The Perfect Idea

This note was originally published at 8am on November 17, 2014 for Hedgeye subscribers.

“The idea, the perfect idea, is to keep moving.”

-Eisenhower

 

The more #history I read, the more I like Ike; especially the Ike (Dwight D. Eisenhower) that was on the ground alongside his men, serving as the 1st Supreme Allied Commander of Europe during WWII.

 

The aforementioned quote comes from page 273 of The Guns At Last Light above a picture of American soldiers wading “from a landing craft toward Omaha Beach” #1944. Oh how our collective expectations in life have changed since then.

 

I thank God every day for the opportunities I’ve been provided. While my “highest conviction” ideas reside in this fish bowl, The Perfect Idea is for me to have two feet on the floor at the top of the risk management morning, and to keep moving.

 

The Perfect Idea - dwight

 

Back to the Global Macro Grind

 

While risk often moves slowly, then all at once… sometimes it doesn’t move at all. Last week, our least preferred of the major US stock market indices (Russell 2000) did absolutely nothing.

 

Oh, and it was unchanged in the week before that too. I guess that’s what they call a “bull market” - something that doesn’t go down! After going down hard (-15% from its all-time #bubble high in July, to its October low), the Russell is +0.9% YTD.

 

“So”, keep selling that (IWM) against The Perfect Idea during what we call #Quad4 Deflation = Long the Long Bond (in TLT, EDV, etc.). And de-stress yourself a little as the macro market stresses about both growth and inflation slowing.

 

Dow navel gazers saw it “up” +0.3% last week – but here were the rest of the world’s #deflation signals:

 

  1. Japanese Yen burnt for another -1.4% devaluation (-9.4% YTD vs USD)
  2. Commodities (CRB Index) deflated another -1.4% week-over-week to -4.8% YTD
  3. Oil (WTI crude) continued to crash, down another -3.4% on the wk to -18.1% YTD
  4. Natural Gas dropped -7.8% week-over-week (sans le Polar Vortex) to -5.7% YTD
  5. Energy Stocks (XLE) led US stock market sector losers, -1.8% on the wk to -2.6% YTD
  6. Russian Stocks (RSX) continued to crash, -0.7% to -30.7% YTD

 

I know, this is cherry picking – or something like that (like quoting the Dow isn’t!), but if you broaden your horizons and look beyond an epic currency devaluation and energy-deflation linked stock and bond exposures, here’s what else was going on:

 

  1. Greek stocks continued to crash, down another -2.2% on the wk to -23.4% YTD
  2. Brazil’s major stock market index (Bovespa) got tagged for another -2.7% weekly loss (+0.5% YTD)
  3. Mexico’s stock market dropped -2.8% week-over-week to +1.5% YTD

 

Yes, the “no worries” CNBC narrative gets more worrisome when you consider what the Bank of England’s chief, Mark Carney, called “huge disinflationary pressures” (code words for #deflation) this morning.

 

That comment came on the heels of Japan’s stock market dropping -3% overnight (after the Yen stopped going down) as Japan “unexpectedly falls into recession.” Unexpected by some Bloomberg beat writer maybe - #expected by anyone paying attention.

 

While it may feel a little odd buying into a central plan that promises more of what has not worked economically (they call it Abenomics), if you did that last week, you #crushed it –amidst the global #deflation in stock prices, the Nikkei was +3.6% #hooray.

 

Which brings us to this morning’s Consensus Macro positioning (non-commercial CFTC futures and options contracts):

 

  1. Japanes Yen’s net short position got -12,042 shorter last week to -85,768 NET SHORT
  2. SP500 (Index + Emini) NET SHORT position got cut by +36,543 contracts to almost neutral at -1,762
  3. UST 10yr Treasury NET SHORT position ramped by another -86,212 contracts to -126,213 shorts!

 

In other words, Consensus Macro (which has had both global growth and bond yields wrong for all of 2014) figured the Japanese Yen was going to go down every day, US stocks higher (every day), and the Long Bond down (bond yields up)…

 

In other news, the exact opposite is happening this morning. Which makes being NET LONG the long-end of the Treasury market and NET SHORT the Russell 2000 feel like the perfect contrarian idea to start off your week.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.28-2.36%

SPX 1995-2050

RUT 1148-1187

Italy MIB 18601-19088

Yen 113.58-116.51
WTI Oil 74.35-77.25

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Perfect Idea - 11.17.14 Chart


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