Selling Bounces

“Money ranks with love as man’s greatest joy. And it ranks with death as his greatest source of anxiety.”
-John Kenneth Galbraith

If you have it, you want to have a risk management process for not losing it. Especially if you had your money in Emerging Market Equities and/or EM Currencies this year, you’d have learned that lesson. 

That’s the only way we learn in this profession. Even Madoff eventually lost money. When we lose other people’s money, they expect us to make it back. One way to do that is not making the same mistakes over and over again.

One of the tougher lessons I’ve ever learned (and still have to re-learn over and over again) is when to take losses. In bear markets like some of the aforementioned ones, selling every bounce since January has been the right risk management decision to make.

Back to the Global Macro Grind… 

It’s late August, but it’s still Macro Monday @Hedgeye! For those of you who are new to our #process, in our Monday notes we try our best to contextualize the prior week’s moves across Global Macro within our multi-factor, multi-duration, TRADE, TREND, and TAIL research views. 

Let’s start with FX… 

What was most interesting about the Global Foreign Currency market last week was that it was a short-term correction week for the US Dollar Index (after its net LONG position hit a YTD high), but some currencies that have been crashing… kept crashing: 

1. US Dollar Index was down -0.3% last week to +4.3% YTD and remains Bullish TREND @Hedgeye
2. Euro (vs. USD) was up +0.2% last week to -4.7% YTD and remains Bearish TREND @Hedgeye
3. British Pound (vs. USD) was down -0.1% last week to -5.7% YTD and remains Bearish TREND @Hedgeye
4. Argentine Peso (vs. USD) was down another -2.0% last week to -37.6% YTD and remains Bearish TREND @Hedgeye
5. Brazilian Real (vs. USD) was down another -1.2% last week to -15.3% YTD and remains Bearish TREND @Hedgeye 

We define a -10% drop in a currency as a #crash inasmuch as we define a -20% decline in a commodity or equity market as the same. It’s a good long-term career risk management idea to not be long of those on the way down.

The thing about crashing market prices is that they bounce. 

The question, of course, is what do you do when they bounce? The answer to that question is usually defined by what you did in those markets before they bounced. That’s why we’re constantly measuring and mapping market prices: 

1. Within its immediate-term @Hedgeye Risk Range
2. Within the context of CFTC futures and options net long/short positioning
3. Within the context of developing implied volatility premiums and/or discounts 

Put simply, when a market price hits the low-end of the @Hedgeye Risk Range and the Street is max net SHORT that asset on 1-year z-score basis … and the asset’s price has developed a big fat implied volatility PREMIUM… you cover some or all of short position. 

Then you’re in a much better position to sell some again on the bounce. 

What didn’t bounce last week (but is broadly bouncing this morning) is the entire edifice of Global Equity risk that’s been in either crash or draw-down mode since January: 

1. Chinese Stocks (Shanghai Comp) were down another -4.5% last week to -19.3% YTD = Bearish TREND @Hedgeye
2. Turkish Stocks were down another -6.5% last week to -23.1% YTD = Bearish TREND @Hedgeye
3. Indonesian Stocks were down another -4.8% last week to -9.0% YTD = Bearish TREND @Hedgeye
4. Filipino Stocks were down another -2.8% last week to -11.4% YTD = Bearish TREND @Hedgeye  
5. Italian Stocks were down another -3.2% last week to -6.6% YTD = Bearish TREND @Hedgeye 

Filipino? Yep. As in the Philippines, whose equity ETF (EPHE), was most certainly part of the pie-chart “diversified Emerging Market” exposure plenty of money managers had after the epic 2-year run EM Equities had pre this #StrongDollar and #EMSlowing reality. 

I’m not cherry picking the weak. If you want to look at broad regional Global Equity indices: 

1. EuroStoxx 600 was down -1.2% last week to -2.1% YTD
2. Emerging Markets (MSCI index) was down -3.7% last week to -11.7% YTD
3. EM Latin America (MSCI Index) was down -2.5% last week to -11.6% YTD 

And that’s totally cool with me because we’ve been reiterating: 

1. Long USA vs. Europe (in Equity space) for at least a year now
2. Long USA vs. China and EM (in Equity space) since January of 2018 

I was also cool with no longer being long of US inflation expectations and/or Commodities last week: 

1. CRB Commodities Index was down another -1.5% last week to -2.6% YTD and remains Bearish TREND @Hedgeye
2. Oil (WTI) corrected another -2.5% last week to +11.6% YTD and is a relatively new Bearish TREND @Hedgeye
3. Copper’s crash continued with another -4.2% drop last week to -21.0% YTD and remains Bearish TREND @Hedgeye
4. Gold continued its terrible year, down another -2.9% last week to -11.2% YTD and remains Bearish TREND @Hedgeye
5. Coffee continued to crash, dropping another -4.2% last week to -21.0% YTD and remains Bearish TREND @Hedgeye

Both the bond market and the US Equity read-through (Bond Proxies) Sector Styles agreed with our call for US #InflationSlowing for potentially the next year: 

1. UST 10yr Yield was down another basis point last week to 2.86% and the UST 10yr Treasury Bond remains Bullish TREND @Hedgeye
2. Utilities (XLU) led US Equity Sector Style gainers, up +2.9% last week to +3.5% YTD and remain Bullish TREND @Hedgeye
3. REITS (MSCI) were up an impressive +3.0% last week to +2.3% YTD and remain Bullish TREND @Hedgeye 

Those weekly returns rhyme with the #PeakCycle inflation tune that Mr. Market has been playing for the last month. Long REITS and Utes (XLU) are both up +3.9% in the last month vs. Energy Stocks (XLE) and the NASDAQ which are down -3.3% and -0.5% in the last month, respectively. 

While I’m sure you’ll read some super cool Macro Tourist stories about “trade wars easing” this morning… and, heck, maybe Elon showing us the money! … none of that had anything to do with our calls on growth or inflation for the last 9-12 months anyway. 

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

UST 10yr Yield 2.81-2.97% (bearish)
SPX 2 (bullish)
NASDAQ 7 (bullish)
Utilities (XLU) 52.87-54.66 (bullish)
REITS (VNQ) 81.75-84.23 (bullish)
VIX 10.75-15.65 (neutral)
USD 95.02-97.22 (bullish)
EUR/USD 1.12-1.15 (bearish)
GBP/USD 1.26-1.29 (bearish)
Oil (WTI) 64.02-67.85 (bearish)
Gold 1171-1220 (bearish)
Copper 2.54-2.77 (bearish) 

Best of luck out there this week,

KM 

Keith R. McCullough
Chief Executive Officer