MACRO PLAYBOOK DARIUS DALE: MACRO TEAM

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1 MACRO PLAYBOOK DARIUS DALE: MACRO TEAM APRIL 22, 2015 UPDATE

2 LEGAL 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 provide investment advice to individuals. 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 HEDGEYE 2

3 THEMATIC INVESTMENT CONCLUSIONS THE PERFORMANCE OF EACH EXPOSURE IS CALCULATED FROM THE CLOSING PRICE ON THE DATE IT WAS ADDED TO OUR THEMATIC INVESTMENT CONCLUSIONS EITHER VIA OUR QUARTERLY MACRO THEMES, A MACRO PLAYBOOK UPDATE OR AN AD HOC RESEARCH PRESENTATION THROUGH THE CLOSING PRICE OF THE CORRESPONDING DATE ON THE RIGHT. FOR EXAMPLE, THE XLV ETF HAS APPRECIATED +22.4% SINCE WE ADDED IT ON 8/5/14 (GOOD RELATIVE TO OUR BULLISH BIAS); THE JNK ETF HAS APPRECIATED +2.2% SINCE WE ADDED IT ON 1/8/15 (BAD RELATIVE TO OUR BEARISH BIAS). Current Top-5 Short Ideas Short Bench Former 0 Short 0.05 Idea (YTD) SPDR S&P Oil & Gas Exploration & Production ETF (XOP) CurrencyShares Euro Trust (FXE) SPDR Gold Shares (GLD) ipath Goldman Sachs Crude Oil Total Return Index ETN (OIL) WisdomTree Emerging Currency Strategy Fund (CEW) Financial Select Sector SPDR Fund (XLF) Consumer Discretionary Select Sector SPDR Fund (XLY) Industrial Select Sector SPDR Fund (XLI) ishares Russell 2000 ETF (IWM) CurrencyShares Japanese Yen Trust (FXY) SPDR Barclays High Yield Bond ETF (JNK) ishares TIPS Bond ETF (TIP) ishares MSCI Turkey ETF (TUR) ishares U.S. Home Construction ETF (ITB) PowerShares DB US Dollar Index Bullish Fund (UUP) ishares MSCI Emerging Markets ETF (EEM) Utilities Select Sector SPDR Fund (XLU) Consumer Staples Select Sector SPDR Fund (XLP) SPDR S&P Regional Banking ETF (KRE) Vanguard Extended Duration Treasury ETF (EDV) Vanguard REIT ETF (VNQ) ishares 20+ Year Treasury Bond ETF (TLT) Health Care Select Sector SPDR Fund (XLV) Current Top-5 Long Ideas Long Bench Former Long Idea (YTD) -9.8% -9.4% -9.4% -1.4% -0.4% 0.0% 0.3% 0.6% 0.9% 1.7% 2.2% 2.6% 3.0% 5.0% 5.4% 5.5% 6.4% 8.6% 11.0% 12.1% 14.4% 18.6% 22.4% LONG IDEAS TLT: 4/8/14-4/21/15 EDV: 10/30/14-4/21/15 XLV: 8/5/14-4/21/15 ITB: 1/8/15-4/21/15 VNQ: 4/8/14-4/21/15 LONG BENCH UUP: 1/8/15-4/21/15 IWM: 4/7/15-4/21/15 FORMER LONG IDEAS (YTD) XLY: 3/6/15-4/7/15 XLU: 4/8/14-4/7/15 GLD: 1/30/15-3/6/15 XLP: 10/2/14-3/6/15 SHORT IDEAS JNK: 1/8/15-4/21/15 OIL: 2/3/15-4/21/15 XOP: 11/5/14-4/21/15 XLF: 4/7/15-4/21/15 XLI: 1/8/15-4/21/15 SHORT BENCH FXE: 1/12/15-4/21/15 TUR: 3/17/15-4/21/15 FORMER SHORT IDEAS (YTD) KRE: 1/30/15-4/7/15 EEM: 1/8/15-4/7/15 CEW: 1/12/15-4/7/15 FXY: 1/8/15-2/3/15 TIP: 1/8/15-1/30/15 DATA SOURCE: BLOOMBERG HEDGEYE 3

