Project Olaf

This note was originally published at 8am on March 13, 2015 for Hedgeye subscribers.

“Do you want to build a snowman?”

-Anna

 

If you haven’t seen Disney’s Frozen, you should. I have two daughters and a son. They love that movie. And, I must admit, I think I know all of the words to Anna and Elsa’s songs too!

 

Back to the Global Macro Grind

 

I’m in my favorite fairy-tale place on earth this morning (Washington DC) so I’ll keep this brief as I need to run over to the Fed’s office to have breakfast with all of my buddies over there. We’re going to hammer out how we keep ice cubes from melting.

 

In the spirit of centrally planning things like economic gravity (and Disney’s announced sequel), we’ve named our latest idea Project Olaf. This was inspired by the inflated hopes of Frozen’s first snowman, who thought the sun couldn’t deflate his expectations.

 

Admittedly, while we’re wicked “smart” Ivy League guys, I think this whole idea of ours has some headwinds (like heat for example). “So”, I’m thinking that instead of building a snowman, we should just build a billion dollar ice cube app.

Project Olaf - Fed forecast cartoon 03.02.2015

 

Moving along…

 

These meetings we do in Washington are funny. I think my defense partner, Daryl Jones, and I are the only two Canadian macro guys within 50 miles of this place who aren’t trying to get inside information on what the Fed is going to say next.

 

Notwithstanding the whole orange jump-suit risk part, we’re simply more comfortable reminding our audience that you don’t need that stuff to make and/or save money in macro – you simply need to front-run the predictable behavior of people who chase it.

 

“So”, before I have breakfast with my central planning boys, here’s what Mr. Macro Market is telling me to tell you across 10 Big Macro Risk Management Factors:

 

  1. US 10yr Yield signaled immediate-term TRADE oversold within its bearish intermediate-term TREND yesterday
  2. SP500 bounced right off @Hedgeye TRADE support and now needs to close > 2080 to keep the snowman from melting
  3. Russell 2000 (IWM) ramped +1.7% post our immediate-term buy signal (lower) on red; next resistance = all-time highs
  4. Weimar Nikkei up another +1.4% overnight to +10.4% YTD (vs. SPX +0.3%) signals immediate-term overbought
  5. Germany’s DAX has immediate-term downside to 11,506 after signaling overbought yesterday at +21% YTD
  6. US Equity Volatility (VIX) signaled overbought where I signaled SELL VXX on Wednesday; risk range = 13.03-17.36
  7. US Dollar Index signaled immediate-term TRADE overbought at 99.99 yesterday; bullish TRADE support = 97.46
  8. Burning Euros are straight back down this morning after their 1-day bounce; bearish TREND call remains
  9. Gold is bouncing (small) as the USD stops going up, but remains bearish TREND with a risk range of 1137-1179
  10. Oil (WTI) is probing the low-end of its immediate-term range this a.m., but has no intermediate-term support to $36.35

 

In other words, Global #Deflation remains a much more practical intermediate-term TREND investment outlook than building a snowman of inflation expectations in March.

 

Nope, sorry Olaf. It’s not different this time.

 

For those of you who are new to my average at best sense of humor and risk management lingo, the aforementioned dump of macro signals are meant to contextualize multiple durations:

 

    1. Immediate-term TRADE and “risk range” commentary deals with the very immediate-term
    2. Intermediate-term TREND themes and signals consider a duration of 3 months or more
    3. And if I go all “long-term” TAIL on you, I’m considering the next 3 years or less

 

Yep, more or less. Those are two critical words in risk management as market history will teach you that it’s a lot easier to have:

 

A)     A “longer-term” outlook (more days in your holding period) if volatility is trending lower, and…

B)       less days (more risk managing of your core investments, hedges, etc.) as implied volatility is tending higher

 

If that investing style rhymes with what you’ve realized using real ammo in this game of expectations, good. I’ll lose my boys at the Fed as soon as I start talking about anything that’s non-linear (like volatility). They think they can build an app to “smooth” that too…

 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND view in brackets) are now:

 

UST 10yr Yield 2.01-2.24% (bearish)

SPX 2030-2080 (bullish)

RUT 1205-1248 (bullish)

DAX 11506-11866 (bullish)

VIX 13.03-17.36 (bullish)
USD 97.46-100.31 (bullish)
EUR/USD 1.04-1.107 (bearish)

YEN 119.45-122.01 (bearish)
Oil (WTI) 46.35-49.64 (bearish)

Gold 1137-1179 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Project Olaf - 03.13.15 chart


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