This note was originally published at 8am on March 30, 2015 for Hedgeye subscribers.
“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