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Takeaway: In today's Macro Playbook, we show why the deterioration in the domestic labor market is perpetuating underperformance in the Financials.


Long Ideas/Overweight Recommendations

  1. iShares U.S. Home Construction ETF (ITB)
  2. Health Care Select Sector SPDR Fund (XLV)
  3. iShares 20+ Year Treasury Bond ETF (TLT)
  4. Consumer Staples Select Sector SPDR Fund (XLP)
  5. PowerShares DB U.S. Dollar Index Bullish Fund (UUP)
  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. iShares MSCI Emerging Markets ETF (EEM)
  3. Industrial Select Sector SPDR Fund (XLI)
  4. CurrencyShares Japanese Yen Trust (FXY)
  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)


Reviewing the Very Nascent Negative Inflection in the U.S. Labor Market: Core to our repeatable process is an extensive focus on rate-of-change and how inflections, accelerations and/or decelerations in the second derivatives of key economic variables impact financial markets.

In the spirit of this never-ending interplay, why are Financials (XLF) down -2.8% YTD when Consumer Staples (XLP) and Healthcare (XLV) are up +3.6% and +4.3%, respectively, over the same duration?

Perhaps the answer lies within the domestic labor market, which is showing both late-cycle strength and very nascent signs of what could become permanent deterioration – for this particular business cycle, that is. Recall that labor is critical to the rate-of-change in both credit demand and asset quality for banks.

From the perspective of “late-cycle strength”, the rolling 6-month average of seasonally-adjusted initial jobless claims is now ~295k. Moreover, this month marks the fourth month of readings at or below 300k. That is important because it’s very difficult for seasonally-adjusted initial jobless claims to continue to fall once this critical level is breached. In fact, you can officially set your U.S. recession clock to this indicator; the last three recessions began 18, 19 and 20 months after this metric hit ~300k. Repeat: we’re only four months into the topping process, which tends to last about a year-and-a half.


From the perspective of “nascent signs of deterioration”, neither jobless claims nor non-farm payrolls are showing the strength that they once were.

Regarding the former: The YoY percentage change in the rolling 4-week average of non-seasonally adjusted initial jobless claims is another way us macro mavens examine the U.S. labor market. On this metric, the U.S. labor market is improving at a worse pace than in previous weeks and months. In other words, it is showing classic deterioration on a 2nd derivative basis.


Regarding the latter: The MoM nominal change in non-farm payrolls is among the most pronounced ways investors examine the labor market. On this metric, employment growth is not as robust as it has been in recent months. Another way to put that: the U.S. labor market is showing classic deterioration on a 2nd derivative basis as well.


Whether or not the peak in the employment growth is in the rear-view mirror is something that we cannot confirm at the current juncture. What we can confirm is that the probability that the peak in employment growth is in the rear-view mirror is substantially higher than it was a month ago.

What I won’t do is lick my finger in the air and give you some fabricated estimation of said probability; markets and economies move in non-linear and uncertain terms; so should you.

Pardon our comfortableness with uncertainty. If you ask us, the “uncertainty” regarding the state of the U.S. labor market is precisely why Financials are underperforming our recommended U.S. equity sectors (i.e. Consumer Staples and Healthcare) by 638bps and 717bps, respectively, for the year-to-date.

If only I received nickel over the last 6-9 months for every PM that said: “but I can’t buy Consumer Staples or Healthcare [or Utilities, or REITs] because they are expensive”…

***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.

Draghi Delivers the Drugs! (1/22)

#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: FHFA HPI | Notable Acceleration (1/22)

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.