THEMATIC INVESTMENT CONCLUSIONS
Long Ideas/Overweight Recommendations
- iShares U.S. Home Construction ETF (ITB)
- Consumer Staples Select Sector SPDR Fund (XLP)
- Health Care Select Sector SPDR Fund (XLV)
- iShares 20+ Year Treasury Bond ETF (TLT)
- PowerShares DB U.S. Dollar Index Bullish Fund (UUP)
- 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)
- Industrial Select Sector SPDR Fund (XLI)
- CurrencyShares Japanese Yen Trust (FXY)
- 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
Reviewing the Setup Into the 4Q14 GDP Release: This week, we get the last heavy dosage of DEC/Q4 economic data, with Friday morning’s GDP print as the obvious main event. There are three reasons we think GDP is likely to slow markedly from the +2.7% YoY growth rate recorded in the third quarter:
One – Unsupportive Base Effects: The GDP “comp” for 4Q14 is the most difficult “comp” the U.S. economy has faced since the fourth quarter of 2007, which marked the start of the Great Recession. Akin to how a bottom-up analyst would model a company, we use a Bayesian inference process to model GDP, smoothing the 1yr, 2yr and 3yr average growth rate to determine the GDP “comp” (i.e. the prior), which determines ~60% of the directional rate-of-change in YoY GDP (i.e. the posterior). On a relative basis, our “comp” metric is more difficult that it was in 3Q14 and it’s as difficult as any comp we’ve seen in the past seven years on an absolute basis as well.
Two – Slowing High-Frequency Data: Determining the other ~40% of the directional rate-of-change in YoY GDP is a function of tracking the relevant high-frequency economic data and interpolating conclusions from market-based signals. As we showed in our 12/10 edition of the Macro Playbook, the three-month moving average in economy-weighted composite PMI has a r² of 0.83 to YoY GDP. On a quarterly average basis, this metric has slowed from 59.8 in 3Q14 to 55.6 in 4Q14 – a slowdown that’s in line with the downside surprise to domestic consumption growth data throughout the quarter.
Three – Dour Market Signals: The persistent bearish quantitative setup combined with lower-lows and lower-highs in the immediate-term risk range for the 10yr Treasury yield continues to signal to us that the market is pricing in a slowing of U.S. economic growth on a reported basis. As we detailed most recently in our 1/20 edition of the Macro Playbook, the persistent strength in asset classes and U.S. equity sectors and style factors that have historically outperformed in #Quad4 is also signaling to us that domestic #GrowthSlowing is likely to continue on a reported basis through at least this week.
A move back into #Quad4 for the fourth quarter (recall that the third and final estimate for 3Q14 GDP nudged the U.S. economy ever-so-slightly into the #Quad1 due to the QSS restatement of healthcare consumption) would mark what we are content to view as the “second consecutive” quarter of #Quad4 in the U.S.
All told, by the time 1H15 is done, it’s likely to “feel” to investors like the U.S. economy has been in #Quad4 for roughly one full year – especially if “Snowmageddon” is as bad as they are predicting it to be, which may cap a likely acceleration in GDP growth here in Q1.
3-4 quarters of #Quad4 would be very counter to the consensus bullish narrative surrounding lower gas prices; luckily for those of you who have been appropriately positioned, that’s not counter to what’s been working in and across financial markets.
***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.
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 (1/23)
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.
EHS | RoC Solid (1/23)
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.