This note was originally published at 8am on September 15, 2014 for Hedgeye subscribers.
“Sometimes you got to go back to actually move forward.”
-Matthew McConaughey in the new Lincoln MKC commercial
I thought Lincoln nailed it with this one-minute McConaughey spot (click here Lincoln’s newest commercial). Both our personal and collective histories have always provided great sources of leadership and inspiration in this country. “You just have to know where to look.”
As our firm moves forward, we’ll continue to be the change we’d like to see in America. We’ve created an outreach program called HedgeyeCares and tomorrow we’ll be hosting our inaugural golf tournament to support the area’s youth through the Bridgeport Caribe Youth Leaders, a 501(c)(3) organization. (Here’s a short video we put together with testimonials from current recipients: https://www.youtube.com/watch?v=t5NgER166I0).
We’re also extremely thankful to The Lincoln Motor Company for its title sponsorship. Lincoln is a great American luxury brand that recognizes the importance of giving back to communities across the country. With its test drive program “Driven to Give”, it has raised more than $3.27 million dollars for schools and charities across the United States since it was created in 2011. That’s a great win!
Thanks again to all of our event sponsors and participants. Change doesn’t happen unless we make it happen, together.
Back to the Global Macro Grind…
Change happened in macro markets last week. They went backwards! And it wasn’t just stocks that pulled back. They smoked pretty much everything from commodities to bonds to any stock that looked like a bond. That leaves us with a lot to think about ahead of the Fed this week.
Will the US Federal Reserve get more hawkish or dovish at its Wednesday meeting? With the US Dollar having had its biggest point to point ramp since 1997, and the 10yr bond yield ramping +15bps week-over-week to 2.61%, expectations for hawkishness are high.
Since I think this USD ramp has been largely driven by horrendous economic data in both Europe and Japan (weaker Euros and Yens), I think you fade the recent strength in US interest rates and buy what was down the most last week:
- Long end of the bond market (TLT and EDV) with no support for the 10 and 30 yr yields to 2.34% and 3.11%, respectively
- Gold (GLD) was down -2.8% last week (to +2.1% YTD), and has immediate-term upside to $1275
- Utilities (XLU) were down -3.1% last week (to +11.3% YTD), and has immediate-term upside to $44
- REITS (VNQ) were down -5.4% last week (to +13.2% YTD), and has immediate-term upside to $77
- Emerging Markets (VWO) got sacked last week (MSCI LATAM -6.7% on the wk) and have immediate-term upside to $46
That’s why you see me investing what was our largest Cash position of the year in the Hedgeye Asset Allocation Model, taking up our US Equity exposure from 0% to 6% (split the net long position between Utilities and REITS, and stay short the Russell, Housing, and Regional Banks).
The alternative to buying slow-growth #YieldChasing is, of course, chasing the #MoBros. You know, something like Argentina (ARGT) which was up another +6.1% last week to +105% YTD – even though you really can’t get your money in/out of the country.
With the Russell 2000 down for the 2nd straight week to -0.3% for 2014 YTD, that’s why I still like staying net short (for long onlys its called underweight) one of the most obvious bubbles in America right now – small cap stocks that trade at 50x trailing earnings, with no liquidity.
In other #bubble news, at 30x revenues and $220B in market cap, you’ll have plenty of liquidity in AliBubble (BABA) this week!
While I am sure BABA is a fantastic story… as I see it, the problem with Jack Ma’s company is that... I can’t see it. While the Old Wall is fist pumping this sucker to oblivion this week, that’s the bear case – #opacity. And that’s all I have to say about that.
The other big #bubble callout from last week was #deflation.
Unfortunately, your cost of living didn’t deflate much (CRB Food Index was up another +1.3% on the week to 18.3% YTD, Cattle prices were up another +0.7% to +33.4% YTD, etc.), but that was one of the most broad based selloffs across asset classes of the year.
Most of this #deflation was driven by the biggest currency move (in weekly rate of change terms) we’ve seen in 17 years. When stuff moves that fast, what you get is this thing called volatility.
In rate of change terms, the +10.1% week-over-week move in front month US Equity volatility (VIX) was peanuts compared to the % move in volatility in foreign currency and fixed income. That’s what happens when the Fed suppresses volatility to all time lows. The bubble peaks.
If we’re right and we’re set up for one of the most asymmetric moves in volatility ever (see our Q3 Macro Theme deck titled #VolatilityAsymmetry), Americans may be looking back at late 2007 a lot faster than they think.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.34-2.62%
Best of luck out there today,