This note was originally published at 8am on March 21, 2013 for Hedgeye subscribers.
“Blows must decide whether they are to be subject to this country or independent.”
-King George III
And they did… the British lost and the Americans won their independence. “Jefferson threw himself into whatever came his way. He was hardheaded, not rhetorical. He believed the hour called for action, not rhetoric.” (John Meacham’s Thomas Jefferson, pg 79)
The founding principles of this country aren’t romantic. They are real. And it started with a fight. People used to stand up for something and really argue for it. Passion and pride wasn’t always politically correct.
“As our enemies have found we can reason like men, so now let us show them we can fight like men also.” –Jefferson, 1775
Back to the Global Macro Grind…
After 5 long years of war versus the #OldWall, independent minds are winning. This isn’t about being bullish or bearish. It’s about being transparent as opposed to opaque; it’s about being accountable as opposed to arcane.
As Patrick Henry said, “give me liberty, or give me death.” Economic freedom versus hereditary right is an old war. We’re just fighting it on a new front. Revolutions are rarely pretty. This one is no exception.
So upward and onward we go. Today isn’t unlike any other day where, God willing, we all put our feet on the floor at the top of the risk management morning - one shoe on a time - and decide where we think we can be less wrong than right.
This morning’s Global Macro Research and Risk Signals are decidedly mixed – let’s look at Asia first:
A) China’s flash PMI for MAR accelerates to 51.7 (vs 50.4 FEB); Shanghai Comp holds bullish TRADE/TREND
B) South Korea is (allegedly) cyber attacked by China, and the KOSPI closes -0.4% (bearish TRADE/TREND)
How about Europe?
A) German Manufacturing PMI for MAR slows to 48.9 (vs 50.3 FEB); but German DAX holds TRADE/TREND support
B) France’s Services PMI tanks to 41.9 in MAR (vs 43.7 FEB); French CAC snaps TRADE support (again) of 3864
A) US Housing Starts ripped another +3% sequentially in FEB, but what will this morning’s Existing Homes print bring?
B) Housing stocks (ITB) led gainers +2.9% yesterday, making a fresh YTD high as the SP500 closed -0.3% inside of hers
All the while, on the interconnected risk front:
- US Dollar Index is having its 6th up week in the last 7
- CRB Commodities Index is having its 6th down week in the last 7
- Correlation Risk between USD/CRB and USD/SPY continue to diverge, big time
Immediate-term TRADE (inverse correlations) between USD and CRB (Commodities):
- USD vs Brent Oil = -0.98
- USD vs Copper = -0.95
- USD vs Gold = -0.69
Immediate-term TRADE (positive correlations) between USD and Stocks:
- USD vs MSCI Asia = +0.71
- USD vs SP500 = +0.63
- USD vs EuroStoxx600 = -0.16
Oops. That last one wasn’t a positive correlation – a month ago European stocks had a barely positive correlation to the US Dollar; now that’s melting away. Other than how bad it is for a socialized economic zone having its currency debauched by money launderers in Cyprus (and Italian criminals holding other parts of the money bags), I can’t think of any fundamental reason why Europe sucks economically.
And why is the correlation between the US Dollar and Emerging Market (MSCI EM Index) not positive? It’s actually going really negative (-0.70 vs USD on a 60 day correlation basis). Does that make sense? Sure does. That’s why we aren’t long EM. If #StrongDollar continues to crush Commodities, guess who loses? “Emerging Markets” (like Brazil, whose stock market is basically a commodity-linked index).
What about Gold? On a 60-day basis, the inverse correlation to the USD was like it is for Copper and Oil right now (wacky high). But this morning it’s less so. Is that interesting? Sure. What do I do with that? Well, I’ll tell you what I won’t do today – and that’s short Gold. I’d much rather short Oil - not only from a correlation perspective, but because the net long position in Oil (CFTC data) remains much larger.
There are so many things to consider - so many signals and pieces of data to incorporate into our decision making process; so many new technologies and mathematical concepts to apply to our analysis. Embracing The Uncertainty of it all is what makes us different. It allows for freedom of thought – and the humility to change our minds. Long live the independent research revolution.
Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1593-1615, $107.23-109.26, $3.38-3.51, $82.61-83.31, 94.19-97.02, 1.89-1.97%, 10.73-14.51, and 1546-1565, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer