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February 23, 2015

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BULLISH TRENDS

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BEARISH TRENDS

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CHART OF THE DAY: Surreal U.S. Dollar Correlations

CHART OF THE DAY: Surreal U.S. Dollar Correlations - USD correls

 

This is an excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here for more information on how you can subscribe.

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Inverse correlations between commodity markets and USD remains surreal. Going back to when #Deflation’s Dominoes started to become readily apparent (let’s use 180-days ago) here are 4 big correlations to keep in mind:

 

      1. USD vs CRB Commodities Index -0.98
      2. USD vs WTI Oil -0.96
      3. USD vs. Gold -0.55
      4. USD vs SP500 +0.69

 

In other words, #StrongDollar has perpetuated both Oil and Commodity #Deflation. And now the US stock market is looking for some love from the bond market (or the lack thereof), because both USD + #RatesRising would force funds out of Treasuries.

 

That was our call in 2013 (#StrongDollar + #RatesRising) would force the Fed’s hand – and that would shake Fixed Income markets. Today is not 2013. It’s 2015, and this week USA’s un-elected-central-planner-in-Chief has 2-days of “testimony” to talk about that.

 


Rocking Returns!

“You are what your record says you are.”

-Bill Parcells

 

That’s how William Thorndike kicks off a solid history/investing book that one of my friends recommended to me titled The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success.

 

Chapter 1 of the book, “An Intelligent Iconoclasm”, starts with another great quote from John Templeton: “It is impossible to produce superior performance unless you do something different.

 

In other words, if being long Europe with a concentrated position in Italian stocks was your big idea for 2015, you definitely did something different. And you’re getting paid for it. Italy’s stock market is +15.4% YTD!

 

Rocking Returns! - parx

 

Back to the Global Macro Grind

 

Yep, after 3 straight up weeks (on decelerating volume), never mind a +2.5% YTD return for the SP500, being long something like Germany’s DAX (+13.1% YTD) is where the rocking returns are at, baby!

 

After taking a -0.6% breather in the week prior, the US Dollar stabilized at higher-lows again last week and is ramping versus Burning Euros and Yens again this morning, +0.6% to $94.84 on the US Dollar Index.

 

Inverse correlations between commodity markets and USD remains surreal. Going back to when #Deflation’s Dominoes started to become readily apparent (let’s use 180-days ago) here are 4 big correlations to keep in mind:

 

  1. USD vs CRB Commodities Index -0.98
  2. USD vs WTI Oil -0.96
  3. USD vs. Gold -0.55
  4. USD vs SP500 +0.69

 

In other words, #StrongDollar has perpetuated both Oil and Commodity #Deflation. And now the US stock market is looking for some love from the bond market (or the lack thereof), because both USD + #RatesRising would force funds out of Treasuries.

 

That was our call in 2013 (#StrongDollar + #RatesRising) would force the Fed’s hand – and that would shake Fixed Income markets. Today is not 2013. It’s 2015, and this week USA’s un-elected-central-planner-in-Chief has 2-days of “testimony” to talk about that.

 

Will Yellen be hawkish or dovish on rates? I can tell you what I think she should do, but what she actually does is entirely another matter. Immediately following her lagging forecasts will be slowing inflation (CPI Thursday) and growth (GDP Friday) data…

 

“Hawkish” in currency terms = #StrongDollar, Commodity #Deflation.

 

On a mere +0.1% USD gain last week, here’s how that looked, in Global Macro terms:

 

  1. The Euro (EUR/USD) -0.1% to -5.9% YTD
  2. Canadian Dollar -0.7% to -7.3% YTD
  3. CRB Commodities index -1.9% to -2.3% YTD
  4. WTI Oil -5.3% to -6.4% YTD
  5. Gold -1.8% to +1.7% YTD
  6. Copper -0.6% to -8.2% YTD
  7. Coffee -8.2% to -9.7% YTD
  8. Wheat -4.2% to -14.7% YTD
  9. US Energy Stocks (XLE) -1.8% to +1.7% YTD
  10.  Latin American Stocks (MSCI LATAM) -0.8% to -3.7% YTD

 

Exactly! There are a lot of places (primarily USD/Commodity correlating) that you do not want your assets allocated during Global #Deflation. But you already know that. We’re well over 180 days into this, don’t forget.

