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Look Out! European Equities "Teetering On Implosion"

Takeaway: U.S. dollar strength = European equities "teetering on implosion"

Look Out! European Equities "Teetering On Implosion" - Europe Japan cartoon 04.04.2016

 

Despite the irony of Treasury Secretary Jack Lew scolding Japan for devaluing the yen at the G7 meeting over the weekend (after years of Fed US Dollar devaluation), all the G7 bloviating didn’t change much in macro markets. The top correlation risk in macro markets remains the US Dollar. 

 

As McCullough writes in a note to subscribers this morning, with the U.S. dollar index up for the third straight week, that's taking the hatchet to European equities: 

 

"Europe teetering on implosion (Equities) again as USD signals immediate-term TRADE overbought vs. Euro at $1.11-1.12; Italy’s stock market is a bloody mess, -1.5% (leading losers), taking its crash to -26% since this time last year; NIRP doesn’t work."

 

Look Out! European Equities "Teetering On Implosion" - ftse mib 5 23

 

With ECB head Draghi struggling to arrest the crash, the continued implosion of European equities is yet more evidence of the central planning #BeliefSystem gone awry.


Daily Market Data Dump: Monday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, and rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Monday - equity markets 5 23

 

Daily Market Data Dump: Monday - sector performance 5 23

 

Daily Market Data Dump: Monday - volume 5 23

 

Daily Market Data Dump: Monday - rates and spreads 5 23


CHART OF THE DAY: Consensus Macro Positioning Vs. Hedgeye's Macro View

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.

 

"Another reason not to worry (be happy) if you have Hedgeye’s macro view, is that the crowd still doesn’t agree with us. Here’s what Consensus Macro positioning looks like from a CFTC futures and options perspective:

  1. SP500 (Index + E-mini) net LONG position of +9,630 contracts = +1.83x 1YR z-score
  2. Crude Oil net LONG position of +408,569 contracts = +1.93x 1YR z-score
  3. 10YR Treasury net SHORT position of -131,565 contracts = -2.33x 1YR z-score

For those of you who are new to following us, we measure current macro positioning across multiple durations relative to where the positioning has been in the past. Anything plus or minus 2x tends to be a great contrarian indicator."

 

CHART OF THE DAY: Consensus Macro Positioning Vs. Hedgeye's Macro View - 05.23.16 chart


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Long Bond Bears

“Our greatest glory is not in never failing, but in rising up every time we fall.”

-Long Bond Bears

 

Actually, Ralph Waldo Emerson wrote that. But for this morning’s note I thought I’d borrow it for the Long Bond Bears. They’ve failed since #TheCycle peaked in July of 2015. Despite the perceived glory in “calling the top”, shorting long-term Treasuries because they’re “expensive” has been a costly mistake.

 

As all long-term cycle investors know, “expensive” gets more expensive as GDP growth slows and asset allocators seek exposures that get them paid during the down-cycle. Put another way, there’s a premium valuation assigned to the return of capital when returns on capital are falling.

 

One of the most expensive major macro securities in world history (Japanese Government Bonds) hasn’t paid the bears for decades. Despite all the glory of living life as a central planner, their policy to “stimulate growth” with negative rates has failed too.

 

Long Bond Bears - negative interest rate cartoon 04.21.2016

 

Back to the Global Macro Grind

 

Taking a breather from the battle between #Reflation and #Deflation (in Dollars), last week’s biggest moves in macro were driven by what I think was another head-fake for rates rising:

 

  1. US Treasury 2YR Yield popped +13 basis points on the week to 0.88% (still down -17 basis points YTD)
  2. US Treasury 10YR Yield rose +15 basis points on the week to 1.85% (still down -42 basis points YTD)
  3. Utilities (XLU) corrected -2.2% on the week to +11.6% YTD
  4. REITS (MSCI) fell -2.7%  on the week to +2.8% YTD
  5. Consumer Staples (XLP) dropped -2.0% on the week to +3.3% YTD

 

From a US Equity Style Factor perspective, you can see the impact of Rates Rising last week as well:

 

  1. High Yield Stocks lost -0.2% on the week to +2.2% YTD
  2. Low Yield Stocks gained +1.3% on the week to +0.6% YTD

*Mean Performance of the Top Quartile vs. Bottom Quartile of SP500 companies

 

In other words, last week provided one of the few major 2016 buying opportunities in what we call a counter-TREND move in rate sensitive macro exposures.

 

And you thought I wasn’t bullish? I’m super bullish on #GrowthSlowing. There’s always a bull market somewhere!

 

Another reason not to worry (be happy) if you have Hedgeye’s macro view, is that the crowd still doesn’t agree with us. Here’s what Consensus Macro positioning looks like from a CFTC futures and options perspective:

 

  1. SP500 (Index + E-mini) net LONG position of +9,630 contracts = +1.83x 1YR z-score
  2. Crude Oil net LONG position of +408,569 contracts = +1.93x 1YR z-score
  3. 10YR Treasury net SHORT position of -131,565 contracts = -2.33x 1YR z-score

 

For those of you who are new to following us, we measure current macro positioning across multiple durations relative to where the positioning has been in the past. Anything plus or minus 2x tends to be a great contrarian indicator.

 

While it’s amazing to watch, I still can’t for the life of me believe that consensus is this complacent about US GDP #GrowthSlowing. If you thought GDP was going to be 2-2.5% in Q2, you’d probably chase US Equity Beta and short bonds.

 

If, however, you have our Wall Street low forecast of sub 1% US GDP for Q2, you’d:

 

A) Buy Long-term Bonds, Utilities, REITS, and Staples

B) Short High Beta, Small Caps, and Financials

 

So let’s do more of that this week ahead of #TheCycle growth slowing reports for both Durable Goods (Thursday) and GDP (Friday).

 

The other not so funny thing that happened on the way to the risk management forum last week was that the US Dollar Index had its 3rd straight up week, closing +0.8% on the US Dollar Index, holding comfortably above long-term TAIL support of 92-93.

 

As macro tourists were hyperventilating about the prospects of a “rate hike”, the consensus that “Global Demand has bottomed” met its maker in #StrongDollar terms:

 

  1. Emerging Market Stocks (MSCI) dropped back into the red for 2016, -1.8% to -1.5% YTD
  2. Chinese Stocks (Shanghai Comp) were down another -0.1% on the week to -20.1% YTD
  3. Dr. Copper deflated another -0.9% on the week to -4.3% YTD

 

Dollar Up, Rates Down? Yep.

 

That’s what happens when the rate of change of both growth and inflation are slowing. In our GIP (Growth, Inflation, Policy) model, we call it #Quad4. There may be no Old Wall glory in it, but it’s the ultra-bull case for Long Bond Bulls.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.68-1.87%

SPX 2029-2066
RUT 1089-1129
USD 93.70-95.65
Copper 2.02-2.10

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Long Bond Bears - 05.23.16 chart


Correlation Risk

Client Talking Points

UST 10YR

Most things macro (last week) queued off of what we think was another head-fake in rate hike risk. The UST 10YR Yield being up +15 basis points week-over-week was a counter TREND move to 1.90% which has since pulled all the way back to 1.82% this morning, flattening the Yield Spread to yet another year-to-date low of +94 basis points wide (10s/2s), which is an explicitly bearish GDP growth signal.

OIL

It dislocated from the Correlation Trade last week (USD +0.8%, Gold -1.5%, WTI +3.5%), but is correcting -1.1% this morning (Iran Supply comments) back below $48 with an immediate-term risk range of $45.07-50.53.

FINANCIALS

Teetering on implosion (Equities) again as USD signals immediate-term TRADE overbought vs. Euro at $1.11-1.12; Italy’s stock market is a bloody mess, -1.5% (leading losers), taking its crash to -26% since this time last year; NIRP doesn’t work.

 

*Tune into The Macro Show with Darius Dale and Ben Ryan live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
5/22/16 49% 6% 0% 10% 30% 5%
5/23/16 50% 6% 0% 8% 30% 6%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
5/22/16 49% 18% 0% 30% 91% 15%
5/23/16 50% 18% 0% 24% 91% 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
GLD

When Janet does have to acknowledge the deterioration in U.S. growth, we expect the policy shift to be dollar bearish on the margin. And, to the contrary, if the Fed RAISES RATES (June) into this slow-down, they’ll be the catalyst for DEFLATION (down yields) again anyway. And there’s nothing Gold (GLD) likes more than a falling dollar and falling interest rates which is why we added it to the long-side of Investing Ideas this week. Remember, this is the same week various Fed members were in public calling for a rate hike with the worst jobless claims print since 2012. #GoodLuck.

MCD

McDonald's (MCD) continues to evolve. The company's latest step is testing never frozen burgers at 14 units in the Dallas, TX area. This initiative could give them the ability to compete with better burger concepts such as Shake Shack, In-N-Out and Five Guys.

 

Meanwhile, there has been chatter about the lack of identity for their value platform in 2Q16. MCD is truly still in the testing phase as to what their national value message will be. We can appreciate the fact that they are testing multiple formats before fully committing.

 

In the meantime, the tailwind from all-day breakfast will continue to propel growth going forward, until lapping this initiative in 4Q16. We continue to favor MCD as one of the best LONGs in the market right now, due to actual growth and style factors that are friendly in volatile markets.

TLT

If you haven’t yet, you got another chance to buy long-term Treasuries at lower highs this week. If you’re already long of Long Bonds (TLT, ZROZ), stick with it. None of the relevant data released this past week suggests that growth could inflect and trend positive:

  • Thursday’s Jobless Claims Report was the worst print, in Y/Y rate of change terms, since 2012, and it was the fourth consecutive week of increasing jobless claims
  • Industrial Production declined -1.1% Y/Y for April, marking the 8th consecutive month of Y/Y contraction: #IndustrialRecession

Tying together a continued deceleration in growth with policy expectations, the most important callout is that our expectation for growth in Q2 is well below consensus and Fed expectations (which have been horribly inaccurate). 

Three for the Road

TWEET OF THE DAY

REPLAY | "About Everything" w/ Demographer @HoweGeneration

#Millennials: Are We There Yet?

https://app.hedgeye.com/insights/51101-live-about-everything-q-a-12-30-pm-et-with-demography-sector-head-ne

@Hedgeye

QUOTE OF THE DAY

Thousands of candles can be lighted from a single candle, and the life of the candle will not be shortened. Happiness never decreases by being shared.

Buddha

STAT OF THE DAY

U.S. Credit card debt is set to hit $1.0 trillion this year, the highest level since 2008.


The Macro Show with Darius Dale Replay | May 23, 2016

CLICK HERE to access the associated slides.

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


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.

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