Patriot Day

“The lessons of history are manifold.”
-David McCullough

The aforementioned quote has a deep simplicity to it. It was part of a commencement speech David McCullough gave at the University of Massachusetts in 1998.

“Nothing happens in isolation. Everything that happens has consequences. We are all part of a larger stream of events, past, present and future. We are all the beneficiaries of those who went before us…” (The America Spirit, pg 57)

And with that humbling reminder I’d like to extend my thoughts and prayers to all those affected by Hurricane Irma. Today is also Patriot Day in America. We will never forget 9/11, 2001 either.

Back to the Global Macro Grind…

On Mondays I always try to contextualize the prior week’s macro moves within the context of intermediate-term @Hedgeye TRENDs. So let’s get right into it and look at big stuff ex-stocks first:

1. US Dollar Index got smoked by hurricane (Dovish Fed) expectations, dropping another -1.6% to -10.6% YTD
2. Japanese Yen was the biggest major FX winner on the USD drop, closing +2.2% at +8.5% YTD = #Overbought
3. Commodities (CRB Index) had a quiet week closing flattish at +0.1% and still down -5.9% YTD
4. Oil (WTI) nudged +0.4% higher on last week’s bounce, but is still bearish TREND at -16.7% YTD
5. Gold loved the Down Dollar, Down Rates move = +1.6% on the week to +15.9% YTD = #Overbought
6. Orange Juice was the biggest mover on Irma, closing +12.8% on the week but is still -17.3% YTD
7. UST 2yr Yield dropped -8 basis points on the week to 1.26% = bearish TREND (in yield terms) @Hedgeye
8. UST 10yr Yield dropped -12 basis points on the week to 2.05% = bearish TREND @Hedgeye too

For the last 3-6 months, US stocks have loved the Dovish Fed, Down Dollar moves (the USD has a trending 90-120 day inverse-correlation to the SP500 of -0.80), but they did not last week:

1. Nasdaq led the major US Equity Index pullbacks, closing -1.2% to +18.2% YTD
2. The Financials laden Russell 2000 continued to lag, closing down -1.0% at +3.1% YTD
3. SP500 corrected -0.6% on the week to +9.9% YTD

In other words, the “Lower-Beta” Style Factor out-performed last week (SP500 has a lower beta than the Russell, for example) and you can see that’s been consistent within the SP500 for the past 1-3 months in addition to the YTD:

A) High Beta was down -0.5% last week, is -2.2% in the last month, and is only +6.8% YTD
B) Low Beta was +0.7% in a down tape last week, is +0.7% in the last month, and is +10.7% YTD
*Mean performance of Top Quintile vs. Bottom Quintile of SP500 companies

If you just look at the “raw beta” in the SP500 at the Sector Style level, you’ll see that the 2 sectors with the highest 1-month beta had the worst performance last week:

1. Financials (XLF) have a 1-month raw beta of 1.27 and closed down -2.7% on the week to only +3.7% YTD
2. Tech (XLK) has a 1-month raw beta of 1.37 and closed down -1.3% on the week to +20.0% YTD

Clearly not all “high beta” is the same position in 2017 and we continue to like being long “growth” more so than anything else, irrespective of Tech’s beta.

Interestingly, Energy Stocks (XLE) have developed a relatively “low” raw beta (on a 1-month duration) of 0.59. That definitely helped the sector last week as XLE closed +1.3% at -14.5% YTD.

European and Japanese stocks didn’t enjoy the Down Dollar, Up Euro, Yen, etc. move:

1. Spain’s IBEX, which is bearish TREND @Hedgeye, dropped -1.9% on the week to +8.3% YTD
2. London’s FTSE (also bearish TREND @Hedgeye), lost another -0.8% on the week to +3.3% YTD
3. Japan’s Nikkei 225 got tagged for another -2.1% loss on the week, taking it to just +0.8% YTD

Despite this morning’s bounce in Global Equities, I still don’t like “cheaper” European and Japanese equity exposures relative to US Growth ones. Therefore, I’ll be especially looking forward to short selling opportunities in Germany, France, and Spain.

“An astute observer of old wrote that history is a philosophy taught with examples. Harry Truman liked to say that the only new thing in the world is the history you don’t know.” –David McCullough

What I don’t know is manifold. What I do know is that France is not the USA.

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

UST 10yr Yield 2.03-2.17% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 6 (bullish)
Nikkei 199 (bearish)
DAX 114 (bearish)
VIX 10.12-12.77 (bearish)
USD 91.25-93.20 (bearish)
EUR/USD 1.18-1.20 (neutral)
YEN 107.70-109.69 (bullish)
Oil (WTI) 45.22-49.56 (bearish)
Gold 1 (bullish) 

Best of luck out there this week,
KM

Keith R. McCullough
Chief Executive Officer