 

Away from being long Italy, what else is rocking on the other side of this FX flow trade?

 

  1. European Stocks (EuroStoxx600 Index) +1.4% last wk to +11.6% YTD
  2. Japanese Stocks (Weimar Nikkei) +2.3% last wk to +5.1% YTD
  3. US Healthcare Stocks (XLV) +2.1% last wk to +5.6% YTD

 

Yep, in relative equity terms, US equity returns aren’t exactly rocking (Dow Bro 18,000 got you +0.7% last week to +1.8% YTD) this year. But they aren’t getting rocked like pie charts over-indexed to commodity inflation expectations either!

 

Seriously, who needs details about Greece when you can just look up YTD returns and see what your record is? Beating the market is the goal of the game, after all.

 

While I didn’t get beat telling you to be long commodities last week, I continued to get slapped around on the long-end of the Treasury bond curve. The Long Bond weakened (yield strengthened) with the UST 10yr Yield +6 basis points to -6 basis point YTD.

 

Consensus Macro (non-commercial CFTC futures/options net positioning) dog-piled me on that:

 

  1. Long Bond (10yr Treasury) net SHORT position ramped another 41,164 contracts last wk to -124,964
  2. Gold’s net LONG position dropped -23,800 contracts last wk to +110,164
  3. Oil’s net LONG position remained nauseatingly high at +328,656 contracts

 

#Dog-Piled. As in they bullied me, telling me what they’ve been telling me for 15 months (“rates are going higher, not lower, Keith”).

 

I don’t like (but I don’t mind) being knocked around. Especially when my team isn’t winning. We are what our record says we are. And there’s no better way to learn from that than by absorbing and learning from every mistake.

 

UST 10yr Yield 1.82-2.16%

SPX 2085-2125
RUT 1
USD 93.69-95.16
Oil (WTI) 49.02-53.70
Gold 1185-1220

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Rocking Returns! - USD correls


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Storytelling Time

This note was originally published at 8am on February 09, 2015 for Hedgeye subscribers.

“Storytelling is probably the single most popular recreational activity after sex and shopping.”

-Tham Kai Meng

 

Do you agree with that? Would your grandmother? How about Wall Street?

 

Interesting questions from a book I’m reading called The Ape, the Adman, and the Astronaut, by Ogilvy & Mather’s Chief Creativity Officer who claims that “the neuroscientists are saying your grandmother may have been right all along.” (pg 11)

 

Since I got crushed on Friday thinking that the US jobs report could be bad, I’m wide open to any story you’d like to tell me this morning. While I still think interest rates are going lower – storytellers make a market, after all.

Storytelling Time - 55

 

Back to the Global Macro Grind

 

To be, or not to be crushed (by counter-TREND moves) … remains the question. With the front-runner on big macro moves (the US Dollar Index) whipping around last week (down, then up), here’s what drove macro storytellers right batty:

 

  1. USD Down – during the front-end of the week, drove Oil, Russia, and Energy Stocks Up
  2. USD Up – on Friday’s jobs report, drove Rates, Utilities, and REITS down

 

These two story lines are not one and the same thing. And to have been properly positioned for both of them (while not getting your rear-end handed to you for 3-6 months prior) was next to impossible.

 

Summarizing the Down Dollar (then up fast on Friday) week:

 

  1. The US Dollar Index finished the week -0.1% at $94.70 (still +4.9% YTD)
  2. Oil (WTI) ramped +7.2% wk-over-wk to $51.69 (still -3.7% YTD)
  3. CRB Commodities Index had its 2nd up wk in a row, +2.7% to -2.2% YTD
  4. SP500 had its 2nd up wk in the last 6, closing +3.0% to -0.2% YTD
  5. Energy Stocks (XLE) led SP500 gainers, +5.7% wk-over-wk to +0.8% YTD
  6. Utilities (XLU) led SP500 losers, -3.6% on the wk (falling to -1.4% YTD)

 

That last part (Utilities Down) all happened on Friday with the #RateRising move where:

 

  1. UST 2yr Yields ripped to +0.64% (+19 bps on the wk, but -2 bps YTD)
  2. UST 10yr Yields shot up to 1.96% (+32 bps on the wk, but -21 bps YTD)

 

And it wasn’t just Utilities that flashed an immediate-term TRADE oversold signal on that. So did REITS (VNQ) and pretty much everything that I’ve liked on the long side of Fixed Income for the last year (TLT, EDV, MUB, ZROZ, BND).

 

The MSCI REITS Index was -1.6% on the week, but is still up +4.9% YTD and my story-line is that looks a lot like the P&L of the Long Bond bull. One down week does not a new intermediate-term TREND make.

 

To be balanced, the other side of the storytelling remains that US GDP growth is going to magically accelerate to +3-4% year-over-year, and that we’re going to get rainbows and puppy dogs delivered in every late-cycle employment report, throughout…

 

To a degree, Consensus Macro bets still agree with that – here’s the updated CFTC Futures/Options net positioning:

 

  1. SP500 (Index + Emini) net LONG position = +66,335 contracts (vs. the 1 yr avg of -10,119)
  2. Treasuries (10yr) net SHORT position = -145,402 contracts (vs. the 1yr avg of -65,444)
  3. Crude Oil net LONG position = +324,181 contracts (vs the 1yr avg of +365,957)

 

For 2015, unless you bought the lows, being long SP500 and commodity related beta has been painful, but consensus has worn it the whole way down inasmuch as it has suffered the under-performance pain of not being bullish on the Long Bond.

 

But maybe the story is different this time? Could rates finally be ready to rocket to the upside? After oil and its related equities have had their counter-TREND bounce, could they continue higher and be the inflation catalyst big equity beta chasers need?

 

I don’t think so. If I did, on Friday I wouldn’t have signaled (in Real-Time Alerts) to:

 

  1. Buy Utilities (XLU)
  2. Buy Municipal Bonds (MUB)
  3. Short Banks (BAC)

 

Opportunities to go shopping for bonds and/or stocks that look like bonds have been few and far between for the last 6 weeks. So I want to signal that you take advantage of one of the two “popular recreational activities” that grandma would sign off on!

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.64-1.95%

SPX 1987-2075
VIX 15.67-21.44
USD 93.52-95.44

WTI Oil 42.89-54.02
Gold 1234-1270

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Storytelling Time - 02.09.15 chart


***MUST READ | Dan Alpert: No Economy Is An Island

Editor's note: A special thank you to Westwood Capital's Dan Alpert for letting Hedgeye run what follows below. Make sure to click on the link which takes you to his must-read, data deck presentation, "No Economy is an Island," challenging the current U.S. economic decoupling meme.

 

***MUST READ | Dan Alpert: No Economy Is An Island - 444

 

From Alpert:

 

Further to the data deck I released on Tuesday, I have done some additional work on the below series illustrating one big reason why U.S. labor productivity is slumping and unit labor costs have been rising somewhat. It is NOT an innovation thing, nor a labor supply mismatch thing…see below:

 

Click image to enlarge.

***MUST READ | Dan Alpert: No Economy Is An Island - al1

 

***On a related note, here's Dan's recent Real Conversations interview "A Dire Appraisal of Our ‘Broken Global Economy’" hosted by Hedgeye CEO Keith McCullough. Click below to watch.

 

***MUST READ | Dan Alpert: No Economy Is An Island - bbb

 


Boston Security Analysts Society Conference: Q&A Session With Keith McCullough

Hedgeye CEO Keith McCullough recently presented an update on his Macro Theme #GLOBALDEFLATION at Asset Allocation 2015: Liquidity,  a conference hosted by The Boston Security Analysts Society in Boston, MA.

 

 

Above is the Q&A portion in which Keith discusses risk managing what the Fed should do vs. what they could do, Emerging Markets sensitivity to a strengthening USD and the 3 main factors currently influencing the market.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%
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