Stock Report: Utilities Select Sector SPDR (XLU)

Takeaway: We added XLU to Investing Ideas on the long side on 1/08.

Stock Report: Utilities Select Sector SPDR (XLU) - HE XLU table 1 11 16

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:

Volatility

+ Illiquidity

+ Too many hedge funds chasing performance...

= #Pain

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.    

ONE-YEAR TRAILING CHART

Stock Report: Utilities Select Sector SPDR (XLU) - HE XLU chart 1 11 16