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Why Investors Should Stay Long "Expensive" Utilities & Short "Cheap" Financials | $XLU $XLF

Takeaway: Utilities are up +22.1% year-to-date vs. Financials down -6%.

Why Investors Should Stay Long "Expensive" Utilities & Short "Cheap" Financials | $XLU $XLF - Cheap cartoon 05.16.2016

 

We're sticking with what's worked all year.

 

As Hedgeye CEO Keith McCullough writes in a note sent to subscribers earlier this morning:

 

"Our Q3 Macro Themes Call is tomorrow and I’m staying long “expensive” (Utes, XLU +22.1% YTD) vs. short “cheap” (using the wrong bond yields, spreads, etc.) Financials (XLF -6% YTD); interesting immediate-term TRADE break-down signal in Basic Materials (XLB) yesterday – we’ll see if there’s follow through on deflating the “reflation.”

 

Why Investors Should Stay Long "Expensive" Utilities & Short "Cheap" Financials | $XLU $XLF - sector performance 7 6

 

In the video below, Hedgeye CEO Keith McCullough explains why we like "expensive" Utilities:

 


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 7 6

 

Daily Market Data Dump: Wednesday - sector performance 7 6

 

Daily Market Data Dump: Wednesday - volume 7 6

 

Daily Market Data Dump: Wednesday - rates and spreads 7 6

 

Daily Market Data Dump: Wednesday - currencies 7 6


About Everything | Live Q&A with Neil Howe: The Global Economy Gears Down

 

In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses lackluster global growth and the IMF's continually downgraded GDP forecasts. 


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

 

Click here to access the associated About Everything slides.

 


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Shall we blame China, Brexit, or Miss Piggy?

Client Talking Points

Japan

How about blaming the #BeliefSystem (that central market planners can arrest gravity) breaking down as growth slows? That is Japan. Yen up another +1.2% vs. USD and Nikkei smoked for another -1.9% loss overnight, taking it’s crash from the Global Equity #Bubble peak (2015) to -26.4%.

Oil

USD Up, Supply Up (trumping Miss Piggy), takes WTI down another -0.7% to $46ish this morning – that’s down almost 4.5% in the last month as #StrongDollar emerges, once again, and correlation risk still matters (our Long Gold position is +10.5% in the last month to +29.2% YTD at $1370/oz this AM).

Sectors

Our Q3 Macro Themes Call is tomorrow and I’m staying long “expensive” (Utes, XLU +22.1% YTD) vs. short “cheap” (using the wrong bond yields, spreads, etc.) Financials (XLF -6% YTD); interesting immediate-term TRADE break-down signal in Basic Materials (XLB) yesterday – we’ll see if there’s follow through on deflating the “reflation”.

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
7/5/16 60% 0% 0% 10% 26% 4%
7/6/16 60% 0% 0% 10% 26% 4%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
7/5/16 60% 0% 0% 30% 79% 12%
7/6/16 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

QUOTE OF THE DAY

“Don’t go around saying the world owes you a living.  The world owes you nothing.  It was here first.”

-Mark Twain

STAT OF THE DAY

John McEnroe won Wimbeldon 3 times (1981, 1983, 1984).


CHART OF THE DAY: Here's Why You Hide Out In Cash & Gold

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.

 

"... Now how about us crazy Canucks who have a 60% Cash position in USD (and 10% in Gold)?

  1. US DOLLAR has not only held @Hedgeye TREND support but continues to rise as the Pound (and Euro) are devalued
  2. USD has developed an immediate-term POSITIVE correlation of +0.8 with GOLD
  3. GOLD continues to hold an intermediate-term INVERSE correlation of +0.9 with 10YR Yields" 

 

CHART OF THE DAY: Here's Why You Hide Out In Cash & Gold - 07.06.16 Chart


Paradigm Shifts

“Discovery commences with the awareness of anomaly.”

-Thomas Kuhn

 

Shall the Old Wall and it’s media blame China, Brexit, or Miss Piggy this morning? Whatever they do, keep doing what you are doing – being on the other side of them continues to pay off, big time, as the Long Bond (TLT) rips to all-time highs and Gold ramps to +29% YTD.

 

The aforementioned quote comes from one of America’s most important 21st century multi-discipline (physics, history, philosophy) thinkers, the late “paradigm shift” author, Thomas Kuhn: “Discovery commences with the awareness of anomaly… i.e. with the recognition that nature has somehow violated the paradigm-induced expectations that govern normal science.”

 

Think about that within the context of the central-market-planning #BeliefSystem (that was never a “normal” science, btw – it was #social)… and think about something big, that breaks… like “The Copernican Revolution, which placed the sun at the center of the solar system as perhaps the most famous example. It replaced Ptolemaic thinking.” (Misbehaving, pg 169).

 

Paradigm Shifts - central bank kool aid 06.09.2016

 

Back to the Global Macro Grind

 

And keep thinking… because Consensus Macro is so busy chasing its own tail from week-to-week (this morning they’re trying to pivot from Brexit to “Italian Banks” – apologies to Macro Muppet fans and Miss Piggy) … and, in doing so, they keep missing the causal factor that’s been wagging their performance all along: Drumroll… Global #GrowthSlowing.

 

Does it frustrate you that consensus has not been able to see the forest amongst these trivial trees?

 

This isn’t new. As Richard Thaler goes on to point out about dogmatic and ideological professions that don’t see they are in a paradigm shift, “for centuries astronomers using the geocentric system had done a pretty good job of explaining the movements of the planets! (Misbehaving, pg 169)

 

I’m not Copernicus. I am Mucker. I am not brilliant, but I can measure and map rates of change …

 

First, they appear as “anomalies” (because that’s what the beginning of a phase transition in macro markets always looks like before it starts to “TREND”). Then, over time, markets (and returns) start to price it in for what it always was. Global #GrowthSlowing = Lower Long-term Bond Yields. Period.

 

Instead of bashing the British this morning, let’s take a twirl around the world:

 

  1. JAPAN – Yen +1.2% (vs. USD) as both Japanese economic cycle #GrowthSlowing (and no reported inflation) renders the monetary policy “arrow” of Abenomics useless; Nikkei down another -1.9% on that, taking its #crash from the Global Equity #Bubble high of 2015 to -26.4%, and Japan’s 10yr Yield to new lows of -0.27% (NIRP)
  2. HONG KONG – Yuan passive aggressively devalued to 6.84 (vs. USD) as Chinese #GrowthSlowing continues; Long Bond investors in  Hong Kong’s 10yr get paid (10yr Yield crashing to 0.86%, down -87bps in the last year) while stock market bulls continue to collapse (Hang Seng down another -1.2% overnight taking its crash from the 2015 Global Equity #Bubble high to -27.1%)
  3. GERMANY – Euro continues to lose credibility ($1.10 vs. USD = bearish @Hedgeye TREND) as Merkel goes after Juncker and Eurocrats move into full blown CYA mode; German Long Bond Bulls getting paid by #GrowthSlowing with a 10yr Yield of NEGATIVE -0.20%; DAX crash from 2015 #Global Equity Bubble High = -24.3% (including this morning’s -1.7% drop)

 

Before I go on and on … and on … about the rest of the world’s initial “anomalies” turned into very visible TREND and TAIL risks (and callout Italy’s stock market crash of -35.1%), allow me to remind you that the all of these major macro markets (stocks and bonds) have been pricing this in for a YEAR now.

 

Q: Who else writes “Global Equity #Bubble High” when they explain being long “Global Stocks” in July of 2015 instead of what Consensus Macro was calling “expensive” and “bubbly” long-term “bond valuations”?

 

A: Not Many.

 

Why? Because they still live in their Ptolemaic world where “cutting rates” and “devaluing the currency” was supposed to create some non-consumer driven level of “demand” and +3-4% GDP growth…

 

Newsflash: consistent with all of post 18th century (when many were “export” economies instead of consumption) human and economic history, burning the currency of The People (British Pound = 31 year low in exchange for a “FTSE rally”), won’t perpetuate real consumption growth. In real purchasing power terms, everyone whose “cash” is in Pounds, just got a lot poorer in the last 2 weeks.

 

Now how about us crazy Canucks who have a 60% Cash position in USD (and 10% in Gold)?

 

  1. US DOLLAR has not only held @Hedgeye TREND support but continues to rise as the Pound (and Euro) are devalued
  2. USD has developed an immediate-term POSITIVE correlation of +0.8 with GOLD
  3. GOLD continues to hold an intermediate-term INVERSE correlation of +0.9 with 10YR Yields

 

That’s right. Unlike many who got caught chasing “reflation” (which peaked on both a relative and absolute basis in Apr/May) we opted to sit back and wait/watch for confirmation that something like being long Oil didn’t have both USD and #SupplyAccelerating risks.

 

Sure, it may have been boring… but staying with the #GrowthSlowing call (long TLT, MUB, ZROZ, EDV, XLU, GLD… vs. short QQQ, XLF, SPY, JPM, XRT, IYT) was a lot easier than trying to call a phase transition back to bullish Oil $60-80/barrel.

 

That doesn’t mean that, from a time and price, I’m not interested in buying Oil and/or safe-yield-big-cap-low-beta Energy Stocks. It simply means that a position I didn’t have during the ramp, is still a position I don’t have during the post-ramp-deflation.

 

Paradigm shifts to the bullish side of an asset-class typically don’t sustain volatility levels of 30-50 like Oil’s has, btw. Paradigm shifts pound the bears, with lower and lower levels of volatility (higher and higher asset prices).

 

Much like #GrowthSlowing, globally, that’s why one of the best positions to own, for the last year, hasn’t been “stocks”… it’s been an “expensive” paradigm shift into an exposure that consensus is still unwilling to accept they’ve missed.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.30-1.51%

SPX 1

NASDAQ 4

Nikkei 149

DAX 9102-9798
USD 95.01-97.78
EUR/USD 1.08-1.12
Oil (WTI) 45.33-48.41

Gold 1


Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Paradigm Shifts - 07.06.16 Chart


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