“I told them I grew my own.”
-Warren Buffett
If your portfolio was up in a sea of red on Friday, well done. That’s one of the ways to grow your wealth – don’t lose money when everyone else does.
The aforementioned quote comes from a great chapter in A Man For All Markets that Edward Thorp titled “Bridge With Buffett”:
Laughingly (I can hear Buffett’s chuckle right now), that’s what Warren replied when asked “how he found so many millionaires for his partnership” (pg 157). He grew his own.
Back to the Global Macro Grind…
Rise and grind, Jedis of the 4 Quadrant wealth management #process. It’s Macro Monday @Hedgeye! On the 1st day of every week we review last week’s macro market moves within the context of @Hedgeye TRENDs.
What is a @Hedgeye TREND?
It’s not a “YTD” chart 2 months into the new year. It’s certainly not a smooth 50-day moving average either. It’s what the market has been signaling for 3 months or more. There was an epic turn to have made, 6 months ago.
As usual, let’s start with the Global Currency market:
- US Dollar Index was +0.1% last week to +0.4% YTD and is currently Neutral @Hedgeye TREND
- EUR/USD was down another -0.2% last week to -1.4% YTD and remains Bearish TREND @Hedgeye
- Yen was up +1.4% vs. USD last week to -0.3% YTD moving back to Bullish TREND @Hedgeye
- Pound was down -0.6% vs. USD last week to +3.6% YTD and remains Bullish TREND @Hedgeye
- Canadian Dollar was down -0.7% vs. USD last week to +1.6% YTD and remains Bearish TREND @Hedgeye
- Argentine Peso was down -4.4% vs. USD last week to -10.2% YTD and remains Bearish TREND @Hedgeye
- Brazilian Real was down -2.3% vs. USD last week to -0.6% YTD and remains Bearish TREND @Hedgeye
- Turkish Lira was down -5.5% vs. USD last week to -8.3% YTD and remains Bearish TREND @Hedgeye
In other words, the EM currency #crash of 2018 vs. #StrongDollar isn’t quite over with yet, despite the Triple Dovish Fed move that has Powell doing everything he can to out-dovish the ECB and BOJ in USD terms.
Since we’ve been bearish on EM (Emerging Markets) for over a year now, we are getting interested on the long side of certain EM Equity markets that are signaling Quads 1 and 2 in the back half of 2019 in our 4 Quadrant model.
That said, when I A/B Test those Quad Outlooks with @Hedgeye TREND market signals, moves like these…
A) Brazilian Stocks down -5.5% last week remain Bearish TREND @Hedgeye
B) Turkish Stocks down -3.4% last week remain Bearish TREND @Hedgeye
… didn’t have me bull-rushing Friday’s market close to buy them. With Utilities (XLU) making another all-time closing high on Friday and our long Treasuries (across the curve) position working swimmingly, I’m in no rush.
Dollar NOT Down + Rates Down HARD = another great week to be long Treasuries instead of High Beta US Stocks:
A) UST 2yr Yield was down another -12 basis points last week to 2.32% and remains Bearish TREND @Hedgeye
B) UST 10yr Yield was down another -15 basis points last week to 2.44% and remains Bearish TREND @Hedgeye
In turn, 2 of our Top 3 US Equity Sector Styles grew your net wealth last week:
A) Utilities (XLU) were up another +0.5% last week to +10.5% YTD and remain Bullish TREND @Hedgeye
B) REITS (VNQ) were up another +0.5% last week to +15.6% YTD and remain Bullish TREND @Hedgeye
I write “up another” because those 2 Sector Styles in particular have POSITIVE absolute returns (pre-dividends) of +10.2% (XLU) and +4.2% (VNQ), respectively, for the @Hedgeye TREND duration of the last 6 months, whereas:
A) Financials (XLF) were down -4.8% last week and are DOWN -11.8% in the last 6 months
B) Basic Materials were down -1.9% last week and are DOWN -10.3% in the last 6 months
Similarly, from a Factor Exposure perspective:
A) SMALLER CAP (Russell 2000) was down another -3.1% last week and is DOWN -12.1% in the last 6 months
B) HIGH BETA was down -2.8% last week and is DOWN -12.0% in the last 6 months
As anyone who has made and/or lost a lot of money in markets knows, when you lose -10% or more in a major asset allocation, the math really starts to work against you when trying to get your money back to break-even:
A) At down -11%, you need to be up +12.4% to get back to break-even
B) At down -12%, you need to be up +13.6% to get back to break-even
If you can, don’t chase charts at the economic turns in The Cycle and allocate pro-cyclically like that. Since Financials (XLF) and Materials (XLB) are the Top 2 SHORTS in #Quad3, our clients aren’t long of those and losing money.
Where they made money (on both an absolute and relative basis) again last week was Long Gold. Gold was up another +0.8% on the week taking it’s 6-month @Hedgeye TREND return to +8.2%.
Why? That’s simple. Real Yields falling is what Gold likes and the UST 10yr Yield was down for the 15th week in the last 20. Global Sovereign Yields (UK, Germany, Switzerland) continued to crash alongside Global #GrowthSlowing too.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 2.43-2.62% (bearish)
UST 2yr Yield 2.30-2.46% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
Utilities (XLU) 56.86-58.93 (bullish)
REITS (VNQ) 84.31-87.01 (bullish)
Financials (XLF) 25.01-26.31 (bearish)
USD 95.25-97.10 (neutral)
EUR/USD 1.11-1.14 (bearish)
USD/YEN 110.00-111.75 (bearish)
GBP/USD 1.30-1.33 (bullish)
Gold 1 (bullish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
