“Rule #1 of Photography: be there.”
-Bruce
Bruce is a guy I met on a fishing boat in Jamaica last week. While consuming a special local species called Red Stripe, we were trying to land a marlin. That didn’t happen. But, as is usually the case with fishing, it’s not the fish that makes the experience.
I wouldn’t have ever thought that a career photographer in his late 60’s and I would have so much in common when it comes to what really matters when trying to achieve moments of greatness in our respective professions – timing.
My new Rule #1 of Risk Managing Markets: be there. It’s good to be back in the saddle this morning.
Back to the Global Macro Grind…
It’s Macro Monday! So let’s get after it this morning and measure and map what happened across major macro markets last week within the context of our multi-factor and multi-duration risk management #process.
After rolling over from late JAN to early APR, the most important move in macro last week was a re-acceleration in both inflation expectations and the market signals that perpetuate them:
- US DOLLAR – down -0.3% on the week was enough to drive that inverse correlation that matters most to commodity reflation
- OIL – up a big +8.6% on the week to +11.8% YTD and fresh 2018 highs (that really matters as monthly inflation comparison’s ease)
- COMMODITIES – the broad CRB Commodities Index was +3.9% last week smoking most Global Equity Indexes
- UST 2YR YIELD - ramped +9 basis points last week to 2.36%, its highest level since 2008
- US 5YR Break-evens – popped +6 basis points last week to 2.10% and +22bps YTD
If you dive into the Sector Styles of the SP500, our re-acceleration in inflation call for Q2 (i.e. Quad 2) was poignant:
- Energy Stocks (XLE) led the charge +6.0% on the week moving back to Bullish TREND @Hedgeye (from Bearish)
- Utilities (XLU) led losers at -1.2% on the week – they remain Bearish TREND @Hedgeye
- REITS (MSCI) Index lagged again at -0.8% last week – they’re -10.1% YTD and still Bearish TREND @Hedgeye
Since getting long either Energy or REITS are contrarian pivots I’ve been considering post Reflation’s Rollover playing out (and it’s really an either/or decision as I don’t think one can really work alongside the other), for now I’ll take Energy (XLE) on pullbacks.
How long I can stay long of things like Oil, Soy, Energy Stocks, etc. (i.e. inflation expectations) will be up to Mr. Market to decide. When he goes back to Bearish TREND on these things, it’ll be nasty.
You see, the higher inflation expectations and bond yields rise, the more likely Mr. Market tells the Fed they’re getting too tight too late in the cycle. When that starts happening, I’ll want to be buying REITS.
From a Style Factor perspective, it wasn’t just Commodity Beta that worked last week:
A) HIGH BETA stocks popped +2.3% week-over-week vs. LOW BETA at only +0.4%
B) HIGH GROWTH stocks ramped +2.7% week-over-week vs. SLOW growers only +1.1%
*Mean performance of Top vs. Bottom Quartile , SP500 companies
With Earnings Season back #on, High Beta Growth stocks taking another run to lower-highs didn’t surprise me; neither did the consensus net LONG position in the SP500 moving to +198,704 contracts (non-commercial CFTC position).
The Old Wall’s consensus loves to chase higher after selling lower.
Another big macro callout last week was the continued under-performance of major Global Equity Markets (and their country’s 10yr bond yields) vs. late cycle (or Quad 2) US Growth:
- NASDAQ (US Growth Expectations) was +2.8% last week to +2.9% YTD back to Bullish TREND @Hedgeye
- Germany’s DAX was +1.6% last week to -3.7% YTD and remains Bearish TREND @Hedgeye
- China’s Shanghai Comp Index was only +0.9% to -4.5% YTD and remains Bearish TREND @Hedgeye
Chinese stocks got hammered again overnight, dropping another -1.5% to fresh YTD lows. If you want to know what a stock market looks like when the central bank is tightening (or not easing!) into a slow-down, look no further than Shanghai or Hong Kong.
That’s why timing the topping process of both the US growth and inflation cycles remain as important to me as being there for that next picture will be for my new fishing friend (and world renowned photographer), Bruce.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.74-2.86% (bullish)
SPX 2 (bearish)
NASDAQ 6 (bearish)
Energy (XLE) 68.27-72.11 (bullish)
REITS (RMZ) 1030-1063 (bearish)
DAX 113 (bearish)
VIX 17.11-22.94 (bullish)
USD 89.00-90.25 (neutral)
Oil (WTI) 61.12-68.45 (bullish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
