“Roberts said it wasn’t as bad as last time he pulled the quad.”
If you want to learn about the Hedgeye Quads, googling them will render your search about as frustrating as if you pulled one. Ever pull a quad? That’s what Global Macro markets did last week.
After finding plenty of info on ATV’s, I finally found a Quad Quote that fit the point I’m trying to make this morning. Many thanks to veteran San Francisco Giants Manager, Bruce Bochy, for providing me with timely/topical content!
No, last week wasn’t as bad as the last time macro markets went to Quad 4. Remember that? That was all the way back in Q4 of 2018. The Russell 2000 is still down -11.8% since then. Don’t just “buy stocks” in Quad 3 and 4. Buy the right sectors.
Back to the Global Macro Grind…
It’s Macro Monday @Hedgeye! Welcome back. Today is the day we measure and map weekly macro market moves within the context of our multi-factor and multi-duration risk management #process.
As usual, let’s start with the Global Currency market, which went all Quad 4 last week:
- US Dollar Index was up another +0.7% last week to +1.9% YTD and remains Bullish @Hedgeye TREND
- EUR/USD was down another -0.7% last week to -2.7% YTD and remains Bearish @Hedgeye TREND
- British Pound was down -2.1% vs. USD last week to -0.3% YTD and remains Bearish @Hedgeye TREND
- Japanese Yen was down -0.1% vs. USD last week to -0.4% YTD and remains Bullish @Hedgeye TREND
- Canadian Dollar was down -0.3% vs. USD last week to +1.3% YTD and is Neutral @Hedgeye TREND
- Argentine Peso was down -0.5% vs. USD last week to -16.5% YTD and remains Bearish @Hedgeye TREND
- Brazilian Real was down -3.3% vs. USD last week to -5.2% YTD and remains Bearish @Hedgeye TREND
- Aussie Dollar was down -1.9% vs. USD last week to -2.6% YTD and remains Bearish @Hedgeye TREND
- Turkish Lira was down -1.1% vs. USD last week to -12.6% YTD and remains Bearish @Hedgeye TREND
- Chinese Yuan was down –1.4% vs. USD last week to -0.6% YTD and remains Bearish @Hedgeye TREND
Now Bochy knows baseball and my Canadian buddies know ATVs, but to know what Quad 4 is, globally, you need to know what the Global Currency market is doing relative to the Global Rates and Equities markets.
As you can see in today’s Chart of The Day, back-testing the US Dollar against The Quads shows you that the highest expected value for the US Dollar Index is when both the Global and US economies are in Quad 4.
The other big thing that happens in Quad 4 is Long Treasuries crushes it:
A) UST 2yr Yield was down another -7 basis points last week to down -29bps YTD
B) UST 10yr Yield was down another -7 basis points last week to down -29bps YTD
DOWN Yields (on a TRENDING basis) makes Treasury Bonds Bullish @Hedgeye TREND, across the curve. A great short against Long Treasuries in both Quads 3 and 4 = High Yield and/or Junk Bonds.
Last week, High Yield OAS (Spread) was +10 basis points to 3.92%. If USA enters an #EarningsRecession here in Q2 and Q3 of 2019, that could easily widen another 100-150 basis points. So I’ll stay Short Junk (JNK) here.
Another awesome asset allocation to have in both Quads 3 and 4 are US Equity Bond Proxies:
A) Utilities (XLU) were up another +1.5% last week to +11.1% YTD and remain Bullish TREND @Hedgeye
B) REITS (VNQ) were up another +1.2% last week to +17.8% YTD and remain Bullish TREND @Hedgeye
Since, selfishly (my p.a.), I’m not as focused on the beloved “YTD” as I am in earning FULL CYCLE returns across The Quads, it’s important to note that while the Russell 2000 is DOWN -5.5% year-over-year, Utes (XLU) are +11.1% year-over-year.
Another thing I’m selfish about is the short side of Quads 3 and 4. The Financials (XLF) are a great place to be short and/or “underweight” in both Quads. Financials (XLF) were DOWN -2.2% last week and are DOWN -4.6% year-over-year.
From a US Equity perspective, other big things to think about being short and/or underweight in Quads 3 and 4 are:
A) HIGH BETA was down another -2.8% last week and is DOWN -5.9% in the last month
B) SMALL CAP was down another -2.7% last week and is DOWN -6.0% in the last month
*Mean performance of Top Quartile vs. Bottom Quartile, SP500 companies
To be sure, down -6% in the last month isn’t as bad as the Chinese stock market being down -12% … but if you could be long things like Utes, REITS, and Treasuries (which are actually UP over that time-period), you would be.
Lastly, in addition to the Quad 4 price action we saw locally, last week saw some nasty Quad 4 moves globally:
A) Brazilian Stocks were down -4.6% last week to +2.3% YTD and remain Bearish @Hedgeye TREND
B) Indonesian Stocks were down -6.2% last week to -5.9% YTD and remain Bearish @Hedgeye TREND
The reason why I’m calling out both of those countries is that both Brazil and Indonesia also saw the 10yr Yield on their respective sovereign bonds RISE last week (Brazil’s was +22bps to 8.99%). That, like Quad 4, is not good.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 2.34-2.48% (bearish)
UST 2yr Yield 2.12-2.28% (bearish)
SPX 2 (neutral)
RUT 1 (bearish)
Utilities (XLU) 56.88-59.30 (bullish)
REITS (VNQ) 85.12-88.64 (bullish)
Financials (XLF) 26.03-27.56 (bearish)
Shanghai Comp 2 (bearish)
VIX 14.12-22.37 (bullish)
USD 96.90-98.21 (bullish)
EUR/USD 1.11-1.13 (bearish)|
USD/YEN 108.96-110.79 (bearish)
GBP/USD 1.27-1.29 (bearish)
Oil (WTI) 60.70-63.32 (bullish)
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer