“Charity should begin at home, but should not stay there.”
-Phillips Brooks
We held our annual Hedgeye Cares Golf Tournament yesterday at beautiful Glen Arbor in Bedford, NY. We had a great turnout and a generous group of sponsors that supported our event. As a result of the success of the event, we will be able to make a sizeable donation to the operating budget of Bridgeport Caribe Youth Leaders (“BCYL”).
We aren't alone in mixing business and charity. Many of you also contribute your time and money to important causes within your communities. We have supported BCYL for many years now and the mission of the organization is something that we really believe in:
“To provide youth with sports, educational and civic direction helping them build the character and self-esteem to reach their full potentially and value in society.”
As part of the golf event, we have graduates of the program come and speak at our golf tournament to discuss the positive and, in some cases, life altering impact that BCYL has had on their trajectories in life.
The derivative benefit of giving back is that it has many positive impacts on our health and well-being. In fact, a 2008 study by Harvard Business School professor Michael Norton found that giving money to someone else lifted participants’ happiness more than spending it on themselves. In addition, a study by Doug Oman from Berkeley “found that elderly people who volunteered for two or more organizations were 44 percent less likely to die over a five-year period than were non-volunteers.”
Not all giving back has such a positive impact. Over the last few weeks, the stock markets have also been giving back some of their YTD returns. Alongside this decline in equities has been a somewhat commensurate decline in Treasuries. In fact, most durations of Treasuries are now on pace for their third down year in a row and the venerable $TLT is now down some -45% from cycle peak-to-trough . . . now that’s a bear market!
The risk of giving back in markets can be offset by being proactively prepared for what may come next. On Thursday, we will be giving our Q4 Themes Presentation, which will walk through, via some 150+ slides, the risks and opportunities that lay ahead on our investing journeys. Please email if you are interested in gaining access to this call.
Back to the Global Macro Grind…
Understanding market structure has become more and more important. We saw this in spades this investing year with the advent of 0DTE options, which for a period-of-time made buying the damn dip in the short term a lucrative strategy. For most of the year, this phenomenon involved call options. Not ironically, the flurry in short term call option buying coincided closely with the stock market peak.
Another important consideration is the positioning of dealers as it relates to gamma (which I will freely admit is a relatively new word in my lexicon). According to our partners at Tier1 Alpha:
“The front end of the curve jumped by 3.15 vol points yesterday, which is pricing in around a 1.2% expected move for today. Dealers remain short gamma, with over $2 billion to hedge per index point at the current levels.”
In essence, volatility begets volatility because the dealers (i.e. the banks) need to increase their hedging as volatility heightens. The same can be said for volatility control funds. Thus, the marginal impact of this volume becomes well, not so marginal, as volatility ticks higher.
In global economic data this week, Consumer Confidence has also been giving back some of its recent gains:
- September U.S. Consumer Confidence slowed to 103.0, from 108.7;
- October Germany Gfk Confidence slowed to -26.5, from -25.6; and
- France September Consumer Confidence slowed to 83, from 85.
These are three big countries with three important measures of confidence decelerating. In particular, the U.S. Confidence report was interesting given that the Expectations Index, which is based on consumers’ short-term outlook for income, business, and labor market conditions, fell to 73.7 in September. Historically, a level below 80 has signaled a recession within a year.
It’s probably no surprise given the re-acceleration in inflation we have been noting lately, also evidenced in the Fed’s updated projections, but write-in responses to the survey “showed that consumers continued to be preoccupied with rising prices in general, and for groceries and gasoline in particular.” On a reported basis, this risk of inflation is going to become even more apparent as we start to roll into easier comparisons on CPI and energy in Q4 2022 and Q1 2023.
The last point on oil is an important one. In December 2022, the monthly average for WTI was ~$78.00. Assuming we stay near current prices, the Y/Y tailwind from oil prices on inflation becomes ~+18% Y/Y. This is in stark contrast to the most recent CPI report in which energy commodities were down -4.2% Y/Y and fuel oil was down -14.8% Y/Y.
Now perhaps oil starts to correct with a slowing global economy, which ultimately saves the day on inflation. That is certainly possible, but there appears to be something greater at work in the global oil market. At the moment, Oil has a roughly (highlighted in the Chart of the Day) +0.89 positive correlation to the dollar. This is unique in that typically a weak dollar leads to higher oil prices as oil is priced in dollars.
Oil supply and demand fundamentals appear to be ruling the day . . . with an emphasis on supply. Current oil inventory in the U.S. is down -2.5% Y/Y and demand continues to grow. While data is hard to come by on global inventory, it appears likely based on projections we’ve reviewed that globally we will increasing be short of oil heading into 2024.
We’ve been allocated to the inflation re-acceleration trade for a number of months now and, as Keith noted, this morning oil is currently the #4 weighted position in our Long Only Asset Allocation model.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 4.40-4.75% (bullish)
UST 10yr Yield 4.30-4.60% (bullish)
UST 2yr Yield 4.98-5.18% (bullish)
High Yield (HYG) 73.22-74.46 (bearish)
SPX 4 (bearish)
NASDAQ 12,826-13,608 (bearish)
RUT 1 (bearish)
Tech (XLK) 159-168 (bearish)
Energy (XLE) 88.45-93.00 (bullish)
Utilities (XLU) 61.11-63.94 (bearish)
DAX 15,195-15,704 (bearish)
VIX 15.23-19.68 (bullish)
Oil (WTI) 89.08-92.06 (bullish)
Oil (Brent) 91.24-95.99 (bullish)
Nat Gas 2.58-2.98 (neutral)
Gold 1 (bullish)
Copper 3.59-3.80 (bearish)
MSFT 305-326 (bearish)
AAPL 170-178 (bearish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
