Takeaway: Today we show empirically why valuation should remain a limited-to-negligible part of your intermediate-term macro risk management process.


Long Ideas/Overweight Recommendations

  1. Consumer Staples Select Sector SPDR Fund (XLP)
  2. SPDR Gold Shares (GLD)
  3. iShares U.S. Home Construction ETF (ITB)
  4. PowerShares DB U.S. Dollar Index Bullish Fund (UUP)
  5. iShares 20+ Year Treasury Bond ETF (TLT)
  1. LONG BENCH: Vanguard REIT ETF (VNQ), Utilities Select Sector SPDR Fund (XLU), Vanguard Extended Duration Treasury ETF (EDV), Healthcare Select Sector SPDR Fund (XLV)

Short Ideas/Underweight Recommendations

  1. SPDR Barclays High Yield Bond ETF (JNK)
  2. iShares MSCI Emerging Markets ETF (EEM)
  3. CurrencyShares Japanese Yen Trust (FXY)
  4. Industrial Select Sector SPDR Fund (XLI)
  5. SPDR S&P Regional Banking ETF (KRE)
  1. SHORT BENCH: SPDR Oil & Gas Exploration & Production ETF (XOP), CurrencyShares Euro Trust (FXE), WisdomTree Emerging Currency Fund (CEW)



Allocating to Gold on the Pullback: Today we are adding the SPDR Gold Shares (GLD) ETF to the long side of thematic investment conclusions. It’s debut in the top-5 implies that we anticipate better absolute and relative returns than the macro exposure it replaced: Healthcare (XLV). In line with our now-bullish bias on Gold, we are removing iShares TIPS Bond ETF (TIP) from the short side of our thematic investment conclusions altogether.


Our bullish bias on Gold can best be summarized by Keith’s Real-Time Alerts signal at 10:27AM on Tuesday:


Going back to the exposure that it replaced, please note that we still anticipate positive absolute and relative returns for the Healthcare sector within the domestic equity market as investors are eventually forced to chase performance. Be it Healthcare, Consumer Staples, Utilities or REITs, the fact that some 85-90% of active managers underperformed their benchmarks last year implies that not enough investors are appropriately allocated to these #Quad4 outperformers.


In our conversations with investors, we often get valuation-based pushback on our bullish bias on the aforementioned sectors. As you probably know by now, valuation plays a very limited-to-negligible role in our tactical asset allocation process. What we are trying to do is isolate those asset classes, regions, countries, sectors and style factors that can do one or both of the following:


  1. Help you preserve capital over the intermediate term
  2. Help you generate positive absolute and relative returns over the intermediate term


What we noticed both empirically and through trial and error (see: Keith’s 10yrs on the buy-side), valuation typically does not play much of a role on in managing intermediate-term macro risks anyway.


While we agree that [perceived] market dislocations generally correct themselves over time and that allocating to “cheap” assets tends to provide for the best prospective returns in the strategic asset allocation process, we can’t say we agree with the premise that valuation-based investments are inherently more attractive on shorter durations (e.g. within a year or less).


But don’t just take our word for it. Listen to the market:


The following four charts show the TTM, trailing 6M, trialing 3M and YTD performance for each of the S&P 500 GICS Level 1 Sectors and Level 4 Sub-Industry indices on the respective y-axes. On the x-axes, we show the ex-ante P/NTM E ratio for each index (i.e. the P/NTM E ratio at 12 months ago, 6 months ago, 3 months ago and at the start of the year). We show this on a percentile basis to improve visual clarity. What you’ll quickly note is the positive sloping relationship between ex-ante valuation and performance in each chart.










Cheap gets cheaper and expensive gets more expensive over the intermediate term as, one-by-one, investors who said along the way, “I missed the move” or “I can’t buy/selll ‘em up/down here” are forced to capitulate at higher/lower prices.


***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.


The Hedgeye Macro Playbook (1/29)


#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 (1/26)


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: Pending Home Sales | Pick Your Colored Glasses (1/29)


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.


Client Talking Points


Shanghai Composite was down for 4 straight days (-5.4% correction to -2.8% year-to-date) as Chinese growth slows. Shanghai Composite is actually underperforming the U.S. stock market. China has very bad economic fundamentals, and just to reiterate, no we don’t think growth is accelerating in China. 


