prev

Risk Managing the Shift to #Quad3 – Especially in Energy

Conclusion: One mother of a short-squeeze does not a trend make, but both our fundamental research output and quantitative risk management signals suggest overweighting energy into/through year-end is the most appropriate debate investors should be having right now.

 

Earlier today on our Q4 2015 Macro Themes presentation, Keith reiterated that we are firmly in “do nothing” mode with respect to energy. In money management speak, that equates to us having a neutral exposure to the sector vs. the benchmark (long-only) or a net exposure of zero (hedge fund).

 

As the originators of the #Quad4, #GlobalDeflation view that helped clients position for the [subsequent] crashes in energy, commodities and inflation expectations, globally, this shift to neutral is extremely noteworthy – as is the fact that the net exposure to commodities in our model asset allocation is at the highest level since the June lower-high in global reflation expectations.

 

Since most investors are not positioned for energy to lead the market higher, we thought we’d offer our detailed thoughts on this developing risk. Specifically, at 7.3% of float, energy is the most heavily shorted sector in the S&P 500. That ratio is 297bps above the aggregate market and the next closest sector, consumer discretionary, is a distant -90bps behind. Indeed, investors are still very bearish on energy.

 

Risk Managing the Shift to #Quad3 – Especially in Energy - Short Interest as a   of Float

 

Why has energy lead the market higher over the past month (XLE +13.2% WoW and +7.1% MoM vs. +4.7% and +2.2% WoW and MoM, respectively, for the S&P 500)? Because of the ongoing shift to #Quad3 – economic growth slowing as reported inflation readings accelerate – and the dovish response we have gotten and may continue to receive from the Fed in the ensuing months.

 

Risk Managing the Shift to #Quad3 – Especially in Energy - UNITED STATES

 

Risk Managing the Shift to #Quad3 – Especially in Energy - WORLD

 

We discussed this move to #Quad3 – both domestically and globally – in great detail during the aforementioned presentation. You may use the following hyperlinks to the extent you’d like to view the video replay or download the slide deck:

 

 

What does #Quad3 entail for equity investors? Historically speaking, #Quad3 is not a great place to be in that the stock market tends to exhibit flat-to-down absolute performance, as well as experience multiple compression:

 

Risk Managing the Shift to #Quad3 – Especially in Energy - SPX

 

Risk Managing the Shift to #Quad3 – Especially in Energy - S P 500 Multiple

 

There are, however, places to “hide”:

 

  1. Utes
  2. Energy
  3. REITS

 

Risk Managing the Shift to #Quad3 – Especially in Energy - Utilities

 

Risk Managing the Shift to #Quad3 – Especially in Energy - Energy

 

Risk Managing the Shift to #Quad3 – Especially in Energy - FTSE NAREIT Index

 

For what it’s worth, our Tactical Asset Class Rotation Model (TACRM) is indeed confirming the move to move to #Quad3 across a variety of factor exposures – just not yet at the primary asset class level given that such regime changes take more time to occur:

 

  • 7 of the top 10 factor exposures signaling the highest degree of positive, risk-adjusted VWAP momentum across multiple durations throughout the global macro universe of investable assets are tethered to rising inflation expectations: U.S. E&Ps (XOP), U.S. REITS (VNQ), Global E&Ps (FILL), Gold Miners (GDX), Silver (SLV), Palladium (PALL) and Sugar (SGG). [slide 16]
  • All seven are signaling investable bearish-to-bullish reversals as well. [slide 16]
  • Within the “U.S. Equities” asset class (as defined by TACRM), 3 of the top 4 factor exposures signaling the highest degree of positive, risk-adjusted VWAP momentum across multiple durations are tethered to rising inflation expectations: Large-Cap Energy Producers & Servicers (XLE), E&Ps (XOP) and Gold Miners (GDX). [slide 17]
  • Within the “International Equities” asset class, the factor exposure signaling the highest degree of positive, risk-adjusted VWAP momentum across multiple durations is tethered to rising inflation expectations: Global E&Ps (FILL). [slide 18]
  • Within the “Emerging Market Equities” asset class, the factor exposure signaling the 2nd highest degree of positive, risk-adjusted VWAP momentum across multiple durations is tethered to rising inflation expectations: the economically embattled Russia (RSX), of all places! [slide 19]
  • Within the “Domestic Fixed Income, Credit & Equity Income” asset class (as defined by TACRM), the factor exposure signaling the highest degree of positive, risk-adjusted VWAP momentum across multiple durations is tethered to rising inflation expectations: REITS (VNQ). [slide 20]

 

When TACRM speaks, investors would do well to listen. Note the timestamps on its latest top-down signals, as well as the historical backtest data, which can be found on slides 7-13 of the presentation: http://docs3.hedgeye.com/macroria/TACRM_10082015.pdf.

 

All told, the material bounce in energy related assets appears to be a classic #Quad3 style factor rotation – which means the probability that it continues is likely much higher than the probability that it does not.

 

Just don’t chase energy from these prices, however, given that the XLE is both immediate-term TRADE overbought and requires additional confirmation from the perspective of our intermediate-term TREND signal:

 

Risk Managing the Shift to #Quad3 – Especially in Energy - XLE

 

Moreover, there are a couple of signals within TACRM that support waiting for confirmation here as well:

 

  1. The underlying commodity itself (OIL, USO) has not yet signaled a bearish-to-bullish breakout. [slide 22]
  2. The U.S. Dollar (UUP) has not yet singled a bullish-to-bearish breakdown. [slide 21]

 

That said, if the aforementioned risk management thresholds are met, investors would do well to get behind the rally in energy (and other #Quad3 style factor exposures) because that is likely where the preponderance of alpha will be generated into/through year-end.

 

Best of luck out there,

 

DD

 

Darius Dale

Director


JNK: Adding JUNK BONDS to Investing Ideas (Short Side)

Takeaway: We are adding Junk Bonds (short side) today.

Please be advised that we are adding Junk Bonds (JNK) to the SHORT SIDE on Investing Ideas today.

 

Our macro team will send a full report to subscribers.

 

In the meantime, here's what our CEO Keith McCullough had to say earlier today:

 

While it's fun for people who have been bullish on both US growth and the cycle being "mid" to tell themselves that Oil, Energy Stocks, Junk Bonds, etc. bouncing are "demand" signals, it's been more fun to fade them.

 

...If we continue to be right on the cycle, the lows for the Junk Bond market are not in.

 JNK: Adding JUNK BONDS to Investing Ideas (Short Side) - z jkkkk


Cartoon of the Day: High Noon?

Cartoon of the Day: High Noon? - late cycle cartoon 10.08.2015

"...If the new bull market thesis is getting back to break-even for 2015, that’s cool. I get it," Hedgeye CEO Keith McCullough wrote in today's Early Look. "Everyone who is in the business of being perma-long growth expectations needs to start somewhere. Sort of like this bear market – she’s just getting started."


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

INITIAL JOBLESS CLAIMS | 19 MONTHS ON THE FLOOR

Takeaway: The labor market just completed its 19th month of sub-330k claims. History suggests we're getting closer to recession.

INITIAL JOBLESS CLAIMS | 19 MONTHS ON THE FLOOR - Claims17

 

Initial claims were strong last week. The seasonally adjusted figure came in at 263k, well below the 330k Rubicon, -14k below the prior week prior to revision, and -8k below expectations. For context, the jobs market just completed its 19th month of strong, sub-330k claims, as the chart below shows. Importantly, as the chart below also shows, the last three cycles saw claims stay below 330k for 24, 45 and 31 months before the economy entered recession. The average duration of those three cycles was 33 months (max: 45, min: 24). That puts us 5 months from the min, 14 months from the average and 26 months from the max. 

 

INITIAL JOBLESS CLAIMS | 19 MONTHS ON THE FLOOR - Claims20

 

Indexed energy state claims in the chart below expanded in the week ending September 26 while the U.S. as a whole decreased. The spread between the two series increased to 18 from 16 in the prior week.

 

INITIAL JOBLESS CLAIMS | 19 MONTHS ON THE FLOOR - Claims18

 

The Data

Prior to revision, initial jobless claims fell 14k to 263k from 277k WoW, as the prior week's number was revised down by -1k to 276k.

 

The headline (unrevised) number shows claims were lower by 13k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -3k WoW to 267.5k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -11.0% lower YoY, which is a sequential improvement versus the previous week's YoY change of -8.3%

 

INITIAL JOBLESS CLAIMS | 19 MONTHS ON THE FLOOR - Claims2

 

INITIAL JOBLESS CLAIMS | 19 MONTHS ON THE FLOOR - Claims3

 

INITIAL JOBLESS CLAIMS | 19 MONTHS ON THE FLOOR - Claims4

 

INITIAL JOBLESS CLAIMS | 19 MONTHS ON THE FLOOR - Claims5

 

INITIAL JOBLESS CLAIMS | 19 MONTHS ON THE FLOOR - Claims6

 

INITIAL JOBLESS CLAIMS | 19 MONTHS ON THE FLOOR - Claims7

 

INITIAL JOBLESS CLAIMS | 19 MONTHS ON THE FLOOR - Claims8

 

INITIAL JOBLESS CLAIMS | 19 MONTHS ON THE FLOOR - Claims9

 

INITIAL JOBLESS CLAIMS | 19 MONTHS ON THE FLOOR - Claims10

 

INITIAL JOBLESS CLAIMS | 19 MONTHS ON THE FLOOR - Claims11

 

INITIAL JOBLESS CLAIMS | 19 MONTHS ON THE FLOOR - Claims19

 

Yield Spreads

The 2-10 spread rose 3 basis points WoW to 144 bps. 4Q15TD, the 2-10 spread is averaging 143 bps, which is lower by -11 bps relative to 3Q15.

 

INITIAL JOBLESS CLAIMS | 19 MONTHS ON THE FLOOR - Claims15

 

INITIAL JOBLESS CLAIMS | 19 MONTHS ON THE FLOOR - Claims16

 

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


LEISURE LETTER (10/8/2015) - AWAY, CCL, NCLH, UBER

TICKERS: AWAY, CCL, NCLH, UBER

EVENTS     

  • Oct 8: Hedgeye Macau call 2:30pm

COMPANY NEWS 

AWAY- HomeAway announced the acquisition of vacation rental startup Dwellable.  Terms of the deal were not disclosed, but CEO Kirby Winfield said it was a positive outcome for investors. Dwellable raised just $2 million in funding — a pittance compared to other heavily-funded competitors in the online vacation rental arena.   

ARTICLE HERE

 

CCL - Australia's P&O and Princess ships are set to be reshuffled to meet increased demand for local holidays at sea, Carnival Australia announced yesterday.  Princess Cruises' 2,000-passenger Dawn Princess will move to the P&O fleet in May 2017, while Golden Princess will remain in Australian waters throughout 2017 (instead of returning to Japan) alongside Sun Princess and Sea Princess.

ARTICLE HERE

 

NCLH -  Oceania Cruises will be offering 60 new itineraries across six continents for 2016/2017.  Never-before-sailed ports of call for the line include Burnie, Tasmania; Ensenada, Mexico; Port Moresby, Papua New Guinea; and Harvest Caye, Belize.  Sirena will debut in April and take on Mediterranean Itineraries before heading to the Caribbean and Pacific for the winter.

ARTICLE HERE

 

UBER - Uber is setting up shop in the Shanghai Experimental Free Trade Zone by incorporating a company called Shanghai Wubo Information Technology with registered capital of RMB2.1 billion (approx: $33 million).  The company also announced it would invest up to RMB6.3 billion (approx: $991 million) to maintain its long-term and sustained development in China and is now preparing to apply to become a fully-licensed car-hire platform. 

ARTICLE HERE

INDUSTRY NEWS    

Golden Week Update- In the first six days of the National Day golden week of holidays in the mainland, Macau had 938,197 visitors, the Macau Government Tourist Office says.  The office says mainlanders made up 85.2% of the visitors. 

The total number of visitors was 8% higher than in the equivalent period last year and the number of mainlanders visiting was 6.3% higher.

LEISURE LETTER (10/8/2015) - AWAY, CCL, NCLH, UBER - GW10 8 2015 5 52 56 AM

ARTICLE HERE

Takeaway: Month to date GGR is still down YoY  but we think the numbers will look much better than trend when we get them next week.

