Takeaway: In today's edition of the Macro Playbook, we analyze the recent breakout in cross-asset volatility through the lens of TACRM.


Long Ideas/Overweight Recommendations

  1. iShares U.S. Home Construction ETF (ITB)
  2. Consumer Staples Select Sector SPDR Fund (XLP)
  3. Health Care Select Sector SPDR Fund (XLV)
  4. PowerShares DB U.S. Dollar Index Bullish Fund (UUP)
  5. iShares 20+ Year Treasury Bond ETF (TLT)
  1. LONG BENCH: Vanguard REIT ETF (VNQ), Utilities Select Sector SPDR Fund (XLU), Vanguard Extended Duration Treasury ETF (EDV)

Short Ideas/Underweight Recommendations

  1. iShares TIPS Bond ETF (TIP)
  2. CurrencyShares Japanese Yen Trust (FXY)
  3. iShares MSCI Emerging Markets ETF (EEM)
  4. Industrial Select Sector SPDR Fund (XLI)
  5. SPDR Barclays High Yield Bond ETF (JNK)
  1. SHORT BENCH: SPDR Oil & Gas Exploration & Production ETF (XOP), CurrencyShares Euro Trust (FXE), WisdomTree Emerging Currency Fund (CEW)



Checking In With TACRM: With the recent bout of cross-asset volatility – e.g. the VIX increased +19.4% WoW to close up +9.1% YTD – we’re sure many investors are incrementally confused about the macro environment. Fortuitously for our subscribers, we have built effective quantitative tools to help investors contextualize what’s happening, why it’s happening and how to take advantage of it in one’s portfolio.


One of those tools is our Tactical Asset Class Rotation Model (TACRM), which is designed to systematically measure momentum across a variety of asset classes in order to transform those signals into actionable investment themes. TACRM does this by generating a normalized view of price momentum for every liquid market in the world. That momentum score is derived from a multi-factor, multi-duration approach, which we have termed a “Volatility-Adjusted Multi-Duration Momentum Indicator” reading, or “VAMDMI” for short.


Recall that this VAMDMI metric is simply the arithmetic mean of three independent z-scores of volume-weighted average price data, in which the three sample sizes (i.e. short-term, intermediate-term and long-term) accordion inversely to the trend in global financial market volatility. The metric is designed to standardize recorded momentum across securities and asset classes with variant betas, effectively normalizing the degree to which marginal investors might have a propensity to buy or sell a given market.


That is definitely a mouthful. What isn’t a mouthful is the analytical color TACRM provides investors. Below, we frame up the current state of macro markets through TACRM’s various analytical lenses, flagging what we deem to be noteworthy (i.e. investable) signals.


At the primary asset class level:


  • Only DM Equities has a bullish “INCREASE Exposure” signal. On a cumulative one-week forward basis since the start of 2008, the MSCI World Index has returned +32.4% when TACRM is generating the aforementioned signal for DM Equities. That compares to a buy-and-hold return of +5.9% over that same time frame.
  • Cash – which is comprised simply of volatility (VXX) and U.S. dollars (UUP) – continues to have the largest Passive Trend Follower Asset Allocation at 36%, which is in the 100th percentile of readings on a TTM basis and in the 95th percentile of readings since the start of 2008. Its “DECREASE Exposure” signal implies one (or both) of these markets will continue to experience a second derivate slowing of VWAP momentum over the intermediate term. A pullback in volatility would obviously auger well for the signal discussed in the previous bullet.
  • Fixed Income & Yield Chasing currently has a “DECREASE Exposure” signal which it has maintained since late-September due to the ongoing break down in foreign-currency denominated debt, domestic high yield debt, curve steepeners and MLPs – which were all in line with our #Quad4 theme.
  • The strength in the other secondary asset classes that make up the Fixed Income & Yield Chasing primary asset class – i.e. Treasuries, munis, Utilities and REITs – is becoming so pervasive that we’d expect it to the push the entire asset class back into “INCREASE Exposure” territory in the coming weeks. Specifically, 47% of the 30 ETFs that comprise this asset class have a VAMDMI reading greater than +1x, which implies a clear trend of positive VWAP momentum across multiple durations.
  • That being said, we don’t need to see an “INCREASE Exposure” signal to be bullish on the appropriate pockets of this (or any other) asset class and we remain bullish on Treasuries (TLT, EDV), munis (MUB), Utilities (XLU) and REITs (VNQ) as outlined above in our thematic investment conclusions.












