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THE HEDGEYE MACRO PLAYBOOK

Takeaway: In today's Macro Playbook, we detail our decision to add crude oil to our list of top short ideas, in lieu of the Japanese yen (FXY).

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. Industrial Select Sector SPDR Fund (XLI)
  2. iShares MSCI Emerging Markets ETF (EEM)
  3. SPDR Barclays High Yield Bond ETF (JNK)
  4. iPath S&P GSCI Crude Oil Total Return ETN (OIL)
  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

Highlighting the Shortable Bear Market Bounce in Oil: Today we are adding the iPath S&P GSCI Crude Oil Total Return ETN (OIL) to our top five global macro short ideas, replacing the Japanese yen (FXY) which should remain range bound for at least two more months.

 

Recall that the securities highlighted above represent our intermediate-term investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework.

 

GIP Model:

THE HEDGEYE MACRO PLAYBOOK - UNITED STATES

 

GIP Model Backtest Results (which form the basis of our long/short biases that are ultimately confirmed/disconfirmed by the market):

THE HEDGEYE MACRO PLAYBOOK - GIP Model Backtest

 

***It’s worth restating that we wouldn’t necessarily be long or short each of these securities at every price; our Real-Time Alerts platform best summarizes our conviction (or lack thereof) in each idea in the most immediate of terms.***

 

The purpose of refreshing and reviewing our list of thematic investment conclusions on a daily basis is to communicate our investment biases to those of you who are less transactional – either because of size constraints in the process of getting in/out of positions OR because of the higher costs associated with a higher frequency of transactions. Ideally, one would only be long securities on the days they go up in price and short those securities on the days they go down in price, but that’s obviously easier said than done – especially in the context of institutional mandates to remain fully invested.

 

Moving along, we still see downside in the price of crude oil over the intermediate term and our core quantitative screens support that investment conclusion:

 

  • WTI remains bearish TREND and TAIL with immediate-term upside to $51.31 in the context of this counter-TREND correlation risk move due to the U.S. dollar arresting its ascent
  • The OIL ETF has a Volatility-Adjusted Multi-Duration Momentum Indicator reading of -0.58x; in the context of a pervasive trend of negative beta at the primary asset class level, we find this consolidation in both price and volatility to be very shortable

 

THE HEDGEYE MACRO PLAYBOOK - CRUDE OIL

 

THE HEDGEYE MACRO PLAYBOOK - TACRM Summary Table

 

THE HEDGEYE MACRO PLAYBOOK - TACRM Commoditeis Backtest

 

THE HEDGEYE MACRO PLAYBOOK - ovx

Source: Bloomberg

 

#Quad4 continues to get priced into the preponderance of global financial markets on a trending basis, so until that changes, we will remain generally bearish on commodities (sans gold) – crude oil in particular. While well off the highs, the net speculative length of +324k contacts remains the largest net long position in the history of the futures and options markets.

 

THE HEDGEYE MACRO PLAYBOOK - Brent Crude Oil GIP Backtest

 

THE HEDGEYE MACRO PLAYBOOK - CFTC

Source: Bloomberg

 

All told, while not nearly as crowded as it once was, crude oil remains a crowded long and we would avoid “bottom fishing” in this asset class until you can connect the dots on a material pullback in the U.S. dollar beyond the immediate-term.

 

***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.

 

Rearview Report:  Income & Spending Diverge in December (2/2)

 

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.


Retail Callouts (2/3): ICSC, TGT Store Growth, AMZN, RSH, ICON

Takeaway: ICSC disappoints against easiest compare in years. After departing Canada, TGT store plan faces the original challenge of driving US growth.

EVENTS TO WATCH

Retail Callouts (2/3): ICSC, TGT Store Growth, AMZN, RSH, ICON - 2 2 chart2

 

 

ICSC RETAIL SALES (80 General Merchandise Stores)

Takeaway: We expected a number far better than +3.7% this week given that it went against a weather-impacted week in 2014 that was the worst in 4-years. Despite the apparent strength, the 2-year trend actually decelerated by 50 bps for the week. The 3-year trend -- which eliminates all the noise -- actually decelerated in all but one week year-to-date.

 

Retail Callouts (2/3): ICSC, TGT Store Growth, AMZN, RSH, ICON - 2 3 chart1

Retail Callouts (2/3): ICSC, TGT Store Growth, AMZN, RSH, ICON - 2 3 chart3

 

 

COMPANY HIGHLIGHTS

 

TGT- Target Announces Store Growth Plans for 2015

(http://pressroom.target.com/news/target-announces-store-growth-plans-for-2015)

 

Takeaway: Every time we talk about TGT we have to put our accountability pants on. In the Black Book we put together in April of last year our research indicated that the company would never make money in Canada and would print $3.2bil in revenue in 2017, 40% below consensus. But we can't ignore what the stock has done since that point - which we can translate pretty easily in to 'We were wrong'. But, this announcement by the company glitzed and glammed by the PR department reminds us what TGT is working with in the US. The 15 openings equate to 0.4% sq. ft. growth in the US and -6% for the consolidated company if we include the discontinued Canada operations (it also ignored closed stores, which could be very well North of 15). As misguided as Steinhafel was in moving to Canada for growth, we have to ask what challenged internal growth forecast led TGT North of the border in the first place? It went from having a peer group where it had a notable competitive advantage, to putting itself right in the middle of four unique competitors – 1) WalMart, 2) Department Stores, 3) Dollar Stores, and 4) Supermarkets. As a bonus, it has Amazon.com hovering over its head plucking away every last sales dollar it can. We get the 'easy comp through 2Q' argument, but for a business trading at 17x earnings and 8x EBITDA on 2015 numbers that is stuck in the competitive set its built for itself, we think it's one of the most expensive names in retail today.

Retail Callouts (2/3): ICSC, TGT Store Growth, AMZN, RSH, ICON - 2 3 chart4

 

 

OTHER NEWS

 

AMZN - Amazon in Talks to Buy Some of RadioShack's Stores

(http://www.bloomberg.com/news/articles/2015-02-03/amazon-said-to-mull-buying-radioshack-stores-in-retail-expansion)

 

SPLS, ODP - Staples, Office Depot in Advanced Talks to Merge

(http://www.wsj.com/articles/staples-office-depot-in-advanced-talks-to-merge-1422937999)

 

TGT, WMT, GNC, WBA - Retailers Receive Cease and Desist Orders Over Herbal Supplements

(http://www.nytimes.com/interactive/2015/02/02/health/herbal_supplement_letters.html?_r=0)

 

RSH - NYSE Moves to Delist RadioShack

(http://www.wsj.com/articles/nyse-moves-to-delist-radioshack-1422919146)

 

AMZN - Report: Amazon pilots e-commerce sites with universities

(http://www.chainstoreage.com/article/report-amazon-pilots-e-commerce-sites-universities)

 

Topshop Reportedly Closes Japan Stores

(http://www.wwd.com/retail-news/specialty-stores/topshop-reportedly-shutters-all-japan-stores-8158060?module=Retail-latest)

 

TJX - The TJX Companies, Inc. Elects William H. Swanson to Board of Directors

(http://investor.tjx.com/phoenix.zhtml?c=118215&p=irol-newsArticle&ID=2012642)

 

LE - Lands' End names new CEO

(http://www.retailingtoday.com/article/lands-end-names-new-ceo)

 

ICON - Iconix Acquires Athletic Brand PONY In North America

(http://phx.corporate-ir.net/phoenix.zhtml?c=62075&p=irol-newsArticle&ID=2012916)

 

ICON - Iconix Announces Definitive Agreement To Acquire Strawberry Shortcake Brand

(http://phx.corporate-ir.net/phoenix.zhtml?c=62075&p=irol-newsArticle&ID=2012958)

 

LOW - Lowe's Names James H. Morgan To Board Of Directors

(http://phx.corporate-ir.net/phoenix.zhtml?c=95223&p=irol-newsArticle&ID=2012244)


Follow The Counter-TREND Move

Client Talking Points

USD

It didn’t take much to get the machines to chase a reversal of what was an epic 6 month inverse correlation move between the USD and Oil. It’s all about rate of change, and the USD arresting its ascent was evidently enough – now it gets whippier. 

 

OIL

The USD Index trades down, but only to the middle of its 93.41-95.82 risk range, but WTI bounces right to the top-end of its 42.84-51.31 range, so we like shorting Oil right here more than shorting U.S. Dollars, but we would keep moving.

EUROPE

Greek stocks go from -13% at the end of last week to -2% year-to-date now, so we guess everything is fine again? While it’s having no economic results (Italy just printed a new low #deflation print of -0.6% year-over-year CPI for JAN), the performance divergence between DAX +11.2% vs SPX -1.8% year-to-date is eye popping – maybe U.S. stocks really do need another QE to compete!

Asset Allocation

CASH 57% US EQUITIES 2%
INTL EQUITIES 4% COMMODITIES 3%
FIXED INCOME 30% INTL CURRENCIES 4%

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

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.

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

$WEN is going to look more like $QSR (BK) where does this leave $MCD? #NEWCEO needs to shake things up!

@HedgeyeHWP

 

 

QUOTE OF THE DAY

Money is not the most important thing in the world. Love is. Fortunately, I love money.

-Jackie Mason

 

 

STAT OF THE DAY

The average American office worker spends nine hours each week in meetings or thinking about meetings, up 14 percent from four years ago.


Attention Students...

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February 3, 2015

February 3, 2015 - Slide1

 

BULLISH TRENDS

February 3, 2015 - 2

February 3, 2015 - 3

February 3, 2015 - 4

February 3, 2015 - 5

 

 

BEARISH TRENDS

February 3, 2015 - Slide6

February 3, 2015 - Slide7

February 3, 2015 - Slide8

February 3, 2015 - Slide9

February 3, 2015 - Slide10

February 3, 2015 - Slide11
February 3, 2015 - Slide12

February 3, 2015 - Slide13


CHART OF THE DAY: The Dominating USD Correlation Matrix

CHART OF THE DAY: The Dominating USD Correlation Matrix - 02.03.15 chart

 

Editor's note: This is a brief excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough.

