CATALYSTS FOR A CORRECTION

Conclusion: We at Hedgeye aren’t alone in our stance that the Fed’s Quantitative Guessing won’t end well. Several important countries and figureheads have joined in the anti-QE parade and we feel that this, combined with other factors is bullish for the U.S. Dollar – and bearish for [nearly] everything else.

 

Position: Long the U.S. Dollar (UUP); Short the S&P 500 (SPY); Short the Russell 2000 (IWM); Short Emerging Market Equities (FFDs);

 

On our Morning Macro Call (email if you are an institutional client and need a live dial-in code), Keith identified three catalysts that are potentially bullish for the U.S. dollar in the near term, which could potentially trigger a 6-9% compressed correction in U.S. equity markets. Those catalysts are: 

  1. Obama’s trip to Asia (starting now for the next ten days): Simply put, Asia is peeved with U.S. monetary policy. Central bankers from China, Japan, Hong Kong, Korea, and India are calling out U.S. monetary policy for what it is – “uncontrolled money printing” and pursuant of a weak dollar. Further, most of these nations are continuing to take measures to counter the inflation Bernanke’s printing press is creating in their countries. Obama will have to answer some tough questions and his rhetoric could prove dollar bullish if he attempts to pander to his Asian counterparts.
  2. October Global Inflation Data (now-month end): We’ve seen countries from China to India to Australia to Sweden raise rates in the last two weeks. Simply judging by the performance of the CRB Index during October, there is further tightening on the horizon. Global hiking could, on the margin, drag U.S. Treasury yields higher and the U.S. dollar with it. To some extent, we’re starting to see that occur on the long end of the curve (see chart below).
  3. G20 Summit in Seoul (Nov. 11-12): Tim Giethner might wind up playing a game of one-versus-nineteen on U.S. dollar policy. For a glimpse of what might come, see commentary out of Brazil’s Finance Minister Guido Mantega on the effectiveness of QE: “It doesn’t work to throw money from a helicopter because this won’t make growth flourish”. Germany’s Minister of Finance, Wolfgang Schauble said Thursday, "I don't think that the Americans are going to solve their problems with [QE2], and I believe that it is going to create extra problems for the world”. Timmy’s got some explaining to do come next Thursday. 

CATALYSTS FOR A CORRECTION - 1

 

On another note, it seems everyone is bearish on the U.S. dollar and bullish on commodities and global equities, including Franklin Templeton’s Mark Mobius. More signs that dollar bearishness are at its peak are: 

  • Belarus is going to become the first country outside Russia to issue debt in rubles to borrow at cheaper rates than U.S. dollars. Countries tend to want to borrow money in currencies they think are going to depreciate, so yields on dollar bonds have gotten too expensive for Belarus. The same is happening to Chinese companies, who are seeking cheaper dollar bond rates by borrowing in Hong Kong vs. mainland China.
  • RBC said the Argentine peso (per U.S. dollar) was the most “attractive currency in the universe they watch”.
  • Turn on CNBC and listen to pundit-after-pundit tell you how QE2 will crush the dollar. For their collective references, the U.S. dollar index is down roughly (-8%) since Bernanke tipped his hand in Jackson Hole, which is a substantial move for the U.S. dollar in a short period of time. 

Clearly, we were early and right calling the accelerated decline in the dollar starting this summer, but evidence is continuing to mount that a weak dollar is solidly consensus. President Obama and his cabinet will see mounting pressure over the next two weeks to adjust their policy towards the dollar as they travel abroad.  Longer term, it is not in their best interests to ignite a currency war, so we would expect their rhetoric to adjust accordingly and be supportive of a stronger dollar policy.

 

Have a great weekend,

 

Darius Dale

Analyst


Premium insight

[UNLOCKED] Today's Daily Trading Ranges

“If I could only have one thing of the many things we have it would be my daily ranges." Hedgeye CEO Keith McCullough said recently.

read more


Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more

Neurofinance: The Psychology Behind When To Sell A Bull Market

"Most momentum investors stay invested too long, under-reacting and holding tight after truly bad news finally arrives to break the trend," writes MarketPsych's Richard Peterson.

read more

Energy Stocks: Time to Buy the Dip? | $XLE

What the heck is happening in the Energy sector (XLE)? Energy stocks have trailed the S&P 500 by a whopping 15% in 2017. Before you buy the dip, here's what you need to know.

read more

Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more