“Understanding the emergence of complexity from simplicity is one of the founding cornerstones…”
-Geoffrey West
That is indeed the next frontier of learning in this profession and many others – the new science of complexity, that is. That’s why I spend a lot of my reading time there. It doesn’t take long to realize that we all have a lot more to learn.
As West goes on to explain in Scale:
“The field of physics is concerned with fundamental principles and concepts at all levels of organization that are quantifiable and mathematizable, and can consequently lead to precise predictions…” that can be back-tested. (pg 81)
Back to the Global Macro Grind…
In the spirit of constantly evolving our process, maybe I’ll start calling today Mathematizable Macro Mondays! A sincere welcome back to all of you who have been using our process to augment yours and thanks to all of you that are new to joining us.
Let’s get right into what we always do on the 1st day of a new week and review last week’s macro market moves within the context of intermediate-term @Hedgeye TREND views and current Macro Themes. Starting with the Global FX market:
- US Dollar did what it should do in Quad 4 and had another up +0.5% week to +5.3% YTD and remains Bullish TREND @Hedgeye
- EUR/USD fell another -0.7% last week to -5.6% YTD and remains Bearish TREND @Hedgeye
- British Pound (vs. USD) slipped -0.1% last week to -5.2% YTD and remains Bearish TREND @Hedgeye
- Canadian Dollar dropped another -0.6% vs. USD last week to -5.0% YTD and remains Bearish TREND @Hedgeye
- Argentine Peso continued to crash, down -4.3% last week to -50.5% YTD and remains Bearish TREND @Hedgeye
- Brazilian Real got tagged for another -2.3% loss last week to -13.5% YTD and remains Bearish TREND @Hedgeye
“So” … as consensus likes to say… if you thought Brazil’s election was going to change the 2018 currency crash for the Real, you should be re-thinking that. If you have friends who thought Bitcoin was the next “reserve currency”, they should be re-thinking that too.
Bitcoin crashed another -22% last week to -70.3% YTD. “But crypto isn’t a currency, it’s a technology…” That’s cool but you shouldn’t be long Technology in Quad 4 either! Here’s how the Top 3 Equity Sector Underweights in Quad 4 looked last week:
- US Technology Stocks (XLK) led losers with a -6.1% weekly loss to +0.2% YTD and remain Bearish TREND @Hedgeye
- US Energy Stocks (XLE) deflated another -4.9% to -11.6% YTD and remain Bearish TREND @Hedgeye
- US Industrials (XLI) dropped another -3.1% to -7.8% YTD and remains Bearish TREND @Hedgeye
If you want to A/B test your portfolio from a Factor Exposure perspective (instead of just from a long/short Sector Exposure perspective), 2 of the worst places to be in Quad 4 remained the same last week:
A) HIGH BETA stocks were down another -3.4% last week and are down -12.3% in the last 3 months alone
B) TOP 25% EPS GROWTH stocks fell another -3.7% last week and are down -10.4% in the last 3 months alone
*Mean performance of Top Quartile vs. Bottom Quartile for SP500 companies
Meanwhile a textbook Quad 4 asset allocation, the Long Bond (TLT), rose for the 3rd straight week with the UST 10yr Yield down for 3 straight weeks to 3.04% and both Utilities and REITS continued to outperform their Quad 4 aforementioned Sector Style options.
The other big thing driving bond yields lower in the US is the combination of:
A) #StrongDollar and
B) Collapsing Inflation Expectations
With a 1-month inverse correlation of -0.8 (The Machine chases that duration) between USD and WTI Oil, this shouldn’t surprise anyone who has crushed it in Quad 4 conditions before. The Commodity Deflation in macro markets last week was plainly obvious:
- CRB Commodities Index (19 Commodities) deflated another -4.1% last week to -7.4% YTD and remains Bearish TREND @Hedgeye
- Oil (WTI) continued to crash, down another -11.1% last week to -12.7% YTD and remains Bearish TREND @Hedgeye
- Copper was down another -0.9% last week to -17.1% YTD and remains Bearish TREND @Hedgeye
- Nickel got crushed for another -3.5% loss last week to -15.7% YTD and remains Bearish TREND @Hedgeye
- Coffee was down another -4.5% last week, taking its crash to -20.8% YTD and remains Bearish TREND @Hedgeye
- Sugar deflated another -1.7% last week to -20.5% YTD and remains Bearish TREND @Hedgeye
No sugar in that coffee or crypto in your Quad 4 asset allocation? Well done. #CleanLivin’
Other than being long #PeakCycle speculative credit and/or pretend “BBB” credit, what else would have hurt you last week?
A) Chinese stocks (Shanghai Comp) were down another -3.7% last week to -22.0% YTD and remain Bearish TREND @Hedgeye
B) Emerging Market Stocks (MSCI) dropped another -1.1% last week to -15.8% YTD and remain Bearish TREND @Hedgeye
C) Greek Stocks continued to crash, down another -3.7% last week to -24.9% YTD and remains Bearish TREND @Hedgeye
But no worries… Trump is going to make The Cycle all good with Xi this week… and the Italians are going to make up another budget deficit number within a made up GDP outlook… and I’m hoping to lose 10 pounds this week.
Or should you be worried that everyone is long those same hopes? Hope is not a risk management process. Reiterating #Quad4.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 3.02-3.16% (neutral)
SPX 2 (bearish)
Utilities (XLU) 53.59-55.45 (bullish)
REITS (VNQ) 79.09-81.24 (bullish)
Industrials (XLI) 68.02-72.50 (bearish)
Shanghai Comp 2 (bearish)
VIX 17.11-24.82 (bullish)
USD 95.90-97.56 (bullish)
EUR/USD 1.11-1.15 (bearish)
GBP/USD 1.26-1.30 (bearish)
Oil (WTI) 50.24-56.66 (bearish)
Copper 2.66-2.85 (bearish)
Bitcoin 3 (bearish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
