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INSTANT INSIGHT | Why Treasury Yields Are Down

What is happening to the 10-year Treasury?

 

The fact that yields are coming down, following last week's rate hike by the Yellen Fed, seems counterintuitive. Below is a brief excerpt from a note sent to subscribers earlier this morning by Hedgeye CEO Keith McCullough explaining why:

 

"... The U.S. 10-year Treasury yield was down to 2.18% yesterday and is holding 2.19% so far this morning with Yield Spread compression (10yr minus 2yr) still testing YTD lows as #GrowthSlowing in Q4 remains obvious to anyone who is rate of change driven and data dependent."

 

INSTANT INSIGHT | Why Treasury Yields Are Down - 10 yr treasury

 

Got it? #GrowthSlowing.


McCullough: The Three Signs of Coming Recession

 

In this brief excerpt from The Macro Show, Hedgeye CEO Keith McCullough breaks down the three precursors to a U.S. recession and urges viewers to be wary of one in 2016. 


CHART OF THE DAY: Defanging Disney And Apple | $AAPL $DIS

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to subscribe. 

 

"... Consider an “expensive” and a “cheap” stock that are currently being defanged:

  1. Disney (DIS) broke its intermediate-term TREND line of $111, 2x in 2015 (AUG and DEC) on accelerating volume
  2. Apple (AAPL) broke its intermediate-term TREND line of $119, 2x in 2015 (AUG and DEC) on accelerating volume

Disney (DIS) now fits the intellectually appealing “expensive that is trending down” short-idea criteria, whereas Apple (AAPL) is crushing the valuation intellects as “cheap” continues to get cheaper."

 

CHART OF THE DAY: Defanging Disney And Apple | $AAPL $DIS - 12.22.15 EL chart


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Defanging Momentum

“You buy cheap assets that are trending up and short expensive assets that are coming down.”

-Cliff Asness

 

Sounds pretty simple, eh? If you can nail the assumptions in the statement, that is. “Cheap” and “expensive” need to be defined using the right forward looking cash flows (not those of consensus) and “trending up” or “down” needs to be quantified, not hoped for.

 

Since Asness is the founder of a quantitatively driven hedge fund (AQR), he’s much more indifferent about what is going up and down than some qualitative fund managers who get married to stocks and their slide decks.

 

That’s not to say storytellers can’t kill it in our profession (they especially do in bull markets). It’s simply a reminder that there are lots of different strategies to consider. When the economic cycle slows, calling something “cheap” on the wrong numbers can kill your returns.

Defanging Momentum - 8 ball bubble 12.11.2015

 

Back to the Global Macro Grind

 

Table 1.2 in Efficiently Inefficient, by Lasse Heje Pedersen, does a good job tabling the differences between “Value” and “Momentum” hedge fund managers. Pedersen interviewed names you’d recognize like Asness, Ainslie, Chanos, Soros, Scholes, Griffin, and Paulson.

 

I call this out this morning as this is the most important debate going on in our investor base into year-end. It seems that many who were long “value” (cyclicals) this year are still long, whereas those who have been short the cycle continue to press it.

 

The economic cycle, that is. As in the thing that matters most at big cyclical turns. Unlike hitting daily, weekly, and monthly “exposure” and return targets, growth and inflation cycles are much more glacial. In other words:

 

  1. When INFLATION ACCELERATING peaked (2011-2012), “cheap” commodity plays peaked
  2. When GROWTH ACCELERATING peaked (Q414-Q215), “cheap” cyclicals started to trend down

 

“Expensive” growth stocks that showed organic #GrowthAccelerating (as cyclicals slowed like cyclicals do during a slow-down – hence the term cyclical) got even more expensive after the US Corporate Profit Cycle peaked in Q2 of 2015. This happened in 2H 2007 too.

 

This brings us to the FANG…

 

For those of you who are new to chasing “Momentum” as a Style Factor (expensive stocks that are trending up), the components of the FANG are Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google (GOOGL).

