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THE HEDGEYE MACRO PLAYBOOK

Takeaway: In today's Macro Playbook, we revisit the #Quad4 vs. #Quad1 debate, highlighting the US equity market's transition to #Quad1, on the margin.

THEMATIC INVESTMENT CONCLUSIONS

Long Ideas/Overweight Recommendations

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

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 Another Punch in the #Quad4 vs. #Quad1 Debate: In last Friday’s edition of the Hedgeye Macro Playbook, we went back to the well on what we think is the most important debate across the investment community – i.e. #Quad4 vs. #Quad1 in the U.S. In that note, we detailed how #Quad1 had finally “landed a punch” and, in the prose below, we show how proponents of #Quad1 are gaining incremental support from the domestic equity market.

 

Looking to our Tactical Asset Class Rotation Model (TACRM), we see that the sectors and style factors which have tended to outperform in historical instances of #Quad1 are starting to dominate the leader board as far as our proprietary Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) reading is concerned.

 

***Recall that our VAMDMI metric is simply the arithmetic mean of three independent z-scores of volume-weighted average price data, in which the three sample sizes (i.e. short-term, intermediate-term and long-term) accordion inversely to the trend in global financial market volatility. The metric is designed to standardize recorded momentum across securities and asset classes with variant betas, effectively normalizing the degree to which marginal investors might have a propensity to buy or sell a given market. Our emphasis on “marginal” is warranted due to the fact that the model is not programmed to be concerned with trailing price performance on longer durations; the velocity of the move is really all that matters as it relates to the proclivity of marginal investors chasing momentum in any given direction.***

 

Going back to our U.S. Equity Style Factor VAMDMI Ranker, we see that sectors and style factors which have tended to underperform in historical instances of #Quad4 continue to head up the rear – with the noteworthy exception of healthcare.

 

In summary:

 

  • 8 of the top 11 VAMDMI readings are pro-#Quad1 sectors and style factors: large-cap consumer discretionary (XLY), retailers (XRT), small caps (IWM), small-cap growth (IWO), broker-dealers (IAI), large-cap financials (XLF), regional banks (KRE) and small-cap value (IWN)
  • 2 of the top 11 VAMDMI readings are pro-#Quad4 sectors and style factors: utilities (XLU) and REITs (VNQ)
  • 7 of the bottom 11 VAMDMI readings are anti-#Quad4 sectors and style factors: gold miners (GDX), oil and gas E&Ps (XOP), oil servicers (IEZ), MLPs (AMLP), large-cap energy (XLE), large-cap materials (XLB) and semiconductors (SMH)
  • 3 of the bottom 11 VAMDMI readings are pro-#Quad4 sectors and style factors: large-cap healthcare (XLV), pharmaceuticals (IHE) and biotech (IBB)

 

THE HEDGEYE MACRO PLAYBOOK - TACRM U.S. Equity Style Factors

 

These signals are consistent with the very nascent trend of pro-#Quad1 sectors and style factors outperforming from a single-factor price performance perspective as well:

 

THE HEDGEYE MACRO PLAYBOOK - IWM vs.

 

THE HEDGEYE MACRO PLAYBOOK - XLY vs.

 

THE HEDGEYE MACRO PLAYBOOK - XLF vs.

 

Obviously a couple of weeks of outperformance does not a trend make, but in the context of our GIP Model signaling a probable transition to #Quad1 in the upcoming quarter – which begins in two days – we think these are some of the most important signals emanating from global financial markets at the current juncture.

 

THE HEDGEYE MACRO PLAYBOOK - UNITED STATES

 

To the extent the U.S. equity market has legs to the upside – which Keith’s quantitative model continues to signal via consistent higher-highs of immediate-term resistance for the SPX (a la late-October) – we are starting to think the next phase of outperformance in the U.S. equity market is likely to come from those sectors and style factors most closely associated with #Quad1.

 

That is especially noteworthy in the context of the next recession being roughly 18 months away according to the trend in initial jobless claims or in the context of the relative healthiness of the broad equity market itself:

 

THE HEDGEYE MACRO PLAYBOOK - JOBLESS CLAIMS

 

THE HEDGEYE MACRO PLAYBOOK - BMBI CURRENT

 

Stay tuned for our Q1 macro themes call, which is tentatively scheduled for January 8th at 1pm EST; we’ve had another fantastic year signaling the important phase transitions in macro and we don’t want to overstay our welcome with respect the thematic investment conclusions highlighted above.

