Yesterday the Hedgeye Macro Team, led by CEO Keith McCullough, hosted its quarterly Macro Themes conference call in which it detailed the THREE MOST IMPORTANT MACRO TRENDS it has identified for 4Q15 and the associated investment implications.
We encourage you to check out the Video Replay (below); the Audio Replay and Presentation Materials can be accessed via the links underneath.
For the audio replay click here.
To access the presentation materials click here.
Q4 2015 MACRO THEMES OVERVIEW:
- Hedgeye Macro
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.
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.
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:
There are, however, places to “hide”:
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:
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:
Moreover, there are a couple of signals within TACRM that support waiting for confirmation here as well:
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,
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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.
"...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."
Takeaway: The labor market just completed its 19th month of sub-330k claims. History suggests we're getting closer to recession.
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.
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.
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%
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.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT