The Dog Days

“The ability to perform Deep Work is becoming increasingly rare at exactly the same time it is becoming increasingly valuable in our economy.” 
-Cal Newport in Deep Work

“Deep Work” is a book Hedgeye Macro team members have cited while reading, and then gone back and recited multiple times. Personally, it’s a helpful guide to reference when my week is running away from me with meaningless activity that likely produces no value over the long-haul but makes one feel “busy”.  

Newport profiles the work habits of Adam Grant, one of the youngest tenured professors at the Wharton School of Business at Penn. According to Newport, he was the “highest-rated” teacher at Wharton. He was also one of the most productive.

Grant published seven articles in 2012 that were all published in major journals. As someone who knows little about this world, supposedly this level of productivity is a rarity in the field. Grant reportedly stacks all of his teaching and office hour availability into the fall semester and then completely isolates himself in the spring and summer for research.

While not a realistic lifestyle for a practitioner, it’s one of many data-supported case studies in the book supporting the Deep Work Hypothesis…

With the Dog Days of Summer often bringing less market noise and inbox overload, it’s a good time for us to reflect on our own process and systems design. We’ve had the chance to circle up the last couple of weeks, and our six-person Macro team fully embraces the necessity to evolve and improve. We look forward to the challenge.

Back to the Global Macro Grind…

“Macro Mondays” are meant to be consistent from a content perspective. These notes are heavy on raw rate-of-change because we need to contextualize the prior week’s moves within the context of intermediate-term underlying TRENDs and Macro Themes. We’ve found hitting ourselves on the head with rate-of-change market data from the previous week is a good way to start the week and contextualize our intermediate and longer-term views.

Our #StrongDollar call continues to wreak havoc for those macro participants late to the party. Remember that the most crowded USD short positions (as seen in futures & options open interest across currencies) were held heading into Q2. The US Dollar Index is now +8.8% off its 02/15 low of 88.59. Here’s how this big macro theme rippled through FX markets last week:

1. US Dollar Index was +1.3% to +4.6% YTD and remains Bullish TREND @Hedgeye
2. Euro (vs. USD) was -1.3% to -4.9% YTD and remains Bearish TREND @Hedgeye
3. Pound (vs. USD) was -1.9% to -5.6% YTD and remains Bearish TREND @Hedgeye
4. Canadian Dollar (vs. USD) was -1.2% to -4.3% YTD and remains Bearish TREND @Hedgeye 

#StrongDollar of course hits higher yielding and less stable currencies the hardest. Here were some of the biggest bloodbaths in Emerging Markets last week: 

5. Turkish Lira (vs. USD) was -20.9% to -40.8% YTD and remains Bearish TREND @Hedgeye
6. Argentine Peso (vs. USD) was -6.6% to -36.3% YTD and remains Bearish TREND @Hedgeye
7. Russian Ruble (vs. USD) was -5.8% to -14.9% YTD and remains Bearish TREND @Hedgeye
8. South African Rand (vs. USD) was -5.3% to -11.7% YTD and remains Bearish TREND @Hedgeye

Following the bouncing ball, many of the equity markets where currencies declined most saw the heaviest selling pressure last week as #Global Divergences keeps rolling:

1. Turkey (TUR) was -20.6% to -50.7% YTD and remains Bearish TREND @Hedgeye
2. Brazil (EWZ) was -9.9% to -16.3% YTD and remains Bearish TREND @Hedgeye
3. Russia (RSX) was -10.2% to -7.7% YTD and remains Bearish TREND @Hedgeye
4. South Africa (EZA) was -6.0% to -20.0% YTD and remains Bearish TREND @Hedgeye 

Unsurprisingly, commodities followed suit as they often do in definitive Bullish USD TRENDs. The 15 & 30-Day correlations between the Dollar and CRB index have tightened up to -0.9 and -0.8, respectively. Here was the rate-of-change reality last week:

1. CRB Commodities Index (19 Commodities) was -0.8% to -1.1% YTD
2. CRB Raw Industrials Index was -0.5% to -2.3% YTD
3. Crude Oil (WTI) was -1.3% to +14.5% YTD = Now BEARISH TREND @Hedgeye 

We’re obviously looking at some sizable red rate-of-change on our screens…

After a crushing 6Mth move in the U.S. dollar (for some), do we run the risk of overstaying our welcome?

Sure, particularly in the short-term (the USD has much less short-term upside in our risk range modeling).

However, #StrongDollar is one of the macro exposures where we have most data-tested conviction in a #QUAD4 deflationary environment which is where our GIP Model (Growth, Inflation, Policy) has the economy squarely tracking in Q4. The market is always front-running what we don’t yet know for certain, but given the set-up within our framework, closing out our Strong USD call “because it’s already moved a lot” is not in the playbook.

Although we’ve gotten a sniff, it’s hard to conclude that U.S. equity-market style factor exposures are definitively front-running QUAD4, but here’s the style-factor scoreboard from last week (high vs. low quartile of S&P 500 companies:

1. High Beta underperformed the low beta quartile by ~80bps
2. Smaller Cap underperformed the large-cap quartile by ~40bps
3. High Debt (Debt/EV) underperformed the “low-debt” quartile by ~40bps

The “dog days” term is rooted in Greek Mythology. It represents the period that Sirius, the Dog Star, rises at the same time as the sun and is characterized by lethargy, inactivity, or indolence. This period ends around mid-August.

After hitting levels not reached since mid-January, domestic equity volatility indices led us out of the dog days last week:

1. VIX (S&P 500 Volatility Index) was +13.1% w/w
2. VXD (Dow Jones Volatility Index) was +6.9% w/w
3. VXN (Nasdaq 100 Volatility Index) was +3% w/w

I just learned of the “dog days” history this morning, but I guess its passing rhymes with our market playbook into year-end. We’ll roll with the ancient Greek calendar on our side. Maybe we’ll see a step-up in the action!  

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

UST 10yr Yield 2.84-2.99% (bearish)
SPX 2 (bullish)
VIX 10.20-14.45 (neutral)
RUT 1 (bullish)
NASDAQ 7 (bullish) 
Nikkei 211 (bearish)
DAX 121 (bearish)
USD 94.50-97.09 (bullish)
EUR/USD 1.13-1.16 (bearish)
YEN 110.05-112.11 (bearish)
GBP/USD 1.27-1.30 (bearish)
Oil (WTI) 66.03-69.98 (bearish)
Nat Gas 2.73-3.02 (bullish)
Gold 1193-1230 (bearish)
Copper 2.68-2.81 (bearish) 

Good luck out there today,

Ben Ryan
Macro Analyst