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INSTANT INSIGHT | Reflation Reversal & How To Play It

INSTANT INSIGHT | Reflation Reversal & How To Play It - Dollar cartoon 04.27.2016 

 

The mother of all reflation trades has inflated equities and commodities off the February lows. Since February 11th, the CRB index of commodities is up 18.8%  while, over that same period, the S&P 500 is up 11.5%.

 

Not so fast.

 

Before buying into the latest permabull narrative that U.S. #GrowthSlowing fears have abated so buy equities now, consider this. Once again, macro markets have already begun letting out some of the rally's hot air. Note: The S&P 500 was down for 4 of the last 6 weeks, meanwhile, net positioning is the most bullish it’s been all year (CFTC data).

 

INSTANT INSIGHT | Reflation Reversal & How To Play It - 05.02.16 Chart

 

So what are we watching? 

 

Top of the list is the U.S. dollar. Here is analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:

 

"Down Dollar (again) -2.2% last wk (-5.7% YTD) after both the PMI (50.4) and Consumer Confidence #s slowed (again) on Friday; markets are obviously questioning whether Dovish Fed can replace actual growth with some version of stagflation, but USD is signaling immediate-term oversold inasmuch as Gold is signaling overbought."

 

 

How do you play the oversold U.S. Dollar? Well, indirectly at the moment, McCullough says.

 

"Instead of buy USD (not brave enough, yet!), I sent out SELL signals in both Oil (+5.2% last week) and Copper on Friday; both are signaling overbought inasmuch as USD is signaling oversold; Copper $2.31 is an important macro level for the stagflation vs. #Deflation debate; so far longer-term #Deflation is still winning."

 

 

Here's the sell Oil signal in Real-Time Alerts:

 

 

U.S. #GrowthSlowing has been our call for a while now. We're sticking with it.

 

For more, watch the video below in which Hedgeye Senior Macro analyst Darius Dale explains why the U.S. Economy is entering "the most difficult part of the cycle."


The Macro Show with Keith McCullough Replay | May 2, 2016

CLICK HERE to access the associated slides.

 

 

 An audio-only replay of today's show is available here.


CHART OF THE DAY: Bearish Sentiment = Non-Existent

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.

 

"... Not to be confused with SENTIMENT on long-term US Treasuries where they ramped the net SHORT position (non-commercial CFTC futures & options contracts) in the 10YR last week to -97,876 contracts (-1.5x on a 1yr zscore):

 

  1. SP500 (Index + E-mini) positioning popped to its MOST BULLISH in 2016 at -1,206 contracts = +1.9x (1yr z-score)..."

*Note: +/- 2.0x on a 1yr z-score is considered overbought/oversold

 

CHART OF THE DAY: Bearish Sentiment = Non-Existent - 05.02.16 Chart


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Buy In May And...

“Our desire to reach into the future will always exceed our grasp.”

-Phil Tetlock

 

“But”… Phil Tetlock wrote in his new #behavioral book that I’m reviewing called Superforecasting… “debunkers go too far when they dismiss all forecasting as a fool’s errand.”

 

I’m a debunker, skeptic, forecaster, etc. Aren’t we all? If not, as analysts, what are we?

 

As the old saying goes, should we sell in May and go away? Or should we, like many did in April, stay? With the SP500 closing pretty much flat for April and US equity market positioning as bullish as it has been all year, our bearish forecast for Q2 really matters now.

 

Buy In May And... - growth escalator cartoon 04.29.2016

 

Back to the Global Macro Grind

 

When I use the word “bearish”, I am talking about US, Chinese, European, and Japanese growth. By growth, I mean the rate of change in demand and/or GDP growth.

 

Being bearish on growth means you’re bullish on Long-term Bonds (TLT), safe-equity yields that look like bonds like Utilities (XLU), and currencies that have no yield (but not a negative yield either) like Gold (GLD).

 

No, that doesn’t mean I nailed calling all 3 of these positions on every day at every price. Did you? But we absolutely nailed the causal factor (#GrowthSlowing) and will continue to run that ball right up the middle on anyone who disagrees with that forecast.

 

Last week’s US economic data ended on a bad note (again) with:

 

  1. US GDP (Q1) coming in at 0.5% (vs. 1.4% in the quarter prior)
  2. Chicago PMI slowing (again) to 50.4 in APR vs. 53.6 in MAR
  3. US Consumer Confidence (Univ. of Michigan report) slowing to 89.0 in APR vs. 91.0 in MAR

 

And, finally, the almighty US Equity market started reading bad as bad:

 

  1. US Dollar dropped another -2.2% to -5.7% YTD as markets are now flat out begging the Fed to ease (again)
  2. Commodities, Oil, and Gold all ripped higher on that … but so did #Stagflation fears
  3. Bond Yields pulled back (again) on that, with the UST 10yr Yield dropping -5bps to -44 basis points YTD

 

Point #2 is the most interesting one to me when it comes to attempting to answer the question in the title of this note. What if both my immediate-term US Dollar SIGNAL and SENTIMENT indicator is right?

 

  1. US Dollar signaling immediate-term TRADE oversold at 92-93 on the US Dollar Index
  2. Crude Oil signaling immediate-term TRADE overbought in the $46-47 range on WTI
  3. CRB Commodities Index signaling immediate-term TRADE overbought in the 185-187 range

 

Not to be confused with SENTIMENT on long-term US Treasuries where they ramped the net SHORT position (non-commercial CFTC futures & options contracts) in the 10YR last week to -97,876 contracts (-1.5x on a 1yr zscore):

 

  1. SP500 (Index + E-mini) positioning popped to its MOST BULLISH in 2016 at -1,206 contracts = +1.9x (1yr z-score)
  2. US DOLLAR positioning remained at YTD lows = -2.1x (1yr z-score)
  3. Gold and Oil positioning remained at YTD highs at +2.1x and +1.9x on 1yr z-scores, respectively

*Note: +/- 2.0x on a 1yr z-score is considered overbought/oversold

 

In other words, whoever has been “getting longer” because “everyone is bearish”, is now everyone (i.e. they’re positioned bullish on growth, from a net perspective, longer SP500 and shorter the Long Bond). And I like that.

 

Oh, you like it, eh? That is so bombastic of you Keith. Stop it.

 

Really? In the 8 years that I’ve been at the helm of my inbox @Hedgeye, I haven’t had more people pestering and poking at me that I’m “way too bearish”, “overstayed my welcome”, “myopic”, “getting fat” (true)…

 

And, after absorbing all of that like a hungry dog in the rain, the SP500 has actually been DOWN for 4 of the last 6 weeks and if I look at it post March month-end markup to April 2nd to May 2nd, here’s the score:

 

  1. SP500 -0.4% month-over-month
  2. Nasdaq -2.8% month-over-month

 

Did I get big things wrong in March? Absolutely. Did you? If you didn’t, you really had things wrong from JAN/FEB! I think that both my firm and credibility would have looked really wrong if we capitulated to the “charts” and went bullish on growth in April.

 

While there were days in April that I wanted to cross-check some people in the small of their back, I’m happy I took the Mature-Mucker road less-travelled and opted for a real vacation (April 13-23). A younger me would have had many many you-ge fights.

 

As a 41 year old man, I quite like the idea of becoming more of a lover than a fighter. God willing, I just love waking up early every day, trying to get intermediate-to-longer-term Macro Themes on growth and inflation right. In May, I’m not going away.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.70-1.87%

SPX 2054-2090

NASDAQ 4

VIX 14.05-17.91
USD 92.83-94.92
Oil (WTI) 41.64-46.57

Gold 1250--1299

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Buy In May And... - 05.02.16 Chart


USD, Japan and Copper

Client Talking Points

USD

The U.S. Dollar was down (again) -2.2% last week (-5.7% year-to-date) after both the PMI (50.4) and Consumer Confidence numbers slowed (again) on Friday. Markets are obviously questioning whether a Dovish Fed can replace actual growth with some version of stagflation, but USD is signaling immediate-term oversold inasmuch as Gold is signaling overbought.

JAPAN

One of the best ways to make money on the short side of Equities this year remains Japan – not only is the U.S. slowing (Dollar Down, Yen Up), but the #BeliefSystem is finally breaking down that Japan (or Europe) can do anything to stop it. The Nikkei is getting newsy though, signaling immediate-term oversold -3.1% overnight (-23% since July 2015).

COPPER

Instead of buy USD (not brave enough, yet!), we sent out SELL signals in both Oil (+5.2% last week) and Copper on Friday; both are signaling overbought inasmuch as USD is signaling oversold. Copper $2.31 is an important macro level for the stagflation vs. #Deflation debate; so far longer-term #Deflation is still winning.

 

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

Asset Allocation

CASH 61% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 4%
FIXED INCOME 29% INTL CURRENCIES 6%

Top Long Ideas

Company Ticker Sector Duration
GIS

We have been LONG General Mills (GIS) since May 26, 2015. We still like the long-term story, that being said, there are a number of one-time items impacting volume growth that should self-correct in 4Q16 and FY17. GIS is currently trading at 13.9x EV / NTM EBITDA an all-time high for the company.

 

Looking past GIS, the entire Consumer Staples space feel like there is a Safety Trade/ZBB/M&A bid underneath the entire group. We maintain our long-term bullish stance on GIS, but giving the rapid acceleration to all-time highs in the YTD period, a correction is inevitable.  

MCD

In a recent note to Real-Time Alerts subscribers, Hedgeye CEO Keith McCullough asked rhetorically, "What to buy?" "On pull backs to the low-end of my immediate-term risk range, I'd be buying more:

1. Long-duration Bond Exposures (TLT, ZROZ, EDV, etc)

2. Low-Beta Big Cap Stocks With Safe Yields (MCD, GIS, NKE, etc.)

3. Gold (GLD)"

 

McDonald's (MCD) has all the style factors we like for these turbulent markets, which explains why it's up 27% since we added it to Investing Ideas in August. Stick with it here.

TLT

Despite the weak U.S. GDP print, growth is very unlikely to rebound here in Q2. Don't get caught up in residual seasonality hopium. The confluence of steepening base effects amid the trending deterioration in economic momentum support our GIP Model forecast of a continued deceleration in the YoY growth rate of real GDP from +1.9% in 1Q16 to +1% in 2Q16E. The latter growth rate translates to +0.3% on a QoQ SAAR basis, which is up from our previous forecast of -0.5% (a lower base rate implies a smaller delta to get to the same numbers, all things being equal).

 

Assuming Q1 isn’t revised in any material way, our forecast for 1H16E is represents the slowest pace of domestic economic growth on a multi-quarter basis since 2H12. Any downside surprises from there will surely translate to renewed recession fears.” Giddy up for continued #GrowthSlowing!

 

The good thing about each of our active Macro positions (i.e. TLT, ZROZ, XLU and JNK) is that each of them typically works on an absolute return basis when growth slows.

Three for the Road

TWEET OF THE DAY

REPLAY! This Week On HedgeyeTV https://app.hedgeye.com/insights/50597-replay-this-week-on-hedgeyetv… via @hedgeye

@KeithMcCullough

QUOTE OF THE DAY

Start where you are. Use what you have. Do what you can.

Arthur Ashe

STAT OF THE DAY

By Uni Watch's count, there were 22 teams in the four major pro leagues (MLB, BFL, NBA, NHL) that either came into existence or were reborn with a new team name in the 1990s. Of those 22 teams, half of them (11) used purple and/or teal in their inaugural color schemes.


REPLAY! This Week On HedgeyeTV

Our deep bench of analysts take to HedgeyeTV every weekday to update subscribers on Hedgeye's high conviction stock ideas and evolving macro trends. Whether it's on The Macro ShowReal-Time Alerts Live or other exclusive live events, HedgeyeTV is always chock full of insight.

 

Below is a taste of the most recent week in HedgeyeTV. (Like what you see? Click here to subscribe for free to our YouTube channel.)

 

Enjoy!   

 

1. McCullough: What If Amazon & Facebook Can’t Go Higher? (4/29/2016)

 

 

In this brief excerpt from The Macro Show, Hedgeye CEO Keith McCullough and Retail analyst Alec Richards respond to a subscriber’s question about whether companies like Amazon and Facebook can continue to prop up equity markets.

 

2. REPLAY | Healthcare Earnings Takeaways: $ATHN $HOLX $MD $ZBH (4/29/2016)

 

 

After a busy week of earnings, our Healthcare analysts Tom Tobin and Andrew Freedman will provide a recap and takeaways of our top ideas athenahealth (ATHN), MEDNAX (MD), Hologic (HOLX) and Zimmer-Biomet (ZBH).

 

3. About Everything | The Surge in Mental Health Services (4/28/2016)

 

 

In this complimentary edition of About Everything, renowned demographer and Hedgeye Sector Head Neil Howe discusses why "mental health services spending is riding a long-term attitudinal shift that has brought mental health issues out into the open." Howe explains why it's happening and explores the broader societal and investing implications.

 

Click here to read Howe’s associated About Everything piece.

 

4. Washington On Wall Street: Handicapping the ‘Acela Primary’ (4/26/2016)

 

 

Potomac Research Group Chief Political Strategist JT Taylor joins Hedgeye Director of Research Daryl Jones to discuss today’s so-called "Acela primary" bringing voters to the polls in Pennsylvania, Connecticut, Rhode Island, Maryland and Delaware.

 

5. Can Fed Stop Recessionary Selloff? (4/26/2016)

 

 

In this animated excerpt from The Macro Show, Hedgeye’s Keith McCullough, Darius Dale and Neil Howe respond to a subscriber’s question about whether the Fed can continue propping up the stock market as economic conditions deteriorate and a recession knocks on the door.

 

6. McCullough: You’re ‘Crazy’ Buying Stocks Now (4/25/2016)

 

  

In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough explains why he’s not going to be the “crazy one” buying U.S. stocks at this point.


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