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THE HEDGEYE MACRO PLAYBOOK

Takeaway: In today's edition of the Macro Playbook, we review the [dour] setup going into Friday morning's 4Q14 U.S. GDP release.

THEMATIC INVESTMENT CONCLUSIONS

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. iShares 20+ Year Treasury Bond ETF (TLT)
  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)

 

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.

 

THE HEDGEYE MACRO PLAYBOOK - GDP COMPS

 

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.

 

THE HEDGEYE MACRO PLAYBOOK - GDP vs. Composite PMI Slide

 

THE HEDGEYE MACRO PLAYBOOK - COMPOSITE PMI

 

THE HEDGEYE MACRO PLAYBOOK - RETAIL SALES  2

 

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.

 

THE HEDGEYE MACRO PLAYBOOK - UST 10Y

 

THE HEDGEYE MACRO PLAYBOOK - UST 10Y GIP

 

THE HEDGEYE MACRO PLAYBOOK - TACRM 20 20

 

THE HEDGEYE MACRO PLAYBOOK - TACRM U.S. Equity Style Factors

 

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.

 

THE HEDGEYE MACRO PLAYBOOK - UNITED STATES

 

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,

 

DD

 

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.          


WEDNESDAY: CRUISE LINE SPEAKER CALL

On Wednesday, January 28 at 11:00am EST, the Hedgeye Gaming, Lodging, and Leisure team will host Mike Driscoll, Editor-In-Chief of Cruise Week to discuss current demand trends.  Mike has extensive contacts throughout the travel agent community and should provide relevant and timely commentary.  In line with our standard format, prepared commentary will be followed by an email Q&A session.

 

The topics of discussion include:

  • Wave 2015 bookings/pricing
  • Travel agent expectations
  • New ship premiums
  • Customer demographics
  • Destinations: What’s hot/what’s not

For conference call details, please contact  

 

Biography

Mike Driscoll is editor-in-chief of Cruise Week, published since June '95. Its readers include most of the top cruise sellers in the industry, industry analysts, and cruise line executives and employees. Mike has covered travel trade issues for more than 25 years. Before Cruise Week, he was the editor of ASTA Agency Management for seven years and is a graduate of the Medill School of Journalism at Northwestern University. Driscoll also studied writing at Trinity College, Oxford, England.


MID-JANUARY 2015 WAVE PRICING SURVEY

Takeaway: European pricing in 2015 is weakening. We saw it particularly with the RC brand in January.

CALL TO ACTION

With oil falling to a new low last week (Brent at $48), the fuel cost tailwind continues for the cruisers. At some point, oil will stop going down and investors may have to contend with potentially softer than expected cruise demand. The latest pricing survey on Wave continues to signal choppiness with European pricing leading the slowdown. Our survey corroborates recent commentary from some of our travel agent contacts.

 

 

Please see our detailed note: 

http://docs.hedgeye.com/HE_Cruise_Pricing_JAN2015_Wave.pdf


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.51%

European Banking Monitor: Euro-QE Drives Swaps Tighter Across the Board

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 

 

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European Financial CDS - Swaps were tighter across the board for Europe's banks last week on ECB asset purchases.  Russia's Sberbank was the only issuer on our list below whose swaps widened.  Notably, Greek swaps tightened significantly, but now with the Syriza party's victory, the stability of the country's economy is even more uncertain.

 

European Banking Monitor: Euro-QE Drives Swaps Tighter Across the Board - chart1 european financials CDS

 

Sovereign CDS – Sovereign swaps were sharply tighter across Europe last week as EUQE assauged concerns. Italian sovereign swaps tightened by -16.7% (-21 bps to 105 bps) while Spanish swaps tightened 12 bps to 77 bps. 

 

European Banking Monitor: Euro-QE Drives Swaps Tighter Across the Board - chart2 sovereign CDS

 

European Banking Monitor: Euro-QE Drives Swaps Tighter Across the Board - chart3 sovereign CDS

 

European Banking Monitor: Euro-QE Drives Swaps Tighter Across the Board - 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 tightened by 4 bps to 9 bps.

 

European Banking Monitor: Euro-QE Drives Swaps Tighter Across the Board - chart5 euribor OIS spread

 

Matthew Hedrick

Associate

 

Ben Ryan

Analyst

 


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.    

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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, ORANGE JUICE, and GOLD markets experienced the most BULLISH relative positioning changes week-over-week
  • The WHEAT, COTTON, and SOYBEANS 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 BRENT, CORN, and LEAN HOGS markets are positioned for HIGHER PRICES near-term
  • The HEATING OIL, SILVER, and LIVE CATTLE 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, LEAN HOGS, and COCOA markets are positioned for LOWER PRICES in 1-year  

Commodities Weekly Sentiment Tracker - chart3 spot 1yr spread

 

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

Analyst


Risk Managing Global #Deflation

Client Talking Points

OIL

#1 read-through from the Mario Draghi move was more, not less, #deflation – there are a lot of ways to play this, but obviously pressing the short side of WTI Oil is one of them, -1.6% this morning (after a -7.2% down week) to $44.95 and no support to lower-lows – there’s still a massive net LONG position of +324,642 futures/options contracts in crude.

#DEFLATION

Reported, big time, in Spain this morning with a -3.7% year-over-year PPI (vs. -1.5% last) and Finland -1.8% year-over-year – remember that A) Mario Draghi is not going to be able to arrest this, B) it’s bad for many corporate top-lines tied to pricing and C) will freak out the Fed (see Hilsenrath article this morning which comes my way on pushing out the dots) – BUY TLT.

 

FINANCIALS

On last week’s beta bounce, the first sector we signaled SELL on (Real Time Alerts) wasn’t Energy, it was the Financials – consensus is dead wrong on both rates and the yield spread compression born out of being wrong on rates – 10s/2s Yield Spread hitting fresh 12 month lows today at 128 basis points – SELL KRE and XLF.

 

*SPECIAL ALL-DAY LIVE EVENT ***NEW EVENT DATE JANUARY 28TH

WATCH and INTERACT with CEO Keith McCullough and Hedgeye's analysts as they discuss the stock market, economy and more all in real-time. They will answer your questions live via email, phone, Twitter and chat throughout the entire trading day. 

   

Special appearances by market experts, including best-selling "Currency Wars" author James Rickards, money manager Michael Holland, Jones Trading chief market strategist Michael O'Rourke and many more. CLICK HERE to sign up.

Asset Allocation

CASH 53% US EQUITIES 4%
INTL EQUITIES 3% COMMODITIES 0%
FIXED INCOME 32% INTL CURRENCIES 8%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). As our declining rates thesis proved out and picked up steam over the course of the year, we see this trend continuing into Q1.  Short of a Fed rate hike, there’s no force out there with the oomph to reverse this trend, particularly with global growth decelerating and disinflationary trends pushing capital flows into the one remaining unbreakable piggy bank, which is the U.S. Treasury debt market.

TLT

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). As our declining rates thesis proved out and picked up steam over the course of the year, we see this trend continuing into Q1.  Short of a Fed rate hike, there’s no force out there with the oomph to reverse this trend, particularly with global growth decelerating and disinflationary trends pushing capital flows into the one remaining unbreakable piggy bank, which is the U.S. Treasury debt market.

HOLX

Hologic (HOLX) is a name our Healthcare Sector Head Tom Tobin has been closing monitoring for awhile. In what Tom calls his 3D TOMO Tracker Update (Institutional Research product) of U.S. facilities currently offering 3D Tomosynthesis, month-to-date December placements signaled a break-out quarter after a sharp acceleration in October and slight correction to a still very high rate in November. We believe we are seeing a sustained acceleration in placements that will likely drive upside to Breast Health throughout FY2015. Tom’s estimates are materially ahead of the Street, but importantly this upward trend in Breast Health should lead not only to earnings upside, but also multiple expansion and a significant move in the stock price.

Three for the Road

TWEET OF THE DAY

RUSSIA: leads #deflation's losers this am, down -4.5% (UAE -3.6%, Norway -0.7%) #NoWorries

@KeithMcCullough

QUOTE OF THE DAY

Practice isn't the thing you do once you're good. It's the thing you do that makes you good.

-Malcolm Gladwell

STAT OF THE DAY

The Euro is getting burnt to a crisp, -3.1% week-over-week, to -7.4% year-to-date, while the U.S. Dollar is  up +2.7% on the week to +5.2% year-to-date.


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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.

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