At the secondary asset class level:


  • We consistently analyze extreme VAMDMI readings to determine if there is a trend developing “underneath the hood” that may be front-running a broader phase transition at the primary asset class level. On this metric, #Quad4 continues to get incrementally priced into global financial markets. Of the top-20 VAMDMI readings, only three of the exposures – i.e. Philippines (EPHE), Indian small-caps (SMIN) and Gold (GLD) – are not consistent outperformers during historical periods of #Quad4. Only one of the bottom-20 VAMDMI readings – i.e. Finland (EFNL) – is not a consistent underperformer during historical periods of #Quad4.
  • In an attempt to take advantage of changing sector and style factor leadership, we consistently analyze extreme VAMDMI readings within the U.S. equity market as well, often looking for a pattern of leadership and/or laggardship that rhymes with one of our GIP Model quadrants. On this metric, #Quad4 continues to dominate as well.
  • Specifically, across the 47 sectors and style factors we track in the domestic equity market, #Quad4 outperformers account for 8 of the highest 10 VAMDMI readings: REITs (VNQ), Utilities (XLU), Healthcare (IHE, IBB, XLV IHI), Consumer Staples (XLP) and mega caps (USMV). Additionally, #Quad4 underperformers account for 9 of the lowest 10 VAMDMI readings: Financials (KRE, IAI, KIE, XLF), Energy (XLE, AMLP, IEZ, XOP) and Basic Materials (XLB).
  • All told, our patience in sticking with our #Quad4 trade continues to pay off amid incessant calls to adopt a more offensive asset allocation strategy heading into a likely #Quad1 setup in 1Q15. It’s a great long/short market for discretionary macro investors that possess a repeatable process to take advantage of!
  • Lastly, TACRM is generating a “BUY” signal for both Gold (GLD) and Silver (SLV). As we highlighted in last Friday’s Macro Playbook, we haven’t yet found a fundamental reason to like the precious metals complex, but we’re happy to make one up because that’s what the market is telling us to do. Gold is resoundingly bullish on our price/volume/volatility quantitative factoring as well, meaning we are looking to buy the metal on pullbacks – irrespective of our view on the U.S. dollar, which may change as the rate of change in the domestic labor market negatively inflects. Stay tuned.








Net-net-net-net-net, with the exception of the breakout in the precious metals, nothing has really changed. That being said, however, the precious metals complex is definitely the most important thing to watch, on the margin, as it relates to its signaling capability regarding G-3 monetary policy, which itself continues to be the primary driver of dispersion among asset class returns.


Please click on the following link to review the various explanations associated with the aforementioned analyses; the model is refreshed daily to the extent you find the aforementioned signals helpful. Send us an email if you’d like to dig in further. Best of luck out there this week!


***CLICK HERE to download the full TACRM presentation.***



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.


EARLY LOOK: Climbing the Wall (1/16)


#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.


The Hedgeye Macro Playbook (1/16)


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.


HOUSING: Purchase Demand | Post-Holiday Deluge (1/14)


Best of luck out there,




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. 

