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A Review Of Recent "Rallies" and What's Really Been Working

Takeaway: Did the permabulls nail this? Utilities are up 11.3% (on U.S. growth slowing) and Financials (a rate hike proxy) are down -5.6% this year.

A Review Of Recent "Rallies" and What's Really Been Working - bull riding cartoon 08.26.2015 large

 

Most bears are positioned bullish now - and the underwater bulls, well, they're always bullish.

 

"After 2-3 weeks of being royally squeezed, I’m doubling down on everything we’ve been saying for 8 months," Hedgeye CEO Keith McCullough wrote this morning in a note to subscribers. McCullough continues: 

 

"Everything we’ve been saying” includes not being long small caps and/or junk bonds – Russell 2000 only +0.5% last week (yes, I can take a lot more pain than that) to -4.3% YTD and -16.1% since we went broadly bearish on US stock market beta in July."

 

Permabulls can call recent bounces from the 2016 lows whatever they like. But ask them to pull the chart back a bit further and explain this uncomfortable reality.  

 

 

Another point. Investors have expressed their lack of conviction in stock rallies all year. On up days, volume is either flat or declining. That's not exactly bullish. 

 

 

To be sure, there have been some clear winners and losers in 2016. Take a look at our favorite Long/Short sectors. Long Utilities (XLU), a U.S. growth slowing proxy, is up 11.25% this year. Meanwhile, our short Financials (XLF) call, for rate hike skeptics, has also worked out nicely, down -5.6%. Neither of those are consensus or fits any bullish narrative.

 

Here's the chart:

 

A Review Of Recent "Rallies" and What's Really Been Working - year to date sectors

 

We also like Long Bonds (TLT), up 5.6% year-to-date.

 

"With the 10yr +10bps last week to 1.98%, now it’s go time (again) for the Long Bond and Utilities (XLU) bulls who are having a great year vs. “Long Financials During Rate Hike Cycle” view  (XLU +11.3% YTD vs XLF -5.6%); is the Fed going to be hawkish this week? I think so – but so does everyone else; I think rates and Financials drop on the “news” like they did post rate hike."

 

 

Don't believe all the storytelling.


MONDAY MORNING RISK MONITOR | GREEN DOESN'T MEAN GO

Takeaway: While global markets pushed higher in response to the ECB, we remain skeptical of the nature and durability of this rally.

MONDAY MORNING RISK MONITOR | GREEN DOESN'T MEAN GO - RM11

 

Key Takeaway:

Global markets reacted with broad optimism to the ECB announcing that it would cut rates and expand asset purchases last week. Our heatmap below reflects this with an overwhelming number green "risk on" signals across the short and intermediate term durations. CDS tightened globally, the high yield YTM tightened by 15 bps, the leveraged loan index rose by 20 points, and the TED spread and Euribor OIS spreads tightened by 5 bps and 4 bps respectively. Meanwhile, the price of Chinese steel jumped by 286 Yuan/ton (+13% W/W).

 

While the drumbeat in the short-term has been positive now for 3-4 weeks, we remain concerned that central planners ability to fight slowing growth is in secular decline (see Japan). We advise caution against getting over your ski tips on the bullish side.

 

Current Ideas:

MONDAY MORNING RISK MONITOR | GREEN DOESN'T MEAN GO - 3 RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 9 of 13 improved / 1 out of 13 worsened / 3 of 13 unchanged
• Intermediate-term(WoW): Positive / 9 of 13 improved / 1 out of 13 worsened / 3 of 13 unchanged
• Long-term(WoW): Negative / 1 of 13 improved / 4 out of 13 worsened / 8 of 13 unchanged

MONDAY MORNING RISK MONITOR | GREEN DOESN'T MEAN GO - 2 RM15

 

1. U.S. Financial CDS – Swaps were tighter across the board for US Financials last week. Positive US labor data coupled with the ECB's announcement for rate cuts and increased asset purchases drove the median US financial swap tighter by -8 bps to 95.

Tightened the most WoW: AIG, AXP, C
Widened the most WoW: AON, TRV, ALL
Tightened the most WoW: AIG, MET, PRU
Widened the most MoM: SLM, MBI, AGO

MONDAY MORNING RISK MONITOR | GREEN DOESN'T MEAN GO - RM1

 

2. European Financial CDS – European investors reacted with broad optimism to the ECB's announcement last week, and swaps tightened across the complex. The median swap fell by -25 bps to 104.

MONDAY MORNING RISK MONITOR | GREEN DOESN'T MEAN GO - RM2

 

3. Asian Financial CDS – Asian Bank CDS were tighter across the board last week. ICICI Bank of India saw the biggest improvement W/W at -20 bps to 182.

MONDAY MORNING RISK MONITOR | GREEN DOESN'T MEAN GO - 2 RM17

 

4. Sovereign CDS – Sovereign Swaps mostly tightened over last week. Portuguese swaps tightened the most, by 17 bps to 252.

MONDAY MORNING RISK MONITOR | GREEN DOESN'T MEAN GO - RM18

 

MONDAY MORNING RISK MONITOR | GREEN DOESN'T MEAN GO - RM3

 

MONDAY MORNING RISK MONITOR | GREEN DOESN'T MEAN GO - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Propelled by optimism over the effects that ECB stimulus might have on global economic growth, the median swap for these producer economies tightened by 13 bps to 181.

MONDAY MORNING RISK MONITOR | GREEN DOESN'T MEAN GO - RM16

MONDAY MORNING RISK MONITOR | GREEN DOESN'T MEAN GO - RM20

6. High Yield (YTM) Monitor – High Yield rates fell 15 bps last week, ending the week at 7.84% versus 7.99% the prior week.

MONDAY MORNING RISK MONITOR | GREEN DOESN'T MEAN GO - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 20.0 points last week, ending at 1833.

MONDAY MORNING RISK MONITOR | GREEN DOESN'T MEAN GO - RM6

8. TED Spread Monitor  – The TED spread fell 5 basis points last week, ending the week at 31 bps this week versus last week’s print of 37 bps.

MONDAY MORNING RISK MONITOR | GREEN DOESN'T MEAN GO - RM7

9. CRB Commodity Price Index – The CRB index rose 5.4%, ending the week at 174 versus 165 the prior week. As compared with the prior month, commodity prices have increased 8.2%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | GREEN DOESN'T MEAN GO - RM8

10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 4 bps to 11 bps.

MONDAY MORNING RISK MONITOR | GREEN DOESN'T MEAN GO - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index was unchanged at 1.95% last week. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

MONDAY MORNING RISK MONITOR | GREEN DOESN'T MEAN GO - RM10

12. Chinese Steel – Steel prices in China rose 13.2% last week, or 286 yuan/ton, to 2458 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

MONDAY MORNING RISK MONITOR | GREEN DOESN'T MEAN GO - RM12

13. 2-10 Spread – Last week the 2-10 spread widened to 103 bps, 2 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | GREEN DOESN'T MEAN GO - RM13

14. CDOR-OIS Spread – The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. The CDOR-OIS spread was unchanged at 40 bps.

MONDAY MORNING RISK MONITOR | GREEN DOESN'T MEAN GO - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


POSITION MONITOR

POSITION MONITOR  - CHART 1

 

RECENT NOTES

2/29/16 UNFI | ZERO VISIBILITY

2/26/16 KHC | BLINDED BY THE MARGIN

2/25/16 REPLAY | KHC SHORT THESIS

2/12/16 NUS | “LAID AN EGG”

2/10/16 GIS | LONG | THINGS TO THINK ABOUT

2/9/16 THOUGHTS ON CONSUMER PACKAGED GOODS (GIS, CAG, WWAV, LNCE, HAIN, PF)

 

SECTOR PERFORMANCE

Food and organic stocks that we follow underperformed the XLP last week. The XLP was up +0.8% last week, the top performers on a relative basis from our list was United Natural Foods (UNFI) and Hain Celestial (HAIN) posting increases of +13.8% and +4.0%, respectively. The worst performing companies on a relative basis on our list were J&J Snack Foods (JJSF) and Post Holdings (POST), which were down -3.3% and -3.4%, respectively.

POSITION MONITOR  - CHART 2

 

XLP VERSUS THE MARKET

POSITION MONITOR  - CHART 3

 

Food and Organic Companies

POSITION MONITOR  - CHART 4

POSITION MONITOR  - CHART 5

POSITION MONITOR  - CHART 6

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


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.

