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Nope, We Do Not Think It's Different This Time $VIX $SPY

Takeaway: A glaring US equity sell signal at VIX 10.32.

Editor's note: This is an excerpt from CEO Keith McCullough's morning research. 

 

A glaring US equity sell signal at VIX 10.32. It has never sustainably held below 10. Never. That is a long time.

 

The first SELL signal I issued in SPY since Feb 10, 2014 came on Thursday in conjunction with that front-month vol oversold reading.

 

Nope, We Do Not Think It's Different This Time $VIX $SPY - Chart of the Day


Unstoppable Ballers

This note was originally published at 8am on June 23, 2014 for Hedgeye subscribers.

“Your love makes me strong; your hate makes me unstoppable.”

-Cristiano Ronaldo

 

If you’ve been following Team USA in the World Cup and didn’t know who Ronaldo was, now you know. Ronaldo’s sick pass in the final minute of last night’s USA-Portugal match reminded the ladies who is one of the best looking ballers in the game too!

 

To be fair, while he did get expelled for throwing a chair at his teacher, Ronaldo isn’t exactly a thug. His Mom was a cook and his Dad was a municipal gardener and they named him after Ronald Reagan. In 2009, the young Manchester United star with the flow became the highest paid footballer in the world.

 

Ronaldo plays for Real Madrid now and gets paid in a strengthening currency – British Pounds. After taxes, he makes 21M Pounds/year. That’s earnings, before-inflation-debauchery-accelerating (EBITDA - i.e. the unstoppable and un-legislated worldwide commodity inflation superimposed on poor people by the Fed).

 

Unstoppable Ballers - cristiano ronaldo therichest

 

Back to the Global Macro Grind

 

Unlike the US Federal Reserve, who knows how to trick people who wouldn’t know otherwise into believing that there is no inflation, after he shocks you with dramatic goals like he did yesterday, Ronaldo says “I don’t think about one trick or the other; they just happen.” #talent

 

As the Fed weakens the US Dollar, inflation just happens too:

 

  1. Last week the US Dollar Index was -0.3% to $80.33
  2. The CRB Commodities Index (19 Commodities) was up another +1% week-over-week to +11.8% YTD
  3. CRB Food Index was up another +2.1% on the week to +22.8% YTD

 

Yep, as Hemingway might have said, at first inflation happens slowly – then all at once. Here’s what some of the sub-components of commodity-inflation-expectations did AFTER the Fed cut its growth forecast and eased last week:

 

  1. Silver +6.1% on the week to +7.4% YTD
  2. Sugar +5.0% on the week to +10.0% YTD
  3. Gold +3.2% on the week to +9.2% YTD
  4. Nickel +2.7% on the week to +32.3% YTD
  5. Brent Oil +2.0% on the week to +5.8% YTD

 

True. Brent Oil isn’t really up that much, compared to Nickel. But West Texas Crude is up more than Silver, at +11.5% YTD! And, despite the bearish supply views of Consensus Macro on most things metals, I’m thinking +32.3% is getting someone paid in size being long #InflationAccelerating YTD.

 

But, but, “the Dow is up” … Uh, ok. It’s up a whopping +2.2% YTD.

 

If you want to be a real baller and be long the stuff in the US stock market that’s crushing a low-single digit performance # for the YTD, you need to be long of both inflation and the slow-growth it drives into the consumption core of America:

 

  1. Energy Stocks (XLE) up another +2.6% last week to +14.0% YTD
  2. Slow-growth Utilities (XLU) up another +2.2% last week to +14.5% YTD
  3. REIT stocks (MSCI Index) up another +1.6% last week to +15.8% YTD

 

Exactly. As long as the Fed won’t call the all-time highs in US Rents “inflation”, just buy exposure to the REIT and/or private equity firm that is going to jam his renters with more of it.

 

Other than currencies, commodities, and stock style factors, there are of course other ways to monitor what the real-time market thinks about #InflationAccelerating.

 

Five-year breakevens, for example, were up a full +11bps (basis points) last week to +26bps YTD. You can look at a chart of TIPs (Treasury Inflation Protection, which we continue to be long of on Real-Time Alerts terms too).

 

Or you can look at things like hedge fund net positioning via CFTC (Commodities Futures Trading Commission) net long and short positions:

 

  1. Gold’s net long position popped +15,292 to a net LONG position of +66,572 contracts last week
  2. Oil’s net long position ramped to an all-time high of +478,907 net LONGs (+39,087 net longer on the week)

 

Or you can just call all of this what it is. Because the only thing more dangerous than having the ball on Ronaldo’s foot in the final minutes of a game that is about to go bad is having both Iraq and the Fed come at you on oil inflation, all at once…

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.47-2.64%

SPX 1926-1968

VIX 10.11-12.98

USD 80.18-80.60

Pound 1.69-1.71

WTI Oil 106.01-107.98

Gold 1285-1325

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Unstoppable Ballers - Chart of the Day


Volatility, U.S. Dollar and Rates

Client Talking Points

VIX

Glaring U.S. equity sell signal at VIX 10.32 (it has never held, sustainably, below 10 – and never is a long time). First SELL signal we issued in SPY since February 10, 2014 came on Thursday in conjunction with that front-month volatility oversold reading.  

USD

At the same time the USD was signaling immediate-term TRADE overbought within its bearish long-term TAIL risk setup on Thursday. Don’t forget that the U.S. unemployment report is a lagging economic indicator – fade it.

UST 10YR

0% follow through for rates today as 10yr yield fails at both our TAIL risk and TREND resistance lines. It would need to close above 2.81% for us to seriously question our U.S. #Q3Slowing Theme (we are hosting our Macro Themes Call for Q3 on Friday at 11:00am EDT).

Asset Allocation

CASH 10% US EQUITIES 8%
INTL EQUITIES 12% COMMODITIES 24%
FIXED INCOME 28% INTL CURRENCIES 18%

Top Long Ideas

Company Ticker Sector Duration
HOLX

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.

OC

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.

LM

Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road

TWEET OF THE DAY

INDIA: (one of our fav equity markets) is now +24.3% YTD (Indonesia +18.3% YTD), crushing the Dow

@Keith McCullough

QUOTE OF THE DAY

“The best way to predict the future is to create it.”

-Peter Drucker

STAT OF THE DAY

German industrial production fell 1.8% in May from April, the largest drop in two years, weighed down by sharp falls in the construction and manufacturing sectors.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.30%
  • SHORT SIGNALS 78.51%

Moments of Discontinuity

“Each circle of time has a great moment of discontinuity.”

-The Fourth Turning

 

No, the stock market is not the economy. And the bond market is not the stock market. Everything is relative to its own rate of change. On that score, I think the US economic cycle is about to meet another great moment of discontinuity.

 

In the ancient view, a new round of time does not emerge gradually from the last but only after the circle experiences a sharp break” (The Fourth Turning, pg 31). The Hedgeye Macro Model is hardly ancient, but Mr. Market’s respect for mean reversion within long-term cycles is.

 

Moments of Discontinuity - clock2

 

After a -2.9% GDP print in Q1, the Old Wall’s latest victory lap on US growth came in the form of a classic lagging economic indicator last week – headline employment data. Since our models focus primarily on rate of change, it wasn’t surprising to see the slope of private wage growth remain negative. #InflationAccelerating and real-wages tracking negative for the first time in two years should ensure #Q3Slowing.

 

Back to the Global Macro Grind

 

On Thursday afternoon, we shorted SPY for the 1st time (in Real-Time Alerts terms) since February 10th, 2014, on that. Well, maybe not only on that. You see, having a view on an economy within the Global Macro marketplace is pretty much useless unless you have some repeatable mechanism (read: #timing signal) that tells you when the probability of acting is falling into your favor.

 

With literally no volume trading in US Equities on Thursday (at the all-time highs), here’s the multi-factor, multi-duration, risk management signal I was looking at:

 

1. US DOLLAR – bouncing to lower-highs for the 1st time in 2 weeks, but still well below $81.17 TAIL risk line (USD Index)

2. US RATES – bouncing to lower-highs for the umpteenth time in 2014, but well below 2.81% TREND line resistance

3. VOLATILITY – front month VIX testing its all-time lows, closing at 10.32 (it has never held below 10, sustainably)

 

Yes, never (in mean reversion terms) remains a very long time. So it’s a lot easier to make the SELL call on US domestic consumption growth today than it was when the Old Wall didn’t agree with us 6 months ago.

 

But consensus wouldn’t want to do that now, would it? How about you? If I’m right, you are going to crush your competition (newsflash: your competition in US Growth Equities is called levered long beta), just like you did from January 1st to the May 2014 lows.

 

If I’m wrong, well, consensus is going to be really right.

 

Strapping on the accountability pants is fun right here and now because the more bearish you are on US growth in Q3, the more you can get invested (on the long side) in what is going to be perpetuating outflows from US domestic equity funds:

 

1. Long Inflation (Commodities, Energy Stocks, Gold, etc.)

2. Long Bonds + Anything That Looks Like A Bond (love those #GrowthSlowing Yield Chasers!)

3. Long Foreign Currencies + Emerging Market Stocks (vs USD short)

 

This is when making a macro call matters – when you get those rare Moments Of Discontinuity in markets where you can put a lot of money to work. Sounds crazy, but this is much like the moment you had on JAN 1 to buy Gold and Utilities (+10% and +12% YTD, respectively).

 

To be crystal clear on this, we aren’t calling for the next Lehman – we are using our process to make an ole school consumption-cycle call. When the cycle is in phase transition, you get paid to shift your Style Factoring for the part of the cycle that you are entering.

 

In our process-speak we call this moving from the 2nd quadrant to the 3rd (within a 4 quad model using 2-factors, Growth & Inflation). Not unlike how Strauss and Howe explain “four-phase time” of the seasons, this risk management framework helps us simplify the complex.

 

“Time’s circle moves not only from cold, to hot, to cold but also from growth to maturity to decay to death.”

-William Strauss and Neil Howe (The Fourth Turning)

 

And while the “decay to death” part is not what I wake up thinking about in the morning, it does happen. Countries and companies slow too - and so does the confidence The People have in things like central-planning and the stock market’s last price being the economy.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.50-2.67%

SPX 1

VIX 10.11-11.54

USD 79.73-80.35

Pound 1.69-1.71

Brent Oil 110.03-112.99

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Moments of Discontinuity - Chart of the Day


July 7, 2014

July 7, 2014 - Slide1


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