“The potential benefits of Artificial Intelligence are huge, so are the dangers” – Dave Waters
This is an extremely busy week for us on the macro front. We have our big Q3 Macro Themes presentation this Thursday which will be featuring A LOT of new content! I cannot share anything specific on our new Themes deck which will make this early look a little different. Rest assured, we are grinding more than ever to preserve and protect our capital.
So keep your macro hats in hand for one day. I guarantee it won’t disappoint.
Today let’s talk about some A.I. and the current setup…
The whole A.I. thing is wild to me. I have been at the center of creating our own A.I. which means I can tell who knows what is actually going on and who doesn’t. I can guarantee you that even if you talk to senior engineers across any industry, most do not have a clue how modern day A.I. is running… Which means, the people investing in it... they are even more clueless. Then we have our Government, but that is a rant for another time.
Here’s the thing with the technology being used, it has been around for a very long time. If you don’t believe me check out the Chart of the Day below (source Harvard) and look at the dates. Now yes, there have been upgrades since 1951 but understand this, the current race is about increasing accuracy.
For example, imagine you have an autonomous car that is accurate 80% of the time. That won’t cut it. But the way to increase your accuracy from 80% to 100% is a lot less about newer technology and more about increased data. So now think about why ChatGPT was released for free to 7.9 billion people… you are the data source. But increasing data gathering is highly specific to each use case.
Meaning, if you want to increase efficiency/automate your warehouse. The only data that will matter is the data gathered by that specific warehouse. And for your algorithm to find patterns, you need A LOT of data from that warehouse. The way to get that data is with time…
But to understand how much data you need, ChatGPT is plugged into the entire Internet and still comes out with wrong answers. Why? Maybe I will be invited to the "Unscripted Equity Curiosity" podcast to talk about it, but for now let’s move on.
To be honest, this little rant won’t change anything in the markets. The only thing that will change that, are the numbers reported by these companies. Make sure to listen closely to the call as there are good and bad companies within any space.
Back to the Global Macro Grind…
Here we are at yet another month end/quarter end. Where for the past 19 months of our bear market call we have had a mark up in securities. Which is exactly what we saw yesterday. On down volume you had every sector up (except healthcare) with consumer discretionary and technology leading the winners. But if you go past the top 11 sectors we can throw in crypto, semiconductors, and China as the top up sectors.
On the largest losers yesterday, we had commodities (Wheat $WEAT, Corn $CORN, Oil $USO) and even more interesting to me… Dry Bulk Shipping $BDRY and Global Shipping $BOAT.
This should be peaking your attention on the “I” part of your FIRR allocation (Financials, Industrials, Retailers, and Real Estate) + Energy.
In terms of process though, notice how Keith was not going crazy on the short side, he took two shots. Both stocks, not ETFs, within industrials and real estate. On the long side, he was selling some of his exposures.
The best part of Hedgeye, you can be as bearish as you want on the economy in a TREND duration but still have the discipline to move your TRADE duration to take advantage of short-term swings.
Since we didn’t lose our capital over the last 19 months of our bear market call, we have awarded ourselves the opportunity to watch where the market takes itself before the lockout period starts. Knowing, that the more the market is marked, the more pressure on companies reporting economic reality. Which don’t tell anyone, but it is supposed to be the hardest quarter since 4Q21 (the beginning of this bear market).
Oh, since I have a fascination with psychology, I’ll mention this open question. If Powell is worried about a reflation in asset prices and he is watching tech companies like Apple and Nvidia make new highs, what is the likelihood that he will stop raising rates?
Let’s give an update on the market:
- US 2-10 Spread remains at -100 bps as the market continues to point towards higher rates into lower demand
- The 1yr Forward 2-10 Spread continues to make new one-month lows at -43 bps
- Crude oil is at the bottom end of its risk range as is Gold
- Shanghai still has upside potential of ~1.5%
- IVOL Premium Callouts (TTM Z Score): $TAN (2.92), $XBI (2.29), $EWI (2.24), $PSCH (2.02), $EMB (1.99), $YOLO (1.61) $THD (1.42), $PSP (1.08)
- IVOL Discount Callouts: $IHF (-2.26), $GREK (-1.76), $SLX (-1.74), $EWJ (-1.7), $CORN (-1.66) $ITA (-1.51), $URA (-1.5), $KCE (-1.48), $PEJ (-1.42), $EWW (-1.4) $EWA (-1.39), $CANE (-1.34), $SOXX (-1.3), $WEAT (-1.29), $EWS (-1.28) $EWH (-1.21), $ESPO (-1.18), $KIE (-1.16), $EWL (-1.09), $EWQ (-1.07)
- South Korea $EWY consumer confidence accelerates for the 4th consecutive month and beats expectations
- Singapore $EWS PPI hits -15.3% YoY, lowest since September of 2015. Mineral Fuels (-36.2% YoY vs -28.5% YoY in April)
- Germany $EWG Consumer Confidence decelerates for the first month in 8. Missing expectations. Driven by a decline in economic (3.7 vs 12.3 in June) and income expectations (-10.6 vs -8.2)
- Denmark $EDEN retail sales accelerated in May for the first time in 3 months to -0.4% YoY from -5.8% YoY
- Norway $NORW retail sales in May accelerated for the 2nd sequential month to -2.2% YoY from -4.8% YoY
- Sweden $EWD household lending growth decelerated for the 13th sequential month to the lowest since 1997 at +1.5% YoY
- Spain $EWP retail sales accelerated in May to +6% YoY from +5.7% YoY
- Austria $EWO manufacturing PMI decelerated in June to 39 from 39.7, the 5th sequential deceleration and lowest since April 2020. New Orders declined at the quickest rate since March 2009.
- Eurozone $IEV M2 YoY decelerates for the 9th consecutive month to +0.2% YoY an all time low
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 3.77-3.92% (bearish)
UST 10yr Yield 3.64-3.84% (neutral)
UST 2yr Yield 4.57-4.81% (bullish)
High Yield (HYG) 73.90-74.99 (bearish)
SPX 4 (bearish)
NASDAQ 13,201-13,840 (bullish)
RUT 1 (bearish)
Tech (XLK) 165-175 (bullish)
Industrials (XLI) 101.42-105.79 (bearish)
Nikkei 32,401-33,999 (bullish)
VIX 13.01-17.90 (neutral)
USD 101.59-103.18 (neutral)
USD/YEN 140.75-144.98 (bullish)
Oil (WTI) 66.54-71.78 (bearish)
Gold 1 (bullish)
Copper 3.71-3.94 (bearish)
Bitcoin 24,705-31,091 (bearish)
Ryan Ricci
Macro
