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THEMATIC INVESTMENT CONCLUSIONS

Long Ideas/Overweight Recommendations

  1. iShares National AMT-Free Muni Bond ETF (MUB)
  2. Health Care Select Sector SPDR Fund (XLV)
  3. Vanguard Extended Duration Treasury ETF (EDV)
  4. iShares 20+ Year Treasury Bond ETF (TLT)
  5. Consumer Staples Select Sector SPDR Fund (XLP)

Short Ideas/Underweight Recommendations

  1. iShares Russell 2000 ETF (IWM)
  2. SPDR S&P Regional Banking ETF (KRE)
  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

#Quad1 Lands a Punch in the “#Quad4 vs. #Quad1 Debate”: For the past 4-6 weeks, we’ve been incessantly looking for confirmation in financial markets and affirmation in the economic data that the domestic equity market was beginning to price in an investable transition to #Quad1 on our GIP chart.

With the advent of recent quant signals and fundamental data, it would appear that process is beginning to get underway. Starting with the economic data, the U.S. consumer has finally responded to disinflationary stimuli by showing signs of life in November:

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Looking to our Tactical Asset Class Rotation Model (TACRM), we’re starting to see quantitative confirmation of this very nascent transition as well. Specifically, of the 47 sectors and style factors we track across the U.S. equity market, those which have been historical outperformers during periods of #Quad1 (i.e. financials, consumer cyclical and small-caps) have six of the top 10 Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) readings: IAI, XRT, XLF, IWO, XLY and IWM. Moreover, healthcare – which has historically been the best performing sector during periods of #Quad4 – now accounts for three of the bottom 11 VAMDMI readings: XLV, IBB and IHE.

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We can’t stress enough that these are very nascent signals, but they are indeed signals nonetheless and require further monitoring as it relates to our current defensive asset allocation recommendation. To the extent such signals start to trend (they aren’t yet), we will undoubtedly look to adopt a more offensive posture in our thematic investment conclusions above.

Happy Boxing Day!

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.

Does Your View on Rates Include the Risk of a “Reflexive Deflationary Spiral”? (12/19)

 

#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.