Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
Takeaway: International risk remains high as Greece's elections later this month and Russia's ongoing woes couple with steady far-East press
Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor". If you'd like to receive the work of the Financials team or request a trial please email
European Financial CDS - Swaps mostly widened in Europe last week. Investors continue to focus on the uncertainty of upcoming Greek elections; Greek banks' CDS widened between 159 and 229 bps last week.
Sovereign CDS – European Sovereign Swaps mostly tightened over last week. German sovereign swaps tightened by -21.3% (-4 bps to 14 ) and Portuguese sovereign swaps widened by 7.8% (14 bps to 187).
Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 1 bps to 10 bps.
Takeaway: Today we highlight the new "INCREASE Exposure" signal TACRM is generating for DM Equities and how that is likely to impact capital flows.
THEMATIC INVESTMENT CONCLUSIONS
Long Ideas/Overweight Recommendations
Short Ideas/Underweight Recommendations
QUANT SIGNALS & RESEARCH CONTEXT
TACRM Generates an “INCREASE Exposure” Signal for DM Equities: For the first time since the week ended May 2nd, our Tactical Asset Class Rotation Model (TACRM) is NOT generating a “DECREASE Exposure” signal for DM Equities. This is because the quantitative model is now generating an “INCREASE Exposure” signal for the primary asset class, which is noteworthy for the following three reasons:
Why should you care about TACRM’s signaling capabilities at the primary asset class level? At a bare minimum, the model is better than bad at front-running phase transitions across the global macro landscape; at a bare maximum, it’s pretty darn good at doing just that.
Here are the most recent rotation-based signals TACRM has generated for each of the other five primary asset classes:
*charts sourced via Bloomberg L.P.
In the spirit of not arguing with basic arithmetic, both the historical backtest data and recent performance support heeding the “INCREASE Exposure” signal TACRM is now generating for DM Equities. To the extent you are looking to increase your allocation to said asset class:
***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.
#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.
#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.
Best of luck out there,
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.
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.
Note: Using the z-score in the tables below as a coefficient of variation for standard error helps us flag the relative market positioning of the commodities in the CRB Index. It is not intended as a predictive signal for the reversion to trailing twelve month historical averages. For week-end price data, please refer to “Commodities: Weekly Quant” published at the end of the previous week. Feel free to ping us for additional color.
1. CFTC Net Futures and Options Positioning CRB Index: The Commodities Futures Trading Commission (CFTC) releases “Commitments of Traders Reports” at 3:30 p.m. Eastern Time on Friday. The release usually includes data from the previous Tuesday (Net Positions as of Tuesday Close), and includes the net positions of “non-commercial” futures and options participants. A “Non-Commercial” market participant is defined as a “speculator.” We observe the weekly marginal changes in the overall positioning of “non-commercial” futures and options positions to assess the directionally-biased capitulation risk among those with large, speculative positions.
**NOTE** Due to the shortened holiday week last week, the data below represents positioning reported by the CFTC on Friday, December 26th (reflecting data through Tuesday, December 23rd)
2. Spot – Second Month Basis Differential: Measures the market expectation for forward looking prices in the near-term.
3. Spot – 1 Year Basis Differential: Measures the market expectation for forward-looking prices between spot and the respective contract expiring 1-year later.
**Note** While the spread between front month prices and contracts expiring 1-year down the road in Brent and WTI crude oil continues widening, we believe the contango in the futures curve is at minimum in part to the fact that markets aren’t being made, and are not nearly as liquid 1-year out. Liquid, more active front-month contracts can respond to the heightened amount of volatility in a shorter time period. The pattern of the back end of the futures curve adjusting more slowly to cash market prices is common at the big inflection points. When oil prices were up ~+12% in the middle of the year 2014, the curve was in backwardation.
4. Open Interest: Aggregate open interest measures the amount of opened positions in all actively traded futures contract months. Open interest can be thought of as “naked” or “directionally-biased” contracts as opposed to hedgers scalping and providing liquidity. Most of the open interest is created from large speculators or participants who are either: 1) Producers/sellers of the physical commodity hedging their cash market exposure or 2) Large speculators who are directionally-biased on price.
Takeaway: Going into preannouncement season, XRT at all-time high, peak multiple, trough short int, trough vol (conviction). Be careful what you own.
HEDGEYE RETAIL IDEA LIST
The only change this week is that we removed AMZN from our Short Bench. We're in the middle of our research process for our e-commerce Black Book, which will be released on Thursday January 22. We'll likely come out with a more conclusive opinion on AMZN -- which could just as easily be positive as negative. We'd rather take it off our list now, and then add back in the appropriate place when our research is done.
This chart of the XRT is so telling to us.
We question how people could objectively own names like KSS, M, FL, TGT, GPS, etc…etc…etc… with this kind of setup?
TGT - Canada Exit Rumors
Takeaway: A lot of media outlets have picked up the idea that Cornell is set to shut down Canada in 2015. We have a hard time seeing that as an option so early into the new CEO's tenure. Even so, we'd argue that Canada speculation was the primary catalyst behind the run from $58 to $75. 15 months ago TGT execs. laid out the 2017 financial targets which called for Canada to generate $6bil in revenue and $0.80 in earnings power. We're a long way from that now. The bigger question for us is, "what led Target into Canada in the first place?" The answer isn't that business prospects in the US were just so dang good. We get the easy comp argument through 2Q because of the 2013 data breach, but TGT is one of the most expensive names in retail relative to its underlying growth. Based on our 2016 earnings number of $3.75, TGT is trading at 17x earnings (ex. Canada) and 20x earnings of the combined entity. We have a hard time reconciling that type of valuation.
DKS, BBBY, GME, PIR - Pier 1, Dick’s Are Among Retail LBO Picks: Real M&A
AMZN - Amazon Sellers Sold Record-Setting More Than 2 Billion Items Worldwide in 2014
Japan Retailers See Mixed Dec. Sales
WTSL - Wet Seal Receives Default Notice From Creditor
NKE - Nike Golf Patent: Recycled Golf Ball
Both Euros and Oil (they’re trading together vs. USD) are signaling immediate-term TRADE oversold this morning, but both remain very #deflationary and (ex-DAX), European Equity markets do not like it – Greece and Russia -2.5%, and ex-Germany, most major European stock markets continue to signal bearish TREND (FTSE, CAC, MIB, IBEX).
WTIC Oil is making fresh 6 month lows as it tests this exhaustion zone $51.76-52.61 that we’ve been monitoring; to get a real bounce, you need a real USD selloff, and you have some big U.S. economic data points this week on that front with ISM Services tomorrow, Fed Minutes Wednesday, and Jobs repot Friday.
The best way to play global #GrowthSlowing + #Deflation remains the Long Bond; 2.11% was a nice -14 basis points drop last week and the Yield Spread (10yr minus 2yr) compressed another -6 basis points to 145, in line with the rate of change in the December U.S. economic data (ISM and PMI, which both slowed).
|FIXED INCOME||30%||INTL CURRENCIES||8%|
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.
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.
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.
Same Global Macro story we ended 2014 on, with both Greek and Russian stocks -2.5% leading losers
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