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.