Post-MLK Day Mashup: SBUX, MCD On Tap

Post-MLK Day Mashup: SBUX, MCD On Tap - 1


Recent Notes

01/12/15 Monday Mashup: Changes to Our Investment Ideas List

01/15/15 Select Long/Short Updates


Events This Week

Tuesday, January 20th

  • Jefferies Winter Consumer Summit: ZOES, NDLS, LOCO

Wednesday, January 21st

  • Jefferies Winter Consumer Summit: BJRI, RUTH, FRSH, CHUY

Thursday, January 22nd

  • SBUX earnings call 5:00pm EST

Friday, January 23rd

  • MCD earnings call 11:00am EST


Chart of the Day

Post-MLK Day Mashup: SBUX, MCD On Tap - 2


Recent News Flow

Monday, January 12th

  • DNKN announced that in 2014 its franchisees open up 422 net new Dunkin' Donuts and Baskin-Robbins units and guided to 410-440 net new units in 2015.
  • KKD reaffirmed FY15 adjusted EPS of $0.69-0.74 and guided to FY16 adjusted EPS of $0.79-0.85, below the $0.86 the street was looking for.
  • CHUY released preliminary fourth quarter results, announcing that same-store sales increased 3.8% during the period.  The company also reaffirmed its 2014 diluted EPS guidance range of $0.67-0.69, implying $0.12-0.14 diluted EPS in 4Q14.
  • PLKI released preliminary FY14 results which included 6.2% global same-store sales growth, 201 global new restaurant openings, and 148 global net restaurants.  They also announced that global same-store sales grew 9.8% in the fourth quarter.
  • JMBA announced that it is deploying software from ArrowStream, a leading SaaS provider for food service supply chains to optimize the company's spend programs and partnerships.  The relationship between the two is expected to enhance and simplify Jamba Juice's supply chain processes and result in cost savings.
  • TXRH CFO Price Cooper resigned to become CFO at Krispy Kreme.

Tuesday, January 13th

  • FRGI promoted IT veteran Ryan Nowlin to vice president - information technology.  Nowlin, who has been with FRGI since 2012, is responsible for the company's entire IT structure.
  • JMBA agreed to appoint James C Pappas, Managing Member of JCP Investment Management, and Glenn W. Welling, Managing Member and CIO of England Capital LLC, to its Board of Directors, effective immediately.


Sector Performance

The SPX (-1.2%) outperformed the XLY (-1.7%) last week.

Post-MLK Day Mashup: SBUX, MCD On Tap - 3


Post-MLK Day Mashup: SBUX, MCD On Tap - 4


XLY Quantitative Setup

Post-MLK Day Mashup: SBUX, MCD On Tap - 5


Casual Dining Restaurants

Post-MLK Day Mashup: SBUX, MCD On Tap - 6


Post-MLK Day Mashup: SBUX, MCD On Tap - 7


Quick Service Restaurants

Post-MLK Day Mashup: SBUX, MCD On Tap - 8


Post-MLK Day Mashup: SBUX, MCD On Tap - 9

Hedging the Storm in Energy

Hedging the Storm in Energy - Marketing ImageVF


Hedgeye’s Macro and Energy teams will host a guest speaker call TOMORROW (Wednesday, January 21st at 1p.m. EST) to discuss current trends in and implications of the commodity hedging practices of US E&Ps, natural gas processors, and various industrial commodity consumers.


The call will feature Wayne Penello and Andy Furman of Risked Revenue Energy Associates (“R^2”).  R^2 is an independent hedge advisor serving E&P companies, midstream service providers, and large consumers.  Wayne Penello is the President and Founder of R^2, and has 30 years of experience in commodity options trading, market-making, and asset management.  Andy Furman has 25 years of experience in energy trading and is an expert at valuing and trading options.


Topics for Discussion:

  • Overview of R^2’s services, clients, and proprietary risk management systems;
  • The mechanics of entering into a commodity hedge;
  • Assessment of current industry hedge positions;
  • R^2’s commodity price outlook for crude oil, natural gas, and NGLs;
  • Client psychology – what E&Ps are currently thinking and doing in the oil, gas, and NGL markets;
  • Likely result of borrowing-base determinations from financial institutions;
  • The challenge and opportunity in hedging NGLs;
  • And more…


About Risked Revenue Energy Associates:

R^2 is a consultant and market agent in the energy space serving upstream, midstream, and end users of energy-related commodities (including private equity interests).  R^2 brings over 150 years of experience including but not limited to market-making, trading, asset management, and industry expertise. The firm utilizes a patented risk management strategy to help implement and stress test a company’s hedge book, leverage, and cash flows, among a long list of other metrics under various scenarios. R^2 suggests the most relevant hedging strategies and negotiates/executes on behalf of their clients on a daily basis.


