“To do good physics work, you do need absolute solid lengths of time.”
-Richard Feynman
That’s a good research #process thought from one of the world’s finest physicists, the late Richard Feynman. In Deep Work, Cal Newport outlines part of Feynman’s process in a chapter he titled “Deep Work Is Rare.”
So are double-digit returns so far in 2018. Unless your #1 gross long position is Oil, that is.
On the Global Equity side, major US, Japanese, and European indices popped back into the black last week. Volatility fell, across most equity markets. Does this mean that the 2018 breakout in Global Equity Volatility (from the all-time lows) is over?
Back to the Global Macro Grind…
It’s Macro Monday again! Welcome to all of our new subscribers and thank you to all of you who have remained loyal to our team’s research process over the years. Today is the day we contextualize weekly macro moves within intermediate-term @Hedgeye TRENDs.
Last week’s -12% drop in US Equity Volatility (VIX) got plenty of stock chart chasers cheering on a rally they better hope isn’t another head-fake. In today’s Chart of The Day, here’s how global equity volatility looked week-over-week:
- NASDAQ VXN Index -12.1% to 16.19
- Euro Stoxx 50 V2X Index -4.2% to 12.85
- FTSE 100 VFTSE Index +6.0% to 11.74
- France’s CAC VCAC Index +1.5% to 12.31
- South Korea’s VKOSPI Index -12.0% to 11.71
- India’s Nifty 50 INVIXN Index +8.0% to 14.32
So, while it wasn’t a broad based break-down in volatility, front-month US Equity VIX breaking @Hedgeye TREND support of 14.05 certainly got my attention. It really got the attention of the machines.
But what duration do the machines chase (hint: 1 month)? Are these what Feynman called the “absolute solid lengths of time” that would change one’s intermediate-term research view? A: Absolutely not.
That’s one reason why the general population of globally synchronized Old Wall returns aren’t anywhere near double-digit so far in 2018. For equity managers in particular, this is a volatility #on vs. volatility #off environment that even Mr. Miyagi might struggle with!
From an intermediate-term GIP Modeling Research #Process perspective, what’s changed? Other than the US Earnings Cycle closing out another strong Q118, not much:
- Global #Divergences in real growth data continues to manifest
- US Inflation continues to #accelerate (fortifying that the real GDP cycle peak is a Q118 rear-view event)
- US Dollar Bottoming is turning into a USD Breakout
Yes, we understand why European and Japanese Equities like that last part of the research review. Down Yen got us to buy Japanese Equities and Down Euro had us stop shorting European stocks too:
- Japan’s Nikkei was up +1.3% last week taking it back to 0.0% YTD = Bullish TREND @Hedgeye
- Germany’s DAX was up +1.4% last week taking it back into the black at +0.6% YTD = Bullish TREND @Hedgeye
- London’s FTSE was +2.1% last week taking it back to positive +0.5% YTD = Bullish TREND @Hedgeye
No, the economic data didn’t suddenly #accelerate in any of these parts of the world. Their currencies broke to Bearish @Hedgeye TREND though. The inverse correlations between FX and Equities in these markets should be respected.
In other FX news:
- The Argentine Peso lost another -5% of its “value” last week taking its YTD crash to -19%
- The Turkish Lira was devalued another -2% last week taking its 2018 train wreck to -12%
Meanwhile US Inflation #Accelerating data continued to ramp last week:
- Oil (WTI) inflated another +1.2% last week to +17.5% YTD = Bullish TREND @Hedgeye
- Natural Gas joined the “up YTD” party, closing +3.8% last week after signaling Bullish TREND @Hedgeye
- Lumber continued to rip closing up another +4.5% last week to +43.2% YTD = Bullish TREND @Hedgeye
Sure, some of the commodities we still like (Corn -2.4% to +8.0% YTD) corrected last week but I’d much rather buy more Corn on sale than do something silly that’s contra to my research process like chase Industrial and/or EM charts at lower-highs.
In US Equity space, it was a great week for 2 of our Top 3 Sector Longs:
A) Energy Stocks (XLE) were up a big +3.9% last week to +6.2% YTD
B) Tech Stocks (XLK) ramped +3.4% last week to a league leading +9.2% YTD
Two Sector Styles we still do not like took up the performance rear:
A) Utilities (XLU) were down another -2.2% last week to a miserable -4.3% YTD
B) Consumer Staples (XLP) had no bid, down another -0.3% last week to -12.9% YTD
I guess when you consider all of the components of macro, there’s a ton of alpha to have already captured in 2018.
Especially if you can short equity and currency exposures and make big pivots like Long Energy (including both the stocks and Natural Gas) you might very well be up double digits for 2018. If that’s the case, we salute you!
Our immediate-term Global Macro Risk Ranges (intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.93-3.02% (bullish)
SPX 2 (neutral)
RUT 1 (bullish)
NASDAQ 7004-7475 (bullish)
Energy (XLE) 74.00-77.40 (bullish)
Industrials (XLI) 70.45-75.39 (bearish)
Nikkei 22154-22898 (bullish)
DAX 128 (bullish)
VIX 12.25-16.90 (neutral)
USD 91.32-93.11 (bullish)
EUR/USD 1.18-1.20 (bearish)
YEN 108.51-110.21 (bearish)
GBP/USD 1.35-1.37 (bearish)
Oil (WTI) 68.01-72.42 (bullish)
Nat Gas 2.69--2.86 (bullish)
Bitcoin 8 (bearish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
