Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
Takeaway: In today's edition of the Macro Playbook, we analyze the recent breakout in cross-asset volatility through the lens of TACRM.
THEMATIC INVESTMENT CONCLUSIONS
Long Ideas/Overweight Recommendations
Short Ideas/Underweight Recommendations
QUANT SIGNALS & RESEARCH CONTEXT
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:
At the secondary asset class level:
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.***
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.
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.
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.
01/15/15 Select Long/Short Updates
Tuesday, January 20th
Wednesday, January 21st
Thursday, January 22nd
Friday, January 23rd
Monday, January 12th
Tuesday, January 13th
The SPX (-1.2%) outperformed the XLY (-1.7%) last week.
This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.
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:
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.
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.
HEDGEYE RETAIL IDEA LIST
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 dot.com 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.
HD - The Home Depot Names Craig Menear Chairman
EXPR - EXPRESS, INC. AND SYCAMORE PARTNERS ANNOUNCE TERMINATION OF DISCUSSIONS
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
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
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.
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).
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.
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