Believe In The #Process

“It was, of course, a fragile kind of faith, not easy to sustain in an age with so many corruptions…”
-David Halberstam 

In The Education of A Coach, that’s how David Halberstam described players believing in the Bill Belichick #process. 

“If you stay with him; if you believe in what he says, even if it’s different than what you expected to hear; sustain your belief for an acceptable period of time, and surely good things will happen…” (pg 272) 

While it may have been “boring” for some, I thought Belichick’s 6^th Super Bowl Championship win was his best coaching performance yet. Holding that LA Rams offense to 3 points doesn’t just happen. Coaching Defense is a #process in Quads 3 and Quad 4 too. 

Back to the Global Macro Grind…

While it should be a national holiday here in New England, it’s still Macro Monday @Hedgeye! Today is the day we review last week’s macro market moves within the context of our multi-factor, multi-duration risk management model.

Let’s start with the Global Currency market: 

1. US Dollar Index was down another -0.2% (as Powell put the Fed on hold) to -0.6% YTD  
2. EUR/USD was +0.4% last week to -0.1% YTD and remains Bearish TREND @Hedgeye
3. Japanese Yen was flat vs. USD last week to +0.1% YTD and remains Bullish TREND @Hedgeye
4. British Pound corrected -0.9% vs. USD last week to +2.5% YTD and is currently signaling Bullish TREND @Hedgeye  
5. Brazilian Real ramped +3.1% vs. USD last week to +6.1% YTD and is currently signaling Bullish TREND @Hedgeye  
6. Indian Rupee fell another -0.7% vs. USD last week to -2.6% YTD and remains Bearish TREND @Hedgeye

Put simply, the Powell Pause = Dollar Down, Rates Down, Reflation Up:

1. Oil (WTI) reflated another +2.9% last week to +20.9% YTD but remains Bearish TREND @Hedgeye
2. Copper reflated another +1.6% last week to +5.4% YTD but remains Bearish TREND @Hedgeye
3. Gold was up another +1.4% last week to +2.7% YTD and remains Bullish TREND @Hedgeye

In Rates Down terms, that meant: 

1. UST 2yr Yield was down another -10 basis points on the week to 2.50% and remains Bearish TREND @Hedgeye
2. UST 10yr Yield was down another -7 basis points on the week to 2.68% and remains Bearish TREND @Hedgeye
3. High Yield OAS spread narrowed -13 basis points on the week to 4.16% and remains Bullish TREND @Hedgeye 

For those of your friends who aren’t yet long of US Treasuries (and Gold) that was the 10^th DOWN week for US Treasuries in the last 13 weeks. If you get the rate of change in GROWTH and INFLATION right, you get the direction of bond yields right. 

Interestingly, but not surprisingly, it was a great week for some US #GrowthSlowing LONG positions as well:

1. Energy Stocks (XLE) which do great in #GrowthSlowing Quad 3 reflated +3.1% last week to +13.1% YTD
2. REITS (VNQ) which do great in both Quad 4 and Quad 3 were up another +3.0% last week to +11.1% YTD 

Where you don’t want to be LONG, from a US Equity Sector Style perspective, in Quad 3 or Quad 4 didn’t do so well last week: 

1. Financials (XLF) were only +0.2% last week to +9.4% YTD and remain Bearish TREND @Hedgeye
2. Consumer Discretionary (XLY) was only +0.2% last week to +8.3% YTD and remains Bearish TREND @Hedgeye 

While Powell was able to suppress US Equity Volatility (front-month VIX down another -7.4% last week to -37% YTD) in the aggregate, the macro market is wondering how that gets the European economy out of recession risk rising: 

1. German Stocks (DAX) were down another -0.9% last week and remain Bearish TREND @Hedgeye
2. Italian Stocks (MIB) were down another -1.2% last week and remain Bearish TREND @Hedgeye
3. Spanish Stocks (IBEX) were down another -1.8% last week and remain Bearish TREND @Hedgeye 

Spanish stocks are leading losers again this morning. Italy has entered a recession. German Retail Sales #slowed to a cycle-low of -2.1% year-over-year in DEC and French Consumer Spending plunged -400 basis points to -2.1% year-over-year in DEC too. 

We’ve not been “Long Europe” for well over a year now. Sure, there have been many bear market bounces that we could have chased. But we don’t chase. We stay with the #process. 

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

UST 10yr Yield 2.61-2.77% (bearish)
UST 2yr Yield 2.43-2.58% (bearish)
SPX 2 (bearish)
NASDAQ 6 (bearish)
REITS (VNQ) 78.04-84.25 (bullish)
DAX 11005-11299 (bearish)
VIX 15.50-22.16 (bullish)
USD 94.75-96.30 (bullish)
EUR/USD 1.13-1.15 (bearish)
USD/YEN 108.60-110.10 (bearish)
GBP/USD 1.29-1.32 (bullish)
Oil (WTI) 51.46-55.73 (bearish)
Gold 1 (bullish)
Copper 2.60-2.80 (bearish) 

Best of luck out there this week,

KM 

Keith R. McCullough
Chief Executive Officer