 

But you already know that since the flexible and prepared player knows this USD correlation matrix is dominating:

 

  1. Inverse correlation between USD and the CRB Index (19 commodities) on a 90-day duration is -0.97
  2. Inverse correlation between USD and Oil on a 90-day duration is -0.95

 

In other words, if you got the rate of change in the USD right, you’ve gotten both the commodities and Oil crash right. Oh, and you played the counter-TREND reversal beautifully too!

 


The Idea Generation Game

“It constipates the whole process.”

-Stephen King

 

While I am sure he has plenty of it, that’s what the King pin of American supernatural fiction had to say about cash. “Money is great stuff to have, but when it comes to the act of creation, the best thing is to not think of it too much.”

 

Sadly, that is not how some think about what they call their “dough.” On the independent research battle front, I can’t count how many people told me we’d be wrong on interest rates falling because guys with a lot more money than me thought otherwise.

 

Who raised these people to think that way? America was built on a meritocracy of new ideas replacing broken ones. The day we wake up thinking that only the people with money are “smart” is the day we start losing. Anyone can win the idea generation game.

 

The Idea Generation Game - 2 it

 

Back to the Global Macro Grind

 

Fast or slow, you probably can’t win this year’s game. Not with our July 2014 call for a breakout in cross asset class volatility in play. Just watch Greece go from -13% to -2% YTD on a floater headline that their “new” Finance Minister is “creative”, and you’ll get my point.

 

Don’t confuse moving slowly with moving patiently either. There’s a big difference. #Patient players can move both fast, and slow. That’s the point. There’s a time to risk manage your active portfolio – and there are times to wait and watch.

 

Risk manage your portfolio? Yes. It’s commonly called trading – and while you can feel really “smart” buying and holding stocks at 10 VIX, at VIX 15-25… not so much. Look what led yesterday’s v-bottom rally off the terrible January ISM report’s lows:

 

  1. US listed Oil & Gas Stocks (XOP) = +6.1%
  2. US listed Energy Stocks (XLE) = +3.1%
  3. US listed Financials (XLF) +1.6%

 

Yes, 2015’s biggest losers led yesterday’s gains. Unless you made some counter-TREND moves (i.e. booked gains in shorts that were working and went long some of the inversely correlated sectors and asset classes linked to a Down Dollar move), you lost ground yesterday.

 

While generating both absolute and relative returns, every day, would be nice – that only happens on either Twitter or in fictional novels about rainbows and puppy dogs. Real world risk management is far closer to Stephen King’s “It!”

 

What is it? What is that thing that helps Portfolio Managers and Self Directed Investors alike beat the market year-in and year-out? I’d say it has a lot do with having a more flexible #process than a constipated one.

 

Did consensus really think the US Dollar was going to go up, every day?

 

  1. Friday’s GDP miss/slowing was a clean cut negative for the US Dollar
  2. So was yesterday’s ISM slowdown from an already slowing 55.5 in DEC to 53.5 in JAN
  3. And so would be a bad jobs report on Friday…

 

But you already know that since the flexible and prepared player knows this USD correlation matrix is dominating:

 

  1. Inverse correlation between USD and the CRB Index (19 commodities) on a 90-day duration is -0.97
  2. Inverse correlation between USD and Oil on a 90-day duration is -0.95

 

In other words, if you got the rate of change in the USD right, you’ve gotten both the commodities and Oil crash right. Oh, and you played the counter-TREND reversal beautifully too!

 

Seriously. Getting that right is not that easy.

 

But not being Consensus Macro is easier than thinking it’s “smart.” Here’s where the “smart” hedge fund futures and options bets were (non-commercial CFTC net futures/options positioning) going into yesterday’s counter-TREND macro move:

 

  1. Peak multi-year net LONG position in US Dollars of +70,456 contracts (vs. the 1yr avg of +24,739)
  2. Peak multi-year net SHORT position in the Euro of -177,296 contracts (vs. the 1yr avg of -83,603)
  3. Net SHORT the Russell 2000 at its peak net short position of the year (-30,174 net short contracts)

 

That’s right, after all of these things have worked, big time, for 6 months – all of the “smart” money has crowded into them.

 

Sure, there was a net LONG position of +324,181 in Crude Oil going into yesterday’s rip, but don’t forget that Wall Street was been levered long Oil the entire way down too (the 1yr avg net LONG position in Crude is +366,487 contracts!).

 

“So”, don’t constipate yourself with consensus. Motivate yourself to open your mind and move aggressively when the big things moving macro markets move. That sure beats counting your moneys. “There’ll be time enough for countin’, then the dealing’s done.”

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.64-1.78%

SPX 1

VIX 18.25-21.92
USD 93.41-95.82
WTI Oil 42.84-51.31
Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Idea Generation Game - 02.03.15 chart


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 80.65%
  • SHORT SIGNALS 78.63%
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