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CHART OF THE DAY: Sector Style Factors: Macro #Alpha

CHART OF THE DAY: Sector Style Factors: Macro #Alpha - 01.12.15 chart

 

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This is a brief excerpt from today's Morning Newsletter.


If you’ve evolved your process to Cross-Disciplinary Macro you should be killing it right now. There are major asset classes like Long Duration Sovereign Bonds (think TLT) that are going straight up at the same time that others (like Commodities) are going straight down. 



Cross-Disciplinary Macro

“Disciplinary science has died.”

-Alan Leshner

 

From a risk management perspective, if something embedded in your #process is dead or dying, you better come up with something better to replace it!

 

Since 2001, Alan Leshner has been the Executive Publisher of the journal Science. He was cited in a fantastic #behavioral book I just finished reading called The Medici Effect, where he added that “most major advancements involve multiple disciplines.”

 

George Cowan, from one of the birthplaces of Complexity Theory (the Sante Fe Institute), added that “you need to get scientists to think about things other than their specialty.” (pg 27) This is so obviously true in asset management today. And I think we are so early.

Cross-Disciplinary Macro - 77

 

Back to the Global Macro Grind

 

Since many US institutional investors still focus exclusively on the US Equity market, there is a lot of frustration out there when it comes to relative performance compared to their US stock market index bogeys.

 

While I’m obviously sympathetic to what people are paid to do, that doesn’t mean I have to put my head in my hands and capitulate alongside them. I can only re-explain that broadening one’s horizons beyond what the SPY is doing is going to help them win.

 

If you’ve evolved your process to Cross-Disciplinary Macro you should be killing it right now. There are major asset classes like Long Duration Sovereign Bonds (think TLT) that are going straight up at the same time that others (like Commodities) are going straight down.

 

If you’re a US Equity only investor (and you’ve expressed the aforementioned position in what we call Sector Style Factors), you should be crushing it too. Look at last week’s S&P Sector level returns:

 

  1. Healthcare Stocks (XLV) +2.3% week-over-week to start 2015 +2.7% YTD
  2. Consumer Staples (XLP) +1.6% on the week to start the year +1.3% YTD
  3. Energy Stocks (XLE) down another -4% last week to -3.5% YTD
  4. Industrial Stocks (XLI) -1.9% week-over-week to start 2015 -2.1%
  5. SP500 -0.7% last week to start the year -0.7%

 

In other words, instead of banging you head against the Old Wall trying to short SPY into a global #GrowthSlowing + #Deflation, all you had to do was be short both of those factors and long the 2 S&P Sectors that literally jump off the page in our Macro Playbook on the long side.

 

I can recap why Healthcare (XLV) and Consumer Staples (XLP) outperform in what we call #Quad4, but since I have been writing about this since September, there’s no need to be repetitive. Since October, our net asset allocation to Commodities has been 0%.

 

How about a US equity only “Income Fund”? Here’s the other very basic differential your portfolio should have capitalized on last week:

 

  1. US REIT Stocks (MSCI Index) +3.5% week-over-week to start the year +5.0% YTD
  2. US MLP Stocks (Alerian Index) down another -3.5% on the wk to start 2015 -2.5%

 

Again, when A) global growth is slowing, bond yields are falling… so you buy stocks that look like bonds… but B) you don’t buy the ones that have two-rocks tied together (Oil + Energy Leverage) like these widely owned and overvalued upstream E&P MLP stocks.

 

If you run a diversified macro fund, making lower-volatility (and higher absolute) returns was so easy a Mucker could do it last week:

 

  1. Long Bond Bulls got paid bank with the UST 10yr Yield down -16 basis points on the wk to -10% already for the YTD!
  2. Commodities (CRB Index) deflated another -1.2% on the week to start 2015 -1.9% YTD
  3. Oil (WTI) got slammed another -8.4% week-over-week to -9.4% already for 2015
  4. US and German 5yr Breakevens (#deflation risk proxies) both dropped to 1.18% and -0.19%, respectively
  5. European Stocks (EuroStoxx600) dropped -1.0% week-over-week to start 2015 -1.3%

 

No, there’s nowhere in our playbook that says “buy European stocks on valuation.” And thank god for that as country equity indexes like Italy and Spain dropped -5% and -6% (on the week!), respectively.

