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THE HEDGEYE MACRO PLAYBOOK

Takeaway: In today's Macro Playbook, we review and reiterate our bullish bias on housing and the homebuilders. Many investors remain skeptical.

THEMATIC INVESTMENT CONCLUSIONS

Long Ideas/Overweight Recommendations

  1. Consumer Staples Select Sector SPDR Fund (XLP)
  2. PowerShares DB U.S. Dollar Index Bullish Fund (UUP)
  3. SPDR Gold Shares (GLD)
  4. iShares 20+ Year Treasury Bond ETF (TLT)
  5. iShares U.S. Home Construction ETF (ITB)
  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. Industrial Select Sector SPDR Fund (XLI)
  4. SPDR S&P Regional Banking ETF (KRE)
  1. iPath S&P GSCI Crude Oil Total Return ETN (OIL)
  1. SHORT BENCH: SPDR Oil & Gas Exploration & Production ETF (XOP), CurrencyShares Euro Trust (FXE), WisdomTree Emerging Currency Fund (CEW)

 

QUANT SIGNALS & RESEARCH CONTEXT

Housing #Working: Among the most staunch of intellectual pushback against our current macro themes is our team’s bullish view on U.S. housing and homebuilder stocks. We definitely understand the nature of the resistance given that we continue to contend that the U.S. economy is in the early innings of a late-cycle slowdown – which effectively means we believe the topping process has begun for all things late-cycle (i.e. employment, inflation, earnings, manufacturing and CapEx).

 

But how can we be bullish on housing if we think the labor market is cresting?

 

The easy answer is that the housing market and homebuilder stocks both sucked last year when employment growth ripped to the upside. The more nuanced answer is as we laid out in the 1/16 edition of the Macro Playbook:

 

“[Our bullish view on housing] is threefold: 1) macroprudential regulation is being unwound, at the margins, which should perpetuate a positive inflection in mortgage demand growth; 2) demand growth leads home prices by ~1yr and demand growth troughed in early 2014, which implies home price appreciation is poised to positively inflect [soon]; and 3) the comparative base effect for home price appreciation – which carries a +0.90 correlation to housing equities since 2008 – gets incrementally supportive throughout 2015. Lower interest rates are a nice kicker as well as it relates to stimulating incremental demand. The 30yr fixed rate mortgage is now 3.8%; it was 4.42% one year ago. Many headwinds still exist in the U.S. housing market (e.g. low household formation, student debt bubble, etc.), but more [factors] are shifting into the tailwind category, at the margins.”

 

As Josh Steiner and Christian Drake highlighted in a note yesterday:

 

“CoreLogic HPI data for December released this morning showed home prices growing +5.0% YoY – a modest sequential acceleration relative to the +4.9% growth reported for November. Price trends in the Ex-Distressed series were moderately better, accelerating to +4.9% YoY from +4.6% last month… Net-net-net, however, the conclusion is largely unchanged. The 2nd derivative trend remains one of stabilization even as we traverse the hardest 1Y and 2Y comps into the February peak.  Stable-to-improving home price growth stands in stark contrast to the marked deceleration in HPI (& significant Housing underperformance) that characterized the February-Sept period last year and should support the complex alongside improving demand trends.”

 

THE HEDGEYE MACRO PLAYBOOK - Corelogic HPI YoY

 

Looking to our Hedgeye Housing Compendium – which aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume – it’s clear to see that demand trends have inflected materially from last year’s prolonged trend of deceleration. Specifically, Mortgage Applications, Existing Home Sales and New Home Sales are all accelerating on both a sequential and trending basis. To top that off, both Single-Family Starts and Single-Family Permits are accelerating on a sequential and trending basis as well.

 

THE HEDGEYE MACRO PLAYBOOK - Compendium 020415

 

Generally speaking, the general hue of green across the table is in stark contrast to the sea of red we saw into the mid-October lows on the ITB ETF (from 10/16):

 

THE HEDGEYE MACRO PLAYBOOK - 2 4 2015 7 46 49 AM

 

Since our 12/17 conference call on housing in which we outlined our bullish thesis, the ITB ETF has gained +4.43%, besting the performance of the SPY ETF by 292bps.

 

All told, we anticipate the recent outperformance of the homebuilders to continue over the intermediate term. Investors got a great opportunity to buy the homebuilders in mid-to-late January. Since we’re not so sure they’ll get a better chance than that, that effectively increases the propensity for eventual “panic buying” of this sector exposure by those investors that missed the move off the lows.

 

***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 (2/3)

 

#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.

 

CoreLogic HPI | Scads of Revisions, Same Conclusion (2/3)

 

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.                


Inverse Correlations

Client Talking Points

USD

The USD had its 3-day down move post the USA Q4 GDP slowing/miss (then ISM miss), and finally signaled immediate-term TRADE oversold into yesterday’s close as the EUR/USD tapped the top-end of our $1.11-1.14 risk range (and failed there) – you can simplify a lot of what happened out there in the last 3 trading days with a counter-TREND move in Down Dollar. 

COMMODITIES

The CRB Index (19 Commodities) went from multi-year lows of 213 on Thursday’s close to bottoming on the U.S. GDP print Friday morning, then ramping +6.6% in a straight line from there. Unless you think the USD keeps falling (and Euro breaks out from $1.14), you sell CRB and Oil, and you buy Gold.

FINANCIALS

On big U.S. equity beta chases in 2015, our favorite sector to lie out on the short side when we’re at the top-end of the risk range remains the Financials (XLF). That’s mainly because we think long-term rates continue to make lower-lows. On a bad jobs print Friday, we can get you UST 10YR Yield of 1.61%, in a hurry.

Asset Allocation

CASH 52% US EQUITIES 2%
INTL EQUITIES 4% COMMODITIES 3%
FIXED INCOME 31% INTL CURRENCIES 8%

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

$ZMH unit pricing getting worse in the US, and that negative price trend following Medicare spending trend

@HedgeyeHC

QUOTE OF THE DAY

The color of springtime is in the flowers; the color of winter is in the imagination.

-Terri Guillemets

STAT OF THE DAY

The median income for men with college degrees in Silicon Valley is 61% higher than the median income for college-educated women, a gap of $34,233. The comparable gender wage gap for the country as a whole is 48%.


CHART OF THE DAY: Patience + Time (U.S. Dollar Correlations)

CHART OF THE DAY: Patience + Time (U.S. Dollar Correlations) - 02.04.15 chart

 

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

 

To review this most recent 3-day counter-TREND move in macro markets:

 

  1. It’s all about the Dollar
  2. Reversing an epic 6 month #StrongDollar move started with a bad US GDP print on Friday
  3. Down Dollar’s counter-TREND move picked up momentum when the ISM # slowed on Monday
  4. By Tuesday, the EUR/USD was headed to the top-end of its $1.11-1.14 risk range
  5. USD had one of its biggest DOWN days in a year (yesterday)
  6. CRB Index had one of its biggest UP days in a year, closing +3.2%

 


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Warrior Tape!

“The two most powerful warriors are patience and time.”

-Tolstoy

 

I love that quote. When I think about risk managing my firm, the Global Macro tape, and what I need to improve upon – as I get older, I usually come back to patience and time.

 

Can I maintain opposing thoughts, across multiple durations, and still operate objectively? Can I help both my team and yours understand the difference between an immediate-term TRADE risk and an intermediate-term TREND?

 

To me, the words patience and time don’t have to imply “long-term investor.” To be a long-term active risk manager (someone please market their fund as doing so!) you have to be patient so that, sometimes, you can act quickly.

 

Warrior Tape! - hrg

 

Back to the Global Macro Grind

 

Since centrally planned markets move quickly, why wouldn’t you, sometimes, risk manage quickly? As I’ve been sitting here this morning the S&P futures have gone from down 2 to down 9, to down 2 (on a Chinese rate cut), to down 6 twenty minutes later.

 

Yeah, that’s about as free-market as the Nikkei being jammed +2% into the bell on a “rumor that the BOJ is going to add another dovish member.” Lol! Seriously, like Japan hasn’t been dovish for 2 decades – they are printing 90 TRILLION Yens a year!

 

To be a warrior of this actively managed tape, in addition to patience and time, you have to have a lot of weapons at your disposal. One of the biggest ones is historical context. Another is keeping yourself together, mentally.

 

If you have neither context nor emotional control, you will get wrecked.

 

To review this most recent 3-day counter-TREND move in macro markets:

 

  1. It’s all about the Dollar
  2. Reversing an epic 6 month #StrongDollar move started with a bad US GDP print on Friday
  3. Down Dollar’s counter-TREND move picked up momentum when the ISM # slowed on Monday
  4. By Tuesday, the EUR/USD was headed to the top-end of its $1.11-1.14 risk range
  5. USD had one of its biggest DOWN days in a year (yesterday)
  6. CRB Index had one of its biggest UP days in a year, closing +3.2%

 

Yeah, Oil ramped. I get it. If you knew what a Down Dollar move would do to both Oil and the Commodities complex, you should have absolutely got that right too. To remind you where the trending probabilities were heading into this 3-day move:

 

  1. USD 3-month inverse correlation to CRB Index = -0.91
  2. USD 3-month inverse correlation to Crude Oil = -0.95
  3. USD 3-month inverse correlation to SP500 = -0.29

 

Sure, it should have been harder to convince yourself that the SP500 could have a big up move on a Down Dollar move – but it really wasn’t that big – certainly not on an absolute or relative basis to the move in Commodities and their linked stock sectors:

 

  1. From the Friday closing low of 1995, SP500 = +2.7%
  2. Whereas the CRB Index ramped +6.6% from its low of last week
  3. And Oil & Gas Stocks (XOP) ramped +10.4% in 3 trading days

 

I know, as long as you bought Greek stocks alongside everything that has been crashing in Commodities and their linked US equity sectors for the last 6 months, you absolutely crushed it yesterday.

 

I am not saying this is easy. I am simply reminding you how the next crisis looks – because you are already in it. It’s called a market volatility crisis perpetuated by central planners who move into panic mode in a final effort to “smooth” the tape.

 

Volatility crisis?

 

Yes, do you know what Oil Volatility (OVX index) did in the midst of crude going from $43 to $53? It went up! And the implied volatility for the SP500 on my intermediate-term TREND duration did not change.

 

No, I do not profess to know how to call this, play by play, with everyone of these countries randomly coming out with made for Bloomberg ad rev headlines on what they are going to try to do to markets next…

 

But my longest term risk management conviction remains that this epic central planning experiment of markets will not end well. It will end the way that it is already ending – with confusion and volatility. Have patience with that.

 

Our immediate-term Global Macro Risk Ranges are now (12 macro ranges with TREND signal in brackets like this are in our Daily Trading Range product):

 

UST 10yr Yield 1.61-1.82% (bearish)
SPX 1 (neutral)

Nikkei 179 (bullish)

Greece (Athens Index) 674-849 (bearish)

VIX 16.06-21.87 (bullish)

USD 93.45-94.84 (bullish)

EUR/USD 1.11-1.14 (bearish)
YEN 116.03-118.34 (bearish)
WTI Oil 42.35-52.79 (bearish)
Natural Gas 2.60-2.81 (bearish)
Gold 1 (bullish)
Copper 2.42-2.59 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Warrior Tape! - 02.04.15 chart


February 4, 2015

February 4, 2015 - Slide1

 

BULLISH TRENDS

February 4, 2015 - Slide2

February 4, 2015 - Slide3

February 4, 2015 - Slide4

February 4, 2015 - Slide5

 

 

BEARISH TRENDS

February 4, 2015 - Slide6

February 4, 2015 - Slide7

February 4, 2015 - Slide8

February 4, 2015 - Slide9

February 4, 2015 - Slide10

February 4, 2015 - Slide11
February 4, 2015 - Slide12


History's People

This note was originally published at 8am on January 21, 2015 for Hedgeye subscribers.

“History isn’t really about events – it’s the people who really matter.”

-Glenn Beck

 

That’s from the intro of the latest US #history book I’ve been grinding through, Dreamers And Deceivers by Glenn Beck. And while I’m sure you have your own opinions about Beck, I personally think he’s a great storyteller.

 

No, Beck isn’t my political idol (here’s a shocker - I don’t have one!). Neither is President Obama. While sometimes fictional, both of these guys tell stories in a way that makes us feel something. That’s what gives birth to a healthy debate about the truth.

 

Ostensibly, in a free-market democracy it is The People who really matter. Do they believe in this Marxist #ClassWarfare argument of the “rich” vs. the “middle class”? Or does that insult them? I guess after last night’s State of The Union storytelling we’ll see…

 

Back to the Global Macro Grind

 

If you listen to just about anyone who loves Obama’s economic policies, they’ll tell you (as he trumpeted last night) that the “economy is back! growing 5%”. That’s obviously fiction, in year-over-year growth rate terms.

 

When someone throws that 5% number at you, they either A) don’t get that a quarter-over-quarter SAAR reading doesn’t equate to a year-over-year growth rate or B) are trying to obfuscate the number because the uninformed wouldn’t get it anyway.

 

Here’s the last 4 quarters of US GDP growth, on a year-over-year growth rate basis:

 

  1. Q413 = +3.1%
  2. Q114 = +1.9%
  3. Q214 = +2.6%
  4. Q314 = +2.7%

 

And since our macro model (GIP - Growth/Inflation/Policy Model that, using Bayesian Inference, has done as good a job as any research firm in predicting the rate of change in both growth and inflation for the last few years) was:

 

A)     Bullish on the y/y rate of change in US #GrowthAccelerating for all of 2013 until the growth rate peaked in Q413

B)      Bearish on the y/y rate of change in US growth starting at the beginning of 2014, as Q114 slowed…

 

I don’t have to make mediocre apologies for getting the rate of change in long-term bond yields right (bullish on #RatesRising in 2013, bearish on rates surprising to the downside in 2014) either.

 

Instead, being true to evolving the macro debate on Wall St., what I need to do after the #SOTU2015 speech is remind you that:

 

  1. The bond market (and economic data for December) signaled that the y/y US GDP growth rate slowed again in Q414
  2. Q414 US GDP growth will be reported much lower than “5% growth” within the coming weeks
  3. The annualized (year-over-year) US GDP growth rate for 2014 will be closer 2% than 4-5%

 

Obama won’t revise his storytelling about economic growth, after that. But #history will.

 

As you know, you can make a ton of money on the long side of asset prices tied to both A) Policies to Inflate (not to be confused with real economic growth – see 2011 for details) and B) #GrowthSlowing (buy Long Duration Bonds!). #TLT

 

What’s much more damning to asset prices than the rate of change in growth slowing is the rate of change in inflation #crashing. That’s mainly because asset #bubbles that were perpetuated by easy money Policies to Inflate get crushed by #deflation.

 

In hindsight, the #deflation risks to certain asset prices have been crystal clear:

 

  1. Commodities (CRB Commodities Index = 219, new lows, -30% since June 2014)
  2. Debt – and I mean high yield and junk bonds tied to cash flow streams that have implied inflation expectations

 

That’s why big debtor nations (and the companies who thrive on leverage to inflation in selling prices) try to avoid #deflation like the bubonic plague. #Deflation hammers debtors.

 

Japan (BOJ) and Europe (ECB) either convince the world that they can create inflation again – or they do not. After cutting his “inflation target” in ½ last night, the BOJ’s Kuroda looks about as confident about inflation as a chart of West Texas Crude Oil.

 

When this epic and unprecedented central planning experiment ends, it will be the people who signed off on it who are held responsible, not the politically conflicted speech events themselves.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.74-1.89%

SPX 1987-2036

Yen 116.12-120.23

Oil (WTI) 45.02-47.66
Gold 1242-1299

Copper 2.48-2.61

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

History's People - Chart of the Day


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 80.64%
  • SHORT SIGNALS 78.61%
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