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And the bounce… off fresh YTD closing lows

Client Talking Points

EURO

Does Draghi need Burning Euro for European Equities to stop crashing? Yes. Down Euro -0.4% vs. USD this morning finally stopped the DAX at a -30% crash (since 2015’s high) – Italy’s crash (MIB Index) was -34%! This stops Gold from going higher this am too (Up Dollar) – my FX volatility signal is surreal (Euro risk range 1.07-1.14).

OIL

What will a +4.5% bounce off new cycle lows do? Keep Oil Volatility (OVX) astonishingly bullish – and that is bearish for the TREND call on everything Energy which remains bearish – risk range on OVX is, get this, 62-79! (immediate-term risk range for WTI = 25.98-29.99) – bear markets don’t end in big media sponsored bounces.

SPY

Still in our Best Ideas list (Short Side), but after closing at new YTD lows yest (1829 SPX = down -10.5% YTD and -14.1% since we went bearish on it in July) we should see a bounce this morning – problem is risk range only gets me 1882 on the upside, whereas a month ago the range could get you at least back to 1950-2000.

Asset Allocation

CASH 66% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 21% INTL CURRENCIES 13%

Top Long Ideas

Company Ticker Sector Duration
XLU

The bond market understands #GrowthSlowing. So do Utilities (XLU), which is why XLU is leading S&P sub-sector performance in 2016. XLU is up +7.6% versus down -8.0% for the S&P 500. Stick with it on the long side.  

GIS

GIS remains one of analyst Howard Penney's top Long ideas in the Consumer Staples space. As we have continued to say, it boasts style factors ideal in turbulent times; high market cap, low beta and liquidity. While GIS is down year-to-date, it's held up very well against the broader stock market. GIS is down -4% versus down -8% for the S&P 500 in 2016.

TLT

Down go growth expectations and down goes the yield curve. That's the latest from Macro markets last week and it plays right into our long Long-Term Treasuries (TLT) and short Junk Bonds (JNK) Investing Ideas.

 

The UST 10YR Yield declined another -9 basis points last week which helped boost TLT +1.1% on the week. In a healthy environment, bonds as an asset class go up in tandem, but JNK lost -0.9% on the week despite a falling yield curve. That’s because we’re NOT in an “all is good” environment. Credit spreads widen in turbulent times. This widening is the alpha-generating opportunity in long TLT, short JNK.

Three for the Road

TWEET OF THE DAY

Headlines/Rumors of OPEC cuts are a mirage. Still too early. Here's what to watch. app.hedgeye.com/insights/48949…

@Hedgeye @JoeMcMonigle

QUOTE OF THE DAY

"I say I'm a million percent. That is better than a hundred percent!"

-Randy "Macho Man" Savage

STAT OF THE DAY

Randy "Macho Man" Savage played 289 games in four minor league seasons, batting .254 with 16 homeruns and 66 RBIs.


CHART OF THE DAY: Over 600 Rate Cuts Globally... What Did We Get?

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

 

"... When you boil down what Yellen had a very hard time distilling yesterday, the most basic market expectation implied by $7 TRILLION (and climbing) negative yielding sovereign bonds is called #Deflation.

 

If you haven’t understood the causal factor behind Global #Deflation all along (Bernanke devaluing the US Dollar to a 40 year low in 2011 – creating unprecedented mountains of supply and leverage on the premise that 0% rates = 0% risk), you need to meet with me."

 

CHART OF THE DAY: Over 600 Rate Cuts Globally... What Did We Get? - Chart of the Day11


Gambler's Ruin

“The risk that you end up bankrupt despite having the odds in your favor.”

-Lasse Heje Pedersen

 

For any of you who have studied statistics, the Gambler’s Ruin is a classic in risk management. It’s part of a general theory by Dutch math/physics genius (a real one), Christiaan Huygens and a critical lesson for fund managers – liquidity risk.

 

As Pedersen explains in a discussion about Liquidity Spirals,  “investors hope to have an edge (alpha) but have limited capital (with leverage) that is subject to margin requirements. In investments, this risk is often referred to as funding liquidity risks. Whereas market liquidity risk is the risk that you cannot sell your securities without incurring large transaction costs, funding liquidity risk is the risk that you must sell them!” (Efficiently Inefficient, pg 81)

 

Being forced to sell because you aren’t allowed to buy more is one thing. If you gave them the capital, some of the super “smart” people in this profession would average down the whole way assuming that their edge is their own perceived genius. What happens when what they thought was “right” (in their favor) becomes dead wrong? Oh boy.

 

Gambler's Ruin - Whiplash cartoon 03.26.2015

 

Back to the Global Macro Grind

 

“A liquidity spiral is an adverse feedback loop that makes prices drop, liquidity dry up, and capital disappear as these events reinforce each other. The spiral starts when some kind of shock to the market causes leveraged traders to lose money.” -Lasse Heje Pedersen

 

Sound familiar?

 

The most important question about a liquidity spiral is what caused the “shock”? This is where the storytelling from the Old Wall and all of its conflicted compensation schemes begins. With the SP500 and Russell 2000 closing at fresh 2016 lows yesterday (down -14.1% and -26.4%, respectively, from their all-time #Bubble highs), I’ve heard everything at this point, including:

 

  1. China
  2. Oil
  3. The Weather
  4. “Risk Parity”
  5. Algos

 

And while it humors me to consider that none of these factors were blamed for all of the compensations we had during the bull market, it is nice to see that Jamie Dimon is putting some of that money back to work trying to be the causal factor in JPM’s stock.

 

Newsflash: no bear market ended (after it just started) with a guy buying his own stock.

 

I hear Dimon is a great guy (so is my Dad) but I completely disagree with him on the US economy right now. The real debate here is about two of the most basic causal factors in all of macro – GROWTH and INFLATION.

 

Dimon (a big time Democrat – and a much more big time man of the Old Wall than I’ll ever be) believes, like Barack Obama, that a non-partisan-independent-researcher like me is “peddling economic fiction.” Whereas I believe, like markets, that I’m telling the truth.

 

“So”, as Janet Yellen prefaced every answer during her confused testimony on Capitol Hill yesterday, what is the truth?

 

  1. On INFLATION: Is #Deflation Risk “transitory” or pervasive?
  2. On GROWTH: Is the US Economy accelerating or decelerating?
  3. On Liquidity & Leverage: is the risk on Dimon’s sell-side balance sheet or the buy-side’s?

 

Gambler's Ruin - CoD inflation

 

I think anyone who runs money (different than running for office or running a bank) knows that the answers to these questions are becoming as obvious as negative bond yields have become.

 

When you boil down what Yellen had a very hard time distilling yesterday, the most basic market expectation implied by $7 TRILLION (and climbing) negative yielding sovereign bonds is called #Deflation.

 

If you haven’t understood the causal factor behind Global #Deflation all along (Bernanke devaluing the US Dollar to a 40 year low in 2011 – creating unprecedented mountains of supply and leverage on the premise that 0% rates = 0% risk), you need to meet with me.

 

Yes, Jamie. I want to meet with you (can someone forward this to him please).

 

I’ll humbly submit that I know the bear case for both growth and inflation as well as anyone else who has authored it. The risk here is the other side of my free-market-opinion.

 

That risk is really simple. The belief system that central-planners and bankers around the world can arrest economic gravity via currency devaluation and “easing” is seeing the odds fall out of its favor. You can end up bankrupt by being dead wrong on that too.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.58-1.81%

SPX 1
RUT 935-990

VIX 23.97-29.50
EUR/USD 1.07-1.14
Oil (WTI) 25.98-29.99

Gold 1170-1245

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Gambler's Ruin - Chart of the Day11


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.

The Macro Show Replay | February 12, 2016


 


Cartoon of the Day: Train Wreck

Cartoon of the Day: Train Wreck - VIX train wreck cartoon 02.11.2016

 

Rising global volatility and credit risk have dominated year-to-date performance. The VIX Volatility index, the implied volatility of S&P 500 index options, is up 54% this year as equity markets crash.


McCullough: Why Global Equity Markets Are Getting Eviscerated

 

In this brief excerpt of The Macro Show this morning, Hedgeye CEO Keith McCullough explains why global stock markets are crashing and why 10-year Treasury yields are hitting new all-time lows.


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

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