“Players have to buy into your system and be willing to accept the role, you, as the coach, have assigned to them”
-Chuck Daly
Now I’m many cycles away from being anywhere near a coach, but when I join a team, I don’t just buy in. I dive in headfirst no matter what.
Chuck Daly was a basketball coach who won two consecutive Championships in 1989 and 1990 with the Detroit Pistons then led world-renown “The Dream Team” to a gold medal in the 1992 Olympics. Oh, he is also a two-time Hall of Famer. But before that he was the head coach for the Penn Quakers (college) where he went to 6 straight National championships and won the title in 4 straight seasons.
If it wasn’t clear from the resume, he was a winner.
Does anyone else remember when Brady left the Patriots and the big narrative going around the media was, is Brady just a system quarterback?
Like all narratives, the media is asking the wrong question and missing the big picture. Brady and Belichick built a system and Brady played the role in the system that would allow the Patriots to win. The goal for them was never to get famous, it was to win a championship. In the process they built a dynasty winning 6 championship rings.
The way I have always thought about the above quote, I’ll apply it to football: The second you join a team you don’t waste time fighting the system that works. You want to move as 1 unit of 11 not 11 units of 1.
Back to the Global Macro Grind…
Little fun fact on your Hedgeye trivia cards: the other day someone informed me I have been with Hedgeye for one year. Which was very cool, but I’m just going to use that segue to highlight some of my favorite Early Looks since joining the team. I highly recommend reading each with a picture of the S&P 500 right next to it.
Raising Cash, Giving Back (12/23/2021) – The SPY was within 0.3% of its ALL-TIME high and ended up making its cycle high on 1/3/2022.
#BubbleCaps & Bitcoins (2/8/2022) – Since this day the S&P 500 has lost $2.976 trillion in market cap
Deep #Quad4 Signals (2/23/2022) – A note on covering shorts, the very next day was a bear market bounce.
What Comes Between Q and S (3/4/2022) – While everyone was chasing crude oil Josh took a second to remind us: “There have been 12 recessions since 1946. Eight have followed major oil price shocks, while a further three have occurred immediately following more modest, but still notable, oil price run-ups. That leaves just one out of twelve recessions that didn’t have any oil fingerprints left at the crime scene. Correlation ≠ Causation? Perhaps, but 11 out of 12 is one hell of a coincidence”
Sell Small Caps Now (3/30/2022) – One day off the peak of a micro cycle that ends on 5/20
Deep Profit #Recession Risk Rising (7/26/2022)
Sucking Memes Back In? (8/9/2022)
Those are just some of the calls we have made this cycle. The history is there for you to see the other cycles Hedgeye has called.
One of the things that is great about transparency is that you can fact check all of someone’s moves and if you are a player like me, you can easily hold yourself to account to what you did at particular points in the cycle. Just like watching back the film of your old games. The key though is to be your own largest critic.
At Hedgeye, our Real-Time Alerts product is an example of that transparency. Every Real-Time Alert that Keith has sent out since Hedgeye started is posted on our website. The very high batting average speaks for itself, but more interesting is the evolution of the product, as it now both a short term risk management and real-time coaching tool. This is the best place to see what Keith is thinking in real-time.
But allow me to get back to my role on this team. The Data.
The sector ETFs up the most yesterday: Natural Gas $UNG (+6.1%), Nat Gas Producers $FCG (+4.8%), Oil Exploration & Production $PXE (+4.7%), Small Cap Energy $PSCE (+4.6%), and Biofuels $FUE (+3%). This one made me laugh a little, due to the media creating a narrative of a Fed pivot since inflation is decelerating. The sectors up the most since this narrative are oil, the best leading indicator of inflation.
PPI did come out yesterday as a declaration, but your CPI-PPI divergence is a 3.1 Z Score (compressing for the first time in 5 months). The last time we had a Z Score like this was Feb 1973 - Nov 1974, the SPY only saw a -48% draw down in that time.
But lets also look at something more recent, China Oct 2021. Their CPI-PPI divergence was a 3.04 Z Score, it is now a 0.54 Z Score. In order to lower that Z Score, CPI has accelerated from +1.27% YoY to +2.7% YoY (the highest CPI since July 2020). Essentially CPI in China didn’t stop accelerating with the first downtick in their CPI-PPI divergence, no it accelerated for another 10 months…
Oh also on the Fed pivot, since the last rate hike the market had added +0.45 hikes by December. Gotta love the numbers.
The sector ETFs down the most yesterday: Silver Miners $SIL (-3.7%), Biotech $XBI (-3.2%), Solar $TAN (-2.4%), 20+yr Govt $TLT (-2.3%), Cancer $CNCR (-2.1%), and Gold Miners $GDX (-1.9%).
I look at 160+ ETFs every morning, my discount/premium callouts are simply when there is a significant TTM Z Score with a decelerating/accelerating IVOL Premium.
IVOL Discount Callouts today: Germany $EWG, Greece $GREK, Mexico $EWW, Copper Miners $COPX, Broker-Dealers $IAI, Small Cap Energy $PSCE, Silver $SLV, Soybean $SOYB, Euro $FXE, 20+ Govt $TLT, Emerging Market Sov $PCY
IVOL Premium Callouts today: New Zealand $ENZL, Saudi Arabia $KSA, Social Media $SOCL, Small Cap Healthcare $PSCH, 1-5yr Corp $IGSB
This is the data that came out while you were sleeping:
- New Zealand Manufacturing PMI Accelerated to 52.7 from 50
- Argentina $ARGT raises interest rates by 950 bps to 69.5% in order to tame inflation
- Argentina Inflation accelerates +71% YoY from +64% YoY, highest since 19+92
- Mexico $EWW raises interest rates by 75 bps to 8.5%
- GB $EWU GDP Decelerates to +1.9% YoY from 3.3% YoY, smallest since Feb 2021 and 5th sequential deceleration
- GB Construction output YoY decelerates
- GB Manufacturing Production YoY decelerates
- Turkey $TUR Retail Sales decelerates to +5.5% YoY from +21.2% YoY for the lowest since Feb 2022
- South Korea $EWY Export Prices Decelerate
- The VIX entered the chop bucket
- Volume was up +15% on a 1M average basis
- The 2-10 spread is at -33 bps while the 1yr forward curve is at -21 bps
- The countries with the largest WoW Deceleration in 2-10 spreads were Indonesia $IDX (-50 bps), Brazil $EWZ (-31 bps), Norway $NORW (-13 bps), Israel $EIS (-14 bps), and Peru $EPU (-12 bps).
- Global CPI (July): 31 countries have reported 20 of the 31 countries had accelerating CPI
- Global PPI (June): 10 countries have reported 3 of the 10 countries had accelerating PPI
I was up way too late last night creating a new data set for world central bank and commercial banks, so I refuse to let this lack of sleep go to waste. The ECB may have cut rate hike expectations to 4 more hikes by December.
But if you look at their balance sheet they continue to tighten as they have decelerating total assets YoY especially if you convert their Euros into Dollars. The chart below focuses on Italy whose central bank is tightening the most in Europe. Full data set to come out next week after some more back testing.
It has been a great first year working and learning from all of you!
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 2.59-2.98% (neutral)
UST 2yr Yield 2.91-3.41% (bullish)
High Yield (HYG) 75.84-78.81 (bearish)
SPX 4016-4229 (bearish)
NASDAQ 11,889-12,966 (bearish)
RUT 1 (bearish)
Tech (XLK) 138-149 (bearish)
Utilities (XLU) 71.73-75.97 (bullish)
Healthcare (PINK) 25.33-26.08 (bullish) `
Shanghai Comp 3149-3299 (bearish)
Nikkei 27,514-28,616 (bullish)
DAX 13,204-13,779 (bearish)
VIX 19.30-24.98 (bullish)
USD 104.70-107.51 (bullish)
Oil (WTI) 87.32-97.88 (bearish)
Nat Gas 7.63-8.99 (bullish)
Gold 1 (bullish)
Copper 3.36-3.72 (bearish)
Have a great weekend,
Ryan Ricci
Macro analyst
