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Macro Notebook 12/30: Deflation | Utilities | Volume

 

Hedgeye Macro Analyst Darius Dale shares the top three things in Keith's macro notebook this morning.


Case/Shiller | HPI Stabilization Confirmation Redux

Takeaway: Case/Shiller is now showing similar trends in HPI stabilizing on a second derivative basis as Corelogic & FHFA.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume. 

 

Case/Shiller | HPI Stabilization Confirmation Redux - Compendium

 

Today's Focus: October S&P/Case-Shiller Home Price Report

 

THE DATA:  The Case-Shiller HPI data for October showed home prices growing +4.5% YoY, decelerating -30bps from +4.8% in September.  Recall that the Case-Shiller HPI series is constructed as a 3-month moving average so the October release reflects HPI changes over the Aug-to-Oct period, effectively amounting to September data. The Case-Shiller series tracks the Corelogic data closely, but on a lag, and with the Corelogic figures released almost a full month before Case-Shiller, the slope and likely magnitude of the C-S HPI is pretty well advertised.

 

BOTTOM-LINE: Home-Price growth continued to decelerate but, from a modeling perspective, we're primarily concerned with the rate of deceleration and, on that score, the trend remains one of improvement.  The sequential change in the YoY Rate of Change improved to -0.3% in October from -0.8% the month prior.  As we’ve highlighted alongside the other HPI releases, all three primary price series are now confirming the same (2nd derivative) stabilization story.  The 1st chart below illustrates that trend.  Given the correlation between 2nd derivative HPI trends and housing related equities, a stabilization/re-acceleration in home price growth augurs positively for the group. 

 

 

Case/Shiller | HPI Stabilization Confirmation Redux - HPI 2nd Deriv Inflection

 

Case/Shiller | HPI Stabilization Confirmation Redux - CS MoM   SA

 

Case/Shiller | HPI Stabilization Confirmation Redux - CS YoY TTM

 

Case/Shiller | HPI Stabilization Confirmation Redux - CS YoY   vs ITB

 

Case/Shiller | HPI Stabilization Confirmation Redux - CS bubble chart

 

 

About Case Shiller:

The S&P/Case-Shiller Home Price Index measures the changes in value of residential real estate by tracking single-family home re-sales in 20 metropolitan areas across the US. The index uses purchase price information obtained from county assessor and recorder offices. The Case-Shiller indexes are value-weighted, meaning price trends for more expensive homes have greater influence on estimated price changes than other homes. It is vital to note that the index’s printed number is a 3-month rolling average released on a two month delay.

 

Frequency and Release Date:

The S&P/Case-Shiller HPI is released on the last Tuesday of every month. The index is on a two month lag and therefore does not reflect the most recent month’s home prices.

 

 

Joshua Steiner, CFA

 

Christian B. Drake


An Eerily Familiar Illiquidity Setup

Editor's note: This is a brief excerpt from Hedgeye morning research. Click here for more information on how you can become a subscriber to the fastest-growing independent research firm in America.

 

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At the S&P 500's all-time closing high yesterday, Total U.S. Equity Market Volume (including dark pool) was down -14% and -33% versus its 1-month and year-to-date averages.

 

An Eerily Familiar Illiquidity Setup  - 78

 

In size, we would much rather be long the Long Bond via TLT than SPY with this illiquidity setup in stocks looking very similar to the end of September and November. That of course was just before the abrupt 10% and 5% corrections in early October and December.

 

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

 

Click image to enlarge.

An Eerily Familiar Illiquidity Setup  - R3K


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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.  



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