #TwilightZone

Asset Allocation

CASH 59% US EQUITIES 4%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 30% INTL CURRENCIES 7%

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

JAPAN: Weimar Nikkei correlation trade firmly intact, +2.3% overnight post Yen resuming being burnt to a crisp

@KeithMcCullough

QUOTE OF THE DAY

Beware of the person who can't be bothered by details.

- William Feather

STAT OF THE DAY

68% of 56 economists surveyed by Bloomberg late last week said the Federal Open Market Committee will drop its pledge to keep interest rates near zero for a “considerable time” and instead adopt a word such as “patient” to describe its approach to policy. Only 23% said the committee will keep “considerable time.”


CHART OF THE DAY: #Deflationary Dominoes

CHART OF THE DAY: #Deflationary Dominoes - 12.18.14 EL Chart

 

The following is an excerpt from Hedgeye CEO Keith McCullough's Morning Newsletter today.

 

*  *  *  *  *  *  *

...If you nailed every 50 handle whip-around in spooz perfectly for the last 2 weeks, congratulations. We had a great year here, so send me your docs and I might give you some of my money to manage. If you did not, and stayed the course of patient, dynamic asset allocation:

 

  1. You sold some of your long duration bonds at 2.03% on the 10yr
  2. You bought some #Quad4 US Equity Exposure (Healthcare or Utilities were 1-2 for us this week)
  3. You shorted more Burning Yens and Euros high, against a net long US Dollar FX asset allocation

 

I didn’t have to nail every US stock market move to get that right in our asset allocation model. I just had to have the patience to not buy the November highs in US stocks and/or get shaken out of my Long Bond and US Dollar allocations on the recent November pullbacks...



#Patient Risk Managers

“The two most powerful warriors are patience and time.”

-Tolstoy

 

In case you didn’t know that I’m not a fan of centrally planned markets and economies, now you know. My long-term risk management call remains that any asset price inflation that is based on perma-planning will end in some form of a deflationary shock.

 

And while I know everything is rainbows and puppy dogs these days in the US economy (it’s going to “de-couple” from all of Global Macro markets, but bounce when they do!)… even the most avid perma bull on global growth should note that the Top 5 Stories on Bloomberg this morning have everything to do with central planners bailing markets out of the “everything is awesome” narrative.

 

Janet Yellen leads headlines this morning, followed by Mario Draghi (Europe), Shinzo Abe (Japan), a Swiss dude you probably don’t know (Switzerland cut interest rates to negative), and, of course, Vlad – as in Putin. Other than what went violently wrong in markets in the 1st two weeks of both October and December, what could possibly go wrong? #Patience, Risk Managers. Patience.

#Patient Risk Managers  - Card house cartoon 12.03.2014

 

Back to the Global Macro Grind

 

Away from her ridiculous comment that the crash in Oil is “transitory” (she can’t call bubbles, but she can call crashes… boil the oceans, part the heavens, etc.), I must give Janet Yellen props for having the #patience to wait until year-end to cut her forecasts (again).

 

This is big news for Hedgeye as the Fed, once again, effectively agrees with our core macro call that:

 

  1. Growth is slowing
  2. Inflation is slowing

 

I recapped the sell-side forecasts for you on Tuesday. Here are the Fed’s for 2015:

 

  1. GDP Growth cut from 3.5% to 3.0%, lowering the range to 2.6-3.0%
  2. Inflation cut from 2.2% to 1.9%, lowering the range to 1.0-1.6%

 

Notwithstanding that the Fed’s forecasts on growth and inflation have been wrong 60-70% of the time since Bernanke/Yellen took over the central planning bureau, the point here isn’t about good or bad – it’s about better or worse.

 

One of my Partners here @Hedgeye (Josh Steiner) coined that one-liner… and since I’m a rate of change guy, I like it. It’s simply another way to say the same thing. I don’t care much about absolutes – I care about the slope of the line. Is it slowing or accelerating?

 

Clearly, both locally and globally, the rate of change in both growth and inflation expectations are slowing. That’s why US, German, and Japanese bond yields continue to fall. That’s also why FX, High Yield, Commodity, and Equity Volatilities continue to accelerate.

 

“So” (Janet said that every other sentence yesterday, proving she’s in the tank with #OldWall groupthink), now that most things Global Macro have corrected (and bounced) again, what do we do next?

 

  1. As Long-term Risk Managers (Long-term Investors, I know you like that term!) we want to have #patience
  2. From Oil to Energy stocks, to EM and High Yield, we want you to recognize that #Deflation’s Dominoes take time

 

What we don’t want you to do is very straightforward:

 

  1. Don’t chase high, and freak out low
  2. Don’t believe the Fed’s forecasts (front-run them)

 

That’s it – just #FadeBeta (when the non-consensus view on growth and/or inflation is the most probable one).

 

Don’t be a Consensus Macro perf chaser who gets stimulated above the 50-day moving monkey and depressed below it. That is not going to make you a warrior of the alpha generating gridiron. No Sirs and Madames. That is going to make you mentally weak.

 

I don’t do weak. And I don’t do drawdown risk either. If I can proactively prepare you for it, that is…

 

If you nailed every 50 handle whip-around in spooz perfectly for the last 2 weeks, congratulations. We had a great year here, so send me your docs and I might give you some of my money to manage. If you did not, and stayed the course of patient, dynamic asset allocation:

 

  1. You sold some of your long duration bonds at 2.03% on the 10yr
  2. You bought some #Quad4 US Equity Exposure (Healthcare or Utilities were 1-2 for us this week)
  3. You shorted more Burning Yens and Euros high, against a net long US Dollar FX asset allocation

 

I didn’t have to nail every US stock market move to get that right in our asset allocation model. I just had to have the patience to not buy the November highs in US stocks and/or get shaken out of my Long Bond and US Dollar allocations on the recent November pullbacks.

 

Patience and time. They work in risk management as well as your best long term ideas do. Be a powerful warrior versus the tyranny of centrally planned momentum chasing consensus.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.03-2.19%

SPX 1

VIX 16.33-25.27

USD 88.15-89.67

Yen 116.16-121.11

WTI Oil 52.49-59.91

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

#Patient Risk Managers  - 12.18.14 EL Chart


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