 

***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: New Discoveries (12/29)

 

#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.          


#Deflation, Utilities and Volume

Client Talking Points

#DEFLATION

Both on a reported basis in Europe this morning (Spain CPI for DEC -1.1% year-over-year vs. -0.4% NOV; Italy PPI -1.2% year-over-year NOV) and in real-time market price terms (Oil down, Russia -2.3%, CRB Index crashing to year-to-dare lows, etc.), this is obvious now; don’t lose money being long it.

UTILITIES

When you have global growth slowing and #deflation you buy the Long Bond (TLT), and anything liquid equities that looks like a bond – Utilities led U.S. Equity gainers (again) yesterday, +1.2% on the day to a monster +29.3% year-to-date.

VOLUME

Total U.S. Equity Market Volume (including dark pool) at the all-time closing high for SPY was -14% and -33% vs. its 1 month and year-to-date averages yesterday. In size, we would much rather be long TLT than SPY with this illiquidity setup in stocks looking very similar to the end of SEP and NOV (before the 10% and 5% abrupt corrections in early OCT and DEC).

Asset Allocation

CASH 56% US EQUITIES 3%
INTL EQUITIES 2% COMMODITIES 0%
FIXED INCOME 32% INTL CURRENCIES 7%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). As our declining rates thesis proved out and picked up steam over the course of the year, we see this trend continuing into Q1.  Short of a Fed rate hike, there’s no force out there with the oomph to reverse this trend, particularly with global growth decelerating and disinflationary trends pushing capital flows into the one remaining unbreakable piggy bank, which is the U.S. Treasury debt market.

TLT

As growth and inflation expectations continue to slow, stay with low-volatility Long Bonds (TLT). We believe the TLT has plenty of room to run. We strongly believe the dynamics in the currency market are likely contribute to a “reflexive deflationary spiral” whereby continued global macro asset price deflation and reported disinflation both contribute to rising investor demand for long-term Treasuries, at the margins.

XLP

Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deflation. 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. 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

RUSSIA: so much for the "bounce", Russian stock market down another -2.3% to -43.8% YTD #deflation

@KeithMcCullough

QUOTE OF THE DAY

The single most powerful asset we all have is our mind. If it is trained well, it can create enormous wealth in what seems to be an instant.

-Robert Kiyosaki

STAT OF THE DAY

Only about 9% of the wealthiest 1% of Americans’ total net worth is tied up in their home. That’s compared to 63% for the broad middle class.


CHART OF THE DAY | Real-Time Alerts: Historical Closed Position Return Distribution

CHART OF THE DAY | Real-Time Alerts: Historical Closed Position Return Distribution - RTA 2008 Present

 

The brief excerpt below is from today's Morning Newsletter written by Hedgeye U.S. macro analyst Christian Drake.

 

We’ve #TimeStamped 2,969 signals in Real-Time Alerts since 2008.  The historical data is there to see and download on our website and in the Chart of the Day below we show the return distribution across RTA’s 6+ year history.  In our attempt to further the evolution towards an investing meritocracy, we feel we’ve built a better Risk Management mousetrap. 

 

As always, you are free to disagree.  We happily accept and consider all (thoughtful) criticism as we work to continually evolve the process.  



Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.51%

Great Moments in #TimeStamping

“You only have a full-year target if someone pays you a lot to have a full-year target”

-Keith McCullough on market dynamism & quixotic sell-side pursuits

 

 

We start every morning missive with a quote.  Sometimes it’s inspirational, sometimes it’s intentionally flippant but, hopefully, it always carries real-time relevance and helps distill some signal from the global macro noise.  

 

Alpha is Early Look modus operandi number one, but if it makes you laugh or re-think or get angry, it’s served its purpose.

 

Anyhow, with the 2015 market prognostications piling up into year end, we thought we’d lighten the tenor in today’s note and look back a bit as we look forward to the new year. 

 

Neils Bohr famously quipped that, “Prediction is very difficult, especially if it’s about the future”.    

