“For most people, the most dangerous self-delusion is that even a falling market will not affect their stocks, which they bought out of a canny understanding of value.”
- Leon Levy
I’ve spent the last 10 days trying to get comfortable being very uncomfortable. Fortunately, I’m not talking about my market positioning. Being proactively prepared for another #Quad4 market in America was the easy part.
The hard part was not only trying to dictate Leon Levy’s timeless markets quote, but trying to get to this stage of the Early Look inside of 10 minutes. It usually takes me 2-3 minutes to write the intro!
While pecking with my left hand sucks, what would really suck is “piling delusion upon delusion” (per Levy) and watching a bunch of my former self’s “high conviction stock picks” get smoked. I watched that happen to many of my friends who got fired in 2001.
Back to the Global Macro Grind…
Welcome to another Macro Monday @Hedgeye. Damn does it feel good to peck that out like a flailing chicken! While Levy wrote The Mind of Wall Street in 2002, he could have very well written it in 2022.
How did Levi found the Oppenheimer fund? Why was he the first to think about shorting stocks in a mutual fund? A: his dad taught him about the rate of change and cycles.
“So at the first indication of a change on the TREND of profits, sell!! Remember 1938. This short note is the essence of the approach to investing I learned from Dad.” -Levy, pg 40
On the US Profit Cycle:
A) You know that the rate of change in US corporate profits has already turned negative, right?
B) Did you know that they’ve (SP500 EPS) already gone from +87% year-over-year growth in Q221 to +38% in Q421?
C) Do you know that they could easily slow towards 0-6% by the end of the second quarter of 2022?
Most importantly did you know most of that is not because of Russia? It’s because of deep #Quad4 in Q2.
Let’s get back to measuring and mapping the #process and start with the Global Currency Market (screaming #Quad4):
- US Dollar Index had a big #Quad4 breakout last week closing up +2.1% to +3.3% in the last month
- EUR/USD got smoked for a -3.0% loss last week (-4.6% in a month) and remains bearish TRADE and TREND
- Yen +0.6% last week vs USD but remains Bearish @Hedgeye TREND at -1.8% in the last 3 months
- GBP/USD was down -1.3% last week, Breaking Bad too Bearish TREND
- Brazilian Real was +2.0% vs USD last week, confirming a new Bullish TREND
- Polish Zloty lost -8.1% vs USD last week and is down -10.9% in the last month
Yes I can measure and map an epic Zloty #divergences vs Brazil’s Commodities-currency one-handed. Aren’t I special?
Unlike my former self (a “fundamental” long/short stock picker from 1), I wouldn’t dare try to pick a country, sector, or stock, without knowing that the Hungarian Forint was down -8.7% last week and stocks in Budapest were down -12.1%.
Why? A better question at this stage of my career is why not?
Why wouldn’t you be Macro Aware of not only the economic Quads in countries or what the best analyst on Earth (Mrs. Market) is signaling from a real-time PRICE, VOLUME, and VOLATILITY perspective?
While US Stock Market navel gazers on CNBC were chasing the tail ends of a bear market rally to lower highs, European Equity & Bond markets were pricing in Deep #Quad4 across Europe all the while:
A) Euro Stoxx 600 was down -7.0% on the week to -8.7% in the last month
B) France’s stock market was down -10.3% on the week to down -12.8% in the last month
C) Germany’s stock market was down -10.1% on the week to down -13.3% in the last month
“But, but, it’s all because of Russia.” No it’s not. That’s just qualitative and lazy. Our original Quad Nowcast was for deep #Quad4 in Europe in the back half of 2022. All Putin did was Pull It Forward into Q2 of 2022.
What did the Russian-Ukrainian War really do to the numbers? A: kept inflation higher for longer:
A) The CRB Commodities index inflated +13.4% last week to +35.9% in the last 3 months
B) Oil (WTI) inflated an epic +26.3% last week to +76.0% in the last 3 months
C) Wheat inflated +40.6% last week to +49.4% in the last 3 months
OMG, “it’s #Quad3!” Yes, for FEB and MAR Monthly Quads, it was. But Mrs. Market’s (she’s far less offended by some of this Captain Stock Picker stuff than some of the men are, haha) #VASP Signal said position for #Quad4 in Q2:
A) UST 10yr Yield was down a big -23 basis points last week and is now down -18 basis points in the last month
B) High Yield OAS Spread widened another +23 basis points last week in kind to +376 basis points over Treasuries
C) Gold was up another +4.2% to + 8.8% in the last month
If you positioned for #Quad3 (i.e. Long Tech and Consumer Discretionary and Short Staples) you got killed. Never forget that my #VASP (volatility adjusted signaling process) front runs the next economic Quad!
And since I’m not an intellect (and have zero problem buying something that is “out of Quad”), I was happily Long Energy (XLE) for last week’s plus +9.2% return vs. Short Real Consumption #slowing (XLY) -2.6% on the week to down -14.0% in the last 3 months.
What else worked for us in what turned out to be a great week for our proprietary Go Anywhere Global Macro process?
A) Indonesia (IDX) was up another +0.6% to +6.0% in the last 3 months
B) Philippines (EPHE) was up another +1.8% on the week to + 4.1% in the last 3 months
If I may rephrase Leon Levy’s statement from 20 years ago,
For most Macro Tourists, the most dangerous self-delusion is being macro-unaware and believing that ignorance of The Quad conditions will not affect their stock picks. It obviously does now, more than ever.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.68-1.89% (neutral)
UST 2yr Yield 1.33-1.55% (bullish)
High Yield (HYG) 81.91-83.54 (bearish)
SPX 4 (bearish)
NASDAQ 13,009-13,873 (bearish)
RUT 1 (bearish)
Tech (XLK) 146-155 (bearish)
Consumer Staples (XLP) 73.60-76.62 (bullish)
Energy (XLE) 68.51-77.01 (bullish)
Gold Miners (GDX) 33.60-39.32 (bullish)
Shanghai Comp 3 (bearish)
Nikkei 24,998-26,909 (bearish)
DAX 12,607-14,102 (bearish)
VIX 27.07-35.61 (bullish)
USD 96.45-99.45 (bullish)
EUR/USD 1.081-1.117 (bearish)
USD/YEN 114.60-115.88 (bullish)
GBP/USD 1.313-1.347 (bearish)
Oil (WTI) 101.17-124.01 (bullish)
Nat Gas 4.40-5.30 (bullish)
Gold 1 (bullish)
Copper 4.55-4.99 (bullish)
Bitcoin 35,008-44,905 (bearish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
