“The battlefield is a scene of constant chaos. The winner will be the one who controls that chaos, both his own and the enemies.”
-Napoleon Bonaparte
In the quote above, Napoleon was talking about the actual battlefield. But his quote could just as easily be adopted to life, business, and analyzing markets. In fact, for stock market operators like ourselves, trying to find order within the chaos is one of the most important things we do every day.
Our search for order amid the chaos begins with an analytical framework to look at markets and economies. For global economies, this framework is obviously our GIP model. By starting with the rate of change of growth, inflation and policy, our back tests reveal that we have a reasonably good chance of getting underlying asset class returns correct.
Now, having a framework doesn’t mean that we are going to be on the right side of every single trade. Nor does it mean we will nail our GDP projection every single quarter. However, this framework most certainly provides an extremely valuable guidepost to interpret the inherent and constant chaos of the markets. And, while they don’t always repeat themselves exactly, patterns do matter.
Underlying much of Hedgeye’s macro analysis is a foundation in chaos theory. In a simplistic sense, chaos theory is the idea that at the core of a complex chaotic system (like the stock market) there are constant feedback loops, patterns, self-similarity, repetition, and, of course our favorite, fractals. In effect, as chaotic as the system may appear, there is some rhyme to it all. The trick (or skill) is finding these rhymes and leveraging them to generate superior investment returns.
As the renowned rapper/philosopher Ice-T once said:
“A good emcee will rhyme a lot of different ways. Don’t limit yourself.”
Indeed.
Back to the Global Macro Grind ...
Speaking of chaos...China’s economy just turned chaotically south with the report of its monthly export number. Chinese export numbers last night were reported at -20.7% for February, which as we’ve highlighted in the Chart of the Day below was the worst monthly export number from China in 3 years. Not only that, the number dramatically missed expectations of down -4.8%. That’s not just a miss, that’s a huuuge miss.
Now, of course, the punditry will tell you that part of this decline is due to the week long Chinese New Year, which occurred in early February this year. In part, that’s fair. But that doesn’t change the fact that for January and February combined, Chinese exports were down -4.6% and that was on the back of a -4% decline in December 2018.
Make no mistake about it, if the world’s second largest economy is slowing, global economic growth is slowing.
The stock market in China is reacting in kind as the Shanghai Composite was beaten like a rented mule over night, closing down close to -4.4%. If the next slew of economic data is negative, it’s going to take a lot more cowbell from the Chinese government to keep Chinese equities levitating.
As if that was enough negative global economic news for one day, German manufacturing orders also “unexpectedly” slumped in January. Orders were down -2.6% in January. That was the largest decline since June and much worse than the expectation of +0.5% growth. Since the Germans don’t celebrate Chinese New Year, let alone celebrate it in January, this is a much more difficult data point to sugarcoat. But no worries, Germany is only the world's 4th largest economy.
From a stock market perspective, the world’s third largest economy, Japan certainly traded like it's slowing as well. The Nikkei index closed down - 2.01% and the Topix was down -1.81%. Ironically, Japanese GDP was actually revised slightly upward for Q4, but as luck (or misfortune) would have it, markets don’t trade on past data.
The primary negative catalyst for the sell off in Japanese equities, appears to be the Cabinet Office’s coincident index of business conditions for January that was down 2.7 points from the previous month at 97.9 against the 2015 base of 100. It was the index’s third consecutive decline, prompting the office to say that it was “signaling a possible turning point.” Prior to that, the office had said conditions were “weakening.”
Despite all the doom-and-gloom this morning, the one thing that’s not weakening is Hedgeye's production and distribution of world class investing research.
On the distribution front, we recently launched a new Hedgeye app for institutional users that can be downloaded. On the production front, we are excited to announce the launch of a new Communications sector. This sector will be led by newly anointed Managing Director Andrew Freedman who honed is analytical skills under healthcare guru Tom Tobin. He’s set to launch his coverage on March 15 and will have views on names like: NFLX, FB, GOOGL, DIS, ROKU, LYV, DISCA, CBS, VZ, T, TMUS, CMCSA, DISH, CHTR. Please ping to get access to this launch call.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.60-2.76% (bearish)
SPX 2 (neutral)
RUT 1 (bearish)
NASDAQ 7 (bullish)
Utilities (XLU) 56.00-57.65 (bullish)
REITS (VNQ) 83.16-84.92 (bullish)
Housing (ITB) 33.52-36.00 (bullish)
Energy (XLE) 64.02-66.85 (bullish)
Shanghai Comp 2 (bullish)
Nikkei 21001-21831 (neutral)
DAX 110 (bearish)
VIX 13.42-18.98 (neutral)
USD 96.08-97.78 (bullish)
EUR/USD 1.11-1.13 (bearish)
Oil (WTI) 55.07-57.75 (bullish)
Gold 1 (bullish)
Copper 2.86-2.96 (neutral)
Keep your head and stick on the ice,
Daryl G. Jones
Director of Research
