America's Got Alpha!

“My Dad said to me ‘work hard and be patient.’ It was the best advice he ever gave me. You have to put the hours in.” -Simon Cowell 

It’s good to be back in the saddle this morning. While I was away with my family in beautiful British Columbia, I never really was “away” from the data and/or our risk management #process. Markets don’t take vacations. My kids do! 

And… when you have 4 kids in hotels… 

You get to watch all their “shows.” Yep. I admit it. We watched a full season of Simon Cowell’s America’s Got Talent. It was a nice change of pace. It reminded me that the American Dream is alive and well, despite people’s politics. 

Back to the Global Macro Grind… 

It’s Macro Monday, so let’s get at it! For those of you who are new to our Global Macro risk management #process, at the beginning of the week we contextualize last week’s macro moves within the lens of @Hedgeye TRADEs, TRENDs, and TAILs. 

Since we’re getting the tail ends of Q218 US economic data, it doesn’t surprise me that macro markets are having weeks where they trade like we’re still in what we call Quad 2 (when both growth and inflation are #accelerating at the same time). 

Quad 2 is where bond yields rise and Financials (XLF) outperform while bonds and their proxies underperform. Quad2 in Q2 is obviously old news now. But it will be really Old Wall news come Friday when we get the Q2 US GDP report! 

*our predictive tracking algo has US GDP at a #PeakCycle forecast of +2.95% year-over-year and +3.73% q/q SAAR (headline) 

Here’s how US rates vs. equities traded last week (i.e. like Quad 2): 

1. UST 2yr Yield +2 basis points to 2.59% remains Bullish TREND @Hedgeye
2. UST 10yr Yield +7 basis points to 2.89% is a new and developing Bearish TREND @Hedgeye
3. Financials (XLF) +2.2% on the week to down -1.3% YTD = Bearish TREND @Hedgeye
4. Industrials (XLI) +0.9% on the week to down -1.6% YTD = Bearish TREND @Hedgeye
5. REITS (VNQ) -2.3% on the week to down -2.3% YTD = Bullish TREND @Hedgeye 

So, in Real-Time Alerts (which does not sleep while I’m on vaca either!), I took #RatesRising to lower-highs within a developing Bearish @Hedgeye TREND as an opportunity to:

1. Buy REITS (VNQ)
2. Buy Long-term Treasury Bonds (TLT) 

These are some of the pivots we made in our Q3 Macro Themes presentation at the beginning of July. I’m not a buyer of bonds and their Quad 3 (and Quad 4) proxies at any price. I am when bond yields approach the top-end of the @Hedgeye Risk Range. Timing matters. 

Another one of our Top 3 Macro Themes remains #StrongDollar. While the US Dollar Index corrected (barely) by -0.2% last week on Trump tweets, the US Dollar continues to crush other country currencies inasmuch as the US economy has in rate of change terms: 

1. British Pound was down another -0.7% last week to -2.8% YTD = Bearish TREND @Hedgeye
2. Argentine Peso lost another -1.4% of its “value” vs. USD last week, taking its crash to -32.6% YTD = Bearish TREND @Hedgeye
3. Chinese Yuan was devalued -1.2% last week vs. USD to -3.8% YTD = Bearish TREND @Hedgeye 

We’ve been saying this for 7 months and I’ll say it again this morning: as the rest of the world’s real GDP growth slows relative to the USA’s, the US Dollar wins in a bigger and bigger way. Trump should understand this and call it really super big and huge. 

*90-day Bullish @Hedgeye TREND correlation between the US stock market (SP500) and US Dollar = +0.8 

With the US Dollar +4.6% in the last 3 months, Commodity #Deflation Risk has re-entered “diversified” portfolios that are over-staying the #InflationAccelerating TREND that effectively ends in the US in the coming months: 

1. CRB Commodities Index was down -0.6% last week and is -4.6% in the last 3 months = Bearish TREND @Hedgeye
2. Copper was down another -0.7% last week and is -13.2% in the last 3 months = Bearish TREND @Hedgeye
3. Palladium was down another -4.7% last week and is -15.0% in the last 3 months = Bearish TREND @Hedgeye 

In sharp contrast to the SP500 which has a positive TRENDING correlation to USD, Gold’s is a nasty inverse one at -0.9. Gold was down another -0.8% last week and is down -8.4% in the last 3 months. America’s (currency) Got Alpha against that! 

Our 3^rd Macro Theme for Q3 is to stay short of EM in Emerging Market terms: 

1. EM (MSCI Index) was down another -0.5% last week to -7.6% YTD = Bearish TREND @Hedgeye
2. Brazil’s Bovespa had a counter TREND bounce of +2.6% last week to +2.8% YTD = Bearish TREND @Hedgeye 

So on any short-term “Trump” related USD weakness (which we’re not getting any follow through on this morning with the USD Index up again), we’ll be looking for short-selling opportunities in EM equities, credit, and FX. 

With the aggregate of Hedge funds “back in the red” (per Bloomberg at the end of Q2), plenty of you’ve got alpha running a patient and data dependent long/short #process in 2018. Your process is beating political views. Cheers to that. 

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

UST 10yr Yield 2.81-2.90% (bearish)
SPX 2 (bullish)
NASDAQ 7 (bullish)
REITS (VNQ) 80.58-83.00 (bullish)
Industrials (XLI) 72.44-74.97 (bearish)
VIX 11.70-14.65 (bearish)
USD 93.70-95.28 (bullish)
EUR/USD 1.15-1.17 (bearish)
GBP/USD 1.29-1.32 (bearish)
Gold 1 (bearish)
Copper 2.65-2.85 (bearish) 

Best of luck out there this week,

KM 

Keith R. McCullough
Chief Executive Officer