THEMATIC INVESTMENT CONCLUSIONS
Long Ideas/Overweight Recommendations
- Utilities Select Sector SPDR Fund (XLU)
- iShares 20+ Year Treasury Bond ETF (TLT)
- SPDR Gold Shares (GLD)
- Consumer Staples Select Sector SPDR Fund (XLP)
- iShares U.S. Home Construction ETF (ITB)
- LONG BENCH: PowerShares DB U.S. Dollar Index Bullish Fund (UUP), Vanguard REIT ETF (VNQ), Vanguard Extended Duration Treasury ETF (EDV), Healthcare Select Sector SPDR Fund (XLV)
Short Ideas/Underweight Recommendations
- iPath S&P GSCI Crude Oil Total Return ETN (OIL)
- SPDR Barclays High Yield Bond ETF (JNK)
- SPDR S&P Regional Banking ETF (KRE)
- Industrial Select Sector SPDR Fund (XLI)
- iShares MSCI Emerging Markets ETF (EEM)
- SHORT BENCH: SPDR Oil & Gas Exploration & Production ETF (XOP), CurrencyShares Euro Trust (FXE), WisdomTree Emerging Currency Fund (CEW)
QUANT SIGNALS & RESEARCH CONTEXT
Revisiting Our #Quad414 Theme Because the January Jobs Report Told Us To: Obviously the JAN employment report was really good – not just relative to consensus expectations, but due to massive positive revisions in the NOV and DEC payrolls growth numbers and a +30bps bump in wage growth to +2.2% YoY (CLICK HERE for our full synopsis).
The headline Nonfarm Payrolls growth figure slowed to +257k MoM from an upwardly-revised +329k in DEC. One month does not a TREND make, however, and we all know payrolls growth north of +300k is generally unsustainable. A growth rate of +257k is solid (i.e. in the 87th percentile of all readings over the trailing 10yrs) and speaks volumes to the pace of economic growth that my ultimately be reported in Q1.
This we know: the Q1 GDP comp is very easy and growth in both aggregate nominal income and average real incomes are accelerating on both a sequential and trending basis.
This we also know: we haven’t received a lot of meaningful economic data for the first quarter yet, but of the data points we have received, all are showing either continued sequential and/or trending accelerations (consumer confidence, employment) OR inflection/stabilization from a trend of deceleration (Markit PMI, ISM PMI).
It’s still very much early innings as far reported Q1 data is concerned, but growth bulls have to like what they’ve seen thus far for the month of January. It’s been a while…
As far as the key risk we outlined in our #Quad414 theme is concerned: will one-day bearish TRADES in fixed income and bond-like equities start to TREND – assuming that Friday’s market reaction was no aberration?
We don’t know for sure but our Real-Time Alerts signals on Friday would suggest which answer we think is most probable from these prices:
- 2/6 @ 9:42am: Real-Time Alert: Macro Buy Signal: Munis (MUB)
- 2/6 @ 10:40am: Real-Time Alert: Steiner Sell Signal: Bank of America (BAC)
- 2/6 @ 3:24pm: Real-Time Alert: Macro Buy Signal: Utilities (XLU)
- 2/6 @ 3:29pm: Real-Time Alert: Macro Sell Signal: Long Bond Bears (TBT)
In the interest of remaining transparent and accountable, it’s worth noting that we positioned for a Treasury bond rally into the Jobs Report as well, so we’re wrong on that for a day:
- 2/5 @ 9:43am: Real-Time Alert: Macro Overbought Signal: US Dollar (UUP)
- 2/5 @ 10:00am: Real-Time Alert: Macro Buy Signal: Utilities (XLU)
- 2/5 @ 10:23am: Real-Time Alert: Steiner Sell Signal: Bank of America (BAC)
- 2/5 @ 3:48pm: Real-Time Alert: Macro Buy Signal: Long Term Bonds (EDV)
All told, to the extent our #Quad414 theme continues to play out as planned, it’s much harder for an investor to justify a buy-and-hold strategy in TLT, EDV, MUB, ZROZ, VNQ, XLU, XLP and XLV here. As such, we think investors should be actively managing interest rate risk on much shorter durations for at least the next ~6-8 weeks.
***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.
#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.
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.
Best of luck out there,
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.