Continua #Quad4

“Such infinitely divisible things are called continua and are said to be continuous.”

-Steve Strogatz 

Since front-running what Quad either the US or Global economy is heading to next can be painful, I’ve been patient in staying with my Global #Quad4 in Q3 Asset Allocations, Sector Styles, and Factor Exposures. After the last 2 weeks, thank goodness for that. 

If you want to dig deeper into our #process, “calculus proceeds in 2 phases: cutting and rebuilding. The cutting process always involves infinitely fine subtraction, which is used to quantify the difference between the parts (that part is called DIFFERENTIAL calculus).”

“The reassembly process always involves infinite addition, which integrates the parts back into the original whole. This half of the subject is called INTEGRAL calculus… the strategy can be used on anything that we can imagine slicing endlessly.” -Infinite Powers, pg xv)

Back to the Global Macro Grind…

Welcome to another Macro Monday @Hedgeye where we continuously measure and map both the economic data and market signals within out multi-factor and multi-duration #process.

Let’s start with last week’s Global #Quad4 moves (where USD strengthens) in the Global Currency market:

1. US Dollar Index tested a new high for The Cycle, closing up another +0.6% on the week at +4.4% year-over-year
2. EUR/USD was down another -0.7% to -6.0% year-over-year and remains Bearish TREND @Hedgeye  
3. Yen was -0.3% vs. USD last week to +1.6% year-over-year after moving back to Neutral TREND @Hedgeye in SEP
4. GBP/USD was down another -1.5% to -6.0% year-over-year and remains Bearish TREND @Hedgeye  
5. Argentine Peso continued to crash, -1.1% last week to -31.0% year-over-year and remains Bearish TREND @Hedgeye  
6. CNY/USD was down another -0.4% to -3.3% year-over-year and remains Bearish TREND @Hedgeye  

OMG, how could CNY (Chinese Yuan) be weak after Mnuchin’s Treasury told everyone “no worries” (on what worried headline chasers on Friday) when CNBC now FOMO Futures opened last night? A: It’s The Cycle, Stupid.

As China’s economy continues to slow (PMI sub 50 for the 5^th straight month this AM) alongside USA’s (US Capex #slowed to -0.3% year-over-year on Friday), both Commodities and their related #Quad4 Equity Exposures continued lower last week:

1. CRB Commodities Index was down another -0.9% last week to -9.5% year-over-year and remains Bearish TREND @Hedgeye  
2. Oil (WTI) deflated another -3.6% last week to -19.0% year-over-year and remains Bearish TREND @Hedgeye during #Quad4
3. Lumber deflated another -3.3% last week to -1.3% year-over-year and remains Bearish TREND @Hedgeye  

Yep, in #Quad4 you should be bearish on Lumber but bullish on US Housing (ITB). Isn’t that non-linear and totally Quad Cool? So was being long of US Treasures, across the curve, instead of bubbly High Yield credit into an #EarningsRecession:

1. UST 2yr Yield dropped -5 basis points last week to -119bps year-over-year
2. UST 10yr Yield dropped -4 basis points last week to -137bps year-over-year
3. High Yield OAS Spread widened +14 basis points last week to +55 basis points year-over-year

Much like what you’re seeing in US “stahks” (where performance dispersion continues to widen at the Sector and Factor level), that’s ALWAYS the story with #LateCycle “Credit.” While widening from the “tights”, certain credit spreads get a lot wider, faster.

Even for the poor Old Wall people who only do CNBC “stahks”, #Quad4 in Q3 is readily apparent at the US Sector Style level:

A) Energy Stocks (XLE) were down another -2.7% last week to -21.5% year-over-year and remain Bearish TREND @Hedgeye  
B) Utilities (XLU) were up another +1.3% last week to +24.7% year-over-year and remain Bullish TREND @Hedgeye  

Tell me there are “hedge funds” out there who nailed that simple @Hedgeye Full Investing Cycle call on long Utes vs. short Energy. There’s +4,620 basis points of absolute performance in that long/short puppy!

Nope, I can’t find my Utes (XLU) and Gold (up +23.0% year-over-year) in the hedgie hotel, Goldman Sachs Hedge Fund Industry (GVIP), ETF for some reason? That sucker got smoked (again) last week (just like it did for most of AUG, during #Quad4 in Q3).

Alongside HIGH BETA stocks, what happened in hedge fund hotels last week was “Secular Growers” saw this thing called The Cycle:

A) HIGH BETA was down -1.7% on the week taking its 3-month price momentum to -5.4%
B) Top 25% SALES GROWERS were down -2.0% last week taking its 3-month price momentum to -1.7%

*Mean performance of Top Quartile vs. Bottom Quartile, SP500 Companies

So, buckle up for the last part of the #Quad4 in Q3 movie. It’s called Earnings Season. That’s where the bottom-up people meet us top-down macro people in ROC (rate of change) space. Such infinitely divisible parts of The Cycle are called continua too, don’t forget.

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

UST 10yr Yield 1.60-1.84% (bearish)
UST 2yr Yield 1.55-1.76% (bearish)
SPX 2 (neutral)
RUT 1 (bearish)
NASDAQ 7 (bearish)
Utilities (XLU) 62.70-65.38 (bullish)
REITS (VNQ) 91.78-93.79 (bullish)
Shanghai Comp 2 (bearish)
VIX 13.25-18.74 (neutral)
USD 97.68-99.25 (bullish)
EUR/USD 1.09-1.11 (bearish)
USD/YEN 106.92-108.58 (neutral)
GBP/USD 1.22-1.25 (bearish)
Oil (WTI) 54.44-59.86 (bearish)
Gold 1 (bullish)
Bitcoin 7 (bearish)

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer