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January 28, 2014

January 28, 2014 - Slide1

 

BULLISH TRENDS

January 28, 2014 - Slide2

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January 28, 2014 - Slide7 

BEARISH TRENDS

January 28, 2014 - Slide8

January 28, 2014 - Slide9

January 28, 2014 - Slide10

January 28, 2014 - Slide11
January 28, 2014 - Slide12

 


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – January 28, 2014


As we look at today's setup for the S&P 500, the range is 64 points or 1.32% downside to 1758 and 2.27% upside to 1822.       

                                                                                                                        

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.42 from 2.41
  • VIX closed at 17.42 1 day percent change of -3.97%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45/8:55am: ICSC/Redbook weekly retail sales
  • 8:30am: Durable Goods, Dec., est. 1.8% (prior 3.5%)
  • 9am: S&P/Case Shiller Home Price Index m/m, Nov., est. 0.8%
  • 10am: Consumer Confidence Index, Jan., est. 78 (prior 78.1)
  • 10am: Richmond Fed Manuf Index, Jan., est. 13 (prior 13)
  • 4:30pm: API weekly oil inventories

GOVERNMENT:

    • Federal Open Market Cmte begins final mtg under Fed Chairman Ben Bernanke, who’ll be succeeded by Janet Yellen
    • U.S. central bank may trim bond purchases in $10b increments over next 6 mtgs b/f announcing program’s end no later than Dec.
    • 8am: FTC’s chief privacy Peter Miller delivers keynote address at American Council for Technology and Industry Advisory Council’s Cybersecurity Forum
    • 10am: CFPB’s Cordray testifies at House Financial Services Cmte hearing
    • 10am: House Ways and Means Cmte holds hearing on how ACA definition of full-time employee affects jobs
    • 10am: Senate Banking Cmte hears from Ex-Im Bank Chairman Fred Hochberg on reauthorization of bank
    • 10am: House Agriculture, Energy and Trade panel meets on effect of intl trade agreements on small business
    • 1:30pm: House Homeland Security panel holds hearing on TSA’s criminal investigators
    • 9pm President Barack Obama gives State of the Union address
    • ~10pm Republican Conference Chair Cathy McMorris Rodgers, R-Wash., will deliver GOP response

WHAT TO WATCH:

  • Apple products losing steam put onus on Cook for new gadgets
  • Samsung keeps lead over Apple as China smartphones gain share
  • Tech cos. win deal to disclose U.S. requests for user data
  • Bank of Montreal agrees to buy U.K.’s F&C for $1.2b
  • Texas Industries said to reach deal for sale to Martin Marietta
  • President Barack Obama gives State of the Union address
  • Rep. Cathy McMorris Rodgers, R-Wash., to give GOP response
  • House, Senate leaders reach deal on farm bill
  • Ukraine premier steps down as lawmakers meet to end protests
  • U.K. 4Q GDP up 0.7%, matches forecast, ending best yr since ’07
  • India unexpectedly raises rate as rupee risks inflation goal
  • Honda becomes net U.S. exporter as Japan imports topped
  • Foxconn in talks with multiple U.S. states for manufacturing
  • Shell said to seek buyers for $1b stake in Ho-Ho pipeline
  • Credit Suisse said to plan $500m U.S. CLO amid slow start
  • Casablanca Capital to push for ops split at Cliffs Natural: WSJ
  • Google pays GBP400m to acquire U.K. Startup: Guardian
  • Vision care insurer VSP will cover Google Glass: NY Times

AM EARNS:

    • Air Products & Chemicals (APD) 6am, $1.33
    • AK Steel Holding (AKS) 8am, $0.05 - Preview
    • CIT Group (CIT) 6am, $0.80
    • Comcast (CMCSA) 7am, $0.68 - Preview
    • Corning (GLW) 7am, $0.28
    • Danaher (DHR) 6am, $0.95
    • DR Horton (DHI) 6am, $0.30 - Preview
    • EI du Pont de Nemours & Co (DD) 6am, $0.55 - Preview
    • FirstMerit (FMER) 7:30am, $0.37
    • Ford Motor Co (F) 7am, $0.28 - Preview
    • Harris (HRS) 6:3am, $1.18
    • Illinois Tool Works (ITW) 8am, $0.91
    • Lexmark International (LXK) 7am, $1.08
    • NextEra Energy (NEE) 7:30am, $0.97
    • Nucor (NUE) 9am, $0.40 - Preview
    • Pentair (PNR) 7am, $0.85
    • Pfizer (PFE) 7am, $0.52 - Preview
    • Polaris Industries (PII) 6am, $1.55
    • T. Rowe Price Group (TROW) 7:29am, $1.03

PM EARNS:

    • ACE (ACE) 4:01pm, $2.01
    • Albemarle (ALB) 4:03pm, $1.05
    • Amgen (AMGN) 4pm, $1.69  - Preview
    • Arthur J Gallagher & Co (AJG) 4:09pm, $0.49
    • AT&T (T) 4:01pm, $0.51 - Preview
    • Cirrus Logic (CRUS) 4pm, $0.77
    • Electronic Arts (EA) 4:03pm, $1.23 - Preview
    • Freescale Semiconductor (FSL) 4:05pm, $0.18
    • Illumina (ILMN) 4:05pm, $0.44 - Preview
    • Owens-Illinois (OI) 4:04pm, $0.52
    • RF Micro Devices (RFMD) 4pm, $0.13
    • Rock Tenn Co (RKT) 5pm, $1.76
    • Total System Services (TSS) 4pm, $0.47
    • VMware (VMW) 4:01pm, $1.00
    • WR Berkley (WRB) 4:01pm, $0.77
    • Yahoo! (YHOO) 4:05pm, $0.38 - Preview

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Gold Flows East as Refiners Recast Bars for China Defying Slump
  • Natural Gas Rebounds After Biggest Drop in Almost Nine Months
  • Nickel Glut Ending as Goldman Sees Rally on Ore Ban: Commodities
  • Copper Rebounds From Longest Losing Streak in Almost Five Months
  • Gold Declines on Speculation Demand to Wane With Fed Set to Meet
  • Deep South Set for Rare Winter Storm as Frigid Front Sweeps U.S.
  • Raw Sugar Extends Drop in NY, Falls to Lowest Since June 2010
  • Wheat Rallies on Concern Freezing U.S. Weather May Damage Crops
  • Rebar Futures Fall Most in a Week as Demand Drops Before Holiday
  • Platinum Miners Bet on Eight-Week Stockpile to Beat Strike
  • Falling Gasoline Hurts Exxon Plea for U.S. Crude Exports: Energy
  • Hong Kong Bans Live Poultry Sales, Culls Chickens As Virus Found
  • Basement Reservoirs May Hold 20% Additional Oil & Gas Resource
  • WTI Rises for First Time in Three Days on Freezing U.S. Weather

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Are You Well Informed?

This note was originally published at 8am on January 14, 2014 for Hedgeye subscribers.

“A vigilant and well-informed press, setting forth the truth…”

-Doris Kearns Goodwin, The Bully Pulpit

 

But what, precisely, is the truth? The truth is that Ray Dalio asks the same question in order to explain his investment process (minus the words ‘but’ and ‘precisely’). It’s the same question you need to be asking yourself every market day.

 

The 20th President of the United States, James A. Garfield, wasn’t talking about markets when he said that “the truth will set you free, but first it will make you miserable.” But for this morning, let’s lie to ourselves and pretend he did. For me at least, it’s the truth!

 

The truth is that for the 1st day of 2014, US stocks down (yesterday) has captured the top (most read) headline on Bloomberg.com: “SP500 Falls Most Since November Amid Valuation Concern.” Only one part of that headline story is true. The “valuation” part is just an #OldMedia editorial. Well-informed market practitioners can do better than that.

 

Back to the Global Macro Grind

 

Fresh off a feeding of our new born baby Lucy Taylor McCullough yesterday (she’s a beauty!), I walked upstairs to my post and bought-the-damn-bubble #BTDB into the US stock market close. Whether I was right or wrong in doing so isn’t the point. #Timestamps are truth.

 

Before I get into the why, I’ll just rehash the step by step process in terms of what I actually did:

 

1. After coming into the open with my first net neutral position of 2014 (8 LONGS, 8 SHORTS), I covered shorts

2. I didn’t cover any of these shorts on “valuation” (RRGB, MCD, LINE, F); I covered them because they were oversold

3. Then I waited, watched, and finally bought SPY on my signal at 3:38PM EST at $181.60

 

Having made every single mistake you can make in this game in buying things too early (which is typically followed up with excuses like, “but it’s cheap”), this time I actually took my time. Getting net longer on red should be a process, not an emotional episode in your life.

 

At Hedgeye there are 3 big parts to how we try to probability weight where Mr. Macro Market might move next:

 

1. History

2. Math

3. Behavioral

 

On the #history front, contextualizing the emotion of yesterday’s final selling moments is easy – that was only the 3rd one-day decline of over 1% for the SP500 in the last 3 months:

 

1. November 7th, 2013 = -1.32%

2. January 14th, 2014 = -1.26%

3. December 11th, 2013 = -1.13%

 

In other words, that’s why the first part of this morning’s Bloomberg headline is true. It was the biggest US stock market down day since November 7th, 2013 when the SP500 closed at 1747. If you bought SPY there, you could have sold it 101 handles higher (+6%) at the US stock market’s all-time closing high of 1848 on December 31, 2012. #truth

 

#History reminds us that past performance doesn’t predict future results. I have no illusions about that. Neither should you. So let’s dig into some of the math (levels, correlations, etc.) that got me to hit that SPY buy button yesterday:

 

1. PRICE: the SP500’s immediate-term TRADE oversold line of support = 1817 with TREND support well below that at 1771

2. VOLUME: my composite volume signal was in line with my TREND based average yesterday; nothing to freak out about

3. VOLATILITY: front-month VIX was obviously up on the day, but still well below @Hedgeye TREND resistance of 14.91

 

So that’s that. The #history and #math parts had nothing to do with “valuation” obviously.

 

How about the #behavioral side of the decision to buy SPY? I think about that in 2-big parts, levels and catalysts:

 

1. LEVELS: for a year now, performance chasers have been selling red and buying green; fade that consensus on the signal

2. CATALYSTS: A) Japanese Yen was signaling overbought and B) JPM was signaling immediate-term TRADE oversold

 

These are, of course, very immediate-term catalysts. But when making buy or sell decisions, what else would you use? Whether people admit it or not, without a tested and tried, real-time, decision making process, they’ll use emotion instead of high probability signal levels and catalysts - or at least I used to.

 

on A) and B):

 

A) The Global Macro Correlation Risk that is the YEN vs Nikkei relationship is crystal clear (Yen Down = Nikkei Up)

B) JP Morgan (JPM) beating earnings in this environment (fat Yield Spread) is research edge you either had or did not

 

On A) the Yen is -0.6% vs USD this morning and on B), thankfully I have a great Financials analyst in Josh Steiner (who has been The Bear on NSM as of late). But even if I didn’t have Steiner, I’d have had that JPM oversold signal alongside the Yen’s overbought one. Now the manic media can run headlines that “JPM Beat, Alleviating Valuation Concerns.”

 

You either have research and risk management signals that you trust, or you do not. They help keep me well informed.

 

Our immediate-term Macro Risk Ranges are now:

 

SPX 1817-1851

Nikkei 15045-15764

VIX 12.08-14.54

USD 80.29-81.35

USD/YEN 103.15-104.61

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Are You Well Informed? - Chart of the Day

 

Are You Well Informed? - Virtual Portfolio


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Pyrrhic Victory for Puma?

Takeaway: Did Nike deliberately inflate the price Puma paid?

Puma to Outfit Arsenal Football Club

(http://online.wsj.com/news/articles/SB10001424052702303553204579346393097168058)

Pyrrhic Victory for Puma? - ars 

  • "Puma AG said it would supply the uniforms and merchandise for English Premier League team Arsenal Football Club..."
  • "He wouldn't comment on the value of the deal beyond saying it represents the 'biggest deal in Puma and Arsenal's history.' British press reports suggest Arsenal will receive £30 million ($49.7 million) a year for the five years of the deal."

Takeaway from Hedgeye Retail analyst Brian McGough: Puma beat out Nike for the right to spend $50 million to put their logo on Arsenal's jersey. Nike is currently in the midst of negotiations with Manchester United, and most likely bowed out of the Arsenal talks after Puma inflated the price. Either that, or in typical Nike fashion, it knew how badly its competitor wanted the deal, so it bid up the price knowing that it would ultimately walk away.

Join the Hedgeye Revolution.


IS VENEZUELA NEXT?

Takeaway: We see heightened risk of a material devaluation of the Venezuelan bolivar (VEF) over the intermediate term.

CONCLUSIONS:

 

  1. All told, we see heightened risk of a material devaluation of the Venezuelan bolivar (VEF) over the intermediate term. This is actually not our first rodeo here; recall that we correctly predicted the eventual devaluation in FEB '13 of -32% in our OCT '12 note titled: "IS CHAVEZ POISED TO DO MORE IN VENEZUELA?".
  2. In normal times, that catalyst might come-and-go without any meaningful degree of broad capital markets impact. In today’s increasingly scrutinized emerging market investment landscape, however, we can’t see how another gap down in an EM currency bodes well for broader sentiment towards EM assets and a reversal of #EmergingOutflows.
  3. Looking to actual conditions on the ground in Venezuela, credit investors have been increasingly worried of late. 5Y CDS has ramped +271bps in the YTD to 1,419bps wide. The move on the 1Y tenor has been even more dramatic since then (+316bps to 1,486bps wide – i.e. wider than the longer 5Y tenor).
  4. Moreover, Venezuela’s benchmark 10Y USD bonds have dropped -8.72 points in the YTD to 66 cents on the dollar and are now yielding a world-beating 16.12%.
  5. Perhaps creditors are anticipating that President Maduro does something equally as dramatic over the intermediate term (i.e. yet another material devaluation of the VEF – or worse). Bloomberg Consensus currently anticipates a VEF devaluation from the current official rate of 6.3 per USD to 10.3 per USD (-39%) by the end of 1Q14.

 

In the wake of Argentina’s currency devaluation last week, we’ve gotten a couple of questions from subscribers asking, “who’s next?”.

 

While it’s tough to get inside the head of foreign (or domestic) policymakers with regard to timing, we think Venezuela is definitely on what appears to be a growing list for prospective material currency debasement. Please note that we don’t care if it’s an intentional devaluation or unintentional debasement; monetary and fiscal policymakers always have a choice with respect to protecting the purchasing power of their citizenry from both internal and external forces.

 

Venezuela remains the certified gong show we’ve identified it as in our published work over the years – most recently in our proprietary EM Crisis Risk Model, which shows that Venezuela is overly exposed to BoP/Currency Crisis risk (i.e. Pillar I) and Political & Regulatory (i.e. Pillar IV) risk:

 

IS VENEZUELA NEXT? - 1

 

This, of course, comes as a surprise to no one, given the country’s history of devaluations, expropriations etc. (CLICK HERE for our most recent work on these topics). It’s fitting that the country is rated B-, Caa1 and B+ by S&P, Moody’s and Fitch, respectively, and all three agencies maintain a negative outlook on their ratings.

 

Looking to actual conditions on the ground, credit investors have been increasingly worried of late. 5Y CDS has ramped +271bps in the YTD to 1,419bps wide. The move on the 1Y tenor has been even more dramatic since then (+316bps to 1,486bps wide – i.e. wider than the longer 5Y tenor).

 

IS VENEZUELA NEXT? - 2

 

That is worrisome. Perhaps creditors are anticipating that President Maduro does something equally as dramatic over the intermediate term (i.e. yet another material devaluation of the VEF – or worse). Bloomberg Consensus currently anticipates a VEF devaluation from the current official rate of 6.3 per USD to 10.3 per USD (-39%) by the end of 1Q14.

 

Maduro’s recent activity (as well as the recent activities of his gov’t) would certainly support that view:

 

  • Devaluing the official exchange rate for oil investments and tourist dollars in mid-DEC;
  • Forcing international airlines to keep their revenues locked in the country at the official exchange rate;
  • Stepping up the military enforcement of broad price controls that have been negatively impacting over 1,000 businesses operating in Venezuela – both domestic and foreign; and
  • The central bank delayed the release of its DEC CPI report for 20 days; a preliminary report on public spending, etc. that was scheduled to be released on DEC 31st has also yet to be released.

 

Meanwhile, here are five key macroeconomic statistics that are currently pressuring Venezuelan policymakers to act:

 

  1. The VEF has lost ~75% of its value in the black market over the TTM, with one USD fetching as much as 64 VEF in Caracas;
  2. Reported inflation ripped to +56.2% YoY in 2013 from 21.3% in 2012 as producers have hoarded goods and/or reduced production in anticipation of another devaluation and further price increases;
  3. The country’s scarcity index, which measures the percentage of goods that are out of stock and has been conspicuously absent since its OCT ’13 publication, hit 22.4% in OCT – the highest ratio since JAN ’08;
  4. Real GDP growth slowed dramatically to +1.6% YoY in 2013 from +5.6% in 2012; and
  5. At $21.2B as of JAN 24th, central bank FX reserves have declined -40% from their peak in DEC ’09.

 

IS VENEZUELA NEXT? - 3

 

IS VENEZUELA NEXT? - 4

 

The first statistic is supportive of a devaluation in the context of President Maduro’s recent promise to “create a unified exchange system next year which will provide foreign currency at a fair price for the functioning of the economy.” Under the current regime the government provides ~95% of the USD in the economy to selected companies and individuals at 6.3 VEF per USD. The remaining 5% is sold through weekly auctions at a higher floating rate, which currently stands at 11.3 VEF per USD.

 

The last statistic supports a currency devaluation because the country may seek a devaluation to shore up its illusion of creditworthiness (via artificially inflating FX reserves like Argentina does). The timing of which is anyone’s guess, but we’re guessing last week’s move in the ARS has investors pulling forward expectations, at the margins.

 

In spite of the aggressive price controls, we can’t see how another devaluation does not promote further rampant inflation – which we’d argue has played a critical role in perpetuating the well-documented social unrest in the country in the wake of Chavez’s death.

 

Net-net-net-net-net, the bond market’s got this one right, folks; Venezuela’s benchmark 10Y USD bonds have dropped -8.72 points in the YTD to 66 cents on the dollar and are now yielding a world-beating 16.12%. Remember, a weaker currency makes it harder to service USD debt (in the absence of pillaging central bank FX reserves, of course).

 

IS VENEZUELA NEXT? - 5

 

All told, we see heightened risk of a material devaluation of the Venezuelan bolivar (VEF) over the intermediate term. In normal times, that catalyst might come-and-go without any meaningful degree of broad capital markets impact. In today’s increasingly scrutinized emerging market investment landscape, however, we can’t see how another gap down in an EM currency bodes well for broader sentiment towards EM assets and a reversal of #EmergingOutflows.

 

Aye, aye, aye…

 

DD

 

Darius Dale

Associate: Macro Team


NAVIGATING #EMERGINGOUTFLOWS: STRATEGY FROM THE SOURCE

Takeaway: We remain broadly bearish on EM assets and continue to think that absolute returns for EM assets will be negative over the intermediate term

CONCLUSIONS:

 

  1. We continue to think it’s of utmost importance for investors to proactively prepare their portfolios for what we continue to see as the next cycle of emerging market crises.
  2. We remain broadly bearish on EM assets and continue to see them for what they are: overpriced relative to a long-term TAIL investment cycle that has clearly turned in favor of DM assets, at the margins. For some long ideas in the DM space, look no further than our #EuroBulls theme, which continues to augur well for appreciation across the UK and German capital and currency markets.
  3. We continue to think that absolute returns for EM assets will be negative over the intermediate term. In fact, we continue to believe that EM assets lose in two out of the three most probable intermediate-term global macro scenarios. As such, we don’t think discretion is overly warranted until investors drill down into the country level.
  4. Here are three more important things to highlight: 1) the US Dollar Index remains broken TREND and TAIL (old news); 2) the 10Y Treasury Yield is now below its TREND line (new news); and 3) the CRB Index is now trading above its TREND line (new news). If this setup continues to manifest in the face of declining risk aversion, then we could get behind EM assets on the long side for trade.
  5. For now, however, we’re comfortable with our current positioning. The SPX is now testing its TREND line of support (1779); a confirmed breakdown below that level in conjunction with the VIX remaining above its TREND line does not augur well for declining risk aversion with respect to the intermediate term.

 

Needless to say, last week was a brutal week if you were running a EM FX carry-trading strategy(ies) or, if you’ve been conditioned by the past ~10Y to be permanently bullish on emerging market assets.

 

As of Friday’s close, the JPM EM Currency Index had fallen -1.8% WoW; LatAm – which remains our favorite region on the short side of EM capital and currency markets – led decliners with the Bloomberg/JPM LatAm Currency Index falling -3.2% WoW. The iShares MSCI Emerging Markets Index ETF (EEM) declined nearly -4% last week and is now down -8.5% for the YTD.

 

NAVIGATING #EMERGINGOUTFLOWS: STRATEGY FROM THE SOURCE - EM

*As of Friday's close.

 

NAVIGATING #EMERGINGOUTFLOWS: STRATEGY FROM THE SOURCE - FX

*As of Friday's close.


The Argentine peso was undoubtedly the life of the party, declining over -15% last week. If you missed our note from last Thursday titled: “ARGENTINE DEFAULT 2.0?”, we encourage you to review it whenever you have a few minutes to spare; it’s a must-read for any investor attempting to understand the myriad of idiosyncratic risks that one must consider when allocating capital to emerging markets at this stage in the cycle.

 

We continue to think it’s of utmost importance for investors to proactively prepare their portfolios for what we continue to see as the next cycle of emerging market crises. Contrast the following preparation with the hyperbolic and emotional research that you’ve likely been spammed with from the sell-side over the past ~72 hours:

 

 

All told, we remain broadly bearish on EM assets and continue to see them for what they are: overpriced relative to a long-term TAIL investment cycle that has clearly turned in favor of DM assets, at the margins. For some long ideas in the DM space, look no further than our #EuroBulls theme, which continues to augur well for appreciation across the UK and German capital and currency markets.

 

When we last left off, we had a number of ways to play this view within the construct of EM assets; below is a review of that strategy:

 

NAVIGATING #EMERGINGOUTFLOWS: STRATEGY FROM THE SOURCE - OW LONGS

 

NAVIGATING #EMERGINGOUTFLOWS: STRATEGY FROM THE SOURCE - UW SHORTS

 

  • ASSET CLASS LEVEL: a cumulative -117bps of equal-weighted performance
    • Overweight EEM: -6.5%
    • Underweight EMLC: -5.4%
  • REGIONAL LEVEL: a cumulative +18bps of equal-weighted performance
    • Overweight GUR: -7.5%
    • Underweight GML: -7.7%
  • COUNTRY LEVEL: a cumulative +614bps of equal-weighted performance
    • Overweight EWW: -8.6%
    • Overweight EPOL: -3.6%
    • Overweight RSX: -9.5%
    • Overweight EWY: -6.6%
    • Overweight EWT: -2.4%
    • Underweight EWZ: -8.6%
    • Underweight ECH: -7.4%
    • Underweight EIDO: +1.2%
    • Underweight THD: -5.9%
    • Underweight TUR: -14.7%

 

Obviously if we were running a fund, we would not have these positions on in equal weights; we’ve obviously been the loudest EM bears on the street since last APR, so it would only make sense to size the shorts appropriately larger than the longs.

 

From here, we continue to think that absolute returns for EM assets will be negative over the intermediate term. In fact, we continue to believe that EM assets lose in two out of the three most probable intermediate-term global macro scenarios. As such, we don’t think discretion is overly warranted until investors drill down into the country level.

 

NAVIGATING #EMERGINGOUTFLOWS: STRATEGY FROM THE SOURCE - Global Macro Scenarios

 

In that vein, the only change we would make there would be to remove Russia (RSX) and Mexico (EWW) from the overweight ideas. Crude oil is now bearish TREND and TAIL on our quant factoring and we no longer wish to seek out that exposure on the long side. Indonesia (EIDO) is nowhere near as compelling on the short side as it once was, given the recent acceleration in hawkish rhetoric out of Bank Indonesia; still, we’d like to see them put their money where their mouth is in that regard (i.e. hike rates again) before we can get behind a turnaround story here.

 

NAVIGATING #EMERGINGOUTFLOWS: STRATEGY FROM THE SOURCE - Crude Oil

 

Here are three more important things to highlight: 1) the US Dollar Index remains broken TREND and TAIL (old news); 2) the 10Y Treasury Yield is now below its TREND line (new news); and 3) the CRB Index is now trading above its TREND line (new news). If this setup continues to manifest in the face of declining risk aversion, then we could get behind EM assets on the long side for trade.

 

NAVIGATING #EMERGINGOUTFLOWS: STRATEGY FROM THE SOURCE - DXY

 

NAVIGATING #EMERGINGOUTFLOWS: STRATEGY FROM THE SOURCE - 10Y UST Yield

 

NAVIGATING #EMERGINGOUTFLOWS: STRATEGY FROM THE SOURCE - CRB Index

 

For now, however, we’re comfortable with our current positioning. The SPX is now testing its TREND line of support (1779); a confirmed breakdown below that level in conjunction with the VIX remaining above its TREND line does not augur well for declining risk aversion with respect to the intermediate term.

 

NAVIGATING #EMERGINGOUTFLOWS: STRATEGY FROM THE SOURCE - SPX

 

NAVIGATING #EMERGINGOUTFLOWS: STRATEGY FROM THE SOURCE - VIX

 

For more details about our multi-factor, multi-duration quantitative overlay, please refer to slide #5 of our 1Q14 Macro Themes presentation. It remains unclear to us how so many strategists make calls on markets without a proven process to contextualize critical inflection points in global markets in real-time, but to each his/her own.

 

At any rate, we’ll stick with our process for marrying bottom-up macro fundamentals (e.g. our proprietary EM Crisis Risk Index and our deep-dive research on the previous two EM crisis cycles) with a top-down overlay (e.g. our quantitative market timing signals).

 

Don’t fix it if it ain’t broken!

 

DD

 

Darius Dale

Associate: Macro Team


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