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Below is a detailed summary of our active Macro Themes. The analysis below is sourced from our periodic Global Macro Risk Monitor research notes. Please email  if you aren’t yet receiving that piece and would like to be added to the distribution list. Please note, however, that access is expressly reserved for key client relationships.

USA: Three Quad 3’s (introduced 4/4/19):

  • 4/15: The Market Always Peaks In #Quad3: To the extent you missed our 4/10 Early Look note with the same title, here are the key takeaways as it pertains to how investors should view the price level of large-cap US equities:

    • “… much like the economy, the market always peaks in #Quad3: 
      • During #Quad3 in 3Q90 the S&P 500 peaked on 7/16/90 at 369
      • During #Quad3 in 1Q00 the S&P 500 peaked on 3/24/00 at 1528
      • During #Quad3 in 3Q00 (double-top) the S&P 500 peaked on 9/1/00 at 1521
      • During #Quad3 in 4Q07 the S&P 500 peaked on 10/9/07 at 1565
      • During #Quad3 in 2Q11 the S&P 500 peaked on 4/29/11 at 1364
      • During #Quad3 in 2Q15 the S&P 500 peaked on 5/21/15 at 2131 
    • What’s really interesting is that when you add an additional layer of analysis by parsing out which #Quad3 episodes led to recession and which did not, you learn a lot more about how best to trade the current, non-recessionary environment: 
      • During the 2H90 recessionary #Quad3 episode, the S&P 500 declined -8.2% with 19% of the 100+ sectors, industries, and style factors we track within the US equity market UP an average of +3% and 81% DOWN and average of -17%.
      • During the 1Q00 non-recessionary #Quad3 episode, the S&P 500 was essentially flat at +1.6% with a percent positive/negative ratio of 42% (mean performance of UP +12%) to 58% (mean performance of DOWN -10%).
      • During the 3Q00 non-recessionary #Quad3 episode, the S&P 500 was flat at +0.4% with a percent positive/negative ratio of 59% (+13%) to 41% (-10%).
      • During the 4Q07 through 3Q08 recessionary #Quad3 episode, the S&P 500 declined -27.5% with a percent positive/negative ratio of 4% (+23%) to 96% (-28%).
      • During the 4Q10 through 3Q11 non-recessionary #Quad3 episode, the S&P 500 was essentially flat at +1.4% with a percent positive/negative ratio of 56% (+10%) to 44% (-15%).
      • Lastly, during the 2Q15 through 3Q16 non-recessionary #Quad3 episode, the S&P 500 was essentially flat at -1.1% with a percent positive/negative ratio of 44% (+13%) to 56% (-12%). 
    • All told, it would not be inconsistent with history for the market to make a new all-time high soon, given the #Quad3 backdrop. It would also not be inconsistent with history for half of the available sectors, industries, and style factors to make NEW HIGHS from there while the other half CRASHES into and through a likely earnings recession that should culminate in Q3 (reported in Q4).”

  • 4/18: Early Look: Small-Cap FOMO:
    • “FYI the total PnL of the aforementioned pair trades equals +801bps on an equal-weighted, market-neutral basis. Obviously the returns would be different with live ammo and real-world liquidity constraints, but all things held equal, that’s a pretty illustrative example of how fundamentally oriented investors can use our GIP Model process to enhance their security selection. Our Macro models were built by market practitioners, not PhD economists for a reason.
    • Lastly, it’s also worth noting that I concluded the aforementioned note with the following statement in bold print:
      • “LONG Large-Cap Growth (NDX) vs. SHORT Levered Small Caps (R2k) is the best top-down trade from here.”
    • The long exposure of what we deemed to be THE BEST Macro US equities pair trade is UP +8.7% since 2/20, while the short exposure is DOWN -0.4%. That spread = +913bps of #alpha.”

Monthly Macro Themes Monitor: Global #Quad3 or #Quad4? -  Quad3   Late Cycle Narrowing of Leadership

Profit #Recession (introduced 4/4/19):

  • 3/14: Why the US Dollar Won’t Go Down Yet Despite Being A Crowded Long: There are two primary reasons why we believe the US dollar (DXY +0.2% DoD, -0.2% MoM, +0.6% YTD) has yet to break down in conjunction with developing expectations for policy-induced global reflation among investor consensus. Number one, the US economy is still receiving #Quad4 data for 1Q19E, as most recently evidenced by this week’s JAN Retail Sales (confirming the DEC weakness was not a one-off), FEB NFIB Small Business Index (no material rebound off the DEC/JAN lows), and FEB CPI (Headline of 1.5% YoY = slowest since AUG ’16; Core of 2.1% YoY = slowest since FEB ’18) data. The JAN Durable Goods (8.39% YoY = fastest since AUG ’18), JAN CapEx (4.14% YoY = fastest since NOV ’18), JAN Nonresidential Construction (4.8% YoY = fastest since OCT ’18), and JAN Residential Construction (-5.7% YoY = fastest since NOV ’18) kept our nowcast for US Real GDP from slowing faster. Specifically, our 30-factor, dynamically re-weighting predictive tracking algorithm for US GDP is currently calling for 2.82% YoY/1.21% QoQ SAAR in the current quarter. Recall that #Quad4 is the best domestic macroeconomic backdrop for US dollar appreciation. Number two, the global economy continues to slow, with half the world’s major economies tracking in #Quad4 here in 1Q19E. Recall that #Quad4 is also the best global macroeconomic backdrop for US dollar appreciation. Moreover, models are calling for, at best, stabilization in Europe and China here through the balance of 1H19E, with elevated risk that structural headwinds (i.e. clogged credit channel in China vs. treacherous demographics in Europe) prevents either economy from besting cycle-peak comparative base effects until comps become much more surmountable in Q4. Stabilizing ≠ decisive v-bottom into Quads 1 or 2, which is what Mr. Market needs confirmation of to facilitate an equally decisive pullback in the greenback. As such, it’s looking increasingly likely that increasingly popular short dollar trades may have to wait at least the mid-to-late summer before the big payouts start to occur ahead of the global economy finally finding firm footing in Q4.
  • 5/1: Early Look: Earnings Still Better Than Expected:
    • “Again, that was then. Today is now. It’s the best opportunity you’ll have to position for the future. What are the details on that +1.36% SP500 EPS growth rate?
      • A) 290 of the SP500 companies have reported so we’re +58% of the way through Q1 EPS Season
      • B) The Peak year-over-year ROC (rate of change) growth rate was earlier last week at +2.7%
      • C) Tech Earnings are actually NEGATIVE -6.2% year-over-year with 37 of 68 Tech names having reported
    • But Tech (XLK) is a Top 4 US Equity Sector LONG in #Quad3, so you have to be careful with that one and engage either your own inner-Neo stock-picking ability and/or the analysts you compensate to do that for you.  As you can see in our Chart of The Day (slide 47 in our current Q2 Macro Themes deck), BUYER BEWARE in Tech because not all Tech “growth” is welcomed by The Matrix in #Quad3:
      • A) Long Organic Growth (Software)
      • B) Short Cyclical Growth (Hardware)
    • Another way to simplify the complex is that you want to be:
      • A) Long “Secular Growers” (i.e. companies unaffected by The Cycle – lots of red pills)
      • B) Short The GDP Cycle (i.e. companies affected by The Cycle – blue pills will do)”
  • 5/7: Global Growth Has Yet To Broadly Inflect Higher: The advent of APR Manufacturing PMI data confirmed not much has changed with respect to the direction of global growth. Specifically, 68% of the 40 economies we track data for showcased trending deceleration as of APR, a marginal improvement from the 73% share recorded in MAR.
    • Trending Higher as of April: China, Denmark, EM, Greece, Hong Kong, Hungary, Malaysia, Mexico, Saudi Arabia, Thailand, Turkey
    • Trending Sideways as of April: Indonesia, Poland, Taiwan, UK
    • Trending Lower as of April: Argentina, Australia, Brazil, Canada, Colombia, Czech Republic, Eurozone, France, Germany, India, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Philippines, Russia, Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, US, Global
    • To the extent our global GDP estimates for 2Q19E exhibit minimal tracking error at the country level, Q2 would represent the seventh consecutive quarter where the mode GIP Model quadrant across the G20 economies is #Quad3 or #Quad4.
    • What’s interesting to note here is that the battle between the two quadrant outcomes is as balanced as it has been in three quarters at 40% for the former vs. 20% for the latter. Recall that #Quad4 has been the dominant outcome at 70% of the total in 4Q18 and 55% of the total in 1Q19E.
    • That mix transitions back to 10% for #Quad3 vs. 35% for #Quad4 (vs. 40% for #Quad1) in 3Q19E, so the only factor standing in the way of a “risk off” summer across global equities, fixed income, and currencies is our forecast for marginal improvement throughout the Eurozone economy: Germany, Italy, and Spain in particular.
    • That setup is tenuous at best and investors may do well to simply anticipate weakness over the next couple of months to build positions ahead of a much more sanguine global backdrop beginning in 4Q19E and extending into the start of next year.

Monthly Macro Themes Monitor: Global #Quad3 or #Quad4? - G20 GIP Model Summary

Monthly Macro Themes Monitor: Global #Quad3 or #Quad4? - MSCI ACWI Global

Monthly Macro Themes Monitor: Global #Quad3 or #Quad4? - 10yr Treasury Yield Global

Monthly Macro Themes Monitor: Global #Quad3 or #Quad4? - DXY Global

Long Ideas: Energy, EM, etc. (introduced 4/4/19):

Monthly Macro Themes Monitor: Global #Quad3 or #Quad4? - Can EM Work When the US is in  Quad3

Monthly Macro Themes Monitor: Global #Quad3 or #Quad4? - ... Yes If You Pick the Right Countries

Monthly Macro Themes Monitor: Global #Quad3 or #Quad4? - EM GIP Model Summary

Monthly Macro Themes Monitor: Global #Quad3 or #Quad4? - Use Our Tools to Front Run the Machine in EM Too

Monthly Macro Themes Monitor: Global #Quad3 or #Quad4? - Global Macro Risk Monitor

CLICK HERE to download the table in Excel format.

Keep your head on a swivel,

DD

Darius Dale

Managing Director