Wayne Penello is the President and Founder of R^2. He has 30 years of market-making, option trading and asset management experience in the energy industry. Mr. Penello began his career on the New York Mercantile Exchange, where he was a market maker and served as Ring Chairman of options trading. Subsequently, he held positions managing globally distributed energy assets for Vitol S.A., Vitol U.S.A., Tenneco Gas Marketing and Torch Energy. Mr. Penello was formerly a research scientist. He holds a Masters degree in Marine Sciences from Stony Brook University and an undergraduate degree in Marine Biology from Southampton College.


Andy Furman was co-founder and CEO of Atlantic Capital Consultants, an options market-making firm on the NYMEX from 1987 – 2001. After leaving the NYMEX trading floor in 2001, Mr. Furman traded for hedge funds. Most recently he held the position of Managing Director for Hudson Capital Group, LLC where as Manager and Trader for Energy Futures and Options he used spread arbitrage and option strategies to achieve consistent profitability. Mr. Furman holds a Bachelor of Science degree in Chemical Engineering from MIT.


Macro Team


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Retail Callouts (1/20): Black Books, Idea List, JCP Catalog, BONT, COH

Takeaway: Hedgeye Retail Black Books-FL (1/22) & HIBB (1/26). Ideas List. JCP brings catalog back from the dead. BONT Holiday. COH new marketing push.

We're releasing a Black Book this Thursday the 22nd to review our Short Call on Foot Locker, and then will follow up with another Book on Hibbett on Monday the 26th. Our 90-page Athletic Black Book we released last month was very heavy on industry trends and themes -- while these will be almost entirely focused on picking apart company financials and debunking the bull cases.



Retail Callouts (1/20): Black Books, Idea List, JCP Catalog, BONT, COH - 1 20 chart1B





JCP - J.C. Penney Resurrects Its Catalog



Takeaway: By this logic Blockbuster should have gone back to VHS to offset the declining rental market brought on by streaming content. Maybe that's an unfair analogy, but we have a hard time seeing how a 120-page Home catalog moves the needle in a meaningful way for JCP. When the company shuttered its catalog business 5 years ago - the average age of the consumer who actually used the catalog to make purchases was approaching 70 years old -- yes, that's actually true. While not a big investment this time around, we can't help but think that the money could be better spent improving JCP's presence.  The company's got a pretty big hole from which to climb. From 2005-13, JCP DTC sales were flat compared to KSS and M at 39% and 32% respectively.


BONT - Reports a 5.3% Comparable Store Increase in Holiday Sales



Takeaway: This is the first retailer we've seen during the January preannouncement schedule who meaningfully surprised to the upside on comp but took down guidance because of margin pressure due to the 'highly promotional retail environment'. Most retailers ignored the margin topic all together. But, our sense is that BONT won't be the last retailer to take it on the chin with margins when 4Q numbers are reported.


COH - Coach Taps Chloë Grace Moretz and Kid Cudi



Takeaway: This is a smart move by Coach (it's so rare that we say that). Moretz is extremely relevant to the teen crowd -- an audience that Coach lost long ago. And unlike high profile sponsorships like Taylor Swift/Keds (WWW) the financial risk here for Coach is likely de minimis. 

Retail Callouts (1/20): Black Books, Idea List, JCP Catalog, BONT, COH - 1 20 chart2





HD - The Home Depot Names Craig Menear Chairman






Cisco Security Poll: Companies Have False Confidence



AMZN - Amazon to Produce Original Feature-Length Movies for Theaters



Gucci Said to Have Appointed Alessandro Michele as Creative Head


European Banking Monitor: Euribor-OIS Inflection

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email 




Key Takeaways:

The XLF shed another 2.6% last week, bringing the month-over-month decline to 5.2%. The focus of late is weak earnings and ongoing international risks. Euribor-OIS is showing the first signs of rising in a long time, gaining 3 bps week-over-week. 


European Financial CDS - Swaps mostly widened in Europe last week but only by an average 0.4%, as European markets have been propped up recently by hopes of ECB asset purchases. Greece and Russia were the exceptions, as usual, as concerns around the election and solvency, respectively, continued to weigh on their banking sectors.


European Banking Monitor: Euribor-OIS Inflection   - chart1 financials CDS


Sovereign CDS – Sovereign swaps mostly tightened last week on rising investor expectations for ECB asset purchases. Spanish sovereign swaps tightened by -13.3% (-14 bps to 89) while Italian sovereign swaps tightened by -10.8% (15 bps to 126).


European Banking Monitor: Euribor-OIS Inflection   - chart2 sovereign CDS


European Banking Monitor: Euribor-OIS Inflection   - chart3 sovereign CDS


European Banking Monitor: Euribor-OIS Inflection   - chart4 sovereign CDS


Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 3 bps to 14 bps.


European Banking Monitor: Euribor-OIS Inflection   - chart5 Euribor OIS SPread



Matthew Hedrick



Ben Ryan



Commodities Weekly Sentiment Tracker

Note: Using the z-score in the tables below as a coefficient of variation for standard error helps us flag the relative market positioning of the commodities in the CRB Index. It is not intended as a predictive signal for the reversion to trailing twelve month historical averages. For week-end price data, please refer to “Commodities: Weekly Quant” published at the end of the previous week. Feel free to ping us for additional color.    



1.       CFTC Net Futures and Options Positioning CRB Index: The Commodities Futures Trading Commission (CFTC) releases “Commitments of Traders Reports” at 3:30 p.m. Eastern Time on Friday. The release usually includes data from the previous Tuesday (Net Positions as of Tuesday Close), and includes the net positions of “non-commercial” futures and options participants. A “Non-Commercial” market participant is defined as a “speculator.” We observe the weekly marginal changes in the overall positioning of “non-commercial” futures and options positions to assess the directionally-biased capitulation risk among those with large, speculative positions.

  • The SUGAR, SILVER, and COFFEE markets experienced the most BULLISH relative positioning changes week-over-week
  • The ORANGE JUICE, SOYBEANS, and WHEAT markets experienced the most BEARISH relative positioning changes week-over-week

Commodities Weekly Sentiment Tracker - chart1 sentiment


2.       Spot – Second Month Spread: Measures the market expectation for forward looking prices in the near-term.

  • The LEAN HOGS, BRENT CRUDE OIL, and RBOB GASOLINE markets are positioned for HIGHER PRICES near-term
  • The HEATING OIL, LIVE CATTLE, and ORANGE JUICE markets are positioned for LOWER PRICES near-term

Commodities Weekly Sentiment Tracker - chart2 spot 2nd month basis


3.       Spot – 1 Year Spread: Measures the market expectation for forward-looking prices between spot and the respective contract expiring 1-year later.

  • The BRENT CRUDE, WTI CRUDE, and NATURAL GAS markets are positioned for HIGHER PRICES in 1-year  
  • The LIVE CATTLE, COCOA, and LEAN HOGS markets are positioned for LOWER PRICES in 1-year  

Commodities Weekly Sentiment Tracker - chart3 spot 1 year basis


4.       Open Interest: Aggregate open interest measures the amount of opened positions in all actively traded futures contract months. Open interest can be thought of as “naked” or “directionally-biased” contracts as opposed to hedgers scalping and providing liquidity. Most of the open interest is created from large speculators or participants who are either: 1) Producers/sellers of the physical commodity hedging their cash market exposure or 2) Large speculators who are directionally-biased on price.


Commodities Weekly Sentiment Tracker - chart4 open interest


Ben Ryan



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