Buy The All-Time Highs?

“Why did nobody see it coming?” -Queen Elizabeth 

That was the question The Queen of England asked “during a visit to the London School of Economics as the 2008 Financial Crisis was reaching its climax.” (The End of Theory, pg 3) 

It’s also the question Richard Bookstaber uses to introduce a good book I’m reading right now called The End of Theory. Why did nobody see the last two epic years of the US stock market rallying to multiple all-time highs coming? 

Well, some did. But most who talk about what markets should do using their valuation and/or political theories did not. What they clearly missed was US Growth, Inflation, and Earnings all #accelerating to their respective cycle highs. 

Back to the Global Macro Grind… 

It’s the final Macro Monday of the summer of 2018. I hope you had a great one with your respective families and friends. For me at least, I’m done fishing and ready to grind! Let’s review what happened in macro week-over-week. 

First, it was a big Counter @Hedgeye TREND move for the US Dollar last week that equated to this in FX: 

1. US Dollar Index down a full 1% to +3.3% YTD and remains Bullish TREND @Hedgeye
2. EUR/USD up +1.6% to -3.2% YTD and remains Bearish TREND @Hedgeye
3. Pound +0.8% vs. USD to -4.9% YTD and remains Bearish TREND @Hedgeye
4. Yen down -0.6% vs. USD to +1.3% YTD and remains Bearish TREND @Hedgeye
5. Argentina’s Peso down another -3.3% vs. USD to -39.7% YTD and remains Bearish TREND @Hedgeye
6. Brazil’s Real down another -4.7% vs. USD to -19.3% YTD and remains Bearish TREND @Hedgeye 

I know. Dollar Down and the Argentine and Brazilian Emerging Market Currency Crash continued? Why did nobody (who publishes their macro research views, daily) other than Hedgeye’s Macro team see that coming back in January? 

And, btw, what do you think Brazil’s economy is going to do with its currency doing this? One word: Stagflation. So put that in your Trump pipe and smoke it. There is no “trade war” with Brazil to blame. 

What there is in EM countries who have been tethered to Mr. Miyagi’s “inflation #on, inflation #off” trade since the 2008 crisis is the ongoing risk of Commodity #Deflation. Here’s how that looked last week: 

1. CRB Commodities Index bounced +1.8% to -0.9% YTD and remains Bearish TREND @Hedgeye
2. Oil (WTI) had a big reflation week of +5.4% to +17.0% YTD and got just above @Hedgeye TREND resistance
3. Copper bounced “off the lows” for a +2.9% weekly gain = down -18.7% YTD and still Bearish TREND @Hedgeye
4. Gold bounced +2.5% “off the lows” with Dollar Down too = down -9.0% YTD and remains Bearish TREND @Hedgeye
5. Corn continued to deflate, falling another -4.2% to -5.5% YTD and remains Bearish TREND @Hedgeye
6. Lumber got tagged for a -7.9% weekly loss to +4.3% YTD and remains Bearish TREND @Hedgeye
7. Hogs moved into #crash mode, deflating -11.7% last week to -25.6% YTD = Bearish TREND @Hedgeye 

Put simply, ex-Oil and some bounces in things that have been crashing to immediate-term #oversold 2018 lows, Mr. Market’s forward outlook on inflation looks like it’s slowing to me:

1. UST 10yr Yield was DOWN -5 basis points last week to 2.81% and remains Bearish TREND @Hedgeye
2. Yield Curve (10s minus 2s) hit fresh YTD low of +19 basis points last week and remains Bearish TREND @Hedgeye 

That’s what makes the all-time closing highs in the US stock market from last week look so short-term and risky… 

While they were perpetuated by Oil’s +5.4% ramp last week (Energy stocks were the best S&P Sector Style with a +3.2% weekly gain), how do you get materially higher all-time highs from here if Oil, Rates, and the Financials don’t follow through? 

I know, I know. Many who weren’t Bullish Enough on US stocks for the last 2 years are probably making the argument that stocks are “cheaper” today than when they didn’t like the SP500 15-25% lower… 

But doesn’t that just make my point about The Cycle more glaringly obvious? AFTER you get #PeakCycle growth rates in US GDP, Inflation, and Earnings, the denominator on your P/E “multiples” is massively, hugely, big. 

What didn’t work in US Equity Sector Style terms last week is what I want to buy more of this week: 

1. Utilities (XLU) corrected -1.5% last week to +2.0% YTD and remain Bullish TREND @Hedgeye (as of July)
2. Consumer Staples (XLP) corrected -1.7% last week to -5.0% YTD and just recently moved to Bullish TREND @Hedgeye 

So I’ll likely be adding Consumer Staples (XLP) to Utes (XLU) and REITS (VNQ) as a Top 3 US Equity Sector pick on the long side inasmuch as I’ll keep Financials (XLF) and Industrials (XLI) as #1 and #2 on the short side. 

Underweight (or short) Financials (XLF) at the top-end of the @Hedgeye Risk Range reflects our Q318 Macro Themes deck views on US inflation #slowing from its cycle peak and falling long-term interest rates.

Short Industrials (XLI) from the top-end of the @Hedgeye Risk Range (not after down moves!) reflects our ongoing views on Global #GrowthSlowing (since January) – China, EM, and Europe in particular. 

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

UST 10yr Yield 2.78-2.90% (bearish)
SPX 2 (bullish)
NASDAQ 7 (bullish)
Utilities (XLU) 53.00-54.85 (bullish)
REITS (VNQ) 81.90-84.72 (bullish)
Industrials (XLI) 74.50-77.82 (bearish)
VIX 11.17-14.62 (neutral)
USD 94.50-97.01 (bullish)
EUR/USD 1.12-1.16 (bearish)
YEN 110.09-111.70 (bearish)
GBP/USD 1.26-1.29 (bearish)
Oil (WTI) 63.97-69.11 (bearish)
Gold 1175-1215 (bearish)
Copper 2.56-2.75 (bearish)
Corn 3.58-3.86 (bearish) 

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer