“You don’t lead by pointing and telling people some place to go. You lead by going to that place and making a case.”
-Ken Kesey

When we made the Quad 4 in Q4 call on September 27th of 2018, most of our subscribers were expecting it. We’d been making the case to go there for most of 2018. We thought the US growth and inflation cycle would peak in Q3.

Having been in Quad 1 or 2 for a record 9 quarters in a row, I’m glad we had the patience and process to make the pivot in a timely fashion. While there have been many head-fakes in the last 3 months, the pervasive @Hedgeye TREND remains Quad 4.

Will the Fed acknowledge tightening during Quad 4? No, but on a lag to what’s being priced into markets they will. That’s the whole point of our GIP (GROWTH, INFLATION, POLICY) model. Growth and inflation data front-runs Fed policy pivots too.

Quad 4 in Q4 - 11.15.2018 storm clouds cartoon

Back to the Global Macro Grind…

It’s Macro Monday here @Hedgeye. Thanks for being subscribers to our apolitical and data-driven process. At the start of every week we review the week-over-week moves in macro within the context of our multi-duration and multi-factor model.

As it has become customary since we started making our #StrongDollar call in Q2 of 2018, I’ll lead off this morning’s analysis with the Global Currency Market:

  1. US Dollar Index was up another +1.0% last week to +5.8% YTD and remains Bullish TREND @Hedgeye
  2. EUR/USD was down another -0.6% last week to -5.8% YTD and remains Bearish TREND @Hedgeye
  3. GBP/USD was down another -1.1% last week to -6.9% YTD and remains Bearish TREND @Hedgeye
  4. Canadian Dollar was down another -0.5% last week to -6.1% YTD and remains Bearish TREND @Hedgeye
  5. Argentine Peso continued to crash last week, -2.2% to -51.1% YTD and remains Bearish TREND @Hedgeye
  6. Turkish Lira continued to crash last week, -1.2% to -29.1% YTD and remains Bearish TREND @Hedgeye
  7. Chilean Peso was down another -1.3% last week to -10.0% YTD and remains Bearish TREND @Hedgeye
  8. Icelandic Krona was down another -1.2% last week to -16.0% YTD and remains Bearish TREND @Hedgeye

If you don’t measure and map the currencies of Chile and Iceland alongside Dollars, Euros, and Liras, that’s cool. I do.

Not surprisingly, with TRENDING inverse correlations in the -0.8% range, a pervasively #StrongDollar has become deflationary (Quad 4) for Commodity prices:

  1. CRB Commodities Index was down another -2.1% last week to -7.0% YTD and remains Bearish TREND @Hedgeye
  2. Oil (WTI) continued to crash last week, -2.7% to -11.3% YTD and remains Bearish TREND @Hedgeye
  3. Coffee continued to crash last week, -1.8% to -27.0% YTD and remains Bearish TREND @Hedgeye
  4. Lumber was down another -3.1% last week to -18.2% YTD and remains Bearish TREND @Hedgeye
  5. Aluminum was down another -2.1% last week to -17.0% YTD and remains Bearish TREND @Hedgeye

If you don’t measure and map coffee and lumber prices alongside energy and inflation expectations, that’s cool. I do.

Another way to see The ROC (rate of change) in Quad 4 inflation expectations is by looking at bond market break-evens and TREND signals in Treasury Yields. US 5-year, 5yr Forward Break-evens fell another -7 basis points last week to 1.99%.

Then, of course, there’s stock prices. With the SP500 down another -1.3% last week to -2.8% YTD (Russell 2000 down another -2.6% last week to -8.1% YTD), here’s what the 3 biggest Sector Style moves did:

  1. Financials (XLF) led losers down another -3.5% last week to -13.1% YTD and remain Bearish TREND @Hedgeye
  2. Energy Stocks (XLE) were down another -3.1% last week to -14.1% YTD and remain Bearish TREND @Hedgeye
  3. Utilities (XLU) were UP another +0.6% last week to +7.9% YTD and remain Bullish TREND @Hedgeye

Yep, I’m going all CAPS on the Utes having another UP week in a down Quad 4 US Equity Tape. When both US GROWTH and INFLATION are slowing, at the same time, bond yields fall alongside inflation expectations and bank stocks. Utes win.

Someone was trying to pitch that “Emerging Markets have been a good place to be in 2018.” Given that’s just not true (the MSCI Emerging Markets Equity Index is down -16.1% YTD for 2018), I just thought I’d remind you about that.

Being long EM in 2018 has been about as bad an asset allocation as having a US Equity Portfolio levered to High Beta Smid Caps for the last 3 months (i.e. during Quad 4):

  1. HIGH BETA stocks were down another -3.0% last week and are down -17.3% in the last 3 months
  2. BOTTOM 25% (of market caps) were down another -3.4% last week and are down -15.3% in the last 3 months
    *Mean performance of Top Quartile vs. Bottom Quartile, SP500 Companies

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

UST 10yr Yield 2.80-2.99% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 6 (bearish)
Utilities (XLU) 54.98-57.26 (bullish)
VIX 17.43-25.72 (bullish)
USD 96.40-97.63 (bullish)
EUR/USD 1.12-1.14 (bearish)
GBP/USD 1.24-1.27 (bearish)
Oil (WTI) 50.07-53.62 (bearish) 

Best of luck out there this week,
KM 

Keith R. McCullough
Chief Executive Officer

Quad 4 in Q4 - Chart of the Day