4 LATE-CYCLE SLOWDOWN CONFIRMED WITH THE EXCEPTION OF NOMINAL WAGE GROWTH WHICH ITSELF IS WELL BELOW PRIOR PEAKS EVERY SINGLE KEY LATE-CYCLE INDICATOR IS SLOWING ON A SEQUENTIAL AND/OR TRENDING BASIS. DATA SOURCE: BLOOMBERG HEDGEYE 4

5 REMEMBER EARLY 2007? THE PERVASIVE WEAKNESS IN LATE-CYCLE GROWTH DATA IS EERILY REMINISCENT OF EARLY THEN AS IS THE CASE NOW, ECONOMIC GROWTH SIMPLY FAILED TO LIVE UP TO PERMA-BULL EXPECTATIONS OF +3% GDP AND A NEVER-ENDING ECONOMIC CYCLE Bloomberg U.S. Econ Surprise Index, Monthly Average (Percentile of Latest Reading = 2%) Bloomberg U.S. Econ Surprise Index, 3MMA (Percentile of Latest Reading = 3%) DATA SOURCE: BLOOMBERG HEDGEYE 5

6 BLAME THE DOLLAR? THE SQUEEZE ON CORPORATE MARGINS AND NEW ORDER BOOKS THAT HAS BEEN PERPETUATED, IN PART, BY #STRONGDOLLAR DEFLATION IS ACTUALLY LIKELY TO ACCELERATE IN THE SECOND QUARTER. 25% Trade-Weighted USD, Quarterly Average (YoY % Change) 20% 16.3% 19.8% 17.6% 15% 10% 9.0% 10.8% 6.4% 6.3% 5% 1.5% 1.1% 2.7% 3.4% 3.3% 3.5% 2.7% 1.7% 0% -0.8% -0.2% -5% -4.0% -10% -10.4% -8.1% -15% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 Forecasts assume no change in prices from the current quarterly average. DATA SOURCE: BLOOMBERG HEDGEYE 6

7 WELCOME BACK TO #QUAD4 150bps 100bps 1Q15E 50bps 2Q14 3Q14 0bps 4Q15E -150bps -100bps -50bps 0bps 50bps 100bps 150bps 4Q14 2Q15E -50bps 3Q15E -100bps 1Q14 DATA SOURCE: BLOOMBERG -150bps x-axis: sequential bps change in YoY CPI y-axis: sequential bps change in YoY Real GDP HEDGEYE 7

8 #QUAD4 IS BULLISH FOR BONDS OLD FORMAT = $800/SQUARE FT NEW FORMAT = $1,300 SQ FT DATA SOURCE: BLOOMBERG HEDGEYE 8

9 AS IS A DOVISH FED WHILE DISSIPATING ON SHORTER DURATIONS, THE POSITIVE RELATIONSHIP BETWEEN LONG-TERM TREASURY BOND YIELDS AND IMPLIED YIELDS ON FED FUNDS FUTURES SUGGESTS AN OUTLOOK FOR DOVISH MONETARY POLICY IS LIKELY TO REMAIN SUPPORTIVE OF BONDS Multi-Duration Correlation Study: US 10Y Yield (%) vs. DEC '15 Fed Funds Futures Implied Yield Y 6M 3M 1M DATA SOURCE: BLOOMBERG HEDGEYE 9

10 CAN BONDS WORK BOTH WAYS? LONG-TERM RATES TEND TO RISE DRAMATICALLY FOLLOWING THE FIRST RATE HIKE WITH THE NOTABLE EXCEPTION OF THE LAST TIGHTENING CYCLE. AS SUCH, THERE IS HISTORICAL PRECEDENT FOR SPREAD COMPRESSION DURING AN EPISODE OF MONETARY TIGHTENING. 200bps 12/16/1986 3/29/1988 2/4/1994 6/30/1999 6/30/2004 Median 190bps 163bps 150bps 114bps 125bps 124bps 115bps 100bps 50bps 0bps -50bps -55bps 0bps 32bps 0bps 69bps 59bps 18bps 18bps -27bps -37bps 38bps 16bps 4bps 4bps -7bps -15bps 49bps 36bps 12bps 12bps -9bps -11bps 9bps 29bps 10bps -46bps 10bps 59bps 59bps 40bps -33bps 78bps 25bps -67bps 78bps -100bps -113bps -150bps t ₆ t ₃ t ₁ t₁ t₃ t₆ t₁₂ DATA SOURCE: BLOOMBERG. PERFORMANCE AS OF PRECEDING 6MO, 3MO, 1MO, AND SUBSEQUENT 1MO, 3MO, 6MO AND 12MO. HEDGEYE 10

