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Counter-TREND Macro Moves

Client Talking Points

EUROPE

Greek stocks were +11.3% last week, but giving up 5% in a hurry, whereas German stocks tapped immediate-term TRADE overbought into the weekend and are down -1.3% this morning. The DAX remains bullish TREND with a risk range of 10572-11031.

OIL

WTI was up +1.9% last week to +8.9% for FEB, and up another +0.5% this morning to $53.05, but closing in on the top-end of its immediate-term risk range = $48.01-53.90. It won’t take much of a USD up move to shake both Oil and the CRB Index.

UST 10YR

The UST 10YR Yield was up +8 basis points last week to 2.04%, and -2 basis points to start the week at 2.02% (started the year at 2.17%). The U.S. PPI data tomorrow will bring back the #deflation theme, then you get CPI next week and plenty of yield expectations into the FEB jobs report after that.

Asset Allocation

CASH 45% US EQUITIES 9%
INTL EQUITIES 7% COMMODITIES 0%
FIXED INCOME 31% INTL CURRENCIES 8%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). As our declining rates thesis proved out and picked up steam over the course of the year, we see this trend continuing into Q1.  Short of a Fed rate hike, there’s no force out there with the oomph to reverse this trend, particularly with global growth decelerating and disinflationary trends pushing capital flows into the one remaining unbreakable piggy bank, which is the U.S. Treasury debt market.

TLT

As growth and inflation expectations continue to slow, stay with low-volatility Long Bonds (TLT). We believe the TLT has plenty of room to run. We strongly believe the dynamics in the currency market are likely contribute to a “reflexive deflationary spiral” whereby continued global macro asset price deflation and reported disinflation both contribute to rising investor demand for long-term Treasuries, at the margins.

HOLX

Hologic (HOLX) is a name our Healthcare Sector Head Tom Tobin has been closing monitoring for awhile. In what Tom calls his 3D TOMO Tracker Update (Institutional Research product) of U.S. facilities currently offering 3D Tomosynthesis, month-to-date December placements signaled a break-out quarter after a sharp acceleration in October and slight correction to a still very high rate in November. We believe we are seeing a sustained acceleration in placements that will likely drive upside to Breast Health throughout FY2015. Tom’s estimates are materially ahead of the Street, but importantly this upward trend in Breast Health should lead not only to earnings upside, but also multiple expansion and a significant move in the stock price.

Three for the Road

TWEET OF THE DAY

Merrill’s FEB Fund Manager Survey: allocations to European equities are the highest since 2007 (2nd highest since survey inception)

@KeithMcCullough

QUOTE OF THE DAY

To talk goodness is not good. Only to do it is.

-Chinese Proverb

STAT OF THE DAY

The CRB Commodities Index currently has a -0.97 correlation to the USD on a 90-day duration, it is up +1.9% on the week.


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CHART OF THE DAY: #Consensus Macro Following the Counter-Trend Move

CHART OF THE DAY: #Consensus Macro Following the Counter-Trend Move - 02.17.15 chart

 

"Can they keep the counter-TREND macro moves from FEB to-date up?" Hedgeye CEO Keith McCullough wrote in today's Morning Newsletter.

 


Mortal and Unsure

“Exposing what is mortal and unsure…”

-Hamlet

 

That’s from Act IV, Scene 4 of Hamlet, where Shakespeare goes on to question the motives of Norwegian crown prince, Fortinbras, who was marching his army into Poland to conquer an “eggshell.”

 

Rightly to be great, is not to stir without great argument,

But greatly to find quarrel in a straw

When honor’s at the stake.”

 

That’s also a passage Peter Thiel effectively cites in chapter 4 of Zero To One, titled “The Ideology of Competition.” And I’m reminded of it this morning, after getting beat up by Mr. Macro Market last week.

 

Back to the Global Macro Grind


To be beaten, or not to be beaten (by the market): that is the question. What makes me mortal certainly makes me unsure. And when the market goes against my preferred position, my mind stirs with great argument!

 

What happened in Global Macro last week was more of the same for the month of February to-date – a counter-TREND move. If you did the opposite of what worked in January, you’ve killed it in the last two weeks.

 

After Retail Sales, Jobless Claims, and Consumer Confidence (University of Michigan reading) missed, the US Dollar Index declined, and everything inversely correlated with Down Dollar ripped. Here’s how that looked, in rate of change terms, week-over-week:

 

  1. US Dollar Index -0.6% on the week (-0.7% for FEB to-date) to $94.16
  2. EUR/USD +0.6% week-over-week (still -5.9% YTD)
  3. CRB Commodities Index (-0.97 correlation to USD on a 90-day duration) = +1.9% on the wk
  4. Oil (WTI) was +1.7% wk-over-wk to $52.55 (90-day inverse correlation -0.89)
  5. SP500 +2.0% wk-over-wk, erasing its negative YTD return to +1.9% for 2015
  6. Argentina’s stock market +6.1% on the wk

 

Don’t cry for me Mucker? Or is that Argentina? You’re telling me you weren’t levered long Argentine inflation expectations and/or the Brazilian stock market last week? What is wrong with you?

 

Setting aside what would have been violently wrong with your returns for the last 3-6 months if you were long inflation instead of hedged vs. Global #Deflation, being long commodity levered and debt ridden nations last week was mint:

 

  1. Brazil’s stock market was +3.8% on the wk, erasing 2015 losses, taking it to +1.3% YTD
  2. Greek stocks were +11.3% on wk-over-wk, putting them back in the black at +8.3% YTD
  3. And the Ruskies crushed it, seeing the Russian Trading System Index +10.6% on the wk to +15.6% YTD

 

And, by the looks of it, Consensus Macro positioning (in CFTC non-commercial futures/options terms) got that right too:

 

  1. Crude Oil net LONG positioning was +7,938 contracts last wk to a total net LONG position of +335,998
  2. SP500 (Index + Emini) net LONG position was +7,396 contracts to a total net LONG position of +96,734
  3. Treasuries (10yr) net SHORT position dropped -66,223 contracts to a net SHORT position of -83,800

 

That’s the other thing I got wrong last week – long-term rates went up another 8 basis points wk-over-wk on the 10yr UST Yield to 2.04%. The short-end of the curve (2yr UST Yield) was flat wk-over-wk at 0.64%.

 

But, with the 10yr Yield down -13 basis points YTD, Oil -2.1% YTD, and Dr. Copper -7.9% YTD, what is the #truth about the Global #Deflation TREND vs. the shorter-term FEB to-date TRADE?

 

Was Oil Volatility (OVX) down -8.7% last week a new intermediate-term TREND, or does the +223% ramp in Oil’s emotional state (OVX) in the last 6 months have something to do with what may be pending if Russia doesn’t bailout Greece? Or something like that…

 

“And let all sleep?

The imminent death of twenty thousand men,

That, for a fantasy and trick of fame,

Go to their graves like beds, fight for a plot

Whereon the numbers cannot try the cause?”

 

Though this macro uncertainty may be madness, there is method in’t.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.69-2.09%
SPX 2063-2101
DAX 101
VIX 14.39-19.41
USD 93.45-95.44
Oil (WTI) 48.01-53.90

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Mortal and Unsure - 02.17.15 chart


February 17, 2015

February 17, 2015 - Slide1

 

BULLISH TRENDS

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February 17, 2015 - Slide6

 

BEARISH TRENDS

February 17, 2015 - Slide7

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February 17, 2015 - Slide13


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