Doubling Down

Client Talking Points

GERMANY

Well, the ECB threw everything (including the kitchen sink) at the tape last week and you know what the DAX did? It closed +0.1% on the week to -8.5% year-to-date. Now what? Angela Merkel was just defeated in 2 of 3 states holding regional elections as A) Germany’s economic cycle continues to slow from recent peak and B) anti-migration exit polls ramp.

RUSSELL 2000

“Everything we’ve been saying” includes not being long small caps and/or junk bonds. The Russell 2000 was only up +0.5% last week (yes, we can take a lot more pain than that) to -4.3% year-to-date and -16.1% since we went broadly bearish on U.S. stock market beta in July.

UST 10YR

With the UST 10YR up +10 basis points last week to 1.98%, now it’s go time (again) for the Long Bond and Utilities (XLU) bulls who are having a great year vs. “Long Financials During Rate Hike Cycle” view  (XLU +11.3% YTD vs XLF -5.6%). Is the Fed going to be hawkish this week? We think so – but so does everyone else; we think rates and Financials drop on the “news” like they did post rate hike.

 

*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH 62% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 4%
FIXED INCOME 26% INTL CURRENCIES 8%

Top Long Ideas

Company Ticker Sector Duration
XLU

Utilities (XLU) remains the alpha generating trades in equities, year-to-date XLU is up 11.3% versus -1.1% for the S&P 500. Factor exposure is very important to us, especially when volatility is in a bullish TREND set-up and small cap, illiquid stocks continue to underperform. Here's another way to look at it:

Volatility

+ Illiquidity

+ Too many hedge funds chasing performance...

= #Pain

We continue to expect utilities to outperform the broader market given this current environment.    

GIS

This stock is not likely going to go up 20% in the next year, but we do believe it will fare better than most in the consumer staples sector, especially as we head into an economic slowdown. That's why GIS is up 5.5% year-to-date versus down -1.4% for the S&P 500.

 

In the past few newsletters we've noted the effect Walmart is having on GIS, how its Yogurt business is faring against competitors, and how the company is broadening the distribution of its top 450 SKUs. On the M&A front, barring any screaming deals in the market place we don’t see General Mills (GIS) buying anything over roughly $1 billion in sales, just given the added complexity it would cause. So they will most likely continue the string of pearls approach in the Natural & Organic/Snacking categories. This does not rule out the possibility of GIS being bought, 3G & Kraft Heinz could be getting back in the mix as well, although it seems too soon for another deal this big.

TLT

Growth and inflation continue to decelerate in the Eurozone and globally. In other words, there is very little central planners can do to stop the cycle and the inevitable deleveraging that must take place in credit Long-Term Treasuries (TLT) remains the alpha generating trade in fixed income this year. 

Three for the Road

TWEET OF THE DAY

No chance FTC would allow single chinese company to buy 2 large US hotels. HOT hoping MAR matches $76 $MAR $HOT

@GLLStrategist

QUOTE OF THE DAY

Rebalancing represents supremely rational behavior.

David Swensen

STAT OF THE DAY

Starwood receives nearly $14 billion buyout bid from a consortium led by China's Anbang Insurance Group (Marriott International Inc. has already bid for Starwood in a deal worth $12.2 billion).


CHART OF THE DAY: The Supremely Long-Term Tail Risk Wagging The Economic Dog

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.

 

"... Since the Supremely Long-Term TAIL risk wagging the economic dog here remains a demographic (aging – see Chart of The Day) one, I’m most impressed with long-term investor returns that have nailed that. Slower (growth) for longer has equated to supreme alpha for buy-and-hold investors in long-term sovereign bonds."

 

CHART OF THE DAY: The Supremely Long-Term Tail Risk Wagging The Economic Dog - 03.14.16 Chart


Supremely Long-Term

“Rebalancing represents supremely rational behavior.”

-David Swensen

 

In reviewing my old college economic-cycle-top notes (there have been 3 since I graduated = 1999, 2007, and 2015), I came across this one from Yale Endowment chief asset allocator, David Swensen.

 

While I don’t think anyone is “supremely rational” when it comes to investing at economic cycle tops and bottoms, I do find it interesting to observe human behavior as the signs of topping (and bottoming) processes become more obvious.

 

Swensen wrote that in the year 2000 stating that “disciplined rebalancers need to sell what’s hot and buy what’s not.” If you have a supremely long-term investment horizon, that’s probably going to work more often than it doesn’t. If you’re like > 90% of money managers out there today, chasing monthly and quarterly returns – not so much.

 

Back to the Global Macro Grind

 

If you’ve been rebalancing into anything related to the Federal Reserve’s 2008-2012 (US Dollar all-time lows 2011) Commodity Bubble, you’ve had quite the headache for the last 3 years.

Supremely Long-Term - Deflation cartoon 12.17.2015

 

If you just started buying them in 2016, you’re feeling like you might have called the bottom. If you were long commodities vs. short Long-term Treasuries, you’ve had a rough year – but you killed it last week!

 

I obviously got killed last week. It happens and it sucks. While I’ve been much more bearish on both rates and the Financials (XLF) in 2016 than I have been on commodities and/or their related equities, the only thing that really worked for me last week was long Utilities (XLU). While the “YTD” is pretty short-term in the context of Swensen’s time-horizon, the YTD score still matters:

 

  1. US Dollar -1.2% on the week to -2.5% YTD
  2. Euro (vs. USD) +1.3% on the week to +2.7% YTD
  3. Canadian Dollar (vs. USD) +0.7% on the week to +4.6% YTD
  4. Commodities (CRB Index) +3.0% on the week to -1.5% YTD
  5. Oil (WTI) +7.3% on the week to -1.5% YTD
  6. Gold -1.5% on the week to +17.9% YTD
  7. SP500 +1.1% on the week to -1.1% YTD
  8. EuroStoxx600 +0.1% on the week to -6.4% YTD
  9. Canadian Stock Market (TSE) +2.3% on the week to +3.9% YTD
  10. US Treasury (10yr) Yield +10 basis points on the week to -29 basis points YTD

 

In other words, the closer you were (last week) to being long what hasn’t worked for 3 years, the better you’d have done. That’s why longer-term investors who have been right on longer-term growth and inflation expectations had a supremely bad week!

 

What is a “longer-term investor”?

 

  1. Someone who just buys, averages down, and holds, forever?
  2. Someone who gets the longer-term fundamentals right?
  3. Or neither? (I’m not marketing a fund here, so happy to consider other definitions)

 

Since the Supremely Long-Term TAIL risk wagging the economic dog here remains a demographic (aging – see Chart of The Day) one, I’m most impressed with long-term investor returns that have nailed that. Slower (growth) for longer has equated to supreme alpha for buy-and-hold investors in long-term sovereign bonds.

 

Great Keith – you still sucked last week.

 

Yep. And I’ll suck even more this week if I’m wrong on the economic cycle. But that’s been my “catalyst” since telling you to “rebalance” out of Small Cap, High Leverage, High Beta stocks, 8 months ago.

 

That’s right. Tell your boss (in my case, my wife) that there’s a guy in Stamford, CT whose research team keeps reiterating that the catalyst to be long:

 

  1. Long-term US Treasuries (TLT) = +5.6% YTD (ex the yield)
  2. Utilities (XLU) = +11.3% YTD (ex the yield)
  3. Gold (GLD) = +17.9% YTD (there is no yield!)

 

Has been, and continues to be, The Cycle.

 

Especially on #LateCycle consumption, employment, and profit metrics (isn’t it sad that Consensus Macro isn’t talking about those?), we’re actually at the YTD lows (see SP500 Earnings, Pending Home Sales, and ISM Services for details).

 

But, but, but…

 

On cyclical stuff that has been crashing for 1-3 years, we’re “off the lows”, bros! And the Fed is going to be hawkish about that on Wednesday because:

 

  1. Deflation In Commodities has had another short-term “reflation” (isn’t that “transitory” btw?)
  2. Late Cycle Employment reports (while slowing in rate of change terms) are still “good”

 

So, they’ll stay tight into an economic slow-down (like they did in raising rates in December). Wouldn’t it be a shocker if the US Dollar goes up on that this week and that we go back to what’s been right since July (selling all reflation rallies)?

 

I know. That’s supremely short-term. Hopefully my sucking wind is too.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.75-1.99%

SPX 1
RUT 1036-1099
USD 95.83-97.38
Oil (WTI) 32.21-39.92

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Supremely Long-Term - 03.14.16 Chart


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