The U.S. Dollar is signaling that consensus was wrong on GDP, the actual number is closer to 2%. GDP is much more reflective of what the bond market has been telling you. Yen wasn’t going down anymore (in U.S. Dollars) pre the GDP print at $117.66. The immediate-term risk range for the U.S. Dollar is USD 92.63-96.11.


Breaking: inline with Hedgeye's forecast, 2014 U.S. GDP was closer to 2% than 5%. Bond Yields are crashing and have been reflecting the rate of change in U.S. growth. The rate of change of U.S. growth got you paid on TLT, with the long bond (TLT) up +7.9% year-to-date vs. -1.83% for the SPX.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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.


As growth and inflation expectations continue to slow, stay with low-volatility Long Bonds (TLT). We believe the TLT has plenty of room to run. We strongly believe the dynamics in the currency market are likely contribute to a “reflexive deflationary spiral” whereby continued global macro asset price deflation and reported disinflation both contribute to rising investor demand for long-term Treasuries, at the margins.


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


How are things working out for Japanese QE?

1. Household spending -3.4% y/y

2. Housing starts -14.7% y/y



No one can whistle a symphony. It takes a whole orchestra to play it.

-H.E. Luccock


Ticket prices for Super Bowl XLIX have skyrocketed, from an average of $2,799 the day of the AFC Championship to $4,594 (Wednesday) an increase of 64%.

January 30, 2015

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Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

CHART OF THE DAY: (En Fuego) U.S. Household Formation

CHART OF THE DAY: (En Fuego) U.S. Household Formation - HH formation


Editor's note: This is a brief excerpt from today's Morning Newsletter written by Hedgeye U.S. macro analyst Christian Drake.


  • Household Formation:  The same survey data showed household formation was en fuego in 4Q.  As can be seen in the Chart of the Day below, the CPS/HVS survey estimated that the total number of households grew by 2.0MM in December vs a year earlier, the largest yearly change since July 2005. On a rate of change basis, year-over-year growth accelerated to +1.4% in 4Q – up from 0.4% growth in the Jan-Sept period and the first material acceleration in 8 years. 

USA Inc.

“We shall not cease from exploration, and the end of all our exploring will be to arrive where we started and know the place for the first time.” T. S. Eliot

Is the USA a good business? 


It’s the most fundamental question of all and one of ongoing import for both global capital suppliers and domestic residents as returns to capital increasingly accrue to foreign investors in the wake of decades of cumulative trade deficits and trillions in net capital inflows.  It’s also a topic for a different Early Look.  


Considering the “business of America”, however, leads to a question of equal import to Macro investors – and a relevant one alongside the release of the advance estimate of 4Q GDP this morning.    Specifically, does it make sense to model the Macroeconomy as you would a company?


Think of it this way:   Would you want to be long a company with accelerating topline, expanding margins and a competent management team while being underweight/short the converse?   No brainer, right.  


Conceptually, we view Macro investing in the same way.  In the context of our GIP (Growth/Inflation/Policy) model, we want to be long accelerating topline (GDP), expanding margins (decelerating Inflation) and competent management (policy effective in supporting sustainable growth). 


Q:  How do you model companies?...or put differently, how many companies that you follow reported earnings results on a QoQ annualized basis this quarter? …I’ll take the under on “one”.


How does the U.S. report/ measure GDP?  Officially QoQ, kinda….it depends

  • BEA: The BEA reports real GDP growth on a seasonally adjusted annual rate (SAAR) basis, but….
  • ....when they report longer run data they report it on a year-over-year basis using an average of the quarterly data
  • FOMC:  The Fed projections typically estimate growth on a Q4-over-Q4 basis
  • Consensus:  Consensus estimates are generally available for both QoQ and full year.  However, attempting to true up quarterly estimates with the full year growth estimate is typically a quixotic pursuit.   Fuzzy math and data collection/sample differences drive the delta and incongruity.   

Conveniently, all this variation lets both policy makers and pundits speak to whichever estimate best fits the narrative du jour and/or writes the best revisionist history.  Same goes for inflation measurement.  


