Always Learning

This note was originally published at 8am on April 06, 2015 for Hedgeye subscribers.

“Organizations cannot learn unless the individuals within them learn.”

-Edward Hess

“Always Learning” is a nicer title for the morning after the long weekend than the title of the most recent book I cracked open: Learn Or Die, by Edward Hess.

For those of you who missed the Late-cycle slow-down in the US labor report on Friday, Global Macro markets did not. It’s a big Rates Down, Dollar Down (Commodities Up) morning here in America that we need to risk manage.

We’re on the right side of the rates move, so my primary focus will be risk managing the losing side of the Currency move. Will a bearish TRADE in the US Dollar disrupt our bearish intermediate-term TREND view of Commodities? Learning starts by questioning what it is that we believe.

Always Learning - 44

Back to the Global Macro Grind

When it comes to running money or an independent research firm, I think Hess asks the right question as an opening volley to the aforementioned book: “Learn or Die: Is this just a snappy title or is it a business truth?”

Having run both a buy-side and research company, I’d say that it is an absolute truth. Everyone makes mistakes. Not everyone can recover from not learning from those mistakes.

Since what I believe about Global Macro markets today can easily change tomorrow, I try to put myself in a position of perpetually being open to the idea that Mr. Market’s immediate-term TRADE can change the direction of our intermediate-term TREND views.

With that in mind, the easiest call to reiterate this morning is the one where both the TRADE and TREND agree: lower-for-longer on US interest rates. Here’s how that looked both week-over-week, and in the context of the intermediate-term TREND:

  1. US 2yr yield dropped -12 basis points last week to 0.48% (-19 bps YTD) and remains bearish TREND
  2. US 10yr yield dropped -12 basis points last week to 1.83% (-33 bps YTD) and remains bearish TREND

Whereas the toughest call to make is the counter-TREND move (which was caused by the same employment #GrowthSlowing factor – a weak jobs report) in the US Dollar. Here’s how I’d contextualize that, across durations:

  1. US Dollar Index -0.5% on the wk to 96.80 (+7.2% YTD with bullish intermediate-term TREND support of 93.71)
  2. CRB Commodities Index +0.4% last wk to 216 (-6.0% YTD with bearish intermediate-term TREND resistance of 239)

What makes easy even easier (and tough tougher) is Consensus Macro positioning (in non-Commercial CFTC futures and options positioning terms) right now:

  1. Long Bond (10yr US Treasury) net SHORT position still way too short at -134,579 contracts
  2. EUR/USD net SHORT position at its highest short position of 2015 at -225,776 contracts

In other words, Bond Bears got squeezed on Friday inasmuch as Euro Bears did – and now one major question is will there be follow through on either and/or both? The other, of course, is what do slowing growth expectations mean for US stocks?

If you’re purely playing this from a Correlation Risk perspective (like many of the machines are), answering the question on US Equities is tough too. That’s because shorter-term durations have an inverse correlation, whereas longer-term ones have a positive correlation.

Here’s what I mean by that:

  1. US Dollar Index 30-day correlation to the SP500 is -0.70
  2. US Dollar Index 180-day correlation to the SP500 is +0.73

I could be wrong on this, but what I believe Mr. Market is trying to tell us with that juxtaposition is that for the US stock market to go up longer-term, growth expectations need to stabilize and strengthen. That only happens with a #StrongDollar – not a weak one.

But, if growth expectations continue to fall, at an accelerating rate:

  1. US interest rates will fall
  2. US Dollar will fall
  3. And as expectations for an easier Fed rise, stocks could bounce like commodities just did

If I haven’t confused you yet on the potential for multiple scenarios playing out, across multiple durations, let me speak to you every other day as rates, currencies, stocks, and commodities whip around! This is going to be fun.

In the meantime, the only big macro call that I’ll stay with is being long Long-term Bonds. While I’m always learning about theoretical scenarios where the easiest call to make can be wrong, the only thing that’s been dead wrong there is the Rate Hike consensus.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 1.80-1.93%
SPX 2039-2076
RUT 1226-1273
USD 96.60-98.80
EUR/USD 1.07-1.10
Oil (WTI) 46.48-51.06
Gold 1181-1227

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer

Always Learning - 04.06.15