This note was originally published at 8am on March 25, 2013 for Hedgeye subscribers.
“New is always bad. Never not be afraid.”
If you don’t know who Grug is, take your kids to see The Croods – the latest American computer-animated family film by Dreamworks that opened this weekend. Nicolas Cage crushes it in this one. We loved it!
The movie starts with scarier stuff than Cyprus (Croods fend it off), then Grug’s daughter introduces herself: “My name is Eep and this is my family, the Croods. We never had the chance to explore the outside world because of my Dad’s one rule: Never leave the cave.”
I know – I’m too bullish about US Equity markets, life, etc. these days. But, sometimes, it’s ok to look on the bright side. If you have a fear-mongering Cave Dweller in the office, maybe you should take him to see the movie too. Everyone needs to leave the cave.
Back to the Global Macro Grind…
There are plenty of things to worry about out there – and, from a time and price, that will include US Equities too – but for now, the most bullish TREND in America remains your friend: #StrongDollar = Stronger America. Period.
We’ll dig deeper on the Dollar on our upcoming Q2 2013 Global Macro Themes presentation, but for now it’s important to review why US Equity Markets are testing all-time highs into the end of Q1 (our Q113 Themes):
- #GrowthStabilizing – US GDP Growth bottomed, sequentially, in Q4 of 2012; upside vs consensus in Q1/Q2 2013
- #HousingsHammer – consensus is not yet Bullish Enough on US employment and housing reflexivity
- #QuadrillYen – as the US Dollar strengthens on domestic factors, it’s picking up the relative (Burning Yen) trade too
What’s good for the US Dollar is bad for Commodities:
- US Dollar Index = +0.5% last week to $82.53 (up for 6 of the last 7 weeks)
- CRB Commodities Index = -0.6% last wk to 294 (down for 6 of the last 7 weeks)
What’s good for the US Dollar is also bad for Commodities Correlation Risks:
- 30-day inverse correlation between USD and Brent Crude Oil = -0.97
- 30-day inverse correlation between USD and High Grade Copper = -0.94
- 30-day inverse correlation between USD and Rough Rice = -0.86
Rice? Grug didn’t know how to boil water, but it’s still the world’s top consumed food these days.
And that’s the other big thing going on out there this year in Global Equity markets – not all markets are going up as the US Dollar does.
A) Emerging Markets that don’t have a US Dollar peg are seeing local inflations (inflation is priced in local FX)
B) Emerging Markets whose Equity Markets are commodity-linked are losing (Brazil = down -9.4% YTD)
On that score, note the following Global Equity market divergences:
- SP500 and Russell2000 = +9.1% and +11.4% YTD, respectively
- MSCI Emerging Markets (EM) Index = -3.8% YTD
- MSCI Emerging Markets (EM) Index = -1.9% last wk vs the Dow -0.013%
If you want to freak yourself right out, there are plenty of securities and markets out there where you can do that. After all, there’s always a bear market somewhere – and the top 3 bearish TRENDs in our macro model continue to be:
- Japanese Yen
- US Treasuries
Within the Commodities Deflation trend, consensus first saw Copper imploding as a “bearish growth signal.” Now, consensus is calling it what it is this morning – the biggest build of Copper inventory on the LME (London Metals Exchange) since 2003. What if you bought SPY in 2003?
Yep, LME Copper inventory is up +76% YTD. With supply that high and the Correlation Risk in Copper to #StrongDollar ripping, who cares about anything else? It certainly doesn’t mean the world is ending either.
The End of World (#EOW) trade has great marketing programs and tends to get priced into Gold in a hurry. Last week’s net long position in Gold (per CFTC futures/options data) exploded to the upside by 63% week-over-week (to 70,193 net long contracts).
But Gold bulls have been going back to this Cave Dweller well of fear for the last 6 months. So that’s not new. Neither is Gold’s price not reacting to the fear-born expectation that it out-performs. Gold is down again this morning, testing $1605 support.
Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST 10yr Yield, VIX, and SP500 are now $1599-1619, $106.97-108.66, $3.36-3.48, $82.15-83.25, 94.07-96.71, 1.89-1.97%, 10.78-14.92, and 1543-1565, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer