THE HEDGEYE MACRO PLAYBOOK

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

THEMATIC INVESTMENT CONCLUSIONS

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)

 

QUANT SIGNALS & RESEARCH CONTEXT

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: http://app.hedgeye.com/m/rPM/a0)65Q/buy-signal-gld-124-00.

 

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.

 

THE HEDGEYE MACRO PLAYBOOK - 3

 

THE HEDGEYE MACRO PLAYBOOK - 2

 

THE HEDGEYE MACRO PLAYBOOK - 1

 

THE HEDGEYE MACRO PLAYBOOK - 4

 

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.***

 

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.

 

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,

 

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.


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