We Are Unafraid To Be The Bears

Takeaway: The Fed raising rates into a slowdown could be the catalyst for dollar strength. Not good for commodities and stocks.

In the famous scene above from the 1980s classic "Caddyshack," ace golfer Ty Webb (Chevy Chase) blindfolds himself before making a string of tremendous shots, advising his young confused-about-life caddy Danny Noonan to "be the ball."

Ty's point? Relax. Take a deep breath. Trust in your skill and hard work.

On a related note, the recent stock market "rally" doesn't mitigate our major concerns about market risk. To the contrary. As many of you already know, we're unafraid to "Be the Bears" on stocks. In light of the precarious setup in U.S. equity markets, here's what Hedgeye CEO Keith McCullough wrote in a note to subscribers earlier today.

"Dollar Up, Reflation Down – it’s not that complicated to understand unless you are the Fed, trying to maintain “credibility” going for another policy mistake, raising rates into a slowdown. We’ll see if they’re S&P 500 (instead of data) dependent, the 15-day correlation (machines chase it) between USD and SPX is -0.84."

And some related thoughts from Hedgeye Macro analyst Darius Dale. (Click to enlarge the chart.)

The other market tethered to moves in the U.S. dollar? Commodities.

As McCullough points out in today's Early Look, the two week inverse correlation between U.S. and CRB commodities index is -0.96. "Where do you think the Commodity “Bull” and/or reflation trade will be if the US Dollar Index ramps another +3% from here?" 

Here's a hint. Look at the chart of the CRB index below, inclusive of the recent "rally" and yesterday's drawdown on dollar strength:

Remember... Fed heads have been trumpeting U.S. economic fundamentals that look "really quite good" and lauding modest improvements in inflation and the manufacturing sector. In fact, the chorus of Fed officials getting hawkish on further interest rate increases gets stronger every day. Some are calling for rate hikes as soon as April. We think the likely outcome from here is further dollar strength (i.e. not good for commodities or stocks).

More data...

With the S&P 500 back to flat for the year, permabull pundits and financial journalists have been praising the recent "rally." Rally? Meanwhile, small cap stocks reveal an entirely different story. 

"We are The Bears on U.S. stocks," McCullough writes. "And we can’t understand how the Russell dropping a full -1.9% yesterday back to -5.3% year-to-date (and -17% since July) is bullish. Apparently, if no one talks about it and quotes the S&P 500, everything is fine."

No matter. We'll keep crunching the numbers.

What the data tells us is that U.S. growth is slowing and the Fed is hell-bent on raising rates into this slowdown.