THEMATIC INVESTMENT CONCLUSIONS
Long Ideas/Overweight Recommendations
- iShares U.S. Home Construction ETF (ITB)
- Health Care Select Sector SPDR Fund (XLV)
- Consumer Staples Select Sector SPDR Fund (XLP)
- PowerShares DB U.S. Dollar Index Bullish Fund (UUP)
- 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)
- iShares MSCI Emerging Markets ETF (EEM)
- CurrencyShares Japanese Yen Trust (FXY)
- Industrial Select Sector SPDR Fund (XLI)
- SPDR Barclays High Yield Bond ETF (JNK)
- SHORT BENCH: SPDR Oil & Gas Exploration & Production ETF (XOP), CurrencyShares Euro Trust (FXE), WisdomTree Emerging Currency Fund (CEW)
QUANT SIGNALS & RESEARCH CONTEXT
Framing Up Global Macro Amid ECB-Related Consternation: Instead of focusing on the “tree” (i.e. Draghi’s ongoing press conference) in today’s Macro Playbook, we thought we’d focus on the “forest” by quickly framing up the global macro landscape through the lens of our Tactical Asset Class Rotation Model (TACRM). The saying, “to know where you’re headed, you need to know where you’re coming from” has rarely been truer than it may wind up being today.
One of the most important pieces of market color TACRM provides investors is through the lens of its Extreme Momentum Monitor, which flags the 20 highest and 20 lowest Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) readings throughout the accessible global macro investment universe of roughly 200 ETFs.
Specifically, observing what’s leading or lagging global macro markets, at the margins, tends to provide investors with a material signal in the dynamic process allocating to and from asset class beta. For example, we noticed that commodities and Euro-denominated assets had begun to consistently dominate the bottom-20 VAMDMI readings by mid-summer (see: slide 14 HERE) and that color that was very instrumental in helping us make the #StrongDollar commodity price #Deflation call that we continue to stick with today.
Among the top-20 readings:
- Fixed-Income and Yield Chasing accounts for 12 of the exposures: LQD, BNDX, XLU, EDV, ZROZ, TLT, MUB, AGG, VNQ, IYR, FLAT and BND
- DM Equities account for 0 of the exposures
- EM Equities account for 4 of the exposures: EPHE, SMIN, EPI and FXI
- Foreign Exchange accounts for 1 of the exposures: FXF
- Commodities account for 2 of the exposures: GLD and SLV
- Cash accounts for 1 of the exposures: UUP
*Things that do NOT rhyme with our active macro themes (refer to the hyperlinks below):
- The breakout in precious metals – which may be alluding to a meaningful pullback in the USD vis-à-vis peer currencies from here – is relatively new and is among the key discussion topics we’ve had with our institutional subscriber base of late.
- Amid our expectation of a continuation of broad-based EM asset price deflation, we have been bullish on both the Philippines and China, but India did not make the cut from a fundamental perspective. Should we chase India or is India signaling a bottoming process across EM asset prices? If the latter is true, we’ll be forced to close out many of our short ideas in the EM space in the red.
- Not many investors saw this move in the Swiss franc coming – including us.
Among the bottom-20 readings:
- Fixed-Income and Yield Chasing accounts for 3 of the exposures: BWZ, IBND and EU
- DM Equities account for 3 of the exposures: EWC, EWCS and KRE
- EM Equities account for 3 of the exposures: EPOL, VNM and EPU
- Foreign Exchange accounts for 4 of the exposures: UDN, FXE, FXS and FXC
- Commodities account for 7 of the exposures: DBB, JO, SOYB, JJC, BAL, COW and DBA
- Cash accounts for 0 of the exposures:
*Every exposure in the bottom-20 VAMDMI readings is well within the scope of our active macro themes and hopefully we helped you get appropriately positioned for these draw-downs.
One more quick thing to note: currently there are 32 ETFs with a VAMDMI reading greater than +1x, which indicates a trend of positive VWAP momentum across multiple durations. That number compares to 49 ETFs with a VAMDMI reading less than -1x, which indicates the opposite. That ratio was 30/85 at the end of last week.
What this tells us is that investors are clearly bottom-fishing in bombed-out assets (think: EM, junk debt, energy, foreign currencies, etc.), effectively attempting to take advantage of any relief rally that Mario Draghi may provide.
They better hope markets are broadly satisfied with whatever he announces today, or another leg down in everything allergic to #Quad4 could be just around the corner.
***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.
EARLY LOOK: History's People (1/21)
#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.