1q14 macro themes - hedgeyedocs.hedgeye.com/1q14macrothemes_01.09.14.pdf · 1/9/2014 · hedgeye...

MACRO TEAM

1Q14 MACRO THEMES

THURSDAY JANUARY 9, 2014

HEDGEYE 2

DISCLAIMER Hedgeye Risk Management is a registered investment advisor, registered with the State of Connecticut. Hedgeye Risk Management is not a broker dealer and does not make investment recommendations. This research does not constitute an offer to sell, or a solicitation of an offer to buy any security. This research is presented without regard to individual investment preferences or risk parameters; it is general information and does not constitute specific investment advice. This presentation is based on information from sources believed to be reliable. Hedgeye Risk Management is not responsible for errors, inaccuracies or omissions of information. The opinions and conclusions contained in this report are those of Hedgeye Risk Management, and are intended solely for the use of Hedgeye Risk Management’s clients and subscribers. In reaching these opinions and conclusions, Hedgeye Risk Management and its employees have relied upon research conducted by Hedgeye Risk Management’s employees, which is based upon sources considered credible and reliable within the industry. Hedgeye Risk Management is not responsible for the validity or authenticity of the information upon which it has relied. TERMS OF USE This report is intended solely for the use of its recipient. Re-distribution or republication of this report and its contents are prohibited. For more detail please refer to the appropriate sections of the Hedgeye Services Agreement and the Terms of Use at www.hedgeye.com

LEGAL

HEDGEYE 3

OLD FORMAT = $800/SQUARE FT NEW FORMAT = $1,300 SQ FT

PROCESS SLIDE #1

DIFFERENTIATED FROM THE HERD Macroeconomics and Global Macro Risk Management are two very different fields. We specialize in the latter.

WE FOCUS ON THE SLOPES Everything that matters in Global Macro occurs on the margin.

HEDGEYE 4


PROCESS SLIDE #2

OUR FUNDAMENTAL PROCESS If you get the slopes of both growth and inflation right, you’ll tend to get a lot of other things right – particularly in your P&L.

HISTORY MATTERS Analyzing intermediate-term trends within the context of long-term economic and political cycles helps us consistently front-run major asset class turns.

HEDGEYE 5

PROCESS SLIDE #3

Multi-factor: Price, Volume and Volatility Multi-duration: TRADE (3 weeks or less), TREND (3 months or more) and TAIL (3 years or less)

ALL BACKSTOPPED BY A PROVEN QUANTITATIVE OVERLAY

DATA SOURCE: BLOOMBERG

1,400

1,450

1,500

1,550

1,600

1,650

1,700

1,750

1,800

1,850

1,900

HEDGEYE QUANTITATIVE SETUP: US EQUITIES S&P 500 TREND = 1763 TAIL = 1660

#INFLATIONACCELERATING

HEDGEYE 7

ARE COMMODITIES BASING?


250

275

300

325

350

375

HEDGEYE QUANTITATIVE SETUP: COMMODITY COMPLEX CRB INDEX TREND = 281 TAIL = 287

HEDGEYE 8

COMMODITY BASE EFFECT TAILWIND


-2%

-1%

0%

1%

2%

3%

4%

5%

6%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

CPI READINGS SHOULD COME IN ~100+ BASIS POINTS HIGHER GLOBALLY OVER THE INTERMEDIATE TERM

Thomson/Reuters CRB Commodities Index, Monthly Average YoY Compounded at +1% per Month From Here

Compounded at +3% per Month From Here Median YoY CPI Reading of US, Eurozone and China (rhs)

Forecasts for the CRB Index assume no change to current prices unless otherwise noted.

It’s worth noting that 0% YoY for the CRB Index corresponds perfectly with +2% for our CPI sample and +2% is a common goal for “Price Stability” among central banks.