11 DÉJÀ VU? JUST LIKE EVERY* YEAR IN THE POST-CRISIS ERA, 2015 HAS SEEN A DOWNWARD REVISION BIAS TO BLOOMBERG CONSENSUS REAL GDP AND CPI FORECASTS. SIMPLY PUT, THE STREET CONSISTENTLY OVERESTIMATES THE NOMINAL GROWTH POTENTIAL OF THE U.S. ECONOMY. Bloomberg Consensus 2015 U.S. Real GDP Forecast Linear (Bloomberg Consensus 2015 U.S. Real GDP Forecast) 3.25% 3.20% 3.15% 3.10% 3.05% 3.00% 2.95% 2.90% 2.85% 2.80% 2.75% Bloomberg Consensus 2015 U.S. CPI Forecast Linear (Bloomberg Consensus 2015 U.S. CPI Forecast) 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 2.9% 0.4% 0.2% 0.2% 0.0% -0.2% DATA SOURCE: BLOOMBERG. *2011 WAS AN OUTLIER FOR CPI AMID QE2 PERPETUATING ALL-TIME LOWS IN THE USD. HEDGEYE 11

12 MISUNDERSTOOD HEADWIND: DEMOGRAPHICS THE POST-CRISIS ERA HAS SEEN THE U.S. AGE AT AN UNPRECEDENTED RATE AND PEAK/NEAR-PEAK AGEING (IN RATE-OF-CHANGE TERMS) IS PROJECTED TO CONTINUE THROUGH THE BALANCE OF THE DECADE; IS IT IRONIC THAT BOND YIELDS HIT AN ALL-TIME LOW IN 2012? 90bps 80bps 70bps 60bps 50bps 40bps 30bps 20bps 10bps 0bps -10bps -20bps 25bps 23bps 17bps 19bps 18bps 19bps 15bps U.S. 65+ Year-Old Population as a % of Working-Age Population (15-64) YoY bps Change U.S. 65+ Year-Old Population as a % of Working-Age Population (15-64); (rhs) 9bps 10bps 2bps 0bps -4bps -11bps -10bps -14bps -12bps -15bps-16bps -2bps -5bps 4bps 0bps 14bps 31bps 30bps 26bps 26bps 79bps 81bps 75bps 72bps 67bps 68bps 64bps 64bps 65bps 27% 26% 25% 24% 23% 22% 21% 20% 19% 18% 17% DATA SOURCE: OECD HEDGEYE 12

13 THE CORE CONSUMPTION DEMOGRAPHIC IS SHRINKING! GIVEN THE DISAPPOINTING TREND IN U.S. GROWTH SINCE 2007, IT S NOT AT ALL IRONIC THAT GROWTH IN THE U.S. S CORE CONSUMPTION DEMOGRAPHIC WENT NEGATIVE IN 2008 AND IS PROJECTED TO CONTINUE CONTRACTING THOUGH % 3.5% 3.0% 2.5% 2.4% 3.2% 3.2% 3.2% 3.0% 2.8% U.S Year-Old Population YoY % Change 3.4% 3.6% 3.3% 3.1% 3.1% 2.9% 2.7% U.S Year-Old Population as a % of Total 30% 29% 28% 2.0% 2.0% 2.1% 1.9% 27% 1.5% 1.5% 26% 1.0% 0.5% 0.0% -0.5% -1.0% 0.4% 0.5% 0.7% 0.6% 0.2% 0.2% -0.1% -0.3% -0.4% -0.7% -0.7% -0.7% -0.6% -0.2% -0.2% -0.2% -0.4% -0.4% 0.1% 25% 24% 23% 22% DATA SOURCE: OECD HEDGEYE 13