 

The short selection of some of our favorite misadventures in #TimeStamping below bears witness to that reality and provides a potent reminder that imagination remains a scarce resource, conventionalisms box can be hermetic  and humility oft follows hubris.

 

If you have favorites of your own, feel free to pass them along.  They will, at the least, be tweeted. 

 

 

***********************************************************

 

“We see no serious broader spillover to banks or thrift institutions from the problems in the subprime market…We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”    - Ben Bernanke,  May 17, 2007

 

“We don’t know what we’ll be doing a year from now. It’s a mistake to try and get too precise…you can’t expect the Fed to spell out what it’s going to do...because it doesn’t know…Year after year we have had to explain why the global growth rate has been lower than predicted.”  - Stanley Fischer providing a little 2014 FOMC truth serum

 

“In all likelihood world inflation is over” - Per Jacobbson, IMF, 1959

 

“I believe the fundamentals of our economy are strong. Very Strong” - John McCain during run for President, 6/5/2008

 

“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies”  - Senator Barack Obama, 3/16/2006

 

“There is no doubt that the regime of Saddam Hussein possesses weapons of mass destruction. As this operation continues, those weapons will be identified, found, along with the people who have produced them and who guard them.”  - General Tommy Franks

 

“Everything that can be invented has been invented”  - Charles H. Duell, US patent office, 1899

 

“Who would want to use it anyway?” - President Rutherford B Hayes on the telephone, 1876

 

"The world only needs five computers"  - Thomas J. Watson Sr, President of IBM

 

“They couldn’t hit an elephant at this distance” - General John Sedgwick moments before being killed by enemy fire. 

 

"I will say that I cannot imagine any condition which could cause a ship to founder. I cannot conceive of any vital disaster happening to this vessel. Modern shipbuilding has gone beyond that." -  Capt. E. J. Smith of the Titanic, a few days before it sank.

 

“If I had asked people what they wanted, they would have said faster horses.” - Henry Ford

 

And, of course, perhaps the pithiest prediction from one of the Great Moderation’s foremost prognosticator’s…..

 

My Prediction?...PAIN! - Mr. T, 1982

 

 

***********************************************************

 

We’ve #TimeStamped 2,969 signals in Real-Time Alerts since 2008.  The historical data is there to see and download on our website and in the Chart of the Day below we show the return distribution across RTA’s 6+ year history.  In our attempt to further the evolution towards an investing meritocracy, we feel we’ve built a better Risk Management mousetrap. 

 

As always, you are free to disagree.  We happily accept and consider all (thoughtful) criticism as we work to continually evolve the process. 

 

”You have two ears and one mouth, use them in that proportion”.   I’m not sure to whom that’s attributable, but Hedgeye would sign off on its sageness.     

 

Our immediate-term Global Macro Risk Ranges are now :

 

UST 10yr Yield 2.06-2.23%

SPX 1

RUT 1145-1240

KOSPI 1

Oil (WTI) 52.56-55.79

Gold 1168-1196

 

Happy Birthday Lebron James & Tiger Woods and Happy Tuesday - the humpday between Monday and humpday

 

Christian B. Drake 

Macro Analyst

 

Great Moments in #TimeStamping - RTA 2008 Present


December 30, 2014

December 30, 2014 - Slide1

 

BULLISH TRENDS

December 30, 2014 - Slide2

December 30, 2014 - Slide3

December 30, 2014 - Slide4

 

 

BEARISH TRENDS

December 30, 2014 - Slide5

December 30, 2014 - Slide6

December 30, 2014 - Slide7

December 30, 2014 - Slide8

December 30, 2014 - Slide9

December 30, 2014 - Slide10

December 30, 2014 - Slide11
December 30, 2014 - Slide12


Revolutionary Outlook

This note was originally published at 8am on December 16, 2014 for Hedgeye subscribers.

“The Revolution transformed science from a popular hobby into a full-fledged profession.”

-Sharon Bertsch McGrayne

 

While December 16th was one of the beauty days of the American Revolution (the Sons of Liberty dumped loads of tea in the Boston Harbor #TeaParty), that is not the revolution the aforementioned quote is alluding to…

 

Believe it or not, there was a time when the French were hard core evolutionists in math, science, and innovation too.”For almost 50 years (from the 1780s until Pierre Simon Laplace’s death in 1827), France led world science as no other country has before or since.

