Backward & Forward

“I had made the trip from London to Moscow so many times I knew it backward and forward.”

-Bill Browder

While I haven’t made the kinds of stressful trips Bill Browder made to Russia (I’m still reading his riveting book about investing in Russia called Red Notice), I’ve made the trip from New York to London many times. I’m on that JFK flight this morning.

Post the London Bridge attack, I doubt where I’m headed is at the top of the list for everyone in this world today. But when it comes to co-existing with these cowardly terrorists, I’m not moving backwards this morning.

For me, it’s upward and onward, God willing, every day. My heartfelt prayers go out to all of those affected by these attacks on our liberties and freedoms.

Back to the Global Macro Grind…

Closing up for its 4^th week in the last 5, the US stock market continued to march forward to fresh all-time highs on Friday. The SP500 and Nasdaq were +1.0% and +1.5% on the week to +8.9% and +17.1% YTD, respectively.

Contextualizing the weekly move within the intermediate-term TREND (3 months or more) @Hedgeye:

1. Healthcare Stocks (XLV) led gainers, +2.0% on the week to +12.3% YTD
2. Consumer Discretionary (XLY) beat the market (again) +1.7% on the week to +13.3% YTD
3. Tech (XLK) added +1.4% to its league-leading +18.3% YTD gain
4. Energy Stocks (XLE) continued to lead losers, -2.3% on the week to -13.6% YTD
5. Financials (XLF) lagged again too, -0.7% to +0.9% YTD

Put simply, real growth sectors (we signaled buy in the growthier part of Healthcare, Biotech (IBB), on red earlier in the week) continue to absolutely crush anything that has to do with “reflation” expectations.

That obviously included the bank stocks since the “inflation expectations” component of bond yields is getting smoked. That’s why our “Top 3” buy signals (on all pullbacks) in Real-time Alerts have been Tech, Consumer Discretionary, and Biotech.

Taking a closer look at Reflation’s Rollover (Q2 Macro Theme @Hedgeye) last week:

1. CRB Index (19 Commodities) deflated another -2.2% on the week to -7.6% YTD
2. Oil (WTI) got smoked for a -4.3% weekly loss, taking it to -16.0% YTD
3. Natural Gas got pounded for a -9.4% weekly loss, taking it to -16.4% YTD
4. Rubber deflated another -8.0% on the week to -32.7% YTD
5. Nickel fell another -1.8% on the week to -11.8% YTD
6. Coffee lost another -4.3% on the week to -11.3% YTD
7. Sugar dropped another -8.7% on the week to -27.1% YTD
8. Orange Juice deflated another -4.4% on the week to -30.2% YTD

Coffee, Sugar, Orange Juice? Really? What about non-glute? I’m not as skinny as I used to be because I eat gluten for breakfast and I like it! Love #beers too.

The best way to not see your YTD returns move backwards is to either avoid things that are crashing entirely or to simply be short of them as they are collapsing.

The other side of not being long “reflation” is being long those who gain purchasing power when the things they consume are deflating in price. That’s a big reason to keep buying Consumer Discretionary (XLY) stocks on pullbacks.

Another major callout last week was that “high quality” and big cap outperformed from a US Equity Style Factor perspective:

1. Low Debt/EV (enterprise value) Stocks were +1.4% on the week to +12.1% YTD
2. Large Cap Stocks (Top 25% Market Cap) were +1.2% on the week to +10.8% YTD

*Mean performance of the Top Quartile vs. Bottom Quartile for SP500 companies

Real growth, not Reflation. Quality, not “levered upstream E&P.” There are a lot of ways to think about why the real US consumption economy will continue to move forward even if inflation expectations keep pulling back.

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:

UST 10yr Yield 2.14-2.32% (bullish)

SPX 2 (bullish)

RUT 1 (bullish)

NASDAQ 6121-6339 (bullish)

XOP 31.06-34.43 (bearish)

VIX 9.22-11.70 (bearish)

USD 96.25-99.18 (neutral)

EUR/USD 1.10-1.13 (bearish)

YEN 110.01-112.28 (bearish)

GBP/USD 1.27-1.30 (bullish)

Oil (WTI) 46.83-49.19 (bearish)

Nat Gas 2.91-3.20 (bearish)

Gold 1 (neutral)

Copper 2.50-2.60 (bearish)

AAPL 152.23-156.15 (bullish)

AMZN (bullish)

GOOGL (bullish)

WMT 77.44-80.12 (bullish)

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer