Blank Cartridges

“The West was not built with blank cartridges.”

-Wallace Stegner


That’s another beauty of an American one-liner from 1972 Pulitzer Prize winner, Angle of Repose. I’m in the old West this morning (Denver) where the homeless population is booming.


Overseas, the Chinese have manufactured a 3-day rally out of 1,045 halts and the Greeks have saved themselves from themselves again. It looks like we’re going to have one more centrally planned stock market rally to sell into as a result.


With Global Equity Volatility breaking out to the upside and Global #GrowthSlowing, it will be fascinating to watch how the mainstream media reads Down Euro = Down Oil this morning. Storytelling sucks when supply is up and demand is falling.

Blank Cartridges - Oil cartoon 04.17.2015


Back to the Global Macro Grind


Apologies for sounding a little moody this morning. Denver is two hours behind my risk management clock and I had a pot-smoking room service lady deliver my coffee 40 minutes late. Wow was that weird.


To review where Global Macro markets are vs. where they came from last week:


  1. The Euro was actually up +0.4% on the week to $1.12, and has back off hard this morning to $1.10 (bearish TREND)
  2. #StrongDollar held flat last week at $96.01 on the US Dollar Index =+6.4% YTD (bullish TREND @Hedgeye)
  3. Japanese Yen was flat wk-over-wk and weakened today, driving our bullish TREND Nikkei +1.6% overnight
  4. Commodities (CRB Index) deflated another -2.8% last week and are down again this morning (bearish TREND)
  5. Oil (WTI) got smoked -7.4% last week and is down another -1.5% on #StrongDollar deflation today (bearish TREND)
  6. Gold deflated another -0.5% last week, is down -0.6% this morning, and is now back to bearish TREND @Hedgeye


Yep, I’ll go all macro on you without hitting on stocks and bonds first. Imagine that – our government PIG (Policy, Inflation, Growth) model is the tail wagging the Global Macro dog. I’m cutting our net asset allocation to Commodities back to 0%.


While inverse correlations continue to drive #Deflation in the CRB Index, Oil, and Gold, most of you already know that. The 180-day correlation between USD and Commodities (CRB) is -0.94. The 15-day correlation between USD and Gold is -0.92!


What you might not know (because its new) is that shorter-term inverse correlations (meaning that when the USD goes up, these things go down) between #StrongDollar and US Equities are picking up again. Here’s what I mean by that:


  1. SP500 correlation to USD on a 15-day basis = -0.56
  2. SP500 correlation to USD on a 30-day basis = -0.43


That matters because, for a long-time, the US stock market told you that it was ok with #StrongDollar, Down Oil Tax Cut, etc. (the 180-day correlation between SP500 and USD = +0.49). What’s changing on the margin always matters.


Put another way, if you’re like me, betting on:


  1. #EuropeSlowing driving more Greek-type gong shows (they just wanted vaca, this will be back in the Fall)
  2. And Down Euro due to more bailouts, Draghi cowbell, etc…


You should be betting on #StrongDollar Deflation. For the last month, Global Macro market risk has.


Putting things in perspective (multi-factor, multi-duration analysis) is always critical when the central planners are celebrating their latest market plan. Using last week’s closing prices, this is what markets have priced in using 1-month as a duration:


  1. US Dollar Index +1.5% month-over-month
  2. Euro -1.4% month-over-month
  3. Commodities (CRB Index) -4.4% month-over-month
  4. Copper -7.8% month-over-month
  5. Oil (WTI) -14.7% month-over-month
  6. Canadian Dollar -3.2% month-over-month
  7. Russian Stocks -5.6% month-over-month
  8. Emerging Market Stocks (MSCI Index) -4.6% month-over-month
  9. European Stocks (EuroStoxx600) +0.5% month-over-month
  10. US 10yr Bond Yield -9 basis points, month-over-month


Taking a step back to a month ago, Mr. Macro Market was pretty efficient in pricing in:


  1. Down Euro and relative bailout (reflation) of European Equities
  2. #StrongDollar Deflation’s return to everything linked to inflation expectations
  3. Less volatility in a range bound US Treasury market


Since you might be asking yourself what to do with Treasuries when yields trade toward the top-end of the 2.20-2.47% risk range, you buy. Because the non-emotional risk manager in you sold some bonds at the low-end of the yield range last week.


Lower your stress. Lower your beta. Rinse & Repeat. Without growth accelerating, the central planners in China and Europe will not win this war. The battle of your every market day is to keep in perspective that they are firing on blank cartridges.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.20-2.47%

SPX 2043-2090
VIX 14.90-20.34
USD 95.58-97.66
EUR/USD 1.09-1.12
Oil (WTI) 49.42-53.83


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Blank Cartridges - z 07.13.15 Chart

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