#StrongDollar, #GlobalDivergences, etc.

“If you turn the ball over, you won’t play.”
-Red Auerbach 

That’s maybe the simplest risk management quote I’ve ever read. In Let Me Tell You A Story, Auerbach went on to explain, “I’ve always believed that ninety-five percent of turnovers are caused by the passer.” (pg 63)

What percentage of portfolio losses are caused by getting the rate of change in growth and/or inflation wrong?

I don’t know, but I can assure you it’s a much larger number than most would admit. The only reason why I started doing macro was that most of my bottom-up investing mistakes were born out of top-down risks that companies weren’t prepared for.

Back to the Global Macro Grind…

It’s Macro Monday! Welcome to August and thanks to all of our new subscribers for joining us. As a matter of #process, Mondays are the days we contextualize the prior week’s macro moves within our multi-duration and multi-factor framework.

Let’s start with FX and our #StrongDollar call:

1. US Dollar Index was up another +0.5% last week to +3.3% YTD and remains Bullish TREND @Hedgeye
2. Euro (vs. USD) was down another -0.8% last week to -3.6% YTD and remains Bearish TREND @Hedgeye
3. Pound (vs. USD) was down another -0.8% last week to -3.8% YTD and remains Bearish TREND @Hedgeye
4. Canadian Dollar (vs. USD) was down another -0.8% last week to -3.2% YTD and remains Bearish TREND @Hedgeye
5. Russian Ruble (vs. USD) was down another -2.2% last week to -9.7% YTD and remains Bearish TREND @Hedgeye
6. Turkish Lira (vs. USD was down another -4.4% last week to -25.2% YTD and remains Bearish TREND @Hedgeye

That’s right. In line with market history, pervasive US Dollar strength has a central tendency to force people to turn over the ball. Ultimately, we think this will be one of the biggest risks to the SP500’s peak operating margin comparisons in Q4.

Depending on the company, #StrongDollar may be a good or a bad thing. If you have a commodity-heavy input cost structure, you’re finally going to see #PeakCycle cost pressures alleviate. Here’s what the Commodities market did last week:

1. CRB Commodities Index (19 Commodities) was down another -0.5% last week to -0.3% YTD = Bearish TREND @Hedgeye
2. Oil (WTI) was down -0.3% last week to +15.9% YTD = Bullish TREND @Hedgeye
3. Copper deflated another -1.4% last week to -17.2% YTD = Bearish TREND @Hedgeye
4. Corn rallied +2.1% last week to +0.1% YTD = Neutral TREND @Hedgeye
5. Coffee prices tanked another -2.4% last week to -19.2% YTD = Bearish TREND @Hedgeye
6. Rubber deflated another -1.1% last week to -30.0% YTD = Bearish TREND @Hedgeye

Gold, which has been getting beat with the silly-stick by #StrongDollar in 2018, was down another -0.8% last week to down -8.2% YTD and remains Bearish TREND @Hedgeye too.

With the SP500 up +0.8% on the week to +6.2% YTD, #GlobalDivergences in the Global Equity market have become so obvious at this point in the 2018 season that even Baron’s is starting to cover our story on a 7-month delay:

1. EuroStoxx600 was down -0.7% last week to 0.0% YTD and remains Bearish TREND @Hedgeye
2. Germany’s DAX was down another -1.9% last week to -2.3% YTD and remains Bearish TREND @Hedgeye
3. Italy’s MIB Index was down -1.7% last week to -1.2% YTD and remains Bearish TREND @Hedgeye
4. Emerging Markets (MSCI Index) was down another -1.7% last week to -7.3% YTD and remains Bearish TREND @Hedgeye
5. Singapore’s stock market was down another -1.8% last week to -4.0% YTD and remains Bearish TREND @Hedgeye
6. China’s Shanghai Composite Index was down another -4.6% to -17.2% YTD and remains Bearish TREND @Hedgeye

Long USA (FX, Equities, Credit) vs. the rest of the world’s Quad 3 and Quad 4 #GrowthSlowing problems saw a notable shift with respect to the componentry underlying US Equity outperformance last week – the Bond Proxies led the charge!

1. REITS (VNQ) were up a big +3.2% last week moving into the black at +0.1% YTD = Bullish TREND @Hedgeye
2. Utilities (XLU) were up +1.3% last week moving into the black at +1.2% YTD = Bullish TREND @Hedgeye

US Healthcare Stocks (XLV), which are a core Quad 4 sub-sector allocation, were up +2.1% to +8.6% YTD and are also Bullish TREND @Hedgeye whereas US Industrials (XLI) were down -0.2% last week to +0.2% YTD and remain Bearish TREND @Hedgeye.

Having sold my long US Energy (XLE) position in July, fortunately I didn’t turn-over the ball there last week. Energy led US Equity Sector losers at -1.8% on the week, moving to Neutral TREND @Hedgeye.

Since we’re on your team providing a Global Macro risk management overlay to how you prefer to play the game, we like being the passer. Our goal is to limit the amount of turnovers and help you score as many alpha points as possible.

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

UST 10yr Yield 2.89-3.00% (neutral)
SPX 2 (bullish)
NASDAQ 7 (bullish)
Utilities (XLU) 52.05—53.65 (bullish)
REITS (VNQ) 80.30-82.52 (bullish)
Industrials (XLI) 74.06-77.14 (bearish)
DAX 125 (bearish)
VIX 11.20-14.25 (bullish)
USD 94.00-95.27 (bullish)
EUR/USD 1.14-1.17 (bearish)
GBP/USD 1.29-1.31 (bearish)
Oil (WTI) 67.45-70.26 (bullish)
Gold 1 (bearish)
Copper 2.70-2.84 (bearish)
Corn 3.67-3.90 (neutral)

Best of luck out there today,
KM 

Keith R. McCullough
Chief Executive Officer