If You're Up, Stay Up!

“It’s not what you look at that matters, it’s what you see.”
-Henry David Thoreau 

When it comes to defining the difference between the legions of Macro Tourists out there these days (thank God for them!) and a solid, multi-factor, multi-duration Global Macro Risk Management #process, Thoreau’s quote is one of my favs!

The month of May delivered bursts of alpha for those of you who were on the right side of seeing plenty emergent properties that had been developing for the last 5-6 months. In certain parts of Europe, growth and inflation cycle peaks are older than that!

I agree with Ray Dalio that “everything that happens in markets comes about because of cause-effect relationships that repeat and evolve over time.” Sometimes risk happens slowly. Sometimes it happens all at once. But all the time something is happening.

 

Back to the Global Macro Grind…

I had some fun with the “crushing it” note yesterday. Apparently clients are totally into the ‘crush or be crushed’ capitalism thing. I had more feedback on that Early Look than any other in the month of May. Thank you for that.

Are you competitive? Big time, I hope. We don’t get up at these ungodly hours of the morning to kiss babies, waive at crowds, or backslap each other for generating beta.

If you kept most of your big alpha bets in the USA in the month of May, you had a crusher of a month. Our currency bet (Long USA via US Dollars) perpetuated crashes in some Emerging Market (EM) currencies and our favorite currency pair looked like this:

1. US Dollar (UUP) +1.9% to +3.0% YTD
2. Euro (FXE) -2.6% to -2.9% YTD

Meanwhile, our Top 3 US Equity Sector Styles looked like this in May:

1. Energy (XLE) +3.0% to +5.2% YTD
2. Consumer Discretionary (XLY) +2.0% to +7.2% YTD
3. Tech (XLK) +6.8% to +9.3% YTD

Of the 10 SP500 Sectors, those 3 are the Top 3 performers for 2018. We like riding winners that are winning for the right reasons. So we’ll keep those as our Top 3 to start the month of June.

On the short side, one of our Top 3 Underweights (shorts) that didn’t deliver alpha was Industrials (XLI). They bounced +3.1% in May to -1.6% YTD. The other 2 Sector Styles we still don’t like did their job for us however:

1. Consumer Staples (XLP) were down another -1.6% to -12.7% YTD
2. Utilities (XLU) were down another -1.1% to -3.2% YTD

For now, we’ll stay with all 3 of those bearish views as well. The performance variance at the US Equity Sector level alone so far in 2018 is making for some Monster Truck crushing vs. the SP500’s paltry YTD return of +1.18%.

In addition to this morning’s critical US Wage #InflationAccelerating report, we’re still looking for US core and headline inflation to continue to accelerate in both June and July. If anything changes there, we’ll let you know. We remain data dependent on that front.

In the USA specifically, 3 other big things we’ll be paying close attention to as we move through the end of Q218 are going to be:

1. The US Consumption Cycle  
2. The US Housing Cycle
3. The FAANG Factor

On the Consumption Cycle, yesterday’s news = continued #acceleration on a trending basis, but not an absolute #acceleration to a new cycle high. By that I mean:

1. Real PCE (Personal Consumption Expenditure) #accelerated to +2.7% y/y in APR vs. +2.4% in MAR
2. Vs. Consumption Cycle peak growth rates of +2.9% y/y in NOV/DEC 2017 (post Tax Reform giddiness)

On the Housing Cycle:

1. US Pending Home Sales #slowed to -2.1% y/y (i.e. contraction) in APR
2. That was the 4^th straight month of deceleration for one of the key leading indicators in our model

So I’m happy I don’t have you long Housing (ITB) which closed down another -1.1% yesterday to close out May at a nasty -12.0% YTD. One of our all-star US Housing Research Team’s (Steiner & Drake) favorite SELL ideas remains Redfin (RDFN) at -29% YTD.

And on the FAANG Factor:

1. Facebook (FB) agreed with our Bullish @Hedgeye TREND signal closing up +2.2% yesterday to +8.7% YTD
2. Amazon (AMZN) remains the rock-star of our Consumer Discretionary (XLY) Sector Style (20% weight) at +39.4% YTD  
3. Apple (AAPL) was -0.3% yesterday at +10.4% YTD and remains Bullish TREND @Hedgeye
4. Netflix (NFLX) was -0.6% yesterday at an eye-popping +83.2% YTD and remains Bullish TREND @Hedgeye
5. Google (GOOGL) popped +1.6% at month-end yesterday but is only +3.7% YTD and remains Neutral TREND @Hedgeye

If you’d like my daily FAANG Factor, ask our team for the daily @Hedgeye Risk Ranges product where I refresh the risk range and provide the Bullish or Bearish @Hedgeye TREND view. They’re at the bottom of this note as well today.

The alternative to being overweight late-cycle US growth via Sector ETFs and/or FAANG is just being long the Dow Bro (DIA). But that’s laden with international #GrowthSlowing risks + the Dow doesn’t like #StrongDollar like we do. The Dow is down -1.3% YTD.

Like I tell the 10-11 year old boys I coach in hockey: “If you’re down, you find a way to get up – and if you’re up, stay up!” We didn’t build this independent research platform to help you achieve mediocrity. Have a great end to Q2!

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

UST 10yr Yield 2.74-3.17% (bullish)
SPX 2 (neutral)
RUT 1 (bullish)
NASDAQ 7 (bullish)
Energy (XLE) 73.70-79.75 (bullish)
Industrials (XLI) 74.02-76.54 (bearish)
VIX 13.04-16.97 (bullish)
USD 93.00-94.85 (bullish)
EUR/USD 1.15-1.18 (bearish)
Oil (WTI) 66.02-73.40 (bullish)
AAPL 183.68-188.98 (bullish)
AMZN 1 (bullish)
FB 182-193 (bullish)
GOOGL 1070-1104 (neutral)
NFLX 323-364 (bullish) 

Best of luck out there today,
KM 

Keith R. McCullough
Chief Executive Officer