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RTA Live: May 7, 2015

Here is the replay of today's edition of RTA Live.

 

 


Our Starting Point

This note was originally published at 8am on April 23, 2015 for Hedgeye subscribers.

“The fact is our starting point.”

-Aristotle

 

I’m not a big Aristotle fan, but I like some of his simpler quotes. In Global Macro risk management (and in life), I like to boil things down as simply as I can, or I don’t feel like I understand them well enough.

 

The aforementioned quote is one that Ed Hess used to introduce Chapter 7 of Learn or Die, “Critical Thinking Tools.” In both the chapter and the book, Hess leans on Dr. Gary Klein’s RPD (Recognition-Primed Decision) Model.

 

Klein has developed three tools that can increase the probability that we’ll be able to “see” and process new or disconfirming data and mitigate our cognitive blindness and dissonance (pg 75).” Being a data driven #process guy, I’m all for trying that.

Our Starting Point - 10 yr yield cartoon 04.20.2015 normal

 

Back to the Global Macro Grind

 

Our starting point is last price. I know that sounds simple. It should. Our best starting point for evaluating new, confirming, and/or disconfirming “data” is to get Mr. Macro Market’s cumulative opinion on whatever that data is perceived to be.

 

“Klein found that people in high-velocity environments, where speed of decision making is important, generally don’t take the time to generate alternatives and then weigh the pros and cons of each (or engage in a probability evaluation). Instead, they engage in fast pattern matching.” (pg 76)

 

Sound familiar? We’ve all done this at some point in our careers. Some people in this profession probably still do it in trying to process every macro headline, every day!

 

“So”, try not to do that.

 

Let’s start this morning with some fast pattern matching (and see if any of it matches):

 

  1. Both US Existing Home Sales and weekly US mortgage demand data surprise to the upside (again)
  2. SP500 reverses its early morning losses to close within 0.5% of her all-time highs
  3. Bond Bears claim Housing data is “too good”, so the Fed needs to raise rates (rates rise, bonds fall)

 

Throw a little extra headline sauce in there like “Bill Gross Says Short Of A Lifetime” (yesterday he was talking his book to all mainstream media outlets who would listen) on German Bunds, and you saw the worst down day for the G-10 Bonds, in a month.

 

But, if you’re not flash crashing your P&L with every tick of the New Tape (Twitter)… and you take a step back (breathe)… does that sequence of pattern matching with very immediate-term price action make sense?

 

Do people who shorted Bunds and Bonds on the lows yesterday actually think that:

 

A)     The Fed is going to change their statement on April 29th due to the Existing Home Sales print and/or

B)      Thwart one of the few things they can currently take political credit for (#HousingAccelerating) by raising rates?

 

I remain bullish on both Long-Duration Bonds (TLT, EDV, MUB, etc.) and Housing (ITB, DHI, MTG, etc.), so you can argue that I am dead wrong on this due to my own cognitive blindness. But that’s what makes a market.

 

Another thread of short-term pattern-matching that was bearish for sovereign bonds yesterday goes something like this:

 

  1. “The European economy is booming”
  2. German economic growth will force Draghi to back off QE
  3. European Bond Yields can only rise now, as a result

 

Oh, then there’s this stuff called the global (not local) economic data this morning:

 

  1. Chinese and Japanese PMIs for APR slow (again) to 49.2 and 49.7, respecitvely
  2. Germany’s PMI slowed (for the 1st time in months) to 51.9 APR vs. 52.8 last
  3. France’s PMI (which never accelerated to begin with) slowed, again, to 48.4 in APR vs. 48.8 last

 

In other words, the Italian (Draghi) needs to provide the French with moarrr cowbell!

 

In psychology, Cognitive Dissonance is the mental stress or discomfort experienced by an individual who holds two or more contradictory beliefs, ideas, or values, at the same time…” –Wikipedia

 

The fact is that Bond Bears need one very simple thing to be as right as we were on US #RatesRising in 2013 – and that’s real economic #GrowthAccelerating. Meanwhile (not to be confused with centrally planned stock market ramps), Global Growth continues to slow.

