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THE HEDGEYE MACRO PLAYBOOK

Takeaway: In today's edition of the Macro Playbook, we discuss the potential turn from #Quad4 to #Quad1 back to #Quad4 in the U.S. for 1H15.

THEMATIC INVESTMENT CONCLUSIONS

Long Ideas/Overweight Recommendations

  1. Consumer Staples Select Sector SPDR Fund (XLP)
  2. iShares U.S. Home Construction ETF (ITB)
  3. SPDR Gold Shares (GLD)
  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. CurrencyShares Japanese Yen Trust (FXY)
  2. SPDR Barclays High Yield Bond ETF (JNK)
  3. Industrial Select Sector SPDR Fund (XLI)
  4. iShares MSCI Emerging Markets ETF (EEM)
  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

#Quad414 Progressing According to the Plan: Last week’s deluge of economic data confirmed a #Quad4 setup for the fourth quarter of 2014. On both an absolute and relative (i.e. directional) basis, data continued to run counter to the consensus narrative of the U.S. being a +3-5% GDP growth economy and financial markets responded appropriately:

 

  • S&P 500 Index: -2.8% WoW
  • Dow Jones Industrial Average: -2.9% WoW
  • Russell 2000 Index: -2% WoW
  • NASDAQ Composite Index: -2.6% WoW
  • U.S. 10yr Treasury Note Yield: -16bps WoW to close the week at 1.64% – the lowest level since late-April of 2013, prior to Bernanke’s May 22nd speech of that year which ignited the infamous “Taper Tantrum”
  • Bloomberg U.S. 10+ Year Treasury Bond Index: +2.3% WoW

 

Net-net, the data was bad, on the margin, and markets reflected that. Now what?

 

Perhaps lost said data deluge were the first three releases of high-frequency economic growth indicators for the month of January:

 

  • Markit Manufacturing PMI: a preliminary figure of 53.7 in JAN vs. 53.9 in DEC
  • Markit Services PMI: a preliminary figure of 54 in JAN vs. 53.3 in DEC
  • Markit Composite PMI: a preliminary figure of 54.2 in JAN vs. 53.5 in DEC

 

THE HEDGEYE MACRO PLAYBOOK - MANUFACTURING PMI

 

THE HEDGEYE MACRO PLAYBOOK - SERVICES PMI

 

THE HEDGEYE MACRO PLAYBOOK - COMPOSITE PMI

 

The three key takeaways from those releases are as follows:

 

  1. The slowdown in the late-cycle segments of the economy (e.g. manufacturing, CapEx, earnings, inflation, employment, etc.) continues unabated
  2. The U.S. economy at large continues to be driven by consumption, as highlighted by the uptick in services sector growth dragging the composite index higher despite the ongoing deterioration in manufacturing
  3. The composite index bucked a sustained trend of deceleration by positing its first positive sequential uptick since June

 

We’ll see if takeaway #3 is sustainable as we parse through January high-frequency economic data over the next 3-4 weeks. The Bayesian inference process we apply to modeling the economy would suggest that it is. In layman’s terms, Q1 has an extremely subdued base effect, which greatly enhances the probability that YoY real GDP growth accelerates in the quarter.

 

Don’t get too excited (read: position sizing) about chasing any growth-oriented sector, style factor or security, however.

 

Specifically, that same Bayesian inference process suggests that we’re headed right back in the ever-defensive #Quad4 for Q2. The base effects from Q2 through Q4 of this year are as difficult as the base effect in Q1 is easy.

 

THE HEDGEYE MACRO PLAYBOOK - GDP COMPS

 

THE HEDGEYE MACRO PLAYBOOK - UNITED STATES

 

***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.

 

#Quad414 Confirmation (1/30)

 

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.

 

EARLY LOOK: USA Inc. (1/30)

 

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. 


February 2, 2015

February 2, 2015 - HE DTR 2 2 15


Investing Ideas Newsletter

Takeaway: Current Investing Ideas: GLD, EDV, HOLX, MDSO, MUB, RH, TLT and XLP.

Below are Hedgeye analysts’ latest updates on our eight current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.

 

Please note that we added Gold (GLD) this week and removed Yum! Brands (YUM).

 

We also feature two additional pieces of content at the bottom.

Investing Ideas Newsletter      - 34 

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

CARTOON OF THE WEEK

Investing Ideas Newsletter      - GDP cartoon 01.30.2015

2014 full year GDP growth was +2.4%, not 5%. Our call was y/y growth peaked in Q4 of 2013, and it did.

IDEAS UPDATES

GLD

Gold completed its BEARISH to BULLISH TREND REVERSAL and we’re adding it back on the long side for 2015. We sent out our first buy signal in GLD on Tuesday. Keith added to that position in Real-Time Alerts on Thursday ahead of Friday’s GDP print (which missed expectations).

 

TREND DURATION = 3-Months or More

 

*Our real-time alerts product notifies subscribers of the exact time and price we are managing our exposure to our top investing ideas. 

------

Dollar Down, Rates Down = #StrongGold

 

Bad economic data warrants an easier Fed, and Friday’s GDP print did in fact miss q/q annualized:

  • Sequential (q/q) GDP annualized printed +2.6% for Q4 vs. consensus expectations of +3.0%
  • Synching Friday’s print with our internal GROWTH, INFLATION, POLICY model, full-year 2014 GDP printed +2.5% vs. Hedgeye, Central Bank, and consensus forecasts of +2.4%.

