THEMATIC INVESTMENT CONCLUSIONS
Long Ideas/Overweight Recommendations
- Health Care Select Sector SPDR Fund (XLV)
- Consumer Staples Select Sector SPDR Fund (XLP)
- iShares National AMT-Free Muni Bond ETF (MUB)
- Vanguard Extended Duration Treasury ETF (EDV)
- iShares 20+ Year Treasury Bond ETF (TLT)
Short Ideas/Underweight Recommendations
- iShares TIPS Bond ETF (TIP)
- SPDR S&P Regional Banking ETF (KRE)
- SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
- iShares MSCI European Monetary Union ETF (EZU)
- 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?
Financials or Healthcare?
Offensive Small-Caps or Defensive Utilities?
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:
- The outperformance of pro-#Quad1 sectors and style factors on a trending basis
- 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.
Source: Bloomberg L.P.
Source: Bloomberg L.P.
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.
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.
#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.
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.