 

We believe that, with neither growth nor inflation accelerating (intermediate-term TREND), the Long Bond Bears will continue to lose money. Our starting point on that Macro Theme is what Mr. Macro Market has been discounting now, for 15 months.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.84-1.99%
SPX 2090-2117
RUT 1252-1275

EUR/USD 1.05-1.08
Oil (WTI) 50.04-57.78
Gold 1181-1208

 

Best of luck out there today – Go Rangers!

KM

 

Keith R. McCullough
Chief Executive Officer

 

Our Starting Point - 04.23.15 chart


Bunds, Euro and Asia

Client Talking Points

BUNDS

German Bunds just crashed (yield on the 10YR just quintupled in 8 trading days, from 0.14% to 0.76%) – this is actually wild to watch this morning, so it will be interesting to see how U.S. markets/futures react once everyone gets to work – paging Dr. Draghi….

EURO

The Euro is straight back up to tagging the top-end of a $1.06-1.14 range vs. USD and European stocks do not like that. Both the EuroStoxx50 and German DAX are breaking down through @Hedgeye TREND supports, which is new (only thing that likes this is Oil).

ASIA

There was a nasty 3-day drop for the Shanghai Composite Casino, down another -2.8% overnight (-8% in 3 days). Australia was down again, despite the rate cut. India dropped -3.1% year-to-date, and the Japanese Nikkei was -1.3%, breaking our TRADE support line of 19,682.

Asset Allocation

CASH 57% US EQUITIES 4%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 31% INTL CURRENCIES 2%

Top Long Ideas

Company Ticker Sector Duration
RH

We think people are missing the magnitude of earnings growth at Restoration Hardware (RH), the sustainability of that trajectory over a long period of time, and ultimately the degree to which that will accrue to equity holders. The question is not whether the stock will go to $110 vs $120 (where we see most price targets), but whether it will get to $200 vs $300. We think the catalyst calendar looks healthy starting with the 1Q15 print set to be release in early June. Following that, RH is set to pick up the cadence of its store opening, with 4 new stores set to be open in the back half of the year. This remains our favorite name in retail.  

ITB

iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. Builder performance was choppy in the latest week alongside beta volatility and investor attempts to square the net impact to housing from rising rates and ongoing improvement in housing fundamentals. As it stands currently, rates remain a tailwind to affordability relative to last year and would require a significant, expedited increase to have a material negative impact on housing activity in the immediate/intermediate term. Elsewhere across Housing Macro, the fundamental data continued to roll in strong.

TLT

Insomuch as the April Jobs Report may prove to be a bearish catalyst for Treasury bonds, slowing growth data over the next two quarters should prove decidedly bullish. Fighting buy-side consensus on the long side of Treasury bonds been a great call thus far so we’d be booking gains and taking down our gross exposure to this asset class on the next immediate-term pop. Ultimately, we think our #LowerForLonger theme prevails, but volatility is likely to pick up in the interim.

Three for the Road

TWEET OF THE DAY

The Macro Show, Live with (me) at 8:30AM ET https://app.hedgeye.com/insights/43964-the-macro-show-live-with-keith-mccullough-at-8-30am-et… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

Never doubt that a small group of thoughtful, committed citizens can change the world. Indeed, it’s the only thing that ever has.

Margaret Mead

STAT OF THE DAY

U.S. sales of sportswear apparel is $91 billion, sales are up 9.8% compared to last year.


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.

CHART OF THE DAY: Weakening US Economic Data - #ADP Style

CHART OF THE DAY: Weakening US Economic Data - #ADP Style - z 05.07.15 chart

 

Editor's Note: This is an excerpt and chart from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. If you're looking for a reliable way to stay ahead of consensus we encourage you to learn more and subscribe.

 

"...Despite weakening US economic data (see the rate of change in the ADP jobs report in today’s Chart of The Day), Treasuries have been down for 7 straight days. #EuropeanYieldRamp is the main reason why.

 

To be fair to the revisionist historians, they think this is all supply and demand and/or “fundamentally” driven by things like “higher inflation expectations.” I don’t. This is an outright panic-shift in market expectations."

 


God's Bunds?

“God understands more about financial markets than many who write about them.”

-Jean-Claude Juncker, May 6th, 2014

 

Now that German Bund Yields have quintupled, in 8 trading days, I’m thinking God understands more about financial markets and economic cycles than many who try to centrally plan and smooth them.

 

For those of you who don’t know who Jean-Claude Juncker is, he’s the former Prime Minister of Luxembourg (1) and residing President of the European Commission. This guy is a hard-core Eurocrat.

 

It might just be me, but I was under the impression that these dudes in Europe thought they had this all under control. Didn’t Draghi promise investors “whatever it takes”? If this bond market move is God’s work, Europeans better pray for it to stop.

God's Bunds? - Draghi cartoon 03.05.2015

 

Back to the Global Macro Grind

 

That wasn’t a typo – at one point this morning German Bund Yields flash-crashed, or something like that, to 0.76% on the 10 year. Only last week it was trading at 0.14%. That’s a five bagger!

 

Since I’m bullish on US Treasuries, that’s not good. Despite weakening US economic data (see the rate of change in the ADP jobs report in today’s Chart of The Day), Treasuries have been down for 7 straight days. #EuropeanYieldRamp is the main reason why.

 

To be fair to the revisionist historians, they think this is all supply and demand and/or “fundamentally” driven by things like “higher inflation expectations.” I don’t. This is an outright panic-shift in market expectations.

 

To review where some big market expectations were 10-30 trading days ago:

  1. Draghi was going to keep rates low (in some cases negative), for as long as it takes
  2. European growth was being engineered by this lower-for-longer rate policy
  3. Down Euro was damn good for German, Dutch, etc. “exporters”… and their “stocks”

 

Then, z-z-z-ooom! (or ka-boom, depending on what you’re long)

  1. Euro stopped going down (USD stopped going up) as both US jobs and GDP reports slowed
  2. Oil started to rip on Down Dollar (and a circular supply narrative)
  3. And out of nowhere, despite Down Dollar, European rates started to rip higher

 

This morning alone:

  1. German 10yr Yield = +15 bps to 0.75%
  2. France 10yr Yield = +14 bps to 1.05%
  3. *Japanese 10yr Yield = +8 bps to 0.43% (one of the biggest daily % moves in a decade)

 

And US centric navel gazers are freaking out because US 10yr Treasuries moved 2 basis points off a base of 2.26%. If I’ve said this to investors who have emailed/called me in the last 48 hours 100 times, I’ve said it 1,000 times - #EuropeanYields!

 

If central planners didn’t give markets the “all-clear” expectation, absolutists who say “well, this isn’t much of a move from such low levels” might have a reasonable point. But that’s not how macro market risks evolve.

 

There is a massive amount of leverage that is betting on #LowerForLonger in Europe/Japan, and risk models move in percentage terms, not “valuation” opinions. Forget the +25% move in 30 minutes in German Bund Yields, they’re +514% in eight days. #Again!

 

So what is a man or woman to do when neither stocks nor bonds work?

  1. Raise Cash – we’ve been moving towards our highest Cash position (57%) of the year in the Asset Allocation Model
  2. Wish that you’d raised more Cash… and
  3. Call yourself as dumb as I feel for not selling US Bonds when the #process said buy more

 

To review the #process. We believe that you:

 

A)     Buy long-term Treasury bonds when growth is slowing

B)      Sell them when growth, in rate of change terms, is accelerating

 

And since I personally didn’t get the memo from God on the Euro Bond Yield move, I am going to evolve the #process and implement prayer this morning. Because, to be honest with you, other than raising cash, I don’t know what else to do.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.86-2.29%

SPX 2063-2096
RUT 1
DAX 11101-11304
VIX 13.32-16.51
EUR/USD 1.06-1.14
Oil (WTI) 54.13-61.92

Gold 1169-1203

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

God's Bunds? - z 05.07.15 chart


May 7, 2015

May 7, 2015 - Slide1

 

BULLISH TRENDS

May 7, 2015 - Slide2

May 7, 2015 - Slide3

 

BEARISH TRENDS

May 7, 2015 - Slide4

May 7, 2015 - Slide5

May 7, 2015 - Slide6

May 7, 2015 - Slide7

May 7, 2015 - Slide8

May 7, 2015 - Slide9

May 7, 2015 - Slide10


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