THEMATIC INVESTMENT CONCLUSIONS
Long Ideas/Overweight Recommendations
- Consumer Staples Select Sector SPDR Fund (XLP)
- Health Care Select Sector SPDR Fund (XLV)
- PowerShares DB U.S. Dollar Index Bullish Fund (UUP)
- iShares U.S. Home Construction ETF (ITB)
- iShares 20+ Year Treasury Bond ETF (TLT)
- LONG BENCH: Vanguard REIT ETF (VNQ), Utilities Select Sector SPDR Fund (XLU), Vanguard Extended Duration Treasury ETF (EDV)
Short Ideas/Underweight Recommendations
- iShares TIPS Bond ETF (TIP)
- CurrencyShares Japanese Yen Trust (FXY)
- Industrial Select Sector SPDR Fund (XLI)
- SPDR Barclays High Yield Bond ETF (JNK)
- iShares MSCI Emerging Markets ETF (EEM)
- SHORT BENCH: SPDR Oil & Gas Exploration & Production ETF (XOP), CurrencyShares Euro Trust (FXE), WisdomTree Emerging Currency Fund (CEW)
QUANT SIGNALS & RESEARCH CONTEXT
#Quad4 Continues to Support a Stronger USD: For those of you who enjoy the occasional game show:
The correct answer is, “What is a chart of the U.S. Dollar Index (DXY)?”, which continues on one of its largest intermediate-term melt-ups ever. In fact, its +16.7% return from its TTM closing low of 79.09 on May 6th, 2014 is good for the steepest 179-day return since April ’09.
Source: Bloomberg L.P.
This rapid appreciation of the U.S. currency has coincided with an equally – if not more dramatic – rise in the net LONG position in DXY futures and options. Specifically, the non-commercial net length in this asset class has rotated all the way from a net SHORT position as recently as late-May to an all-time wide net LONG position of +69.2k contracts per the most recently reported weekly data (through 1/6).
Source: Bloomberg L.P.
This material ramp in positioning has facilitated the emergence of a crowded LONG-dollar trade. Specifically, that +69.2k net LONG position is good for a +2.2 SIGMA move vs. its TTM average net length. Recall that we are typically inclined to fade beta in the immediate-term when the net length exceeds two SIGMA.
That would likely coincide with a pullback to 91.58 on the DXY. A more material pullback to 87.95 is a key risk in the context of a likely continuation of #Quad4-confirming reported U.S. growth and inflation data for the next ~3 weeks.
That being said, however, the EUR and JPY net SHORT positions aren’t nearly as crowded so that would seem to suggest the positioning in the DXY is more a function of investor hedging than it is a function of absolute belief in secular dollar appreciation.
Moreover, we continue to think the USD is likely to trade materially higher vs. its peers over the intermediate-to-long term as market participants increasingly price in a sustained policy divergence among the G-3 economies.
Our Tactical Asset Class Rotation Model (TACRM) continues to signal this from a quantitative perspective. At the primary asset class level, TACRM continues to generate a “DECREASE Exposure” signal for Foreign Exchange, which it has maintained since the week ended September 5th, 2014. Its Passive Trend Follower Asset Allocation of 1% is down -88% from its TTM average and in the 0th percentile of all readings over both the TTM and since the start of 2008.
Very rarely in the history of global macro do you have such impactful moves in the currency market as it pertains to knock-on effects such as #EmergingOutflows, #Quad4 commodity price deflation and global capital flows into liquid dollar-denominated financial assets (think: SPY and TLT).
To the extent you are not already, we continue to implore you to get on the right side of this trade because we think it has serious legs.
***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.