Repetition & Scaling

“People often think and behave in hierarchies with repetition and scaling.”
-Benoit Mandelbrot

Nothing like a little bit of The Brot to get you going on a Monday in November, eh! I’m just back from the homeland where my American boys had to fight off a bunch of Canadians at the Mississauga Border Battle. Hence the eh, eh.

On this US Thanksgiving week we all have plenty to be thankful for. I remain thankful to have been welcomed into this great country. Building a Made in America firm is something my teammates are proud to say. We love the idea of paying lower US taxes too.

Whether or not this pending tax-cut (or reform) does everything that the market “expects” is an interesting question now that Nasdaq made fresh all-time-highs (again) last week. I’m thankful to have been on the right side of this epic run.

 

Back to the Global Macro Grind…

It’s Macro Monday! That means we have another opportunity to contextualize last week’s immediate-term @Hedgeye TRADE macro market moves within the context of intermediate-term @Hedgeye TRENDS and long-term TAILs.

Despite the best reported US Industrial Production growth rate (+2.9% year-over-year for OCT) in 3 years, both the US Dollar and US 10yr Treasury Yield were down, week-over-week. There wasn’t much “reflation” in asset prices either.

Here’s what happened week-over-week in FICC (Foreign Currency, Fixed Income, and Commodities):

1. US Dollar Index -0.8% on the week to -8.4% YTD is still (barely) Bullish TREND @Hedgeye
2. EUR/USD +1.1% on the week to +12.1% YTD is barely Bearish TREND @Hedgeye
3. Yen (vs. USD) rallied +1.2% on the week to +4.3% YTD and remains Bearish TREND @Hedgeye
4. Canadian Dollar (vs. USD) was down another -0.7% on the week and remains Bearish TREND @Hedgeye
5. CRB Commodities Index corrected -0.7% on the week but remains Bullish TREND @Hedgeye
6. Oil (WTI) corrected -0.3% on the week but remains Bullish TREND @Hedgeye
7. Gold bounced +1.6% last week and is back (barely) to Bullish TREND @Hedgeye
8. Copper was -0.2% last week and remains Bullish TREND @Hedgeye
9. Corn was down another -0.5% last week and remains Bearish TREND @Hedgeye
10. UST 2yr Yield was up +7bps to 1.72% and remains Bullish TREND @Hedgeye
11. UST 10yr Yield was down -6bps to 2.34% and remains Bullish TREND @Hedgeye
12. Yield Spread (10yr minus 2yr) compressed -13bps on the week to +62bps
13. High Yield saw another +11bps bounce (in the yield) to +5.66% but the yield remains Bearish TREND @Hedgeye

Lucky #13 (the move in High Yield) caught plenty of Macro Tourist attention as it was coupled with the 3^rd biggest week of outflows in the history of High Yield. One of the biggest movers (Altice) said they have no plans to raise cash through an equity sale today.

The move in High Yield is a good example of what we call a short-term TRADE, not an intermediate-term TREND. While every new TREND starts with a TRADE, not every touristy TRADE is the new TREND!

If you’re looking for Bearish intermediate-term @Hedgeye TRENDs, European Equities is where you should have your cameras right now. In sharp contrast to what the Nasdaq did last week, here’s what you should have seen:

1. EuroStoxx 600 down another -1.3% on the week to only +6.2% YTD is now Bearish TREND @Hedgeye
2. Spanish Stocks (IBEX) were down another -0.8% on the week and remain Bearish TREND @Hedgeye
3. Greek Stocks (ATG) led losers, down -3.0% on the week, and remain Bearish TREND @Hedgeye

Unlike the German DAX, Spain, Portugal, and Greece are currently Bearish TRENDs @Hedgeye and Italy and France (MIB Index and French CAC) are barely above their @Hedgeye TREND signal lines. They look nothing like:

A) Nasdaq up another +0.5% on the week to all-time-highs = Bullish TREND @Hedgeye… OR
B) US Consumer Discretionary Stocks (XLY) that led US gainers +1.3% last week = Bullish TREND @Hedgeye … OR
C) A chart of Wal-Mart (WMT), hoowah!

What also out-performed last week was what we call “low quality” Style Factors in the US Equity market:

1. HIGH SHORT INTEREST was +1.6% week-over-week to only +0.4% YTD
2. BOTTOM 25% SALES GROWTH was +1.1% week-over-week to +3.9% YTD
3. BOTTOM 25% EPS GROWTH was +0.7% week-over-week to +3.8% YTD

*Mean performance of Top Quartile vs. Bottom Quartile, SP500 companies

If the US was about to go to hell in a High Yield hand basket, you’d think the US Equity market’s style factors might pick up on that. But they did not.

Instead, it was a rinse, repeat, and scale to all-time highs.

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

UST 10yr Yield 2.28-2.42% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
DAX 123 (bullish)
VIX 9.25-13.26 (bearish)
USD 93.25-95.05 (bullish)
EUR/USD 1.15-1.18 (bearish)
YEN 111.90-114.39 (bearish)
Oil (WTI) 55.02-57.93 (bullish)
Gold 1 (bearish)
Copper 3.01-3.12 (bullish)

Best of luck out there today,
KM

Keith R. McCullough
Chief Executive Officer