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“Tradition is a guide and not a jailer.”
-W. Somerset Maugham 

Over the years, our 4 Quadrant macro measuring and mapping process has been called everything from “lucky” to “creative.” I’m totally cool with whatever people want to call something that didn’t exist prior to our thinking it through, as long as it works. 

Friday’s #PeakCycle US GDP print for Q3 of 2018 of 3.46% (headline), came in 3 basis points higher than our final nowcast of 3.43%. Our year-over-year estimate of 3.03% was a mere basis point shy of the actual 3.04% print. 

As Anthony Brandt reminded me in The Runaway Species, “the past may be revered but it is not untouchable… creativity does not emerge out of thin air… we often search for the best of what we’ve inherited in order to make something new.” (pg 134)

Quad 4 Jail - hedgeye the cycle

Back to the Global Macro Grind… 

It’s Macro Monday! Thanks to all of you who are new to following our Global Macro risk management process. On the 1st day of the week we review last week’s macro moves within the context of our multi-duration and multi-factor TRADE, TREND, TAIL model. 

Starting with the currency market, it was another great week to be long of our #StrongDollar Macro Theme:

  1. US Dollar Index was up another +0.6% on the week to +4.6% YTD and remains Bullish TREND @Hedgeye
  2. EUR/USD was down another -0.9% last week to -5.0% YTD and remains Bearish TREND @Hedgeye
  3. British Pound got pounded for another -1.8% loss to -5.0% vs. USD YTD and remains Bearish TREND @Hedgeye
  4. Argentina’s Peso fell another -1.1% last week to -49.5% vs. USD YTD and remains Bearish TREND @Hedgeye
  5. South Africa’s Rand dropped another -1.2% last week to -14.9% vs. USD YTD and remains Bearish TREND @Hedgeye
  6. Iceland’s Krona sank another -2.7% last week to -13.9% vs. USD YTD and remains Bearish TREND @Hedgeye 

Iceland? Are you kidding me KM? Stick to Quad 4 in Q4. 

OK. The Quad 4 Hurricane of risk was most readily apparent in Global Equity Markets: 

  1. Europe (EuroStoxx600) was down another -2.5% last week to -9.5% YTD and remains Bearish TREND @Hedgeye
  2. Emerging Markets (MSCI) were down another -2.3% last week to -18.1% YTD and remain Bearish TREND @Hedgeye
  3. Japanese Stocks (Nikkei) were down -6.0% last week to -6.9% YTD and remain Bearish TREND @Hedgeye
  4. Canadian Stocks (TSX) were down -3.8% last week to -8.1% YTD and remain Bearish TREND @Hedgeye
  5. Turkish Stocks were down -6.1% last week taking their crash to -21.5% YTD and remain Bearish TREND @Hedgeye 

But Quad 4 in Q4 was particularly pronounced in the Sector and Factor Exposures of the US Equity Market: 

  1. Energy Stocks (XLE) led the decline, down another -7.1% to -8.0% YTD and remain Bearish TREND @Hedgeye
  2. Industrial Stocks (XLI) were down another -5.6% last week to -8.7% YTD and remain Bearish TREND @Hedgeye
  3. Financials (XLF) were down another -5.3% last week to -9.5% YTD and remain Bearish TREND @Hedgeye
  4. HIGH BETA stocks were down another -7.3% last week to -11.9% YTD and remain Bearish TREND @Hedgeye
  5. TOP EPS GROWTH stocks were down -6.0% last week to -1.4% YTD and remain Bearish TREND @Hedgeye 

Being short Momentum, High Beta, and US Growth sounded “creative” and “interesting” at the time that we made that call at the end of September. Now it just sounds right. 

The other thing that worked out well for us last week (instead of freaking out and capitulating alongside consensus at 3.23% on the UST 10yr Yield earlier in the month), was being long both short and long-term US Treasury Bonds: 

A) UST 2-year Yield dropped -9 basis points last week, breaking immediate-term TRADE support of 2.84% (closing 2.81%)
B) UST 10-year Yield dropped -11 basis points last week, breaking immediate-term TRADE support of 3.12% (closing 3.08%) 

All the while, what you shouldn’t be overweight relative to the Long Bond in Quad 4 (Junk Bonds) saw yields RISE +12 basis points last week to 6.29% on the High Yield Index (which is up +36 basis points in the last month alone). 

Helping inflation expectations and Treasury Yields fall was another -2.3% weekly decline in Oil (WTI) which has broken bad to Bearish @Hedgeye TREND as well. Lumber prices moved into crash mode, -5.8% on the week to -21.3% YTD, as well. 

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

UST 10yr Yield 3.01-3.17% (bullish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 7041-7423 (bearish)
Industrials (XLI) 67.09-72.19 (bearish)
Shanghai Comp 2 (bearish)
VIX 15.65-26.94 (bullish)
USD 94.75-96.80 (bullish)
EUR/USD 1.13-1.15 (bearish)
GBP/USD 1.27-1.30 (bearish)
Oil (WTI) 65.12-69.69 (bearish) 

Best of luck out there today,

KM 

Keith R. McCullough
Chief Executive Officer

Quad 4 Jail - 10.29.18 EL Chart