We’ve found modeling growth on a year-over-year basis - and backtesting it against equity/sector/asset class performance – to be an effective approach.  It makes intuitive sense to us as well. 


Relatedly, how many countries report GDP principally on a year-over-year basis? …. Most.


As it relates to this morning’s 4Q14 growth data - Consensus is expecting +2.95% QoQ SAAR and the Fed’s GDPNow model is estimating +3.5%.  For illustrative purposes, if we simply split the difference and assume 3.2% for the quarter, full year growth for 2014 will be ~+2.4% YoY. 


So, inclusive of two ~+5.0% QoQ prints, we’re still essentially a 2% plus-or-minus economy.   We think 2% with cyclical oscillations above and below remains the right reflection of our intermediate term reality.  


The GDP table below provides a redux ahead of this morning’s data.  I’ll tweet out the updated table after the release (@HedgeyeUSA)


USA Inc. - GDP table


Yesterday’s Early Look explored the value of asking both a lot of questions and, importantly, the right questions in generating investing insight.  Given some of the (superficially) internal inconsistency in recent macro data it makes sense to extend that discussion.  


Consider yesterday’s Housing data:  


Pending Home Sales:  Pending Home Sales in December were pretty bad…..or pretty good

  • MoM:  On a month-over-month basis, PHS dropped the most in a year with seasonally-adjusted sales declining -3.7% sequentially .
  • YoY:  On a year-over-year basis both SA and NSA sales accelerated to their fastest rate of growth in 18 months.   Seasonally adjusted sales accelerated +220bps sequentially to +6.1% YoY while NSA sales accelerated to +8.5% YoY from +1.5% YoY in November.  So, from which rate of change metric should you take your cue?
  • Our take:  With Purchase Application accelerating sharply thus far into January, the preponderance of housing data improving as we traverse progressively easier comps, and PHM, DHI and RYL results reflecting positive momentum of late, we’re inclined to maintain our constructive view on housing.  


Household Formation vs Homeownership Rate -  A Tale of Two (or Three) Metrics:

  • Homeownership Rate:  Housing Vacancy and Homeownership data released from the Census Bureau yesterday showed the national homeownership rate declining to 64% to close out 2014- the lowest level since 1994.  Doesn’t sound too good, right?
  • Household Formation:  The same survey data showed household formation was en fuego in 4Q.  As can be seen in the Chart of the Day below, the CPS/HVS survey estimated that the total number of households grew by 2.0MM in December vs a year earlier, the largest yearly change since July 2005. On a rate of change basis, year-over-year growth accelerated to +1.4% in 4Q – up from 0.4% growth in the Jan-Sept period and the first material acceleration in 8 years. 
  • Headship Rate:  Rising household formation rates will show up in a rising Headship Rate.  The Headship Rate represents the percentage of adults who head households (Headship Rate = Households/Population) and is a more comprehensive measure than the homeownership rate.  It’s important to understand the distinction.   Definitionally, Households can be either  1. Owners or 2. Renters and the Homeownership Rate = Owners/Households.  Thus, similar to Unemployment Rate dynamics, the Homeownership Rate could ‘improve’ due to fundamentally negative developments.  For instance, if both the number of owners and the number of renters declines (an obvious negative for housing broadly) the homeownership rate could actually increase if the magnitude of decline in renters is larger than that for owners.   The Headship Rate is less ambiguous. 
  • Our Take:  Accelerating household formation and a retreat from peak in “basement dwelling” is a broad positive for the housing market.  Even if the balance of activity is occurring on the rental side – which it appears to be thus far – the broader recovery in headship rates will ultimately see flow through to single-family purchase activity. 


More broadly:  The preponderance of domestic macro data has been slowing from a rate of change perspective the last couple months (retail sales, durable/capital goods, ISM/PMI’s).  Less than 56% of SPX constituents have beaten topline estimates in 4Q thus far and less than a third of companies have registered sequential acceleration in revenue growth.   Corporate earnings estimates are sliding and revenue revision trends are almost universally negative alongside decelerating global growth and the ongoing energy price cratering.   


Does a modest deceleration in domestic growth matter for domestic assets in the face of the flood of global capital inflow and relative value reaching?  While the US may benefit broadly from the inflow, with the long bond (TLT) up +7.9% YTD vs. -1.83% for the SPX, its seems that capital deluge is, indeed, discerning. 


The YTD performance divergences across equity sectors are equally large…and the year is young.  Performance chases price, particularly in the immediate term, and with the fundamentals rightly supporting deflation leverage and defensive yield flows, we think what has been working continues to work.   


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.70-1.82%

Nikkei 179

VIX 16.61-21.98
USD 92.63-96.11
WTI Oil 43.22-46.26

Gold 1 


Re-think. Re-work. Reward. 


Christian B. Drake

U.S. Macro Analyst


USA Inc. - HH formation


Takeaway: Overall, the takeaway is on the margin negative: Wave momentum slowed in Jan Europe is struggling.

Summary from Wednesday's conf call with Mike Driscoll from Cruise Week



Yesterday, we held a conference call for subscribers Mike Driscoll Editor In Chief of Cruise Week.  From Mike's commentary, we came away with the impression that Wave momentum slowed in January and European demand was softening. Overall, the call seemed to corroborate the findings of our latest cruise pricing survey.  


Here are some more thoughts from Mike:


Wave 2015

  • Mixed results despite high expectations for Wave North America.
    • December Wave bookings were strong, primarly due to a lot of deals and discounting by the cruise lines.
    • January slowed considerably possibly due to an earlier start to Wave this year


  • Mediterranean/Baltic both slowing since France crisis  
  • 2014 was a record booking season for Europe.
  • Not seeing cancellations but seeing weakness in ocean cruising. River cruising has held up better.
  • St. Petersburg struggling for quite some time


  • Recovery happening.
    • Last year, many norovirus issues. This year, nothing.
    • Benefiting from cold weather
  • Norwegian started discounting early in December and then put out its Wave package in January

Carnival brand  

  • Expectations from agents was already low
    • Agents think Carnival could be doing much better due to comps but that hasn't materialized. 
    • Agents blame Carnival's heavy direct business for the slow recovery (not surprise that agents would blame the competition)
    • Some reluctance from agents to reestablish trust with the Carnival brand
    • Getting hurt badly on the interior part of the US.  Carnival brand but doing better on the ports (e.g. Galveston, Carolinas etc)
      • Norwegian, however, has grown with its national business
  • Feedback from Vista was underwelming


  • Question mark market
  • RCL only putting its best ships there. CCL testing its middle ships there
  • In the past, Carnival went into Japan with two ships year round and mgmt didn't speak of Japan on the conference calls. Then they pulled back. When things are going well, mgmt will talk it up, like China for example.

1st time cruisers

  • Cruise lines still having difficulty attracting 1st cruisers
  • Very challenging to increase 1st timers
  • Agents are most helpful in this area but requires more of their time
  • They feel like they’re not getting the deal because they don’t know what they’re looking at
  • Many complexities are holding back first timers
  • Norwegian is doing somewhat well but overall, we are not seeing the bump in first timers as we should 
  • Carnival is losing share of 1st timers

More bundled promotions

  • Retailers love it. It’s the way consumers now shop.
  • Travel agents like it because commissions are higher with bundled deals
  • Norwegian is changing its promotions every month.
  • Sometimes it can undermine the group business.

What do consumers value most today when booking?

  • All inclusive bundles
  • Consumers aren't falling for the price tag
  • Direct business hasn’t grown as much because they know they not getting the best deal
  • Repeat customers know what prices they should be paying 


  • Royal and Princess have a very loyal customer base


  • River cruise industry is a serious competitor. Even Seabourn is losing business to river cruises.
  • In the US, the alternative vacation choice is Vegas and Orlando
  • Carnival's biggest competition is all-inclusive packages


  • Princess is doing 3-4 day cruises out of Los Angeles and Fort Lauderdale to attract first time customers. Prices lower than expected. ~50% of customers were first timers to Princess but not first time cruisers.


  • Only a few large travel agencies control the business now
  • Viking is coming out with new ocean going ships in the Med with higher commissions
  • Max out at 17% commission with Princess

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