High Beta Breakdown

“It bites back.”
-Colonel John Boyd 

Due to popular feedback on my portfolio fighter pilot analogues, I’m bringing back the man they called Genghis John this morning. If you are going to war with High Beta Factor Exposures, you want his wisdom embedded in your #process. 

Being long High Beta can be fun in Quads 1 and 2, but in Quads 3 and 4, it bites back. Boyd obviously wasn’t talking about Quads. He was talking about F-100s, or The Hun. 

“Hun as in hundred was a lieutenant-killer, a widow-maker with a fearsome reputation… One quarter of all F-100s ever produced were lost in accidents. The Hun was one of the most unforgiving airplanes ever built. It had to be flown every second; one wrong control move, one moment of inattention, and it would “depart flight”; that is quit flying and assumed the aeronautical attributes of a brick.” (Boyd, pg 82) 

Back to the Global Macro Grind… 

It’s Macro Monday @Hedgeye! Welcome back to the grind. As a matter of #process, we use the 1^st day of every week to review the ROC (rate of change) across Global Macro markets within the context of @Hedgeye TRADEs and TRENDs. 

As usual, I like to start with the Global Currency market: 

1. US Dollar Index was down -0.2% last week to +1.2% YTD and remains Bullish TREND @Hedgeye
2. EUR/USD bounced +0.3% last week to -2.0% YTD and remains Bearish TREND @Hedgeye
3. YEN was up another +1.0% vs. USD last week to -0.3% YTD after moving back to Bullish TREND @Hedgeye
4. Pound was down -1.3% vs. USD last week to +1.9% YTD and remains Bearish TREND @Hedgeye
5. Argentine Peso was down -0.9% vs. USD last week to -16.2% YTD and remains Bearish TREND @Hedgeye
6. Chinese Yuan was down -1.3% vs. USD last week to -0.3% YTD breaking bad to Bearish TREND @Hedgeye
7. Bitcoin was up another +11% last week to +71.2% YTD and remains Bullish TREND @Hedgeye 

If you didn’t get the Bitcoin signal, I did. I publish both my daily/dynamic @Hedgeye Risk Range + proprietary TREND signal for almost 30 big things across Global Macro, daily. Bitcoin went Bullish @Hedgeye TREND on April 23, 2019. 

Is Bitcoin part of the Global Currency market? Depends on who you ask. I’m just happy I wasn’t long the damn thing from $19,000 to The Shallow of 2018! As most of you know, I go both ways and will eventually buy just about anything. 

Moving along to Gold and the Commodities market: 

1. CRB Commodities Index was -1.6% last week to +5.4% YTD breaking @Hedgeye TREND support of 183
2. Oil (WTI) corrected another -0.5% last week to +31.4% YTD but held @Hedgeye TREND support of $59.12
3. Gold was +0.5% last week to -0.5% YTD and remains Bullish TREND @Hedgeye
4. Copper deflated -1.6% to +5.1% YTD and remains Bearish TREND @Hedgeye
5. Corn was down -5.1% to -10.0% YTD and remains Bearish TREND @Hedgeye 

Is Gold a Currency? That also depends on who you ask. I’m just happy to have it in my core asset allocation when REAL YIELDS are falling. Gold is an absolute return holding that has to compete with YIELD. When yields fall, it does better. 

On that score, it was another great week to be Long of US Treasuries:

A) UST 2yr Yield fell another -7 basis points last week to -22bps YTD
B) UST 10yr Yield fell another -6 basis points last week to -22bps YTD

And it was an even greater week if you were short Junk (JNK) and/or High Yield bonds on the other side of Long Treasuries. High Yield OAS Spreads WIDENED +28 basis points last week to +3.82% and are +46bps wider year-over-year. 

The other yield on Credit Watch is the Italian 10yr Yield. With Global Yields lower on the week, Italian 10yr was UP +12 basis points to 2.68% and is +75bps year-over-year. 

As a reminder, it would be different this time if USA enters an #EarningsRecession (not quite there yet with Q119 SP500 Earnings +1.69% year-over-year, but the toughest compares coming in Q2 and Q3) and Credit Spreads DON’T widen. 

Oh, then there was that move in Global Equities last week: 

1. SP500 corrected -2.2% last week to +14.9% YTD and remains Bullish TREND @Hedgeye
2. Russell 2000 down -2.5% last week to +16.6% YTD and remains Bearish TREND @Hedgeye
3. EuroStoxx600 down -3.4% last week to +11.7% YTD remains Bearish TREND @Hedgeye
4. EM (MSCI) down -4.6% last week to +7.0% YTD moving back to Bearish TREND @Hedgeye
5. China (Shanghai Comp) down -4.5% last week to +17.9% YTD broke bad to Bearish TREND @Hedgeye
6. South Korea (KOSPI) down -4.5% last week to +4.6% YTD remains Bearish TREND @Hedgeye
7. Turkey continued to crash, down -5.8% last week to -3.0% YTD and remains Bearish TREND @Hedgeye
8. Germany (DAX) down -2.8% last week to +14.2% YTD remains Bullish TREND @Hedgeye 

Lots going on there (see my Early Look note from last Thursday showing the #divergences between markets that are signaling Bearish TRADE And TREND vs. those that currently are not). This #process needs to be flown every day! 

Looking at all the signals within the signals in US Equity Factor Exposures: 

A) HIGH BETA was down -3.7% last week taking its 1-month MOMENTUM to -3.9%
B) SMALL CAP was down -4.6% last week taking its 1-month MOMENTUM to -4.6%
*mean performance of Top Quartile vs. Bottom Quartile, SP500 companies 

For those of you familiar with how The Hun works, when 1-week and 1-month MOMENTUM goes from bullish to bearish TRADE @Hedgeye, The Machine goes from being a buyer to a seller. That’s why market bounces can be short-lived. 

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

UST 10yr Yield 2.40-2.52% (bearish)
UST 2yr Yield 2.20-2.33% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
Utilities (XLU) 56.69-59.01 (bullish)
Shanghai Comp 2 (bearish)
DAX 110 (bullish)
VIX 13.80-20.99 (bullish)
USD 96.50-97.65 (bullish)
EUR/USD 1.11-1.13 (bearish)
USD/YEN 109.20-111.07 (bearish)
GBP/USD 1.29-1.31 (bearish)
Oil (WTI) 60.06-63.95 (bullish)
Gold 1 (bullish)
Copper 2.71-2.84 (bearish)
TSLA 221-256 (bearish)
Bitcoin 5 (bullish) 

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer