“Individual persons tend to act pretty randomly.”
“But put those individual persons into large groups and individual randomness gives way to group patterns.”
-The Accidental Superpower, pg 92
Zeihan was alluding to one of the most important research topics @Hedgeye right now (demographics), but it can very well be applied to intermediate-term TRENDs in Global Macro positioning.
Eventually, most have to chase. And until everyone has given up on inflation expectations, I think the chase for #StrongDollar Deflation performance remains very much #on.
Back to the Global Macro Grind…
I do both bottom-up and top-down investing. And while some of their respective rate-of-change analytics are the same, how I consider “valuation” in each discipline is not.
In Global Macro, funds flow to and from specific exposures and styles; whereas in value-investing, for example, you can buy something that’s “cheap”, and get paid – provided there is a catalyst. In macro, “cheap” tends to get cheaper – and “expensive” tends to stay expensive, until a phase transition finds a causal factor to arrest it.
In the case of what was our Top Global Macro Theme for Q1 of 2015, Global #Deflation, the causal (and correlating) factor is the US Dollar. Get the TREND in the US Dollar right, and you’re going to get a lot of other things right.
Last week, the US Dollar had what we call a counter-TREND move, closing down for the 2nd straight week. Down Dollar weeks provide us both buying (stocks) and selling (commodities) opportunities – here’s what a -0.6% wk-over-wk decline in the US Dollar Index delivered:
- Burning Euros bounced +0.6% to -10.0% YTD vs. USD
- Commodities (CRB Index) bounced +0.5% to -6.4% YTD
- Oil (WTI) bounced +4.9% to -11.1% YTD
- Gold bounced +1.3% to +1.3% YTD
- Copper bounced +0.2% to -2.0% YTD
That’s a lot of bouncing! Notwithstanding that I was long 0% of those 5 things, I am quite pleased that I didn’t chase any of them either. Come Friday afternoon, most of these counter-TREND bounces failed @Hedgeye immediate-term resistance.
In Global Equities last week, Down Dollar didn’t get either the #BigBeta chasers (Biotech and Technology) or #YieldChasers (Utilities and REITS) bulls paid. For one of the few weeks of the year, it didn’t get European Equity bulls paid either – Emerging Market equities were weak as well:
- SP500 lost -2.2% on the week taking it to +0.1% YTD
- EuroStoxx600 corrected -2.1% wk-over-wk to +15.5% YTD
- Emerging Markets LATAM dropped another -2.3% to -11.8% YTD
In other words, if you chased the counter-TREND move in Oil mid-week, by the weekend you were getting spanked, in Brazilian stock market terms, as the Bovespa reversed sharply, closing down -3.6% on the week at +0.2% YTD.
But why does CNBC’s beloved SP500 look as anemic as a major equity market index that is tied to commodities (like Brazil). Oh, right – they’ve morphed the SP500’s earnings into an international basket that is very much infected by #StrongDollar too. That sucks.
This is why, instead of owning the SP500, Global #Deflation Bulls have appropriately re-allocated their US equity exposure to US domestic revenue and earnings expectations:
- US Housing Stocks (ITB) were +0.1% in a down tape to +7.3% YTD
- US Consumer (XLY) and Healthcare (XLV) stocks continue to beat the SP500 at +3.8% and +6.8% YTD, respectively
- Russell 2000 and Nasdaq are +3.0-3.3% for 2015, beating their International Earnings Index competition too
If I didn’t signal “BUY” in what I signaled on red last week (and I had to chase the green US Equity futures this morning), I’d definitely buy more of the aforementioned basket over the SP500. It’s much more appropriately positioned for #Deflation.
The last point I wanted to make this morning has to do with Consensus Macro Sentiment. Going back to the weekend wood chopping, here’s how Wall Street’s (non-Commercial CFTC Futures & Options) net positioning looks going into quarter-end:
- SP500 (Index + Emini) net SHORT position came in by 41,359 contracts last week to -35,152
- Russell 2000 net SHORT position came in by 12,952 contracts last week to -13,277
- US Treasury 10yr Bond net SHORT position ROSE by 23,083 contracts last wk to -155,983
So you’ll probably get paid on hedge fund guys getting squeezed in both SP500 and Russell 2000 today anyway. We call this a good ole fashioned group pattern of a month-end markup!
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.84-2.01%
Oil (WTI) 42.82-51.40
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
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Takeaway: Current Investing Ideas: UUP, EDV, GS, ITB, TLT, MTW, MUB, RH
Below are Hedgeye analysts’ latest updates on our eight current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.
*Please note we added GS, EDV and UUP this week.
We also feature two additional pieces of content at the bottom.
Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.
- "Trade" is a duration of 3 weeks or less
- "Trend" is a duration of 3 months or more
- "Tail" is a duration of 3 years or less
CARTOON OF THE WEEK
We added Goldman Sachs to Investing Ideas this week.
This new position is a profitable way to invest in what will be incremental uncertainty about the U.S. economy and also a more active Federal Reserve into 2016. After six years of releasing credit into the banking system, the U.S. central bank on the margin will be looking for adjust its half decade long policy and slowly be more restrictive in monetary policy. These adjustments will finally spur trading volume in both credit and equities on the biggest trading desks on Wall Street.
The investment banks are a cheaper way to capitalize on this trend versus the more expensive exchange sector. Goldman firstly should put up its first year-over-year gain in Fixed Income trading in 1Q15 since 2009, marking an inflection point in trading activity. In addition, the firm is mentioning incremental dividend and share repurchase activity signaling that it finally has a handle on the new Financial regulatory regime instilled since the Financial Crisis and can again engage in shareholder friendly activities.
Only equity volatility remains stubbornly suppressed currently with FX, Bond, and Commodity volatility starting to percolate higher which will benefit the Goldman Sach trading desk throughout 2015 and beyond.
Housing was 3 for 3 in the latest week as Existing Home Sales improved sequentially, New Home Sales saw an epic acceleration and the high frequency purchase application data showed signs of thawing alongside the break in the weather.
To review the data: Sales of Existing Homes, which account for ~90% of the total market, accelerated to +4.7% YoY in February, marking the fastest rate of growth in 17-months. More impressively, New Home Sales (~10% of the market) hit their highest level since February 2008 rising +7.8% MoM to 539K. On a year-over-year basis, sales were up a remarkable +25% and should continue to look strong from a second derivative perspective as we traverse a 5-month period of (very) easy comparisons. Meanwhile, weekly Purchase demand, as measured by the Mortgage Bankers Association, showed some emergent mojo as well, rising +4.9% sequentially and accelerating +200bps to +2.7% on a year-over-year basis.
As we’ve highlighted, we expect a modest backlog of deferred housing consumption in conjunction with healthy organic demand trends to manifest in accelerating improvement in reported activity over the next 6-8 weeks. Indeed, the crux of our underlying thesis remains largely unchanged. Labor market strength + credit box expansion + easy comps should continue to support improving rates of change in housing demand over the intermediate term.
TLT | MUB | UUP | EDV
We added the U.S. dollar (UUP) and Long-Duration Treasury Bonds (EDV) this week for two additional vehicles to play growth slowing and deflation over the intermediate to longer-term.
While day-to-day timing isn’t a focus for the longer-term investor, a big counter-TREND move in the U.S. dollar (pullback within a BULLISH TREND set-up) presents a buying opportunity.
After the Federal Reserve revised their growth and inflation expectations downward last week, a short-term rout in the USD has manifested as the market front-runs the currency-devaluing policy effects and discounts the expectation of an interest rate hike near-term.
Most importantly in contextualizing the market’s reaction, all of our key risk-management levels have confirmed our fundamental macro thesis: The dollar has more upside through the back half of this year as deflation remains a global reality moving forward:
- TRADE Support (3 Weeks or Less): $96.29
- TREND Support (3-Months or More): $93.20
- TAIL Support (3-Years or Less): $88.12
The long-end of the bond market has continued to prove its legitimacy as a proxy for forward-looking growth, and forward-looking growth can slow with inflation going both ways….
Look no further than the USD reversal over the last couple of weeks. The reactionary monetary policy from the Fed to “the data” last week succeeded at shifting global currency markets and the yield curve still moved lower. The forward-looking expectation for the dollar can shift, but the bond market continues to tell the same story: lower highs for long duration yields (higher lows for TLT, MUB, and EDV) with more pain for those levered to inflation expectations.
Editor's Note: Shares of Restoration Hardware finished Friday's trading up 4%.
There was no shortage of moving parts in the Restoration Hardware print. Though the after-hours stock reaction immediately suggested otherwise, we think that the story is squarely on track. Actually, we know it is. We’re making slight changes to our quarterly estimates, but are not making any material changes to our annual numbers, which remain materially above consensus.
We would still take advantage of whatever weakness we see. Even though the stock closed up on the day, we’d still buy it here.
We think the road map to a $150 stock at the end of the year is intact.
Improving public and residential construction activity amid continued private nonresidential construction spending growth has helped push the Dodge Index back toward peak 2005-2006 levels, while touching its highest growth rate since 1983.
It is worth noting that real nonresidential spending, excluding mining, oil & gas, has performed very poorly since the financial crisis, but still retains its cyclical rebound potential. So. as the Dodge Index and other construction indicators show signs of life, Manitowoc should receive a helpful tailwind.
* * * * * * * * * *
ADDITIONAL RESEARCH CONTENT BELOW
Our updated, detailed thoughts on the Chinese economy and its financial markets.
Improving public and residential construction activity amid continued private nonresidential construction spending growth has helped to push the Dodge Index back toward peak 2005-2006 levels.
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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.