Changing Strategy In Q2

“Strategy is about making choices, trade-offs.”
-Michael Porter 

I hope you all had a nice long weekend. Welcome to Q2! 

The aforementioned quote is one Greg McKeown used to introduce Chapter 4 of Essentialism. He titled it “Trade-Off” and focused on what we try to help you focus on at the beginning of each quarter – making some deliberate, non-consensus, decisions. 

I’ll review some changes in our strategy in tomorrow’s Macro Themes Call (11AM EST). One is that Reflation’s Rollover is getting priced in around 2.70% on the UST 10yr. Another one is the potential beginning of a bottoming process for the US Dollar.

Back to the Global Macro Grind…

It’s Macro Monday! So let’s shake off those choco-pounds from the Easter Bunny and get after it, breaking down what happened in macro last week within the context of @Hedgeye intermediate-term TREND and long-term TAIL durations.

First, in FX and Commodities:

1. US Dollar Index was +0.6% last week and remains a Neutral TREND @Hedgeye at -2.3% YTD
2. EUR/USD was -0.2% last week and also remains Neutral TREND @Hedgeye at +2.7% YTD
3. Yen (vs. USD) corrected -1.4% last week but remains Bullish TREND @Hedgeye at +6.0% YTD
4. Commodities (CRB Index) fell -0.5% last week but remain Bullish TREND @Hedgeye at +0.8% YTD
5. Oil (WTI) was down -1.4% last week but remains Bullish TREND @Hedgeye at +7.7% YTD
6. Gold corrected -2.1% last week but remains Bullish TREND @Hedgeye at +0.7% YTD
7. Copper bounced +1.1% last week but remains Bearish TREND @Hedgeye at -8.7% YTD
8. Aluminum didn’t bounce, down another -2.3% last week and remains Bearish TREND @Hedgeye at -12.4% YTD
9. Corn was up another +2.8% last week and remains Bullish TREND @Hedgeye at +8.0% YTD
10. Soybeans were up +1.6% last week and also remain Bullish TREND @Hedgeye at +7.4% YTD

“So”… one reason for Reflation’s Rollover “getting priced in” is that the Commodity Price Sample basket that we use to now-cast headline inflation has already rolled over and is now trading side-ways into easing base effects in Q2 vs. Q1. 

Another “pricing in” of inflation expectations rolling over can be readily observed in bond yields:

1. UST 10yr Yield rolled over another -7 basis points last week to 2.74% (down -21bps from its FEB peak)
2. Spanish 10yr Yield dropped another -11 basis points last week to 1.16% at -40bps YTD
3. Portuguese 10yr Yield fell another -11 basis points last week to 1.61% at -33bps YTD 

That’s right, any cyclical slow-down in European growth and/or inflation is the Sword of Damocles over long-term global bond yields. That’s because European secular issues like demographics, deficits, and debts are about to be as bad as they’ve ever been. 

Yep, ever, remains a long time. 

In the meantime, however, let’s keep contextualizing last week’s macro moves. Here’s how Global Equities did:

1. SP500 bounced +2.0% last week but is now signaling Bearish TREND @Hedgeye at -1.2% YTD
2. NASDAQ lagged at only +1.0% last week and is also signaling Bearish TREND @Hedgeye despite being +2.3% YTD
3. EuroStoxx600 was up +1.4% last week but remains Bearish TREND @Hedgeye at -4.7% YTD
4. Germany’s DAX bounced +1.8% last week but remains Bearish TREND @Hedgeye at -6.4% YTD
5. Japan’s Nikkei popped +4.1% last week but remains Bearish TREND @Hedgeye at -5.8% YTD
6. China’s Shanghai Comp Index was only +0.5% last week and remains Bearish TREND @Hedgeye at -4.2% YTD 

“So”… that’s 6 for 6 on Bearish TRENDs in major Global stock markets… and mainly why people who have their portfolios choke full with a “Globally Synchronized Recovery” may very well have hit the bottle hard this weekend.

#Drink

And if you don’t drink, that’s totally cool with me… but looking at the US Equity Style Factor performance for the last month, you might need some other type of self-medication because there are some serious pain trades going #on right now:

1. HIGH BETA was down -0.7% in an up tape last week and is -3.1% in the last month
2. LOW YIELD was down -0.7% last week and is -1.2% in the last month
3. TOP 25% EPS growers were down -0.5% last week and are down -1.2% in the last month

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

Oh boy. What is Mr. Market signaling here? Doesn’t this beg one of the most important questions about changes in our strategy here in Q2? As opposed to staying short inflation expectations, when should we start shorting US Growth Expectations?

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

UST 10yr Yield 2.72-2.83% (bullish)
SPX 2 (bearish)
NASDAQ 6 (bearish)
Nikkei 202 (bearish)
DAX 115 (bearish)
VIX 16.39-25.93 (bullish)
USD 88.39-90.29 (neutral)
EUR/USD 1.22-1.24 (neutral)
YEN 104.50-107.28 (bullish)
Oil (WTI) 62.08-66.75 (bullish)
Gold 1 (bullish)
Copper 2.95-3.09 (bearish) 

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer