THE HEDGEYE MACRO PLAYBOOK

Takeaway: In today's edition of Macro Playbook, we revisit the #Quad4 vs. #Quad1 debate. #Quad4 is once again winning the fight and remains our view.

THEMATIC INVESTMENT CONCLUSIONS

Long Ideas/Overweight Recommendations

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

Short Ideas/Underweight Recommendations

  1. iShares TIPS Bond ETF (TIP)
  2. SPDR S&P Regional Banking ETF (KRE)
  3. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
  4. iShares MSCI European Monetary Union ETF (EZU)
  5. iShares MSCI France ETF (EWQ)

 

QUANT SIGNALS & RESEARCH CONTEXT

Revisiting the #Quad4 vs. #Quad1 Debate: For the past 3-4 weeks, we’ve been highlighting the U.S. equity market’s ongoing internal struggle between #Quad4 – an economic environment where both real GDP growth and reported inflation are slowing simultaneously – and #Quad1, which is an economic environment whereby disinflation is contributing to (or at least concomitant with) an acceleration in real GDP growth.

 

For equity investors – even the most ardent stock pickers that “don’t do macro” – understanding and, more importantly, navigating this transition will be the key to generating alpha – which is becoming increasingly scarce – in 1H15:

 

Consumer Cyclical or Consumer Non-Cyclical?

 

THE HEDGEYE MACRO PLAYBOOK - XLY GIP

 

THE HEDGEYE MACRO PLAYBOOK - XLP GIP

 

Financials or Healthcare?

 

THE HEDGEYE MACRO PLAYBOOK - XLF GIP

 

THE HEDGEYE MACRO PLAYBOOK - XLV GIP

 

Offensive Small-Caps or Defensive Utilities?

 

THE HEDGEYE MACRO PLAYBOOK - IWM GIP

 

THE HEDGEYE MACRO PLAYBOOK - XLU GIP

 

On that note, let’s revisit the debate from our usual quantitative perspective. There are two signals we are looking for to justify a transition from our long-held defensive sector and style factor recommendations to a more offensive/cyclical grouping:

 

  1. The outperformance of pro-#Quad1 sectors and style factors on a trending basis
  2. Pro-#Quad1 sectors and style factors consistently atop the leader board from the perspective of TACRM’s U.S. Equity Style Factor Volatility-Adjusted Multi-Duration Momentum Indicator Ranking System

 

As the following charts show, neither #1 nor #2 are occurring at the present moment. We’ve seen glimpses of both in recent weeks, but the fact remains neither are occurring on a trending/consistent basis.

 

THE HEDGEYE MACRO PLAYBOOK - XLY vs.

Source: Bloomberg L.P. 

 

THE HEDGEYE MACRO PLAYBOOK - XLF vs.

Source: Bloomberg L.P. 

 

THE HEDGEYE MACRO PLAYBOOK - IWM vs.

Source: Bloomberg L.P. 

 

Please note that of the top-10 VAMDMI readings, #Quad4 accounts for seven of the ETFs: VNQ, IBB, XLU, IHI, IHE, XLP and XLV, while #Quad1 accounts for only two: ITB and XRT; the former is in line with our team’s now-bullish bias on the domestic housing market and the latter is supported by the recent – and nascent – uptick in consumption data.

 

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

 

All told, the most appropriate call we can make is to stick with our pro-#Quad4 sector and style factor recommendations for the time being (i.e. healthcare, staples, utilities and REITs).

 

***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.

 

Captain Obvious: December ISM (1/6)

 

#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.

 

Grexit? Not So Fast (1/6)

 

#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.       


Today 12PM ET: LIVE Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more

Capital Brief: 5 Things to Watch Right Now In Washington

Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

read more

Premium insight

[UNLOCKED] Today's Daily Trading Ranges

“If I could only have one thing of the many things we have it would be my daily ranges." Hedgeye CEO Keith McCullough said recently.

read more

We'll Say It Again: Leave Your Politics Out of Your Portfolio

If your politics dictates your portfolio positioning, the Democrats and #NeverTrump crowd out there have had a hell of a week.

read more

Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more

Neurofinance: The Psychology Behind When To Sell A Bull Market

"Most momentum investors stay invested too long, under-reacting and holding tight after truly bad news finally arrives to break the trend," writes MarketPsych's Richard Peterson.

read more

Energy Stocks: Time to Buy the Dip? | $XLE

What the heck is happening in the Energy sector (XLE)? Energy stocks have trailed the S&P 500 by a whopping 15% in 2017. Before you buy the dip, here's what you need to know.

read more

Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more