“Very simple. It’s going to be a big letdown for everyone. It was process and spot.”
I don’t know about yours, but my multi-factor, multi-duration analysis this summer has revealed that my golf game needs some serious work. The hottest hand on the Hedgeye Research Tour, Howard Penney, reminded me that I need to get Rory’s #process.
After his British Open win, Mcilroy explained “with my long shots, I just wanted to stick to my process and stick to making good decisions… I just wanted to roll that ball over that spot. If it went in, then great. If it didn’t, then I’d try it the next hole.”
Process & Spot - #love that. If we can execute it, consistently, on the Global Macro course of interconnected risk, we’ll make less double bogeys. Remember, it’s those of you who don’t have a lot of blow-up holes that have the best performance track records.
Back to the Global Macro Grind…
In Hedgeye-speak, making our tee-to-fairway swing (process) repeatable means embracing the uncertainty of Mr. Macro Market’s intermediate-term TREND signals:
- If something like Chinese Stocks or Copper signal a bearish to bullish TREND reversal, we buy/cover
- If something like the Russell 2000 or Bond Yields signal a bullish to bearish TREND reversal, we sell/short
In long-bond speak, when we sell bond yields, we buy bonds. And we like it.
When it comes to our shorter-term duration game (putting), we try to manage what we call the immediate-term TRADE risk of the range. In other words, we respect the breaks and try to take the highest probability line of the proverbial putt by:
- Selling if the price is at the high end of the range
- Buying if the price is at the low-end of the range
Yep. So easy a Mucker can do it. What’s differentiated in this process is that I’m consistent in being inconsistent:
- My long shots are playing with the wind (bullish or bearish TREND)
- My putts are playing the breaks (fading last price)
Consensus Macro tends to do the opposite:
- Longer-term – consensus tends to be late in acknowledging bullish and bearish TREND reversals
- Shorter-term – consensus tends to chase, rather than fade, last price
Across both short and longer-term durations, you can see this on the most emotional strokes the Consensus Macro takes (net long or short futures and options bets in Big Macro positioning):
- LONG BOND (10r Treasury) saw a +26,023 wk/wk swing to a net LONG position in bonds now of +5,282 contracts last wk
- SPX (Index + Emini) saw a +37,728 wk/wk swing to a net LONG position in SP500 of +614 contracts last wk
Now, if you only look at these putts in isolation, you’d say that week over week, these were the right lines to take. But if you look at all the swings it took to get to the green, this was the score:
- LONG BOND – consensus net SHORT bet on average of -21,204 and -43,289 contracts for the last 3 and 6 months, respectively
- SPX – consensus net SHORT bet on average of -65,318 and -44,327 contracts for the last 3 and 6 months, respectively
In other words, for the last 3-6 months, Consensus Macro was A) shorting 10yr Treasuries and B) shorting SPY (and C) making double bogeys). You don’t want to be doing that.
And now you don’t want to be getting net long US Equity beta A) after consensus hedge funds have covered SPX shorts, B) Russell 2000 continues to signal bearish TREND, and C) front-month VIX is testing an intermediate-term TREND bearish to bullish reversal.
Or at least my process says you wouldn’t…
With the CRB Food Index and Energy Stocks (XLE) both up another +0.9% last week to +19.7% and +12.8%, respectively (Coffee and Cattle prices are +52.9% and +28.2% YTD), you probably want to stay net LONG our 2014 #InflationAccelerating Theme and short US Consumers (discretionary and housing stocks) too.
In golf sometimes it’s the shots you don’t take that make all the difference. #Process, spot, #process. Rinse and repeat.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.44-2.54%
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
the macro show
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TODAY’S S&P 500 SET-UP – July 28, 2014
As we look at today's setup for the S&P 500, the range is 21 points or 0.62% downside to 1966 and 0.44% upside to 1987.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 1.99 from 1.98
- VIX closed at 12.69 1 day percent change of 7.18%
MACRO DATA POINTS (Bloomberg Estimates):
- 9:45am: Markit U.S. Services, July prelim., est. 59.8 (prior 61.0)
- 9:45am: Markit U.S. Composite PMI, July prelim. (prior 61)
- 10am: Pending Home Sales m/m, Jun, est. 0.5% (prior 6.1%)
- 10:30am: Dallas Fed Mfg Activity, July, est. 12 (prior 11.4)
- 11am: Fed purchases $1b-$1.25b notes in 2036-2044 sector
- 11am: U.S. announce plans for auction of 4W bills
- 11:30am: U.S. to sell $27b 3M, $24b 6M bills
- 1pm: U.S. to sell $29b 2Y notes
- EPA to hold public hearings this week in Atlanta, Denver, Pittsburgh, Washington on proposed carbon dioxide emissions standards for existing, modified, reconstructed power plants
- EU representatives to discuss curbs on trade, investment with Crimea, penalites for business allies of Russian President Vladimir Putin
- 9:30am: Rep. Scott Garrett, R-N.J., holds roundtable on equity market structure with KCG CEO Daniel B. Coleman, SIFMA CEO Ken Bentsen, Nasdaq OMX CEO Robert Greifeld, BATS Global Markets CEO Joe Ratterman, TD Ameritrade CEO Fred Tomczyk among participants; Library of Congress
- 12:15pm: Treasury Secretary Jack Lew releases annual Social Security and Medicare trustees reports
WHAT TO WATCH:
- Danone said to be in talks to sell medical unit to Hospira
- JPMorgan to sell $1.3b of assets to Sankaty Advisors
- Yukos owners win $50b award against Russia
- Global pressure mounts on Israel to halt Gaza offensive
- Goldman said in talks to settle mortgage case for $800m-$1.25b
- Reckitt Benckiser confirms plans to spin off suboxone unit
- China H-shares rise 20% from March low, enter bull market
- Big Mac banished in Shanghai after meat scare prompts recall
- U.S. says satellite photos show Russia shelling into Ukraine
- Fox said open to giving board seats to Time Warner investors
- Microsoft taps Tencent, JD.com for first Xbox sales in China
- Deutsche Bank, HSBC sued for alleged silver fix manipulation
- Armstrong World (AWI) 7am, $0.65
- Capitol Federal Financial (CFFN) 8am, $0.14
- Compass Minerals Intl (CMP) 7am, $0.26
- Cummins (CMI) 7:30am, $2.39
- Old National Bancorp (ONB) 9am, $0.26
- Roper (ROP) 7am, $1.50
- RPM Intl (RPM) 7:30am, $0.78
- Tenneco (TEN) 7am, $1.26
- Tyson Foods (TSN) 7:30am, $0.78
- American Capital Agency (AGNC) 4:01pm, $0.68
- American Financial (AFG) 5pm, $0.94
- Amkor Technology (AMKR) 4:08pm, $0.15
- CNO Financial (CNO) 4:03pm, $0.31
- Cognex (CGNX) 4:06pm, $0.22
- Crane (CR) 4:15pm, $1.16
- Eastman Chemical (EMN) 5pm, $1.84
- General Growth Properties (GGP) 4:01pm, $0.10
- HealthSouth (HLS) 4:30pm, $0.47
- Herbalife (HLF) 4:30pm, $1.57
- Integrated Device Technology (IDTI) 4:01pm, $0.16
- Jacobs Engineering (JEC) 9:30pm, $0.86
- Masco (MAS) 5:15pm, $0.28
- Norwegian Cruise Line (NCLH) 4pm, $0.57
- Owens & Minor (OMI) 5:17pm, $0.46
- PartnerRe (PRE) 4:30pm, $2.62
- Plum Creek Timber (PCL) 4:04pm, $0.30
- Range Resources (RRC) 5:02pm, $0.40
- WR Berkley (WRB) 4:05pm, $0.76
- XL (XL) 5pm, $0.84
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- WTI Crude Drops Before U.S. Economic Data; Brent Falls
- Gold Bulls Boost Bet on Rally as Prices Extend Drop: Commodities
- World Weather Seen Abnormal as El Nino Poised to Develop: Lerner
- Gold Declines in London as Stronger Dollar Curbs Investor Demand
- Lead Reaches 17-Month High on Supply Outlook as Aluminum Gains
- Wheat Production in Parts of Australia Seen Hurt by Dry Weather
- Big Mac Banished in Shanghai as Meat Scare Prompts Probe
- Morgan Stanley Sees Weaker Aluminum Premiums as Contango Shrinks
- China Takes on Hitachi as 17-Year-Old Rare Earth Patent Ends
- Rubber Reaches Three-Week High as Thai Price Drop Lures Buyers
- Steel Rebar Rises Most in One-Month as China Outlook Improves
- Bulls Fleeing Natural Gas as Goldman Sees Further Drop: Energy
- Corn, Wheat Supply Outlook Fully Priced In, ANZ Says in Report
- China’s State Stockpiler Said to Miss Cobalt Purchase Target
The Hedgeye Macro Team
Takeaway: Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.
Outspoken free market economist and TV personality Larry Kudlow explains why America is suffering from the "worst recovery since World War II" and offers solutions on how the U.S. can regain its economic footing once again.
Here’s the question-and-answer portion from Keith’s daily Morning Call with Hedgeye’s institutional subscribers.
Real Americans are about to get eaten.
HARBINGER? CHINA'S BEARISH-TO-BULLISH REVERSAL
Chinese Stocks (Shanghai Composite) closed up another +1.3% last night after China’s best PMI in 18 months.
LEADING VS. LAGGING INDICATORS: YOU CHOOSE
Risk managing macro rarely has anything to do with “valuation” or even reported supply and demand metrics. Most of the big moves in macro happen on the margin when there is a phase transition in price momentum, volume, and volatility.
Measures of volatility suggest investors remain complacent about a variety of risks, including rising global turmoil which could disrupt the calm over the coming months.
The our poll on Wednesday we asked: Which global conflict is a bigger market threat Israel/Gaza or Russia/Ukraine?
At the time of this post, 69% voted that Russia/Ukraine posted the bigger market threat vs 31% that voted for Israel/Gaza.