“Remember that weaknesses don’t matter, if you find solutions.”
-Ray Dalio
When it comes to the weakening parts of your portfolio, what do you do? One of the best early lessons I learned from working with Jon Dawson (who started Dawson Samberg with former hedge fund manager Art Samberg) was “just get it out.”
In hockey, when a team is under siege in their defensive zone, you’ll hear the same advice from thousands of fans. “Get it out! Ice it.” Why? Because that’s how the defense gets a whistle and a break to re-orient themselves.
No one likes to lose. One of the hardest things I’ve had to learn in this business is not to ride losers. Getting them out of your portfolio (and your life for that matter!) is a simple solution. It frees your mind so that you can get on with winning again.
Back to the Global Macro Grind…
After a great run, Commodity Weakness is manifesting as a problem in portfolios that have been properly positioned for US #InflationAccelerating. Not ironically, this runs in conjunction with our view of headline US inflation peaking this summer.
What does weakening mean?
A: @Hedgeye that means breaking down from a Bullish to a Bearish TREND
Since it’s always about the rate of change here @Hedgeye, there’s nothing that matters more in macro than an asset class that is undergoing what we call a Phase Transition from:
- Bullish to Bearish TREND or
- Bearish to Bullish TREND
Our TREND duration = 3 months or more. Going back 10 years, that’s the duration where Hedgeye has the most wins. That’s why @Hedgeye TREND views are the ones that most of our clients care on.
Can there be head-fakes? Big time. But we have a solution for that which is called the @Hedgeye Risk Management #process of measuring and mapping markets across multiple durations on a daily basis using our core PRICE/VOLUME/VOLATILITY model.
Here are some very recent (i.e. in the last 2-3 weeks) Bearish TREND break-downs in the Commodities:
- The CRB Index (19 commodities) itself
- Oil (Brent and WTI)
- Big Ag: Corn, Wheat, Soy
In fact, for my own money, the only commodity exposure I’m currently long is Natural Gas (UNG). In sharp contrast to the asset class risk that has developed, Nat Gas (UNG) is +3.9% in the last month alone. Our signal went Bullish TREND on UNG 2 months ago.
Does 1-month price momentum matter?
A: it’s the #1 factor exposure that matters to the machines, so absolutely yes
Do 1-month price reversals feed on themselves reflexively? Of course they can; especially when @Hedgeye TREND signal breaks from Bullish to Bearish. The main reason for that is that the VOLATILITY of the price is breaking out to bullish.
To be fair to the bulls (I was one of them on US #InflationAccelerating but that’s going to change in Q3/Q4 as our call for US headline inflation is for it to fall 100 basis points in the next 9 months), Commodities (the CRB Index) peaked very recently (late May of 2018).
But in the last month alone, look at the relative weakness in Commodity Exposures vs. the all-time closing highs that were registered yesterday in what remain some of our favorite US Equity LONGs (Nasdaq, Russell 2000, Consumer Discretionary):
- United States Oil Fund (USO) down -9.5%
- United States Brent Oil Fund (BNO) down -6.4%
- United States Gasoline Fund (UGA) down -10.4%
- Teucrium Corn Fund (CORN) down -9.0%
- Teucrium Soy Fund (SOYB) down -9.8%
- Powershares DB Commodity Index Tracking Fund (DBC) down -5.9%
Again, if you’ve been bullish on most of these exposures for the last 6-12 months (instead of buying something like Spanish Equities at their peak 12 months ago), you’ve crushed it. But the name of the game is not losing the money you make, don’t forget.
Isn’t it amazing (but not surprising) that Mr. Market has an uncanny ability to front-run the future? For the last two weeks I’ve been asking “Have Rates Peaked?” That critical risk management question didn’t come out of thin air.
It comes at a time when the now consensus “Inflation and Rates Rising” view is running out of fundamental runway. Again and again, I’ll be reminding you that come Q4 of this year and Q1 of 2019 both local and global inflation will be slowing materially.
In the face of steepening base effects (for reported headline US inflation) and Bearish @Hedgeye TREND break-downs in big components of our predictive tracking algorithm for inflation (like Oil and Ag)…
It’s mathematically impossible for Mr. Market to be wrong on this one. If the risk management signals change, I’ll be the first to let you know. But for now, the best advice I can give you is to just get the Commodity Weakness out of your portfolio on up days.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.87-2.98% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 7 (bullish)
VIX 11.54-14.91 (bearish)
USD 93.65-95.11 (bullish)
Oil (WTI) 64.04-67.20 (neutral)
Nat Gas 2.89-3.03 (bullish)
Gold 1 (bearish)
Copper 3.00--3.12 (bearish)
Corn 3.46-3.78 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
