The front month fear has crashed to the upside (doubling since the Russell topped July 7th), closing +46% last week to +54.8% VIX year-to-date; immediate-term TRADE overbought within a risk range of 16.85-21.67, so U.S. stocks should bounce.
Oil is not bouncing; after ramming the rocks of #Quad4 deflation (-4.4% last week), WTI is down another -1.9% this morning and this is starting to get gnarly for both spec and low-quality small/mid cap stocks (and bonds) across the energy complex.
Not the best place to be in #Quad4 (the Long Bond and Cash are), but definitely not the worst either – after closing +2.4% last week, Gold is +0.5% to $1230; +2% year-to-date vs. the Russell 2000 -9.5%; Dollar Down helping today.
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The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.
Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position. Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.
Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.
GERMANY: DAX +0.3% to -7.8% YTD #EuropeSlowing
You may have to fight a battle more than once to win it.
We hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 year-to-date, ex-reinvesting interest, TLT = +18.3% year-to-date vs. Russell 2000 -9.5%.
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Best of luck out there,
Associate: Macro Team
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“But pardon, gentles all…”
That’s from William Shakespeare’s Prologue to Henry V. It’s also the opening volley from a #history brick my wife gave me for Father’s Day (sorry, just digging into it now!) called The Guns At Last Light – The War in Western Europe 1.
While I think she sometimes thinks I’m at war with my keyboard in the early mornings, she puts up with my market life – and for that I am forever grateful. From my family to my friends at the firm, getting it done is an all-out team effort.
But whose team is The Bear on? While I received some kind emails while in London last week, I’m not sure that being right this time is a good thing. The #Quad4 Deflation is nastier than a gnarling grizzly. And I fear the war between inflated asset #Bubbles and gravity has just begun.
Back to the Global Macro Grind…
The thing about fear is that you need to accept it before you conquer it. Last week’s +46% move in the front-month fear (VIX) index to +54.8% YTD should help pave part of that path towards acceptance. But don’t forget that there’s a long way between denial (1st stage of grief), anger, bargaining, depression, and acceptance.
Maybe using the Five Stages of Grief is a little over the top for a Monday morning. Maybe not (especially if you are a NY Jets fan). Being bearish at 1208 on the Russell (all-time #Bubble high = July 7th) or during the Ali-Bubble (BABA) IPO day (September 19th) at SPX > 2011 wasn’t easy for me. The denial stage for the bulls was equally isolating for our bearish macro view.
So pardon, gentles all – isolation is often where the alpha lives. And we certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest, TLT = +18.3% YTD vs Russell 2000 -9.5%).
In US Equity terms, here’s how the Def-#Quad4 Deflation looked last week:
That’s right. In addition to the Long Bond (Treasuries), Munis, and Cash, we’ve noted in our most recent Macro Themes slide deck that Consumer Staples (XLP) is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.
Typically, when Correlation Risk (commodities trading inversely to USD) is this high, Down Dollar pays the commodity bulls. But last week, that was only true for pockets of the commodity complex (Oil was -4.4%). In addition to Gold +2.4% last week:
But I am thinking there are more hedge funds who are still carry trading oil futures with a levered long bias than there are 2 and 20 alpha dogs who are long Cocoa on the #Ebola trade.
In fact, if you look at how hedge funds are positioned from a speculative net futures and options perspective:
We’re obviously on the other side of every one of these Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX), so it was a good week. But the bigger question is where do the US equity bulls (and Treasury bears) go from here?
Within the small cap US equity #Bubble, there are a whole bunch of #bubbles we highlighted on our Q4 Macro Themes call (ping if you want the replay). And some of them play right into hedge fund consensus:
We can do a conference call with you to review all of these #bubbles, but the #Complacency one is really easy to show in terms of the number of days where the SP500 has had a > 1% move. After hitting an all-time YTD low, we just had 4 of those days, in a row!
Sure, markets scare people when they do that. I think I scared the hell out of some Institutional Investors in London with some of these slides too. Coming off the all-time lows in complacency, there’s never been this level of #VolatilityAsymmetry, ever.
While never-ever is a very long time – and I certainly don’t mean to be mean (or scare people) - I’d appreciate it if you took it easy on my inbox. My wife thinks of me as a cuddly Thunder Bay Bear, so be gentle with me.
Our immediate-term Global Macro Risk Ranges are now:
WTI Oil 83.99-88.64
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
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