Where's Santa?

“I put on weight like Santa Claus. I just get this belly that kind of extends out.”
-Christian Bale 

Bale is a beauty. He’s British and played Batman in The Dark Knight. Amongst many other great movies (The Fighter, American Hustle, etc.), he also did a great job in Wall Street’s The Big Short. 

How about The Dark Knight Rises? Bear markets? Big shorts? Oh yeah, bears and bulls, I love them all.

But what about the Santa Claus rallies? I love those too. What if we get one this year (defined in the Stock Market Almanac as the last 5 trading sessions of the year)? But what if it comes from SP? 

Back to the Global Macro Grind…

It’s Macro Monday @Hedgeye. Thanks to those of you who are new to joining our Global Macro Risk Management #process. As always, thanks to our long-time and loyal subscribers too. 

As a matter of measuring and mapping #process, we always start the week with a week-over-week review of what moved in macro within the context of our intermediate-term @Hedgeye TREND view.

Let’s start with a the Global Currency market: 

1. US Dollar Index was down for the 1^st week in 3, correcting -0.7% to +4.9% YTD and remains Bullish TREND @Hedgeye
2. EUR/USD had a counter-TREND bounce of +0.8% last week to -5.0% YTD and remains Bearish TREND @Hedgeye
3. British Pound was flat vs. USD last week at -5.7% YTD and remains Bearish TREND @Hedgeye
4. Canadian Dollar dropped another -0.2% vs. USD last week to -5.6% YTD and remains Bearish TREND @Hedgeye
5. Turkish Lira’s crash continued, -1.6% vs. USD last week to -28.2% YTD and remains Bearish TREND @Hedgeye
6. India’s Rupee deflated another -2.2% vs. USD last week to -10.6% YTD and remains Bearish TREND @Hedgeye
7. Brazil’s Real fell another -1.0% vs. USD last week to -15.2% YTD and remains Bearish TREND @Hedgeye 

In other words, even when the USD corrects (infrequent since April), Mr. Market is still telling you that plenty of these Emerging Markets are going to stay in Stagflation (when your currency collapses, local inflation rises, and real growth slows). 

We also call Stagflation, Quad 3. 

In case you’re overly enjoying Quad 4, don’t get too cozy with that portfolio construction. We have the USA rolling into Quad 3 by Q2 of 2019. Not surprisingly, since GROWTH is slowing in both Quad 4 and Quad 3, some of your positions stay the same. 

What works in both Quad 3 and Quad 4? 

1. Utilities (XLU) were up another +1.6% in a down tape last week to +7.2% YTD and remain Bullish @Hedgeye TREND
2. REITS (VNQ) were up +0.2% last week to -1.0% YTD and remain Bullish @Hedgeye TREND
3. Both Short (SHY) and Long-term (TLT) US Treasuries were up again last week and are both Bullish @Hedgeye TREND 

Oh, I know. All of your kids want some Fortnite and TLT for the holidays, eh! 

For all of my friends and foes who didn’t like the Treasury “charts” back when they should have been buying them (SEP, OCT, NOV), I have a sneaking suspicion that some of them like those charts now: 

A) UST 2yr Yield dropped another -7 basis points last week to 2.71% and remains Bearish TREND @Hedgeye
B) UST 10yr Yield dropped another -13 basis points last week to 2.85% and remains Bearish TREND @Hedgeye 

Obviously when Bond Yields are Bearish TREND, being long Treasury Bonds = Bullish TREND @Hedgeye. After 5 straight weeks of bond yields falling, the charts look more like our Quad 4 in Q4 research call.

What else happens in Quad 4 when it’s Global? Equities (especially higher beta ones) get body bagged: 

1. SP500 got tagged for a -4.6% loss last week to -1.5% YTD and remains Bearish TREND @Hedgeye
2. RUSSELL 2000 lost another -5.6% last week to -5.7% YTD and remains Bearish TREND @Hedgeye
3. EuroStoxx600 fell another -3.4% last week to -11.2% YTD and remains Bearish TREND @Hedgeye
4. Germany’s DAX got smoked for another -4.2% loss last week to -16.5% YTD and remains Bearish TREND @Hedgeye
5. Emerging Markets (MSCI) lost another -1.6% last week to -15.5% YTD and remains Bearish TREND @Hedgeye

And this morning we have the German stock market joining a broadening list of major Global Equity index crashes (greater than a -20% decline from peak) which includes China, South Korea, Italy, etc. 

Eventually, even the Fed, ECB, BOE, etc. figure out that the world is slowing and stock markets are crashing. But that doesn’t mean that everything is “Goldilocks” again. Even if that or Santa is your new narrative, don’t forget about The Three Bears. 

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

UST 10yr Yield 2.81-3.03% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
Utilities (XLU) 54.02-57.05 (bullish)
REITS (VNQ) 79.51-83.48 (bullish)
Industrials (XLI) 67.22-71.43 (bearish)
Shanghai Comp 2 (bearish)
DAX 106 (bearish)
VIX 17.75-25.19 (bullish)
USD 96.10-97.47 (bullish)
EUR/USD 1.11-1.14 (bearish)
YEN 112.11-114.11 (bearish)
GBP/USD 1.26-1.28 (bearish)
Oil (WTI) 49.78-53.91 (bearish) 

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer