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A Quick Look At The Brexit Bounce

Takeaway: European equities popped following U.K. Finance minister George Osborne's Brexit assessment. The FTSE is still down -11% from its 2015 high.

A Quick Look At The Brexit Bounce - Brexit cartoon 06.07.2016 

 

Ah, the Brexit Bounce...

 

European equities popped this morning following U.K. Finance minister George Osborne's warning shot to Brexit voters. Osborne suggested that a "Leave" vote would force the U.K. to raise taxes and enact spending cuts worth 30 billion pounds ($43 billion) and proposed measures to fill an economic "black hole" from lower trade, investment, and tax receipts.

 

Essentially markets bet that Osborne's dire predictions raised the likelihood of a "stay" vote. Here's analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers this morning: 

 

"Big bear market slash Brexit bounce this morning as Osborne threatens tax hikes – levels matter here as yesterday was a big immediate-term oversold signal in almost every major European index. The FTSE is up +1.1% to 5,986 and would need to recapture 6,305 to not be bearish TREND however."

 

 

Take a look at the most recent Brexit tracker (an aggregation of various polls) via Bloomberg. At this point, polls are showing a coin flip vote:

 

Click image to enlarge. 

A Quick Look At The Brexit Bounce - brexit tracker 6 15

 

By way of contrast, we've laid out why we think there are Political, Financial, and Behavioral reasons why the balance is tipped toward a "Stay" vote on June 23, in "An Update On Brexit: Should I Stay Or Should I Go Now."

 

**In case you missed it, here's a good wrap of Osborne's proposed emergency public spending cuts and tax increases from the BBC and the opposition party's pushback.


Daily Market Data Dump: Wednesday

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: Wednesday - equity markets 6 15

 

Daily Market Data Dump: Wednesday - sector performance 6 15

 

Daily Market Data Dump: Wednesday - volume 6 15

 

Daily Market Data Dump: Wednesday - rates and spreads 6 15

 

Daily Market Data Dump: Wednesday - currencies 6 15


Europe, Oil and S&P 500

Client Talking Points

EUROPE

Big bear market slash Brexit bounce this morning as Osborne threatens tax hikes – levels matter here as yesterday was a big immediate-term oversold signal in almost every major European index. The FTSE is up +1.1% to 5,986 and would need to recapture 6,305 to not be bearish TREND however.

OIL

Oil is trading almost textbook range-bound now as opposed to ramping higher every week. WTI is +30% in 3 months, but -20% in the last year, so this is where we expect to see more chop after signaling immediate-term overbought last week. The risk range for WTI is now $47.05-49.59 with Oil Volatility (OVX) back up to 43.

S&P 500

If you give us a 50 handle drop in less than a week, I’m covering SPY ahead of the Fed meeting on that oversold signal. I also signaled buy Healthcare (XLV) for the 1st time in 2016 yesterday, added long High Dividend Yield (VYM), and big cap/low beta with something like LMT (all in Real-Time Alerts).

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
6/14/16 64% 2% 0% 6% 19% 9%
6/15/16 64% 6% 0% 6% 18% 6%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
6/14/16 64% 6% 0% 18% 58% 27%
6/15/16 64% 18% 0% 18% 55% 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
TLT

No matter what side of the reflation/deflation trade you’re on, the growth in global demand continues to decelerate on a trending basis. The debate is no longer whether or not growth is slowing. The real debate centers on the policy response and the market reaction to that policy response. While that question presents us with “open the envelope” risk, #GrowthSlowing will continue to be the bull catalyst for U.S. Treasuries whatever the policy response as the slow march to zero yields globally goes on. 

GLD

To sum things up, stay away from the guessing game and stick to what is empirically evident. A stronger USD over the longer term is a probable scenario in our book. We expect the Fed, and all central banks for that matter, will try to combat deflation. That said, global currencies all burning at the same time makes a compelling case for GLD, as gold knows no currency. You can sell it in local currency all over the world. Scary but true.

MCD

There have been rumblings in the news that McDonald's (MCD) 2Q comps have slowed due to the temporary replacement of the 2 for $5 value platform for Monopoly. This has clearly been reflected in the stock as of late, as MCD has underperformed the S&P 500 over the last month.

 

Despite this near term headwind, we still strongly believe in the long-term story for MCD and remain confident that once they get their value platform right nationally, they will be just fine. In the short to intermediate term, as we wait for a solidified value platform, this recent underperformance represents a great buying opportunity. We remain LONG MCD.

Three for the Road

TWEET OF THE DAY

**NEW VIDEO Drake: Keep An Eye On (Decelerating) Income Growth https://app.hedgeye.com/insights/51688-drake-keep-an-eye-on-decelerating-income-growth … via @HedgeyeUSA

QUOTE OF THE DAY

You must never be fearful about what you are doing when it is right.

Rosa Parks

STAT OF THE DAY

Brexit? Currency traders have doubled their wagers on the pound returning to $35 billion, levels not seen since the 1980s.


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

The Macro Show Replay with Keith McCullough and Josh Steiner | June 15, 2016

CLICK HERE to access the associated slides.

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


CHART OF THE DAY: Dear US Equity Beta Chasers, Here Are 3 Catalysts To Risk Manage

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.


"... That’s right muddlers – there has been a ton of alpha out there to be had. So let’s get with the program and do what we’re paid to do and get the next move right from here. For US Equity Beta chasers, I think the next move is Up, then Down. Potential catalysts:

 

  1. The Fed (going back to dovish today with Late Cycle #EmploymentSlowing)
  2. Brexit (if they don’t exit)
  3. Mean reversion and performance chasing"

 

CHART OF THE DAY: Dear US Equity Beta Chasers, Here Are 3 Catalysts To Risk Manage - 06.15.16 EL Chart


Time To Muddle Long?

