Growth Is Painful

“Growth is painful. Change is painful. But, nothing is as painful as staying stuck where you do not belong.”
-Narayana Murthy 

Murthy understands investing in Tech more than most. He’s not only one of the Founders of Infosys Technologies (INFY) but he’s considered by many to be the “father of the Indian IT Sector.” 

He’s also one of the few Chairmen (Emeritus) of a $40B Tech company that has seen more than a few Tech Cycles. How many CEOs of smid-cap cloud companies or CFOs of social media companies can walk you through investing across 3-6 cycles? 

A term we often hear as a counter-argument to our Sell Tech call  (Quad 4 in Q4) is “Secular Growers.” That’s an allegedly awesome company that has done nothing but grow in the last 5-9 years that’s never seen a cycle. Newsflash: they will.

Back to the Global Macro Grind… 

It’s Macro Monday here @Hedgeye. To long-time subscribers of our research and risk management #process, welcome back. To those of you who are new to the data-driven revolution, thanks for joining us. 

On the first day of the week, we take a step back and look at all of the weekly moves in macro markets within the context of intermediate-term @Hedgeye TREND views. It sure beats being a Macro Tourist, jumping from journo headline to headline.

Starting with the Global Currency market: 

1. US Dollar Index corrected -0.5% last week to +4.7% YTD and remains Bullish @Hedgeye TREND
2. EUR/USD bounced +0.7% last week to -4.9% YTD and remains Bearish @Hedgeye TREND
3. Pound (GBP/USD) dropped another -1.1% last week to -5.1% YTD and remains Bearish @Hedgeye TREND
4. Argentina’s Peso continued to crash, down another -1.8% last week to -48.2% YTD and remains Bearish @Hedgeye TREND
5. Pakistani Rupee continued to crash, down another -1.2% last week to -17.6% YTD and remains Bearish @Hedgeye TREND
6. Bitcoin continued to crash, down another -13.7% last week to -61.8% YTD and remains Bearish @Hedgeye TREND 

Who cares about Pakistani Rupees? Uh, people who live in Pakistan! Combining their > 200 million people with Murthy’s country (India has 1.36B people), you have 20% of the world’s population, don’t forget. 

Oh, right. Back to what Trump is tweeting.

Last week Global Equities continued to trade like they always do when the world is in Quad 4: 

1. SP500 was down for the 6^th week in the last 8 losing -1.6% to +2.3% YTD and remains Bearish @Hedgeye TREND
2. EuroStoxx600 was down another -2.2% last week to -8.1% YTD and remains Bearish @Hedgeye TREND
3. EM (MSCI) was down (despite USD down) -0.7% last week to -18.1% YTD and remains Bearish @Hedgeye TREND 

While China finally bounced +3.1% to -19.0% YTD on the allegedly wonderful conversations we’re having with the Chinese about resolving the “trade war”… 

Mexico (who Trump saved from said “trade war”, remember?) was down another -4.4% last week to -14.3% YTD and remains Bearish @Hedgeye TREND. So are you buying stocks with that as your catalyst, or do you have a process to map The Cycle? 

Back to the US #GrowthSlowing (Quad 4 in Q4) story that’s becoming more and more painful to be long of instead of US Dollars, Treasuries, and Equity Bond Proxies: 

A) US Consumer Discretionary (XLY) was the worst Sector Style at down -3.3% last week and remains Bearish @Hedgeye TREND
B) US Tech (XLK) was the 2^nd worst place to be at down -2.3% last week and also remains Bearish @Hedgeye TREND 

From a US Equity Factor Exposure perspective, two of the worst places to be were: 

A) HIGH BETA Stocks were down another -1.9% last week and remain Bearish @Hedgeye TREND
B) TOP 25% SALES growers were down another -1.8% last week and remain Bearish @Hedgeye TREND
C) TOP 25% EPS growers were down another -2.0% last week and remain Bearish @Hedgeye TREND
*Mean Performance of Top Quartile vs. Bottom Quartile, SP500 Companies 

And how about being long US Inflation Expectations? 

1. CRB Commodities Index was down (despite USD down) another -0.6% to -3.4% YTD and remains Bearish @Hedgeye TREND
2. Oil (WTI) continued to crash, down another -5.7% to -2.2% YTD and remains Bearish @Hedgeye TREND
3. 5 year 5-yr Forward Break-Evens dropped another -3bps to 2.12% 

Long Treasuries across the curve was far less painful than being long US Momentum, High Beta, and Growth: 

A) UST 2yr Yield got smoked for a -12 basis point loss on the week to 2.80%
B) UST 10yr Yield had a big -12 basis point drop on the week to 3.06% too 

With US Equity Volatility (VIX) up another +5% last week to +64% YTD, why wouldn’t a Risk Manager of all those US #GrowthAccelerating (for a record 9 straight quarters) exposures book gains and move to the uncrowded port of capital preservation? 

Not changing one’s position at critical points in The Cycle can be very painful. 

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

UST 10yr Yield 3.05-3.17% (neutral)
SPX 2 (bearish)
NASDAQ 7025-7399 (bearish)
Utilities (XLU) 54.00-55.52 (bullish)
Shanghai Comp 2 (bearish)
VIX 15.44-23.28 (bullish)
USD 95.65-97.63 (bullish)
EUR/USD 1.11-1.15 (bearish)
YEN 112.80-114.21 (bearish)
GBP/USD 1.27-1.31 (bearish)
Oil (WTI) 54.05-63.35 (bearish)
Nat Gas 3.59-4.84 (bullish)
Bitcoin 5124-6051 (bearish) 

Best of luck out there this week,

KM 

Keith R. McCullough
Chief Executive Officer