Since-athon

12/21/18 08:55AM EST

“Q:  What keeps you awake at night?” …. “A: Nothing, I keep other people awake at night”
-(former) Secretary of Defense, Jim Mattis 

Some folks are going to be having some more restful nights it seems.    

And from the tone and language of the resignation letter it also seems, unfortunately, that Trump’s foreign and national security policy held the exclusive ‘honor’ of keeping the General from restful repose.  

Now, not to make the morning any more somber, but I had an unfortunate and probably overdue convergence with one of life’s inenitable crossroads this morning.

It’s a rite of passage of sorts but you hope that the fates never really conspire in this direction as any resolution inevitably involves choice and sacrifice.  

Without question, it’s a defining decision – typically a binary bridge to crowning achievement or personal nadir … a kind of existential partition forever dividing your life between before and after. 

Invariably, it catalyzes an intensive journey of soul-searching and self-reflection.   A psycho-emotional sojourn I was reluctantly forced to take at 4am this morning.  I haven’t broken the news to Keith yet, either. 

I’m talking, of course, about the decision of whether or not to join the illustrious likes of Madonna & that dude who played Darryl on “the Office” …… and write a children’s book.  

Stay with me here …. 

The plot centers on an ambitious and naively misanthropic 6-7 year old with grandiose plans for world domination which get serially foiled by his/her own inability to stay focused enough to see them through.

It’s not-so-loosely autobiographical but I’m sure it captures a universally experienced reality (which is why its marketable).  

For example, take my son, who somewhere along the 3 foot journey from his room to the bathroom to brush his teeth before school yesterday somehow managed to end up, 15 minutes later, sitting in the hallway talking to himself with 1 sock and no pants. 

Our delightfully conflicted protagonist will carry the dutifully villainous name Distractor and we’ll document his comedic (Mis)Adventures in World Domination. 

Anyway, the concept is half-baked and only a few hours old but that’s the thematic arc …. If anyone wants in on developing it. 

Back to the Global Macro Grind ….. 

Since-athon - 12.20.2018 Santa rally cartoon

Listen, it’s not that it’s purposeful.  

I mean Mr. Market is generally a good guy.  He’s well-intentioned and aspires to do his part in supporting both the wealth effect and the real economy.   

It’s just that every time a tweet, trade headline or sirenic 2019 year-end price target manages to dust him off and restore his Santa rally optimism, he gets distracted by all the Quad 4 data and an offsides consensus colliding with market structure fragilities and reflexive price action. 

Moving on …

Since it’s a Friday before a holiday week, lets relax this morning’s discussion and gamify the data contextualization in another rousing edition of OMQ! (Oh My Quad!). 

Here, instead of telling you our quad expectation and the implications for fundamental developments and asset prices, I’ll give you the data and you tell me what Quad the market thinks we’re in.  

It’s a kind of Socratic exercise and the conclusion should be self-evident …… Let the since-athon commence:  

  • SPX = -1.6% D/D and -16.1% off the High = 2467.42 = lowest since September 2017
  • Russell 2000  = -1.7% D/D and -23.9% off the high = lowest since December 2016
  • Oil =-4.8% D/ad and -68% off the 52-week high = lowest since the deflationary and manufacturing/profit recession lows of April 2016. High Yield =
  • IG Spreads = +2bps to 1.8% = widest since July 2016
  • HY Spreads = +31 bps to 5.12% = widest since July 2016.    And up a full +200 bps since the start of 4Q and the “we’re not seeing it [Quad 4] in credit yet” peak
  • HYG = -0.9% D/D and again trading at a growing discount to NAV= lowest since March 2016
  • JNK = -1% D/D = lowest since Feb 2016
  • Volume = +31% D/D, +57% vs 1M and 3M ave = highest volume since the vol-pocalypse in February. 
  • VIX = +10.9% D/D = 28.38 = also highest since the February rout.
  • Inflation Expectations (10Y Breakevens) = lowest since September 2017.
  • 10Y Yield = down to 2.78% this morning = lower lows as Quad 4 continues to pressure the long end lower.
  • Yield Spread (10’s-2’s) = bull steepened modestly yesterday but still = tightest since June 2007  
  • Single-Family Housing Starts Growth = -13.1% Y/Y = worst since April 2011
  • Existing Home Sales = -7% Y/Y = also worst since the housing recession doldrums of 2011
  • Financial Stress Index = highest since March 2016
  • Financial Conditions = Tightest since December 2016
  • 2020 Policy Expectations = derivatives markets have gone from pricing in further tightening in 2020 just 4 weeks ago to now discounting policy easing. 

So that was fun.  

It was also just a selective tour around domestic dynamics.  Quad 4 developments globally have become ubiquitous at this point.   But you already knew that.  

You also know that changing prices within a dynamic risk range determine our tactical positioning. But with our TREND outlook unchanged, selling strength remains the current risk management ethos.

Ultimately, this brings me back to one of my favorite Jim Rhon quotes:  

“Learn how to separate the majors and the minors. A lot of people don’t do well simply because they major in minor things.”

Growth, Inflation and #TheCycle are the majors.  Don’t get distracted by the shiny macro tourist objects.  

Lastly, I know it’s been a trying few months.   Take some time this weekend and next week to take a step back, refocus on the majors, re-remember why you love playing this game and re-internalize, remix or otherwise re-invent your process.    

You’ll sleep better at night. 

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

UST 10yr Yield 2.75-2.94% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 6 (bearish)
Utilities (XLU) 53.75-57.73 (bullish)
Consumer Staples (XLP) 50.57-54.33 (bearish)
REITS (VNQ) 74.58-82.20 (bullish)
Industrials (XLI) 62.79-68.94 (bearish) 
Shanghai Comp 2 (bearish)
Nikkei 20105-21608 (bearish)
DAX 109 (bearish)
VIX 20.78-29.43 (bullish)
USD 95.65-97.70 (bullish)
EUR/USD 1.11-1.14 (bearish)
YEN 111.05-114.01 (bearish)
GBP/USD 1.24-1.28 (bearish)
Oil (WTI) 45.06-49.93 (bearish)
Nat Gas 3.29-4.65 (bullish)
Gold 1 (bullish)
Copper 2.63-2.77 (bearish)

Christian B. Drake
U.S. Macro Analyst

Since-athon - CoD HY Spread

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