THEMATIC INVESTMENT CONCLUSIONS
Long Ideas/Overweight Recommendations
- Health Care Select Sector SPDR Fund (XLV)
- Consumer Staples Select Sector SPDR Fund (XLP)
- iShares U.S. Home Construction ETF (ITB)
- PowerShares DB U.S. Dollar Index Bullish Fund (UUP)
- iShares 20+ Year Treasury Bond ETF (TLT)
Short Ideas/Underweight Recommendations
- Industrial Select Sector SPDR Fund (XLI)
- iShares TIPS Bond ETF (TIP)
- CurrencyShares Japanese Yen Trust (FXY)
- iShares MSCI Emerging Markets ETF (EEM)
- SPDR Barclays High Yield Bond ETF (JNK)
QUANT SIGNALS & RESEARCH CONTEXT
Developed World Demographic Tailwinds? Yes, For Bonds, That Is: Yesterday afternoon we held our 1Q15 Macro Themes conference call (CLICK HERE to review). As always, the presentation was jam-packed with cutting-edge data analysis and thoughtful, well-researched assertions. One of those cutting-edge analyses in the presentation is among my favorite slides in the deck, #24:
What this chart shows is the ratio of the number of people in the world that are at/above retirement age as a ratio of 25-54 year-olds (black bars). The grey line shows the YoY bps change on the right axis. What you should quickly note is the steepening of the slope starting in 2014 and continuing over the next four years.
The key takeaway here is that the population of people that are predisposed to de-risk their investment portfolios (think “60/40” going to “40/60”) and have little-to-no income growth is growing increasingly faster than those that are inclined to own “stocks for the long term” and have (or at least prefer) income growth.
The net result is the number of people that prefer deflation is growing faster than the number of people that prefer inflation, at the margins. We think this demographic trend has the potential to weigh on both reported inflation readings and long-term interest rates across the developed world’s liquid bond markets over the long term.
With 10Y Treasury yields at/near 2%, that call seems downright preposterous – especially to someone who has yet to sit down and do their homework on the subject. But I’m guessing 10% on the 10Y Treasury yield sounded equally as preposterous to an investor in the early-to-mid 1980s. It certainly doesn’t sound preposterous to retirees in Germany or Japan right about now.
Source: Bloomberg L.P.
Source: Bloomberg L.P.
So why does the buy-side remain heavily short of 10Y Treasuries on a tired U.S. “escape velocity” thesis?
Perhaps we’ll learn the answer to that question in the coming weeks and months…
***CLICK HERE to download the full TACRM presentation.***
TRACKING OUR ACTIVE MACRO THEMES
Global #Deflation: Amidst a backdrop of secular stagnation across developed economies, we continue to think cyclical forces (namely #StrongDollar driven commodity price deflation) will drag down reported inflation readings globally over the intermediate term. That is likely to weigh heavily upon long-term interest rates in the developed world, underpinning our bullish outlook for U.S. Treasury bonds.
#Quad414: After DEC and Q4 (2014) data slows, in Q1 of 2015 we think growth in the US is likely to accelerate from 4Q, aided by base effects and a broad-based pickup in real discretionary income. We do not, however, think such a pickup is sustainable, as we foresee another #Quad4 setup for the 2nd quarter. Risk managing these turns at the sector and style factor level will be the key to generating alpha in the U.S. equity market in 1H15.
Long #Housing?: The collective impact of rising rates, severe weather, waning investor interest, decelerating HPI, and tighter credit capsized housing in 2014. 2015 is setting up as the obverse with demand improving, the credit box opening and 2nd derivative price and volume trends beginning to inflect positively against progressively easier comps. We'll review the current dynamics and discuss whether the stage is set for a transition from under to outperformance for the complex.
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.