March 18th is the next Fed catalyst, and we expect that they’ll announce a reversion from the plan to raise rates in June. The depreciation of the EURO and YEN against the dollar have already moved on their respective catalysts. The Fed has the next move, and we are front-running the foreseeable shift in policy.

 

We like an allocation to gold against our other macro positions and will look to buy on short-term pullbacks within the BULLISH TREND set-up. 

Investing Ideas Newsletter      - 444

HOLX

Hologic finished the week up +3.8% versus down -2.4% for the S&P 500.

 

It's up approximately 14% since we added it to Investing Ideas at the beginning of the year, while the S&P 500 is down -3% year-to-date.

 

HOLX pre-announced a positive F1Q15 during the JPM Healthcare conference earlier this month, but did not update their guidance at the time. This week, the company officially reported earnings and raised guidance above consensus expectations. With this recent guidance raise and positive management commentary, HOLX is very likely heading above $40 sometime in the next 6 to 9 months, with $50 just around the corner. Accelerating revenue and earnings growth, a higher multiple, and earnings power above $2.00 gets us there.

 

We think this will be the first of several beat and raise quarters.

Investing Ideas Newsletter      - c5

Earnings Call Highlights

 

Diagnostics:  The most significant change from the quarter was stability in ThinPrep. Thanks to incremental disclosures the company is providing (positive trends tend to make companies more open) it's now possible to actually see the company's Cytology results, which while down in the US, managed to grow modestly year over year. Our OB/GYN survey has been flagging stability in US Pap trends and we will have the January update next week.  Our model previously anticipated -10% declines over the next 2 years which will now improve to 0%, a massive acceleration and very accretive for the model.

Investing Ideas Newsletter      - c6

M&A: When Hologic bought Cytec and Gen-Probe, they were plugging major holes in their businesses.  In the first case, slowing/declining 2D mammography, in the second, declines in ThinPrep.   While they still have to execute, looking out past peak 3D growth rates likely to occur in 2016/2017 and acting proactively, should be a significant tailwind to the multiple.  In prior work we have found topline growth drives their EV/EBITDA and P/E multiples while debt metrics are largely irrelevent.

 

3D Mammography:  Our estimate for Breast Health was too high coming into the quarter.  We'll be running our update for US facility counts for January this weekend and reviewing the 10K.  We'll refine our estimate and publish the results and update next week.  We still believe consensus Breast Health numbers are too low.  It was clear from the call that HOLX is taking share from GE, which will increase our out year estimates, and placement rates are accelerating, which we should capture in our survey.  How that translates into revenue will be increasingly accurate in our model.  Anecdotes regarding aggressive pricing from GE suggest they are acting out of a position of weakness.  

 

Key to our thesis is 3D adoption, which continues to progress into the fast part of the adoption curve.

Investing Ideas Newsletter      - c7

Transparency:  It's always easier to deliver good news than disappointment, and we welcomed the increased details in HOLX's earnings presentation which provided greater detail.  In this case a clear narrative supported by data will will go a long way to improving investor confidence and the multiple.

Investing Ideas Newsletter      - c8

Debt Leverage:  We hear the complaint, but think its misguided, that HOLX is over-levered.  For such a stable business, with accelerating fundamentals, we think the concern is misguided.  Regardless leverage is heading lower, which should allay those concerns.

Investing Ideas Newsletter      - c9

MDSO

The Hedgeye Healthcare team has no material update this week ahead of Medidata Solutions earnings on Thursday (2/5 pre-market). We reiterate our expectations for the company to beat expectations on both the top and bottom line.

Investing Ideas Newsletter      - mdso

TLT | EDV | XLP | MUB

Editor's note: Our longstanding, non-consensus call on bonds remains the gift that keeps on giving. This January, TLT was up +10% versus the S&P 500 which was down -3%.

 

Per Hedgeye senior macro analyst Darius Dale:

 

Our #Quad414 theme is picking up steam with the deluge of this week's U.S. economic data and remains core to alpha generation in 1H15.

 

Click here to read the full report. 

RH 

Hedgeye's retail sector analysts have no material update on Restoration Hardware this week.

 

 

* * * * * * * * * * 

ADDITIONAL RESEARCH CONTENT BELOW

Mcdonald's: a new beginning

The first email we received from a client following the news of Thompson’s departure yesterday posed a simple question: “Should I chase MCD tomorrow?”

Investing Ideas Newsletter      - 70

Riding Strong Through the Actual and arithmetic blizzard of crummy macro data

Whether housing can remain an insular island of intermediate term strength against the burgeoning blizzard of global disinflationary pressure and decelerating domestic Macro data for December is the relevant question.

Investing Ideas Newsletter      - bz


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The Week Ahead

The Economic Data calendar for the week of the 2nd of February through the 6th of February is full of critical releases and events.  Attached below is a snapshot of some of the headline numbers that we will be focused on.


Click on image to enlarge.

 

The Week Ahead - Week Ahead normal


Commodities: Weekly Quant

Commodities: Weekly Quant - chart1 divergences

Commodities: Weekly Quant - chart2 deltas

Commodities: Weekly Quant - chart3 correls

Commodities: Weekly Quant - chart4 volume

Commodities: Weekly Quant - chart5 open interest

Commodities: Weekly Quant - chart6 implied volatility

Commodities: Weekly Quant - chart7 sentiment

 

Ben Ryan 

Analyst


The Week Ahead

The Economic Data calendar for the week of the 2nd of February through the 6th of February is full of critical releases and events.  Attached below is a snapshot of some of the headline numbers that we will be focused on.

 

The Week Ahead - 01.30.15 Week Ahead


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