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CHART OF THE DAY | Correlation Risk: U.S. Dollar, CRB Index

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.

 

"... Putting our immediate-term TRADE signal in the context of long-term TAIL risk:

  1. US Dollar Index would have to sustain a break-down through the 92-93 level
  2. CRB Commodities Index would have to sustain a break-out (on accelerating volume) through the 190-192 level

*As of this morning, the US Dollar Index and CRB Commodities Index are trading at 94.55 and 185, respectively."

 

CHART OF THE DAY | Correlation Risk: U.S. Dollar, CRB Index - 05.17.16 EL Chart


Tenderheart Bears

“This is a job for all the Care Bears!”

-Tenderheart Bear

 

For those of you who didn’t grow up with a little sister in the 80’s (I did), this Early Look quote might be a little out there. But empathize with this US Growth Bear for a few minutes this morning. At Hedgeye Cares we’re a group of multi-factor bears!

 

Ex-McCullough, Ex-EnergyStocksRamping, and Ex-Earnings we’re going to try our best to look like the original multi-colored Care Bear franchise at the 3rd Annual Hedgeye Cares Charity Golf Challenge today at the beautiful Glen Arbor Golf Club in Bedford Hills, NY.

 

We’re all for last minute donations. And since many of you are always asking me where to put some “money to work”, we have a magical place just for you. Hedgeye Cares is a 501c3 organization (www.Hedgeye.com/cares/golf) that is internally driven by our employees who want to give back to our community. I couldn’t be more proud of their tireless efforts.

 

Back to the Global Macro Grind

 

Now, hold your tishie-tags, it’s time I spoke” like your Risk Manager again (that’s a quote from Grumpy Bear in the 1987 Care Bears movie – The Care Bears Adventure In Wonderland).

Tenderheart Bears - GDP cartoon 01.30.2015

 

In the wonderland that has become Wall Street consensus, what the US stock market really needs to go higher from here is not rainbows and puppy dogs – it’s a devalued and debauched US Dollar.

 

Yep. That’s what Consensus Macro is positioned for. Here’s the latest non-commercial CFTC Futures & Options data:

 

  1. US DOLLAR = +12,114 net LONG contracts (vs. the 1YR avg of +40,772) = 1YR z-score of -1.81x  
  2. GOLD = +225,884 net LONG contracts (vs. the 1YR avg of +61,080) = 1YR z-score of +2.29x
  3. SP500 = +27,235 net LONG contracts (vs. the 1YR avg of -127,441) = 1YR z-score of +2.09x

 

Since the z-score measures the distance between the current position and the population mean in units of standard deviation, what this means it that USD Dollar consensus positioning is almost as bearish as Gold and SPY positioning is bullish.

 

This, of course, should surprise no one who has been as aware of US #GrowthSlowing as Janet Yellen is starting to become. As US GDP, employment, and consumption growth has slowed, she’s A) gone dovish (devalued the Dollar) and B) guided rates lower.

 

That’s mainly why Gold is +20% YTD:

 

A) Dollar Down -4.2% YTD

B) Rates (10yr) Down -55 basis points YTD after starting 2016 at 2.27%

 

That’s also why I don’t want to be the guy sending you Tenderheart BUY signals on Gold > $1300/oz. I’d rather wait for a pull-back to the $1 range (i.e. low-end of our immediate-term TRADE risk range).

 

Interestingly, but not surprisingly, the US Dollar is starting to signal its 1st immediate-term TRADE series of higher-lows as Commodities (CRB Index) are signaling a series of immediate-term lower-highs.

 

I say ‘not surprisingly’ because this is precisely what happens when consensus realizes that there is falling probability for either a sustainable bounce in US GROWTH or another massive round of REFLATION from current levels.

 

Putting our immediate-term TRADE signal in the context of long-term TAIL risk:

 

  1. US Dollar Index would have to sustain a break-down through the 92-93 level
  2. CRB Commodities Index would have to sustain a break-out (on accelerating volume) through the 190-192 level

*As of this morning, the US Dollar Index and CRB Commodities Index are trading at 94.55 and 185, respectively.

 

Since we’re multi-duration (and multi-colored) US growth bears, it’s also important to call out the intermediate-term TREND Correlation Risk to a US Dollar not crushing the purchasing power of the American people much further.

 

Here’s the 90-day (TREND duration) inverse correlation between the big macro stuff that matters and USD:

 

  1. CRB Index -0.91
  2. GOLD -0.80
  3. SP500 -0.77

 

With the US Dollar up for 3 of the last 4 weeks, that’s been a major headwind for the “SP500 is gonna rip to all-time highs” capitulation concern. For the real Grumpy Bear of the lower-highs in SPY (April) that concern has morphed into my content.

 

On decelerating volume yesterday (Total US Equity Volume was -11% vs. the 1-month average), the SP500 closed right at the top-end of yesterday’s immediate-term risk range. Now that range = 2038-2082.

 

And while I think it would be a gift to have another selling opportunity in the 2080-2090 SP500 range, I’m not sure that Mr. Market will be so gracious. But, if the Tenderheart Bear in you wants to make up for that, we’d really appreciate anything you can do for the kids in Bridgeport, CT that Hedgeye Cares is supporting today.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.70-1.80%

SPX 2038-2082

NASDAQ 4
USD 93.11-94.99
YEN 106.44-109.99
Oil (WTI) 45.16-49.13

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Tenderheart Bears - 05.17.16 EL Chart



Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

Big Reflation

Client Talking Points

USD

Interestingly, but maybe not surprisingly, the US Dollar Index is starting to stabilize and signal a series of higher-lows (93.11 support) within its bullish long-term setup – consensus (CFTC futures/options) is positioned bearish USD and long Oil and Gold here.

COMMODITIES

CRB Index (19 commodities) looks like the upside down of the USD on a 3 year look-back – inasmuch as USD would have to breakdown and hold below the 92-93 range, CRB would have to breakout above the 190-192 range and our math doesn’t see that happening anytime soon.

SP500

Total US Equity Volume (including dark pool) was -11% vs. the 1 month average yesterday as SPY bounced post 3 straight weeks of losses; since we signaled cover on red last week, we'd consider another bounce to 2080-2090 a gift on the short side, but not sure we'll get that if the Equity Reflation trade runs out of steam again.

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
5/16/16 58% 2% 0% 7% 27% 6%
5/17/16 58% 2% 0% 6% 28% 6%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
5/16/16 58% 6% 0% 21% 82% 18%
5/17/16 58% 6% 0% 18% 85% 18%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company Ticker Sector Duration
XLU

Utilities (XLU) remains our favorite sector on the long side as Financials (XLF) remains our favorite sector on the short side. Current global macro positioning is squarely behind a continuation in the reflation trade as evidenced by commodity leveraged credit spreads, global macro futures and options positioning, and forward-looking volatility expectations. Global macro futures and options positioning show a market that is leaning long of commodities and short of U.S. dollars. Corporate credit as a % of GDP remains at cycle highs, capital markets activity has dried up significantly, and credit extension is tightening nationwide according the most recent Fed Senior Loan Officer survey.

MCD

For some perspective on the Macro environment and why we favor companies like McDonald's (MCD), here's an excerpt from the Early Look written by Hedgeye CEO Keith McCullough:

 

Taking a step back, don’t forget where US Consumers (70% of GDP) were at this time last year:

 

  • US Employment Growth (NFP) was putting in a cycle peak
  • US Consumer Confidence was putting in a cycle peak
  • US Consumption Growth was putting in a cycle peak

 

Peak. Peak. #Peak!

 

And what happens when you start to lap the cycle peak? Well, instead of crappy Baby Boom capacity putting up mediocre (barely positive) same store sales at the peak, they look even crappier on the back side of the cycle."

 

That's why we like large-cap, low-beta, liquid companies like McDonald's in this tumultuous market environment. Case in point, earlier in the week, MCD hit an all-time high. Since we added the company to Investing Ideas, it is up almost 30%.

 

Stick with it. Restaurants analyst Howard Penney reiterates his "road to $150" call, implyling more than 15% upside from here.

TLT

Credit markets are one of the major beneficiaries (maybe the largest) of the reflation trade since February. While yield spread compression has been a positive for Long Bonds (TLT, ZROZ), a perceived monetary policy shift and a collapse in bond market volatility expectations have been a positive for Junk Bonds (JNK), but we don’t expect it to continue.

 

With growth continuing to slow alongside consensus positioning broadly, downside deflation risk is on the table. As we’ve highlighted on a daily basis, consumption growth and labor market growth peaked in Q1 2015 and both are slowing alongside a continued corporate profits slowdown. This mix:

  • Smells like incremental deflation on the margin;
  • Is a huge risk for high yield credit (JNK);

 

Did we mention TLT and ZROZ were up 4.4% and 2.1% respectively last week? Not bad with U.S. #GrowthSlowing.

Three for the Road

TWEET OF THE DAY

"Winning means being unafraid to lose."

-Fran Tarkenton @KeithMcCullough

QUOTE OF THE DAY

"I feel the need.....the need for speed!"

-Maverick; Top Gun

STAT OF THE DAY

Wade Boggs had 24 stolen bases over his 18 year career.


Cartoon of the Day: Cheap, Cheap, Cheap...

Cartoon of the Day: Cheap, Cheap, Cheap... - Cheap cartoon 05.16.2016

 

"I still say short what appears to be “cheap” and keep buying what continues to get more expensive," Hedgeye CEO Keith McCullough wrote in this morning's Early Look.


#Timestamped: Why The Worst Is Yet To Come For U.S. Growth

#Timestamped: Why The Worst Is Yet To Come For U.S. Growth - GDP cartoon 01.30.2015

 

While Wall Street still expects rainbows and puppy dogs for U.S. growth... our Macro team prefers to deal with economic reality. We have been (and remain) the Growth Bears. Further vindication of our non-consensus economic call arrived just a few short weeks ago, when 1Q16 GDP came in at 0.5%, well below the rosy picture painted by consensus, but nailed by our Macro team.

 

We believe the worst is yet to come. Watch below as Hedgeye CEO Keith McCullough and Senior Macro analyst Darius Dale discuss why on The Macro Show.

 

1. An Animated History Of U.S. #GrowthSlowing

 

 

In this animated video, Hedgeye CEO Keith McCullough walks through the recent history of the #LateCycle U.S. economy, exploring peak corporate profits in 2014 to today’s lackluster growth.

 

2. McCullough: Why Our GDP Forecasts Are So Accurate

 

 

In this special excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough takes subscribers “behind the curtain” on our quantitative forecasting model and how we interpret and debate evolving economic data.

 

3. U.S. Economy Enters Most Difficult Part of Cycle

 

 

In this brief excerpt from The Macro Show, Hedgeye Senior Macro analyst Darius Dale discusses how the U.S. economy has entered the toughest part of the cycle and why our growth estimate remains so bearish.

 

4. Can Fed Stop Recessionary Selloff?

 

 

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.

 

By the way...

 

Like what you see? Click here to watch a complimentary edition of The Macro Show from today, in its entirety. This one's on the house.


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