 

If you’re a Global Macro hedge fund, you should be slaying the alpha beast right now. Imagine just being Short Euros, European Stocks, Oil, US Energy and Industrials… with the Long Bond and some Healthcare/Staples/REITs action on the long side?

 

Sadly, Consensus Macro funds can’t. Here’s where they were position from an options perspective going into the end of last week (CFTC Non-Commercial futures/options positioning):

 

  1. SPX (Index + Emini) net LONG position got +31,658 LONGER last week to +170,240 (vs the 6mth avg of +14,575)
  2. 10yr Treasury Bond net SHORT position got +17,379 smaller last week to -250,163 (vs the 6mth avg of -72,383)

 

Forget generating alpha, having those levered (options) positions on issued some seriously negative beta. And we’re quite happy you made money on the other side of that, fading the crowd, doing Cross-Disciplinary Macro, Hedgeye-style!

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.88-2.07%

SPX 1

FTSE 6

VIX 15.69-21.89

EUR/USD 1.17-1.19
Oil (WTI) 46.01-50.99

 

Best of luck out there this week,
KM

 

Keith R. McCullough
Chief Executive Officer

 

Cross-Disciplinary Macro - 01.12.15 chart


January 12, 2015

January 12, 2015 - Slide1

 

BULLISH TRENDS

January 12, 2015 - Slide2

January 12, 2015 - Slide3

January 12, 2015 - Slide4

 

 

BEARISH TRENDS

January 12, 2015 - Slide5

January 12, 2015 - Slide6

January 12, 2015 - Slide8

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January 12, 2015 - Slide9

January 12, 2015 - Slide10

January 12, 2015 - Slide11
January 12, 2015 - Slide12


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New Discoveries

This note was originally published at 8am on December 29, 2014 for Hedgeye subscribers.

“Our interdisciplinary approach sets us apart and gives us a chance to lead new discovery.”

-Leon Cooper

 

While he won’t lead you to where the latest Air Asia flight went this morning, 84 year old Nobel Prize winning physics professor Leon Cooper has had his fair share of discovery in his lifetime. From synaptic plasticity to superconductivity, being first (and right) is how you get that done.

 

This weekend I learned about Cooper’s interdisciplinary research while reading about one of my favorite topics (#monkeys) in a book called The Medici Effect, by Frans Johansson: “Tiny implanted electrodes read signals from the monkey’s brain cells… data from the brain could now be translated into what the monkey was thinking… turning thoughts into action in real time.” (pg 12)

 

Now if only Cooper’s team at Brown University could send us a real-time feed on what 50,000 fund managers were thinking during 5-10% corrections in stocks (in December) that are followed by sharp v-bottoms and epic no-volume ramps to new highs… oh, while commodities and global bond yields crash…

 

New Discoveries - m5

 

Back to the Global Macro Grind

 

Thankfully, I learned a long time ago that making a living trying to call what SPYs are going to do next is no way to live. That’s why I built our Global Macro Risk Management #Process to be both multi-factor and multi-duration, across asset classes.

 

If you do macro the way we do, you don’t have to be one-dimensional. You don’t have to have as many blind spots as I used to have either. From a research perspective, there’s always a new discovery to be made on both the bullish and bearish sides of markets.

 

In our research process, new discoveries are driven by what many probability theorists would call Bayesian Inference. That basically means that what we learned yesterday might change what we think about today.

 

Discoveries don’t always have to be progressive or regressive – sometimes they should just stop you from doing anything at all. While you may think you know your “companies” better than anyone on earth (and I genuinely hope you do), it’s next to impossible to have that kind of conviction on global macro risks.

 

If you had to pick one major new discovery (if you’re long Energy stocks, Emerging Markets, Junk Bonds, etc., it’s probably in your “diversified portfolio”!) in global macro risk that you should have proactively prepared for in the last 3-6 months, would it be?

 

A)     Global #GrowthSlowing

B)      Global #Deflation

 

Since the dogmatic +3-4% US growth forever bulls are still staring at non-year-over-year GDP growth data for Q3 (newsflash: it’s the end of Q4, and Q314 was +2.7% y/y, not +5.0), and inflation expectations continue to get hammered, I’ll take B).