-The Theory That Would Not Die (pg 30)

 

Today, Canadians and Americans (sorry, had to include the homeland) have a once in a lifetime opportunity to revolt and redo the entire profession of mainstream economic and market analysis. During the 18th century American and French Revolutions, they needed a crisis to change. Sadly, I don’t think the change I’m envisioning will be born out of something that’s different this time.

Revolutionary Outlook - minutemen01 jpg

 

Back to the Global Macro Grind

 

While I realize there is tremendous value in fading the forecasts of the #OldWall (and that we should probably pay to keep them in business for that reason alone!), eventually redoing all of this means we must move forward and evolve.

 

Moving forward starts with understanding where we came from. So let’s do that and look at the almighty US growth and inflation “2014 Forecasts” (summarized in bond yield terms) from Barron’s on what was going to happen this year:

 

  1. Bank of America (Savita Subramanian) 10yr Yield forecast = 3.75%
  2. Tom Lee (formerly JP Morgan) 10yr Yield forecast = 3.65%
  3. Barclays (Barry Knapp) 10yr Yield forecast = 3.50%
  4. Morgan Stanley (Adam Parker) 10yr Yield forecast = 3.45%
  5. Citigroup (Tobias Levkovich) 10yr Yield forecast = 3.25%

 

With the 10yr US Treasury Yield crashing to 2.09% today (-31% YTD), my congratulations goes out to the fine folks at Citigroup for being closest to the pin. If you had client moneys in that strategy, you’d be short the Long Bond (and long the Russell, which is -2.1% YTD).

 

#sweet

 

Looking forward at Barron’s “2015 Outlook” for growth and inflation expectations (yes, they do manifest in the bond market):

 

  1. Tobias @Citigroup inched his forecast down to 2.95%
  2. Parker @MorganStanley opted for 2.85%
  3. And Savita @BofA went all-bearish on bond yields at 2.75%!

 

I couldn’t make this up if I tried.

 

And on the why, don’t ask me, because I genuinely do not understand A) the process that got them to 3.25-3.75% in 2014 to begin with and/or B) the risk management components of the 2.75-2.95% forecast cuts, when they should be 100 basis points lower than that.

 

Both Barron’s and Bloomberg Magazine recently ran “This Time It’s Different” on their covers (Barron’s did on the weekend before their almighty god Dow dropped over 700 points). But, for the life of me, I can’t find an 2014 Outlook that read something like this:

 

  1. Worldwide growth will start to slow in the back half of 2014
  2. In response to #GrowthSlowing Europe, Japan, and China will all panic and print
  3. After seeing late cycle inflation peak in 1H14, #deflation will take hold by Q4
  4. Oil will start to crash…
  5. Then Russia will crash…
  6. As Energy stocks crash
  7. And the High Yield debt markets will start to shake…
  8. As Emerging markets will continue to crash

 

I’ll stop there…

 

Q: Who nailed all of that? A: Not Ed & Nancy.

 

The only thing that is different this time are the names of the macro “forecasters” on the sell-side who are willing to subject themselves to my #timestamping. With Tom Lee out, JP Morgan has enlisted some dude named Dubravko.

 

“So”, excited to hear of new competition, I looked Dubravko up hoping to find some innovation in his process. Unfortunately, while his resume says he has some experience as a “Quantitative Researcher”, his 2015 “forecast” looks very #OldWall to me:

 

  1. US GDP Growth = 3.0%
  2. UST 10yr Yield = 2.80%
  3. SP500 “target” = 2250

 

Nice round numbers that ultimately imply:

 

A)     US growth to “de-couple” from global #GrowthSlowing and accelerate year-over-year

B)      US Bond Yields and Growth Equity returns to rise in response to that

 

I wish you luck, Dubravko. And thank you for being part of a Consensus Macro that we will continue to fade with a revolutionary process and risk managed outlook.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.09-2.21%

SPX 1980-2002

RUT 1125-1151

VIX 16.31-23.47

YEN 116.28-121.01

WTI Oil 53.27-61.15

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Revolutionary Outlook - 12.16.14 chart


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