 

REGIONAL REVENUES (SEPT): 

  • Illinois SS GGR: -5.4% YoY
    • PENN SS GGR: +0.6% YoY
  • Ohio SS GGR: +5.3% YoY
    • PENN SS GGR: +10.0% YoY

Takeaway: IL was a bit of a disappointment but the other states have come in strong, as we expected. PENN crushed it in its most important state (Ohio) and held up better than most in IL. 


Retail Callouts (10/8): Chip Speaks on LULU, AMZN, ETSY

Takeaway: Chip opines on LULU - company needs a change of address. Amazon officially launches 'Handmade' vs ETSY.

LULU - Chip Speaks on LULU

(http://www.theglobeandmail.com/report-on-business/lululemon-founder-takes-responsibility-for-controversial-remarks/article26692505/)

 

This was probably the least controversial  and most candid public comment Chip has made in over 3 years.  His comments on former CEO Day, apology for fat shaming his customers on Bloomberg, and thoughts on the present state of the company  don't surprise us in the least. He wouldn't have stepped down from the Board in February or announced that he was selling the rest of his stake in LULU if he felt otherwise.

 

As far as his comments on UA are concerned. Yes, UA has a market cap 3x LULU today and three years ago UA was in LULU's rearview. But, that is the inherent problem with both Chip's vision for the company (he wanted to switch the brand identity from yoga to 'mindfulness') and it's current distribution/brand segmentation. To even compare the two, LULU would need to double down on its ability to flow product more accurately throughout a multi-channel distribution platform, while maintaining price integrity, and its premium brand status

 

Separating the lululemon brand from its Founder was a win for the board, there is still a lot of wood to chop in Vancouver. We think LULU needs a change of address (not literally). This is an extremely powerful brand in a solid, yet increasingly competitive, space. LULU needs to not only be a great brand, but a great company. Then and only then will it be a great stock. We think management is coasting on the power of the brand, by tweaking a legacy operating plan, blindly opening stores, and hoping that nothing else goes wrong. Hope, however, is not a profitable growth process.

 

AMZN, ETSY - Amazon Handmade, a competitor to ETSY, has been officially launched.  The concept connects makers of handcrafted goods with Amazon shoppers.  Select sellers have been using the platform for several weeks.

(http://www.nytimes.com/2015/10/08/business/amazon-challenges-etsy-with-strictly-handmade-marketplace.html)

 

National Retail Federation Forecasts Holiday Sales to Increase 3.7%, vs +4.1% Last Year

(https://nrf.com/media/press-releases/national-retail-federation-forecasts-holiday-sales-increase-37)

 

AMZN - Jet.com, which launched July 21, has decided to abandon its membership fee model in hopes of attracting a broader customer base.  The $50 annual fee was planned to be the profit center for the company while selling at ultra thin margins.

(http://recode.net/2015/10/07/jet-com-overhauls-business-model-kills-50-membership-fee-to-broaden-appeal/)

 

TJX - The TJX Companies Announced Ernie Herrman as CEO, current CEO Carol Meyrowitz to Become Executive Chairman

(http://investor.tjx.com/phoenix.zhtml?c=118215&p=irol-newsArticle&ID=2094950)

 

Uniqlo - Fast Retailing Warns of Slowing Profit, Sales Growth

(http://wwd.com/retail-news/mass-off-price/fast-retailing-warns-of-slowing-profit-sales-growth-10257877/

 

Gilt Groupe to lay off 47 staff members as part of a restructuring to be cash flow positive.

(http://wwd.com/business-news/human-resources/gilt-groupe-cut-jobs-profit-cash-flow-flash-sale-fashion-10257799/)

 

TLYS - Edmond Thomas appointed President, CEO, and Board Member replacing Daniel Griesemer.

(http://phx.corporate-ir.net/phoenix.zhtml?c=247315&p=irol-newsArticle&ID=2095160)

 

AMZN - Amazon Prime Now expands 1hr and 2hr delivery in London market.  London was the first international Prime Now city launched back in June.

(http://www.ecommercebytes.com/cab/abn/y15/m10/i07/s02)

 


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

next