 

While the causal factor for #deflation may be global #GrowthSlowing (think demand), for the last 3 days of the compensation calendar, who actually gets paid to care? What most of you really care about is the score, and here’s how that risk looked last week:

 

  1. US Dollar up another +0.5% week-over-week with Burning Euros and Yens down around the same
  2. CRB Commodities Index (19 commodities) down another -2.3% last week to -16.2% YTD
  3. Oil (WTI) continued its #crash -4.2% week-over-week to -40.1% YTD
  4. Copper down another -2.4% last week to -16.0% YTD
  5. US 5yr Breakeven Rate hit fresh YTD lows of 1.19% last week (-65 bps, or -35% YTD)

 

For those of you who don’t know that breakevens are a leading indicator for the rate of change in inflation expectations, now you know. For all of you who know that falling bond yields and flattening yield curves are leading indicators for #GrowthSlowing, well, you still know that… but need to ignore it on low-volume SPY ramps into your year-end!

 

In the last 6 months, what we (and physicists like Cooper) call a phase transition (from bullish to bearish) in #deflation has been much more pronounced than the macro market acknowledging it as a #deflation risk in the 1st 2 weeks of December. To put that in time/price context, check out these 6 month moves:

 

  1. Japanese Yen -15.5% vs. USD (yes, that was on Japanese #GrowthSlowing to the point where they needed more QE)
  2. Euro -10.5% vs USD (as the Draghi devalued in response to #GrowthSlowing)
  3. CRB Commodities Index #crashed -24.8% in the last 6 months
  4. Oil (WTI) #crashed -45.7% in the last 6 months
  5. Natural Gas #crashed -34.3% in the last 6 months

 

And 5yr breakevens were actually down a lot more in the last 6 months (-90bps, or -43%) than they’ve been for the YTD (remember when late-cycle inflation accelerated in the first half of 2014 and the perma growth bulls just called that bullish for consumers too?).

 

While the growth bulls finding a new narrative at all rates of change in prices doesn’t surprise me, what will definitely surprise me when the macro market’s volume comes back next week is if #deflation isn’t a marked to market risk for high yield debt.

 

On the bullish side, with the macro market marking up everything US consumer assets (Consumer Discretionary, XLY +1.9% last week vs Energy, XLE -0.6%) on the “down gas prices” theme, it wouldn’t surprise me if the Russell (domestic pure play) continued to outperform Emerging Equity Markets linked to #deflation either. With new discoveries come new positions in the new year.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.05-2.31%

SPX 1965-2122

RUT 1131-1235

YEN 119.20-121.97

Oil (WTI) 54.01-57.43

Copper 2.80-2.88

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

New Discoveries - 12.29.14 chart


***Note to Our Investing Ideas Subscribers

Dear Investing Ideas Subscriber,

 

A number of our subscribers experienced issues accessing the two pieces of featured content at the conclusion of this week's edition. We apologize if you experienced any difficulty accessing the content. The two links below ought to work for all of our subscribers.

 

We thank you for your business and we look forward to an exciting and profitable year together!

 

ICI FUND FLOW SURVEY: 2014 WAS THE YEAR FOR FOREIGN STOCKS AND DOMESTIC EQUITY ETFS

http://app.hedgeye.com/m/rSY/a0cKxs/ici-fund-flow-survey-2014-was-the-year-for-foreign-stocks-and-domestic-equity-etfs

 

JUST CHARTS: EYE-CATCHING INDUSTRIALS DATA

http://app.hedgeye.com/m/rSw/a0lpyo/just-charts-eye-catching-industrials-data-1-6-15

 

Best Regards,

 

The Hedgeye Team


Commodities: Weekly Quant

Commodities: Weekly Quant - chart 1 divergencesvf

Commodities: Weekly Quant - chart2 deltaas

Commodities: Weekly Quant - chart3 usd correls

Commodities: Weekly Quant - chart4 volume

Commodities: Weekly Quant - chart5 open interest

Commodities: Weekly Quant - chart6 volatility

Commodities: Weekly Quant - chart7 sentiment

 

 

Ben Ryan

Analyst


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