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Vive la France! (Well, Not So Much)

Takeaway: It's a big, stinky mess in France and the rest of Europe. It's not going to get better any time soon.

In case you missed it ... France officially joined the laundry list of crashing equity market casualties this morning.

 

Some brief analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:

 

"European stocks had their bear market bounce last wk (EuroStoxx600 +3.2% on the wk), but have given back a large % of those gains already this week and mostly remain in crash mode, with France’s CAC40 re-entering that risk zone at -1.7% this am (-20.5% from the 2015 Global Equity #Bubble high); Spain -2% to -32% from its 2015 cycle high."

 

Vive la France! (Well, Not So Much) - Stocks crash test dummies cartoon 02.18.2016

 

 To be clear, we don't believe the worst is over. Not only in France, but across Europe.


Now What? Earnings Season and Jobs Report pending...

Client Talking Points

Pound

Getting pounded to new post Brexit lows of $1.31 this morning and the UK 10yr Gilt Yield is down another -4bps to a new low of 0.79%... *burning your currency and breaking the mechanism by which banks make money doesn’t work, in the end.

Europe

European stocks had their bear market bounce last week (EuroStoxx600 +3.2% on the week), but have given back a large % of those gains already this week and mostly remain in crash mode, with France’s CAC40 re-entering that risk zone at -1.7% this am (-20.5% from the 2015 Global Equity #Bubble high); Spain -2% to -32% from its 2015 cycle high.

UST 10YR

While “stocks” have these 1 week ramps, you have to take on a lot of volatility to time those returns – with the Long Bond and it’s proxies, both absolute and volatility adjusted returns have been awesome. All-time low this am for the US 10yr of 1.38% ahead of the Friday jobs report and the Q2 Earnings Recession season.

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
7/4/16 58% 0% 0% 12% 26% 4%
7/5/16 60% 0% 0% 10% 26% 4%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
7/4/16 58% 0% 0% 36% 79% 12%
7/5/16 60% 0% 0% 30% 79% 12%
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

Since equity markets peaked last summer, TLT has been a resilient and less volatile source of absolute alpha, and the good news is that spotting the opportunity requires a daily data grind and a wrestling with reality more than a sky-high IQ:

  • S&P 500: +0.1% Y/Y
  • TLT: +22.0% Y/Y

Brexit, Frexit, Yuan devaluation – whatever the story, investors are paying higher premiums for the safety and appreciation potential of the long bond, a source of long-standing outperformance in this #GrowthSlowing environment. Moving into 2015, net futures and options positioning shows that traders had the largest net short position in the 10-year Treasury of the entire cycle, as most were positioned for rate hikes and a “lift-off economy."

GLD

It was another week of all-time lows in long-term Treasury yields and YTD highs in Gold (GLD), Treasury Inflation-Protected Securities (TIP), and Long Bonds (TLT is at a new all-time high!) as the rotation out of volatile equity markets continues. 

TIP

See above update on TLT/GLD.

Three for the Road

TWEET OF THE DAY

CHART OF THE DAY: The March To All-Time Lows In Sovereign Yields app.hedgeye.com/insights/52120… via @KeithMcCullough #Bonds

@Hedgeye

QUOTE OF THE DAY

“The price of freedom is eternal vigilance.”  

–Thomas Jefferson 

STAT OF THE DAY

Madison Bumgarner has a career ERA of 2.96.



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CHART OF THE DAY: The March To All-Time Lows In Sovereign Yields

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. 

 

"... Whereas, both Long-term Sovereign Bonds and their equity market proxies did the following:

  1. US Treasury 10-year Yield dropped another -12 basis points on the week to 1.44% (down -83bps YTD)
  2. UK 10-year Yield crashed another -22 basis points on the week to 0.86% (down -110bps YTD)
  3. Germany’s 10yr Yield dropped back to negative, falling -8bps on the week to -0.13% (down -76bps YTD)
  4. Japan’s 10yr Yield fell another -8 basis points on the week to -0.25% (down -52bps YTD)
  5. Low Beta US Equities ramped another +3.7% on the week to +14.0% YTD
  6. High Yield US Equities added another +3.1% on the week to +7.4% YTD
  7. MSCI REITS Equity Index rose another +4.3% on the week to +11.5% YTD
  8. US listed Utilities (XLU) added another +3.7% on the week to +21.3% YTD

*for 5 and 6, that’s the mean performance of Top Quintile vs. Bottom Quintile SP500 Companies"

 

CHART OF THE DAY: The March To All-Time Lows In Sovereign Yields - 07.05.16 Chart


Do We Understand?

“We didn’t understand scientifically why glass is transparent until the twentieth century.”

-Steven Johnson

 

The title of this morning’s Early Look is really the question I kept asking myself while I spent some time up at the lake in Canada last week. The question being whether or not anyone understands where this grand central-market-planning experiment is taking us…

 

There’s a great long-term learning metaphor in How We Got To Now about glass: “Roughly 26 million years ago, something happened over the sands of the Lybian Desert… Grains of silica melted and fused under an intense heat… The compounds of silicon dioxide that formed had a number of curious chemical traits.” (pg 13)

 

While the birth of modern glass didn’t happen until the 14th and 15th centuries in Venice, it wasn’t until the 20th that we came to understand the physical properties of one of the world’s most important innovations. “In a strange way, glass was trying to extend our vision of the universe from the very beginning, way before we were smart enough to notice.” (pg 43)

 

Back to the Global Macro Grind

 

Longer-term, are central-market-planners smart enough to know what negative interest rates do to both economies and the banks trying to finance them? Shorter-term, are we dumb enough to think that what markets do on a weekly basis are signaling how this ultimately plays out? For the last year (intermediate-term), have we noticed anything about the #BeliefSystem breaking down?

 

Do We Understand? - central bankers cartoon 06.29.2016

 

On the longest of long-term questions, Janet Yellen said (under oath last month) that she hadn’t fully considered that keeping interest rate policy at 0% could be a bad thing. From a shorter-term perspective, you’re seeing the British burn their currency to new lows this morning, as the UK 10yr Yield plunges to 0.79%. Is it working?

 

After the 1st up week in the last 4, some global stock market cheer-leaders may think it has… but the real, volatility-adjusted absolute and relative returns for the last year have sided with the slower-for-longer, low-beta, safe-yield-chasing, camp of investors. Even in a broad based Equity Beta Chase, last week was no different:

 

  1. SP500 and Nasdaq were +3.2-3.3% on the week to +2.9% and -2.9% YTD, respectively
  2. EuroStoxx600 and DAX were +3.2% and +2.3% on the week to -9.2% and -9.0% YTD, respectively
  3. Nikkei (Japan) and Shanghai Comp were +4.9% and +2.7% on the week to -17.6% and -17.1% YTD, respectively

 

Whereas, both Long-term Sovereign Bonds and their equity market proxies did the following:

 

  1. US Treasury 10-year Yield dropped another -12 basis points on the week to 1.44% (down -83bps YTD)
  2. UK 10-year Yield crashed another -22 basis points on the week to 0.86% (down -110bps YTD)
  3. Germany’s 10yr Yield dropped back to negative, falling -8bps on the week to -0.13% (down -76bps YTD)
  4. Japan’s 10yr Yield fell another -8 basis points on the week to -0.25% (down -52bps YTD)
  5. Low Beta US Equities ramped another +3.7% on the week to +14.0% YTD
  6. High Yield US Equities added another +3.1% on the week to +7.4% YTD
  7. MSCI REITS Equity Index rose another +4.3% on the week to +11.5% YTD
  8. US listed Utilities (XLU) added another +3.7% on the week to +21.3% YTD

*for 5 and 6, that’s the mean performance of Top Quintile vs. Bottom Quintile SP500 Companies

 

In other words, if your view for the last year was that neither rate hikes nor rate cuts would do anything to stop economic gravity from slowing from its cycle peaks in Europe, Japan, and the USA, your long-duration bond and safe-equity-yield bet has absolutely crushed it.

 

Was it a longer-term cycle bet? Sure. A high-probability one that was measured and mapped by both incoming economic data and the macro market exposures that reflect upon them on a trending basis.

 

Is it something that central-market-planners expected? Of course not. That’s why I’m quite surprised that many of them still don’t understand that it’s negative rates themselves that are perpetuating the slow-down.

 

Long Gold?

 

I certainly hope so. Even if it only took world markets until the 21st century to understand that while Gold has “no yield”, it loves to compete in the asset allocation space for assets that have priced in negative yields… that should work for our subscribers.

 

Unfortunately from a shorter-term perspective, now that it’s up +26.9% YTD at $1345, it’s signaling immediate-term TRADE overbought as consensus is chasing Gold with as much enthusiasm as a levered long hedge fund chasing the SP500 when it goes green.

 

Per the recent (weekly) CFTC Futures & Options (non-commercial) data, here’s what net positioning looks like in big macro positions relative to where they’ve been in the last year:

 

  1. SP500 (Index + Emini) +66,900 net LONG contracts = a 1YR z-score of +1.9x
  2. Gold +273,179 net LONG contracts = a 1YR z-score of +2.1x
  3. US Dollar +12,425 net LONG contracts = a 1YR z-score of -1.3x

 

In other words, Consensus Macro is still betting that the Fed devalues the Dollar and that both US Equity Beta and Gold (and Oil, Commodities, etc.) go higher on that.

 

What if they can’t? And/or…

 

What if they are starting to understand (like macro market participants are) that they shouldn’t? What if they are starting to realize that burning America’s currency, crashing her bond yields to all-time lows, and pancaking the yield curve is bad for banks that hired them?

 

They didn’t understand that Japanese and European Equities were glass houses until they threw negative rates at them either.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.33-1.55%

SPX 1

NASDAQ 4

Nikkei 14

DAX 9128-9802

VIX 13.98-25.11
USD 94.90-97.55

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Do We Understand? - 07.05.16 Chart


Investing Ideas - Levels

Takeaway: Current Investing Ideas: DNKN, HOLX, HBI, LAZ, MDRX, FL, JNK, TIF, WAB, ZBH, TIP, LMT, GLD, TLT

Please see below Hedgeye CEO Keith McCullough's refreshed levels for our high-conviction Investing Ideas.

 

Enjoy the rest of the holiday weekend.

LEVELS

Investing Ideas - Levels - levels 7 1


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