THE HEDGEYE EDGE
For new subscribers unfamiliar with our macro team's process, we have a battle-tested approach on which asset classes outperform beta given our proprietary view on both growth and inflation. Our loudest call right now remains positioning for #SlowerForLonger (growth) as the steady stream of #SuperLateCycle economic data continues to manifest itself.
That’s our edge – an empirically-tested model for front-running the second derivative of growth, inflation, and policy. Once we know whether or not growth and inflation are accelerating or decelerating, we have a back-tested, tactical strategy for which asset classes outperform in a given environment.
Make no mistake. Our #SlowerForLonger call still fits our team's macro view. As a consequence, we are sticking with #LowerForLonger on interest rates and higher Utilities (XLU) multiples.
INTERMEDIATE TERM (TREND)
Factor exposure is very important to us, especially when volatility is in a bullish TREND set-up and small cap, illiquid stocks continue to underperform. Here's another way to look at it:
+ Too many hedge funds chasing performance...
Unlike the holiday season squeeze in everything we don’t like, continuing to short small cap, volatile stocks and buying less volatile utilities has been an alpha-generating strategy so far in 2016:
- High-beta stocks lost another -8.9% last week (-17.6% in the last 6 months)
- Small cap stocks lost another -6.9% last week (-17.3% in the last 6 months)
LONG TERM (TAIL)
To be clear, we don’t expect our non-consensus #SuperLateCycle and #SlowerForLonger call to end without a recession. While the exact timing of when a recession will ultimately commence is always difficult to nail-down, we are arguably already in an industrial recession (cyclicals peaked in rate-of-change terms in late 2014), as late-cycle things like employment and corporate profits peak ~3-9 months after that.
The bottom line here? We continue to expect utilities to outperform the broader market given this current environment.