Fleeting Emotions

This note was originally published at 8am on July 30, 2014 for Hedgeye subscribers.

“Fleeting emotions tempt us to make decisions that are bad in the long term.”

-Chip & Dan Heath

That’s another important quote from the recent #behavioral book I finished this week – Decisive, by Chip & Dan Heath.

How do you overcome your short-term emotions in markets? Does loss aversion drive your decision making? How does mere exposure to something going against you affect your #process?

The Heath boys suggest that “our decisions are often altered by two subtle short-term emotions: 1. Exposure to what’s familiar to us; and 2. Loss aversion.” (pg 174) Both 1 and 2 sound like a market’s last price to me.

Fleeting Emotions - 4v

Back to the Global Macro Grind

Real-time prices are very familiar to us. Unless you’re someone who doesn’t do #timestamps (in Independent Research terms) or have a buy-side P&L, so is loss aversion. Which brings me to the one major macro position that is currently going against me – the US Dollar.

If you pull up a 2 year chart of the US Dollar Index, you’ll note that:

  1. It made a long-term higher-low in Q4 of 2012 around $79 when we made the US #GrowthAccelerating call
  2. It made a #GrowthAccelerating cycle peak around $85 in Q3 of 2013 (Q313 GDP = +4.1%)
  3. As #GrowthSlowing took hold from Q413 to Q214, it retraced all of those gains back to $79 and change

If you only look at a 6-7 month (YTD) chart of the US Dollar Index:

  1. It dropped from $81.5 in January back down to $79.5 in May
  2. Then it bounced hard off that May low when Draghi devalued the EUR/USD
  3. And now it’s right back to where it was in January

In other words it really hasn’t done anything. That said, it could go up or down a lot from here. If it continues to track both Fed Policy and the rate of change (slope of the line) in US Growth, there’s no reason why it can’t go straight back down to $79.5.

But what if US growth continues to slow, the Fed gets incrementally dovish, and Draghi gets even more dovish? Unfortunately, God didn’t call me this morning with that answer – so I don’t know.

Rather than be wed to any particular macro theme, I’ll let Mr. Macro Market give me hints as to what I should do next. If the Fed does what consensus has been looking for all yr (continues to taper/tighten), and USD heads higher, that would be bearish for Commodities (and bullish for the US consumer). Everyone in America (other than the guys running #YieldChasing MLP schemes) should want that.

In other news that is un-related to my current macro mistake:

  1. Industrial Stocks (XLI) were -1.3% yesterday (-2.2% for July) and are now signaling bearish TREND @Hedgeye
  2. Equity Volatility (VIX) was up again yesterday to 13.28 (+19% since 1st wk of July) = bullish TREND @Hedgeye
  3. Both the Russell 2000 and UST 10yr Bond Yield continue to signal bearish TRADE and TREND @Hedgeye

What’s most interesting to me about the Industrials (XLI) joining the US Consumer and Housing stocks (XLY and ITB are down 2014 YTD too) is that some of them are classic early-cycle indicators.

“So,” setting aside my own personal US Dollar baggage, what if the bigger picture here is that the entire US economy is heading into an early cycle recession? Wouldn’t that be just peachy?

Don’t forget that we are 62 months into a US economic “expansion.” Both that and the SP500 not having had a 10% correction in 33 months (hasn’t happened since 1990) might just be a tad longer in the tooth than a 2-3 month US Dollar dead cat bounce.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 2.44-2.54%

SPX 1960-1978

RUT 1131-1154

VIX 11.94-14.41

USD 80.61-81.39

EUR/USD 1.33-1.35

Gold 1292-1321

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

Fleeting Emotions - Chart of the Day