HEDGEYE 9

PLUS, COMPS GET EASIER GLOBALLY


0.1x

-0.5x -0.5x

-1.4x

-1.7x -1.9x

-1.8x

-0.7x

0.1x

0.6x

0.8x

1.1x 1.0x 1.0x

0.9x

0.6x

0.2x

-0.4x

-1.0x -1.1x

-2.5x

-2.0x

-1.5x

-1.0x

-0.5x

0.0x

0.5x

1.0x

1.5x

1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14

Z-SCORE (TRAILING 3Y) OF SELECTED COMPARATIVE BASE (2Y COMP) FOR THE RESPECTIVE CPI REPORTING PERIOD

WORLD

Data Source: Bloomberg

Recall that this period was the post-crisis peak in reported inflation globally.

HEDGEYE 10

THE ACCELERATION HAS COMMENCED


HEDGEYE 11

CRUDE OIL IS A WILD CARD


95

97

99

101

103

105

107

109

111

113

115

HEDGEYE QUANTITATIVE SETUP: CRUDE OIL BRENT CRUDE OIL ($/bbl.) TREND = 108.89 TAIL = 108.86

HEDGEYE 12

THE DOLLAR IS AMERICA'S PROBLEM


78

79

80

81

82

83

84

85

HEDGEYE QUANTITATIVE SETUP: US DOLLAR INDEX US DOLLAR INDEX TREND = 80.92 TAIL = 81.12

HEDGEYE 13

$USD DRIVES ENERGY/FOOD PRICES


y = -1.0818x2 - 0.4305x + 0.0445 R² = 0.3714

-15%

-10%

-5%

0%

5%

10%

15%

20%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Food

& E

nerg

y In

flati

on, Y

oY %

DXY (U.S. Dollar), YoY %

U.S. DOLLAR VS. FOOD & ENERGY INFLATION

Down Dollar almost always results in commodity inflation

DOLLAR DOWN DOLLAR UP

INFL

ATIO

N

UP

INFL

ATIO

N

DOW

N

HEDGEYE 14

& HEADLINE CPI TRACKS NON-CORE


y = 0.227x + 5E-05 R² = 0.9413

-3%

-2%

-1%

0%

1%

2%

3%

-15%

-10%

-5%

0%

5%

10%

Hea

dlin

e CP

I, Se

quen

tial

Cha

nge

in Y

oY %

Food & Energy Inflation, Sequential Change in YoY %

HEADLINE CPI TRACKS THE SLOPE OF FOOD & ENERGY INFLATION

HEDGEYE 15

SEASONALITY IN EXPECTATIONS


0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

1.50

1.60

1.70

1.80

1.90

2.00

2.10

2.20

2.30

2.40

2.50

SEASONALITY HAS DRIVEN INFLATION EXPECTATIONS IN RECENT YEARS

5Y Breakeven (LH Axis) CPI, YoY % (RH Axis)

?

HEDGEYE 16

INFLATIONARY PRESSURES BUILDING


65

70

75

80

85

90

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

CPI COMPS EASE WHILE CAPACITY UTILIZATION, SERVICES INFLATION, WAGE AND CREDIT GROWTH ARE BEGINNING TO BREAKOUT

Household Debt, YoY % CPI, 2Y Ave Private Sector Salaries & Wages, 2Y Ave CPI: Services less Energy, 2Y Ave Capacity Utilization, 2Y Ave (RH Axis)

HEDGEYE 17

NOT JUST A U.S. PROBLEM


-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50% Ja

n-04

May

-04

Sep-

04

Jan-

05

May

-05

Sep-

05

Jan-

06

May

-06

Sep-

06

Jan-

07

May

-07

Sep-

07

Jan-

08

May

-08

Sep-

08

Jan-

09

May

-09

Sep-

09

Jan-

10

May

-10

Sep-

10

Jan-

11

May

-11

Sep-

11

Jan-

12

May

-12

Sep-

12

Jan-

13

May

-13

Sep-

13

CRB Index, YoY % DXY, YoY %

THE DOLLAR DRIVES COMMODITY INFLATION GLOBALLY.

HEDGEYE 18

OVERWEIGHT TECH, ENERGY AND H/C


1.4% 1.7%

2.9%

2.2%

1.1%

3.7%

3.1%

6.5%

0.8%

-1.7%

1.0%

0.5% 0.6%

3.6%

0.2%

1.0% 0.9%

2.4%

0.1%

3.1%

1.2% 1.1%

1.7%

2.9%

0.6%

2.3% 2.0%

4.5%

0.5% 0.7%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

S&P 500 S&P 500 Consumer

Discretionary Index

S&P 500 Consumer

Staples Index

S&P 500 Energy Index

S&P 500 Financials

Index

S&P 500 Health Care

Index

S&P 500 Industrials

Index

S&P 500 Information Technology

Index

S&P 500 Materials Index

S&P 500 Utilities Index

AVERAGE PERFORMANCE OF SELECTED INDICES ACCORDING TO HEDGEYE MACRO GIP QUADRANT

Quad #2: Growth Accelerates as Inflation Accelerates Quad #3: Growth Slows as Inflation Accelerates Average

HEDGEYE 19

GROWTH STILL WORKS IF RATES DO


1.60

1.80

2.00

2.20

2.40

2.60

2.80

3.00

3.20

98

108

118

128

138

148

158

INTERMEDIATE-TERM PERFORMANCE OF SELECT STYLE FACTORS (TOP AND BOTTOM DECILES OF THE S&P 500 INDEX)

LOW Dividend Yield HIGH Long-term EPS Growth HIGH NTM Sales Growth US Treasury 10Y Yield (%)


HEDGEYE 20

SPREADS CAN STILL COMPRESS


1.64

1.16

0.00

1.00

2.00

3.00

4.00

5.00

6.00

CORPORATE SPREADS STILL HAVE SOME ROOM TO TIGHTEN

IG SPREAD (Corp BBB over 10Y Treasury Yield) Current LOW

#GROWTHDIVERGENCES

HEDGEYE 22

JAPAN AND GERMANY STANDING OUT


7.9

(1.0)

0.0

(0.3)

0.2

2.0

7.7

(1.2) (1.6)

0.1

0.7

1.3

7.5

-0.6

0.9 1.2

2.0 1.6

7.8

(0.4)

1.1

2.4 1.9 2.0

(4.0)

(2.0)

0.0

2.0

4.0

6.0

8.0

10.0

China (3Q13) Eurozone (3Q13) Germany (3Q13) Japan (3Q13) UK (3Q13) USA (3Q13)

REAL GDP (YOY % CHANGE) t₀-3Q t₀-2Q t₀-1Q Latest Print


HEDGEYE 23

EASY COMPS VS. HARD COMPS


-0.9x

0.8x

1.0x

0.7x

0.9x

1.2x

-1.2x

0.4x 0.4x

0.3x

0.5x

0.9x

-1.4x

0.1x 0.2x

-0.5x

0.4x

0.7x

-1.2x

-0.4x

-0.2x

-0.6x

0.4x 0.4x

-1.5x

-1.0x -0.9x

0.5x

0.2x

0.5x

-1.5x

-1.1x

-0.9x

0.9x

0.3x 0.3x

-2.0x

-1.5x

-1.0x

-0.5x

0.0x

0.5x

1.0x

1.5x

China Eurozone Germany Japan United Kingdom United States

Z-SCORE (TRAILING 3Y) OF SELECTED COMPARATIVE BASE (2Y COMP) FOR THE RESPECTIVE GDP REPORTING PERIOD

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14


HEDGEYE 24

EUROPE IN POLE POSITION


9.7

(1.6)

(0.3)

(1.9)

(1.0)

2.5

9.9

(0.9)

0.8

2.0

0.5

2.7

10.2

-0.4

1.7

5.2

1.3

3.3

10.0

0.2

3.5

5.0

3.2 3.2

(4.0)

(2.0)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

China (11/2013) Eurozone (10/2013) Germany (11/2013) Japan (11/2013) UK (10/2013) USA (11/2013)

INDUSTRIAL PRODUCTION (YOY % CHANGE) Trailing 12M Average Trailing 6M Average Trailing 3M Average Latest Print


HEDGEYE 25

PRE-TAX HIKE SPENDING IN JAPAN?


13.4

(0.9)

0.1 0.5

1.7

4.5

13.4

(0.2)

0.5

2.3 2.3

4.8

13.5

0.4 0.6

3.1

2.4

4.1

13.7

1.6 1.6

4.0

2.3

4.7

(2.0)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0


RETAIL SALES (YOY % CHANGE) Trailing 12M Average Trailing 6M Average Trailing 3M Average Latest Print


HEDGEYE 26

CHINA SLOWING WHERE IT MATTERS


50.8

49.6

50.6

51.8

53.5

53.9

51.0

51.4

52.1

53.3

56.7

56.3

51.3

51.9

52.9

54.8

57.3

56.9

51.0

52.7

54.3

55.2

57.3 57.0

49.0

50.0

51.0

52.0

53.0

54.0

55.0

56.0

57.0

58.0


MANUFACTURING PMI Trailing 12M Average Trailing 6M Average Trailing 3M Average Latest Print


HEDGEYE 27

SERVICE SECTORS SLOWING BROADLY


54.9

49.3

52.6

56.9

54.7 55.1

51.1

53.3

60.4

55.2 55.6

51.3

54.0

60.4

54.1

54.6

51.0

53.5

58.8

53.0

49.0

51.0

53.0

55.0

57.0

59.0

61.0

China (12/2013) Eurozone (12/2013) Germany (12/2013) Japan (N/A) UK (12/2013) USA (12/2013)

NON-MANUFACTURING PMI Trailing 12M Average Trailing 6M Average Trailing 3M Average Latest Print


HEDGEYE 28

GERMAN CONFIDENCE CLIMBING


101.3

(18.8)

4.8

43.3

(19.0)

73.3

98.9

(15.2)

12.0

43.0

(13.0)

77.6

100.5

-14.5

18.3

42.3

-12.0

74.2

98.9

(13.6)

23.3

41.3

(13.0)

78.1

(30.0)

(10.0)

10.0

30.0

50.0

70.0

90.0

110.0

China (NBS; 11/2013) Eurozone (European Commission; 12/2013)

Germany (GFK; 12/2013) Japan (ESRI; 11/2013) UK (GFK; 12/2013) USA (Conference Board; 12/2013)

BENCHMARK CONSUMER CONFIDENCE INDEX Trailing 12M Average Trailing 6M Average Trailing 3M Average Latest Print


HEDGEYE 29

WILL THE EUROZONE FOLLOW GERMANY'S LEAD?


123.0

(70.4)

106.8

0.0

39.0

92.0

121.1

(64.2)

108.0

5.0

52.0

93.3

121.5

-59.0

108.7

8.0

54.0

92.7

121.5

(54.4)

109.5

8.0

48.0

92.5

(75.0)

(55.0)

(35.0)

(15.0)

5.0

25.0

45.0

65.0

85.0

105.0

125.0

China (NBS; 9/2013) Eurozone (ZEW; 12/2013) Germany (IFO; 12/2013) Japan (Tankan; 12/2013) UK (Lloyds Bank; 12/2013)

USA (NFIB; 11/2013)

BENCHMARK BUSINESS CONFIDENCE INDEX Trailing 12M Average Trailing 6M Average Trailing 3M Average Latest Print


HEDGEYE 30

US: #2 OR #3? IT DEPENDS: Y/Y VS. Q/Q


HEDGEYE 31

CHINA: #GROWTHSTABILIZING


HEDGEYE 32

EUROZONE: #GROWTHACCELERATING


HEDGEYE 33

GERMANY: #GROWTHACCELERATING


HEDGEYE 34

JAPAN: RECOVERY LOSING STEAM?


HEDGEYE 35

UK: #GROWTHACCELERATING


#FLOWSHOW

HEDGEYE 37

3 TO 1 DEBT TO EQUITY


HEDGEYE 38

BOND ALLOCATIONS TO MEAN REVERT LOWER

DATA SOURCE: SIFMA; WILSHIRE 5000

0%

10%

20%

30%

40%

50%

60%

70%

80%

Ratio of Outstanding U.S. Bonds v. Outstanding U.S. Stocks

U.S. Stocks Market Cap/Market Cap of Stocks & Bonds

U.S. Bonds Market Cap/Market Cap of Stocks & Bonds

In the year 1999 the ratio was 50/50%

Now the ratio is 67/33% bonds to stocks

HEDGEYE 39

FLOWS CHASE PERFORMANCE


30%

-5%

0%

8%

47%

-3%

9%

28%

47%

3%

14%

31%

-10%

0%

10%

20%

30%

40%

50%

S&P500 Bloomberg Global DM Sovereign Debt Index

Bloomberg Global IG Corporate Index Bloomberg Global HY Corporate Index

1 YR Performance 2 YR Performance 3 YR Performance

HEDGEYE 40

BONDS: 1ST NEG. RETURN IN 14 YEARS


HEDGEYE 41

= RECORD NOMINAL BOND FUND OUTFLOWS

SOURCE: HEDGEYE FINANCIALS TEAM

HEDGEYE 42

BUT THIS IS STILL THE SMALLEST OUTFLOW IN HISTORY ON A % BASIS


2.3%

5.0% 5.0%

14.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2013 2003-2004 1999-2000 1994-1995

Historical Fixed Income Outflows on Beginning Bond Fund AUM

2013 saw a record net outflow from bond funds in nominal terms ($86B), yet as a

percentage of starting AUM, 2013’s outflow was less than half the median

outflow episode over the past 20Y!

HEDGEYE 43

REVIEWING THE 1994 TURN: #CRITICAL


HEDGEYE 44

TAPER = #RATESRISING


HEDGEYE 45

#ASYMMETRY: THE QUEEN MARY CAN TURN!


1.0%

3.0%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

17.0% U.S. GOVT 10 YEAR BOND YIELD TREND = 2.76% 50 YR Avg.

HEDGEYE 46

DO YOU KNOW WHAT BOND OUTFLOWS LOOK LIKE?


-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

$(2.00)

$(1.50)

$(1.00)

$(0.50)

$-

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

Net Inflow into Bonds versus Citi Big Bond Index Performance

3 month Mov. Avg Bond flow over most recent month's beginning assets Y-o-Y total return on Citi Big Bond Index

HEDGEYE 47

HOW ABOUT EQUITY INFLOWS?


-60%

-40%

-20%

0%

20%

40%

60%

80%

$(40)

$(30)

$(20)

$(10)

$-

$10

$20

$30

$40

$50

Net Inflow into Stocks versus MSCI Global Stock Index Performance

6 month Mov. Avg of Global Equity Flow $BB Y-o-Y total return on MSCI Index

HEDGEYE 48


INVESTMENT CONCLUSIONS

• Long-term US Treasury Bonds (TLT)

• PIMCO Total Return Fund (BOND)

• US MLPs (AMLP)

• Kinder Morgan (KMI)

• Nationstar Mortgage Holdings (NSM)

• US Utilities Sector (XLU)

• EM Local Currency Debt (EMLC)

• Latin American Equities (GML)

• Germany (EWG)

• UK Small-Caps (EWUS)

• British Pound (FXB)

• Euro (FXE)

• Nasdaq (QQQ)

• US Tech Sector (XLK)

• US Energy Sector (XLE)

• US Health Care Sector (XLV)

LONGS SHORTS

FOR MORE INFORMATION CONTACT:

[email protected] 203.562.6500

1q14 macro themes - hedgeyedocs.hedgeye.com/1q14macrothemes_01.09.14.pdf · 1/9/2014 · hedgeye...

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