 

If you’re looking for an intermediate-term TREND signal on these stocks (a way to quantify “trending up or down”):

 

  1. FB intermediate-term TREND support = $101
  2. AMZN intermediate-term TREND support = $606
  3. NFLX intermediate-term TREND support = $115
  4. GOOGL intermediate-term TREND support = $720

 

Unlike most establishment “technicians” on Wall Street, I don’t use single-factor point and click price momentum charts to define what is bullish or bearish from a TREND perspective. I use a composite 3-factor signal that includes PRICE, VOLUME, and VOLATILITY.

 

I don’t use my quantitative signal to be mean to people who don’t do macro. I use it because it works. I can assure you that I have back-tested and tried most technical “signals” you can get free on the internet. They are free for a reason. They don’t work at the macro turns.

 

Consider an “expensive” and a “cheap” stock that are currently being defanged:

 

  1. Disney (DIS) broke its intermediate-term TREND line of $111, 2x in 2015 (AUG and DEC) on accelerating volume
  2. Apple (AAPL) broke its intermediate-term TREND line of $119, 2x in 2015 (AUG and DEC) on accelerating volume

 

Disney (DIS) now fits the intellectually appealing “expensive that is trending down” short-idea criteria, whereas Apple (AAPL) is crushing the valuation intellects as “cheap” continues to get cheaper.

 

So why doesn’t the Old Wall and its circus of chart chasers (they are loudest at every economic cycle peak) start talking about DA-FANG? Or Defanging Momentum? Give it some time.

 

Because that’s all that remains between #Deflation and #GrowthSlowing morphing into a recessionary stock market signal (see Credit Markets for details). That’s when both “expensive” and “cheap” go down at the same time.

 

Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND signals in brackets):

 

UST 10yr Yield 2.12-2.32% (bearish)

SPX 1 (bearish)
RUT 1106--1155 (bearish)

VIX 17.86-24.41 (bullish)
USD 97.61-99.42 (bullish)
EUR/USD 1.07-1.10 (bearish)
Oil (WTI) 34.99-37.37 (bearish)

Gold 1050-1085 (bearish)
Copper 2.03-2.15 (bearish)

AAPL 104-111 (bearish)

AMZN 641-682 (bullish)

GOOGL 745-779 (bullish)

KMI 13.85-17.35 (bearish)

DIS 104-111 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Defanging Momentum - 12.22.15 EL chart


The Macro Show Replay | December 22, 2015

 


December 22, 2015

Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, with our intermediate-term (TREND) view and the previous day's closing price for each name.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.

 

  • Bullish Trend
  • Bearish Trend
  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
2.32 2.12 2.20
SPX
S&P 500
1,993 2,046 2,021
RUT
Russell 2000
1,106 1,155 1,127
COMPQ
NASDAQ Composite
4,890 5,043 4,968
NIKK
Nikkei 225 Index
18,569 19,275 18,916
DAX
German DAX Composite
10,142 10,714 10,497
VIX
Volatility Index
17.86 24.41 18.70
DXY
U.S. Dollar Index
97.61 99.42 98.46
EURUSD
Euro
1.07 1.10 1.08
USDJPY
Japanese Yen
120.35 123.05 121.21
WTIC
Light Crude Oil Spot Price
34.99 37.37 35.78
NATGAS
Natural Gas Spot Price
1.67 2.04 1.94
GOLD
Gold Spot Price
1,050 1,085 1,077
COPPER
Copper Spot Price
2.03 2.15 2.14
AAPL
Apple Inc.
104 111 107
AMZN
Amazon.com Inc.
641 682 664
GOOGL
Alphabet Inc.
745 779 760
NFLX
Netflix
112 121 116
KMI
Kinder Morgan Inc.
13.85 17.35 15.14
DIS
Walt Disney Company, Inc.
104 111 106

 

 


Early Look

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