14 CONCLUSION: LOWER-FOR-LONGER OUR ESTIMATES SUGGEST THERE S JUST OVER $4 TRILLION IN NEGATIVE-YIELDING G-10 SOVEREIGN DEBT OUTSTANDING AT THE CURRENT JUNCTURE; INVESTORS ARE CLEARLY BETTING ON DEFLATION TO PERPETUATE STABLE-TO-HIGHER REAL YIELDS AND/OR CAPITAL APPRECIATION AMID THIS RETURN-OF-CAPITAL STRATEGY. DATA SOURCE: BLOOMBERG; IMF. DATA AS OF 4/6/14. HEDGEYE 14

15 DRUCKENMILLER S DECOUPLING VIEW IS RIGHT ON OIL FOR NOW THE DRAMATIC INVERSE CORRELATION BETWEEN THE U.S. DOLLAR AND CRUDE OIL PRICES HAS COMPLETELY DISSIPATED IN THE YTD. FRONT-MONTH WTI AND BRENT ARE UP ROUGHLY % OFF THEIR RESPECTIVE YTD LOWS Multi-Duration Correlation Study: US Dollar Index (DXY) vs. Front-month WTI Crude Oil Y 3M 1M 3W 1W DATA SOURCE: BLOOMBERG HEDGEYE 15

16 SUPPLY HAS TAKEN OVER AS A DRIVER OF PRICES DOMESTIC CRUDE OIL PRODUCTION GROWTH IS IN THE PROCESS OF TURNING DELTA NEGATIVE ON A SEQUENTIAL BASIS. WILL NEGATIVE GROWTH RATES START TO TREND? 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% Haynesville Marcellus Utica Niobrara Bakken Eagle Ford Permian YY % 6M % 3M % 1M % Bakken, Permian, and Eagle Ford which make up 62% of the big 7 domestic oil plays have seen a significant deceleration in production growth and EIA survey data suggests production growth rates are likely to be negative sequentially in April in each of these three regions. DATA SOURCE: DOE, EIA HEDGEYE 16

17 THE USD DRIVES ENERGY PRICES LONG-TERM U.S. Dollar Index Historical Oil Price* ($) Sep. 69- June 80: 1970s inflation/bretton Woods Jun. 80 Dec. 84: Recession & contractionary Policy Dec. 84 Jun. 95: Decade-Long Expansion Jun. 95 Jun. 01: Clinton era tight fiscal policy, strong-dollar de-leveraging Jun. 01 Mar. 11: Greenspan deregulation, low-interest rate era Mar. 11- Present: Grt.-Rec. to present inflation of asset prices How Much Higher? *Log Scaling DATA SOURCE: BLOOMBERG (*BLOOMBERG HISTORICAL CRUDE OIL PRICE INDEX) HEDGEYE 17

18 KEY UPCOMING CALENDAR CATALYSTS 4/24: MAR Durable Goods 4/29: 1Q GDP, FOMC Announcement 4/30: MAR PCE (Spending & Prices), APR Chicago PMI 5/1: APR ISM Manufacturing 5/4: MAR Factory Orders 5/6: APR ISM Non-Manufacturing 5/8: APR Employment Report 5/13: APR Retail Sales 5/14: APR PPI 5/15: APR Industrial Production 5/19: APR Housing Starts and Building Permits 5/21: APR Existing Home Sales 5/22: APR CPI 5/26: APR Durable Goods, MAR FHFA House Price Index, MAR S&P/Case-Shiller House Price Index, APR New Home Sales 5/28: APR Pending Home Sales 5/29: 1Q GDP 1 st Revision, MAY Chicago PMI Survey DATA SOURCE: BLOOMBERG HEDGEYE 18

19 LINKS TO ADDITIONAL RESOURCES #LateCycle USA: Early Look: I Love Debate (4/10) #DemographicYields: Tactical Asset Class Rotation Model (TACRM): CLICK HERE to view today s video update. CLICK HERE to download the full TACRM presentation. No Growth? (3/30) Oil s #DeflationDeck: Oil: Quick Check-in With the U.S. Production Machine (4/8) DATA SOURCE: BLOOMBERG HEDGEYE 19

20 For more information contact: