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Still Crashing... Rolling The Dice In China's Shanghai Comp Casino

Takeaway: China's Shanghai Comp is down another -0.9% overnight after dropping -1.1% last week, taking its crash to -43% from its 2015 high.

I'm having a hard time seeing a “bottom” in any non-made-up time series. After falling another -1.1% last week, Shanghai Comp loses another -0.9% overnight (taking its crash to -43% since June 2015) as the Yuan continues to hit new lows.

 

 

Still Crashing... Rolling The Dice In China's Shanghai Comp Casino - China crash cartoon 08.25.2015 

 

Editor's Note: The snippet above is from a note Hedgeye CEO Keith McCullough wrote for subscribers this morning. Click here to learn more.


Big July for High Beta, Tech, etc.; bad July for “Reflation”, Oil...

Client Talking Points

China

Having a hard time seeing a “bottom” in any non-made-up time series; after falling another -1.1% last wk, Shanghai Comp loses another -0.9% overnight (taking its crash to -43% since JUN 2015) as the Yuan continues to hit new lows.

Oil

So if China hasn’t bottomed, Oil must be still bottoming, right? Not this morning – down another -1% to $41.20 WTI after a -16% JUL; everything is cool when levering up to pay dividends, until it isn’t … Oil remains bearish TREND @Hedgeye.

UST 10YR

Did what it should have done on the GDP miss (Consumption hit the number our tracker was anchoring on, but they told the #truth on the Deflator! and that subtracted 170bps); assuming 1-1.5% GDP was always the bull case for stocks and bonds (not really, but narratives come and go), consensus is now long both (see CFTC futz/options positioning report).

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
7/31/16 66% 4% 6% 6% 6% 12%
8/1/16 62% 3% 5% 6% 12% 12%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
7/31/16 66% 12% 18% 18% 18% 36%
8/1/16 62% 9% 15% 18% 36% 36%
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

To summarize our active ideas, long Gold (GLD) and long U.S. Dollar position (via PowerShares DB US Dollar Index Bullish Fund (UUP), netted out Friday, with gold catching a bid against a USD that got crushed on the report. (Part of the reason we added UUP to Investing Ideas was the expectation of a GDP print that may have sent a hawkish message to the market.) Think of Gold and the USD as a position against a basket of other currencies.

TLT

The good news for #GrowthSlowing bulls is that the Treasury rate curve will likely get pushed lower over the coming days as investors take stock of this week’s ugly data. That's good for Treasury Inflation-Protected Securities (TIP) and Long Bonds (TLT).

UUP

See update on GLD.

Three for the Road

TWEET OF THE DAY

VIDEO: This Overlooked US Housing Investigation Has Huge Investing Implications app.hedgeye.com/insights/52742

@KeithMcCullough

QUOTE OF THE DAY

”Me shooting 40% at the foul line is just God's way to say nobody's perfect”

-Shaquille O'Neal

STAT OF THE DAY

Brian McCann has 1359 career hits.


August 1, 2016

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  • Bullish Trend
  • Bearish Trend
  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
1.55 1.45 1.46
SPX
S&P 500
2,160 2,179 2,173
RUT
Russell 2000
1,197 1,226 1,219
COMPQ
NASDAQ Composite
5,021 5,180 5,162
NIKK
Nikkei 225 Index
16,275 16,869 16,569
DAX
German DAX Composite
9,963 10,418 10,337
VIX
Volatility Index
11.42 15.40 11.87
USD
U.S. Dollar Index
95.25 96.99 95.49
EURUSD
Euro
1.09 1.12 1.10
USDJPY
Japanese Yen
101.16 104.85 102.10
WTIC
Light Crude Oil Spot Price
40.13 43.53 41.60
NATGAS
Natural Gas Spot Price
2.56 2.91 2.88
GOLD
Gold Spot Price
1,320 1,358 1,357
COPPER
Copper Spot Price
2.16 2.28 2.22
AAPL
Apple Inc.
98.89 105.62 104.21
AMZN
Amazon.com Inc.
730 762 758
NFLX
Netflix Inc.
83.55 92.93 91.25
JPM
J.P. Morgan Chase & Co.
62.17 64.44 63.97
FB
Facebook Inc.
119.24 126.02 123.94
F
Ford Motor Company
12.10 13.21 12.66


Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, along with our intermediate-term (TREND) view.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.


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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.

CHART OF THE DAY: Celebrate 1% GDP While It Lasts

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. Don’t be afraid of a 1.2% US GDP number ahead of the toughest 2-year comparison of #TheCycle for Real PCE Growth (Q3). Celebrate it, while it lasts! Consensus is now very long of both stocks and bonds on a clean cut #GrowthSlowing GDP TREND."

 

CHART OF THE DAY: Celebrate 1% GDP While It Lasts - 08.01.16 EL Chart


Celebrate 1% GDP!

“Don’t be afraid to ignore rules of your industry that have become obsolete or that defy common sense.”

-Marc Benioff

 

That’s right. Don’t be afraid of a 1.2% US GDP number ahead of the toughest 2-year comparison of #TheCycle for Real PCE Growth (Q3). Celebrate it, while it lasts! Consensus is now very long of both stocks and bonds on a clean cut #GrowthSlowing GDP TREND.

 

No, GDP is not in the area code of where our industry was on GDP 7 months ago, never mind 12 (where you could have bought stocks up here last time and not bought bonds or equity sectors that look like safe-yielding bonds). But “at least it’s not a recession.”

 

Q1 GDP would have been a recessionary print if they used the same “Deflator” that they used in Q2. And, yes, while the storytelling on “all-time-highs” would have been more difficult, why not just “Defy Convention” as Benioff likes to say in a good business builder’s book I’m reading right now called Behind The Cloud. Even if you’re in the 80% who doesn’t get paid by this, stay positive, “folks”!

 

Celebrate 1% GDP! - GDP cartoon 02.29.2016

 

Back to the Global Macro Grind

 

So what the heck happened on Friday? Why wasn’t that Q2 GDP report a “beat” as CNBC likes to report on Q2 (non-GAAP) Earnings that are currently running down -4.1% year-over-year?

 

  1. They finally told the truth on the GDP Deflator taking it from 0.5% to 2.20% (subtracts -1.70% GDP from Q1 to Q2)
  2. Inventories (our model doesn’t yet nail those with any precision) subtracted -120 basis points from GDP
  3. Government Spending, in an election year God forbid, subtracted another -44 basis points

 

In other words, since our call on 70% of the number (Consumption) was right (it contributed +2.83% to GDP), where we had the short-term “GDP surprise” wrong is a trivial matter. That’s the 1st one we’ve had wrong in the last 6 quarters. And, as usual, we’re reviewing our model to see if there are any evolutions we can make to improve it. I can’t see many big ones though.

 

Now what?

 

Well, it’s not just the US government that was making up the real level of inflation (GDP Deflator) in order to maintain a “positive” Q1 GDP report. It’s the storytellers on “Global Demand has bottomed” that are having big issues now too.

 

Amidst an awesome run for Tech stocks to end July (Tech Sector ETF XLK = +7.10%):

 

  1. Chinese stocks dropped another -1.1% last week to -15.8% YTD
  2. Japanese stocks lost another -0.4% last week to -12.9% YTD
  3. Commodities (CRB Index) deflated -1.0% last week to +2.8% YTD
  4. Oil (WTI) got tagged for another -5.9% loss last week to -1.9% YTD
  5. Energy Stocks (XLE) dropped -1.4% last week to +8.3% YTD

 

Yeah, I get it. Exxon is going to borrow to pay their dividend… so under any Oil #Deflation scenario, the stock can never go down again. But that and a bucket of pucks might get you KM in a beer league trade vs. being long Facebook (FB) or Amazon (AMZN) here in Q3.

 

That’s right. If you can’t tell me a story that “China has bottomed”, “Brexit doesn’t matter”, Oil “is going to $70”, blah blah blah… what you really need to do is saddle up and stay with the FANG (Ex-Netflix). That story isn’t “cheap”, but at least it’s not peddling fiction.

 

While my story this year has been that GDP #GrowthSlowing means you:

 

  1. Buy the Long Bond and/or Sectors that look like safe-yielding bonds (TLT, EDV, ZROZ, MUB, XLU, etc.)
  2. Buy Gold and precious metals (GLD, PTM, etc.)
  3. Buy Low-Beta Big Cap Liquidity (Style Factors)

 

That doesn’t mean that my narrative isn’t currently:

 

A) Boring

B) Over-owned

C) Expensive

 

You know that I like the idea of expensive getting more expensive when top-down growth is slowing. I like that idea because market history does. That’s also an idea that Tech investors should enjoy, if their companies show continued accelerations in their top-line.

 

Consensus is getting expensive and extended too. Here’s the latest non-commercial CFTC Futures & Options positioning data:

 

  1. SP500 (Index + E-mini) net LONG position up to +175,288 contracts = +2.38x on a 1-yr z-score
  2. Russell 2000 net SHORT position down to -7,939  = +2.57 on a 1-yr z-score
  3. 10YR Treasury net LONG position up to +141,138 =  +2.25x on a 1-yr z-score

 

In other words, since anything +/- 2x happens less than 5% of the time, everyone has now been forced into being net LONG (or way less net short) pretty much everything in terms of equity and fixed income beta.

 

Ex-China-Japan-Europe-Oil-Netflix, what could possibly go wrong?

 

Who cares about the details. Let’s just celebrate the 1% this morning… and stay positive. Everyone’s in the 1% now!

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.45-1.55%

SPX 2160-2179

VIX 11.42-15.40
USD 95.25-96.99
Oil (WTI) 40.13-43.53

Gold 1

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Celebrate 1% GDP! - 08.01.16 EL Chart


The Macro Show with Keith McCullough Replay | August 1, 2016

CLICK HERE to access the associated slides. 

 

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


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