Takeaway: The VIX is at 14. That's not bullish.
The S&P 500 might be back to “flat," but being Long the Long Bond, Gold, and Utilities continues to dominate in the absolute return space.
The recent "back to flat" rally is starting to look precarious. Here's analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers this morning:
"While being right on all of my macro longs in 2016 (and having covered SPY in FEB, then coming back to the short side too early here in March SPY short -3.65% against me currently), I’m as committed to the bear side of SPX and Russell as I have been every time VIX has been in this 12-14 range since JUL (when I initially went bearish on SPY)"
Check out the corresponding chart of the S&P 500.
With the VIX tapping 14, where do we go from here?
Client Talking Points
While being right on all of our macro longs in 2016 (and having covered SPY in FEB, then coming back to the short side too early here in March SPY short -3.65% against us currently), we are as committed to the bear side of SPX and Russell as we have been every time VIX has been in this 12-14 range since JUL (when we initially went bearish on SPY).
Massive ramp in everything reflation post Janet Yellen going Dovish, but now that both the SPX and CRB Index are “flat” year-to-date (i.e the new bull is flat), but now USD is signaling immediate-term TRADE oversold inasmuch as CRB overbought.
Being bearish on the big 3 global Equity indexes (Nikkei, DAX, and S&P 500) continues to pay off in long/short space (vs. Long TLT, XLU, GLD). This will not be highlighted by the bulls but the Nikkei closed down for the 4th straight session overnight, now down -12.1% year-to-date (vs. DAX -8% YTD) and teetering on going back into #crash mode (-20% from July highs).
*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE.
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Top Long Ideas
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:
+ Too many hedge funds chasing performance...
We continue to expect utilities to outperform the broader market given this current environment.
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.
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
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QUOTE OF THE DAY
If you want to have a better performance than the crowd, you must do things differently from the crowd.
Sir John Templeton
STAT OF THE DAY
Since 2001, Earth has experienced 15 out of the 16 hottest years on record and 2015 was the warmest year ever recorded.
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Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Macro analyst Christian Drake. Click here to learn more.
"... As the Chart of the Day below illustrates, inventories again grew at a premium to sales in the latest January data, sending inventory-to-sales ratios across the supply chain to new highs. Note: Unless companies are successfully foreshadowing accelerating demand, excess inventory = lower future profitability at the corporate level (discounting to move supply) and lower growth at the aggregate level (lower inventory build drags on Investment growth)"
“The more you do QE, the more it works. It is like love.”
As the former chief economist at the IMF was busy romantically lauding how the QE cup runneth over with increasing returns, the Japanese Yen was busy making a new 17-month high against the dollar.
Euro = +0.8% against the Dollar yesterday to +4.2% YTD
How about a fresh rate cut to new record lows in Norway?
Norwegian Krone = +1.6% against the Dollar
In the Big (Macro) Dance:
#12 Seed = Economic Gravity
#5 Seed = Central Bank Omnipotence
We’ve dubbed the diminishing-turned-negative returns to QE a breakdown in the central banking #BeliefSystem.
You can’t spell believe without a ‘lie’ in the middle.
Back to the Global Macro Grind …..
Let’s do a brief thought experiment.
First, let’s allow our analytical cup to runneth over with willful blindness for a moment and ignore:
- Past Peak: That the corporate profit, labor, income, consumption, confidence and credit cycles are all in their expansionary twilight.
- Industrial production accelerated to the downside (-1.0% YoY) in Feb.
- HMI & Housing Starts: Builder Confidence held at a 9-month low in March and Housing Starts, despite sequential improvement, have been flat for 10-months. (& Spoiler: Existing Home Sales should be negative on Monday)
- Retail Sales: Headline retail sales were negative MoM for a second month in February
- Inventories: As the Chart of the Day below illustrates, inventories again grew at a premium to sales in the latest January data, sending inventory-to-sales ratios across the supply chain to new highs. Note: Unless companies are successfully foreshadowing accelerating demand, excess inventory = lower future profitability at the corporate level (discounting to move supply) and lower growth at the aggregate level (lower inventory build drags on Investment growth)
That’s not to go all scorched earth. I could certainly highlight some positive data (remember that balmy Thursday morning, 20 hours ago when everyone got levered long equities because the Philly Fed beat? … good times) …. it’s just to highlight the broader reality that we don’t have rising global central bank interventionism, $7T in negative yielding debt and an incrementally dovish Fed …. because everything is awesome and the global populous is drowning in a wave of escape velocity growth.
Instead, let’s narrow the focus to policy’s dual mandate:
- Employment: The unemployment rate is 4.9%, labor force participation is showing some multi-month mojo and labor slack continues to diminish.
- Inflation: Core CPI Inflation accelerated for a 9th straight month, making a new 45-month high at +2.3% YoY in February. And while Shelter inflation (33% weighting in the Index) made a new high at +3.28% YoY and continues to backstop headline growth, Services ex-shelter accelerated to a 13-month high. Meanwhile, Core Goods (i.e. commodities less food & energy) inflation - which depends more on short-run inflation expectations, currency impacts and import prices – went positive (+0.1% YoY) for the first time in 3 years and will be broadly interpreted as strong dollar impacts burning off. Moreover, the pickup in core and ex-shelter price growth – and in Medical Care specifically (which carries a significantly higher weighting in the PCE price index than the CPI index), suggests inflation in the Fed’s preferred Core PCE inflation reading will continue its path higher.
Of course, not all inflation is created equal and excess inflation in key consumer cost centers (rent/housing & healthcare) steals share of wallet from discretionary consumption.
But that underlying dynamic aside, if I told you that employment growth is past peak but still good and inflation (for the sake of our argument here) is non-transiently accelerating, what part of the cycle would you think we’re in?
Indeed, inflation is the most lagging of indicators and cresting employment + rising inflation classically characterizes the last part of the cycle.
With year-over-year GDP growth slowing in each of the last three quarters (and facing its hardest comp of the cycle in 2Q16), we are in the middle of cyclical deceleration. And if the Fed gets the inflation it’s looking for it will simply serve as further confirmation of our current late-cycle reality.
As Keith highlighted yesterday: ↓ growth + ↑ Inflation ≠ Multiple Expansion … and the worst pro-cyclical allocations are made at the best of times.
Next week we’ll probably see Existing Home Sales decline, Home Prices decelerate and Durable Goods remain recessionary. We’ll also get the Services PMI for March which, recall, fell into contraction in February for the first time since the recession.
Yesterday was kind of like a T-ball game. With rates down and financials outperforming and long bonds bid with high beta illiquidity leading, everyone got a trophy just for showing up.
Daily moves can be random walks but get the Trend/Cycle right and you’ll get your net wealth right.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.79-1.98%
Oil (WTI) 34.59-41.52
Best of luck out there today,
Christian B. Drake
U.S. Macro Analyst
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