“I’m at my best in a messy, middle-of-the-road muddle.”

-Harold Wilson

 

Have you ever “muddled along”? For those of you who are new to Wall Street, those are code words for “the market can’t go down” (as long as nothing really bad happens).

 

But, like most things group-think, the precise definition of what people might think something is, isn’t! To muddle (verb used with object per Dictionary.com):

 

  1. To mix up in a confused or bungling manner
  2. To cause to become mentally confused
  3. To cause to become confused or stupid or as if with an intoxicating drink

 

Oh boy, do I like that last one! If we either start re-living the stagflation of the 1970s (like Harold Wilson did: PM of the UK 1 and 1) or just get right hammered every night, all of our real growth hopes might just muddle away.

 

Time To Muddle Long? - Fed cartoon 06.10.2016

 

Back to the Global Macro Grind

 

“So”, in the spirit of Old Wall sayings, I’m going to muddle to the long side of US Equities this morning. Yep, you read that right. For the first time all year I’m going to mentally confuse you in a bungling manner.

 

To be crystal clear, this is more of an immediate-term risk management call than it is a change in the bearish #GrowthSlowing call we’ve had for almost a year now. At best, this is going to be messy. And I reserve my liberty and rights to change my mind 50 handles higher.

 

What’s 50 handles?

 

  1. In beloved beta chasing terms, 50 handles in the SP500 = 50 points
  2. The SP500 just dropped approximately 50 handles (-2.4%) in less than a week
  3. A 2.4% move, in equity return terms, beats more than 90% of equity managers YTD

 

To be doubly clear as I muddle, I don’t subscribe to some passive aggressive version of Wall Street relative performance Schadenfreude where my goal in life is to help you achieve mediocre returns and/or barely beat beta. I want you to crush it.

 

For “long onlys” what is crushing it from both #TheCycle high of July 2015 and for 2016 YTD?

 

  1. Not being long any European or Japanese Equity Index whose draw-down/crash is currently -22-30%
  2. Not being long higher beta versions of US Equities like the Nasdaq or Russell which are -7.2% and -11.4% since July 2015
  3. Being long the Long Bond and/or anything equities that looks like a bond (Utilities = +17.3% YTD)

 

For hedgies…

 

  1. How about being up +22.2% YTD if you had a 2/20 fund long Utes (+17.3%) vs. short Financials (XLF) -4.9% YTD
  2. Long Gold, i.e. #GrowthSlowing (+21% YTD) vs. Short Copper (i.e. demand hasn’t “bottomed”) -5.5% YTD
  3. Long Energy (XLE +11.3% YTD) on Down Dollar Dovish Fed (#GrowthSlowing) vs. Short Ackman (VRX -76% YTD)

 

That’s right muddlers – there has been a ton of alpha out there to be had. So let’s get with the program and do what we’re paid to do and get the next move right from here. For US Equity Beta chasers, I think the next move is Up, then Down. Potential catalysts:

 

  1. The Fed (going back to dovish today with Late Cycle #EmploymentSlowing)
  2. Brexit (if they don’t exit)
  3. Mean reversion and performance chasing

 

Sound risky? Oh yeah. But aren’t we all just gambling that the Fed will help us “muddle away” as the rest of The People in this country melt-down? With a lot of PMs behind the 8-ball, don’t forget there’s a natural willingness to believe in almost any catalyst at this point.

 

As Richard Thaler reminds us in Misbehaving, “gambling when behind in an effort to break-even can be seen in the professional investor… people who are threatened with big losses and have a chance to break-even, will be unusually willing to take risks.” (pg 84)

 

If you’re one of the alpha generators playing with 1 year and YTD relative and absolute performance leads right now, getting net long US Equity Beta here for an immediate-term return that beats the year-over-year return of the SP500 (-0.44%) sounds like fun, no?

 

While you might want to just get long SPY, here’s what I’ve done on red this week (in Real-Time Alerts):

 

  1. Gone from 3 LONGS and 11 SHORTS to 6 LONGS and 3 SHORTS
  2. Covered my SPY (SP500 short position)
  3. Signaled BUY in Healthcare Stocks (XLV) for the 1st time in 2016
  4. Signaled BUY in High Dividend Yield (VYM) stocks
  5. Signaled BUY in a low-beta big cap exposures (LMT)

 

Yep. If you’re muddlin’, keep it simple, stupid, I guess. The quantamental reasoning for this is two-fold:

 

  1. All of US Equity Beta signaled immediate-term TRADE oversold (and volatility overbought at VIX 22) yesterday
  2. Our predictive tracking-algo for US GDP just ticked up to +1.4-1.7% year-over-year

 

More on the muddling GDP reality later. Unlike the Fed, the thing about being objective and data-dependent is that we actually change as the data does. It’s non-linear.

 

Sure, a big reason for GDP not having a 0% in front of it for Q2 (like it did in Q1 on a SAAR basis) is that the US government is understating inflation with a 0.7% Deflator. But that is what it is and it’s going to give us a middle-of-the-slowing-road muddle.

 

It’s messy. It’s confusing. It’s bungling. So I suggest you trade the chop associated with it accordingly.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.57-1.76%

SPX 2066-2100
RUT 1140-1170

NASDAQ 4

VIX 16.03-21.55
USD 93.13-95.45

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Time To Muddle Long? - 06.15.16 EL Chart


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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