Hedgeye - Winning Year-End #Quad4

“We have an opponent in this State that we work every day, 365 days a year, to dominate.”
-Nick Saban

Not matter where you go this morning, here we are. It’s year-end for both your 2018 portfolio returns and US College Football! I hope you’re enjoying some time with your family and friends. After a great Q4, 2019 is setting up for a fun start.

The aforementioned quote is what the legendary Head Coach of the Alabama Crimson Tide had to say about playing Auburn. How do you feel about doing what it takes to beat your competition? Have you defined who or what that is? I have.

No matter what our differences and/or similarities in investing styles, you and I have one common goal: to beat our competition. During Quad 4 in Q4, there was a career opportunity to post differentiated returns. We sure hope you did!

Back to the Global Macro Grind…

It’s the final Macro Monday of 2018 @Hedgeye! I’d like to welcome our new subscribers and also thank long-time ones. We sincerely appreciate both your business and incorporation of our risk management process into your investing process.

For those of you who have been with us for the last 10 years, the 1^st day of the week is going to be old hat. As the data changes, we do. Today is the day we measure and map macro returns vs. our intermediate-term @Hedgeye TREND and Theme based views.

With the Old Wall consensus now begging for the Fed to back off, last week was what we call a Counter @Hedgeye TREND move in most of the Global Currency market:

The US Dollar Index corrected -0.6% last week to +4.6% YTD and remains Bullish TREND @Hedgeye
EUR/USD bounced +0.6% last week to -4.7 YTD and remains Bearish TREND @Hedgeye
Japanese Yen ramped +0.9% vs. USD last week to +2.2% YTD and is now Neutral TREND @Hedgeye
British Pound bounced +0.4% vs. USD last week to -6.1% YTD and remains Bearish TREND @Hedgeye
Canadian Dollar didn’t bounce, closing down -0.3% last week to -7.9% YTD and remains Bearish TREND @Hedgeye
Russian Ruble didn’t bounce, closing down -0.9% last week to -17.2% YTD and remains Bearish TREND @Hedgeye

The main problem that people who don’t do Global Macro have in understanding where the US Dollar is going next is that they don’t do Global Macro. As Einstein would have reminded them, everything is relative. Ask the Canadians and Russians about that.

Canada and Russia, of course, are as levered to Oil prices (down -38% in Q4) as any country in the Top 20 of our Global 4 Quadrant GIP Model. Even though US Equity Beta bounced off #oversold lows last week, big macro things like these did not:

Emerging Market Stocks (MSCI Index) were down another -0.5% to -17.8% YTD and remains Bearish TREND @Hedgeye
Commodities (CRB Index) were down another -0.7% last week to -11.8% YTD and remains Bearish TREND @Hedgeye
High Yield US Corporate Bonds were down again as credit spreads continued to break-out to the upside

“But we’re not seeing it in Credit.”
-Our Competition in OCT of 2018

Two months later, they’re seeing it. High Yield OAS (credit spread) blew out another +17 basis points last week to +531bps wide and is +215 basis points wider during Quad 4 in Q4.

“But Treasury Yields aren’t falling.”
-Our Competition in OCT and NOV of 2018

Two months later, they’re seeing that too:

UST 2yr Yield was down another -12 basis points last week to 2.51% (down -30bps in the last 3 months)
UST 10yr Yield was down another -7 basis points last week to 2.73% (down -34bps in the last 3 months)

After Bond Kings (yep, our competition) were shouting from their towers that the UST 10yr Yield would be at +3.6-4.0% in no time, the best asset allocation decision you could have made was to buy Treasuries, across the curve, as inflation expectations collapsed.

Collapse? Look at 5-year, 5yr Forward Break-evens. They dropped another -7 basis points last week to 1.87% and are down -35 basis points (that’s a lot) during Quad 4 in Q4.

Oh, but stocks bounced last week. US stocks, only, that is:

German Stocks dropped another -0.7% last week to -18.3% YTD and remain Bearish TREND @Hedgeye
Russian Stocks dropped another -1.0% last week to -7.6% YTD and remain Bearish TREND @Hedgeye
Chinese Stocks dropped another -0.9% last week to -24.6% YTD and remain Bearish TREND @Hedgeye

We didn’t have you long any of those macro exposures (or Bitcoin which crashed -73% to YTD) throughout 2018. Instead, we were long and strong US Growth Stocks until Q3 of 2018, then we de-risked and re-allocated to Treasuries and Bond Proxies in Q4.

It was a December to remember, indeed. And, no, it doesn’t always work out that way. But when it does, we know why we helped you dominate the competition. Cheers to having not only a differentiated process, but the winning one throughout 2018.

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

UST 10yr Yield 2.70-2.89% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 6192-6905 (bearish)
Utilities (XLU) 51.25-55.45 (bullish)
REITS (VNQ) 71.50-79.27 (neutral)
Industrials (XLI) 60.08-66.75 (bearish)
Energy (XLE) 53.55-60.83 (bearish)
Shanghai Comp 2 (bearish)
DAX 107 (bearish)
VIX 20.43-36.73 (bullish)
USD 95.54-97.15 (bullish)
EUR/USD 1.12-1.15 (bearish)
YEN 109.64-113.38 (neutral)
GBP/USD 1.25-1.27 (bearish)
Oil (WTI) 41.96-47.13 (bearish)
Gold 1 (bullish)
Copper 2.60-2.75 (bearish

Best of luck out there in 2019,

Keith R. McCullough
Chief Executive Officer